of her own which could properly be considered for purposes of
GUIDE NOTES ON
INCOME TAX
Dean Lily K. Gruba*
TITLE II — TAX ON INCOME
Q: What is income? How is it different from capital?
In Madrigal v. Rafferty, Madrigal and Paterno were legally
married and their marriage was contracted under the
provisions of law concerning conjugal partnerships. In 1915,
Madrigal filed his income tax return for the previous year.
Later, however, Madrigal contended that his declared income
was in fact the income of the conjugal partnership existing
between himself and his wife. Thus, his declared income was
supposed to be divided into 2 equal parts, i.e., ½ to be
considered the income of Madrigal and ½ of Paterno. The CIR
argued that a distinction must be drawn between the ordinary
form of commercial partnership and the conjugal partnership
of spouses resulting from the relation of marriage. The Supreme
Court agreed with the CIR. Paterno had an inchoate right in the
property of her husband during the life of the conjugal
partnership. She had an interest in the ultimate property rights
and in the ultimate ownership of property acquired as income
after such income had become capital. However, Paterno’s right
to ½ of the income of the conjugal partnership was not absolute.
The High Court found that Paterno had no estate and income
1. Madrigal v. Rafferty, GR No. L-12287, 7 August 1918.
2. Conwi v. Court of Tax Appeals, GR Nos. 48532 & 48533, 31 August 1992.
income taxation.
The Supreme Court had occasion to differentiate between
income and capital in this manner: “Income as contrasted with
capital or property is to be the test. The essential difference
between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the
payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time
is called an income. Capital is wealth, while income is the
service of wealth.”1
In Conwi v. Court of Tax Appeals,2 petitioners were Filipino
citizens and employees of Procter & Gamble, Philippine
Manufacturing Corporation. In the years 1970 and 1971,
petitioners were assigned to other subsidiaries of Procter &
Gamble outside of the Philippines, during which time
petitioners were paid USD as compensation for services in their
foreign assignments. Were petitioners liable to pay income tax
on their dollar earnings? The Supreme Court held in the
affirmative. The governing law then was Section 21 of the old
Tax Code, amended up to 4 August 1969, which imposed a tax
upon the taxable net income received during each taxable year
from all sources by a citizen of the Philippines, whether residing
here or abroad.3 Petitioners’ dollar earnings were classified as
income and hence, subject to income tax. The next issue was the
exchange rate to be used to determine the peso equivalent of the
dollar earnings of petitioners for income tax purposes. The
Supreme Court held that the par value of the peso, not the
prevailing free market rate of exchange, should be the guiding
rate used for purposes of computing income tax. In this case,
income was defined in this sense: it is “an amount of money
coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from
3. Today, the 1997 Tax Code treats resident citizens and non-resident citizens
differently.
A.Y. 2017-2018 Ateneo de Manila University School of Law
investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the fruits
of one’s labor.” 4
At issue in CIR v. Court of Appeals5 was the taxability of
the shares of stock in ANSCOR owned by the estate of Don
Andres Soriano as well as Don Andres Soriano’s widow, Doña
Carmen Soriano. On various dates, (1) the estate and Doña
Carmen exchanged a portion of their common shares for
preferred shares, and (2) ANSCOR redeemed a portion of the
common shares owned by the estate and Doña Carmen.
ANSCOR’s business purpose for the redemption of stocks was
to partially retire said stocks as treasury shares in order to
reduce the company’s foreign exchange remittances in case
cash dividends were declared. Subsequently, ANSCOR was
issued an assessment for deficiency withholding tax at source
based on the transactions of exchange and redemption of
stocks. Regarding the exchange of stocks, the Supreme Court
found that there was no change in the proportional interest of
the estate and Doña Carmen before and after the exchange. The
exchange transaction did not result into a flow of wealth and
hence, there was no income tax liability.
As regards the redemption of stocks, the issue was,
particularly, whether ANSCOR’s redemption of stocks from its
stockholder as well as the exchange of common with preferred
shares could be considered as essentially equivalent to the
distribution of taxable dividends, making the proceeds thereof
taxable income. The Supreme Court started by saying that the
stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. The mere issuance of stock
dividends is not yet subject to income tax. As capital, the stock
dividends postpone the realization of profits. However, a
redemption of the stocks converts into money the stock
dividends which become a realized profit or gain and
consequently, the stockholder’s separate property. As realized
income, the proceeds of the redeemed stock dividends can be
4. Conwi, GR Nos. 48532 & 48533
5. CIR v. Court of Appeals, GR No. 108576, 20 January 1999.
2
reached by income taxation regardless of the existence of any
business purpose for the redemption. Here, the proceeds of the
redemption of the stock dividends were deemed taxable
dividends, i.e., income subject to income tax which was
required to be withheld at source.
“The determining factor for the imposition of income tax
is whether any gain or profit was derived from a transaction.”
Furthermore, there are 3 elements in the imposition of income
tax, namely: (1) there must be gain or profit; (2) the gain or profit
is realized or received, actually or constructively; and (3) the
gain or profit is not exempted by law or treaty from income tax.
“Any business purpose as to why or how the income was
earned by the taxpayer is not a requirement. Income tax is
assessed on income received from any property, activity or
service that produces the income because the Tax Code stands
as an indifferent neutral party on the matter where income
comes from.”
In Chamber of Real Estate and Builders’ Associations, Inc. v.
Romulo,6 petitioner was an association of real estate developers
and builders in the country. It assailed the validity of the
imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of
real properties classified as ordinary assets. On the topic of
MCIT, petitioner argued that MCIT violated the due process
clause because it levied income tax even if there was no realized
gain. In effect, MCIT was a tax on capital. According to
petitioner, income tax could only be imposed on income, not
capital. The Supreme Court took the opportunity to explain the
concept and rationale of MCIT as follows: MCIT on domestic
corporations came about as a result of the perceived inadequacy
of the self-assessment system in capturing the true income of
corporations. “Congress intended to put a stop to the practice
of corporations which, while having large turn-overs, report
minimal or negative net income resulting in minimal or zero
income taxes year in and year out, through under-declaration
6. Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, GR No.
160756, 9 March 2010.
3 Guide Notes on Income Tax
of income or over-deduction of expenses otherwise called tax
shelters.” In other words, MCIT serves to put a cap on such tax
shelters.7
On petitioner’s argument that the imposition of MCIT
amounted to deprivation of property without due process of
law, the Supreme Court held that “MCIT is imposed on gross
income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sale. Clearly, the capital is not
being taxed.” Otherwise stated, MCIT is a tax on income.
Furthermore, “MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation’s gross income.”8
Q: What is the source of an income?
In CIR v. British Overseas Airways Corporation,9 BOAC was a
British Government-owned corporation engaged in the
international airline business. As such, it operated air
transportation service and sold transportation tickets over the
routes of the other airline members. For the years 1959 to 1971,
BOAC had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or cargo to and
from the Philippines, although from 1959 to 1971, BOAC
maintained a general sales agent in the country which was
responsible for selling BOAC tickets covering passengers and
cargoes. The CIR issued an assessment against BOAC for
deficiency income taxes for the years 1959 to 1971 for the sale of
tickets in the Philippines for air transportation. Was BOAC a
resident foreign corporation doing business in the Philippines?
The Supreme Court held affirmatively. BOAC, during the
7. Id.
8. Id.
9. CIR v. British Overseas Airways Corporation, GR Nos. L-65773-74, 30 April
1987.
2D SEM.
periods covered by the subject assessments, maintained a
general sales agent in the Philippines which performed
activities in the exercise of the functions normally incident to,
and in progressive pursuit of, the purpose and object of its
organization as an international air carrier. BOAC was held to
be engaged in business in the Philippines through its local agent
during the period covered by the assessments.10
Did BOAC’s income from the sale of tickets in the
Philippines come from sources within the Philippines? The
source of an income is the property, activity or service that
produced the income. The Supreme Court stated that in
BOAC’s case, the sale of tickets in the Philippines was the
activity that produced the income. “The tickets exchanged
hands here and payment for fares were also made here in
Philippine currency. The situs of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded
by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government.”
In CIR v. Baier-Nickel,11 respondent was a non-resident
German citizen who was employed as a commission agent of
JUBANITEX, which was a domestic corporation. It was agreed
that respondent would receive 10% sales commission on all
sales actually concluded and collected through her efforts. In
1995, respondent received a certain sum representing her sales
commission income from which JUBANITEX withheld the
corresponding 10% withholding tax and remitting such amount
to the BIR. Respondent filed a claim for tax refund on the
contention that her sales commission income was not taxable in
the Philippines because the same was a compensation for her
services rendered in Germany and therefore considered as
income from sources outside the Philippines. Was respondent’s
10. Id.
11. CIR v. Baier-Nickel, GR No. 153793, 29 August 2006.
A.Y. 2017-2018 Ateneo de Manila University School of Law
sales commission income taxable in the Philippines? The
Supreme Court held affirmatively. Pursuant to Sections 23(D)
and 25 of the 1997 Tax Code, non-resident aliens, whether or
not engaged in trade or business, are subject to Philippine
income taxation on their income received from all sources
within the Philippines. What is thus meant by “source” of
income? Source of income relates to the property, activity or
service that produced the income. “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, or the place of payment, but
the place where the services were actually rendered.” Here, the
Supreme Court found that respondent failed to show
substantial evidence, or “that relevant evidence that a
reasonable mind might accept as adequate to support the
conclusion that it was in Germany where she performed the
income producing service which gave rise to the reported
monthly sales in the months of March and May to September of
1995. She thus failed to discharge the burden of proving that her
income was from sources outside the Philippines and exempt
from the application of our income tax law. Hence, the claim for
tax refund should be denied.”
Q: Define income tax.
Black’s Law Dictionary defines “income tax” as a tax “on the
annual profits arising from property, business pursuits,
professions, trades, or offices.” It is a tax “on a person’s income,
wages, salary, commissions, emoluments, profits, and the like,
or the excess thereof over a certain amount.”12
Income tax is a tax on all yearly profits arising from
property, professions, trades or offices, or a tax on a person’s
income, emoluments, profits and the like. It is tax on income,
whether net or gross, realized in one taxable year.13
At issue in CIR v. Court of Appeals was the taxability of the
shares of stock in ANSCOR owned by the estate of Don Andres
12. Black’s Law Dictionary
4
Soriano as well as Don Andres Soriano’s widow, Doña Carmen
Soriano. On various dates, (1) the estate and Doña Carmen
exchanged a portion of their common shares for preferred
shares, and (2) ANSCOR redeemed a portion of the common
shares owned by the estate and Doña Carmen. ANSCOR’s
business purpose for the redemption of stocks was to partially
retire said stocks as treasury shares in order to reduce the
company’s foreign exchange remittances in case cash dividends
were declared. Subsequently, ANSCOR was issued an
assessment for deficiency withholding tax at source based on
the transactions of exchange and redemption of stocks.
Regarding the exchange of stocks, the Supreme Court found
that there was no change in the proportional interest of the
estate and Doña Carmen before and after the exchange. The
exchange transaction did not result into a flow of wealth and
hence, there was no income tax liability.
As regards the redemption of stocks, the issue was,
particularly, whether ANSCOR’s redemption of stocks from its
stockholder as well as the exchange of common with preferred
shares could be considered as essentially equivalent to the
distribution of taxable dividends, making the proceeds thereof
taxable income. The Supreme Court started by saying that the
stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. The mere issuance of stock
dividends is not yet subject to income tax. As capital, the stock
dividends postpone the realization of profits. However, a
redemption of the stocks converts into money the stock
dividends which become a realized profit or gain and
consequently, the stockholder’s separate property. As realized
income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any
business purpose for the redemption. Here, the proceeds of the
redemption of the stock dividends were deemed taxable
dividends, i.e., income subject to income tax which was
required to be withheld at source.
13. 27 AM JUR. 308.
5 Guide Notes on Income Tax 2D SEM.
“The determining factor for the imposition of income tax operations to yield revenue or income. They are items of
is whether any gain or profit was derived from a transaction.” expenses which contribute or are attributable to the production
Furthermore, there are 3 elements in the imposition of income of income or revenue.”
tax, namely: (1) there must be gain or profit; (2) the gain or profit
On the other hand, income tax is “imposed on an
is realized or received, actually or constructively; and (3) the
individual or entity as a form of excise tax or a tax on the
gain or profit is not exempted by law or treaty from income tax.
privilege of earning income. In exchange for the protection
“Any business purpose as to why or how the income was
extended by the State to the taxpayer, the government collects
earned by the taxpayer is not a requirement. Income tax is
taxes as a source of revenue to finance its activities. Clearly, by
assessed on income received from any property, activity or
its nature, income tax payments of a public utility are not
service that produces the income because the Tax Code stands
expenses which contribute to or are incurred in connection with
as an indifferent neutral party on the matter where income
the production of profit of a public utility. Income tax should be
comes from.”14 borne by the taxpayer alone as they are payments made in
exchange for benefits received by the taxpayer from the
Q: Does income tax form part of operating expenses? State.”15
Should income tax be included in the computation of operating
expenses of a public utility? This was one of the questions Q: Distinguish between income tax and percentage tax.
answered in Republic of the Philippines v. Manila Electric
Does the 20% final withholding tax on a bank’s passive interest
Company. In this case, in 1993, Meralco filed with the ERB an
income form part of its taxable gross receipts in computing the
application for the revision of its rate schedules, i.e., increase in
gross receipts tax? This was the issue resolved in CIR v.
its distribution charge. Income taxes paid by Meralco were
Solidbank Corporation. In this case, Solidbank sought the refund
included as part of its operating expenses for purposes of rate
of allegedly overpaid gross receipts tax for the year 1995. The
determination. The ERB argued against including income taxes
CIR opposed on the ground that although the 20% final
paid by Meralco as part of the public utility’s operating
withholding tax on Solidbank’s interest income was not
expenses as this should be “borne by the stockholders who are
actually received because it was remitted directly to the
recipients of the income or profits realized from the operation
government, the fact that the amount redounded to Solidbank’s
of their business,” and hence should not be passed on to the
benefit made it part of the taxable gross receipts in computing
consumers. The Supreme Court acknowledged that “the public
the 5% gross receipts tax. The Supreme Court adhered to the
utility is allowed a return on capital over and above operating
CIR’s view and ruled that the amount of interest income
expenses. However, only such expenses and in such amounts
withheld in payment of the 20% final withholding tax formed
should be allowed for determination of the rates to be charged
part of gross receipts in computing for the gross receipts tax on
by a public utility.” Does income tax form part of Meralco’s
banks. The High Court said that as a bank, Solidbank was
operating expenses for purposes of computing a fair return on
covered by both gross receipts tax and final withholding tax.
capital? The Supreme Court answered negatively. “Income tax
However, the Supreme Court took the opportunity to
paid by a public utility is inconsistent with the nature of
differentiate gross receipts tax, which is a percentage tax, from
operating expenses. In general, operating expenses are those
final withholding tax, which is an income tax.
which are reasonably incurred in connection with business

14. CIR v. Court of Appeals, GR No. 108576, 20 January 1999. 15. Republic of the Philippines v. Manila Electric Company, GR Nos. 141314 and
141369, 15 November 2002.
A.Y. 2017-2018 Ateneo de Manila University School of Law
“A percentage tax is a national tax measured by a certain
percentage of the gross selling price or gross value in money of
goods sold, bartered or imported; or of the gross receipts or
earnings derived by ay person engaged in the sale of services.
It is not subject to withholding.”16
On the other hand, “[a]n income tax, on the other hand, is
a national tax imposed on the net or the gross income realized
in a taxable year. It is subject to withholding.”17
Q: What are the kinds of income tax systems?
The case of Tan v. del Rosario dealt with the constitutionality of
RA No. 7496, also commonly known as the Simplified Net
Income Taxation Scheme (SNIT), amending certain provisions
of the old Tax Code. One argument raised by petitioners was
that the law now taxed single proprietorships and professionals
differently from the manner it imposed tax on corporations and
partnerships. Another argument was that general professional
partnerships should not be treated differently from ordinary
business partnerships. The Supreme Court held that the
classification made between single proprietorships and
professionals on the one hand, and corporations and
partnerships on the other, was valid. Furthermore, “[w]hat may
instead be perceived to be apparent from the amendatory law
is the legislative intent to increasingly shift the income tax
system towards the schedular approach in the income taxation
of individual taxpayers and to maintain, by and large, the
present global treatment on taxable corporations.”18
On the topic of partnerships, the Supreme Court
confirmed that general professional partnerships and ordinary
business partnerships are treated differently for purposes of
16. NOTE: The subject matter of gross receipts tax is the privilege of engaging in the
business of banking.
17. CIR v. Solidbank Corporation, GR No. 148191, 25 November 2003. NOTE: The
subject matter of final withholding tax is the passive income generated in the form
of interest on deposits and yield on deposit substitutes.
18. NOTE: See footnotes 2 and 3 of the decision. Schedular approach is defined as a
system employed where the income tax treatment varies and made to depend on
6
income taxation. In general professional partnerships, “the
partners themselves, not the partnership (although it is still
obligated to file an income tax return [mainly for administration
and data], are liable for the payment of income tax in their
individual capacity computed on their respective and
distributive shares of profits. In the determination of the tax
liability, a partner does so as an individual, and there is no choice
on the matter. In fine, under the Tax Code on income taxation,
the general professional partnership is deemed to be no more
than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such
income to, respectively, each of the individual partners.”19
Q: What are the basic features of our present income tax
system?
Our present income tax system is global, schedular, and
progressive.
Q: What are the kinds of tax rates?
Tax rates are either (1) flat or proportional, or (2) graduated. The
latter may further be classified into (a) progressive, or (b)
regressive.
Q: What are the kinds of income according to tax rates?
Income may either be subject to (1) schedular tax, (2) final tax,
or (3) reduced rate, e.g., minimum corporate income tax.
Income subject to schedular tax includes: (a)
compensation income earned by an individual; (b) income from
the kind or category of taxable income of the taxpayer. Global approach, on the
other hand, refers to a system where the tax treatment view indifferently the tax
base and generally treats in common all categories of taxable income of the
taxpayer.
19. Tan v. del Rosario, GR Nos. 109289 and 109446, 3 October 1994.
7 Guide Notes on Income Tax
trade or exercise of profession of an individual; and (c) income
earned by an estate or trust.
Income subject to final tax includes: (a) interest, royalties,
prizes, and winnings; (b) cash or property dividends; (c) capital
gains from sale of shares of stock not traded in the stock
exchange; and (d) capital gains from sale of real property.
Q: What law governs Philippine income taxation?
The basic Philippine income tax law can be found in the 1997
Tax Code, i.e., RA No. 8424, as amended. The latest amendment
to our Philippine income tax law is found in RA No. 9504 (2008).
US tax cases have persuasive effect in our jurisdiction
because Philippine income taxation is patterned after its US
counterpart.
CHAPTER I — DEFINITIONS
SEC. 22. DEFINITIONS — WHEN USED IN THIS TITLE:
(A) THE TERM 'PERSON' MEANS AN INDIVIDUAL, A TRUST,
ESTATE OR CORPORATION.
(B) THE TERM 'CORPORATION' SHALL INCLUDE
PARTNERSHIPS, NO MATTER HOW CREATED OR
ORGANIZED, JOINT-STOCK COMPANIES, JOINT
ACCOUNTS (CUENTAS EN PARTICIPACION),
ASSOCIATION, OR INSURANCE COMPANIES, BUT DOES
NOT INCLUDE GENERAL PROFESSIONAL PARTNERSHIPS
AND A JOINT VENTURE OR CONSORTIUM FORMED FOR
THE PURPOSE OF UNDERTAKING CONSTRUCTION
PROJECTS OR ENGAGING IN PETROLEUM, COAL,
GEOTHERMAL AND OTHER ENERGY OPERATIONS
PURSUANT TO AN OPERATING CONSORTIUM
AGREEMENT UNDER A SERVICE CONTRACT WITH THE
GOVERNMENT. 'GENERAL PROFESSIONAL
PARTNERSHIPS' ARE PARTNERSHIPS FORMED BY
PERSONS FOR THE SOLE PURPOSE OF EXERCISING THEIR
COMMON PROFESSION, NO PART OF THE INCOME OF
WHICH IS DERIVED FROM ENGAGING IN ANY TRADE OR
2D SEM.
BUSINESS.
(C) THE TERM 'DOMESTIC,' WHEN APPLIED TO A
CORPORATION, MEANS CREATED OR ORGANIZED IN THE
PHILIPPINES OR UNDER ITS LAWS.
(D) THE TERM 'FOREIGN,' WHEN APPLIED TO A
CORPORATION, MEANS A CORPORATION WHICH IS NOT
DOMESTIC.
(E) THE TERM 'NONRESIDENT CITIZEN' MEANS:
(1) A CITIZEN OF THE PHILIPPINES WHO ESTABLISHES TO
THE SATISFACTION OF THE COMMISSIONER THE
FACT OF HIS PHYSICAL PRESENCE ABROAD WITH A
DEFINITE INTENTION TO RESIDE THEREIN.
(2) A CITIZEN OF THE PHILIPPINES WHO LEAVES THE
PHILIPPINES DURING THE TAXABLE YEAR TO RESIDE
ABROAD, EITHER AS AN IMMIGRANT OR FOR
EMPLOYMENT ON A PERMANENT BASIS.
(3) A CITIZEN OF THE PHILIPPINES WHO WORKS AND
DERIVES INCOME FROM ABROAD AND WHOSE
EMPLOYMENT THEREAT REQUIRES HIM TO BE
PHYSICALLY PRESENT ABROAD MOST OF THE TIME
DURING THE TAXABLE YEAR.
(4) A CITIZEN WHO HAS BEEN PREVIOUSLY CONSIDERED
AS NONRESIDENT CITIZEN AND WHO ARRIVES IN THE
PHILIPPINES AT ANY TIME DURING THE TAXABLE
YEAR TO RESIDE PERMANENTLY IN THE PHILIPPINES
SHALL LIKEWISE BE TREATED AS A NONRESIDENT
CITIZEN FOR THE TAXABLE YEAR IN WHICH HE
ARRIVES IN THE PHILIPPINES WITH RESPECT TO HIS
INCOME DERIVED FROM SOURCES ABROAD UNTIL
THE DATE OF HIS ARRIVAL IN THE PHILIPPINES.
(5) THE TAXPAYER SHALL SUBMIT PROOF TO THE
COMMISSIONER TO SHOW HIS INTENTION OF
LEAVING THE PHILIPPINES TO RESIDE PERMANENTLY
ABROAD OR TO RETURN TO AND RESIDE IN THE
PHILIPPINES AS THE CASE MAY BE FOR PURPOSE OF
THIS SECTION.
A.Y. 2017-2018 Ateneo de Manila University School of Law
(F) THE TERM 'RESIDENT ALIEN' MEANS AN INDIVIDUAL
WHOSE RESIDENCE IS WITHIN THE PHILIPPINES AND
WHO IS NOT A CITIZEN THEREOF.
(G) THE TERM 'NONRESIDENT ALIEN' MEANS AN INDIVIDUAL
WHOSE RESIDENCE IS NOT WITHIN THE PHILIPPINES AND
WHO IS NOT A CITIZEN THEREOF.
(H) THE TERM 'RESIDENT FOREIGN CORPORATION' APPLIES
TO A FOREIGN CORPORATION ENGAGED IN TRADE OR
BUSINESS WITHIN THE PHILIPPINES.
(I) THE TERM 'NONRESIDENT FOREIGN CORPORATION'
APPLIES TO A FOREIGN CORPORATION NOT ENGAGED IN
TRADE OR BUSINESS WITHIN THE PHILIPPINES.
(J) THE TERM 'FIDUCIARY' MEANS A GUARDIAN, TRUSTEE,
EXECUTOR, ADMINISTRATOR, RECEIVER, CONSERVATOR
OR ANY PERSON ACTING IN ANY FIDUCIARY CAPACITY
FOR ANY PERSON.
(K) THE TERM 'WITHHOLDING AGENT' MEANS ANY PERSON
REQUIRED TO DEDUCT AND WITHHOLD ANY TAX UNDER
THE PROVISIONS OF SECTION 57.
(L) THE TERM 'SHARES OF STOCK' SHALL INCLUDE SHARES
OF STOCK OF A CORPORATION, WARRANTS AND/OR
OPTIONS TO PURCHASE SHARES OF STOCK, AS WELL AS
UNITS OF PARTICIPATION IN A PARTNERSHIP (EXCEPT
GENERAL PROFESSIONAL PARTNERSHIPS), JOINT STOCK
COMPANIES, JOINT ACCOUNTS, JOINT VENTURES
TAXABLE AS CORPORATIONS, ASSOCIATIONS AND
RECREATION OR AMUSEMENT CLUBS (SUCH AS GOLF,
POLO OR SIMILAR CLUBS), AND MUTUAL FUND
CERTIFICATES.
(M) THE TERM 'SHAREHOLDER' SHALL INCLUDE
HOLDERS OF A SHARE/S OF STOCK, WARRANT/S AND/OR
OPTION/S TO PURCHASE SHARES OF STOCK OF A
CORPORATION, AS WELL AS A HOLDER OF A UNIT OF
PARTICIPATION IN A PARTNERSHIP (EXCEPT GENERAL
PROFESSIONAL PARTNERSHIPS) IN A JOINT STOCK
COMPANY, A JOINT ACCOUNT, A TAXABLE JOINT
8
VENTURE, A MEMBER OF AN ASSOCIATION, RECREATION
OR AMUSEMENT CLUB (SUCH AS GOLF, POLO OR SIMILAR
CLUBS) AND A HOLDER OF A MUTUAL FUND CERTIFICATE,
A MEMBER IN AN ASSOCIATION, JOINT-STOCK COMPANY,
OR INSURANCE COMPANY.
(N) THE TERM 'TAXPAYER' MEANS ANY PERSON SUBJECT TO
TAX IMPOSED BY THIS TITLE.
(O) THE TERMS 'INCLUDING' AND 'INCLUDES', WHEN USED IN
A DEFINITION CONTAINED IN THIS TITLE, SHALL NOT BE
DEEMED TO EXCLUDE OTHER THINGS OTHERWISE
WITHIN THE MEANING OF THE TERM DEFINED.
(P) THE TERM 'TAXABLE YEAR' MEANS THE CALENDAR YEAR,
OR THE FISCAL YEAR ENDING DURING SUCH CALENDAR
YEAR, UPON THE BASIS OF WHICH THE NET INCOME IS
COMPUTED UNDER THIS TITLE. 'TAXABLE YEAR'
INCLUDES, IN THE CASE OF A RETURN MADE FOR A
FRACTIONAL PART OF A YEAR UNDER THE PROVISIONS OF
THIS TITLE OR UNDER RULES AND REGULATIONS
PRESCRIBED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, THE
PERIOD FOR WHICH SUCH RETURN IS MADE.
(Q) THE TERM 'FISCAL YEAR' MEANS AN ACCOUNTING
PERIOD OF TWELVE (12) MONTHS ENDING ON THE LAST
DAY OF ANY MONTH OTHER THAN DECEMBER.
(R) THE TERMS 'PAID OR INCURRED' AND 'PAID OR
ACCRUED' SHALL BE CONSTRUED ACCORDING TO THE
METHOD OF ACCOUNTING UPON THE BASIS OF WHICH
THE NET INCOME IS COMPUTED UNDER THIS TITLE.
(S) THE TERM 'TRADE OR BUSINESS' INCLUDES THE
PERFORMANCE OF THE FUNCTIONS OF A PUBLIC OFFICE.
(T) THE TERM 'SECURITIES' MEANS SHARES OF STOCK IN A
CORPORATION AND RIGHTS TO SUBSCRIBE FOR OR TO
RECEIVE SUCH SHARES. THE TERM INCLUDES BONDS,
DEBENTURES, NOTES OR CERTIFICATES, OR OTHER
EVIDENCE OR INDEBTEDNESS, ISSUED BY ANY
CORPORATION, INCLUDING THOSE ISSUED BY A
9 Guide Notes on Income Tax
GOVERNMENT OR POLITICAL SUBDIVISION THEREOF,
WITH INTEREST COUPONS OR IN REGISTERED FORM.
(U) THE TERM 'DEALER IN SECURITIES' MEANS A MERCHANT
OF STOCKS OR SECURITIES, WHETHER AN INDIVIDUAL,
PARTNERSHIP OR CORPORATION, WITH AN ESTABLISHED
PLACE OF BUSINESS, REGULARLY ENGAGED IN THE
PURCHASE OF SECURITIES AND THE RESALE THEREOF TO
CUSTOMERS; THAT IS, ONE WHO, AS A MERCHANT, BUYS
SECURITIES AND RE-SELLS THEM TO CUSTOMERS WITH A
VIEW TO THE GAINS AND PROFITS THAT MAY BE DERIVED
THEREFROM.
(V) THE TERM 'BANK' MEANS EVERY BANKING INSTITUTION,
AS DEFINED IN SECTION 2 OF REPUBLIC ACT NO. 337, AS
AMENDED, OTHERWISE KNOWN AS THE GENERAL
BANKING ACT. A BANK MAY EITHER BE A COMMERCIAL
BANK, A THRIFT BANK, A DEVELOPMENT BANK, A RURAL
BANK OR SPECIALIZED GOVERNMENT BANK.
(W) THE TERM 'NON-BANK FINANCIAL
INTERMEDIARY' MEANS A FINANCIAL INTERMEDIARY, AS
DEFINED IN SECTION 2(D)(C) OF REPUBLIC ACT NO. 337,
AS AMENDED, OTHERWISE KNOWN AS THE GENERAL
BANKING ACT, AUTHORIZED BY THE BANGKO SENTRAL
NG PILIPINAS (BSP) TO PERFORM QUASI-BANKING
ACTIVITIES.
(X) THE TERM 'QUASI-BANKING ACTIVITIES' MEANS
BORROWING FUNDS FROM TWENTY (20) OR MORE
PERSONAL OR CORPORATE LENDERS AT ANY ONE TIME,
THROUGH THE ISSUANCE, ENDORSEMENT, OR
ACCEPTANCE OF DEBT INSTRUMENTS OF ANY KIND
OTHER THAN DEPOSITS FOR THE BORROWER'S OWN
ACCOUNT, OR THROUGH THE ISSUANCE OF
CERTIFICATES OF ASSIGNMENT OR SIMILAR
INSTRUMENTS, WITH RECOURSE, OR OF REPURCHASE
AGREEMENTS FOR PURPOSES OF RELENDING OR
PURCHASING RECEIVABLES AND OTHER SIMILAR
OBLIGATIONS: PROVIDED, HOWEVER, THAT
COMMERCIAL, INDUSTRIAL AND OTHER NON-FINANCIAL
COMPANIES, WHICH BORROW FUNDS THROUGH ANY OF
2D SEM.
THESE MEANS FOR THE LIMITED PURPOSE OF FINANCING
THEIR OWN NEEDS OR THE NEEDS OF THEIR AGENTS OR
DEALERS, SHALL NOT BE CONSIDERED AS PERFORMING
QUASI-BANKING FUNCTIONS.
(Y) THE TERM 'DEPOSIT SUBSTITUTES' SHALL MEAN AN
ALTERNATIVE FROM OF OBTAINING FUNDS FROM THE
PUBLIC (THE TERM 'PUBLIC' MEANS BORROWING FROM
TWENTY (20) OR MORE INDIVIDUAL OR CORPORATE
LENDERS AT ANY ONE TIME) OTHER THAN DEPOSITS,
THROUGH THE ISSUANCE, ENDORSEMENT, OR
ACCEPTANCE OF DEBT INSTRUMENTS FOR THE
BORROWERS OWN ACCOUNT, FOR THE PURPOSE OF
RELENDING OR PURCHASING OF RECEIVABLES AND
OTHER OBLIGATIONS, OR FINANCING THEIR OWN NEEDS
OR THE NEEDS OF THEIR AGENT OR DEALER. THESE
INSTRUMENTS MAY INCLUDE, BUT NEED NOT BE LIMITED
TO BANKERS' ACCEPTANCES, PROMISSORY NOTES,
REPURCHASE AGREEMENTS, INCLUDING REVERSE
REPURCHASE AGREEMENTS ENTERED INTO BY AND
BETWEEN THE BANGKO SENTRAL NG PILIPINAS (BSP)
AND ANY AUTHORIZED AGENT BANK, CERTIFICATES OF
ASSIGNMENT OR PARTICIPATION AND SIMILAR
INSTRUMENTS WITH RECOURSE: PROVIDED, HOWEVER,
THAT DEBT INSTRUMENTS ISSUED FOR INTERBANK CALL
LOANS WITH MATURITY OF NOT MORE THAN FIVE (5)
DAYS TO COVER DEFICIENCY IN RESERVES AGAINST
DEPOSIT LIABILITIES, INCLUDING THOSE BETWEEN OR
AMONG BANKS AND QUASI-BANKS, SHALL NOT BE
CONSIDERED AS DEPOSIT SUBSTITUTE DEBT
INSTRUMENTS.
(Z) THE TERM 'ORDINARY INCOME' INCLUDES ANY GAIN
FROM THE SALE OR EXCHANGE OF PROPERTY WHICH IS
NOT A CAPITAL ASSET OR PROPERTY DESCRIBED IN
SECTION 39(A)(1). ANY GAIN FROM THE SALE OR
EXCHANGE OF PROPERTY WHICH IS TREATED OR
CONSIDERED, UNDER OTHER PROVISIONS OF THIS TITLE,
AS 'ORDINARY INCOME' SHALL BE TREATED AS GAIN
FROM THE SALE OR EXCHANGE OF PROPERTY WHICH IS
NOT A CAPITAL ASSET AS DEFINED IN SECTION 39(A)(1).
A.Y. 2017-2018 Ateneo de Manila University School of Law
THE TERM 'ORDINARY LOSS' INCLUDES ANY LOSS FROM
THE SALE OR EXCHANGE OF PROPERTY WHICH IS NOT A
CAPITAL ASSET. ANY LOSS FROM THE SALE OR
EXCHANGE OF PROPERTY WHICH IS TREATED OR
CONSIDERED, UNDER OTHER PROVISIONS OF THIS TITLE,
AS 'ORDINARY LOSS' SHALL BE TREATED AS LOSS FROM
THE SALE OR EXCHANGE OF PROPERTY WHICH IS NOT A
CAPITAL ASSET.
(FF)
(AA) THE TERM 'RANK AND FILE EMPLOYEES' SHALL
MEAN ALL EMPLOYEES WHO ARE HOLDING NEITHER
MANAGERIAL NOR SUPERVISORY POSITION AS DEFINED
UNDER EXISTING PROVISIONS OF THE LABOR CODE OF
THE PHILIPPINES, AS AMENDED.
(BB) THE TERM 'MUTUAL FUND COMPANY' SHALL
MEAN AN OPEN-END AND CLOSE-END INVESTMENT
COMPANY AS DEFINED UNDER THE INVESTMENT
COMPANY ACT.
(CC) THE TERM 'TRADE, BUSINESS OR PROFESSION'
SHALL NOT INCLUDE PERFORMANCE OF SERVICES BY THE
TAXPAYER AS AN EMPLOYEE.
(DD) THE TERM 'REGIONAL OR AREA HEADQUARTERS' (GG)
SHALL MEAN A BRANCH ESTABLISHED IN THE
PHILIPPINES BY MULTINATIONAL COMPANIES AND
WHICH HEADQUARTERS DO NOT EARN OR DERIVE
INCOME FROM THE PHILIPPINES AND WHICH ACT AS
SUPERVISORY, COMMUNICATIONS AND COORDINATING
CENTER FOR THEIR AFFILIATES, SUBSIDIARIES, OR
BRANCHES IN THE ASIA-PACIFIC REGION AND OTHER
FOREIGN MARKETS.
(HH)
(EE) THE TERM 'REGIONAL OPERATING
HEADQUARTERS' SHALL MEAN A BRANCH ESTABLISHED
IN THE PHILIPPINES BY MULTINATIONAL COMPANIES
WHICH ARE ENGAGED IN ANY OF THE FOLLOWING
SERVICES: GENERAL ADMINISTRATION AND PLANNING;
BUSINESS PLANNING AND COORDINATION; SOURCING
AND PROCUREMENT OF RAW MATERIALS AND
COMPONENTS; CORPORATE FINANCE ADVISORY
10
SERVICES; MARKETING CONTROL AND SALES
PROMOTION; TRAINING AND PERSONNEL
MANAGEMENT; LOGISTIC SERVICES; RESEARCH AND
DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT;
TECHNICAL SUPPORT AND MAINTENANCE; DATA
PROCESSING AND COMMUNICATIONS; AND BUSINESS
DEVELOPMENT.
THE TERM 'LONG-TERM DEPOSIT OR
INVESTMENT CERTIFICATES' SHALL REFER TO
CERTIFICATE OF TIME DEPOSIT OR INVESTMENT IN THE
FORM OF SAVINGS, COMMON OR INDIVIDUAL TRUST
FUNDS, DEPOSIT SUBSTITUTES, INVESTMENT
MANAGEMENT ACCOUNTS AND OTHER INVESTMENTS
WITH A MATURITY PERIOD OF NOT LESS THAN FIVE (5)
YEARS, THE FORM OF WHICH SHALL BE PRESCRIBED BY
THE BANGKO SENTRAL NG PILIPINAS (BSP) AND ISSUED
BY BANKS ONLY (NOT BY NONBANK FINANCIAL
INTERMEDIARIES AND FINANCE COMPANIES) TO
INDIVIDUALS IN DENOMINATIONS OF TEN THOUSAND
PESOS (P10,000) AND OTHER DENOMINATIONS AS MAY
BE PRESCRIBED BY THE BSP.
THE TERM ‘STATUTORY MINIMUM WAGE’
EARNER SHALL REFER TO RATE FIXED BY THE REGIONAL
TRIPARTITE WAGE AND PRODUCTIVITY BOARD, AS
DEFINED BY THE BUREAU OF LABOR AND EMPLOYMENT
STATISTICS (BLES) OF THE DEPARTMENT OF LABOR
AND EMPLOYMENT (DOLE). (AS AMENDED BY RA NO.
9504.)
THE TERM ‘MINIMUM WAGE EARNER’ SHALL
REFER TO A WORKER IN THE PRIVATE SECTOR PAID THE
STATUTORY MINIMUM WAGE; OR TO AN EMPLOYEE IN
THE PUBLIC SECTOR WITH COMPENSATION INCOME OF
NOT MORE THAN THE STATUTORY MINIMUM WAGE IN
THE NON-AGRICULTURAL SECTOR WHERE HE/SHE IS
ASSIGNED. (AS AMENDED BY RA NO. 9504.)
11 Guide Notes on Income Tax
CHAPTER II — GENERAL PRINCIPLES
SEC. 23. GENERAL PRINCIPLES OF INCOME TAXATION IN THE
PHILIPPINES. — EXCEPT WHEN OTHERWISE PROVIDED IN THIS
CODE:
(A) A CITIZEN OF THE PHILIPPINES RESIDING THEREIN IS
TAXABLE ON ALL INCOME DERIVED FROM SOURCES
WITHIN AND WITHOUT THE PHILIPPINES;
(B) A NONRESIDENT CITIZEN IS TAXABLE ONLY ON INCOME
DERIVED FROM SOURCES WITHIN THE PHILIPPINES;
(C) AN INDIVIDUAL CITIZEN OF THE PHILIPPINES WHO IS
WORKING AND DERIVING INCOME FROM ABROAD AS AN
OVERSEAS CONTRACT WORKER IS TAXABLE ONLY ON
INCOME DERIVED FROM SOURCES WITHIN THE
PHILIPPINES: PROVIDED, THAT A SEAMAN WHO IS A
CITIZEN OF THE PHILIPPINES AND WHO RECEIVES
COMPENSATION FOR SERVICES RENDERED ABROAD AS A
MEMBER OF THE COMPLEMENT OF A VESSEL ENGAGED
EXCLUSIVELY IN INTERNATIONAL TRADE SHALL BE
TREATED AS AN OVERSEAS CONTRACT WORKER;
(D) AN ALIEN INDIVIDUAL, WHETHER A RESIDENT OR NOT
OF THE PHILIPPINES, IS TAXABLE ONLY ON INCOME
DERIVED FROM SOURCES WITHIN THE PHILIPPINES;
(E) A DOMESTIC CORPORATION IS TAXABLE ON ALL INCOME
DERIVED FROM SOURCES WITHIN AND WITHOUT THE
PHILIPPINES; AND
(F) A FOREIGN CORPORATION, WHETHER ENGAGED OR NOT
IN TRADE OR BUSINESS IN THE PHILIPPINES, IS TAXABLE
ONLY ON INCOME DERIVED FROM SOURCES WITHIN THE
PHILIPPINES.
Q: How is a resident citizen taxed?
20. NOTE: Today, the 1997 Tax Code treats resident citizens and non-resident
citizens differently.
2D SEM.
* In Conwi v. Court of Tax Appeals, petitioners were Filipino
citizens and employees of Procter & Gamble, Philippine
Manufacturing Corporation. In the years 1970 and 1971,
petitioners were assigned to other subsidiaries of Procter &
Gamble outside of the Philippines, during which time
petitioners were paid USD as compensation for services in their
foreign assignments. Were petitioners liable to pay income tax
on their dollar earnings? The Supreme Court held in the
affirmative. The governing law then was Section 21 of the old
Tax Code, amended up to 4 August 1969, which imposed a tax
upon the taxable net income received during each taxable year
from all sources by a citizen of the Philippines, whether residing
here or abroad.20 Petitioners’ dollar earnings were classified as
income and hence, subject to income tax. The next issue was the
exchange rate to be used to determine the peso equivalent of the
dollar earnings of petitioners for income tax purposes. The
Supreme Court held that the par value of the peso, not the
prevailing free market rate of exchange, should be the guiding
rate used for purposes of computing income tax.
In this case, income was defined in this sense: it is “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, it means
cash or its equivalent. Income can also be thought of as a flow
of the fruits of one’s labor.”21
Q: How is a nonresident alien taxed?
In CIR v. Baier-Nickel, respondent was a non-resident German
citizen who was employed as a commission agent of
JUBANITEX, which was a domestic corporation. It was agreed
that respondent would receive 10% sales commission on all
sales actually concluded and collected through her efforts. In
1995, respondent received a certain sum representing her sales
commission income from which JUBANITEX withheld the
corresponding 10% withholding tax and remitting such amount
21. Conwi, GR Nos. 48532 & 48533.
A.Y. 2017-2018 Ateneo de Manila University School of Law
to the BIR. Respondent filed a claim for tax refund on the
contention that her sales commission income was not taxable in
the Philippines because the same was a compensation for her
services rendered in Germany and therefore considered as
income from sources outside the Philippines. Was respondent’s
sales commission income taxable in the Philippines? The
Supreme Court held affirmatively. Pursuant to Sections 23(D)
and 25 of the 1997 Tax Code, non-resident aliens, whether or
not engaged in trade or business, are subject to Philippine
income taxation on their income received from all sources
within the Philippines. What is thus meant by “source” of
income? Source of income relates to the property, activity or
service that produced the income. “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, or the place of payment, but
the place where the services were actually rendered.” Here, the
Supreme Court found that respondent failed to show
substantial evidence, or “that relevant evidence that a
reasonable mind might accept as adequate to support the
conclusion that it was in Germany where she performed the
income producing service which gave rise to the reported
monthly sales in the months of March and May to September of
1995. She thus failed to discharge the burden of proving that her
income was from sources outside the Philippines and exempt
from the application of our income tax law. Hence, the claim for
tax refund should be denied.”22
Q: What are considered corporations for income tax purposes?
Section 22(B) of the 1997 Tax Code defines “corporation” in this
wise:
(B) The term 'corporation' shall include
partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies,
but does not include general professional
22. Baier-Nickel, GR No. 153793.
12
partnerships and a joint venture or consortium
formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating consortium agreement under a service
contract with the Government. 'General
professional partnerships' are partnerships formed
by persons for the sole purpose of exercising their
common profession, no part of the income of which
is derived from engaging in any trade or business.
In the case of Obillos v. CIR, Jose Obillos, Sr. bequeathed
two lots located in Greenhills, San Juan to his four children
(here, the petitioners) to enable them to build their residences.
After more than a year, petitioners resold the lots to Walled City
Securities Corporation and Canda. Petitioners derived from the
sale a total profit of Php 134,341.88, or Php 33,584 for each of
them. Petitioners treated each of their profits as a capital gain
and paid an income tax on ½ thereof. Later, the CIR issued an
assessment against petitioners for deficiency income tax on the
ground that petitioners formed an unregistered partnership or
joint venture. Hence, the CIR required petitioners to pay
corporate income tax on the total profit, in addition to
individual income tax on each of their shares. The CIR
considered the share of the profits of each of petitioners as a
distributive dividend taxable in full (not a mere capital gain of
which ½ is taxable). The Supreme Court disagreed. The Court
held that it was error to consider petitioners as having formed
a partnership. Petitioners were merely co-owners. “To consider
them as partners would obliterate the distinction between a co-
ownership and a partnership. The petitioners were not engaged
in any joint venture by reason of that isolated transaction. Their
original purpose was to divide the lots for residential purposes.
If later on they found it not feasible to build their residences on
the lots because of the high cost of construction, then they had
no choice but to resell the same to dissolve the co-ownership.
The division of the profit was merely incidental to the
13 Guide Notes on Income Tax
dissolution of the co-ownership which was in the nature of
things a temporary state. It had to be terminated sooner or
later.”23
In Pascual v. CIR, Pascual and Dragon together bought
five parcels of land. In 1968, petitioners sold two parcels of land
to Marenir Development Corporation, while the remaining
three parcels of land were sold to Reyes and Samson in 1970.
Petitioners realized a net profit in the 1968 sale in the amount of
Php 165,224.70, while they realized a net profit of Php 60,000 in
the 1970 sale. The corresponding capital gains taxes were paid
by petitioners in 1973 and 1974 by availing of the tax amnesties
granted in said years. Later, an assessment for deficiency
corporate income taxes for the years 1968 and 1970 was issued
against petitioners. The CIR contended that during said years,
petitioners as co-owners in the real estate transactions formed
an unregistered partnership or joint venture taxable as a
corporation. The Supreme Court held that a mere co-ownership
existed between petitioners. There was no adequate basis to
support the proposition that petitioners formed an unregistered
partnership. “The sharing of returns does not in itself establish
a partnership whether or not the persons sharing therein have
a joint or common right or interest in the property. There must
be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and
the freedom of each party to transfer or assign the whole
property.” Hence, petitioners could not have been liable for
corporate income taxes.24
In Afisco Insurance Corporation v. Court of Appeals,
petitioners were 41 non-life insurance corporations in the
Philippines. Upon issuance by them of machinery insurance
policies, petitioners entered into a Quota Share Reinsurance
Treaty and a Surplus Reinsurance Treaty with Munchener
Ruchversicherungs-Gesselschaft, a nonresident foreign
insurance corporation. The reinsurance treaties required
petitioners to form a pool. Accordingly, a pool composed of
23. Obillos v. CIR, GR No. L-68118, 29 October 1985.
24. Pascual v. CIR, GR No. L-78133, 18 October 1988.
2D SEM.
petitioners was formed. The CIR issued an assessment against
petitioners for deficiency corporate income taxes on the ground
that the pool of machinery insurers was a partnership taxable
as a corporation. Petitioners protested the assessment and
belied the existence of a partnership. The Supreme Court
agreed with the CIR. It held that the following unmistakably
indicated a partnership or an association among petitioners that
was taxable as a corporation:
(1) The pool had a common fund consisting of money
and other valuables that were deposited in the
name and credit of the pool. This common fund
paid for the administration and operation
expenses of the pool.
(2) The pool functioned through an executive board,
which resembled the board of directors of a
corporation, composed of one representative for
each of petitioners.
(3) Petitioners shared in the profits derived from the
business ceded to the pool.
A partnership is formed when persons contract to devote
to a common purpose either money, property or labor with the
intention of dividing the profits among themselves. On the
other hand, an association implies associates who enter into a
joint enterprise for the transaction of business.25
Q: Give an example of a resident foreign corporation.
In CIR v. Tokyo Shipping Co., Ltd., respondent was a foreign
corporation represented in the Philippines by a domestic
corporation. It owned and operated tramper vessel M/V
Gardenia. In December 1980, NASUTRA chartered M/V
Gardenia to load 16,500 metric tons of raw sugar in the
Philippines. In the same month, the domestic corporation paid
the required income and common carrier’s taxes based on the
expected gross receipts of the vessel. Upon arriving at the
25. Afisco Insurance Corporation v. Court of Appeals, GR No. 112675, 25 January
1999.
A.Y. 2017-2018 Ateneo de Manila University School of Law
Guimaras Port of Iloilo, however, the vessel found no sugar for
loading. Claiming the prepayment of income and common
carrier’s taxes as erroneous since no receipt was realized from
the charter agreement, respondent instituted a claim for tax
refund or credit. Was respondent entitled to its claim? The
Supreme Court stated that a resident foreign corporation
engaged in the transport of cargo was liable for taxes depending
on the amount of income it derived from sources within the
Philippines. Before such a tax liability could be enforced, the
taxpayer must be shown to have earned income sourced from
the Philippines. The Supreme Court found that respondent
adduced sufficient evidence to prove that it derived no receipt
from its charter agreement with NASUTRA. The tramper vessel
M/V Gardenia arrived in Iloilo on 10 January 1981 but found
no raw sugar to load and returned to Japan without any cargo
laden on board. Thus, respondent was entitled to its claim for
tax refund or credit of prepaid income and common carrier’s
taxes.26
Q: Give examples of nonresident foreign corporations.
* In CIR v. British Overseas Airways Corporation, BOAC was a
British Government-owned corporation engaged in the
international airline business. As such, it operated air
transportation service and sold transportation tickets over the
routes of the other airline members. For the years 1959 to 1971,
BOAC had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or cargo to and
from the Philippines, although from 1959 to 1971, BOAC
maintained a general sales agent in the country which was
responsible for selling BOAC tickets covering passengers and
cargoes. The CIR issued an assessment against BOAC for
deficiency income taxes for the years 1959 to 1971 for the sale of
tickets in the Philippines for air transportation. Was BOAC a
resident foreign corporation doing business in the Philippines?
The Supreme Court held affirmatively. BOAC, during the
26. CIR v. Tokyo Shipping Co., Ltd., GR No. 68252, 26 May 1995.
14
periods covered by the subject assessments, maintained a
general sales agent in the Philippines which performed
activities in the exercise of the functions normally incident to,
and in progressive pursuit of, the purpose and object of its
organization as an international air carrier. BOAC was held to
be engaged in business in the Philippines through its local agent
during the period covered by the assessments.
“There is no specific criterion as to what constitutes
‘doing’ or ‘engaging in’ or ‘transacting’ business. Each case
must be adjudged in the light of its peculiar environmental
circumstances. The term 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 and object of the business
organization. In order that a foreign corporation may be
regarded as doing business in within a State, there must be a
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.”27
The issue in N.V. Reederij “Amsterdam” v. CIR was the
income tax liability of a foreign shipping corporation which
called on Philippine ports to load cargoes for foreign
destination on two occasions (in 1963 and 1964), and which
collected freight fees on these transactions. The Supreme Court
classified N.V. Reederij “Amsterdam” as a foreign corporation
not engaged in trade or business in the Philippines. It did not
have a branch office in the Philippines and it made only two
calls in Philippine ports in different years. “In order that a
foreign corporation may be considered engaged in trade or
business, its business transactions must be continuous. A casual
business activity in the Philippines by a foreign corporation, as
27. CIR v. British Overseas Airways Corporation, GR Nos. L-65773-74, 30 April
1987.
15 Guide Notes on Income Tax
in the present case, does not amount to engaging in trade or
business in the Philippines for income tax purposes.”28
In Marubeni Corporation v. CIR, Marubeni Corporation
(the “Head Office”) was a Japanese corporation which
established a branch office (the “Branch Office”) in the
Philippines. The Head Office made equity investments in
Atlantic Gulf and Pacific Co. of Manila. In 1981, AG&P declared
and paid cash dividends to the Head Office. AG&P directly
remitted the cash dividends to the Head Office, net not only of
the 10% final dividend tax, but also of the withheld 15% profit
remittance tax (based on the remittable amount after deducting
the 10% final dividend tax). Later, the Head Office filed a claim
for tax refund or credit of alleged erroneously paid branch
profit remittance tax on the dividends remitted by AG&P to the
Head Office. The issue in this case revolved around the Head
Office’s tax liability on its dividend income from Philippine
sources. The Supreme Court deemed it wise to first determine
the classification of the Head Office for income taxation
purposes. The Head Office contended that following the
principal-agent relationship theory, because the Branch Office
was a resident foreign corporation, the Head Office was
likewise a resident foreign corporation. Hence, the Head Office
was subject only to the 10% final dividend tax. Upon the other
hand, the CIR argued that the Head Office was a nonresident
foreign corporation which was neither subject to the 10% final
dividend tax nor the withheld 15% branch profit remittance tax.
Instead, the Head Office was subject to the 35% final
withholding tax on its gross income earned from Philippine
sources. The Supreme Court declared that in this particular
transaction, the Head Office was considered a nonresident
foreign corporation. The general rule is that a foreign
corporation is the same juridical entity as its branch office in the
Philippines. However, “when the foreign corporation transacts
business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction
becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the
28. N.V. Reederij “Amsterdam” v. CIR, GR No. L-46029, 23 June 1988.
2D SEM.
branch or the resident foreign corporation.” Being a
nonresident foreign corporation with respect to the transaction
in question, generally, the Head Office must be taxed 35% of its
gross income from all sources within the Philippines. However,
based on now Section 28(B)(5)(b) of the 1997 Tax Code and the
relevant provision of the RP-Japan Tax Treaty (i.e., the tax
sparing rule), a discounted rate of 15% was given to the Head
Office on dividends received from AG&P. 29
Philippine income taxation recognizes two kinds of
foreign corporations: (1) resident foreign corporation, and (2)
nonresident foreign corporation. What makes a foreign
corporation a resident of the Philippines? In State Investment
House, Inc. v. Citibank, N.A., respondents were foreign banks
with principal offices situated outside of the Philippines. Said
banks were licensed to do business in the country and did so
for many years, through branch offices or agencies. Were these
Philippine branches or units considered residents of the
Philippines pursuant to then prevailing Insolvency Law, or
were they residents of the state under the laws of which they
were respectively incorporated? The Supreme Court
acknowledged that the Insolvency Law itself did not contain a
definition of the term “resident.” The Court resorted to a
reading of other statutes, albeit of subsequent enactment and
effectivity, from which enlightening notions of the term could
be derived, e.g., then prevailing Tax Code, Offshore Banking
Law, and General Banking Act. “Courts have held that ‘a
domestic corporation is regarded as having a residence within
the state at any place where it is engaged in the particulars of
the corporate enterprise, and not only at its chief place or home
office;’ that ‘a corporation may be domiciled in one state and
resident in another; its legal domicile in the state of its creation
presents no impediment to its residence in a real and practical
sense in the state of its business activities.” Here, the Supreme
Court found that the foreign banks were residents of the
Philippines. It was not the grant of license to do business in the
country which made them residents of the Philippines. The
license merely gave them legitimacy to their business in the
29. Marubeni Corporation v. CIR, GR No. 76573, 14 September 1989.
A.Y. 2017-2018 Ateneo de Manila University School of Law 16

Philippines. The “necessary element in its signification is SECTION, DERIVED FOR EACH TAXABLE YEAR
locality of existence.”30 FROM ALL SOURCES WITHIN THE PHILIPPINES
BY AN INDIVIDUAL ALIEN WHO IS A RESIDENT
CHAPTER III — TAX ON INDIVIDUALS OF THE PHILIPPINES.
(2) RATES OF TAX ON TAXABLE INCOME OF
SEC. 24. INCOME TAX RATES. — INDIVIDUALS. THE TAX SHALL BE COMPUTED IN
(A) RATES OF INCOME TAX ON INDIVIDUAL CITIZEN AND ACCORDANCE WITH AND AT THE RATES
INDIVIDUAL RESIDENT ALIEN OF THE PHILIPPINES. — ESTABLISHED IN THE FOLLOWING SCHEDULE: 

(1) AN INCOME TAX IS HEREBY IMPOSED: (a) TAX SCHEDULE EFFECTIVE JANUARY 1,
(a) ON THE TAXABLE INCOME DEFINED IN 2018 UNTIL DECEMBER 31, 2022:
SECTION 31 OF THIS CODE, OTHER THAN NOT OVER P250,000 0%
INCOME SUBJECT TO TAX UNDER
SUBSECTIONS (B), (C) AND (D) OF THIS OVER P250,000 BUT NOT 20% OF THE EXCESS
SECTION, DERIVED FOR EACH TAXABLE YEAR OVER P400,000 OVER P250, 000
FROM ALL SOURCES WITHIN AND WITHOUT OVER P400,000 BUT NOT P30,000 + 25% OF THE
THE PHILIPPINES BE EVERY INDIVIDUAL OVER P800,000 EXCESS OVER P400,000
CITIZEN OF THE PHILIPPINES RESIDING
THEREIN; OVER P800,000 BUT NOT P130,000 + 30% OF THE
OVER P2,000,000 EXCESS OVER P800,000
(b) ON THE TAXABLE INCOME DEFINED IN
SECTION 31 OF THIS CODE, OTHER THAN OVER P2,000,000 BUT NOT P490,000 + 32% OF THE
INCOME SUBJECT TO TAX UNDER OVER P8,000,000 EXCESS OVER P2,000,000
SUBSECTIONS (B), (C) AND (D) OF THIS OVER P8,000,000 P2,410,000 + 35% OF THE
SECTION, DERIVED FOR EACH TAXABLE YEAR EXCESS OVER P8,000,000
FROM ALL SOURCES WITHIN THE PHILIPPINES
BY AN INDIVIDUAL CITIZEN OF THE TAX SCHEDULE EFFECTIVE JANUARY 1,
PHILIPPINES WHO IS RESIDING OUTSIDE OF 2023 AND ONWARDS:
THE PHILIPPINES INCLUDING OVERSEAS
NOT OVER P250,000 0%
CONTRACT WORKERS REFERRED TO IN
SUBSECTION(C) OF SECTION 23 HEREOF; AND OVER P250,000 BUT NOT 15% OF THE EXCESS

 OVER P400,000 OVER P250, 000
(c) ON THE TAXABLE INCOME DEFINED IN OVER P400,000 BUT NOT P22,500 + 20% OF THE
SECTION 31 OF THIS CODE, OTHER THAN OVER P800,000 EXCESS OVER P400,000
INCOME SUBJECT TO TAX UNDER
SUBSECTIONS (B), (C) AND (D) OF THIS

30. State Investment House, Inc. v. Citibank, N.A., GR Nos. 79926-27, 17 October business, whereas domicile is the state of that corporation’s formation or
1991. NOTE: Residence is the place where a corporation operates and transacts organization.
17 Guide Notes on Income Tax 2D SEM.
OVER P800,000 BUT NOT P102,500 + 25% OF THE PESOS (P250,000) IN LIEU OF THE
OVER P2,000,000 EXCESS OVER P800,000 GRADUATED INCOME TAX RATES
UNDER SUBSECTION (A)(2)(A) OF THIS
OVER P2,000,000 BUT NOT P402,500 + 30% OF THE SECTION AND THE PERCENTAGE TAX
OVER P8,000,000 EXCESS OVER P2,000,000 UNDER SECTION 116 OF THIS CODE.
OVER P8,000,000 P2,202,500 + 35% OF THE (c) RATE OF TAX FOR MIXED INCOME
EXCESS OVER P8,000,000 EARNERS – TAXPAYERS EARNING
BOTH COMPENSATION INCOME AND
FOR MARRIED INDIVIDUALS, THE HUSBAND AND WIFE, INCOME FROM BUSINESS OR
SUBJECT TO THE PROVISION OF SECTION 51(D) HEREOF, SHALL PRACTICE OF PROFESSION SHALL BE
COMPUTE SEPARATELY THEIR INDIVIDUAL INCOME TAX BASED SUBJECT TO THE FOLLOWING TAXES:
ON THEIR RESPECTIVE TOTAL TAXABLE INCOME: PROVIDED,
THAT IF ANY INCOME CANNOT BE DEFINITELY ATTRIBUTED TO 1. ALL INCOME FROM
OR IDENTIFIED AS INCOME EXCLUSIVELY EARNED OR REALIZED COMPENSATION — THE
BY EITHER OF THE SPOUSES FOR THE PURPOSE OF DETERMINING RATES PRESCRIBED UNDER
THEIR RESPECTIVE TAXABLE INCOME. SUBSECTION (A)(2)(A) OF
THIS SECTION.
PROVIDED, THAT MINIMUM WAGE EARNERS AS DEFINED
IN SECTION 22(HH) OF THIS CODE SHALL BE EXEMPT FROM THE 2. ALL INCOME FROM
PAYMENT OF INCOME TAX ON THEIR TAXABLE INCOME: BUSINESS OR PRACTICE OF
PROVIDED, FURTHER, THAT THE HOLIDAY PAY, OVERTIME PAY, PROFESSION —
NIGHT SHIFT DIFFERENTIAL PAY AND HAZARD PAY RECEIVED BY
a. IF TOTAL GROSS
SUCH MINIMUM WAGE EARNERS SHALL LIKEWISE BE EXEMPT
SALES AND/OR GROSS
FROM INCOME TAX.
RECEIPTS AND OTHER
(b) RATE OF TAX ON INCOME OF PURELY NON-OPERATING
SELFEMPLOYED INDIVIDUALS INCOME WHICH DO
AND/OR PROFESSIONALS WHOSE NOT EXCEED THE
GROSS SALES OR GROSS RECEIPTS VALUEADDED TAX
AND OTHER NONOPERATING (VAT) THRESHOLD AS
INCOME DOES NOT EXCEED THE PROVIDED IN
VALUE-ADDED TAX (VAT) SECTION 109(BB) OF
THRESHOLD AS PROVIDED IN THIS CODE. - THE
SECTION 109 (BB). – SELFEMPLOYED RATES PRESCRIBED
INDIVIDUALS AND/OR UNDER SUBSECTION
PROFESSIONALS SHALL HAVE THE (A)(2)(A) OF THIS
OPTION TO AVAIL OF AN EIGHT SECTION ON TAXABLE
PERCENT (8%) TAX ON GROSS SALES INCOME, OR EIGHT
OR GROSS RECEIPTS AND OTHER PERCENT (8%)
NON-OPERATING INCOME IN EXCESS INCOME TAX BASED
OF TWO HUNDRED FIFTY THOUSAND ON GROSS SALES OR
A.Y. 2017-2018 Ateneo de Manila University School of Law 18

GROSS RECEIPTS AND PERCENT (10%); PRIZES (EXCEPT PRIZES AMOUNTING

OTHER NON- TO TEN THOUSAND PESOS (P10,000) OR LESS WHICH
OPERATING INCOME SHALL BE SUBJECT TO TAX UNDER SUBSECTION (A)
IN LIEU OF THE OF SECTION 24; AND OTHER WINNINGS (EXCEPT
GRADUATED INCOME WINNINGS AMOUNTING TO TEN
TAX RATES UNDER THOUSAND PESOS (P10,000) OR LESS FROM
SUBSECTION (A)(2)(A) PHILIPPINE CHARITY SWEEPSTAKES AND LOTTO
OF THIS SECTION WHICH SHALL BE EXEMPT), DERIVED FROM
AND THE SOURCES WITHIN THE PHILIPPINES: PROVIDED,
PERCENTAGE TAX HOWEVER, THAT INTEREST INCOME RECEIVED BY AN
UNDER SECTION 116 INDIVIDUAL TAXPAYER (EXCEPT A NONRESIDENT
OF THIS CODE. INDIVIDUAL) FROM A DEPOSITORY BANK UNDER THE
EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM
b. IF TOTAL GROSS
SHALL BE SUBJECT TO A FINAL INCOME TAX AT THE
SALES AND/OR GROSS
RATE OF FIFTEEN PERCENT (15%) OF SUCH
RECEIPTS AND OTHER
INTEREST INCOME: PROVIDED, FURTHER, THAT
NON-OPERATING
INTEREST INCOME FROM LONG-TERM DEPOSIT OR
INCOME WHICH
INVESTMENT IN THE FORM OF SAVINGS, COMMON
EXCEEDS THE VALUE-
OR INDIVIDUAL TRUST FUNDS, DEPOSIT
ADDED TAX (VAT)
SUBSTITUTES, INVESTMENT MANAGEMENT
THRESHOLD AS
ACCOUNTS AND OTHER INVESTMENTS EVIDENCED
PROVIDED IN
BY CERTIFICATES IN SUCH FORM PRESCRIBED BY THE
SECTION 109(BB) OF
THIS CODE. - THE BANGKO SENTRAL NG PILIPINAS (BSP) SHALL BE
EXEMPT FROM THE TAX IMPOSED UNDER THIS
RATES PRESCRIBED
UNDER SUBSECTION SUBSECTION: PROVIDED, FINALLY, THAT SHOULD
THE HOLDER OF THE CERTIFICATE PRE-TERMINATE
(A)(2)(A) OF THIS
THE DEPOSIT OR INVESTMENT BEFORE THE FIFTH (5 )
TH

SECTION.
YEAR, A FINAL TAX SHALL BE IMPOSED ON THE
(B) RATE OF TAX ON CERTAIN PASSIVE INCOME. — ENTIRE INCOME AND SHALL BE DEDUCTED AND
(1) INTERESTS, ROYALTIES, PRIZES, AND OTHER WITHHELD BY THE DEPOSITORY BANK FROM THE
WINNINGS. — A FINAL TAX AT THE RATE OF TWENTY PROCEEDS OF THE LONG-TERM DEPOSIT OR
PERCENT (20%) IS HEREBY IMPOSED UPON THE INVESTMENT CERTIFICATE BASED ON THE
AMOUNT OF INTEREST FROM ANY CURRENCY BANK REMAINING MATURITY THEREOF:
DEPOSIT AND YIELD OR ANY OTHER MONETARY FOUR (4) YEARS TO LESS THAN FIVE (5) YEARS —
BENEFIT FROM DEPOSIT SUBSTITUTES AND FROM 5%;
TRUST FUNDS AND SIMILAR ARRANGEMENTS;
ROYALTIES, EXCEPT ON BOOKS, AS WELL AS OTHER
THREE (3) YEARS TO LESS THAN (4) YEARS — 12%;
AND
LITERARY WORKS AND MUSICAL COMPOSITIONS,
WHICH SHALL BE IMPOSED A FINAL TAX OF TEN LESS THAN THREE (3) YEARS — 20%
19 Guide Notes on Income Tax 2D SEM.
(2) CASH AND/OR PROPERTY DIVIDENDS. — A FINAL ESTATES AND TRUSTS: PROVIDED, THAT THE TAX
TAX AT THE RATE OF TEN PERCENT (10%) SHALL LIABILITY, IF ANY, ON GAINS FROM SALES OR OTHER
BE IMPOSED UPON THE CASH AND/OR PROPERTY DISPOSITIONS OF REAL PROPERTY TO THE
DIVIDENDS ACTUALLY OR CONSTRUCTIVELY GOVERNMENT OR ANY OF ITS POLITICAL
RECEIVED BY AN INDIVIDUAL FROM A DOMESTIC SUBDIVISIONS OR AGENCIES OR TO GOVERNMENT-
CORPORATION OR FROM A JOINT STOCK COMPANY, OWNED OR CONTROLLED CORPORATIONS SHALL BE
INSURANCE OR MUTUAL FUND COMPANIES AND DETERMINED EITHER UNDER SECTION 24 (A) OR
REGIONAL OPERATING HEADQUARTERS OF UNDER THIS SUBSECTION, AT THE OPTION OF THE
MULTINATIONAL COMPANIES, OR ON THE SHARE OF TAXPAYER.
AN INDIVIDUAL IN THE DISTRIBUTABLE NET INCOME
(2) EXCEPTION. — THE PROVISIONS OF PARAGRAPH (1)
AFTER TAX OF A PARTNERSHIP (EXCEPT A GENERAL
OF THIS SUBSECTION TO THE CONTRARY
PROFESSIONAL PARTNERSHIP) OF WHICH HE IS A
NOTWITHSTANDING, CAPITAL GAINS PRESUMED TO
PARTNER, OR ON THE SHARE OF AN INDIVIDUAL IN
HAVE BEEN REALIZED FROM THE SALE OR
THE NET INCOME AFTER TAX OF AN ASSOCIATION, A
DISPOSITION OF THEIR PRINCIPAL RESIDENCE BY
JOINT ACCOUNT, OR A JOINT VENTURE OR
NATURAL PERSONS, THE PROCEEDS OF WHICH IS
CONSORTIUM TAXABLE AS A CORPORATION OF
FULLY UTILIZED IN ACQUIRING OR CONSTRUCTING A
WHICH HE IS A MEMBER OR CO-VENTURER.
NEW PRINCIPAL RESIDENCE WITHIN EIGHTEEN (18)
(B) CAPITAL GAINS FROM SALE OF SHARES OF STOCK NOT CALENDAR MONTHS FROM THE DATE OF SALE OR
TRADED IN THE STOCK EXCHANGE. — THE PROVISIONS DISPOSITION, SHALL BE EXEMPT FROM THE CAPITAL
OF SECTION 39(B) NOTWITHSTANDING, A FINAL TAX AT
GAINS TAX IMPOSED UNDER THIS SUBSECTION:
THE RATE OF FIFTEEN PERCENT (15%)IS HEREBY
PROVIDED, THAT THE HISTORICAL COST OR
IMPOSED UPON THE NET CAPITAL GAINS REALIZED
ADJUSTED BASIS OF THE REAL PROPERTY SOLD OR
DURING THE TAXABLE YEAR FROM THE SALE, BARTER,
DISPOSED SHALL BE CARRIED OVER TO THE NEW
EXCHANGE OR OTHER DISPOSITION OF SHARES OF STOCK
PRINCIPAL RESIDENCE BUILT OR ACQUIRED:
IN A DOMESTIC CORPORATION, EXCEPT SHARES SOLD,
PROVIDED, FURTHER, THAT THE COMMISSIONER
OR DISPOSED OF THROUGH THE STOCK EXCHANGE. SHALL HAVE BEEN DULY NOTIFIED BY THE TAXPAYER
(C) CAPITAL GAINS FROM SALE OF REAL PROPERTY. — WITHIN THIRTY (30) DAYS FROM THE DATE OF SALE
OR DISPOSITION THROUGH A PRESCRIBED RETURN
(1) IN GENERAL. — THE PROVISIONS OF SECTION 39(B)
OF HIS INTENTION TO AVAIL OF THE TAX EXEMPTION
NOTWITHSTANDING, A FINAL TAX OF SIX PERCENT
HEREIN MENTIONED: PROVIDED, STILL FURTHER,
(6%) BASED ON THE GROSS SELLING PRICE OR
CURRENT FAIR MARKET VALUE AS DETERMINED IN
THAT THE SAID TAX EXEMPTION CAN ONLY BE
AVAILED OF ONCE EVERY TEN (10) YEARS: PROVIDED,
ACCORDANCE WITH SECTION 6(E) OF THIS CODE,
FINALLY, THAT IF THERE IS NO FULL UTILIZATION OF
WHICHEVER IS HIGHER, IS HEREBY IMPOSED UPON
THE PROCEEDS OF SALE OR DISPOSITION, THE
CAPITAL GAINS PRESUMED TO HAVE BEEN REALIZED
PORTION OF THE GAIN PRESUMED TO HAVE BEEN
FROM THE SALE, EXCHANGE, OR OTHER DISPOSITION
REALIZED FROM THE SALE OR DISPOSITION SHALL BE
OF REAL PROPERTY LOCATED IN THE PHILIPPINES,
SUBJECT TO CAPITAL GAINS TAX. FOR THIS PURPOSE,
CLASSIFIED AS CAPITAL ASSETS, INCLUDING PACTO
THE GROSS SELLING PRICE OR FAIR MARKET VALUE
DE RETRO SALES AND OTHER FORMS OF
AT THE TIME OF SALE, WHICHEVER IS HIGHER, SHALL
CONDITIONAL SALES, BY INDIVIDUALS, INCLUDING
A.Y. 2017-2018 Ateneo de Manila University School of Law
BE MULTIPLIED BY A FRACTION WHICH THE
UNUTILIZED AMOUNT BEARS TO THE GROSS SELLING
PRICE IN ORDER TO DETERMINE THE TAXABLE
PORTION AND THE TAX PRESCRIBED UNDER
PARAGRAPH (1) OF THIS SUBSECTION SHALL BE
IMPOSED THEREON.
Q: What is the difference in treatment between a co-owner and
a partner?
In the case of Obillos v. CIR, Jose Obillos, Sr. bequeathed two lots
located in Greenhills, San Juan to his four children (here, the
petitioners) to enable them to build their residences. After more
than a year, petitioners resold the lots to Walled City Securities
Corporation and Canda. Petitioners derived from the sale a
total profit of Php 134,341.88, or Php 33,584 for each of them.
Petitioners treated each of their profits as a capital gain and paid
an income tax on ½ thereof. Later, the CIR issued an assessment
against petitioners for deficiency income tax on the ground that
petitioners formed an unregistered partnership or joint venture.
Hence, the CIR required petitioners to pay corporate income tax
on the total profit, in addition to individual income tax on each
of their shares. The CIR considered the share of the profits of
each of petitioners as a distributive dividend taxable in full (not
a mere capital gain of which ½ is taxable). The Supreme Court
disagreed. The Court held that it was error to consider
petitioners as having formed a partnership. Petitioners were
merely co-owners. “To consider them as partners would
obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint
venture by reason of that isolated transaction. Their original
purpose was to divide the lots for residential purposes. If later
on they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice
but to resell the same to dissolve the co-ownership. The division
of the profit was merely incidental to the dissolution of the co-
31. Obillos, GR No. L-68118.
20
ownership which was in the nature of things a temporary state.
It had to be terminated sooner or later.”31
Q: Explain the concept of final withholding tax.
In China Banking Corporation v. CIR, Chinabank paid a certain
sum as gross receipts tax on its income from interests on loan,
investments, commissions, services, collection charges, foreign
exchange profits and other operating earnings during the
second quarter of 1994. Does the 20% final withholding tax on
a bank’s passive interest income form part of its taxable gross
receipts in computing the gross receipts tax? The CIR
contended that the term “gross receipts” meant the entire
income or receipt, without any deduction. The Supreme Court
held that the amount of interest income withheld in payment of
the 20% final withholding tax formed part of Chinabank’s gross
receipts in computing the gross receipts tax on banks. “As
commonly understood, the term ‘gross receipts’ means the
entire receipts without any deduction. Deducting any amount
from the gross receipts changes the result, and the meaning, to
net receipts. Any deduction from gross receipts is inconsistent
with a law that mandates a tax on gross receipts, unless the law
itself makes an exception.”
Furthermore: “Unless otherwise provided by law,
ownership is essential in determining whether interest income
forms part of taxable gross receipts. Ownership is the
circumstance that makes interest income part of the taxable
gross receipts of the taxpayer. When the taxpayer acquires
ownership of money representing interest, the money
constitutes income or receipt of the taxpayer.” Here, the amount
constituting the 20% final withholding tax, being originally
owned by Chinabank as part of its interest income, should form
part of its taxable gross receipts subject to gross receipts tax. 32
Does the 20% final withholding tax on a bank’s passive
interest income form part of its taxable gross receipts in
computing the gross receipts tax? This was the issue resolved
32. China Banking Corporation v. CIR, GR Nos. 146749, 10 June 2003.
21 Guide Notes on Income Tax
in CIR v. Solidbank Corporation. In this case, Solidbank sought
the refund of allegedly overpaid gross receipts tax for the year
1995. The CIR opposed on the ground that although the 20%
final withholding tax on Solidbank’s interest income was not
actually received because it was remitted directly to the
government, the fact that the amount redounded to Solidbank’s
benefit made it part of the taxable gross receipts in computing
the 5% gross receipts tax. The Supreme Court adhered to the
CIR’s view and ruled that the amount of interest income
withheld in payment of the 20% final withholding tax formed
part of gross receipts in computing for the gross receipts tax on
banks. The High Court said that as a bank, Solidbank was
covered by both gross receipts tax and final withholding tax.
However, the Supreme Court took the opportunity to
differentiate gross receipts tax, which is a percentage tax, from
final withholding tax, which is an income tax.
“A percentage tax is a national tax measured by a certain
percentage of the gross selling price or gross value in money of
goods sold, bartered or imported; or of the gross receipts or
earnings derived by ay person engaged in the sale of services.
It is not subject to withholding.”33
On the other han, “[a]n income tax, on the other hand, is a
national tax imposed on the net or the gross income realized in
a taxable year. It is subject to withholding.”34
What does the term “gross receipts” include? CIR v. Bank
of Commerce held that the bank’s interest income subject to final
tax included those actually, physically, and constructively
received. [The surrounding facts of this case are similar to those
of the immediately preceding case.] “Actual receipt of interest
income is not limited to physical receipt. Actual receipt may
either be physical receipt or constructive receipt. When the
depositary bank withholds the final tax to pay the tax liability
of the lending bank, there is prior to the withholding a
33. NOTE: The subject matter of gross receipts tax is the privilege of engaging in the
business of banking.
2D SEM.
constructive receipt by the lending bank of the amount
withheld. From the amount constructively received by the
lending bank, the depositary bank deducts the final
withholding tax and remits it to the government for the account
of the lending bank. Thus, the interest income actually received by
the lending bank, both physically and constructively, is the net
interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and
necessarily implies that the amount of the tax withheld comes
from the income earned by the taxpayer. Since the amount of
the tax withheld constitutes income earned by the taxpayer,
then that amount manifestly forms part of the taxpayer’s gross
receipt. Because the amount withheld belongs to the taxpayer,
he can transfer its ownership to the government in payment of
his tax liability. The amount withheld indubitabley comes from
income of the taxpayer, and thus forms part of his gross
receipts.”35
Are gross receipts the same as gross revenues? In Ericsson
Telecommunications, Inc. v. City of Pasig, the substantive issue
was whether the local business tax imposed by the City of Pasig
should be based on gross receipts or gross revenues.
Respondent assessed deficiency local business taxes against
petitioner based on the latter’s gross revenues as reported in its
financial statements, arguing that “gross receipts” is
synonymous with “gross earnings/revenue,” which, in turn,
included uncollected earnings. Petitioner, in contrast,
contended that only the portion of the revenues which were
actually and constructively received should be considered in
determining its tax base. According to the Supreme Court, the
local business tax should be computed based on gross receipts.
“Gross receipts include money or its equivalent actually or
constructively received in consideration of services rendered or
articles sold, exchanged or leased, whether actual or
34. CIR v. Solidbank Corporation, GR No. 148191, 25 November 2003. NOTE: The
subject matter of final withholding tax is the passive income generated in the form
of interest on deposits and yield on deposit substitutes.
35. CIR v. Bank of Commerce, GR No. 149636, 8 June 2005.
A.Y. 2017-2018 Ateneo de Manila University School of Law
constructive.” On the other hand, “gross revenue covers money
or its equivalent actually or constructively received, including
the value of services rendered or articles sold, exchanged or
leased, the payment of which is yet to be received.”36
Q: Explain the relevance of payment of capital gains tax in the
sale of real property.
In the case of Chua v. Court of Appeals, the Supreme Court
classified the agreement between Valdes-Choy as the seller and
Chua as the buyer as a contract to sell (not a contract of sale)
over a property situated in San Lorenzo Village, Makati City.
Ownership over the subject property was retained by Valdes-
Choy and was not to pass to Chua until full payment of the
purchase price. On the topic of payment of capital gains tax, the
High Court had this to say: “The buyer has more interest in
having the capital gains tax paid immediately since this is a pre-
requisite to the issuance of a new Torrens title in his name.
Nevertheless, as far as the government is concerned, the capital
gains tax remains a liability of the seller since it is a tax on the
seller’s gain from the sale of the real estate. Payment of the capital
gains tax, however, is not a pre-requisite to the transfer of ownership
to the buyer. The transfer of ownership takes effect upon the
signing and notarization of the deed of absolute sale.”37
In Torcuator v. Bernabe, the Supreme Court likewise
characterized as a contract to sell the agreement between the
Bernabe Spouses (seller) and the Torcuator Spouses (buyer)
over a vacant lot in Ayala Alabang Village. The Court cited the
following reasons: (1) the agreement imposed upon the
Torcuator Spouses the obligation to fully pay the agreed
purchase price for the property; (2) the parties clearly intended
the construction of a residential house on the property as
another suspensive condition which had to be fulfilled; and (3)
there was neither actual nor constructive delivery of the
property to the Torcuator Spouses. The Supreme Court further
36. Ericsson Telecommunications, Inc. v. City of Pasig, GR No. 176667, 22
November 2007.
22
ruled that “the issue of whether the agreement violated the law
as it deprived the government of capital gains tax is wholly
irrelevant. Capital gains taxes, after all, are only imposed on
gains presumed to have been realized from sales, exchanges or
dispositions of property. Having declared that the contract to
sell in this case was aborted by [the Torcuator Spouses’] failure
to comply with the twin suspensive conditions of full payment
and construction of a residence, the obligation to pay taxes
never arose.”38
SEC. 25. TAX ON NONRESIDENT ALIEN INDIVIDUAL. —
(A) NONRESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS
WITHIN THE PHILIPPINES. —
(1) IN GENERAL. — A NONRESIDENT ALIEN INDIVIDUAL
ENGAGED IN TRADE OR BUSINESS IN THE
PHILIPPINES SHALL BE SUBJECT TO AN INCOME TAX
IN THE SAME MANNER AS AN INDIVIDUAL CITIZEN
AND A RESIDENT ALIEN INDIVIDUAL, ON TAXABLE
INCOME RECEIVED FROM ALL SOURCES WITHIN THE
PHILIPPINES. A NONRESIDENT ALIEN INDIVIDUAL
WHO SHALL COME TO THE PHILIPPINES AND STAY
THEREIN FOR AN AGGREGATE PERIOD OF MORE
THAN ONE HUNDRED EIGHTY (180) DAYS DURING
ANY CALENDAR YEAR SHALL BE DEEMED A
'NONRESIDENT ALIEN DOING BUSINESS IN THE
PHILIPPINES'. SECTION 22 (G) OF THIS CODE
NOTWITHSTANDING.
(2) CASH AND/OR PROPERTY DIVIDENDS FROM A
DOMESTIC CORPORATION OR JOINT STOCK
COMPANY, OR INSURANCE OR MUTUAL FUND
COMPANY OR REGIONAL OPERATING
HEADQUARTER OR MULTINATIONAL COMPANY, OR
SHARE IN THE DISTRIBUTABLE NET INCOME OF A
PARTNERSHIP (EXCEPT A GENERAL PROFESSIONAL
PARTNERSHIP), JOINT ACCOUNT, JOINT VENTURE
37. Chua v. Court of Appeals, GR No. 119255, 9 April 2003.
38. Torcuator v. Bernabe, GR No. 134219, 8 June 2005.
23 Guide Notes on Income Tax
TAXABLE AS A CORPORATION OR ASSOCIATION.,
INTERESTS, ROYALTIES, PRIZES, AND OTHER
WINNINGS. - CASH AND/OR PROPERTY DIVIDENDS
FROM A DOMESTIC CORPORATION, OR FROM A JOINT
STOCK COMPANY, OR FROM AN INSURANCE OR
MUTUAL FUND COMPANY OR FROM A REGIONAL
OPERATING HEADQUARTER OF MULTINATIONAL
COMPANY, OR THE SHARE OF A NONRESIDENT ALIEN
INDIVIDUAL IN THE DISTRIBUTABLE NET INCOME
AFTER TAX OF A PARTNERSHIP (EXCEPT A GENERAL
PROFESSIONAL PARTNERSHIP) OF WHICH HE IS A
PARTNER, OR THE SHARE OF A NONRESIDENT ALIEN
INDIVIDUAL IN THE NET INCOME AFTER TAX OF AN
ASSOCIATION, A JOINT ACCOUNT, OR A JOINT
VENTURE TAXABLE AS A CORPORATION OF WHICH HE
IS A MEMBER OR A CO-VENTURER; INTERESTS;
ROYALTIES (IN ANY FORM); AND PRIZES (EXCEPT
PRIZES AMOUNTING TO TEN THOUSAND PESOS
(P10,000) OR LESS WHICH SHALL BE SUBJECT TO TAX
UNDER SUBSECTION (B)(1) OF SECTION 24) AND
OTHER WINNINGS (EXCEPT PHILIPPINE CHARITY
SWEEPSTAKES AND LOTTO WINNINGS); SHALL BE
SUBJECT TO AN INCOME TAX OF TWENTY PERCENT
(20%) ON THE TOTAL AMOUNT THEREOF: PROVIDED,
HOWEVER, THAT ROYALTIES ON BOOKS AS WELL AS
OTHER LITERARY WORKS, AND ROYALTIES ON
MUSICAL COMPOSITIONS SHALL BE SUBJECT TO A
FINAL TAX OF TEN PERCENT (10%) ON THE TOTAL
AMOUNT THEREOF: PROVIDED, FURTHER, THAT
CINEMATOGRAPHIC FILMS AND SIMILAR WORKS
SHALL BE SUBJECT TO THE TAX PROVIDED UNDER
SECTION 28 OF THIS CODE: PROVIDED,
FURTHERMORE, THAT INTEREST INCOME FROM
LONG-TERM DEPOSIT OR INVESTMENT IN THE FORM
OF SAVINGS, COMMON OR INDIVIDUAL TRUST
FUNDS, DEPOSIT SUBSTITUTES, INVESTMENT
MANAGEMENT ACCOUNTS AND OTHER
INVESTMENTS EVIDENCED BY CERTIFICATES IN SUCH
FORM PRESCRIBED BY THE BANGKO SENTRAL NG
PILIPINAS (BSP) SHALL BE EXEMPT FROM THE TAX
2D SEM.
IMPOSED UNDER THIS SUBSECTION: PROVIDED,
FINALLY, THAT SHOULD THE HOLDER OF THE
CERTIFICATE PRE-TERMINATE THE DEPOSIT OR
INVESTMENT BEFORE THE FIFTH (5 ) YEAR, A FINAL
TH
TAX SHALL BE IMPOSED ON THE ENTIRE INCOME AND
SHALL BE DEDUCTED AND WITHHELD BY THE
DEPOSITORY BANK FROM THE PROCEEDS OF THE
LONG-TERM DEPOSIT OR INVESTMENT CERTIFICATE
BASED ON THE REMAINING MATURITY THEREOF: 

FOUR (4) YEARS TO LESS THAN FIVE (5) YEARS —
5%;
THREE (3) YEARS TO LESS THAN FOUR (4) YEARS
— 12%; AND
LESS THAN THREE (3) YEARS — 20%.
(3) CAPITAL GAINS. — CAPITAL GAINS REALIZED FROM
SALE, BARTER OR EXCHANGE OF SHARES OF STOCK IN
DOMESTIC CORPORATIONS NOT TRADED THROUGH
THE LOCAL STOCK EXCHANGE, AND REAL
PROPERTIES SHALL BE SUBJECT TO THE TAX
PRESCRIBED UNDER SUBSECTIONS (C) AND (D) OF
SECTION 24.
(B) NONRESIDENT ALIEN INDIVIDUAL NOT ENGAGED IN
TRADE OR BUSINESS WITHIN THE PHILIPPINES. —
THERE SHALL BE LEVIED, COLLECTED AND PAID FOR
EACH TAXABLE YEAR UPON THE ENTIRE INCOME
RECEIVED FROM ALL SOURCES WITHIN THE PHILIPPINES
BY EVERY NONRESIDENT ALIEN INDIVIDUAL NOT
ENGAGED IN TRADE OR BUSINESS WITHIN THE
PHILIPPINES AS INTEREST, CASH AND/OR PROPERTY
DIVIDENDS, RENTS, SALARIES, WAGES, PREMIUMS,
ANNUITIES, COMPENSATION, REMUNERATION,
EMOLUMENTS, OR OTHER FIXED OR DETERMINABLE
ANNUAL OR PERIODIC OR CASUAL GAINS, PROFITS, AND
INCOME, AND CAPITAL GAINS, A TAX EQUAL TO TWENTY-
FIVE PERCENT (25%) OF SUCH INCOME. CAPITAL GAINS
REALIZED BY A NONRESIDENT ALIEN INDIVIDUAL NOT
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES
A.Y. 2017-2018 Ateneo de Manila University School of Law
FROM THE SALE OF SHARES OF STOCK IN ANY DOMESTIC
CORPORATION AND REAL PROPERTY SHALL BE SUBJECT
TO THE INCOME TAX PRESCRIBED UNDER SUBSECTIONS
(C) AND (D) OF SECTION 24.
(C) ALIEN INDIVIDUAL EMPLOYED BY REGIONAL OR AREA
HEADQUARTERS AND REGIONAL OPERATING
HEADQUARTERS OF MULTINATIONAL COMPANIES. —
THERE SHALL BE LEVIED, COLLECTED AND PAID FOR
EACH TAXABLE YEAR UPON THE GROSS INCOME
RECEIVED BY EVERY ALIEN INDIVIDUAL EMPLOYED BY
REGIONAL OR AREA HEADQUARTERS AND REGIONAL
OPERATING HEADQUARTERS ESTABLISHED IN THE
PHILIPPINES BY MULTINATIONAL COMPANIES AS
SALARIES, WAGES, ANNUITIES, COMPENSATION,
REMUNERATION AND OTHER EMOLUMENTS, SUCH AS
HONORARIA AND ALLOWANCES, FROM SUCH REGIONAL
OR AREA HEADQUARTERS AND REGIONAL OPERATING
HEADQUARTERS, A TAX EQUAL TO FIFTEEN PERCENT
(15%) OF SUCH GROSS INCOME: PROVIDED, HOWEVER,
THAT THE SAME TAX TREATMENT SHALL APPLY TO
FILIPINOS EMPLOYED AND OCCUPYING THE SAME
POSITION AS THOSE OF ALIENS EMPLOYED BY THESE
MULTINATIONAL COMPANIES. FOR PURPOSES OF THIS
CHAPTER, THE TERM 'MULTINATIONAL COMPANY'
MEANS A FOREIGN FIRM OR ENTITY ENGAGED IN
INTERNATIONAL TRADE WITH AFFILIATES OR
SUBSIDIARIES OR BRANCH OFFICES IN THE ASIA-PACIFIC
REGION AND OTHER FOREIGN MARKETS.
(D) ALIEN INDIVIDUAL EMPLOYED BY OFFSHORE BANKING
UNITS. — THERE SHALL BE LEVIED, COLLECTED AND
PAID FOR EACH TAXABLE YEAR UPON THE GROSS INCOME
RECEIVED BY EVERY ALIEN INDIVIDUAL EMPLOYED BY
OFFSHORE BANKING UNITS ESTABLISHED IN THE
PHILIPPINES AS SALARIES, WAGES, ANNUITIES,
COMPENSATION, REMUNERATION AND OTHER
EMOLUMENTS, SUCH AS HONORARIA AND ALLOWANCES,
FROM SUCH OFF-SHORE BANKING UNITS, A TAX EQUAL
TO FIFTEEN PERCENT (15%) OF SUCH GROSS INCOME:
24
PROVIDED, HOWEVER, THAT THE SAME TAX TREATMENT
SHALL APPLY TO FILIPINOS EMPLOYED AND OCCUPYING
THE SAME POSITIONS AS THOSE OF ALIENS EMPLOYED BY
THESE OFFSHORE BANKING UNITS.
(E) ALIEN INDIVIDUAL EMPLOYED BY PETROLEUM SERVICE
CONTRACTOR AND SUBCONTRACTOR. — AN ALIEN
INDIVIDUAL WHO IS A PERMANENT RESIDENT OF A
FOREIGN COUNTRY BUT WHO IS EMPLOYED AND
ASSIGNED IN THE PHILIPPINES BY A FOREIGN SERVICE
CONTRACTOR OR BY A FOREIGN SERVICE
SUBCONTRACTOR ENGAGED IN PETROLEUM
OPERATIONS IN THE PHILIPPINES SHALL BE LIABLE TO A
TAX OF FIFTEEN PERCENT (15%) OF THE SALARIES,
WAGES, ANNUITIES, COMPENSATION, REMUNERATION
AND OTHER EMOLUMENTS, SUCH AS HONORARIA AND
ALLOWANCES, RECEIVED FROM SUCH CONTRACTOR OR
SUBCONTRACTOR: PROVIDED, HOWEVER, THAT THE
SAME TAX TREATMENT SHALL APPLY TO A FILIPINO
EMPLOYED AND OCCUPYING THE SAME POSITION AS AN
ALIEN EMPLOYED BY PETROLEUM SERVICE CONTRACTOR
AND SUBCONTRACTOR.
ANY INCOME EARNED FROM ALL OTHER
SOURCES WITHIN THE PHILIPPINES BY THE ALIEN
EMPLOYEES REFERRED TO UNDER SUBSECTIONS (C), (D)
AND (E) HEREOF SHALL BE SUBJECT TO THE PERTINENT
INCOME TAX, AS THE CASE MAY BE, IMPOSED UNDER THIS
CODE.
(F) THE PREFERENTIAL TAX TREATMENT
PROVIDED IN SUBSECTIONS (C), (D), AND (E) OF
THIS SECTION SHALL NOT BE APPLICABLE TO
REGIONAL HEADQUARTER (RHQS), REGIONAL
OPERATING HEADQUARTERS (ROHQS),
OFFSHORE BANKING UNITS (OBUS) OR
PETROLEUM SERVICE CONTRACTORS AND
SUBCONTRACTORS REGISTERING WITH THE
SECURITIES AND EXCHANGE COMMISSION
(SEC) AFTER JANUARY 1, 2018: PROVIDED,
HOWEVER, THAT EXISTING RHQS/ROHQS,
25 Guide Notes on Income Tax
OBUS, OR PETROLEUM SERVICE CONTRACTORS
AND SUBCONTRACTORS PRESENTLY AVAILING
OF PREFERENTIAL TAX RATES FOR QUALIFIED
EMPLOYEES SHALL CONTINUE TO BE ENTITLED
TO AVAIL OF THE PREFERENTIAL TAX RATE FOR
PRESENT AND FUTURE QUALIFIED EMPLOYEES.
SEC. 26. TAX LIABILITY OF MEMBERS OF GENERAL
PROFESSIONAL PARTNERSHIPS. — A GENERAL PROFESSIONAL
PARTNERSHIP AS SUCH SHALL NOT BE SUBJECT TO THE INCOME
TAX IMPOSED UNDER THIS CHAPTER. PERSONS ENGAGING IN
BUSINESS AS PARTNERS IN A GENERAL PROFESSIONAL
PARTNERSHIP SHALL BE LIABLE FOR INCOME TAX ONLY IN THEIR
SEPARATE AND INDIVIDUAL CAPACITIES.
FOR PURPOSES OF COMPUTING THE DISTRIBUTIVE SHARE
OF THE PARTNERS, THE NET INCOME OF THE PARTNERSHIP SHALL
BE COMPUTED IN THE SAME MANNER AS A CORPORATION.
EACH PARTNER SHALL REPORT AS GROSS INCOME HIS
DISTRIBUTIVE SHARE, ACTUALLY OR CONSTRUCTIVELY
RECEIVED, IN THE NET INCOME OF THE PARTNERSHIP.
Q: How are partners of a general professional partnership
taxed?
The case of Tan v. del Rosario dealt with the constitutionality of
RA No. 7496, also commonly known as the Simplified Net
Income Taxation Scheme (SNIT), amending certain provisions
of the old Tax Code. One argument raised by petitioners was
that the law now taxed single proprietorships and professionals
differently from the manner it imposed tax on corporations and
partnerships. Another argument was that general professional
partnerships should not be treated differently from ordinary
business partnerships. The Supreme Court held that the
39. NOTE: See footnotes 2 and 3 of the decision. Schedular approach is defined as a
system employed where the income tax treatment varies and made to depend on
the kind or category of taxable income of the taxpayer. Global approach, on the
other hand, refers to a system where the tax treatment view indifferently the tax
base and generally treats in common all categories of taxable income of the
taxpayer.
2D SEM.
classification made between single proprietorships and
professionals on the one hand, and corporations and
partnerships on the other, was valid. Furthermore, “[w]hat may
instead be perceived to be apparent from the amendatory law
is the legislative intent to increasingly shift the income tax
system towards the schedular approach in the income taxation
of individual taxpayers and to maintain, by and large, the
present global treatment on taxable corporations.”39
On the topic of partnerships, the Supreme Court
confirmed that general professional partnerships and ordinary
business partnerships are treated differently for purposes of
income taxation. In general professional partnerships, “the
partners themselves, not the partnership (although it is still
obligated to file an income tax return [mainly for administration
and data], are liable for the payment of income tax in their
individual capacity computed on their respective and
distributive shares of profits. In the determination of the tax
liability, a partner does so as an individual, and there is no choice
on the matter. In fine, under the Tax Code on income taxation,
the general professional partnership is deemed to be no more
than a mere mechanism or a flow—through entity in the
generation of income by, and the ultimate distribution of such
income to, respectively, each of the individual partners.”40
FIXED TAX ON INDIVIDUALS41
40. Tan, GR Nos. 109289 & 109446.
41. A nonresident alien engaged in trade or business is an individual who shall come
to the Philippines & stay therein for an aggregate period of more than 180 days
during any calendar year
 A.Y. 2017-2018 Ateneo de Manila University School of Law 26

NON- NON- NON- NON-

NON- RESIDENT RESIDENT NON- RESIDENT RESIDENT
RESIDENT RESIDENT RESIDENT ALIEN ALIEN NOT RESIDENT RESIDENT RESIDENT ALIEN ALIEN NOT
TYPE OF INCOME TYPE OF INCOME
CITIZEN CITIZEN ALIEN ENGAGED IN ENGAGED IN CITIZEN CITIZEN ALIEN ENGAGED IN ENGAGED IN
(INCL. OCW) TRADE / TRADE / (INCL. OCW) TRADE / TRADE /
BUSINESS BUSINESS BUSINESS BUSINESS
Interest from any currency bank 20% Final 20% Final Tax 20% Final Tax 20% Final
CashTax and/or 25%
Property
Final Tax
Dividends 10% Final 10% Final Tax 10% Final Tax 20% Final Tax 25% Final Tax
deposit & yield or any other Tax from a domestic corp. or from a joint Tax
monetary benefit from deposit stock co., insurance or mutual fund
substitutes & from trust funds & companies & regional operating
similar arrangements headquarters of multinational
Royalties (except on books & other companies;
literary works & musical Share of an individual in the
compositions) distributable net income after tax of a
Prizes> P10,000 partnership (except GPP);
Other winnings except PCSO & Share of an individual in the net
Lotto < P10,000 income after tax of an assn., a joint
Royalties on books & other literary 10% Final 10% Final Tax 10% Final Tax account
10% Final Tax or 25%a joint venture or
Final Tax
works & musical compositions Tax consortium taxable as a corp. of w/c
he is a member/co-venturer
Capital gains from sale, barter, 15% Final 15% Final Tax 15% Final Tax 15% Final Tax 15% Final Tax
Prizes< P10,000 Schedular Schedular rate Schedular rate exchange
Schedular rate or 25%other disposition
Final Tax of Tax on net on net capital on net capital on net capital on net capital
rate shares of stock (of domestic corp.) not capital gains realized gains realized gains realized gains realized
traded in the stock exchange gains during the during the during the during the
For the first P100,000 realized taxable yr. taxable yr. taxable yr. taxable yr.
Winnings from PCSO& Lotto < Exempt Exempt Exempt Exempt 25% Final Tax during the
taxable yr. Commented [TCE1]: Note: Provision of the law was not
P10,000
Capital gains from sale, exchange or 6% Final 6% Final Tax 6% Final Tax 6% Final Tax on amended
6% Final Tax onby TRAIN
Winnings from PCSO& Lotto > 20% Final 20% Final Tax 20% Final Tax
P10,000 Tax other disposition of real property Tax on the on the gross on the gross the gross the gross
located in Philippines, classified as gross selling price selling price or selling price or selling price or
Interest Income received by an 15% Final Exempt 15% Final Tax capital assets,Exempt
Exempt including pacto de selling or current fair current fair current fair current fair
individual (except a nonresident Tax retro sales & other forms of price or market value market value market value or market value or
individual) from a depositary bank conditional sales current fair or zonal value or zonal value zonal value zonal value
under the expanded foreign market whichever is whichever is whichever is whichever is
currency deposit system value or higher higher higher higher
Interest income from long term Exempt Exempt Exempt Exempt 25% Final Tax zonal value
deposit or investment in the form of whichever
savings, common or individual trust is higher
fund, deposit substitutes, investment CG from sale/disposition of
management accounts & other principal residence by natural
investments evidenced by persons, the proceeds of which is Exempt Exempt from Exempt from Exempt from Exempt from
certification in such form prescribed fully utilized in from CG tax CG tax CG tax CG tax CG tax
by the BSP (held for 5 years or more) acquiring/constructing a new
Pre-termination of such certificate 5% Final 5% Final Tax 5% Final Tax principal
5% Final Tax onresidence
N/A w/in 18 mos.
before the 5 year (i.e. 4 years to less
th
Tax on the on the entire on the entire the from entire
date of sale, provided historical
than 5 years) entire income income cost/adjusted
income basis of sold property
income be carried to the new principal
3 years to less than 4 years 12% 12% 12% 12% residence N/A built/acquired.
Commissioner must be duly notified
less than 3 years 20% 20% 20% 20% w/in 30 days
N/A from sale. Tax
exemption can only be availed once
every 10 years. If no full utilization of
proceeds of sale, such portion shall be
 27 Guide Notes on Income Tax
NON- RESIDENT
RESIDENT RESIDENT RESIDENT
TYPE OF INCOME
CITIZEN CITIZEN ALIEN ENGAGED IN
(INCL. OCW)
BUSINESS
subject to CG tax
CHAPTER IV — TAX ON CORPORATIONS
Q: Is passive income considered in the computation of taxable
income?
A corporate income tax liability has two components: (1) the
general rate of 30%, and (2) the specific final rates for certain
passive income. Our Tax Code imposes final taxes on certain
passive income (withheld at source) as follows:
(a) 20% on the interests on currency bank deposits,
other monetary benefits from deposit substitutes,
trust funds and similar arrangements, and
royalties derived from sources within the
Philippines;
(b) 5% / 10% on the net capital gains realized from the
sale of shares of stock in a domestic corporation not
traded in the stock exchange;
(c) 10% on income derived by a depositary bank
under the expanded foreign currency deposit
system; and
2D SEM.
NON- NON- (d) 6% on the gain presumed to be realized on the sale
RESIDENT
ALIEN ALIEN NOT
or disposition of lands and buildings treated as
ENGAGED IN capital assets.
TRADE / TRADE /
BUSINESS In CIR v. Philippine Airlines, Inc., in dispute was PAL’s
franchise which contained the following provisos: (1) as
consideration for the franchise, PAL is liable to pay either (a) its
basic corporate income tax based on its net taxable income in
accordance with the Tax Code, or (b) a franchise tax of 2% based
on its gross revenues, whichever is lower; and (2) the tax paid
shall be “in lieu of all other taxes” imposed by all government
entities in the country.
One of the questions answered in the case was whether
“gross income” included those items constituting passive
income. “Gross income” means income derived from whatever
source, including compensation for services, the conduct of
trade or business or the exercise of a profession, dealings in
property, interests, rents, royalties, dividends, annuities, prizes
and winnings, pensions, and a partner’s distributive share in
the net income of a general professional partnership. The
Supreme Court held that: “The definition of gross income is
broad enough to include all passive incomes subject to specific
rates or final taxes. However, since these passive incomes are
already subject to different rates and taxed finally at source, they
are no longer included in the computation of gross income, which
determines taxable income.42
SEC. 27. RATES OF INCOME TAX ON DOMESTIC CORPORATIONS.
—
(A) IN GENERAL. — EXCEPT AS OTHERWISE PROVIDED IN
THIS CODE, AN INCOME TAX OF THIRTY-FIVE PERCENT
(35%) IS HEREBY IMPOSED UPON THE TAXABLE INCOME
DERIVED DURING EACH TAXABLE YEAR FROM ALL
SOURCES WITHIN AND WITHOUT THE PHILIPPINES BY
EVERY CORPORATION, AS DEFINED IN SECTION 22(B) OF
THIS CODE AND TAXABLE UNDER THIS TITLE AS A

42. CIR v. Philippine Airlines, Inc., GR No. 160528, 9 October 2006. NOTE: At No. 9504 (2008). On the other hand, the regular corporate income tax rate is 30%.
present, the graduated individual income tax rates shall be between 5-32%. RA RA No. 9337 (2005).
A.Y. 2017-2018 Ateneo de Manila University School of Law
CORPORATION, ORGANIZED IN, OR EXISTING UNDER THE
LAWS OF THE PHILIPPINES: PROVIDED, THAT EFFECTIVE
JANUARY 1, 2009, THE RATE OF INCOME TAX SHALL BE
THIRTY PERCENT (30%).
IN THE CASE OF CORPORATIONS ADOPTING THE
FISCAL-YEAR ACCOUNTING PERIOD, THE TAXABLE
INCOME SHALL BE COMPUTED WITHOUT REGARD TO THE
SPECIFIC DATE WHEN SPECIFIC SALES, PURCHASES AND
OTHER TRANSACTIONS OCCUR. THEIR INCOME AND
EXPENSES FOR THE FISCAL YEAR SHALL BE DEEMED TO
HAVE BEEN EARNED AND SPENT EQUALLY FOR EACH
MONTH OF THE PERIOD.
THE CORPORATE INCOME TAX RATE SHALL BE
APPLIED ON THE AMOUNT COMPUTED BY MULTIPLYING
THE NUMBER OF MONTHS COVERED BY THE NEW RATE
WITHIN THE FISCAL YEAR BY THE TAXABLE INCOME OF
THE CORPORATION FOR THE PERIOD, DIVIDED BY
TWELVE.
PROVIDED, FURTHER, THAT THE PRESIDENT,
UPON THE RECOMMENDATION OF THE SECRETARY OF
FINANCE, MAY EFFECTIVE JANUARY 1, 2000, ALLOW
CORPORATIONS THE OPTION TO BE TAXED AT FIFTEEN
PERCENT (15%) OF GROSS INCOME AS DEFINED HEREIN,
AFTER THE FOLLOWING CONDITIONS HAVE BEEN
SATISFIED:
(1) A TAX EFFORT RATIO OF TWENTY PERCENT (20%) OF
GROSS NATIONAL PRODUCT (GNP);
(2) A RATIO OF FORTY PERCENT (40%) OF INCOME TAX
COLLECTION TO TOTAL TAX REVENUES;
(3) A VAT TAX EFFORT OF FOUR PERCENT (4%) OF GNP;
AND
(4) A 0.9 PERCENT (0.9%) RATIO OF THE CONSOLIDATED
PUBLIC SECTOR FINANCIAL POSITION (CPSFP) TO
GNP.
(B) PROPRIETARY
THE OPTION TO BE TAXED BASED ON GROSS
INCOME SHALL BE AVAILABLE ONLY TO FIRMS WHOSE
28
RATIO OF COST OF SALES TO GROSS SALES OR RECEIPTS
FROM ALL SOURCES DOES NOT EXCEED FIFTY-FIVE
PERCENT (55%).
THE ELECTION OF THE GROSS INCOME TAX
OPTION BY THE CORPORATION SHALL BE IRREVOCABLE
FOR THREE (3) CONSECUTIVE TAXABLE YEARS DURING
WHICH THE CORPORATION IS QUALIFIED UNDER THE
SCHEME.
FOR PURPOSES OF THIS SECTION, THE TERM
'GROSS INCOME' DERIVED FROM BUSINESS SHALL BE
EQUIVALENT TO GROSS SALES LESS SALES RETURNS,
DISCOUNTS AND ALLOWANCES AND COST OF GOODS
SOLD. "COST OF GOODS SOLD' SHALL INCLUDE ALL
BUSINESS EXPENSES DIRECTLY INCURRED TO PRODUCE
THE MERCHANDISE TO BRING THEM TO THEIR PRESENT
LOCATION AND USE.
FOR A TRADING OR MERCHANDISING CONCERN,
'COST OF GOODS' SOLD SHALL INCLUDE THE INVOICE
COST OF THE GOODS SOLD, PLUS IMPORT DUTIES,
FREIGHT IN TRANSPORTING THE GOODS TO THE PLACE
WHERE THE GOODS ARE ACTUALLY SOLD, INCLUDING
INSURANCE WHILE THE GOODS ARE IN TRANSIT.
FOR A MANUFACTURING CONCERN, 'COST OF
GOODS MANUFACTURED AND SOLD' SHALL INCLUDE ALL
COSTS OF PRODUCTION OF FINISHED GOODS, SUCH AS
RAW MATERIALS USED, DIRECT LABOR AND
MANUFACTURING OVERHEAD, FREIGHT COST,
INSURANCE PREMIUMS AND OTHER COSTS INCURRED TO
BRING THE RAW MATERIALS TO THE FACTORY OR
WAREHOUSE.
IN THE CASE OF TAXPAYERS ENGAGED IN THE
SALE OF SERVICE, 'GROSS INCOME' MEANS GROSS
RECEIPTS LESS SALES RETURNS, ALLOWANCES AND
DISCOUNTS. (AS AMENDED BY RA NO. 9337.)
EDUCATIONAL INSTITUTIONS AND
HOSPITALS. — PROPRIETARY EDUCATIONAL
INSTITUTIONS AND HOSPITALS WHICH ARE NONPROFIT
29 Guide Notes on Income Tax
SHALL PAY A TAX OF TEN PERCENT (10%) ON THEIR
TAXABLE INCOME EXCEPT THOSE COVERED BY
SUBSECTION (D) HEREOF: PROVIDED, THAT IF THE
GROSS INCOME FROM UNRELATED TRADE, BUSINESS OR
OTHER ACTIVITY EXCEEDS FIFTY PERCENT (50%) OF THE
TOTAL GROSS INCOME DERIVED BY SUCH EDUCATIONAL
INSTITUTIONS OR HOSPITALS FROM ALL SOURCES, THE
TAX PRESCRIBED IN SUBSECTION (A) HEREOF SHALL BE
IMPOSED ON THE ENTIRE TAXABLE INCOME. FOR
PURPOSES OF THIS SUBSECTION, THE TERM 'UNRELATED
TRADE, BUSINESS OR OTHER ACTIVITY' MEANS ANY
TRADE, BUSINESS OR OTHER ACTIVITY, THE CONDUCT OF
WHICH IS NOT SUBSTANTIALLY RELATED TO THE
EXERCISE OR PERFORMANCE BY SUCH EDUCATIONAL
INSTITUTION OR HOSPITAL OF ITS PRIMARY PURPOSE OR
FUNCTION. A 'PROPRIETARY EDUCATIONAL
INSTITUTION' IS ANY PRIVATE SCHOOL MAINTAINED
AND ADMINISTERED BY PRIVATE INDIVIDUALS OR
GROUPS WITH AN ISSUED PERMIT TO OPERATE FROM THE
DEPARTMENT OF EDUCATION, CULTURE AND SPORTS
(DECS), OR THE COMMISSION ON HIGHER EDUCATION
(CHED), OR THE TECHNICAL EDUCATION AND SKILLS
DEVELOPMENT AUTHORITY (TESDA), AS THE CASE MAY
BE, IN ACCORDANCE WITH EXISTING LAWS AND
REGULATIONS
 A FINAL TAX AT THE RATE OF FIFTEEN PERCENT
(C) GOVERNMENT-OWNED OR CONTROLLED-
CORPORATIONS, AGENCIES OR INSTRUMENTALITIES. —
THE PROVISIONS OF EXISTING SPECIAL OR GENERAL
LAWS TO THE CONTRARY NOTWITHSTANDING, ALL
CORPORATIONS, AGENCIES, OR INSTRUMENTALITIES
OWNED OR CONTROLLED BY THE GOVERNMENT, EXCEPT
THE GOVERNMENT SERVICE INSURANCE SYSTEM
(GSIS), THE SOCIAL SECURITY SYSTEM (SSS), THE
PHILIPPINE HEALTH INSURANCE CORPORATION
(PHIC), THE LOCAL WATER DISTRICTS (LWD) AND THE
PHILIPPINE CHARITY SWEEPSTAKES OFFICE (PCSO),
SHALL PAY SUCH RATE OF TAX UPON THEIR TAXABLE
INCOME AS ARE IMPOSED BY THIS SECTION UPON
CORPORATIONS OR ASSOCIATIONS ENGAGED IN S
2D SEM.
SIMILAR BUSINESS, INDUSTRY, OR ACTIVITY. (AS
AMENDED BY RA NO. 10026.)
(D) RATES OF TAX ON CERTAIN PASSIVE INCOMES. —
(1) INTEREST FROM DEPOSITS AND YIELD OR ANY
OTHER MONETARY BENEFIT FROM DEPOSIT
SUBSTITUTES AND FROM TRUST FUNDS AND
SIMILAR ARRANGEMENTS, AND ROYALTIES. — A
FINAL TAX AT THE RATE OF TWENTY PERCENT (20%)
IS HEREBY IMPOSED UPON THE AMOUNT OF INTEREST
ON CURRENCY BANK DEPOSIT AND YIELD OR ANY
OTHER MONETARY BENEFIT FROM DEPOSIT
SUBSTITUTES AND FROM TRUST FUNDS AND SIMILAR
ARRANGEMENTS RECEIVED BY DOMESTIC
CORPORATIONS, AND ROYALTIES, DERIVED FROM
SOURCES WITHIN THE PHILIPPINES: PROVIDED,
HOWEVER, THAT INTEREST INCOME DERIVED BY A
DOMESTIC CORPORATION FROM A DEPOSITORY
BANK UNDER THE EXPANDED FOREIGN CURRENCY
DEPOSIT SYSTEM SHALL BE SUBJECT TO A FINAL
INCOME TAX AT THE RATE OF FIFTEEN PERCENT
(15%) OF SUCH INTEREST INCOME.
(2) CAPITAL GAINS FROM THE SALE OF SHARES OF
STOCK NOT TRADED IN THE STOCK EXCHANGE. —
(15%) SHALL BE IMPOSED ON NET CAPITAL GAINS
REALIZED DURING THE TAXABLE YEAR FROM THE
SALE, EXCHANGE OR OTHER DISPOSITION OF SHARES
OF STOCK IN A DOMESTIC CORPORATION EXCEPT
SHARES SOLD OR DISPOSED OF THROUGH THE STOCK
EXCHANGE
(3) TAX ON INCOME DERIVED UNDER THE EXPANDED
FOREIGN CURRENCY DEPOSIT SYSTEM. — INCOME
DERIVED BY A DEPOSITORY BANK UNDER THE
EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM
FROM FOREIGN CURRENCY TRANSACTIONS WITH
NONRESIDENTS, OFFSHORE BANKING UNITS IN THE
PHILIPPINES, LOCAL COMMERCIAL BANKS,
INCLUDING BRANCHES OF FOREIGN BANKS THAT
A.Y. 2017-2018 Ateneo de Manila University School of Law
MAY BE AUTHORIZED BY THE BANGKO SENTRAL NG
PILIPINAS (BSP) TO TRANSACT BUSINESS WITH
FOREIGN CURRENCY DEPOSITORY SYSTEM UNITS
(E) MINIMUM CORPORATE INCOME TAX ON DOMESTIC
AND OTHER DEPOSITORY BANKS UNDER THE
EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM
SHALL BE EXEMPT FROM ALL TAXES, EXCEPT NET
INCOME FROM SUCH TRANSACTIONS AS MAY BE
SPECIFIED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION BY THE MONETARY BOARD TO
BE SUBJECT TO THE REGULAR INCOME TAX PAYABLE
BY BANKS; PROVIDED, HOWEVER, THAT INTEREST
INCOME FROM FOREIGN CURRENCY LOANS GRANTED
BY SUCH DEPOSITORY BANKS UNDER SAID
EXPANDED FOREIGN SYSTEM TO RESIDENTS OTHER
THAN OFFSHORE BANKING UNITS IN THE
PHILIPPINES OR OTHER DEPOSITORY BANKS UNDER
THE EXPANDED SYSTEM, SHALL BE SUBJECT TO A
FINAL INCOME TAX AT THE RATE OF TEN PERCENT
(10%).
ANY INCOME OF NONRESIDENTS, WHETHER
INDIVIDUALS OR CORPORATIONS, FROM
TRANSACTIONS WITH DEPOSITORY BANKS UNDER
THE EXPANDED SYSTEM SHALL BE EXEMPT FROM
INCOME TAX. (AS AMENDED BY RA NO. 9294.)
(4) INTERCORPORATE DIVIDENDS. — DIVIDENDS
RECEIVED BY A DOMESTIC CORPORATION FROM
ANOTHER DOMESTIC CORPORATION SHALL NOT BE
SUBJECT TO TAX.
(5) CAPITAL GAINS REALIZED FROM THE SALE,
EXCHANGE OR DISPOSITION OF LANDS AND/OR
BUILDINGS. — A FINAL TAX OF SIX PERCENT (6%) IS
HEREBY IMPOSED ON THE GAIN PRESUMED TO HAVE
BEEN REALIZED ON THE SALE, EXCHANGE OR
DISPOSITION OF LANDS AND/OR BUILDINGS WHICH
ARE NOT ACTUALLY USED IN THE BUSINESS OF A
CORPORATION AND ARE TREATED AS CAPITAL
ASSETS, BASED ON THE GROSS SELLING PRICE OF FAIR
MARKET VALUE AS DETERMINED IN ACCORDANCE
30
WITH SECTION 6(E) OF THIS CODE, WHICHEVER IS
HIGHER, OF SUCH LANDS AND/OR BUILDINGS.
CORPORATIONS. —
(1) IMPOSITION OF TAX. — A MINIMUM CORPORATE
INCOME TAX OF TWO PERCENT (2%) OF THE GROSS
INCOME AS OF THE END OF THE TAXABLE YEAR, AS
DEFINED HEREIN, IS HEREBY IMPOSED ON A
CORPORATION TAXABLE UNDER THIS TITLE,
BEGINNING ON THE FOURTH TAXABLE YEAR
IMMEDIATELY FOLLOWING THE YEAR IN WHICH
SUCH CORPORATION COMMENCED ITS BUSINESS
OPERATIONS, WHEN THE MINIMUM INCOME TAX IS
GREATER THAN THE TAX COMPUTED UNDER
SUBSECTION (A) OF THIS SECTION FOR THE TAXABLE
YEAR.
(2) CARRY FORWARD OF EXCESS MINIMUM TAX. — ANY
EXCESS OF THE MINIMUM CORPORATE INCOME TAX
OVER THE NORMAL INCOME TAX AS COMPUTED
UNDER SUBSECTION (A) OF THIS SECTION SHALL BE
CARRIED FORWARD AND CREDITED AGAINST THE
NORMAL INCOME TAX FOR THE THREE (3)
IMMEDIATELY SUCCEEDING TAXABLE YEARS.
(3) RELIEF FROM THE MINIMUM CORPORATE INCOME
TAX UNDER CERTAIN CONDITIONS. — THE
SECRETARY OF FINANCE IS HEREBY AUTHORIZED TO
SUSPEND THE IMPOSITION OF THE MINIMUM
CORPORATE INCOME TAX ON ANY CORPORATION
WHICH SUFFERS LOSSES ON ACCOUNT OF
PROLONGED LABOR DISPUTE, OR BECAUSE OF FORCE
MAJEURE, OR BECAUSE OF LEGITIMATE BUSINESS
REVERSES.
THE SECRETARY OF FINANCE IS HEREBY
AUTHORIZED TO PROMULGATE, UPON
RECOMMENDATION OF THE COMMISSIONER, THE
NECESSARY RULES AND REGULATION THAT SHALL
DEFINE THE TERMS AND CONDITIONS UNDER WHICH
31 Guide Notes on Income Tax
HE MAY SUSPEND THE IMPOSITION OF THE MINIMUM
CORPORATE INCOME TAX IN A MERITORIOUS CASE.
(4) GROSS INCOME DEFINED. — FOR PURPOSES OF
APPLYING THE MINIMUM CORPORATE INCOME TAX
PROVIDED UNDER SUBSECTION (E) HEREOF, THE
TERM 'GROSS INCOME' SHALL MEAN GROSS SALES
LESS SALES RETURNS, DISCOUNTS AND ALLOWANCES
AND COST OF GOODS SOLD. "COST OF GOODS SOLD'
SHALL INCLUDE ALL BUSINESS EXPENSES DIRECTLY
INCURRED TO PRODUCE THE MERCHANDISE TO
BRING THEM TO THEIR PRESENT LOCATION AND USE.
FOR A TRADING OR MERCHANDISING
CONCERN, 'COST OF GOODS SOLD' SHALL INCLUDE
THE INVOICE COST OF THE GOODS SOLD, PLUS
IMPORT DUTIES, FREIGHT IN TRANSPORTING THE
GOODS TO THE PLACE WHERE THE GOODS ARE
ACTUALLY SOLD INCLUDING INSURANCE WHILE THE
GOODS ARE IN TRANSIT.
FOR A MANUFACTURING CONCERN, COST OF
'GOODS MANUFACTURED AND SOLD' SHALL
INCLUDE ALL COSTS OF PRODUCTION OF FINISHED
GOODS, SUCH AS RAW MATERIALS USED, DIRECT
LABOR AND MANUFACTURING OVERHEAD, FREIGHT
COST, INSURANCE PREMIUMS AND OTHER COSTS
INCURRED TO BRING THE RAW MATERIALS TO THE
FACTORY OR WAREHOUSE.
IN THE CASE OF TAXPAYERS ENGAGED IN THE
SALE OF SERVICE, 'GROSS INCOME' MEANS GROSS
RECEIPTS LESS SALES RETURNS, ALLOWANCES,
DISCOUNTS AND COST OF SERVICES. 'COST OF
SERVICES' SHALL MEAN ALL DIRECT COSTS AND
EXPENSES NECESSARILY INCURRED TO PROVIDE THE
SERVICES REQUIRED BY THE CUSTOMERS AND
CLIENTS INCLUDING (A) SALARIES AND EMPLOYEE
BENEFITS OF PERSONNEL, CONSULTANTS AND
43. Manila International Airport Authority v. City of Pasay, GR No. 163072, 2 April
2009.
2D SEM.
SPECIALISTS DIRECTLY RENDERING THE SERVICE
AND (B) COST OF FACILITIES DIRECTLY UTILIZED IN
PROVIDING THE SERVICE SUCH AS DEPRECIATION OR
RENTAL OF EQUIPMENT USED AND COST OF SUPPLIES:
PROVIDED, HOWEVER, THAT IN THE CASE OF BANKS,
'COST OF SERVICES' SHALL INCLUDE INTEREST
EXPENSE.
Q: What are government owned or controlled corporations
(GOCCs)? What are government instrumentalities?
The case of Manila International Airport Authority v. City of Pasay
dealt with the issue of whether the NAIA Pasay properties of
MIAA were exempt from real property tax under the 1991 LGC.
However, the decision is relevant for purposes of
differentiating between a government owned or controlled
corporation and a government instrumentality. According to
the Supreme Court, a government owned or controlled
corporation must be organized as a stock or non-stock
corporation. MIAA was not a stock corporation because it did
not have stockholders. MIAA was not a non-stock corporation
since it did not have members. The High Court classified MIAA
as a government instrumentality vested with corporate powers
to perform efficiently its governmental functions. “When the
law vests in a government instrumentality corporate powers,
the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-
stock corporation, it remains a government instrumentality
exercising not only governmental but also corporate powers.
Thus, MIAA exercises the governmental powers of eminent
domain, police authority and the levying of fees and charges.
At the same time, MIAA exercises ‘all the powers of a
corporation under the Corporation Code, insofar as these
powers are not inconsistent with the provisions of this
Executive Order.”43
A.Y. 2017-2018 Ateneo de Manila University School of Law
Q: How is capital gains tax computed in sales of shares of
stock?
In Compagnie Financiere Sucres et Denress v. CIR, petitioner was
a nonresident foreign corporation which sold its shareholding
in the Makati Shangri-La Hotel to Kerry Holdings, Ltd.
Petitioner alleged that the transfer of deposits on stock
subscriptions was not a sale/assignment of shares of stock
subject to documentary stamp tax and capital gains tax. The
Supreme Court disagreed. “In the Capital Gains Tax Return on
Stock Transaction, which petitioner filed with the Bureau of
Internal Revenue, the acquisition cost of the shares it sold,
including the stock subscription is Php 69,143,630.28. The
transfer price to Kerry Holdings, Ltd. is Php 70,332,869.92.
Obviously, petitioner has a net gain in the amount of Php
1,189,239.64. As the CTA aptly ruled, “a tax on the profit of sale
on net capital gain is the very essence of the net capital gains tax
law. To hold otherwise will ineluctably deprive the government
of its due and unduly set free from tax liability persons who
profited from said transactions.”44
Q: How is capital gains tax computed in sales of real property?
In Vive Eagle Land, Inc. v. Court of Appeals, the Flores Spouses
were owners of two parcels of land situated in Cubao, Quezon
City. In April 1988, the Flores Spouses sold the parcels of land
to Tatic Square International Corporation (the “First Sale”). A
few days later, TATIC sold the properties to Vive Eagle Land,
Inc. (the “Second Sale”). In November 1988, VELI sold one of
the parcels of land to Genuino Ice Co., Inc. (the “Third Sale”).
GICI demanded that VELI pay to the BIR the capital gains tax
amounting to Php 285,000. VELI rejected GICI’s demand.
Hence, GICI filed a complaint against VELI for specific
performance and damages. GICI alleged among others that
VELI failed to pay the capital gains tax and other assessments
due to effectuate the transfer of the titles of the property to and
in GICI’s name. VELI argued that it was exempt from payment
44. Compagnie Financiere Sucres et Denrees v. CIR, GR No. 133834, 28 August
2006.

32
of capital gains tax, and that the Flores Spouses were liable for
the payment of such tax. The Supreme Court pointed out that
the Third Sale occurred in November 1988. At that time, it was
the 1977 Tax Code, as amended, which was in effect. Under the
old Tax Code, VELI, being a corporation, was not obliged to pay
capital gains tax. [Only individual taxpayers were then
required to pay capital gains tax on sale of real property.]
“However, petitioner VELI, as seller, should have included in
its ordinary income tax return, whatever gain or loss it incurred
with respect to the sale of the property in dispute, pursuant to
Section 24(a) of the 1977 NIRC, as amended.”45
Q: What is the minimum corporate income tax?
In Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,
petitioner was an association of real estate developers and
builders in the country. It assailed the validity of the imposition
of minimum corporate income tax (MCIT) on corporations and
creditable withholding tax (CWT) on sales of real properties
classified as ordinary assets. On the topic of MCIT, petitioner
argued that MCIT violated the due process clause because it
levied income tax even if there was no realized gain. In effect,
MCIT was a tax on capital. According to petitioner, income tax
could only be imposed on income, not capital. The Supreme
Court took the opportunity to explain the concept and rationale
of MCIT as follows: MCIT on domestic corporations came about
as a result of the perceived inadequacy of the self-assessment
system in capturing the true income of corporations. “Congress
intended to put a stop to the practice of corporations which,
while having large turn-overs, report minimal or negative net
income resulting in minimal or zero income taxes year in and
year out, through under-declaration of income or over-
deduction of expenses otherwise called tax shelters.” In other
words, MCIT serves to put a cap on such tax shelters.
On petitioner’s argument that the imposition of MCIT
amounted to deprivation of property without due process of
45. Vive Eagle Land, Inc. v. Court of Appeals, GR No. 150308, 26 November 2004.


33 Guide Notes on Income Tax
law, the Supreme Court held that “MCIT is imposed on gross
income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sale. Clearly, the capital is not
being taxed.” Otherwise stated, MCIT is a tax on income.
Furthermore, “MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation’s gross income.”46
SEC. 28. RATES OF INCOME TAX ON FOREIGN CORPORATIONS.
— (2) MINIMUM CORPORATE INCOME TAX ON RESIDENT
(A) TAX ON RESIDENT FOREIGN CORPORATIONS. —
(1) IN GENERAL. — EXCEPT AS OTHERWISE PROVIDED IN
THIS CODE, A CORPORATION ORGANIZED,
AUTHORIZED, OR EXISTING UNDER THE LAWS OF ANY
FOREIGN COUNTRY, ENGAGED IN TRADE OR
BUSINESS WITHIN THE PHILIPPINES, SHALL BE
SUBJECT TO AN INCOME TAX EQUIVALENT TO
THIRTY-FIVE PERCENT (35%) OF THE TAXABLE
INCOME DERIVED IN THE PRECEDING TAXABLE YEAR
FROM ALL SOURCES WITHIN THE PHILIPPINES:
PROVIDED, THAT EFFECTIVE JANUARY 1, 2009, THE
RATE OF INCOME TAX SHALL BE THIRTY PERCENT
(30%).
IN THE CASE OF CORPORATIONS ADOPTING
THE FISCAL-YEAR ACCOUNTING PERIOD, THE
TAXABLE INCOME SHALL BE COMPUTED WITHOUT
REGARD TO THE SPECIFIC DATE WHEN SALES,
PURCHASES AND OTHER TRANSACTIONS OCCUR.
THEIR INCOME AND EXPENSES FOR THE FISCAL YEAR
SHALL BE DEEMED TO HAVE BEEN EARNED AND
SPENT EQUALLY FOR EACH MONTH OF THE PERIOD.
46. Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, GR No.
160756, 9 March 2010.
2D SEM.
THE CORPORATE INCOME TAX RATE SHALL BE
APPLIED ON THE AMOUNT COMPUTED BY
MULTIPLYING THE NUMBER OF MONTHS COVERED BY
THE NEW RATE WITHIN THE FISCAL YEAR BY THE
TAXABLE INCOME OF THE CORPORATION FOR THE
PERIOD, DIVIDED BY TWELVE.
PROVIDED, HOWEVER, THAT A RESIDENT
FOREIGN CORPORATION SHALL BE GRANTED THE
OPTION TO BE TAXED AT FIFTEEN PERCENT (15%) ON
GROSS INCOME UNDER THE SAME CONDITIONS, AS
PROVIDED IN SECTION 27 (A). (AS AMENDED BY RA
NO. 9337.)
FOREIGN CORPORATIONS. - A MINIMUM
CORPORATE INCOME TAX OF TWO PERCENT (2%) OF
GROSS INCOME, AS PRESCRIBED UNDER SECTION 27
(E) OF THIS CODE, SHALL BE IMPOSED, UNDER THE
SAME CONDITIONS, ON A RESIDENT FOREIGN
CORPORATION TAXABLE UNDER PARAGRAPH (1) OF
THIS SUBSECTION.
(3) INTERNATIONAL CARRIER. — AN INTERNATIONAL
CARRIER DOING BUSINESS IN THE PHILIPPINES
SHALL PAY A TAX OF TWO AND ONE-HALF PERCENT (2
1/2%) ON ITS 'GROSS PHILIPPINE BILLINGS' AS
DEFINED HEREUNDER: 

(a) INTERNATIONAL AIR CARRIER. —
'GROSS PHILIPPINE BILLINGS' REFERS
TO THE AMOUNT OF GROSS REVENUE
DERIVED FROM CARRIAGE OF PERSONS,
EXCESS BAGGAGE, CARGO AND MAIL
ORIGINATING FROM THE PHILIPPINES
IN A CONTINUOUS AND
UNINTERRUPTED FLIGHT,
IRRESPECTIVE OF THE PLACE OF SALE OR
ISSUE AND THE PLACE OF PAYMENT OF
A.Y. 2017-2018 Ateneo de Manila University School of Law
THE TICKET OR PASSAGE DOCUMENT:
PROVIDED, THAT TICKETS
REVALIDATED, EXCHANGED AND/OR
INDORSED TO ANOTHER
INTERNATIONAL AIRLINE FORM PART
OF THE GROSS PHILIPPINE BILLINGS IF
THE PASSENGER BOARDS A PLANE IN A
PORT OR POINT IN THE PHILIPPINES:
PROVIDED, FURTHER, THAT FOR A
FLIGHT WHICH ORIGINATES FROM THE
PHILIPPINES, BUT TRANSSHIPMENT OF
PASSENGER TAKES PLACE AT ANY PORT
OUTSIDE THE PHILIPPINES ON
ANOTHER AIRLINE, ONLY THE ALIQUOT
PORTION OF THE COST OF THE TICKET
CORRESPONDING TO THE LEG FLOWN
FROM THE PHILIPPINES TO THE POINT
OF TRANSSHIPMENT SHALL FORM PART
OF GROSS PHILIPPINE BILLINGS.
(5) TAX ON BRANCH PROFITS REMITTANCES. — ANY
(b) INTERNATIONAL SHIPPING. — 'GROSS
PHILIPPINE BILLINGS' MEANS GROSS
REVENUE WHETHER FOR PASSENGER,
CARGO OR MAIL ORIGINATING FROM
THE PHILIPPINES UP TO FINAL
DESTINATION, REGARDLESS OF THE
PLACE OF SALE OR PAYMENTS OF THE
PASSAGE OR FREIGHT DOCUMENTS.
(4) OFFSHORE BANKING UNITS. — THE PROVISIONS OF
ANY LAW TO THE CONTRARY NOTWITHSTANDING,
INCOME DERIVED BY OFFSHORE BANKING UNITS
AUTHORIZED BY THE BANGKO SENTRAL NG
PILIPINAS (BSP), FROM FOREIGN CURRENCY
TRANSACTIONS WITH NONRESIDENTS, OTHER
OFFSHORE BANKING UNITS, LOCAL COMMERCIAL
BANKS, INCLUDING BRANCHES OF FOREIGN BANKS
THAT MAY BE AUTHORIZED BY THE BANGKO
SENTRAL NG PILIPINAS (BSP) TO TRANSACT
BUSINESS WITH OFFSHORE BANKING UNITS SHALL BE
34
EXEMPT FROM ALL TAXES EXCEPT NET INCOME FROM
SUCH TRANSACTIONS AS MAY BE SPECIFIED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION
OF THE MONETARY BOARD WHICH SHALL BE
SUBJECT TO THE REGULAR INCOME TAX PAYABLE BY
BANKS: PROVIDED, HOWEVER, THAT ANY INTEREST
INCOME DERIVED FROM FOREIGN CURRENCY LOANS
GRANTED TO RESIDENTS OTHER THAN OFFSHORE
BANKING UNITS OR LOCAL COMMERCIAL BANKS,
INCLUDING LOCAL, BRANCHES OF FOREIGN BANKS
THAT MAY BE AUTHORIZED BY THE BSP TO
TRANSACT BUSINESS WITH OFFSHORE BANKING
UNITS, SHALL BE SUBJECT ONLY TO A FINAL TAX AT
THE RATE OF TEN PERCENT (10%).
ANY INCOME OF NONRESIDENTS, WHETHER
INDIVIDUALS OR CORPORATIONS, FROM
TRANSACTIONS WITH SAID OFFSHORE BANKING
UNITS SHALL BE EXEMPT FROM INCOME TAX.
PROFIT REMITTED BY A BRANCH TO ITS HEAD OFFICE
SHALL BE SUBJECT TO A TAX OF FIFTEEN (15%) WHICH
SHALL BE BASED ON THE TOTAL PROFITS APPLIED OR
EARMARKED FOR REMITTANCE WITHOUT ANY
DEDUCTION FOR THE TAX COMPONENT THEREOF
(EXCEPT THOSE ACTIVITIES WHICH ARE REGISTERED
WITH THE PHILIPPINE ECONOMIC ZONE
AUTHORITY). THE TAX SHALL BE COLLECTED AND
PAID IN THE SAME MANNER AS PROVIDED IN
SECTIONS 57 AND 58 OF THIS CODE: PROVIDED,
THAT INTERESTS, DIVIDENDS, RENTS, ROYALTIES,
INCLUDING REMUNERATION FOR TECHNICAL
SERVICES, SALARIES, WAGES PREMIUMS, ANNUITIES,
EMOLUMENTS OR OTHER FIXED OR DETERMINABLE
ANNUAL, PERIODIC OR CASUAL GAINS, PROFITS,
INCOME AND CAPITAL GAINS RECEIVED BY A
FOREIGN CORPORATION DURING EACH TAXABLE
YEAR FROM ALL SOURCES WITHIN THE PHILIPPINES
SHALL NOT BE TREATED AS BRANCH PROFITS UNLESS
35 Guide Notes on Income Tax
THE SAME ARE EFFECTIVELY CONNECTED WITH THE
CONDUCT OF ITS TRADE OR BUSINESS IN THE
(b) INCOME
PHILIPPINES.
(6) REGIONAL OR AREA HEADQUARTERS AND
REGIONAL OPERATING HEADQUARTERS OF
MULTINATIONAL COMPANIES. —
(a) REGIONAL OR AREA HEADQUARTERS
AS DEFINED IN SECTION 22(DD) SHALL
NOT BE SUBJECT TO INCOME TAX.
(b) REGIONAL OPERATING
HEADQUARTERS AS DEFINED IN
SECTION 22(EE) SHALL PAY A TAX OF
TEN PERCENT (10%) OF THEIR TAXABLE
INCOME.
(7) TAX ON CERTAIN INCOMES RECEIVED BY A
RESIDENT FOREIGN CORPORATION. —
(a) INTEREST FROM DEPOSITS AND YIELD
OR ANY OTHER MONETARY BENEFIT
FROM DEPOSIT SUBSTITUTES, TRUST
FUNDS AND SIMILAR ARRANGEMENTS
AND ROYALTIES. — INTEREST FROM
ANY CURRENCY BANK DEPOSIT AND
YIELD OR ANY OTHER MONETARY
BENEFIT FROM DEPOSIT SUBSTITUTES
AND FROM TRUST FUNDS AND SIMILAR
ARRANGEMENTS AND ROYALTIES
DERIVED FROM SOURCES WITHIN THE
PHILIPPINES SHALL BE SUBJECT TO A
FINAL INCOME TAX AT THE RATE OF
TWENTY PERCENT (20%) OF SUCH
INTEREST: PROVIDED, HOWEVER, THAT
INTEREST INCOME DERIVED BY A
RESIDENT FOREIGN CORPORATION
FROM A DEPOSITORY BANK UNDER THE
EXPANDED FOREIGN CURRENCY
DEPOSIT SYSTEM SHALL BE SUBJECT TO
A FINAL INCOME TAX AT THE RATE OF
SEVEN AND ONE-HALF PERCENT (7 / %)1
2
2D SEM.
OF SUCH INTEREST INCOME.
DERIVED UNDER THE
EXPANDED FOREIGN CURRENCY
DEPOSIT SYSTEM. — INCOME DERIVED
BY A DEPOSITORY BANK UNDER THE
EXPANDED FOREIGN CURRENCY
DEPOSIT SYSTEM FROM FOREIGN
CURRENCY TRANSACTIONS WITH
NONRESIDENTS, OFFSHORE BANKING
UNITS IN THE PHILIPPINES, LOCAL
COMMERCIAL BANKS INCLUDING
BRANCHES OF FOREIGN BANKS THAT
MAY BE AUTHORIZED BY THE BANGKO
SENTRAL NG PILIPINAS (BSP) TO
TRANSACT BUSINESS WITH FOREIGN
CURRENCY DEPOSIT SYSTEM UNITS,
AND OTHER DEPOSITORY BANKS
UNDER THE EXPANDED FOREIGN
CURRENCY DEPOSIT SYSTEM SHALL BE
EXEMPT FROM ALL TAXES, EXCEPT NET
INCOME FROM SUCH TRANSACTIONS
AS MAY BE SPECIFIED BY THE
SECRETARY OF FINANCE, UPON
RECOMMENDATION BY THE
MONETARY BOARD TO BE SUBJECT TO
THE REGULAR INCOME TAX PAYABLE BY
BANKS: PROVIDED, HOWEVER, THAT
INTEREST INCOME FROM FOREIGN
CURRENCY LOANS GRANTED BY SUCH
DEPOSITORY BANKS UNDER SAID
EXPANDED SYSTEM TO RESIDENTS
OTHER THAN OFFSHORE BANKING
UNITS IN THE PHILIPPINES OR OTHER
DEPOSITORY BANKS UNDER THE
EXPANDED SYSTEM SHALL BE SUBJECT
TO A FINAL TAX AT THE RATE OF TEN
PERCENT (10%).
ANY INCOME OF NONRESIDENTS,
WHETHER INDIVIDUALS OR
A.Y. 2017-2018 Ateneo de Manila University School of Law
CORPORATIONS, FROM TRANSACTIONS
WITH DEPOSITORY BANKS UNDER THE
EXPANDED SYSTEM SHALL BE EXEMPT
FROM INCOME TAX.
(c) CAPITAL GAINS FROM SALE OF SHARES
OF STOCK NOT TRADED IN THE STOCK
EXCHANGE. — A FINAL TAX AT THE
RATES PRESCRIBED BELOW IS HEREBY
IMPOSED UPON THE NET CAPITAL
GAINS REALIZED DURING THE TAXABLE
YEAR FROM THE SALE, BARTER,
EXCHANGE OR OTHER DISPOSITION OF
SHARES OF STOCK IN A DOMESTIC
CORPORATION EXCEPT SHARES SOLD
OR DISPOSED OF THROUGH THE STOCK
EXCHANGE:
NOT OVER P 100,000 5%
ON ANY AMOUNT IN EXCESS 10%
OF P 100,000
(d) INTERCORPORATE DIVIDENDS. —
DIVIDENDS RECEIVED BY A RESIDENT
FOREIGN CORPORATION FROM A
DOMESTIC CORPORATION LIABLE TO
TAX UNDER THIS CODE SHALL NOT BE
SUBJECT TO TAX UNDER THIS TITLE.
(B) TAX ON NONRESIDENT FOREIGN CORPORATION. —
(1) IN GENERAL. — EXCEPT AS OTHERWISE PROVIDED IN
THIS CODE, A FOREIGN CORPORATION NOT
ENGAGED IN TRADE OR BUSINESS IN THE
PHILIPPINES SHALL PAY A TAX EQUAL TO THIRTY-
FIVE PERCENT (35%) OF THE GROSS INCOME
RECEIVED DURING EACH TAXABLE YEAR FROM ALL
SOURCES WITHIN THE PHILIPPINES, SUCH AS
INTERESTS, DIVIDENDS, RENTS, ROYALTIES,
SALARIES, PREMIUMS (EXCEPT REINSURANCE
PREMIUMS), ANNUITIES, EMOLUMENTS OR OTHER
36
FIXED OR DETERMINABLE ANNUAL, PERIODIC OR
CASUAL GAINS, PROFITS AND INCOME, AND CAPITAL
GAINS, EXCEPT CAPITAL GAINS SUBJECT TO TAX
UNDER SUBPARAGRAPH 5 ( C ): PROVIDED, THAT
EFFECTIVE JANUARY 1, 2009, THE RATE OF INCOME
TAX SHALL BE THIRTY PERCENT (30%).
(2) NONRESIDENT CINEMATOGRAPHIC FILM OWNER,
LESSOR OR DISTRIBUTOR. — A CINEMATOGRAPHIC
FILM OWNER, LESSOR, OR DISTRIBUTOR SHALL PAY A
TAX OF TWENTY-FIVE PERCENT (25%) OF ITS GROSS
INCOME FROM ALL SOURCES WITHIN THE
PHILIPPINES.
(3) NONRESIDENT OWNER OR LESSOR OF VESSELS
CHARTERED BY PHILIPPINE NATIONALS. — A
NONRESIDENT OWNER OR LESSOR OF VESSELS SHALL
BE SUBJECT TO A TAX OF FOUR AND ONE-HALF
PERCENT (4 / %) OF GROSS RENTALS, LEASE OR
1
2
CHARTER FEES FROM LEASES OR CHARTERS TO
FILIPINO CITIZENS OR CORPORATIONS, AS
APPROVED BY THE MARITIME INDUSTRY
AUTHORITY.
(4) NONRESIDENT OWNER OR LESSOR OF AIRCRAFT,
MACHINERIES AND OTHER EQUIPMENT. —
RENTALS, CHARTERS AND OTHER FEES DERIVED BY A
NONRESIDENT LESSOR OF AIRCRAFT, MACHINERIES
AND OTHER EQUIPMENT SHALL BE SUBJECT TO A TAX
OF SEVEN AND ONE-HALF PERCENT (7 / %) OF GROSS
1
2
RENTALS OR FEES.
(5) TAX ON CERTAIN INCOMES RECEIVED BY A
NONRESIDENT FOREIGN CORPORATION. —
(a) INTEREST ON FOREIGN LOANS. — A
FINAL WITHHOLDING TAX AT THE RATE
OF TWENTY PERCENT (20%) IS HEREBY
IMPOSED ON THE AMOUNT OF INTEREST
ON FOREIGN LOANS CONTRACTED ON
OR AFTER AUGUST 1, 1986;
(b) INTERCORPORATE DIVIDENDS. — A
37 Guide Notes on Income Tax
FINAL WITHHOLDING TAX AT THE RATE
OF FIFTEEN PERCENT (15%) IS HEREBY
IMPOSED ON THE AMOUNT OF CASH
AND/OR PROPERTY DIVIDENDS
RECEIVED FROM A DOMESTIC
CORPORATION, WHICH SHALL BE
COLLECTED AND PAID AS PROVIDED IN
SECTION 57 (A) OF THIS CODE, SUBJECT
TO THE CONDITION THAT THE
COUNTRY IN WHICH THE NONRESIDENT
FOREIGN CORPORATION IS DOMICILED,
SHALL ALLOW A CREDIT AGAINST THE
TAX DUE FROM THE NONRESIDENT
FOREIGN CORPORATION TAXES
DEEMED TO HAVE BEEN PAID IN THE
PHILIPPINES EQUIVALENT TO TWENTY
PERCENT (20%), WHICH REPRESENTS
THE DIFFERENCE BETWEEN THE
REGULAR INCOME TAX OF THIRTY-FIVE
PERCENT (35%) AND THE FIFTEEN
PERCENT (15%) TAX ON DIVIDENDS AS
PROVIDED IN THIS SUBPARAGRAPH:
PROVIDED, THAT EFFECTIVE JANUARY
1, 2009, THE CREDIT AGAINST THE TAX
DUE SHALL BE EQUIVALENT TO FIFTEEN
PERCENT (15%), WHICH REPRESENTS
THE DIFFERENCE BETWEEN THE
REGULAR INCOME TAX OF THIRTY
PERCENT (30%) AND THE FIFTEEN
PERCENT (15%) TAX ON DIVIDENDS;
(c) CAPITAL GAINS FROM SALE OF SHARES
OF STOCK NOT TRADED IN THE STOCK
EXCHANGE. — A FINAL TAX AT THE
RATES PRESCRIBED BELOW IS HEREBY
IMPOSED UPON THE NET CAPITAL
GAINS REALIZED DURING THE TAXABLE
YEAR FROM THE SALE, BARTER,
EXCHANGE OR OTHER DISPOSITION OF
SHARES OF STOCK IN A DOMESTIC
2D SEM.
CORPORATION, EXCEPT SHARES SOLD,
OR DISPOSED OF THROUGH THE STOCK
EXCHANGE:
NOT OVER P 100,000 5%
ON ANY AMOUNT IN EXCESS 10%
OF P 100,000
Q: Explain the concept of gross Philippine billings.
In CIR v. British Overseas Airways Corporation, BOAC was a
British Government-owned corporation engaged in the
international airline business. As such, it operated air
transportation service and sold transportation tickets over the
routes of the other airline members. For the years 1959 to 1971,
BOAC had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or cargo to and
from the Philippines, although from 1959 to 1971, BOAC
maintained a general sales agent in the country which was
responsible for selling BOAC tickets covering passengers and
cargoes. The CIR issued an assessment against BOAC for
deficiency income taxes for the years 1959 to 1971 for the sale of
tickets in the Philippines for air transportation. Was BOAC a
resident foreign corporation doing business in the Philippines?
The Supreme Court held affirmatively. BOAC, during the
periods covered by the subject assessments, maintained a
general sales agent in the Philippines which performed
activities in the exercise of the functions normally incident to,
and in progressive pursuit of, the purpose and object of its
organization as an international air carrier. BOAC was held to
be engaged in business in the Philippines through its local agent
during the period covered by the assessments.
Did BOAC’s income from the sale of tickets in the
Philippines come from sources within the Philippines? The
source of an income is the property, activity or service that
produced the income. The Supreme Court stated that in
BOAC’s case, the sale of tickets in the Philippines was the
activity that produced the income. “The tickets exchanged
hands here and payment for fares were also made here in
A.Y. 2017-2018 Ateneo de Manila University School of Law
Philippine currency. The situs of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded
by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government.”
Additionally, the Supreme Court differentiated between
gross Philippine billings tax and common carrier’s tax. Gross
Philippine billings tax is an income tax, i.e., a direct tax on the
income of persons and other entities of “whatever kind and in
whatever form derived from any source.” On the other hand,
common carrier’s tax is an excise tax, that is, a tax on the activity
of transporting, conveying or removing passengers and cargo
from one place to another.47
Q: What is the branch profit remittance tax?
In CIR v. Burroughs Limited, on 14 March 1979, respondent paid
the 15% branch profit remittance tax based on the amount of its
profits before tax. Subsequently and relying on the BIR Ruling
dated 21 January 1980, respondent filed a claim for tax refund
or credit of allegedly overpaid branch profit remittance tax.
Pursuant to the 1980 BIR Ruling, branch profit remittance tax
should be based on the profit actually remitted abroad and not
on the total branch profits out of which the remittance was to
be made. The CIR argued that respondent was no longer
entitled to a refund because RMC No. 8-82 dated 17 March 1982
had revoked and/or repealed the 1980 BIR Ruling, to wit:
“Considering that the 15% branch profit remittance tax is
imposed and collected at source, necessarily the tax base should
be the amount actually applied for by the branch with the
Central Bank of the Philippines as profit to be remitted abroad.”
The Supreme Court cited Section 327 (now Section 246 of the
1997 Tax Code) in holding that RMC No. 8-82 could not be
given retroactive effect. “The prejudice that would result to
[respondent] by a retroactive application of [RMC No. 8-82] is
47. CIR v. British Overseas Airways Corporation, GR Nos. L-65773-74, 30 April
1987.
38
beyond question for it would be deprived of the substantial
amount of P172,058.90.”48
In Marubeni Corporation v. CIR, Marubeni Corporation
(the “Head Office”) was a Japanese corporation which
established a branch office (the “Branch Office”) in the
Philippines. The Head Office made equity investments in
Atlantic Gulf and Pacific Co. of Manila. In 1981, AG&P declared
and paid cash dividends to the Head Office. AG&P directly
remitted the cash dividends to the Head Office, net not only of
the 10% final dividend tax, but also of the withheld 15% profit
remittance tax (based on the remittable amount after deducting
the 10% final dividend tax). Later, the Head Office filed a claim
for tax refund or credit of alleged erroneously paid branch
profit remittance tax on the dividends remitted by AG&P to the
Head Office. The issue in this case revolved around the Head
Office’s tax liability on its dividend income from Philippine
sources. The Supreme Court deemed it wise to first determine
the classification of the Head Office for income taxation
purposes. The Head Office contended that following the
principal-agent relationship theory, because the Branch Office
was a resident foreign corporation, the Head Office was
likewise a resident foreign corporation. Hence, the Head Office
was subject only to the 10% final dividend tax. Upon the other
hand, the CIR argued that the Head Office was a nonresident
foreign corporation which was neither subject to the 10% final
dividend tax nor the withheld 15% branch profit remittance tax.
Instead, the Head Office was subject to the 35% final
withholding tax on its gross income earned from Philippine
sources. The Supreme Court declared that in this particular
transaction, the Head Office was considered a nonresident
foreign corporation. The general rule is that a foreign
corporation is the same juridical entity as its branch office in the
Philippines. However, “when the foreign corporation transacts
business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction
48. CIR v. Burroughs Limited, GR No. L-66653, 19 June 1986.
39 Guide Notes on Income Tax
becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation.” Being a
nonresident foreign corporation with respect to the transaction
in question, generally, the Head Office must be taxed 35% of its
gross income from all sources within the Philippines. However,
based on now Section 28(B)(5)(b) of the 1997 Tax Code and the
relevant provision of the RP-Japan Tax Treaty (i.e., the tax
sparing rule), a discounted rate of 15% was given to the Head
Office on dividends received from AG&P.49
In Bank of America NT & SA v. Court of Appeals, petitioner
was a foreign corporation duly licensed to engage in business
in the Philippines with a branch office in Makati. In 1982, it paid
the 15% branch profit remittance tax on profits from its regular
banking unit operations and foreign currency deposit unit
operations. The tax was based on net profits after income tax
without deducting the amount corresponding to the 15% tax.
Later, petitioner filed a claim for tax refund or credit on the
ground that the 15% tax should have been computed on the
basis of profits actually remitted, and not on the amount before
profit remittance tax. The Supreme Court held that the law was
clear. The 15% branch profit remittance tax was based on the
profits actually remitted. “The remittance tax was conceived in
an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices
and organizing, on the other hand, subsidiary domestic
corporations where at least a majority of all the latter’s shares
of stocks are owned by such foreign corporations. xxx In order
to avert what would otherwise appear to be an unequal tax
treatment on such subsidiaries vis-à-vis local branch offices, a
20%, later reduced to 15%, profit remittance tax was imposed
on local branches on their remittances of profits abroad. But this
is where the tax pari passu ends between domestic branches and
subsidiaries of foreign corporations.”50
49. Marubeni Corporation v. CIR, GR No. 76573, 14 September 1989.
50. Bank of America NT & SA v. Court of Appeals, GR Nos. 103092 and 103106,
21 July 1994.
2D SEM.
Q: Explain the tax sparing rule.
In CIR v. Wander Philippines, Inc., respondent was a domestic
corporation that was a wholly owned subsidiary of a Swiss
corporation not engaged in trade or business in the Philippines.
In July 1975 and July 1976, respondent remitted to the Swiss
corporation dividends in various sums on which 35%
withholding tax was withheld and paid to the BIR. Later,
respondent filed a claim for tax refund or credit contending that
it was liable only to pay 15% withholding tax in accordance
with Section 24(b)(1) of the old Tax Code [now Section
28(B)(5)(b) of the 1997 Tax Code, or the tax sparing rule]. Was
respondent entitled to the preferential rate of 15% withholding
tax on dividends declared and remitted to the Swiss
corporation? Particularly, did Switzerland allow as tax credit
the “deemed paid” Philippine tax on such dividends?
[Otherwise stated, did Switzerland grant to the Swiss
corporation a tax credit against the tax due it equivalent to 20%,
or the difference between the regular 35% rate and the
preferential 15% rate?] The Supreme Court noted that during
the period in question, Switzerland did not impose any income
tax on dividends received by a Swiss corporation from
corporations domiciled in foreign countries. To the Court’s
mind, “the fact that Switzerland did not impose any tax or the
dividends received by [the Swiss corporation] from the
Philippines should be considered as a full satisfaction of the
given condition.” Hence, the dividends should be subject to the
preferential rate of 15% withholding tax.51
In Marubeni Corporation v. CIR, Marubeni Corporation
(the “Head Office”) was a Japanese corporation which
established a branch office (the “Branch Office”) in the
Philippines. The Head Office made equity investments in
Atlantic Gulf and Pacific Co. of Manila. In 1981, AG&P declared
and paid cash dividends to the Head Office. AG&P directly
remitted the cash dividends to the Head Office, net not only of
51. CIR v. Wander Philippines, Inc., GR No. L-68375, 15 April 1988.
A.Y. 2017-2018 Ateneo de Manila University School of Law
the 10% final dividend tax, but also of the withheld 15% profit
remittance tax (based on the remittable amount after deducting
the 10% final dividend tax). Later, the Head Office filed a claim
for tax refund or credit of alleged erroneously paid branch
profit remittance tax on the dividends remitted by AG&P to the
Head Office. The issue in this case revolved around the Head
Office’s tax liability on its dividend income from Philippine
sources. The Supreme Court deemed it wise to first determine
the classification of the Head Office for income taxation
purposes. The Head Office contended that following the
principal-agent relationship theory, because the Branch Office
was a resident foreign corporation, the Head Office was
likewise a resident foreign corporation. Hence, the Head Office
was subject only to the 10% final dividend tax. Upon the other
hand, the CIR argued that the Head Office was a nonresident
foreign corporation which was neither subject to the 10% final
dividend tax nor the withheld 15% branch profit remittance tax.
Instead, the Head Office was subject to the 35% final
withholding tax on its gross income earned from Philippine
sources. The Supreme Court declared that in this particular
transaction, the Head Office was considered a nonresident
foreign corporation. The general rule is that a foreign
corporation is the same juridical entity as its branch office in the
Philippines. However, “when the foreign corporation transacts
business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction
becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation.” Being a
nonresident foreign corporation with respect to the transaction
in question, generally, the Head Office must be taxed 35% of its
gross income from all sources within the Philippines. However,
based on now Section 28(B)(5)(b) of the 1997 Tax Code and the
relevant provision of the RP-Japan Tax Treaty (i.e., the tax
52.Marubeni Corporation v. CIR, GR No. 76573, 14 September 1989.
40
sparing rule), a discounted rate of 15% was given to the Head
Office on dividends received from AG&P.52
In CIR v. Procter & Gamble Philippine Manufacturing
Corporation, for the years 1974 and 1975, P&G Phils. declared
dividends payable to its parent company and sole stockholder,
P&G U.S., from which dividends 35% withholding tax at source
was deducted. Thereafter, P&G Phils. filed a claim for tax
refund or credit claiming that the applicable rate of withholding
tax on the dividends remitted was only 15%, and not 35%. The
Supreme Court stated that “our NIRC does not require that the
US tax law deem the parent-corporation to have paid the twenty (20)
percentage points of dividend tax waived by the Philippines. The
NIRC only requires that the US ‘shall allow’ [P&G US] a
“deemed paid” tax credit in an amount equivalent to twenty (20)
percentage points waived by the Philippines.” Did the US law
comply with the above requirement? The Supreme Court ruled
positively. Thus, the dividends should be subject to the
preferential rate of 15% withholding tax.53
SEC. 29. IMPOSITION OF IMPROPERLY ACCUMULATED
EARNINGS TAX. —
(A) IN GENERAL. — IN ADDITION TO OTHER TAXES IMPOSED
BY THIS TITLE, THERE IS HEREBY IMPOSED FOR EACH
TAXABLE YEAR ON THE IMPROPERLY ACCUMULATED
TAXABLE INCOME OF EACH CORPORATION DESCRIBED IN
SUBSECTION B HEREOF, AN IMPROPERLY ACCUMULATED
EARNINGS TAX EQUAL TO TEN PERCENT (10%) OF THE
IMPROPERLY ACCUMULATED TAXABLE INCOME.
(B) TAX ON CORPORATIONS SUBJECT TO IMPROPERLY
ACCUMULATED EARNINGS TAX. —
(1) IN GENERAL. — THE IMPROPERLY ACCUMULATED
EARNINGS TAX IMPOSED IN THE PRECEDING
SECTION SHALL APPLY TO EVERY CORPORATION
FORMED OR AVAILED FOR THE PURPOSE OF
AVOIDING THE INCOME TAX WITH RESPECT TO ITS
53. CIR v. Procter & Gamble Philippine Manufacturing Corporation, GR No. 66838,
2 December 1991.
41 Guide Notes on Income Tax
SHAREHOLDERS OR THE SHAREHOLDERS OF ANY
OTHER CORPORATION, BY PERMITTING EARNINGS
AND PROFITS TO ACCUMULATE INSTEAD OF BEING
DIVIDED OR DISTRIBUTED.
(2) EXCEPTIONS. — THE IMPROPERLY ACCUMULATED
EARNINGS TAX AS PROVIDED FOR UNDER THIS
SECTION SHALL NOT APPLY TO: 
 CORPORATIONS USING THE CALENDAR YEAR BASIS,
(a) PUBLICLY-HELD CORPORATIONS;
(b) BANKS AND OTHER NONBANK
FINANCIAL INTERMEDIARIES; AND
(c) INSURANCE COMPANIES.
(C) EVIDENCE OF PURPOSE TO AVOID INCOME TAX. —
(1) PRIMA FACIE EVIDENCE. — THE FACT THAT ANY
CORPORATION IS A MERE HOLDING COMPANY OR
INVESTMENT COMPANY SHALL BE PRIMA FACIE
EVIDENCE OF A PURPOSE TO AVOID THE TAX UPON
ITS SHAREHOLDERS OR MEMBERS.
(2) EVIDENCE DETERMINATIVE OF PURPOSE. — THE
FACT THAT THE EARNINGS OR PROFITS OF A
CORPORATION ARE PERMITTED TO ACCUMULATE
BEYOND THE REASONABLE NEEDS OF THE BUSINESS
SHALL BE DETERMINATIVE OF THE PURPOSE TO
AVOID THE TAX UPON ITS SHAREHOLDERS OR
MEMBERS UNLESS THE CORPORATION, BY THE CLEAR
PREPONDERANCE OF EVIDENCE, SHALL PROVE TO
THE CONTRARY.
(D) IMPROPERLY ACCUMULATED TAXABLE INCOME. — FOR
PURPOSES OF THIS SECTION, THE TERM 'IMPROPERLY
ACCUMULATED TAXABLE INCOME' MEANS TAXABLE
INCOME' ADJUSTED BY:
(1) INCOME EXEMPT FROM TAX;
(2) INCOME EXCLUDED FROM GROSS INCOME;
(3) INCOME SUBJECT TO FINAL TAX; AND
(4) THE AMOUNT OF NET OPERATING LOSS CARRY-OVER
DEDUCTED;
2D SEM.
AND REDUCED BY THE SUM OF:
(1) DIVIDENDS ACTUALLY OR CONSTRUCTIVELY PAID;
AND
(2) INCOME TAX PAID FOR THE TAXABLE YEAR.
PROVIDED, HOWEVER, THAT FOR
THE ACCUMULATED EARNINGS UNDER TAX SHALL
NOT APPLY ON IMPROPERLY ACCUMULATED INCOME
AS OF DECEMBER 31, 1997. IN THE CASE OF
CORPORATIONS ADOPTING THE FISCAL YEAR
ACCOUNTING PERIOD, THE IMPROPERLY
ACCUMULATED INCOME NOT SUBJECT TO THIS TAX,
SHALL BE RECKONED, AS OF THE END OF THE MONTH
COMPRISING THE TWELVE (12)-MONTH PERIOD OF
FISCAL YEAR 1997-1998.
(E) REASONABLE NEEDS OF THE BUSINESS. — FOR
PURPOSES OF THIS SECTION, THE TERM 'REASONABLE
NEEDS OF THE BUSINESS' INCLUDES THE REASONABLY
ANTICIPATED NEEDS OF THE BUSINESS.
Q: What is the improperly accumulated earnings tax?
In Basilan Estates, Inc. v. CIR, petitioner was a domestic
corporation engaged in the coconut industry. In February 1959,
the CIR issued an assessment against petitioner for deficiency
income tax and a 25% surtax on unreasonably accumulated
profits as of 1953. The following year, petitioner filed with the
Court of Tax Appeals a petition for review contesting the CIR’s
assessment alleging: (1) prescription of the period for
assessment and collection; (2) error in disallowing claimed
depreciation, traveling and miscellaneous expenses; and (3)
error in finding the existence of unreasonably accumulated
profits an the imposition of a 25% surtax thereon. On the topic
of unreasonably accumulated profits, the Supreme Court said
that: “In order to determine whether profits were accumulated
for the reasonable needs of the business or to avoid the surtax
upon shareholders, the controlling intention of the taxpayer is
that which is manifested at the time of the accumulation, not
A.Y. 2017-2018 Ateneo de Manila University School of Law
subsequently declared intentions which are merely the
products of afterthought.” Moreover: “In determining whether
accumulations of earnings or profits in a particular year are
within the reasonable needs of a corporation, it is necessary to
take into account prior accumulations, since accumulations
prior to the year involved may have been sufficient to cover the
business needs and additional accumulations during the year
involved would not reasonably be necessary.” Applying the
foregoing standards, the High Court found that petitioner
made unreasonable accumulation of surplus beyond the needs
of the business.54
In Manila Wine Merchants, Inc. v. CIR, petitioner
questioned the Court of Tax Appeals’ decision ordering it to
pay the CIR a 25% surtax plus interest which represented the
additional tax due for improperly accumulated profits or
surplus in the taxable year 1957. One basis in assessing
petitioner for the 25% surtax was its substantial investment of
surplus or profits in unrelated business, i.e., purchase of U.S.A.
Treasury Bonds. According to the Supreme Court, to avoid the
imposition of the 25% surtax, petitioner should prove that the
purchase of the U.S.A. Treasury Bonds in 1951 was an
investment within the reasonable needs of the company. “To
determine the ‘reasonable needs’ of the business in order to
justify an accumulation of earnings, the Courts of the United
States have invented the so-called ‘Immediacy Test’ which
construed the words ‘reasonable needs of the business’ to mean
the immediate needs of the business, and it was generally held
that if the corporation did not prove an immediate need for the
accumulation of the earnings and profits, the accumulation was
not for the reasonable needs of the business, and the penalty tax
would apply. American cases likewise hold that investment of
the earnings and profits of the corporation in stock or securities
54. Basilan Estates, Inc. v. CIR, GR No. L-22492, 5 September 1967.
55. Manila Wine Merchants, Inc. v. CIR, GR No. L-26145, 20 February 1984.
56. CIR v. Antonio Tuason, Inc., G.R. No. 85749, 15 May 1989.
57. NOTE: Under the 1997 Tax Code, the improperly accumulated earnings tax does
not apply to publicly held corporations, banks and other nonbank financial
42
of an unrelated business usually indicates an accumulation
beyond the reasonable needs of the business.” Here, the
Supreme Court held that the purchase of the U.S.A. Treasury
Bonds was in no way related to petitioner’s business of
importing and selling wines, whisky, liquors and distilled
spirits. It was thus construed to be an investment beyond the
reasonable needs of petitioner’s business.55
In CIR v. Antonio Tuason, Inc., respondent questioned the
CIR’s assessment for a 25% surtax on unreasonable
accumulation of surplus for the years 1975 to 1978. Respondent
argued that the accumulation of surplus profits during the
years in question was solely for the purpose of expanding its
business operations as real estate broker. Unfortunately, as the
Supreme Court held, respondent failed to overcome the
presumption of correctness of the CIR’s assessment. “The
touchstone of liability is the purpose behind the accumulation
of the income and not the consequences of the accumulation.
Thus, if the failure to pay dividends were for the purpose of
using the undistributed earnings and profits for the reasonable
needs of the business, that purpose would not fall within the
interdiction of the statute.”56
In Cyanamid Philippines, Inc. v. Court of Appeals, petitioner
was a domestic corporation that was a wholly owned
subsidiary of an American company. Petitioner was engaged in
the manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an
importer/indentor. In February 1985, the CIR issued an
assessment against petitioner for deficiency income tax,
deficiency percentage tax, and a 25% surtax. Petitioner argued,
among others, that the surtax for undue accumulation of
earnings did not apply to it because petitioner was a wholly
owned subsidiary of a publicly owned company.57 Under the
intermediaries, and insurance companies. However, the present case was decided
under the 1977 Tax Code. Under the old code, only the following were exempted
from the improperly accumulated earnings tax: banks, nonbank financial
intermediaries, corporation organized primarily and authorized by the Central
43 Guide Notes on Income Tax
1977 Tax Code, as amended, therefore, petitioner did not fall
among those exempt from the imposition of improperly
accumulated earnings tax. The Supreme Court likewise had
occasion to discuss the rationale behind the imposition of the
surtax, to wit: “The provision discouraged tax avoidance
through corporate surplus accumulation. When corporations
do not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The tax on
improper accumulation of surplus is essentially a penalty tax
designed to compel corporations to distribute earnings so that
the said earnings by shareholders could, in turn, be taxed.”58
SEC. 30. EXEMPTIONS FROM TAX ON CORPORATIONS. — THE
FOLLOWING ORGANIZATIONS SHALL NOT BE TAXED UNDER THIS
TITLE IN RESPECT TO INCOME RECEIVED BY THEM AS SUCH:
(A) LABOR, AGRICULTURAL OR HORTICULTURAL
ORGANIZATION NOT ORGANIZED PRINCIPALLY FOR
PROFIT;
(B) MUTUAL SAVINGS BANK NOT HAVING A CAPITAL STOCK
REPRESENTED BY SHARES, AND COOPERATIVE BANK
WITHOUT CAPITAL STOCK ORGANIZED AND OPERATED
FOR MUTUAL PURPOSES AND WITHOUT PROFIT;
(C) A BENEFICIARY SOCIETY, ORDER OR ASSOCIATION,
OPERATING FORT HE EXCLUSIVE BENEFIT OF THE
MEMBERS SUCH AS A FRATERNAL ORGANIZATION
OPERATING UNDER THE LODGE SYSTEM, OR MUTUAL AID
ASSOCIATION OR A NONSTOCK CORPORATION
ORGANIZED BY EMPLOYEES PROVIDING FOR THE
PAYMENT OF LIFE, SICKNESS, ACCIDENT, OR OTHER
BENEFITS EXCLUSIVELY TO THE MEMBERS OF SUCH
SOCIETY, ORDER, OR ASSOCIATION, OR NONSTOCK
CORPORATION OR THEIR DEPENDENTS;
(D) CEMETERY COMPANY OWNED AND OPERATED
EXCLUSIVELY FOR THE BENEFIT OF ITS MEMBERS;
(E) NONSTOCK CORPORATION OR ASSOCIATION
Bank of the Philippines to hold shares of stocks of banks, and insurance
companies.
2D SEM.
ORGANIZED AND OPERATED EXCLUSIVELY FOR
RELIGIOUS, CHARITABLE, SCIENTIFIC, ATHLETIC, OR
CULTURAL PURPOSES, OR FOR THE REHABILITATION OF
VETERANS, NO PART OF ITS NET INCOME OR ASSET SHALL
BELONG TO OR INURES TO THE BENEFIT OF ANY MEMBER,
ORGANIZER, OFFICER OR ANY SPECIFIC PERSON;
(F) BUSINESS LEAGUE CHAMBER OF COMMERCE, OR BOARD
OF TRADE, NOT ORGANIZED FOR PROFIT AND NO PART OF
THE NET INCOME OF WHICH INURES TO THE BENEFIT OF
ANY PRIVATE STOCK-HOLDER, OR INDIVIDUAL;
(G) CIVIC LEAGUE OR ORGANIZATION NOT ORGANIZED FOR
PROFIT BUT OPERATED EXCLUSIVELY FOR THE
PROMOTION OF SOCIAL WELFARE;
(H) A NONSTOCK AND NONPROFIT EDUCATIONAL
INSTITUTION;
(I) GOVERNMENT EDUCATIONAL INSTITUTION;
(J) FARMERS' OR OTHER MUTUAL TYPHOON OR FIRE
INSURANCE COMPANY, MUTUAL DITCH OR IRRIGATION
COMPANY, MUTUAL OR COOPERATIVE TELEPHONE
COMPANY, OR LIKE ORGANIZATION OF A PURELY LOCAL
CHARACTER, THE INCOME OF WHICH CONSISTS SOLELY
OF ASSESSMENTS, DUES, AND FEES COLLECTED FROM
MEMBERS FOR THE SOLE PURPOSE OF MEETING ITS
EXPENSES; AND
(K) FARMERS', FRUIT GROWERS', OR LIKE ASSOCIATION
ORGANIZED AND OPERATED AS A SALES AGENT FOR THE
PURPOSE OF MARKETING THE PRODUCTS OF ITS
MEMBERS AND TURNING BACK TO THEM THE PROCEEDS
OF SALES, LESS THE NECESSARY SELLING EXPENSES ON
THE BASIS OF THE QUANTITY OF PRODUCE FINISHED BY
THEM;
NOTWITHSTANDING THE PROVISIONS IN THE
PRECEDING PARAGRAPHS, THE INCOME OF WHATEVER KIND
AND CHARACTER OF THE FOREGOING ORGANIZATIONS FROM
58. Cyanamid Philippines, Inc. v. Court of Appeals, GR No. 108067, 20 January
2000.
 A.Y. 2017-2018 Ateneo de Manila University School of Law 44

ANY OF THEIR PROPERTIES, REAL OR PERSONAL, OR FROM Interest

ANYon currency bank deposits & yield or any 20% Final Tax 20% Final Tax 30% Income Tax
other monetary benefit form deposit substitutes &
OF THEIR ACTIVITIES CONDUCTED FOR PROFIT REGARDLESS OF
from trust funds & similar arrangement
THE DISPOSITION MADE OF SUCH INCOME, SHALL BE SUBJECT TO (similar within the Philippines)
Royalties
TAX IMPOSED UNDER THIS CODE.
Interest income from a depositary bank under the 15% Final Tax 7.5 Final Tax Exempt from Tax
Commented [TCE2]: Not yet amended by TRAIN. With pending
expanded foreign currency deposit system (EFCDS) (Based on Sec. 7 of
Q: What is the tax consequence of real property owned by Senate Bill.
TRAIN)
exempt corporations?
Capital Gainsfrom sale, barter, exchange or other 15% Final tax on net 5% Final tax on net 5% Final tax on net
The Young Men’s Christian Association of the Philippines, Inc. of shares of stock of domestic
disposition capital gains realized capital gains capital gains
was a non-stock, non-profit institution which conducted corporation NOT traded in the stock exchange during the taxable yr realized during the realized during the
various programs and activities beneficial to the public, (Based on Sec. 7 of taxable yr taxable yr Commented [TCE3]: Not yet amended by TRAIN. With pending
For the first P100,000 TRAIN)
pursuant to its religious, educational and charitable objectives. Senate Bill.
In 1980, YMCA earned income from leasing out a portionOnofany itsamount in excess of P100,000 10% 10% 10% Commented [TCE4]: Not yet amended by TRAIN. With pending
premises to small shop owners and from parking fees collected Senate Bill.
from non-members. In CIR v. Court of Appeals, YMCA contested Income derived by depositary bank under the Exempt from Final Exempt from Final
the CIR’s assessment issued against it for deficiency income EFCDStaxfrom foreign currency transactions with Tax – Part of gross Tax – Part of gross
non-residents, offshore banking units in the income subject to income subject to
on the foregoing income. The Supreme Court held that Philippines,
while local commercial banks including 35%/30% corp. 35%/30% corp.
YMCA was an organization which should not be taxed in of foreign banks that may be authorized
branches income tax income tax
by the BSP to transact business with FCDS units &
respect of income received by it as such, YMCA’s rental income
other depositary banks under the EFCDS (RA 9294) (RA 9294)
from its real estate was subject to income tax. The last paragraph
of now Section 30 of the 1997 Tax Code provides that income Interest income from foreign currency loans 10% Final Tax 10% Final Tax N/A
from the property of covered organizations is taxable.granted “Theby such depository banks under said
EFCDS to RESIDENTS
rental income is taxable regardless of whence such income is
derived and how it is used or disposed of. Where the lawInter-corporate
does dividends (from a domestic corp.) Exempt from Tax Exempt from Tax 15% Final Tax
*subject to the rule on
not distinguish, neither should we.”59 tax credit for tax
actually paid and tax
Under the 1987 Constitution and the 1991 LGC, charitable deemed paid.
institutions, churches and personages or convents appurtenant Otherwise, subject to
regular income tax
thereto, mosques, non-profit cemeteries, and all lands, rate of 35%/30%
buildings, and improvements, actually, directly, Capital andGains from sale, exchange or other 6% Final tax on gross 30% Income Tax 30% Income Tax
exclusively used for religious, charitable, or educational
disposition of lands and/or buildings which are not selling price or FMV
used in the business of a corp. & are treated as or zonal value,
purposes shall be exempt from real property tax. However,
capital assets whichever is higher
pursuant to the 1997 Tax Code, income from real property of
such organizations shall be subject to income tax.
FIXED TAX ON CORPORATIONS
TYPE OF INCOME TAX RATE FOR ALIEN
TYPE OF INCOME DOMESTIC CORP RESIDENT NON-RESIDENT
INDIVIDUAL EMPLOYED BY
FOREIGN CORP FOREIGN

59. CIR v. Court of Appeals, GR No. 124043, 14 October 1998.
45 Guide Notes on Income Tax 2D SEM.
** MULTINATIONAL COMPANY = a foreign Regional or Area Headquarters & him for the taxable year 1997. Succinctly, the Supreme Court
firm/entity engaged in international trade with Regional Operating headquaters
affiliates/subsidiaries/branch offices in the Asia of Multinational Cos. held that the 1997 Tax Code could not be applied retroactively.
Pacific Region & other foreign markets “What the law should consider for the purpose of determining
Gross Income = Salaries, Regular income Tax Rate under Sec. 24 (A) (2) (a) of the tax due from an individual taxpayer is his status and
Wages, Annuities, the Tax Code, as amended. qualified dependents at the close of the taxable year and not at
Compensation,
Remuneration and Other (Based on Sec. 6 of TRAIN and veto message of the time the return is filed and the tax due thereon is paid.” In
Emoluments (i.e., honoraria President Duterte. Veto message is embodied in other words, since the 1997 Tax Code took effect on 1 January
& allowances received from Sec.4(C) of RR 8-2018)
such companies. Provided,
1998, the increased amounts of personal and additional
same tax treatment shall exemptions indicated therein could only be allowed as
apply to Filipinos abroad deductions from an individual taxpayer’s income for the
employed & occupying
same positions in these taxable year 1998 to be filed in 1999.
companies
Other income (that is Subject to Offshore Petroleum Section 31 defines ‘taxable income’ as the pertinent
income other than regular Banking Service items of gross income specified in the NIRC, less the
compensation from being graduated tax Units Contractor and deductions and/or personal and additional
employed by a rate Subcontractor
RHQ/ROHQ, OBU or exemptions, if any, authorized for such types of
Petroleum Service income by the NIRC or other special laws. As
Contractor & Subcontractor
defined under Section 22(P), ‘taxable year’ means
the calendar year, upon the basis of which the net
income is computed under Title II of the NIRC.
CHAPTER V — COMPUTATION OF Section 43 also supports the rule that the taxable
TAXABLE INCOME income of an individual shall be computed on the
basis of the calendar year. In addition, Section 45
SEC. 31. TAXABLE INCOME DEFINED. — THE TERM TAXABLE provides that the deductions provided for the
INCOME MEANS THE PERTINENT ITEMS OF GROSS INCOME taxable year in which they are ‘paid or accrued’ or
SPECIFIED IN THIS CODE, LESS THE DEDUCTIONS AND/OR ‘paid or incurred.
PERSONAL AND ADDITIONAL EXEMPTIONS, IF ANY, AUTHORIZED
FOR SUCH TYPES OF INCOME BY THIS CODE OR OTHER SPECIAL
In this case, the Supreme Court had occasion to
explain the nature of personal and additional
LAWS.
exemptions as, fixed amounts to which certain
individual taxpayers (citizens, resident aliens) are
Q: What is taxable income? How is it computed? entitled. Personal exemptions are the theoretical
The 1997 Tax Code took effect on 1 January 1998. One of the personal, living and family expenses of an
changes introduced by the 1997 Tax Code was the increased individual allowed to be deducted from the gross
personal and additional exemptions which could be availed of or net income of an individual taxpayer. They are
by an individual taxpayer for purposes of computing his arbitrary amounts which have been calculated by
income tax liability for a given taxable year. In Pansacola v. CIR, our lawmakers to be roughly equivalent to the
Pansacola filed his income tax return for the taxable year 1997. minimum of subsistence, taking into account the
Later, Pansacola filed a claim for tax refund or credit of a certain
amount on the ground that the exemptions under the 1997 Tax
Code, taking effect on 1 January 1998, could be availed of by
A.Y. 2017-2018 Ateneo de Manila University School of Law
personal status and additional qualified
dependents of the taxpayer.60
Under PAL’s franchise, the basic corporate income tax or
franchise tax, whichever is lower, that is payable by PAL in a
given taxable year shall be in lieu of “all other taxes.” Is the 20%
final withholding tax on bank deposits included in “all other
taxes”? In CIR v. Philippine Airlines, Inc., the Supreme Court held
affirmatively. [As a consequence, PAL was held to be entitled
to a refund of the 20% FWT it paid on bank deposits for the
period starting March 1995 through November 1997.] A
corporate income tax liability has two components: the general
rate of now 30%, and the specific final rates for certain passive
incomes. In arriving at the taxable income of PAL, are these
passive incomes taken into consideration? No. “The definition
of gross income is broad enough to include all passive incomes
subject to specific rates or final taxes. However, since these
passive incomes are already subject to different rates and taxed
finally at source, they are no longer included in the computation of
gross income, which determines taxable income.”61
Under PAL’s franchise, the basic corporate income tax or
franchise tax, whichever is lower, that is payable by PAL in a
given taxable year shall be in lieu of “all other taxes.” Is MCIT
included in “all other taxes?” In CIR v. Philippine Airlines, Inc.,
the Supreme Court held affirmatively. [As a consequence, PAL
was held not liable to pay MCIT for the fiscal year 2000-2001.]
Although regular corporate income tax and minimum
corporate income tax are both income taxes, they are computed
differently, i.e., varying rates and bases. The basis for regular
corporate income tax is taxable income, while the basis for
minimum corporate income tax is gross income. It must be
further noted that the gross income base for MCIT is slightly
different from “gross income” under Section 32 of the 1997 Tax
Code.
60. Pansacola v. CIR, GR No. 159991, 16 November 2006.
61. CIR v. Philippine Airlines, Inc., GR No. 160528, 9 October 2006.
46
“Taxable income is defined under Section 31 of the NIRC
of 1997 as the pertinent items of gross income specified in the
said Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by the
same Code or other special laws. The gross income, referred to
in Section 31, is described in Section 32 of the NIRC of 1997 as
income from whatever source, including compensation for
services; the conduct of trade or business or the exercise of
profession; dealings in property; interests; rents; royalties;
dividends; annuities; prizes and winnings; pensions; and a
partner’s distributive share in the net income of a general
professional partnership.”
On the other hand, “gross income” in relation to MCIT is
understood to mean “gross receipts, less sales returns,
allowances, discounts and cost of services.” “Noticeably,
inclusions in and exclusions/deductions from gross income for
MCIT purposes are limited to those directly arising from the
conduct of the taxpayer’s business. It is, thus, more limited than
the gross income used in the computation of basic corporate
income tax.”62
Q: Are the salaries of the members of the judiciary subject to
income tax?
Are salaries of judges subject to income tax? Yes. Nitafan v. CIR
confirmed that during their continuance in office, judges and
justices enjoy the constitutional protection against decrease of
their salaries. However, the salaries of members of the judiciary
are subject to the general income tax applied to all taxpayers.63
CHAPTER VI — COMPUTATION OF
GROSS INCOME
SEC. 32. GROSS INCOME. —
(A) GENERAL DEFINITION. — EXCEPT WHEN OTHERWISE
62. CIR v. Philippine Airlines, Inc., GR No. 180066, 7 July 2009.
63. Nitafan v. CIR, GR No. 78780, 23 July 1987.
47 Guide Notes on Income Tax 2D SEM.
PROVIDED IN THIS TITLE, GROSS INCOME MEANS ALL PREMIUM. — THE AMOUNT RECEIVED BY THE
INCOME DERIVED FROM WHATEVER SOURCE, INSURED, AS A RETURN OF PREMIUMS PAID BY HIM
INCLUDING (BUT NOT LIMITED TO) THE FOLLOWING UNDER LIFE INSURANCE, ENDOWMENT, OR ANNUITY
ITEMS: CONTRACTS, EITHER DURING THE TERM OR AT THE
MATURITY OF THE TERM MENTIONED IN THE
(1) COMPENSATION FOR SERVICES IN WHATEVER FORM
CONTRACT OR UPON SURRENDER OF THE CONTRACT.
PAID, INCLUDING, BUT NOT LIMITED TO FEES,
SALARIES, WAGES, COMMISSIONS, AND SIMILAR (3) GIFTS, BEQUESTS, AND DEVISES. — THE VALUE OF
ITEMS; PROPERTY ACQUIRED BY GIFT, BEQUEST, DEVISE, OR
DESCENT: PROVIDED, HOWEVER, THAT INCOME
(2) GROSS INCOME DERIVED FROM THE CONDUCT OF
FROM SUCH PROPERTY, AS WELL AS GIFT, BEQUEST,
TRADE OR BUSINESS OR THE EXERCISE OF A
DEVISE OR DESCENT OF INCOME FROM ANY
PROFESSION;
PROPERTY, IN CASES OF TRANSFERS OF DIVIDED
(3) GAINS DERIVED FROM DEALINGS IN PROPERTY; INTEREST, SHALL BE INCLUDED IN GROSS INCOME.
(4) INTERESTS; (4) COMPENSATION FOR INJURIES OR SICKNESS. —
(5) RENTS; AMOUNTS RECEIVED, THROUGH ACCIDENT OR
HEALTH INSURANCE OR UNDER WORKMEN'S
(6) ROYALTIES; COMPENSATION ACTS, AS COMPENSATION FOR
(7) DIVIDENDS; PERSONAL INJURIES OR SICKNESS, PLUS THE
AMOUNTS OF ANY DAMAGES RECEIVED, WHETHER BY
(8) ANNUITIES;
SUIT OR AGREEMENT, ON ACCOUNT OF SUCH
(9) PRIZES AND WINNINGS; INJURIES OR SICKNESS.
(10) PENSIONS; AND (5) INCOME EXEMPT UNDER TREATY. — INCOME OF
(11) PARTNER'S DISTRIBUTIVE SHARE FROM THE NET ANY KIND, TO THE EXTENT REQUIRED BY ANY TREATY
INCOME OF THE GENERAL PROFESSIONAL OBLIGATION BINDING UPON THE GOVERNMENT OF
PARTNERSHIP. THE PHILIPPINES.

(B) EXCLUSIONS FROM GROSS INCOME. — THE FOLLOWING
ITEMS SHALL NOT BE INCLUDED IN GROSS INCOME AND
SHALL BE EXEMPT FROM TAXATION UNDER THIS TITLE:
(1) LIFE INSURANCE. — THE PROCEEDS OF LIFE
INSURANCE POLICIES PAID TO THE HEIRS OR
BENEFICIARIES UPON THE DEATH OF THE INSURED,
WHETHER IN A SINGLE SUM OR OTHERWISE, BUT IF
SUCH AMOUNTS ARE HELD BY THE INSURER UNDER
AN AGREEMENT TO PAY INTEREST THEREON, THE
INTEREST PAYMENTS SHALL BE INCLUDED IN GROSS
INCOME.
(2) AMOUNT RECEIVED BY INSURED AS RETURN OF
(6) RETIREMENT BENEFITS, PENSIONS, GRATUITIES,
ETC.—
(a) RETIREMENT BENEFITS RECEIVED
UNDER REPUBLIC ACT NO. 7641 AND
THOSE RECEIVED BY OFFICIALS AND
EMPLOYEES OF PRIVATE FIRMS,
WHETHER INDIVIDUAL OR CORPORATE,
IN ACCORDANCE WITH A REASONABLE
PRIVATE BENEFIT PLAN MAINTAINED BY
THE EMPLOYER: PROVIDED, THAT THE
RETIRING OFFICIAL OR EMPLOYEE HAS
BEEN IN THE SERVICE OF THE SAME
EMPLOYER FOR AT LEAST TEN (10)
A.Y. 2017-2018 Ateneo de Manila University School of Law 48

YEARS AND IS NOT LESS THAN FIFTY (50) (c) THE PROVISIONS OF ANY EXISTING LAW
YEARS OF AGE AT THE TIME OF HIS TO THE CONTRARY
RETIREMENT: PROVIDED, FURTHER, NOTWITHSTANDING, SOCIAL SECURITY
THAT THE BENEFITS GRANTED UNDER BENEFITS, RETIREMENT GRATUITIES,
THIS SUBPARAGRAPH SHALL BE PENSIONS AND OTHER SIMILAR
AVAILED OF BY AN OFFICIAL OR BENEFITS RECEIVED BY RESIDENT OR
EMPLOYEE ONLY ONCE. FOR PURPOSES NONRESIDENT CITIZENS OF THE
OF THIS SUBSECTION, THE TERM PHILIPPINES OR ALIENS WHO COME TO
'REASONABLE PRIVATE BENEFIT PLAN' RESIDE PERMANENTLY IN THE
MEANS A PENSION, GRATUITY, STOCK PHILIPPINES FROM FOREIGN
BONUS OR PROFIT-SHARING PLAN GOVERNMENT AGENCIES AND OTHER
MAINTAINED BY AN EMPLOYER FOR THE INSTITUTIONS, PRIVATE OR PUBLIC.
BENEFIT OF SOME OR ALL OF HIS
(d) PAYMENTS OF BENEFITS DUE OR TO
OFFICIALS OR EMPLOYEES, WHEREIN
BECOME DUE TO ANY PERSON RESIDING
CONTRIBUTIONS ARE MADE BY SUCH
IN THE PHILIPPINES UNDER THE LAWS
EMPLOYER FOR THE OFFICIALS OR
OF THE UNITED STATES ADMINISTERED
EMPLOYEES, OR BOTH, FOR THE
BY THE UNITED STATES VETERANS
PURPOSE OF DISTRIBUTING TO SUCH
ADMINISTRATION.
OFFICIALS AND EMPLOYEES THE
EARNINGS AND PRINCIPAL OF THE (e) BENEFITS RECEIVED FROM OR ENJOYED
FUND THUS ACCUMULATED, AND UNDER THE SOCIAL SECURITY SYSTEM
WHEREIN ITS IS PROVIDED IN SAID IN ACCORDANCE WITH THE
PLAN THAT AT NO TIME SHALL ANY PROVISIONS OF REPUBLIC ACT NO.
PART OF THE CORPUS OR INCOME OF 8282.
THE FUND BE USED FOR, OR BE (f) BENEFITS RECEIVED FROM THE GSIS
DIVERTED TO, ANY PURPOSE OTHER UNDER REPUBLIC ACT NO. 8291,
THAN FOR THE EXCLUSIVE BENEFIT OF INCLUDING RETIREMENT GRATUITY
THE SAID OFFICIALS AND EMPLOYEES. RECEIVED BY GOVERNMENT OFFICIALS
(b) ANY AMOUNT RECEIVED BY AN AND EMPLOYEES.
OFFICIAL OR EMPLOYEE OR BY HIS HEIRS (7) MISCELLANEOUS ITEMS. —
FROM THE EMPLOYER AS A
CONSEQUENCE OF SEPARATION OF (a) INCOME DERIVED BY FOREIGN
SUCH OFFICIAL OR EMPLOYEE FROM GOVERNMENT. — INCOME DERIVED
THE SERVICE OF THE EMPLOYER FROM INVESTMENTS IN THE
BECAUSE OF DEATH SICKNESS OR PHILIPPINES IN LOANS, STOCKS, BONDS
OTHER PHYSICAL DISABILITY OR FOR OR OTHER DOMESTIC SECURITIES, OR
ANY CAUSE BEYOND THE CONTROL OF FROM INTEREST ON DEPOSITS IN BANKS
THE SAID OFFICIAL OR EMPLOYEE. IN THE PHILIPPINES BY (I) FOREIGN
GOVERNMENTS, (II) FINANCING
49 Guide Notes on Income Tax 2D SEM.
INSTITUTIONS OWNED, CONTROLLED, (e) 13TH MONTH PAY AND OTHER
OR ENJOYING REFINANCING FROM BENEFITS. — GROSS BENEFITS
FOREIGN GOVERNMENTS, AND (III) RECEIVED BY OFFICIALS AND
INTERNATIONAL OR REGIONAL EMPLOYEES OF PUBLIC AND PRIVATE
FINANCIAL INSTITUTIONS ENTITIES: PROVIDED, HOWEVER, THAT
ESTABLISHED BY FOREIGN THE TOTAL EXCLUSION UNDER THIS
GOVERNMENTS. SUBPARAGRAPH SHALL NOT EXCEED
(b) INCOME DERIVED BY THE
NINETY THOUSAND PESOS
GOVERNMENT OR ITS POLITICAL (P90,000) WHICH SHALL COVER:
SUBDIVISIONS. — INCOME DERIVED i. BENEFITS RECEIVED BY OFFICIALS
FROM ANY PUBLIC UTILITY OR FROM AND EMPLOYEES OF THE
THE EXERCISE OF ANY ESSENTIAL NATIONAL AND LOCAL
GOVERNMENTAL FUNCTION ACCRUING GOVERNMENT PURSUANT TO
TO THE GOVERNMENT OF THE REPUBLIC ACT NO. 6686;
PHILIPPINES OR TO ANY POLITICAL ii. BENEFITS RECEIVED BY
SUBDIVISION THEREOF.
EMPLOYEES PURSUANT TO
(c) PRIZES AND AWARDS. — PRIZES AND PRESIDENTIAL DECREE NO. 851,
AWARDS MADE PRIMARILY IN AS AMENDED BY MEMORANDUM
RECOGNITION OF RELIGIOUS, ORDER NO. 28, DATED AUGUST
CHARITABLE, SCIENTIFIC, 13, 1986;
EDUCATIONAL, ARTISTIC, LITERARY, OR
iii. BENEFITS RECEIVED BY OFFICIALS
CIVIC ACHIEVEMENT BUT ONLY IF: AND EMPLOYEES NOT COVERED
i. THE RECIPIENT WAS SELECTED BY PRESIDENTIAL DECREE NO.
WITHOUT ANY ACTION ON HIS 851, AS AMENDED BY
PART TO ENTER THE CONTEST OR MEMORANDUM ORDER NO. 28,
PROCEEDING; AND DATED AUGUST 13, 1986; AND
ii. THE RECIPIENT IS NOT REQUIRED iv. OTHER BENEFITS SUCH AS
TO RENDER SUBSTANTIAL FUTURE PRODUCTIVITY INCENTIVES AND
SERVICES AS A CONDITION TO CHRISTMAS BONUS.
RECEIVING THE PRIZE OR AWARD.
(f) GSIS, SSS, MEDICARE AND OTHER
(d) PRIZES AND AWARDS IN SPORTS CONTRIBUTIONS. — GSIS, SSS,
COMPETITION. — ALL PRIZES AND MEDICARE AND PAG-IBIG
AWARDS GRANTED TO ATHLETES IN CONTRIBUTIONS, AND UNION DUES OF
LOCAL AND INTERNATIONAL SPORTS INDIVIDUALS.
COMPETITIONS AND TOURNAMENTS
(g) GAINS FROM THE SALE OF BONDS,
WHETHER HELD IN THE PHILIPPINES OR
DEBENTURES OR OTHER CERTIFICATE
ABROAD AND SANCTIONED BY THEIR
OF INDEBTEDNESS. — GAINS REALIZED
NATIONAL SPORTS ASSOCIATIONS.
A.Y. 2017-2018 Ateneo de Manila University School of Law
FROM THE SAME OR EXCHANGE OR
RETIREMENT OF BONDS, DEBENTURES
OR OTHER CERTIFICATE OF
INDEBTEDNESS WITH A MATURITY OF
MORE THAN FIVE (5) YEARS.
(h) GAINS FROM REDEMPTION OF SHARES
IN MUTUAL FUND. — GAINS REALIZED
BY THE INVESTOR UPON REDEMPTION
OF SHARES OF STOCK IN A MUTUAL
FUND COMPANY AS DEFINED IN
SECTION 22 (BB) OF THIS CODE.
Q: What is gross income?
“Gross” means “without deduction.” Gross is the antithesis of
net.
In CIR v. British Overseas Airways Corporation, BOAC was
a British Government-owned corporation engaged in the
international airline business. As such, it operated air
transportation service and sold transportation tickets over the
routes of the other airline members. For the years 1959 to 1971,
BOAC had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or cargo to and
from the Philippines, although from 1959 to 1971, BOAC
maintained a general sales agent in the country which was
responsible for selling BOAC tickets covering passengers and
cargoes. The CIR issued an assessment against BOAC for
deficiency income taxes for the years 1959 to 1971 for the sale of
tickets in the Philippines for air transportation. Did BOAC’s
income from the sale of tickets in the Philippines come from
sources within the Philippines and thus taxable under
Philippine income tax laws? The Supreme Court held in the
affirmative. Although the enumeration in now Section 32(A) of
the 1997 Tax Code does not include income from the sale of
tickets for international transportation, the definition of “gross
income” is broad and comprehensive to include proceeds from
64. British Overseas Airways Corporation, GR Nos. L-65773-74.
50
the sale of transport documents. “[Section 32 of the 1997 Tax
Code], by its language, does not intend the enumeration to be
exclusive. It merely directs that the types of income listed
therein be treated as income from sources within the
Philippines. A cursory reading of the section will show that it
does not state that it is an all-inclusive enumeration, and that
no other kind of income may be so considered."64
Q: Compensation for services in whatever form paid;
illustrative case.
See the case of Sison v. Ancheta which was governed by the 1977
Tax Code. Under the old code, a higher tax rate was imposed
on professional and business income than on compensation
income. Sison attacked the distinction made by law on such
grounds as equal protection and uniformity in taxation. The
Supreme Court justified the difference in treatment, thus:
“Taxpayers who are recipients of compensation income are set
apart as a class. As there is practically no overhead expense,
these taxpayers are not entitled to make deductions for income
tax purposes because they are in the same situation more or
less. On the other hand, in the case of professionals in the
practice of their calling and businessmen, there is no uniformity
in the costs or expenses necessary to produce their income. It
would not be just then to disregard the disparities by giving all
of them zero deduction and indiscriminately impose on all alike
the same tax rates on the basis of gross income. There is ample
justification then for the Batas Pambansa to adopt the gross
system of income taxation to compensation income, while
continuing the system of net income taxation as regards
professional and business income.”65
Q: Gross income derived from the conduct of trade or business
or the exercise of a profession; illustrative case.
The case of Tan v. del Rosario dealt with the constitutionality of
RA No. 7496, also commonly known as the Simplified Net
65. Sison v. Ancheta, GR No. L-59431, 25 July 1984.
51 Guide Notes on Income Tax
Income Taxation Scheme (SNIT), amending certain provisions
of the old Tax Code. One argument raised by petitioners was
that the law now taxed single proprietorships and professionals
differently from the manner it imposed tax on corporations and
partnerships. Another argument was that general professional
partnerships should not be treated differently from ordinary
business partnerships. The Supreme Court held that the
classification made between single proprietorships and
professionals on the one hand, and corporations and
partnerships on the other, was valid. Furthermore, as regards
the first group, i.e., single proprietorships and professionals:
“There is, then and now, no distinction in income tax liability
between a person who practices his profession alone or
individually and one who does it through partnership (whether
registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income
tax and the final tax on passive investment income, under the
present income tax system all individuals deriving from any
source whatsoever are treated in almost invariably the same
manner and under a common set of rules.”66
Q: Dividends; illustrative case.
At issue in CIR v. Court of Appeals was the taxability of the shares
of stock in ANSCOR owned by the estate of Don Andres
Soriano as well as Don Andres Soriano’s widow, Doña Carmen
Soriano. On various dates, (1) the estate and Doña Carmen
exchanged a portion of their common shares for preferred
shares, and (2) ANSCOR redeemed a portion of the common
shares owned by the estate and Doña Carmen. ANSCOR’s
business purpose for the redemption of stocks was to partially
retire said stocks as treasury shares in order to reduce the
company’s foreign exchange remittances in case cash dividends
were declared. Subsequently, ANSCOR was issued an
assessment for deficiency withholding tax at source based on
the transactions of exchange and redemption of stocks.
Regarding the exchange of stocks, the Supreme Court found
that there was no change in the proportional interest of the
66. Tan, GR Nos. 109289 & 109446.
2D SEM.
estate and Doña Carmen before and after the exchange. The
exchange transaction did not result into a flow of wealth and
hence, there was no income tax liability.
As regards the redemption of stocks, the issue was,
particularly, whether ANSCOR’s redemption of stocks from its
stockholder as well as the exchange of common with preferred
shares could be considered as essentially equivalent to the
distribution of taxable dividends, making the proceeds thereof
taxable income. The Supreme Court started by saying that the
stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. The mere issuance of stock
dividends is not yet subject to income tax. As capital, the stock
dividends postpone the realization of profits. However, a
redemption of the stocks converts into money the stock
dividends which become a realized profit or gain and
consequently, the stockholder’s separate property. As realized
income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any
business purpose for the redemption. Here, the proceeds of the
redemption of the stock dividends were deemed taxable
dividends, i.e., income subject to income tax which was
required to be withheld at source.
“The determining factor for the imposition of income tax
is whether any gain or profit was derived from a transaction.”
Furthermore, there are 3 elements in the imposition of income
tax, namely: (1) there must be gain or profit; (2) the gain or profit
is realized or received, actually or constructively; and (3) the
gain or profit is not exempted by law or treaty from income tax.
“Any business purpose as to why or how the income was
earned by the taxpayer is not a requirement. Income tax is
assessed on income received from any property, activity or
service that produces the income because the Tax Code stands
as an indifferent neutral party on the matter where income
comes from.”67
67. CIR v. Court of Appeals, GR No. 108576, 20 January 1999.
A.Y. 2017-2018 Ateneo de Manila University School of Law
2. Exclusions from Gross Income
Q: Are proceeds of life insurance policies excluded from gross
income?
Section 32(B) of the 1997 Tax Code partly provides: “The
following items shall not be included in gross income and shall
be exempt from taxation under this title: xxx The proceeds of
life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise, but
if such amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in
gross income.” The law is clear that the proceeds of life
insurance policies paid to individual beneficiaries are excluded
from gross income. Suppose the proceeds of a life insurance
policy are paid to a corporate beneficiary upon the death of the
insured, are such proceeds likewise excluded from gross
income? In El Oriente Fabrica de Tabacos, Inc. v. Posadas, El
Oriente took out insurance on the life of its manager, who had
more than 35 years of experience in the manufacture of cigars
in the Philippines, to protect itself against the loss it might suffer
by reason of the death of its manager. The Supreme Court held
that: “Considering, therefore, the purport of the stipulated facts,
considering the uncertainty of Philippine law, and considering
the lack of express legislative intention to tax the proceeds of
life insurance policies paid to corporate beneficiaries,
particularly when in the exemption in favor of individual
beneficiaries in the chapter on this subject, the clause is inserted
‘exempt from the provisions of this law,’ we deem it reasonable
to hold the proceeds of the life insurance policy in question as
representing an indemnity and not taxable income.”68
Q: When are retirement benefits excluded from gross income?
68. El Oriente Fabrica de Tabacos, Inc. v. Posadas, GR No. 34774, 21 September
1931. Note that this case was decided in 1931, and that in our present Tax Code,
the clause “exempt from provisions of this law” does not appear anywhere in
Section 32 of the code.
52
In Santos v. Servier Philippines, Inc., Santos was the human
resource manager of Servier Philippines, Inc. since 1991. In
1998, while on vacation in Paris, Santos suffered from a sudden
attack of alimentary allergy. Despite months of medical
treatment, Santos did not fully recover mentally and physically.
Servier Philippines, Inc. was constrained to terminate Santos’
services effective 31 August 1999. As a consequence thereof,
Servier Philippines, Inc. offered Santos a retirement package.
Were Santos’ retirement benefits taxable? The Supreme Court
held in the affirmative. For retirement benefits to be exempt
from income tax, and hence withholding tax, the taxpayer is
burdened to prove the concurrence of the following elements:
(1) a reasonable private benefit plan is maintained by
the employer;
(2) the retiring employee has been in the service of the
same employer for at least 10 years;
(3) the retiring employee is not less than 50 years of
age at the time of his/her retirement; and
(4) the benefit had been availed of only once.
Here, at the time of her retirement, Santos was only 41
years of age, and had been in the service for more or less 8 years.
As such, Section 32(B)(6)(a) of the 1997 Tax Code was
inapplicable for failure to comply with the age and length of
service requirements. The retirement benefits received by
Santos were taxable.69
In Intercontinental Broadcasting Corporation (IBC) v.
Amarilla, Quiñones, Amarilla, Lagahit, and Otadoy retired from
IBC. It was agreed that IBC would shoulder the income tax due
on the retirement benefits to be received by the four
individuals. The Supreme Court first held that the retirement
benefits granted to the retirees were taxable. However, the
69. Santos v. Servier Philippines, Inc., GR No. 166377, 28 November 2008.
53 Guide Notes on Income Tax
Court acknowledged that IBC bound itself to pay the taxes on
the retirement benefits. “An agreement to pay the taxes on the
retirement benefits as an incentive to prospective retirees and
for them to avail of the optional retirement scheme is not
contrary to law or to public morals. Petitioner had agreed to
shoulder such taxes to entice them to voluntarily retire early, on
its belief that this would prove disadvantageous to it.
Respondents agreed and relied on the commitment of
petitioner. For petitioner to renege on its contract with
respondents simply because its new management had found
the same disadvantageous would amount to a breach of
contract.”70
In CIR v. Court of Appeals, Castañeda retired from the
government service as revenue attaché in the Philippine
Embassy in London. Upon retirement, he received terminal
leave pay from which the CIR withheld a certain amount
allegedly representing income tax thereon. The issue in this case
was whether terminal leave pay received by a government
official or employee on the occasion of his compulsory
retirement from the government service was subject to income
tax, and hence withholding tax. The Supreme Court ruled that
terminal leave pay was not a part of the gross income of a
government official or employee, but a retirement benefit that
was not subject to income tax. Commutation of leave credits is
more commonly known as terminal leave. “In the exercise of
sound personnel policy, the Government encourages unused
leaves to be accumulated. The Government recognizes that for
most public servants, retirement pay is always less than
generous if not meager and scrimpy. A modest nest egg which
the senior citizen may look forward to is thus avoided. Terminal
leave payments are given not only at the same time but also for
the same policy considerations governing retirement
benefits.”71
SEC. 33. SPECIAL TREATMENT OF FRINGE BENEFIT. —
(A) IMPOSITION OF TAX. — EFFECTIVE JANUARY 1, 2018
70. Intercontinental Broadcasting Corporation (IBC) v. Amarilla, GR No. 162775,
27 October 2006.
2D SEM.
AND ONWARDS, A FINAL TAX OF THIRTY FIVE
PERCENT (35%), IS HEREBY IMPOSED ON THE GROSSED-
UP MONETARY VALUE OF FRINGE BENEFIT FURNISHED OR
GRANTED TO THE EMPLOYEE (EXCEPT RANK AND FILE
EMPLOYEES AS DEFINED HEREIN) BY THE EMPLOYER,
WHETHER AN INDIVIDUAL OR A CORPORATION (UNLESS
THE FRINGE BENEFIT IS REQUIRED BY THE NATURE OF, OR
NECESSARY TO THE TRADE, BUSINESS OR PROFESSION OF
THE EMPLOYER, OR WHEN THE FRINGE BENEFIT IS FOR
THE CONVENIENCE OR ADVANTAGE OF THE EMPLOYER).
THE TAX HEREIN IMPOSED IS PAYABLE BY THE EMPLOYER
WHICH TAX SHALL BE PAID IN THE SAME MANNER AS
PROVIDED FOR UNDER SECTION 57 (A) OF THIS CODE.
THE GROSSED-UP MONETARY VALUE OF THE FRINGE
BENEFIT SHALL BE DETERMINED BY DIVIDING THE
ACTUAL MONETARY VALUE OF THE FRINGE BENEFIT BY
SIXTY-FIVE PERCENT (65%) EFFECTIVE JANUARY
1, 2018 AND ONWARDS : PROVIDED, HOWEVER, THAT
FRINGE BENEFIT FURNISHED TO EMPLOYEES AND
TAXABLE UNDER SUBSECTIONS (B), (C), (D) AND (E) OF
SECTION 25 SHALL BE TAXED AT THE APPLICABLE RATE
IMPOSED THEREAT: PROVIDED, FURTHER, THAT THE
GROSSED -UP MONETARY VALUE OF THE FRINGE BENEFIT
SHALL BE DETERMINED BY DIVIDING THE ACTUAL
MONETARY VALUE OF THE FRINGE BENEFIT BY THE
DIFFERENCE BETWEEN ONE HUNDRED PERCENT (100%)
AND THE APPLICABLE RATE OF INCOME TAX UNDER
SUBSECTIONS (B), (C), (D), AND (E) OF SECTION 25.
(B) FRINGE BENEFIT DEFINED. — FOR PURPOSES OF THIS
SECTION, THE TERM 'FRINGE BENEFIT' MEANS ANY GOOD,
SERVICE OR OTHER BENEFIT FURNISHED OR GRANTED IN
CASH OR IN KIND BY AN EMPLOYER TO AN INDIVIDUAL
EMPLOYEE (EXCEPT RANK AND FILE EMPLOYEES AS
DEFINED HEREIN) SUCH AS, BUT NOT LIMITED TO, THE
FOLLOWING:
71. CIR v. Court of Appeals, GR No. 96016, 17 October 1991.
A.Y. 2017-2018 Ateneo de Manila University School of Law
(1) HOUSING;
(2) EXPENSE ACCOUNT;
(3) VEHICLE OF ANY KIND;
(4) HOUSEHOLD PERSONNEL, SUCH AS MAID, DRIVER
AND OTHERS;
(5) INTEREST ON LOAN AT LESS THAN MARKET RATE TO
THE EXTENT OF THE DIFFERENCE BETWEEN THE
MARKET RATE AND ACTUAL RATE GRANTED;
(6) MEMBERSHIP FEES, DUES AND OTHER EXPENSES
BORNE BY THE EMPLOYER FOR THE EMPLOYEE IN
SOCIAL AND ATHLETIC CLUBS OR OTHER SIMILAR
ORGANIZATIONS;
(7) EXPENSES FOR FOREIGN TRAVEL;
(8) HOLIDAY AND VACATION EXPENSES;
(9) EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR
HIS DEPENDENTS; AND
(10) LIFE OR HEALTH INSURANCE AND OTHER NON-
LIFE INSURANCE PREMIUMS OR SIMILAR AMOUNTS
IN EXCESS OF WHAT THE LAW ALLOWS.
(C) FRINGE BENEFITS NOT TAXABLE. — THE FOLLOWING
FRINGE BENEFITS ARE NOT TAXABLE UNDER THIS
SECTION:
(1) FRINGE BENEFITS WHICH ARE AUTHORIZED AND
EXEMPTED FROM TAX UNDER SPECIAL LAWS;
(2) CONTRIBUTIONS OF THE EMPLOYER FOR THE BENEFIT
OF THE EMPLOYEE TO RETIREMENT, INSURANCE AND
HOSPITALIZATION BENEFIT PLANS;
(3) BENEFITS GIVEN TO THE RANK AND FILE EMPLOYEES,
WHETHER GRANTED UNDER A COLLECTIVE
BARGAINING AGREEMENT OR NOT; AND
(4) DE MINIMIS BENEFITS AS DEFINED IN THE RULES AND
REGULATIONS TO BE PROMULGATED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION
54
OF THE COMMISSIONER.
THE SECRETARY OF FINANCE IS HEREBY AUTHORIZED TO
PROMULGATE, UPON RECOMMENDATION OF THE
COMMISSIONER, SUCH RULES AND REGULATIONS AS ARE
NECESSARY TO CARRY OUT EFFICIENTLY AND FAIRLY THE
PROVISIONS OF THIS SECTION, TAKING INTO ACCOUNT THE
PECULIAR NATURE AND SPECIAL NEED OF THE TRADE, BUSINESS
OR PROFESSION OF THE EMPLOYER.
Q: What are considered “de minimis” benefits not subject to
income tax as well as withholding tax on compensation income
of both managerial and rank and file employees?
Revenue Regulation 05-2011, as amended by Revenue
Regulation 08-2012 and Revenue Regulation 01-2015 states that
the following fall in the category above mentioned:
(1) Monetized unused vacation leave credits of
private employees not exceeding ten days;
(2) Monetized value of vacation and sick leave credits
paid to government employees;
(3) Medical cash allowance to dependents of
employees, not exceeding P750 per employee
per semester of P125 per month;
(4) Rice Subsidy of P1,500 or one(1) sack of 50kg of rice
per month amounting to not more than P1,500;
(5) Uniform and clothing allowance not exceeding
P5,000 per annum;
(6) Actual medical expenses not exceeding P10,000
per annum;
(7) Laundry allowance not exceeding P300 per
month;
(8) Annual achievement awards with an annual
monetary value not exceeding P10,000;
(9) Gifts during Christmas and major anniversaries
not exceeding P5,000 per annum;
55 Guide Notes on Income Tax 2D SEM.
(10) Daily meal allowance for overtime work and (1) A REASONABLE ALLOWANCE FOR
night shift not exceeding 25% of the basic SALARIES, WAGES, AND OTHER
minimum wage. FORMS OF COMPENSATION FOR
PERSONAL SERVICES ACTUALLY
(11) Benefits received by an employee by virtue of a
RENDERED, INCLUDING THE
collective bargaining agreement (CBA) and
GROSSED-UP MONETARY VALUE
productivity incentive schemes provided that the
OF FRINGE BENEFIT FURNISHED
total annual monetary value received from both
OR GRANTED BY THE EMPLOYER
CBA and productivity incentive schemes
TO THE EMPLOYEE: PROVIDED,
combined, do not exceed ten thousand pesos
THAT THE FINAL TAX IMPOSED
(P10,000.00) per employee per taxable year.
UNDER SECTION 33 HEREOF HAS
BEEN PAID;
CHAPTER VII — ALLOWABLE
(2) A REASONABLE ALLOWANCE FOR
DEDUCTIONS TRAVEL EXPENSES, HERE AND
ABROAD, WHILE AWAY FROM
SEC. 34. DEDUCTIONS FROM GROSS INCOME. — EXCEPT FOR
HOME IN THE PURSUIT OF TRADE,
TAXPAYERS EARNING COMPENSATION INCOME ARISING FROM
BUSINESS OR PROFESSION;
PERSONAL SERVICES RENDERED UNDER AN EMPLOYER-
EMPLOYEE RELATIONSHIP WHERE NO DEDUCTIONS SHALL BE (3) A REASONABLE ALLOWANCE FOR
ALLOWED UNDER THIS SECTION OTHER THAN UNDER RENTALS AND/OR OTHER
SUBSECTION (M) HEREOF, IN COMPUTING TAXABLE INCOME PAYMENTS WHICH ARE REQUIRED
SUBJECT TO INCOME TAX UNDER SECTIONS 24 (A); 25 (A); 26; 27 AS A CONDITION FOR THE
(A), (B) AND (C); AND 28 (A) (1), THERE SHALL BE ALLOWED THE CONTINUED USE OR POSSESSION,
FOLLOWING DEDUCTIONS FROM GROSS INCOME; FOR PURPOSES OF THE TRADE,
BUSINESS OR PROFESSION, OF
(A) EXPENSES. —
PROPERTY TO WHICH THE
(1) ORDINARY AND NECESSARY TRADE, BUSINESS OR TAXPAYER HAS NOT TAKEN OR IS
PROFESSIONAL EXPENSES. — NOT TAKING TITLE OR IN WHICH
(a) IN GENERAL. — THERE SHALL BE HE HAS NO EQUITY OTHER THAN
ALLOWED AS DEDUCTION FROM GROSS THAT OF A LESSEE, USER OR
INCOME ALL THE ORDINARY AND POSSESSOR;
NECESSARY EXPENSES PAID OR (4) A REASONABLE ALLOWANCE FOR
INCURRED DURING THE TAXABLE YEAR ENTERTAINMENT, AMUSEMENT
IN CARRYING ON OR WHICH ARE AND RECREATION EXPENSES
DIRECTLY ATTRIBUTABLE TO, THE DURING THE TAXABLE YEAR,
DEVELOPMENT, MANAGEMENT, THAT ARE DIRECTLY CONNECTED
OPERATION AND/OR CONDUCT OF THE TO THE DEVELOPMENT,
TRADE, BUSINESS OR EXERCISE OF A MANAGEMENT AND OPERATION
PROFESSION, INCLUDING: OF THE TRADE, BUSINESS OR
A.Y. 2017-2018 Ateneo de Manila University School of Law 56

PROFESSION OF THE TAXPAYER, THE TAXPAYER.

OR THAT ARE DIRECTLY RELATED
(c) BRIBES, KICKBACKS AND OTHER
TO OR IN FURTHERANCE OF THE
SIMILAR PAYMENTS. — NO
CONDUCT OF HIS OR ITS TRADE,
DEDUCTION FROM GROSS INCOME
BUSINESS OR EXERCISE OF A
SHALL BE ALLOWED UNDER
PROFESSION NOT TO EXCEED
SUBSECTION (A) HEREOF FOR ANY
SUCH CEILINGS AS THE
PAYMENT MADE, DIRECTLY OR
SECRETARY OF FINANCE MAY, BY INDIRECTLY, TO AN OFFICIAL OR
RULES AND REGULATIONS
EMPLOYEE OF THE NATIONAL
PRESCRIBE, UPON
GOVERNMENT, OR TO AN OFFICIAL OR
RECOMMENDATION OF THE
EMPLOYEE OF ANY LOCAL
COMMISSIONER, TAKING INTO GOVERNMENT UNIT, OR TO AN
ACCOUNT THE NEEDS AS WELL AS
OFFICIAL OR EMPLOYEE OF A
THE SPECIAL CIRCUMSTANCES,
GOVERNMENT-OWNED OR -
NATURE AND CHARACTER OF THE
CONTROLLED CORPORATION, OR TO AN
INDUSTRY, TRADE, BUSINESS, OR
OFFICIAL OR EMPLOYEE OR
PROFESSION OF THE TAXPAYER:
REPRESENTATIVE OF A FOREIGN
PROVIDED, THAT ANY EXPENSE GOVERNMENT, OR TO A PRIVATE
INCURRED FOR ENTERTAINMENT,
CORPORATION, GENERAL
AMUSEMENT OR RECREATION
PROFESSIONAL PARTNERSHIP, OR A
THAT IS CONTRARY TO LAW,
SIMILAR ENTITY, IF THE PAYMENT
MORALS PUBLIC POLICY OR
CONSTITUTES A BRIBE OR KICKBACK.
PUBLIC ORDER SHALL IN NO CASE
BE ALLOWED AS A DEDUCTION. (2) EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL
INSTITUTIONS. — IN ADDITION TO THE EXPENSES
(b) SUBSTANTIATION ALLOWABLE AS DEDUCTIONS UNDER THIS CHAPTER,
REQUIREMENTS. — NO DEDUCTION
A PRIVATE EDUCATIONAL INSTITUTION, REFERRED
FROM GROSS INCOME SHALL BE
TO UNDER SECTION 27 (B) OF THIS CODE, MAY AT ITS
ALLOWED UNDER SUBSECTION (A)
OPTION ELECT EITHER: (A) TO DEDUCT
HEREOF UNLESS THE TAXPAYER SHALL
EXPENDITURES OTHERWISE CONSIDERED AS CAPITAL
SUBSTANTIATE WITH SUFFICIENT
OUTLAYS OF DEPRECIABLE ASSETS INCURRED
EVIDENCE, SUCH AS OFFICIAL RECEIPTS
DURING THE TAXABLE YEAR FOR THE EXPANSION OF
OR OTHER ADEQUATE RECORDS: (I) THE
SCHOOL FACILITIES OR (B) TO DEDUCT ALLOWANCE
AMOUNT OF THE EXPENSE BEING
FOR DEPRECIATION THEREOF UNDER SUBSECTION
DEDUCTED, AND (II) THE DIRECT
(F) HEREOF.
CONNECTION OR RELATION OF THE
EXPENSE BEING DEDUCTED TO THE (B) INTEREST. —
DEVELOPMENT, MANAGEMENT, (1) IN GENERAL. — THE AMOUNT OF INTEREST PAID OR
OPERATION AND/OR CONDUCT OF THE INCURRED WITHIN A TAXABLE YEAR ON
TRADE, BUSINESS OR PROFESSION OF
57 Guide Notes on Income Tax
INDEBTEDNESS IN CONNECTION WITH THE
TAXPAYER'S PROFESSION, TRADE OR BUSINESS SHALL
BE ALLOWED AS DEDUCTION FROM GROSS INCOME:
PROVIDED, HOWEVER, THAT THE TAXPAYER'S
OTHERWISE ALLOWABLE DEDUCTION FOR INTEREST
EXPENSE SHALL BE REDUCED BY FORTY-TWO PERCENT
(C) TAXES. —
(42%) OF THE INTEREST INCOME SUBJECTED TO FINAL
TAX: PROVIDED, THAT EFFECTIVE JANUARY 1, 2009,
THE PERCENTAGE SHALL BE THIRTY-THREE PERCENT
(33%).
(2) EXCEPTIONS. — NO DEDUCTION SHALL BE ALLOWED
IN RESPECT OF INTEREST UNDER THE SUCCEEDING
SUBPARAGRAPHS:
(a) IF WITHIN THE TAXABLE YEAR AN
INDIVIDUAL TAXPAYER REPORTING
INCOME ON THE CASH BASIS INCURS AN
INDEBTEDNESS ON WHICH AN
INTEREST IS PAID IN ADVANCE
THROUGH DISCOUNT OR OTHERWISE:
PROVIDED, THAT SUCH INTEREST
SHALL BE ALLOWED AS A DEDUCTION
IN THE YEAR THE INDEBTEDNESS IS
PAID: PROVIDED, FURTHER, THAT IF
THE INDEBTEDNESS IS PAYABLE IN
PERIODIC AMORTIZATIONS, THE
AMOUNT OF INTEREST WHICH
CORRESPONDS TO THE AMOUNT OF THE
PRINCIPAL AMORTIZED OR PAID
DURING THE YEAR SHALL BE ALLOWED
AS DEDUCTION IN SUCH TAXABLE YEAR;
(b) IF BOTH THE TAXPAYER AND THE
PERSON TO WHOM THE PAYMENT HAS
BEEN MADE OR IS TO BE MADE ARE
PERSONS SPECIFIED UNDER SECTION 36
(B); OR
(c) IF THE INDEBTEDNESS IS INCURRED TO
FINANCE PETROLEUM EXPLORATION.
(3) OPTIONAL TREATMENT OF INTEREST EXPENSE. —
2D SEM.
AT THE OPTION OF THE TAXPAYER, INTEREST
INCURRED TO ACQUIRE PROPERTY USED IN TRADE
BUSINESS OR EXERCISE OF A PROFESSION MAY BE
ALLOWED AS A DEDUCTION OR TREATED AS A
CAPITAL EXPENDITURE.
(1) IN GENERAL. — TAXES PAID OR INCURRED WITHIN
THE TAXABLE YEAR IN CONNECTION WITH THE
TAXPAYER'S PROFESSION, TRADE OR BUSINESS,
SHALL BE ALLOWED AS DEDUCTION, EXCEPT:
(a) THE INCOME TAX PROVIDED FOR
UNDER THIS TITLE;
(b) INCOME TAXES IMPOSED BY
AUTHORITY OF ANY FOREIGN
COUNTRY; BUT THIS DEDUCTION SHALL
BE ALLOWED IN THE CASE OF A
TAXPAYER WHO DOES NOT SIGNIFY IN
HIS RETURN HIS DESIRE TO HAVE TO
ANY EXTENT THE BENEFITS OF
PARAGRAPH (3) OF THIS SUBSECTION
(RELATING TO CREDITS FOR TAXES OF
FOREIGN COUNTRIES);
(c) ESTATE AND DONOR'S TAXES; AND
(d) TAXES ASSESSED AGAINST LOCAL
BENEFITS OF A KIND TENDING TO
INCREASE THE VALUE OF THE PROPERTY
ASSESSED.
PROVIDED, THAT TAXES
ALLOWED UNDER THIS SUBSECTION,
WHEN REFUNDED OR CREDITED, SHALL
BE INCLUDED AS PART OF GROSS
INCOME IN THE YEAR OF RECEIPT TO
THE EXTENT OF THE INCOME TAX
BENEFIT OF SAID DEDUCTION.
(2) LIMITATIONS ON DEDUCTIONS. — IN THE CASE OF A
NONRESIDENT ALIEN INDIVIDUAL ENGAGED IN
A.Y. 2017-2018 Ateneo de Manila University School of Law
TRADE OR BUSINESS IN THE PHILIPPINES AND A
RESIDENT FOREIGN CORPORATION, THE
DEDUCTIONS FOR TAXES PROVIDED IN PARAGRAPH
(4) LIMITATIONS ON CREDIT. — THE AMOUNT OF THE
(1) OF THIS SUBSECTION (C) SHALL BE ALLOWED
ONLY IF AND TO THE EXTENT THAT THEY ARE
CONNECTED WITH INCOME FROM SOURCES WITHIN
THE PHILIPPINES.
(3) CREDIT AGAINST TAX FOR TAXES OF FOREIGN
COUNTRIES. — IF THE TAXPAYER SIGNIFIES IN HIS
RETURN HIS DESIRE TO HAVE THE BENEFITS OF THIS
PARAGRAPH, THE TAX IMPOSED BY THIS TITLE SHALL
BE CREDITED WITH:
(a) CITIZEN AND DOMESTIC
CORPORATION. — IN THE CASE OF A
CITIZEN OF THE PHILIPPINES AND OF A
DOMESTIC CORPORATION, THE
AMOUNT OF INCOME TAXES PAID OR
INCURRED DURING THE TAXABLE YEAR
TO ANY FOREIGN COUNTRY; AND
(b) PARTNERSHIPS AND ESTATES. — IN
THE CASE OF ANY SUCH INDIVIDUAL
WHO IS A MEMBER OF A GENERAL
PROFESSIONAL PARTNERSHIP OR A
BENEFICIARY OF AN ESTATE OR TRUST,
HIS PROPORTIONATE SHARE OF SUCH
TAXES OF THE GENERAL PROFESSIONAL
(5) ADJUSTMENTS ON PAYMENT OF INCURRED
PARTNERSHIP OR THE ESTATE OR TRUST
PAID OR INCURRED DURING THE
TAXABLE YEAR TO A FOREIGN
COUNTRY, IF HIS DISTRIBUTIVE SHARE
OF THE INCOME OF SUCH PARTNERSHIP
OR TRUST IS REPORTED FOR TAXATION
UNDER THIS TITLE.
AN ALIEN INDIVIDUAL AND A
FOREIGN CORPORATION SHALL NOT BE
ALLOWED THE CREDITS AGAINST THE
TAX FOR THE TAXES OF FOREIGN
58
COUNTRIES ALLOWED UNDER THIS
PARAGRAPH.
CREDIT TAKEN UNDER THIS SECTION SHALL BE
SUBJECT TO EACH OF THE FOLLOWING LIMITATIONS:
(a) THE AMOUNT OF THE CREDIT IN
RESPECT TO THE TAX PAID OR
INCURRED TO ANY COUNTRY SHALL
NOT EXCEED THE SAME PROPORTION OF
THE TAX AGAINST WHICH SUCH CREDIT
IS TAKEN, WHICH THE TAXPAYER'S
TAXABLE INCOME FROM SOURCES
WITHIN SUCH COUNTRY UNDER THIS
TITLE BEARS TO HIS ENTIRE TAXABLE
INCOME FOR THE SAME TAXABLE YEAR;
AND
(b) THE TOTAL AMOUNT OF THE CREDIT
SHALL NOT EXCEED THE SAME
PROPORTION OF THE TAX AGAINST
WHICH SUCH CREDIT IS TAKEN, WHICH
THE TAXPAYER'S TAXABLE INCOME
FROM SOURCES WITHOUT THE
PHILIPPINES TAXABLE UNDER THIS
TITLE BEARS TO HIS ENTIRE TAXABLE
INCOME FOR THE SAME TAXABLE YEAR.
TAXES. — IF ACCRUED TAXES WHEN PAID DIFFER
FROM THE AMOUNTS CLAIMED AS CREDITS BY THE
TAXPAYER, OR IF ANY TAX PAID IS REFUNDED IN
WHOLE OR IN PART, THE TAXPAYER SHALL NOTIFY
THE COMMISSIONER; WHO SHALL RE-DETERMINE
THE AMOUNT OF THE TAX FOR THE YEAR OR YEARS
AFFECTED, AND THE AMOUNT OF TAX DUE UPON
SUCH RE-DETERMINATION, IF ANY, SHALL BE PAID BY
THE TAXPAYER UPON NOTICE AND DEMAND BY THE
COMMISSIONER, OR THE AMOUNT OF TAX
OVERPAID, IF ANY, SHALL BE CREDITED OR
59 Guide Notes on Income Tax 2D SEM.
REFUNDED TO THE TAXPAYER. IN THE CASE OF SUCH OR INCURRED TO WHICH IS CLAIMED AS
A TAX INCURRED BUT NOT PAID, THE COMMISSIONER A CREDIT UNDER SAID PARAGRAPH,
AS A CONDITION PRECEDENT TO THE ALLOWANCE OF SUCH AMOUNT TO BE DETERMINED
THIS CREDIT MAY REQUIRE THE TAXPAYER TO GIVE A UNDER RULES AND REGULATIONS
BOND WITH SURETIES SATISFACTORY TO AND TO BE PRESCRIBED BY THE SECRETARY OF
APPROVED BY THE COMMISSIONER IN SUCH SUM AS FINANCE; AND
HE MAY REQUIRE, CONDITIONED UPON THE
(c) ALL OTHER INFORMATION NECESSARY
PAYMENT BY THE TAXPAYER OF ANY AMOUNT OF TAX
FOR THE VERIFICATION AND
FOUND DUE UPON ANY SUCH REDETERMINATION.
COMPUTATION OF SUCH CREDITS.
THE BOND HEREIN PRESCRIBED SHALL CONTAIN
SUCH FURTHER CONDITIONS AS THE COMMISSIONER (D) LOSSES. —
MAY REQUIRE. (1) IN GENERAL. — LOSSES ACTUALLY SUSTAINED
(6) YEAR IN WHICH CREDIT TAKEN. — THE CREDITS DURING THE TAXABLE YEAR AND NOT
PROVIDED FOR IN SUBSECTION (C)(3) OF THIS COMPENSATED FOR BY INSURANCE OR OTHER FORMS
SECTION MAY, AT THE OPTION OF THE TAXPAYER OF INDEMNITY SHALL BE ALLOWED AS DEDUCTIONS:
AND IRRESPECTIVE OF THE METHOD OF (a) IF INCURRED IN TRADE, PROFESSION OR
ACCOUNTING EMPLOYED IN KEEPING HIS BOOKS, BE BUSINESS;
TAKEN IN THE YEAR WHICH THE TAXES OF THE
FOREIGN COUNTRY WERE INCURRED, SUBJECT, (b) OF PROPERTY CONNECTED WITH THE
HOWEVER, TO THE CONDITIONS PRESCRIBED IN TRADE, BUSINESS OR PROFESSION, IF
SUBSECTION (C)(5) OF THIS SECTION. IF THE THE LOSS ARISES FROM FIRES, STORMS,
TAXPAYER ELECTS TO TAKE SUCH CREDITS IN THE SHIPWRECK, OR OTHER CASUALTIES, OR
YEAR IN WHICH THE TAXES OF THE FOREIGN FROM ROBBERY, THEFT OR
COUNTRY ACCRUED, THE CREDITS FOR ALL EMBEZZLEMENT.
SUBSEQUENT YEARS SHALL BE TAKEN UPON THE THE SECRETARY OF FINANCE,
SAME BASIS AND NO PORTION OF ANY SUCH TAXES UPON RECOMMENDATION OF THE
SHALL BE ALLOWED AS A DEDUCTION IN THE SAME COMMISSIONER, IS HEREBY
OR ANY SUCCEEDING YEAR. AUTHORIZED TO PROMULGATE RULES
(7) PROOF OF CREDITS. — THE CREDITS PROVIDED IN AND REGULATIONS PRESCRIBING,
SUBSECTION (C)(3) HEREOF SHALL BE ALLOWED AMONG OTHER THINGS, THE TIME AND
ONLY IF THE TAXPAYER ESTABLISHES TO THE MANNER BY WHICH THE TAXPAYER
SATISFACTION OF THE COMMISSIONER THE SHALL SUBMIT A DECLARATION OF
FOLLOWING: LOSS SUSTAINED FROM CASUALTY OR
FROM ROBBERY, THEFT OR
(a) THE TOTAL AMOUNT OF INCOME EMBEZZLEMENT DURING THE TAXABLE
DERIVED FROM SOURCES WITHOUT THE YEAR: PROVIDED, HOWEVER, THAT THE
PHILIPPINES; TIME LIMIT TO BE SO PRESCRIBED IN
(b) THE AMOUNT OF INCOME DERIVED THE RULES AND REGULATIONS SHALL
FROM EACH COUNTRY, THE TAX PAID NOT BE LESS THAN THIRTY (30) DAYS
A.Y. 2017-2018 Ateneo de Manila University School of Law
NOR MORE THAN NINETY (90) DAYS
FROM THE DATE OF DISCOVERY OF THE
CASUALTY OR ROBBERY, THEFT OR
EMBEZZLEMENT GIVING RISE TO THE
LOSS.
(c) NO LOSS SHALL BE ALLOWED AS A
DEDUCTION UNDER THIS SUBSECTION
IF AT THE TIME OF THE FILING OF THE
RETURN, SUCH LOSS HAS BEEN
CLAIMED AS A DEDUCTION FOR ESTATE
TAX PURPOSES IN THE ESTATE TAX
RETURN.
(2) PROOF OF LOSS. — IN THE CASE OF A NONRESIDENT
ALIEN INDIVIDUAL OR FOREIGN CORPORATION, THE
LOSSES DEDUCTIBLE SHALL BE THOSE ACTUALLY
SUSTAINED DURING THE YEAR INCURRED IN
BUSINESS, TRADE OR EXERCISE OF A PROFESSION
CONDUCTED WITHIN THE PHILIPPINES, WHEN SUCH
LOSSES ARE NOT COMPENSATED FOR BY INSURANCE
OR OTHER FORMS OF INDEMNITY. THE SECRETARY OF
FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER, IS HEREBY AUTHORIZED TO
PROMULGATE RULES AND REGULATIONS
PRESCRIBING, AMONG OTHER THINGS, THE TIME
AND MANNER BY WHICH THE TAXPAYER SHALL
SUBMIT A DECLARATION OF LOSS SUSTAINED FROM
CASUALTY OR FROM ROBBERY, THEFT OR
EMBEZZLEMENT DURING THE TAXABLE YEAR:
PROVIDED, THAT THE TIME TO BE SO PRESCRIBED IN
THE RULES AND REGULATIONS SHALL NOT BE LESS
THAN THIRTY (30) DAYS NOR MORE THAN NINETY
(90) DAYS FROM THE DATE OF DISCOVERY OF THE
CASUALTY OR ROBBERY, THEFT OR EMBEZZLEMENT
GIVING RISE TO THE LOSS; AND
(3) NET OPERATING LOSS CARRY-OVER. — THE NET
OPERATING LOSS OF THE BUSINESS OR ENTERPRISE
FOR ANY TAXABLE YEAR IMMEDIATELY PRECEDING
THE CURRENT TAXABLE YEAR, WHICH HAD NOT BEEN
60
PREVIOUSLY OFFSET AS DEDUCTION FROM GROSS
INCOME SHALL BE CARRIED OVER AS A DEDUCTION
FROM GROSS INCOME FOR THE NEXT THREE (3)
CONSECUTIVE TAXABLE YEARS IMMEDIATELY
FOLLOWING THE YEAR OF SUCH LOSS: PROVIDED,
HOWEVER, THAT ANY NET LOSS INCURRED IN A
TAXABLE YEAR DURING WHICH THE TAXPAYER WAS
EXEMPT FROM INCOME TAX SHALL NOT BE ALLOWED
AS A DEDUCTION UNDER THIS SUBSECTION:
PROVIDED, FURTHER, THAT A NET OPERATING LOSS
CARRY-OVER SHALL BE ALLOWED ONLY IF THERE HAS
BEEN NO SUBSTANTIAL CHANGE IN THE OWNERSHIP
OF THE BUSINESS OR ENTERPRISE IN THAT —
i. NOT LESS THAN SEVENTY-FIVE
PERCENT (75%) IN NOMINAL VALUE
OF OUTSTANDING ISSUED SHARES., IF
THE BUSINESS IS IN THE NAME OF A
CORPORATION, IS HELD BY OR ON
BEHALF OF THE SAME PERSONS; OR
ii. NOT LESS THAN SEVENTY-FIVE
PERCENT (75%) OF THE PAID UP
CAPITAL OF THE CORPORATION, IF
THE BUSINESS IS IN THE NAME OF A
CORPORATION, IS HELD BY OR ON
BEHALF OF THE SAME PERSONS.
FOR PURPOSES OF THIS SUBSECTION, THE TERM
'NET OPERATING LOSS' SHALL MEAN THE EXCESS OF
ALLOWABLE DEDUCTION OVER GROSS INCOME OF
THE BUSINESS IN A TAXABLE YEAR.
PROVIDED, THAT FOR MINES OTHER THAN OIL
AND GAS WELLS, A NET OPERATING LOSS WITHOUT
THE BENEFIT OF INCENTIVES PROVIDED FOR UNDER
EXECUTIVE ORDER NO. 226, AS AMENDED,
OTHERWISE KNOWN AS THE OMNIBUS INVESTMENTS
CODE OF 1987, INCURRED IN ANY OF THE FIRST TEN
(10) YEARS OF OPERATION MAY BE CARRIED OVER AS
A DEDUCTION FROM TAXABLE INCOME FOR THE NEXT
61 Guide Notes on Income Tax
FIVE (5) YEARS IMMEDIATELY FOLLOWING THE YEAR
OF SUCH LOSS. THE ENTIRE AMOUNT OF THE LOSS
SHALL BE CARRIED OVER TO THE FIRST OF THE FIVE
(5) TAXABLE YEARS FOLLOWING THE LOSS, AND ANY
PORTION OF SUCH LOSS WHICH EXCEEDS THE
TAXABLE INCOME OF SUCH FIRST YEAR SHALL BE
DEDUCTED IN LIKE MANNER FORM THE TAXABLE
INCOME OF THE NEXT REMAINING FOUR (4) YEARS.
(4) CAPITAL LOSSES. —
(a) LIMITATIONS. — LOSS FROM SALES OR
EXCHANGES OF CAPITAL ASSETS SHALL
BE ALLOWED ONLY TO THE EXTENT
PROVIDED IN SECTION 39.
(b) SECURITIES BECOMING
WORTHLESS. — IF SECURITIES AS
DEFINED IN SECTION 22 (T) BECOME
WORTHLESS DURING THE TAXABLE
YEAR AND ARE CAPITAL ASSETS, THE
LOSS RESULTING THEREFROM SHALL,
FOR PURPOSES OF THIS TITLE, BE
CONSIDERED AS A LOSS FROM THE SALE
OR EXCHANGE, ON THE LAST DAY OF
SUCH TAXABLE YEAR, OF CAPITAL
ASSETS.
(5) LOSSES FROM WASH SALES OF STOCK OR
SECURITIES. — LOSSES FROM 'WASH SALES' OF
STOCK OR SECURITIES AS PROVIDED IN SECTION 38.
(6) WAGERING LOSSES. — LOSSES FROM WAGERING
TRANSACTIONS SHALL BE ALLOWED ONLY TO THE
EXTENT OF THE GAINS FROM SUCH TRANSACTIONS.
(7) ABANDONMENT LOSSES. —
(a) IN THE EVENT A CONTRACT AREA
WHERE PETROLEUM OPERATIONS ARE
UNDERTAKEN IS PARTIALLY OR
WHOLLY ABANDONED, ALL
ACCUMULATED EXPLORATION AND
DEVELOPMENT EXPENDITURES
2D SEM.
PERTAINING THERETO SHALL BE
ALLOWED AS A DEDUCTION:
PROVIDED, THAT ACCUMULATED
EXPENDITURES INCURRED IN THAT
AREA PRIOR TO JANUARY 1, 1979 SHALL
BE ALLOWED AS A DEDUCTION ONLY
FROM ANY INCOME DERIVED FROM THE
SAME CONTRACT AREA. IN ALL CASES,
NOTICES OF ABANDONMENT SHALL BE
FILED WITH THE COMMISSIONER.
(b) IN CASE A PRODUCING WELL IS
SUBSEQUENTLY ABANDONED, THE UN-
AMORTIZED COSTS THEREOF, AS WELL
AS THE UN-DEPRECIATED COSTS OF
EQUIPMENT DIRECTLY USED THEREIN ,
SHALL BE ALLOWED AS A DEDUCTION
IN THE YEAR SUCH WELL, EQUIPMENT
OR FACILITY IS ABANDONED BY THE
CONTRACTOR: PROVIDED, THAT IF
SUCH ABANDONED WELL IS RE-
ENTERED AND PRODUCTION IS
RESUMED, OR IF SUCH EQUIPMENT OR
FACILITY IS RESTORED INTO SERVICE,
THE SAID COSTS SHALL BE INCLUDED
AS PART OF GROSS INCOME IN THE YEAR
OF RESUMPTION OR RESTORATION AND
SHALL BE AMORTIZED OR
DEPRECIATED, AS THE CASE MAY BE.
(E) BAD DEBTS. —
(1) IN GENERAL. — DEBTS DUE TO THE TAXPAYER
ACTUALLY ASCERTAINED TO BE WORTHLESS AND
CHARGED OFF WITHIN THE TAXABLE YEAR EXCEPT
THOSE NOT CONNECTED WITH PROFESSION, TRADE
OR BUSINESS AND THOSE SUSTAINED IN A
TRANSACTION ENTERED INTO BETWEEN PARTIES
MENTIONED UNDER SECTION 36 (B) OF THIS CODE:
PROVIDED, THAT RECOVERY OF BAD DEBTS
PREVIOUSLY ALLOWED AS DEDUCTION IN THE
A.Y. 2017-2018 Ateneo de Manila University School of Law
PRECEDING YEARS SHALL BE INCLUDED AS PART OF
THE GROSS INCOME IN THE YEAR OF RECOVERY TO
THE EXTENT OF THE INCOME TAX BENEFIT OF SAID
DEDUCTION.
(2) SECURITIES BECOMING WORTHLESS. — IF
SECURITIES, AS DEFINED IN SECTION 22 (T), ARE
ASCERTAINED TO BE WORTHLESS AND CHARGED OFF
WITHIN THE TAXABLE YEAR AND ARE CAPITAL
ASSETS, THE LOSS RESULTING THEREFROM SHALL, IN
THE CASE OF A TAXPAYER OTHER THAN A BANK OR
TRUST COMPANY INCORPORATED UNDER THE LAWS
OF THE PHILIPPINES A SUBSTANTIAL PART OF WHOSE
BUSINESS IS THE RECEIPT OF DEPOSITS, FOR THE
PURPOSE OF THIS TITLE, BE CONSIDERED AS A LOSS
FROM THE SALE OR EXCHANGE, ON THE LAST DAY OF
SUCH TAXABLE YEAR, OF CAPITAL ASSETS.
(F) DEPRECIATION. —
(1) GENERAL RULE. — THERE SHALL BE ALLOWED AS A
DEPRECIATION DEDUCTION A REASONABLE
ALLOWANCE FOR THE EXHAUSTION, WEAR AND TEAR
(INCLUDING REASONABLE ALLOWANCE FOR
OBSOLESCENCE) OF PROPERTY USED IN THE TRADE
OR BUSINESS. IN THE CASE OF PROPERTY HELD BY
ONE PERSON FOR LIFE WITH REMAINDER TO
ANOTHER PERSON, THE DEDUCTION SHALL BE
COMPUTED AS IF THE LIFE TENANT WERE THE
ABSOLUTE OWNER OF THE PROPERTY AND SHALL BE
ALLOWED TO THE LIFE TENANT. IN THE CASE OF
PROPERTY HELD IN TRUST, THE ALLOWABLE
DEDUCTION SHALL BE APPORTIONED BETWEEN THE
INCOME BENEFICIARIES AND THE TRUSTEES IN
ACCORDANCE WITH THE PERTINENT PROVISIONS OF
THE INSTRUMENT CREATING THE TRUST, OR IN THE
ABSENCE OF SUCH PROVISIONS, ON THE BASIS OF THE
TRUST INCOME ALLOWABLE TO EACH.
(2) USE OF CERTAIN METHODS AND RATES. — THE
TERM 'REASONABLE ALLOWANCE' AS USED IN THE
62
PRECEDING PARAGRAPH SHALL INCLUDE, BUT NOT
LIMITED TO, AN ALLOWANCE COMPUTED IN
ACCORDANCE WITH RULES AND REGULATIONS
PRESCRIBED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, UNDER
ANY OF THE FOLLOWING METHODS:
(a) THE STRAIGHT-LINE METHOD;
(b) DECLINING-BALANCE METHOD, USING
A RATE NOT EXCEEDING TWICE THE
RATE WHICH WOULD HAVE BEEN USED
HAD THE ANNUAL ALLOWANCE BEEN
COMPUTED UNDER THE METHOD
DESCRIBED IN SUBSECTION (F) (1);
(c) THE SUM-OF-THE-YEARS-DIGIT
METHOD; AND
(d) ANY OTHER METHOD WHICH MAY BE
PRESCRIBED BY THE SECRETARY OF
FINANCE UPON RECOMMENDATION OF
THE COMMISSIONER.
(3) AGREEMENT AS TO USEFUL LIFE ON WHICH
DEPRECIATION RATE IS BASED. — WHERE UNDER
RULES AND REGULATIONS PRESCRIBED BY THE
SECRETARY OF FINANCE UPON RECOMMENDATION
OF THE COMMISSIONER, THE TAXPAYER AND THE
COMMISSIONER HAVE ENTERED INTO AN
AGREEMENT IN WRITING SPECIFICALLY DEALING
WITH THE USEFUL LIFE AND RATE OF DEPRECIATION
OF ANY PROPERTY, THE RATE SO AGREED UPON
SHALL BE BINDING ON BOTH THE TAXPAYER AND THE
NATIONAL GOVERNMENT IN THE ABSENCE OF FACTS
AND CIRCUMSTANCES NOT TAKEN INTO
CONSIDERATION DURING THE ADOPTION OF SUCH
AGREEMENT. THE RESPONSIBILITY OF ESTABLISHING
THE EXISTENCE OF SUCH FACTS AND
CIRCUMSTANCES SHALL REST WITH THE PARTY
INITIATING THE MODIFICATION. ANY CHANGE IN
THE AGREED RATE AND USEFUL LIFE OF THE
63 Guide Notes on Income Tax
DEPRECIABLE PROPERTY AS SPECIFIED IN THE
AGREEMENT SHALL NOT BE EFFECTIVE FOR TAXABLE
YEARS PRIOR TO THE TAXABLE YEAR IN WHICH
NOTICE IN WRITING BY CERTIFIED MAIL OR
REGISTERED MAIL IS SERVED BY THE PARTY
INITIATING SUCH CHANGE TO THE OTHER PARTY TO
THE AGREEMENT:
PROVIDED, HOWEVER, THAT WHERE THE
TAXPAYER HAS ADOPTED SUCH USEFUL LIFE AND
DEPRECIATION RATE FOR ANY DEPRECIABLE AND
CLAIMED THE DEPRECIATION EXPENSES AS
DEDUCTION FROM HIS GROSS INCOME, WITHOUT
ANY WRITTEN OBJECTION ON THE PART OF THE
COMMISSIONER OR HIS DULY AUTHORIZED
REPRESENTATIVES, THE AFORESAID USEFUL LIFE AND
DEPRECIATION RATE SO ADOPTED BY THE TAXPAYER
FOR THE AFORESAID DEPRECIABLE ASSET SHALL BE
CONSIDERED BINDING FOR PURPOSES OF THIS
SUBSECTION.
(4) DEPRECIATION OF PROPERTIES USED IN PETROLEUM
OPERATIONS. — AN ALLOWANCE FOR
DEPRECIATION IN RESPECT OF ALL PROPERTIES
DIRECTLY RELATED TO PRODUCTION OF PETROLEUM
INITIALLY PLACED IN SERVICE IN A TAXABLE YEAR
SHALL BE ALLOWED UNDER THE STRAIGHT-LINE OR
DECLINING-BALANCE METHOD OF DEPRECIATION AT
THE OPTION OF THE SERVICE CONTRACTOR.
HOWEVER, IF THE SERVICE CONTRACTOR
INITIALLY ELECTS THE DECLINING-BALANCE
METHOD, IT MAY AT ANY SUBSEQUENT DATE, SHIFT
TO THE STRAIGHT-LINE METHOD.
THE USEFUL LIFE OF PROPERTIES USED IN OR
RELATED TO PRODUCTION OF PETROLEUM SHALL BE
TEN (10) YEARS OF SUCH SHORTER LIFE AS MAY BE
(G) DEPLETION OF OIL AND GAS WELLS AND MINES. —
PERMITTED BY THE COMMISSIONER.
PROPERTIES NOT USED DIRECTLY IN THE
PRODUCTION OF PETROLEUM SHALL BE
DEPRECIATED UNDER THE STRAIGHT-LINE METHOD
2D SEM.
ON THE BASIS OF AN ESTIMATED USEFUL LIFE OF FIVE
(5) YEARS.
(5) DEPRECIATION OF PROPERTIES USED IN MINING
OPERATIONS. — AN ALLOWANCE FOR
DEPRECIATION IN RESPECT OF ALL PROPERTIES USED
IN MINING OPERATIONS OTHER THAN PETROLEUM
OPERATIONS, SHALL BE COMPUTED AS FOLLOWS:
(a) AT THE NORMAL RATE OF
DEPRECIATION IF THE EXPECTED LIFE IS
TEN (10) YEARS OR LESS; OR
(b) DEPRECIATED OVER ANY NUMBER OF
YEARS BETWEEN FIVE (5) YEARS AND
THE EXPECTED LIFE IF THE LATTER IS
MORE THAN TEN (10) YEARS, AND THE
DEPRECIATION THEREON ALLOWED AS
DEDUCTION FROM TAXABLE INCOME:
PROVIDED, THAT THE CONTRACTOR
NOTIFIES THE COMMISSIONER AT THE
BEGINNING OF THE DEPRECIATION
PERIOD WHICH DEPRECIATION RATE
ALLOWED BY THIS SECTION WILL BE
USED.
(6) DEPRECIATION DEDUCTIBLE BY NONRESIDENT
ALIENS ENGAGED IN TRADE OR BUSINESS OR
RESIDENT FOREIGN CORPORATIONS. — IN THE
CASE OF A NONRESIDENT ALIEN INDIVIDUAL
ENGAGED IN TRADE OR BUSINESS OR RESIDENT
FOREIGN CORPORATION, A REASONABLE
ALLOWANCE FOR THE DETERIORATION OF PROPERTY
ARISING OUT OF ITS USE OR EMPLOYMENT OR ITS
NON-USE IN THE BUSINESS TRADE OR PROFESSION
SHALL BE PERMITTED ONLY WHEN SUCH PROPERTY IS
LOCATED IN THE PHILIPPINES.
(1) IN GENERAL. — IN THE CASE OF OIL AND GAS WELLS
OR MINES, A REASONABLE ALLOWANCE FOR
DEPLETION OR AMORTIZATION COMPUTED IN
A.Y. 2017-2018 Ateneo de Manila University School of Law 64

ACCORDANCE WITH THE COST-DEPLETION METHOD ALLOWABLE COST DEPLETION.

SHALL BE GRANTED UNDER RULES AND
(2) ELECTION TO DEDUCT EXPLORATION AND
REGULATIONS TO BE PRESCRIBED BY THE SECRETARY
DEVELOPMENT EXPENDITURES. — IN COMPUTING
OF FINANCE, UPON RECOMMENDATION OF THE
TAXABLE INCOME FROM MINING OPERATIONS, THE
COMMISSIONER. PROVIDED, THAT WHEN THE TAXPAYER MAY AT HIS OPTION, DEDUCT
ALLOWANCE FOR DEPLETION SHALL EQUAL THE
EXPLORATION AND DEVELOPMENT EXPENDITURES
CAPITAL INVESTED NO FURTHER ALLOWANCE SHALL
ACCUMULATED AS COST OR ADJUSTED BASIS FOR
BE GRANTED: PROVIDED, FURTHER, THAT AFTER
COST DEPLETION AS OF DATE OF PROSPECTING, AS
PRODUCTION IN COMMERCIAL QUANTITIES HAS
WELL AS EXPLORATION AND DEVELOPMENT
COMMENCED, CERTAIN INTANGIBLE EXPLORATION
EXPENDITURES PAID OR INCURRED DURING THE
AND DEVELOPMENT DRILLING COSTS: (A) SHALL BE
TAXABLE YEAR: PROVIDED, THAT THE AMOUNT
DEDUCTIBLE IN THE YEAR INCURRED IF SUCH
DEDUCTIBLE FOR EXPLORATION AND DEVELOPMENT
EXPENDITURES ARE INCURRED FOR NON-PRODUCING
EXPENDITURES SHALL NOT EXCEED TWENTY-FIVE
WELLS AND/OR MINES, OR (B) SHALL BE DEDUCTIBLE
PERCENT (25%) OF THE NET INCOME FROM MINING
IN FULL IN THE YEAR PAID OR INCURRED OR AT THE
OPERATIONS COMPUTED WITHOUT THE BENEFIT OF
ELECTION OF THE TAXPAYER, MAY BE CAPITALIZED
ANY TAX INCENTIVES UNDER EXISTING LAWS. THE
AND AMORTIZED IF SUCH EXPENDITURES INCURRED
ACTUAL EXPLORATION AND DEVELOPMENT
ARE FOR PRODUCING WELLS AND/OR MINES IN THE
EXPENDITURES MINUS TWENTY-FIVE PERCENT (25%)
SAME CONTRACT AREA.
OF THE NET INCOME FROM MINING SHALL BE
'INTANGIBLE COSTS IN PETROLEUM CARRIED FORWARD TO THE SUCCEEDING YEARS
OPERATIONS' REFERS TO ANY COST INCURRED IN UNTIL FULLY DEDUCTED.
PETROLEUM OPERATIONS WHICH IN ITSELF HAS NO
THE ELECTION BY THE TAXPAYER TO DEDUCT
SALVAGE VALUE AND WHICH IS INCIDENTAL TO AND
THE EXPLORATION AND DEVELOPMENT
NECESSARY FOR THE DRILLING OF WELLS AND
EXPENDITURES IS IRREVOCABLE AND SHALL BE
PREPARATION OF WELLS FOR THE PRODUCTION OF
BINDING IN SUCCEEDING TAXABLE YEARS.
PETROLEUM: PROVIDED, THAT SAID COSTS SHALL
NOT PERTAIN TO THE ACQUISITION OR 'NET INCOME FROM MINING
IMPROVEMENT OF PROPERTY OF A CHARACTER OPERATIONS', AS USED IN THIS SUBSECTION, SHALL
SUBJECT TO THE ALLOWANCE FOR DEPRECIATION MEAN GROSS INCOME FROM OPERATIONS LESS
EXCEPT THAT THE ALLOWANCES FOR DEPRECIATION 'ALLOWABLE DEDUCTIONS' WHICH ARE NECESSARY
ON SUCH PROPERTY SHALL BE DEDUCTIBLE UNDER OR RELATED TO MINING OPERATIONS. 'ALLOWABLE
THIS SUBSECTION. DEDUCTIONS' SHALL INCLUDE MINING, MILLING
AND MARKETING EXPENSES, AND DEPRECIATION OF
ANY INTANGIBLE EXPLORATION, DRILLING PROPERTIES DIRECTLY USED IN THE MINING
AND DEVELOPMENT EXPENSES ALLOWED AS A
OPERATIONS. THIS PARAGRAPH SHALL NOT APPLY
DEDUCTION IN COMPUTING TAXABLE INCOME
TO EXPENDITURES F OR THE ACQUISITION OR
DURING THE YEAR SHALL NOT BE TAKEN INTO
IMPROVEMENT OF PROPERTY OF A CHARACTER
CONSIDERATION IN COMPUTING THE ADJUSTED
WHICH IS SUBJECT TO THE ALLOWANCE FOR
COST BASIS FOR THE PURPOSE OF COMPUTING
DEPRECIATION.
65 Guide Notes on Income Tax 2D SEM.
IN NO CASE SHALL THIS PARAGRAPH APPLY CORPORATION OR ASSOCIATIONS ORGANIZED AND
WITH RESPECT TO AMOUNTS PAID OR INCURRED FOR OPERATED EXCLUSIVELY FOR RELIGIOUS,
THE EXPLORATION AND DEVELOPMENT OF OIL AND CHARITABLE, SCIENTIFIC, YOUTH AND SPORTS
GAS. DEVELOPMENT, CULTURAL OR EDUCATIONAL
PURPOSES OR FOR THE REHABILITATION OF
THE TERM 'EXPLORATION EXPENDITURES'
VETERANS, OR TO SOCIAL WELFARE INSTITUTIONS,
MEANS EXPENDITURES PAID OR INCURRED FOR THE
OR TO NON-GOVERNMENT ORGANIZATIONS, IN
PURPOSE OF ASCERTAINING THE EXISTENCE,
ACCORDANCE WITH RULES AND REGULATIONS
LOCATION, EXTENT OR QUALITY OF ANY DEPOSIT OF
PROMULGATED BY THE SECRETARY OF FINANCE,
ORE OR OTHER MINERAL, AND PAID OR INCURRED
UPON RECOMMENDATION OF THE COMMISSIONER,
BEFORE THE BEGINNING OF THE DEVELOPMENT
NO PART OF THE NET INCOME OF WHICH INURES TO
[30]

STAGE OF THE MINE OR DEPOSIT.

THE BENEFIT OF ANY PRIVATE STOCKHOLDER OR
THE TERM 'DEVELOPMENT EXPENDITURES' INDIVIDUAL IN AN AMOUNT NOT IN EXCESS OF TEN
MEANS EXPENDITURES PAID OR INCURRED DURING PERCENT (10%) IN THE CASE OF AN INDIVIDUAL, AND
THE DEVELOPMENT STAGE OF THE MINE OR OTHER FIVE PERCENT (%) IN THE CASE OF A CORPORATION,
NATURAL DEPOSITS. THE DEVELOPMENT STAGE OF A OF THE TAXPAYER'S TAXABLE INCOME DERIVED
MINE OR OTHER NATURAL DEPOSIT SHALL BEGIN AT FROM TRADE, BUSINESS OR PROFESSION AS
THE TIME WHEN DEPOSITS OF ORE OR OTHER COMPUTED WITHOUT THE BENEFIT OF THIS AND THE
MINERALS ARE SHOWN TO EXIST IN SUFFICIENT FOLLOWING SUBPARAGRAPHS.
COMMERCIAL QUANTITY AND QUALITY AND SHALL
END UPON COMMENCEMENT OF ACTUAL
(2) CONTRIBUTIONS DEDUCTIBLE IN
COMMERCIAL EXTRACTION.
FULL. — NOTWITHSTANDING THE PROVISIONS OF
THE PRECEDING SUBPARAGRAPH, DONATIONS TO
(3) DEPLETION OF OIL AND GAS WELLS AND MINES THE FOLLOWING INSTITUTIONS OR ENTITIES SHALL
DEDUCTIBLE BY A NONRESIDENT ALIEN INDIVIDUAL BE DEDUCTIBLE IN FULL:
OR FOREIGN CORPORATION. — IN THE CASE OF A
NONRESIDENT ALIEN INDIVIDUAL ENGAGED IN
(a) DONATIONS TO THE
TRADE OR BUSINESS IN THE PHILIPPINES OR A
GOVERNMENT. — DONATIONS TO THE
RESIDENT FOREIGN CORPORATION, ALLOWANCE FOR
GOVERNMENT OF THE PHILIPPINES OR
TO ANY OF ITS AGENCIES OR POLITICAL
DEPLETION OF OIL AND GAS WELLS OR MINES UNDER
SUBDIVISIONS, INCLUDING FULLY-
PARAGRAPH (1) OF THIS SUBSECTION SHALL BE
OWNED GOVERNMENT
AUTHORIZED ONLY IN RESPECT TO OIL AND GAS
CORPORATIONS, EXCLUSIVELY TO
WELLS OR MINES LOCATED WITHIN THE PHILIPPINES.
FINANCE, TO PROVIDE FOR, OR TO BE
(H) CHARITABLE AND OTHER CONTRIBUTIONS. — USED IN UNDERTAKING PRIORITY
(1) IN GENERAL. — CONTRIBUTIONS OR GIFTS ACTIVITIES IN EDUCATION, HEALTH,
ACTUALLY PAID OR MADE WITHIN THE TAXABLE YOUTH AND SPORTS DEVELOPMENT,
YEAR TO, OR FOR THE USE OF THE GOVERNMENT OF HUMAN SETTLEMENTS, SCIENCE AND
THE PHILIPPINES OR ANY OF ITS AGENCIES OR ANY CULTURE, AND IN ECONOMIC
POLITICAL SUBDIVISION THEREOF EXCLUSIVELY FOR DEVELOPMENT ACCORDING TO A
PUBLIC PURPOSES, OR TO ACCREDITED DOMESTIC NATIONAL PRIORITY PLAN
A.Y. 2017-2018 Ateneo de Manila University School of Law 66

DETERMINED BY THE NATIONAL RESEARCH, EDUCATIONAL,

ECONOMIC AND DEVELOPMENT CHARACTER-BUILDING AND
AUTHORITY (NEDA), IN YOUTH AND SPORTS
CONSULTATION WITH APPROPRIATE DEVELOPMENT, HEALTH, SOCIAL
GOVERNMENT AGENCIES, INCLUDING WELFARE, CULTURAL OR
ITS REGIONAL DEVELOPMENT CHARITABLE PURPOSES, OR A
COUNCILS AND PRIVATE COMBINATION THEREOF, NO
PHILANTHROPIC PERSONS AND PART OF THE NET INCOME OF
[31]

INSTITUTIONS: PROVIDED, THAT ANY WHICH INURES TO THE BENEFIT OF

DONATION WHICH IS MADE TO THE
GOVERNMENT OR TO ANY OF ITS
AGENCIES OR POLITICAL SUBDIVISIONS
ANY PRIVATE INDIVIDUAL;
(2) WHICH, NOT LATER THAN THE
15 DAY OF THE THIRD MONTH
TH

NOT IN ACCORDANCE WITH THE SAID

AFTER THE CLOSE OF THE
ANNUAL PRIORITY PLAN SHALL BE
ACCREDITED NONGOVERNMENT
SUBJECT TO THE LIMITATIONS
ORGANIZATIONS TAXABLE YEAR
PRESCRIBED IN PARAGRAPH (1) OF THIS
IN WHICH CONTRIBUTIONS ARE
SUBSECTION; RECEIVED, MAKES UTILIZATION
(b) DONATIONS TO CERTAIN FOREIGN DIRECTLY FOR THE ACTIVE
INSTITUTIONS OR INTERNATIONAL CONDUCT OF THE ACTIVITIES
ORGANIZATIONS. — DONATIONS TO CONSTITUTING THE PURPOSE OR
FOREIGN INSTITUTIONS OR FUNCTION FOR WHICH IT IS
INTERNATIONAL ORGANIZATIONS ORGANIZED AND OPERATED,
WHICH ARE FULLY DEDUCTIBLE IN UNLESS AN EXTENDED PERIOD IS
PURSUANCE OF OR IN COMPLIANCE GRANTED BY THE SECRETARY OF
WITH AGREEMENTS, TREATIES, OR FINANCE IN ACCORDANCE WITH
COMMITMENTS ENTERED INTO BY THE THE RULES AND REGULATIONS TO
GOVERNMENT OF THE PHILIPPINES BE PROMULGATED, UPON
AND THE FOREIGN INSTITUTIONS OR RECOMMENDATION OF THE
INTERNATIONAL ORGANIZATIONS OR COMMISSIONER;
IN PURSUANCE OF SPECIAL LAWS;
(3) THE LEVEL OF ADMINISTRATIVE
(c) DONATIONS TO ACCREDITED EXPENSE OF WHICH SHALL, ON AN
NONGOVERNMENT ANNUAL BASIS, CONFORM WITH
ORGANIZATIONS. — THE TERM THE RULES AND REGULATIONS TO
'NONGOVERNMENT ORGANIZATION' BE PRESCRIBED BY THE
MEANS A NON-PROFIT DOMESTIC SECRETARY OF FINANCE, UPON
CORPORATION: RECOMMENDATION OF THE
(1) ORGANIZED AND OPERATED
COMMISSIONER, BUT IN NO CASE
TO EXCEED THIRTY PERCENT
EXCLUSIVELY FOR SCIENTIFIC,
67 Guide Notes on Income Tax
(30%) OF THE TOTAL EXPENSES;
AND
(4) THE ASSETS OF WHICH, IN THE
EVENT OF DISSOLUTION, WOULD
BE DISTRIBUTED TO ANOTHER
NON-PROFIT DOMESTIC
CORPORATION ORGANIZED FOR
SIMILAR PURPOSE OR PURPOSES,
OR TO THE STATE FOR PUBLIC
PURPOSE, OR WOULD BE
DISTRIBUTED BY A COURT TO
ANOTHER ORGANIZATION TO BE
USED IN SUCH MANNER AS IN THE
JUDGMENT OF SAID COURT SHALL
BEST ACCOMPLISH THE GENERAL
PURPOSE FOR WHICH THE
DISSOLVED ORGANIZATION WAS
ORGANIZED.
SUBJECT TO SUCH TERMS AND CONDITIONS AS MAY BE
PRESCRIBED BY THE SECRETARY OF FINANCE, THE TERM
'UTILIZATION' MEANS:
i. ANY AMOUNT IN CASH OR IN KIND (INCLUDING
ADMINISTRATIVE EXPENSES) PAID OR UTILIZED TO
ACCOMPLISH ONE OR MORE PURPOSES FOR WHICH THE
ACCREDITED NONGOVERNMENT ORGANIZATION WAS
CREATED OR ORGANIZED.
ii. ANY AMOUNT PAID TO ACQUIRE AN ASSET USED (OR
HELD FOR USE) DIRECTLY IN CARRYING OUT ONE OR
MORE PURPOSES FOR WHICH THE ACCREDITED
NONGOVERNMENT ORGANIZATION WAS CREATED OR
ORGANIZED.
AN AMOUNT SET ASIDE FOR A SPECIFIC PROJECT WHICH
COMES WITHIN ONE OR MORE PURPOSES OF THE ACCREDITED
NONGOVERNMENT ORGANIZATION MAY BE TREATED AS A
UTILIZATION, BUT ONLY IF AT THE TIME SUCH AMOUNT IS SET
ASIDE, THE ACCREDITED NONGOVERNMENT ORGANIZATION
HAS ESTABLISHED TO THE SATISFACTION OF THE
COMMISSIONER THAT THE AMOUNT WILL BE PAID FOR THE
2D SEM.
SPECIFIC PROJECT WITHIN A PERIOD TO BE PRESCRIBED IN RULES
AND REGULATIONS TO BE PROMULGATED BY THE SECRETARY OF
FINANCE, UPON RECOMMENDATION OF THE COMMISSIONER,
BUT NOT TO EXCEED FIVE (5) YEARS, AND THE PROJECT IS ONE
WHICH CAN BE BETTER ACCOMPLISHED BY SETTING ASIDE SUCH
AMOUNT THAN BY IMMEDIATE PAYMENT OF FUNDS.
(3) VALUATION. — THE AMOUNT OF ANY CHARITABLE
CONTRIBUTION OF PROPERTY OTHER THAN MONEY
SHALL BE BASED ON THE ACQUISITION COST OF SAID
PROPERTY.
(4) PROOF OF DEDUCTIONS. — CONTRIBUTIONS OR
GIFTS SHALL BE ALLOWABLE AS DEDUCTIONS ONLY IF
VERIFIED UNDER THE RULES AND REGULATIONS
PRESCRIBED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER.
(I) RESEARCH AND DEVELOPMENT. —
(1) IN GENERAL. — A TAXPAYER MAY TREAT RESEARCH
OR DEVELOPMENT EXPENDITURES WHICH ARE PAID
OR INCURRED BY HIM DURING THE TAXABLE YEAR IN
CONNECTION WITH HIS TRADE, BUSINESS OR
PROFESSION AS ORDINARY AND NECESSARY
EXPENSES WHICH ARE NOT CHARGEABLE TO CAPITAL
ACCOUNT. THE EXPENDITURES SO TREATED SHALL
BE ALLOWED AS DEDUCTION DURING THE TAXABLE
YEAR WHEN PAID OR INCURRED.
(2) AMORTIZATION OF CERTAIN RESEARCH AND
DEVELOPMENT EXPENDITURES. — AT THE ELECTION
OF THE TAXPAYER AND IN ACCORDANCE WITH THE
RULES AND REGULATIONS TO BE PRESCRIBED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION
OF THE COMMISSIONER, THE FOLLOWING RESEARCH
AND DEVELOPMENT EXPENDITURES MAY BE TREATED
AS DEFERRED EXPENSES:
(a) PAID OR INCURRED BY THE TAXPAYER
IN CONNECTION WITH HIS TRADE,
BUSINESS OR PROFESSION;
(b) NOT TREATED AS EXPENSES UNDER
A.Y. 2017-2018 Ateneo de Manila University School of Law
PARAGRAPH (1) HEREOF; AND
(c) CHARGEABLE TO CAPITAL ACCOUNT
BUT NOT CHARGEABLE TO PROPERTY OF
A CHARACTER WHICH IS SUBJECT TO
DEPRECIATION OR DEPLETION.
IN COMPUTING TAXABLE INCOME, SUCH
DEFERRED EXPENSES SHALL BE ALLOWED AS
DEDUCTION RATABLY DISTRIBUTED OVER A PERIOD
OF NOT LESS THAN SIXTY (60) MONTHS AS MAY BE
ELECTED BY THE TAXPAYER (BEGINNING WITH THE
MONTH IN WHICH THE TAXPAYER FIRST REALIZES
BENEFITS FROM SUCH EXPENDITURES).
THE ELECTION PROVIDED BY PARAGRAPH (2)
HEREOF MAY BE MADE FOR ANY TAXABLE YEAR
BEGINNING AFTER THE EFFECTIVITY OF THIS CODE,
BUT ONLY IF MADE NOT LATER THAN THE TIME
PRESCRIBED BY LAW FOR FILING THE RETURN FOR
SUCH TAXABLE YEAR. THE METHOD SO ELECTED,
AND THE PERIOD SELECTED BY THE TAXPAYER, SHALL
BE ADHERED TO IN COMPUTING TAXABLE INCOME
FOR THE TAXABLE YEAR FOR WHICH THE ELECTION IS
MADE AND FOR ALL SUBSEQUENT TAXABLE YEARS
UNLESS WITH THE APPROVAL OF THE
COMMISSIONER, A CHANGE TO A DIFFERENT
METHOD IS AUTHORIZED WITH RESPECT TO A PART
OR ALL OF SUCH EXPENDITURES. THE ELECTION
SHALL NOT APPLY TO ANY EXPENDITURE PAID OR
INCURRED DURING ANY TAXABLE YEAR FOR WHICH
THE TAXPAYER MAKES THE ELECTION.
(3) LIMITATIONS ON DEDUCTION. — THIS SUBSECTION
SHALL NOT APPLY TO:
(a) ANY EXPENDITURE FOR THE
ACQUISITION OR IMPROVEMENT OF
LAND, OR FOR THE IMPROVEMENT OF
PROPERTY TO BE USED IN CONNECTION
WITH RESEARCH AND DEVELOPMENT
OF A CHARACTER WHICH IS SUBJECT TO
68
DEPRECIATION AND DEPLETION; AND
(b) ANY EXPENDITURE PAID OR INCURRED
FOR THE PURPOSE OF ASCERTAINING
THE EXISTENCE, LOCATION, EXTENT, OR
QUALITY OF ANY DEPOSIT OF ORE OR
OTHER MINERAL, INCLUDING OIL OR
GAS.
(J) PENSION TRUSTS. — AN EMPLOYER ESTABLISHING OR
MAINTAINING A PENSION TRUST TO PROVIDE FOR THE
PAYMENT OF REASONABLE PENSIONS TO HIS EMPLOYEES
SHALL BE ALLOWED AS A DEDUCTION (IN ADDITION TO
THE CONTRIBUTIONS TO SUCH TRUST DURING THE
TAXABLE YEAR TO COVER THE PENSION LIABILITY
ACCRUING DURING THE YEAR, ALLOWED AS A
DEDUCTION UNDER SUBSECTION (A)(1) OF THIS
SECTION) A REASONABLE AMOUNT TRANSFERRED OR
PAID INTO SUCH TRUST DURING THE TAXABLE YEAR IN
EXCESS OF SUCH CONTRIBUTIONS, BUT ONLY IF SUCH
AMOUNT (1)HAS NOT THERETOFORE BEEN ALLOWED AS
A DEDUCTION, AND (2) IS APPORTIONED IN EQUAL PARTS
OVER A PERIOD OF TEN (10) CONSECUTIVE YEARS
BEGINNING WITH THE YEAR IN WHICH THE TRANSFER OR
PAYMENT IS MADE.
(K) ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY OF
CERTAIN PAYMENTS. — ANY AMOUNT PAID OR
PAYABLE WHICH IS OTHERWISE DEDUCTIBLE FROM, OR
TAKEN INTO ACCOUNT IN COMPUTING GROSS INCOME
OR FOR WHICH DEPRECIATION OR AMORTIZATION MAY
BE ALLOWED UNDER THIS SECTION, SHALL BE ALLOWED
AS A DEDUCTION ONLY IF IT IS SHOWN THAT THE TAX
REQUIRED TO BE DEDUCTED AND WITHHELD
THEREFROM HAS BEEN PAID TO THE BUREAU OF
INTERNAL REVENUE IN ACCORDANCE WITH THIS
SECTION 58 AND 81 OF THIS CODE.
(L) OPTIONAL STANDARD DEDUCTION (OSD). — IN LIEU
OF THE DEDUCTIONS ALLOWED UNDER THE PRECEDING
SUBSECTIONS, AN INDIVIDUAL SUBJECT TO TAX UNDER
69 Guide Notes on Income Tax
SECTION 24, OTHER THAN A NONRESIDENT ALIEN, MAY
ELECT A STANDARD DEDUCTION IN AN AMOUNT NOT
EXCEEDING FORTY PERCENT (40%) OF HIS GROSS SALES
OR GROSS RECEIPTS, AS THE CASE MAY BE. IN THE CASE
OF A CORPORATION SUBJECT TO TAX UNDER SECTIONS
27(A) AND 28(A)(1), IT MAY ELECT A STANDARD
DEDUCTION IN AN AMOUNT NOT EXCEEDING FORTY
PERCENT (40%) OF ITS GROSS INCOME AS DEFINED IN
SECTION 32 OF THIS CODE. UNLESS THE TAXPAYER
SIGNIFIES IN HIS RETURN HIS INTENTION TO ELECT THE
OPTIONAL STANDARD DEDUCTION, HE SHALL BE
CONSIDERED AS HAVING AVAILED HIMSELF OF THE
DEDUCTIONS ALLOWED IN THE PRECEDING
SUBSECTIONS. SUCH ELECTION WHEN MADE IN THE
RETURN SHALL BE IRREVOCABLE FOR THE TAXABLE YEAR
FOR WHICH THE RETURN IS MADE: PROVIDED, THAT AN
INDIVIDUAL WHO IS ENTITLED TO AND CLAIMED FOR
THE OPTIONAL STANDARD DEDUCTION SHALL NOT BE
REQUIRED TO SUBMIT WITH HIS TAX RETURN SUCH
FINANCIAL STATEMENTS OTHERWISE REQUIRED UNDER
THIS CODE: PROVIDED, FURTHER, THAT A
GENERAL PROFESSIONAL PARTNERSHIP AND
THE PARTNERS COMPRISING SUCH
PARTNERSHIP MAY AVAIL OF THE OPTIONAL
STANDARD DEDUCTION ONLY ONCE, EITHER
BY THE GENERAL PROFESSIONAL PARTNERSHIP
OR THE PARTNERS COMPRISING THE
PARTNERSHIP: PROVIDED, FINALLY, THAT EXCEPT
WHEN THE COMMISSIONER OTHERWISE PERMITS, THE
SAID INDIVIDUAL SHALL KEEP SUCH RECORDS
PERTAINING TO HIS GROSS SALES OR GROSS RECEIPTS,
OR THE SAID CORPORATION SHALL KEEP SUCH RECORDS
PERTAINING TO HIS GROSS INCOME AS DEFINED IN
SECTION 32 OF THIS CODE DURING THE TAXABLE YEAR,
AS MAY BE REQUIRED BY THE RULES AND REGULATIONS
PROMULGATED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER.
(M) PREMIUM PAYMENTS ON HEALTH AND/OR
HOSPITALIZATION INSURANCE OF AN INDIVIDUAL
2D SEM.
TAXPAYER. — THE AMOUNT OF PREMIUMS NOT TO
EXCEED TWO THOUSAND FOUR HUNDRED PESOS (P2,400)
PER FAMILY OR TWO HUNDRED PESOS (P200) A MONTH
PAID DURING THE TAXABLE YEAR FOR HEALTH AND/OR
HOSPITALIZATION INSURANCE TAKEN BY THE TAXPAYER
FOR HIMSELF, INCLUDING HIS FAMILY, SHALL BE
ALLOWED AS A DEDUCTION FROM HIS GROSS INCOME:
PROVIDED, THAT SAID FAMILY HAS A GROSS INCOME OF
NOT MORE THAN TWO HUNDRED FIFTY THOUSAND
PESOS (P250,000) FOR THE TAXABLE YEAR: PROVIDED,
FINALLY, THAT IN THE CASE OF MARRIED TAXPAYERS,
ONLY THE SPOUSE CLAIMING THE ADDITIONAL
EXEMPTION FOR DEPENDENTS SHALL BE ENTITLED TO
THIS DEDUCTION.
NOTWITHSTANDING THE PROVISION OF THE PRECEDING
SUBSECTIONS, THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, AFTER A PUBLIC
HEARING SHALL HAVE BEEN HELD FOR THIS PURPOSE, MAY
PRESCRIBE BY RULES AND REGULATIONS, LIMITATIONS OR
CEILINGS FOR ANY OF THE ITEMIZED DEDUCTIONS UNDER
SUBSECTIONS (A) TO (J) OF THIS SECTION: PROVIDED, THAT FOR
PURPOSES OF DETERMINING SUCH CEILINGS OR LIMITATIONS,
THE SECRETARY OF FINANCE SHALL CONSIDER THE FOLLOWING
FACTORS: (1) ADEQUACY OF THE PRESCRIBED LIMITS ON THE
ACTUAL EXPENDITURE REQUIREMENTS OF EACH PARTICULAR
INDUSTRY; AND (2)EFFECTS OF INFLATION ON EXPENDITURE
LEVELS: PROVIDED, FURTHER, THAT NO CEILINGS SHALL
FURTHER BE IMPOSED ON ITEMS OF EXPENSE ALREADY SUBJECT
TO CEILINGS UNDER PRESENT LAW.
Q: Differentiate between a tax deduction and a tax credit.
How may a drugstore treat the 20% discount given to senior
citizens? May it be claimed as a tax deduction from gross
income or a tax credit? The case of CIR v. Central Luzon Drug
Corporation covered the taxable year 1997 and thus applied the
old rule under RA No. 7432, i.e., the 20% senior citizens’
discount could be claimed as a tax credit. However, with the
A.Y. 2017-2018 Ateneo de Manila University School of Law
effectivity of RA No. 9257 (21 March 2004), “there is now a new
tax treatment for senior citizens’ discount granted by all
covered establishments. This discount should be considered as
a deductible expense from gross income and no longer as tax
credit.”72
In Carlos Superdrug Corp. v. Department of Social Welfare and
Development (DSWD), petitioners were drugstores assailing the
constitutionality of RA No. 9257, particularly, the validity of the
tax deduction scheme as a reimbursement mechanism for the
20% senior citizens’ discount. A tax deduction was
differentiated from a tax credit in this wise: “the tax deduction
scheme does not fully reimburse petitioners for the discount
privilege accorded to senior citizens. This is because the
discount is treated as a deduction, a tax-deductible expense that
is subtracted from the gross income and results in a lower
taxable income. Stated otherwise, it is an amount that is allowed
by law to reduce the income prior to the application of the tax
rate to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a peso
for peso basis but merely offers a fractional reductions in taxes
owed.” On the other hand, a tax credit is a peso-for-peso
deduction from a taxpayer’s tax liability due to the government
of the amounts of seniors’ citizens discount given by the
covered establishment. Such establishment recovers the full
amount and hence, the government shoulders 100% of the
discounts granted. Ultimately, the Supreme Court upheld the
constitutionality of RA No. 9257 primarily on the ground that
the law was a legitimate exercise of police power.73
Q: In general, what is the treatment accorded to deductions
from gross income?
In Basilan Estates, Inc. v. CIR, petitioner was a domestic
corporation engaged in the coconut industry. In 1953, petitioner
received a deficiency income tax assessment partly due to
72. CIR v. Central Luzon Drug Corporation, GR No. 159610, 12 June 2008.
73. Carlos Superdrug Corp. v. Department of Social Welfare and Development
(DSWD), GR No. 166494, 29 June 2007.
70
disallowed deductions from its gross income in the form of
depreciation, travelling and miscellaneous expenses. One issue
tackled was whether depreciation should be determined on the
acquisition cost or on the reappraised value of the assets. The
Supreme Court ruled that the income tax law did not authorize
the depreciation of an asset beyond its acquisition cost. A
deduction over and above such cost must be disallowed. “The
reason is that deductions from gross income are privileges, not
matters of right. They are not created by implication but upon
clear expression in the law.
Moreover, the recovery, free of income tax, of an amount
more than the invested capital in an asset will transgress the
underlying purpose of a depreciation allowance. For then what
the taxpayer would recover will be not only the acquisition cost,
but also some profit. Recovery in due time thru depreciation of
investment made is the philosophy behind depreciation
allowance; the idea of profit on the investment made has never
been the underlying reason for the allowance of a deduction for
depreciation.”74
In Aguinaldo Industries Corporation v. CIR, when petitioner
sold its property in Muntinglupa, the corporate officers of
petitioner were given bonuses. The amount representing these
bonuses was claimed by petitioner as a deductible business
expense. The Supreme Court held that the bonuses could not be
deemed a deductible expense for tax purposes, “even if the
aforesaid sale could be considered as a transaction for carrying
on the trade or business of the petitioner and the grant of the
bonus to the corporate officers pursuant to petitioner’s by-laws
could, as an intra-corporate matter, be sustained.” Citing
Alhambra Cigar and Cigarette Manufacturing Co. v. CIR (GR No.
L-12026, 29 May 1959), the Supreme Court stated that:
“whenever a controversy arises on the deductibility, for
purposes of income tax, of certain items for alleged
compensation of officers of the taxpayer, two (2) questions
74. Basilan Estates, Inc. v. CIR, GR No. L-22492, 5 September 1967.
71 Guide Notes on Income Tax
become material, namely: (a) Have ‘personal services’ been
‘actually rendered’ by said officers? (b) In the affirmative case,
what is the ‘reasonable allowance’ therefor?”75 Here, no
evidence was presented to show that the corporate officers who
received bonuses had a hand in the sale transaction of the
Muntinglupa property [which could be the basis of a grant to
them of the bonuses out of the profit derived from the sale].
Thus, the amount representing the bonuses could not be
allowed as a deductible business expense.
“This posture is in line with the doctrine in the law of
taxation that the taxpayer must show that its claimed
deductions clearly come within the language of the law since
allowances, like exemptions, are matters of legislative grace.”76
To be deductible from gross income, an advertising
expense must comply with the following requirements:
(1) the expense must be ordinary and necessary;
(2) it must have been paid or incurred during the taxable
year;
(3) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and
(4) it must be supported by receipts, records or other
pertinent papers.
In CIR v. General Foods (Phils.), Inc., respondent filed its
income tax return for 1985, claiming a certain amount as
deductible media advertising expense for the product “Tang.”
Respondent and the CIR were in agreement that the subject
advertising expense was paid or incurred within the relevant
taxable year and was incurred in carrying on a trade or
business. Hence, it was necessary. However, as to whether it
was ordinary, their views were in conflict. The CIR maintained
that the subject advertising expense was not ordinary for failure
to comply with two requirements set by US jurisprudence: (1)
75. Alhambra Cigar and Cigarette Manufacturing Co. v. CIR (GR No. L-12026, 29
May 1959)
2D SEM.
the amount incurred must be reasonable, and (2) the amount
incurred must not be a capital outlay to create “goodwill” for
the product and/or the corporation’s business. [Otherwise, the
expense must be considered a capital expenditure to be spread
out over a reasonable time.]
“There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising expense.
There being no hard and fast rule on the matter, the right to a
deduction depends on a number of factors such as but not
limited to: the type and size of business in which the taxpayer
is engaged; the volume and amount of its net earnings; the
nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of these,
among other factors and properly weighted, that will yield a
proper evaluation.” Here, the Supreme Court held that the
advertising expense for a single product (Tang) was
inordinately large. Even if it was necessary, it could not be
considered an ordinary expense. In order to be deductible, a
business expense must be both ordinary and necessary.
“Deductions for income tax purposes partake the nature
of tax exemptions; hence, if tax exemptions are strictly
construed, then deductions must also be strictly construed
[against the taxpayer and liberally in favor of the taxing
authority].”77
In Philex Mining Corporation v. CIR, petitioner entered into
an agreement with Baguio Gold Mining Company for the
former to manage and operate the latter’s mining claim in the
Benguet Province. The agreement was denominated as Power
of Attorney. In the course of managing and operating the
project, petitioner made advances of cash and property to
Baguio Gold. However, the mine suffered continuing losses
over the years which resulted to petitioner’s withdrawal as
manager of the mine and in the eventual cessation of mine
operations. In its 1982 income tax return, petitioner deducted
from its gross income a sum representing “loss on settlement of
76. Aguinaldo Industries Corporation v. CIR, GR No. L-29790, 25 February 1982.
77. CIR v. General Foods (Phils.), Inc., GR No. 143672, 24 April 2003.
A.Y. 2017-2018 Ateneo de Manila University School of Law
receivables from Baguio Gold against reserves and
allowances.” The CIR disallowed the amount as deductible bad
debt and assessed petitioner a deficiency income tax. The
Supreme Court found that petitioner’s advances were
investments in a partnership known as the Sto. Niño Mine. “The
advances were not ‘debts’ of Baguio Gold to petitioner
inasmuch as the latter was under no unconditional obligation
to return the same to the former under the ‘Power of Attorney.’
Petitioner failed to substantiate its assertion that the advances
were subsisting debts of Baguio Gold that could be deducted
from its gross income.
“Deductions for income tax purposes partake of the
nature of tax exemptions and are strictly construed against the
taxpayer, who must prove by convincing evidence that he is
entitled to the deduction claimed.”78
1. Expenses 
 
 The Supreme Court eventually held that the expense
Q: What are the general requisites for deductibility of business
expense?
In Atlas Consolidated Mining & Development Corporation v. CIR,
one question was: were the expenses paid by Atlas for the
services rendered by a public relations firm, P.K. MacKer & Co.,
labeled as stockholders relation service fee considered
deductible business expense? The expense in question was
incurred to create a favorable image of the corporation in order
to gain or maintain the patronage of its stockholders and the
public. The Supreme Court held that such expense was not an
ordinary and necessary expense allowed to be deducted from
the corporation’s gross income.
In order to be deductible as a business expense, three
conditions must concur [business test]: (1) the expense must be
ordinary and necessary; (2) it must be paid or incurred within
the taxable year; and (3) it must be paid or incurred in carrying
78. Philex Mining Corporation v. CIR, GR No. 148187, 16 April 2008.
72
on a trade or business. Additionally, the taxpayer must
substantially prove by evidence or records the deductions
claimed under the law.
“There is no hard and fast rule on the matter. The right to
a deduction depends in each case on the particular facts and the
relation of the payment to the type of business in which the
taxpayer is engaged. The intention of the taxpayer often may be
the controlling fact in making the determination. Assuming that
the expenditure is ordinary and necessary in the operation of
the taxpayer’s business, the answer to the question as to
whether the expenditure is an allowable deduction as a
business expense must be determined from the nature of the
expenditure itself, which in turn depends on the extent and
permanency of the work accomplished by the expenditure.” In
all events, however, the taxpayer must establish a logical link
between the expense and the taxpayer’s business.
incurred by Atlas was not a deductible business expense, but a
capital expenditure.79
At issue in Esso Standard Eastern, Inc. v. CIR was the
classification of the margin fees paid by ESSO to the Central
Bank on its profit remittances to its New York head office in the
taxable years 1959 and 1960. ESSO sought the refund of the
amount it paid as margin fees contending that these fees were
deductible from gross income either as a tax or as an ordinary
and necessary business expense. The Supreme Court held that
the margin fees were not taxes, as they were imposed by the
State in the exercise of its police power and not the power of
taxation. The margin fees were an exaction designed to curb the
excessive demands upon the country’s international reserve.
The High Court also stated that the margin fees were not an
ordinary and necessary business expense, because ESSO had
not shown that the remittance to the head office of part of its
profits was made in furtherance of its own trade or business. “If
79. Atlas Consolidated Mining & Development Corporation v. CIR, GR Nos. L-
26911 and L-26924, 27 January 1981.
73 Guide Notes on Income Tax
at all, the margin fees were incurred for purposes proper to the
conduct of the corporate affairs of Standard Vacuum Oil
Company in New York, but certainly not in the Philippines.”80
In Hospital de San Juan de Dios, Inc. v. CIR, petitioner was
a charitable, non-stock non-profit corporation which was
engaged in both taxable and non-taxable operations. Its income
included rentals, interests and dividends received from its
properties and investments. In the computation of its taxable
income for the years 1952 to 1955, petitioner allowed all its
taxable income to share in the allocation of administrative
expenses. The CIR, however, disallowed the interests and
dividends from sharing in the allocation of administrative
expenses on the ground that the expenses incurred in the
administration or management of petitioner’s investments
were not allowable business expenses inasmuch as they were
not incurred in “carrying on any trade or business.” The
Supreme Court held that “as the principle of allocating
expenses is grounded on the premise that the taxable income
was derived from carrying on a trade or business, as
distinguished from mere receipt of interests and dividends
from one’s investments, the Court of Tax Appeals correctly
ruled that said income should not share in the allocation of
administrative expenses.” Otherwise stated, the expenses
incurred in the administration or management of petitioner’s
investments, i.e., interests and dividends, were not deductible
business expenses.81
Q: Compensation for personal services actually rendered;
illustrative cases.
In C.M. Hoskins & Co., Inc. v. CIR, petitioner filed its income tax
return for the year 1957. The CIR disallowed as deductible
business expense a certain sum representing supervision fee
paid to its controlling stockholder, Hoskins. Considering the
circumstances (e.g., Hoskins almost wholly owning and
controlling petitioner), the Supreme Court found that the
80. Esso Standard Eastern, Inc. v. CIR, GR Nos. 28508-9, 7 July 1989.
81. Hospital de San Juan de Dios, Inc. v. CIR, GR No. 31305, 10 May 1990.
2D SEM.
supervision fee paid to Hoskins was inordinately large, and
could not be accorded the treatment of ordinary and necessary
expenses allowed as deductible items. [It was treated as a
distribution of earnings and profits of petitioner.] The Court
explained the test of reasonableness, citing in the process the
case of Kuenzle & Streiff, Inc. v. CIR (28 SCRA 366, 29 May 1969),
to wit: “The conditions precedent to the deduction of bonuses
to employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually
rendered; and (3) the bonuses, when added to the salaries, are
‘reasonable x x x when measured by the amount and quality of
the services performed with relation to the business of the
particular taxpayer.”
Of course, “[t]here is no fixed test for determining the
reasonableness of a given bonus as compensation. This depends
upon many factors, one of them being ‘the amount and quality
of the services performed with relation to the business.’ Other
tests suggested are: payment must be ‘made in good faith’; ‘the
character of the taxpayer’s business, the volume and amount of
its net earnings, its locality, the type and extent of the services
rendered, the salary policy of the corporation’; ‘the size of the
particular business’; ‘the employees’ qualifications and
contributions to the business venture’; and ‘general economic
conditions.”
Finally, the right of an employer to fix the compensation
of its officers and employees is recognized, “but for income tax
purposes the employer cannot legally claim such bonuses as
deductible expenses unless they are shown to be reasonable. To
hold otherwise would open the gate of rampant tax evasion.”82
In Aguinaldo Industries Corporation v. CIR, when petitioner
sold its property in Muntinglupa, the corporate officers of
petitioner were given bonuses. The amount representing these
bonuses was claimed by petitioner as a deductible business
expense. The Supreme Court held that the bonuses could not be
deemed a deductible expense for tax purposes, “even if the
82. C.M. Hoskins & Co., Inc. v. CIR, GR No. L-24059, 28 November 1969.
A.Y. 2017-2018 Ateneo de Manila University School of Law
aforesaid sale could be considered as a transaction for carrying
on the trade or business of the petitioner and the grant of the
bonus to the corporate officers pursuant to petitioner’s by-laws
could, as an intra-corporate matter, be sustained.” Citing
Alhambra Cigar and Cigarette Manufacturing Co. v. CIR (GR No.
L-12026, 29 May 1959),83 the Supreme Court stated that:
“whenever a controversy arises on the deductibility, for
purposes of income tax, of certain items for alleged
compensation of officers of the taxpayer, two (2) questions
become material, namely: (a) Have ‘personal services’ been
‘actually rendered’ by said officers? (b) In the affirmative case,
what is the ‘reasonable allowance’ therefor?” Here, no evidence
was presented to show that the corporate officers who received
bonuses had a hand in the sale transaction of the Muntinglupa
property [which could be the basis of a grant to them of the
bonuses out of the profit derived from the sale]. Thus, the
amount representing the bonuses could not be allowed as a
deductible business expense.84
In CIR v. Algue, Inc., for the years 1958 and 1959
respondent sought to claim as deductible business expense the
sum of Php 75,000 as promotional fees. Respondent was a
family corporation appointed by the Philippine Sugar Estate
Development Company as its agent and pursuant to such
authority, several employees of respondent worked for the
formation of the Vegetable Oil Investment Corporation,
inducing others to invest in it. The compensation that these
employees received formed part of the promotional fees. The
CIR argued that these payments were fictitious because most of
the payees were members of the same family in control of
respondent. The CIR suggested a tax dodge, i.e., an attempt to
evade a legitimate assessment by involving an imaginary
deduction. The Supreme Court found for respondent. The
burden is on the taxpayer to prove the validity of the claimed
deduction. The Court held that in the present case, that onus
83. Alhambra Cigar and Cigarette Manufacturing Co. v. CIR, GR No. L-12026, 29
May 1959.
84. Aguinaldo Industries Corporation v. CIR, GR No. L-29790, 25 February 1982.
74
was discharged satisfactorily. Because respondent was a family
corporation, strict business procedures did not apply to it.
Moreover, payment of the promotional fees was “necessary and
reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in
an experimental enterprise and involve themselves in a new
business requiring millions of pesos.”85
Q: Rentals and other payments; illustrative case.
In 3M Philippines, Inc. v. CIR, 3M Phils. was a subsidiary of 3M
US. The parties entered into agreements under which 3M Phils.
agreed to pay to 3M US a 3% technical service fee and a royalty
of 2% of its net sales. In its income tax return for 1974, 3M Phils.
claimed Php 3 million as deductible business expense,
particularly, as royalties and technical service fees. The CIR
allowed a deduction only of an amount representing royalties
and technical service fees for locally manufactured products.
The CIR disallowed the deduction of the amount representing
royalties and technical service fees for finished products
imported by 3M Phils. from 3M US. The CIR based its decision
on CB Circular No. 393 (Regulations Governing
Royalties/Rentals) dated 7 December 1973 partly providing
that royalties should be paid only on commodities
manufactured by the licensee under the royalty agreement. [No
royalty was payable on the wholesale price of finished products
imported by the licensee from the licensor.] The Supreme Court
upheld the CIR’s argument and ruled thus: “although the Tax
Code allows payments of royalty to be deducted from gross
income as business expenses, it is CB Circular No. 393 that
defines what royalty payments are proper. Hence, improper
payments of royalty are not deductible as legitimate business
expenses.”86
Q: Entertainment, amusement and recreation expense;
85. CIR v. Algue, Inc., GR No. L-28896, 17 February 1988.
86. 3M Philippines, Inc. v. CIR, GR No. L-82833, 26 September 1988.
75 Guide Notes on Income Tax
illustrative cases.
In Roxas v. Court of Tax Appeals, the late Roxas Spouses
bequeathed several properties to their grandchildren. To
manage said properties, a partnership called Roxas y Cia was
formed. For the years 1953 and 1955, the CIR disallowed
deductions from gross income of various business expenses of
Roxas y Cia. The business expenses comprised of Php 40 for
tickets to a banquet given in honor of Sergio Osmeña and Ph 28
for San Miguel beer given as gifts to various persons. These
deductions were claimed as representation expenses. The
Supreme Court found that no evidence was shown to link the
expenses to the business of Roxas y Cia. Hence, according to the
Court, such deductions were correctly disallowed by the CIR.
“Representation expenses are deductible from gross
income as expenditures incurred in carrying on a trade or
business under [now Section 34(A) of the 1997 Tax Code]
provided the taxpayer proves that they are reasonable in
amount, ordinary and necessary, and incurred in connection
with his business.”87
Revenue Regulations No. 10-2002 enumerates the
requisites for the deductibility of entertainment, amusement
and recreation expense as follows:
(1) it must be paid or incurred during the taxable year;
(2) it must be directly connected to the development,
management and operation of the trade, business
or profession of the taxpayer, OR directly related
to or in furtherance of the conduct of his/its trade,
business or exercise of a profession;
(3) it must not be contrary to law, morals, good
customs, public policy or public order;
(4) it must not have been paid, directly or indirectly,
to any person as a bribe, kickback or other similar
payment;
87. Roxas v. Court of Tax Appeals, GR No. L-25043, 26 April 1968.
2D SEM.
(5) it must be duly substantiated by adequate proof;
and
(6) the appropriate amount of withholding tax, if
applicable, should have been withheld therefrom
and paid to the BIR. [Revenue Regulations No. 10-
2001, 10 July 2002.]
Q: Make a distinction between business expense and capital
expenditure.
An expense may be treated either as: (1) a deductible business
expense from gross income, or (2) a capital expenditure which
shall be spread out over a reasonable amount of time.
How does one classify expenses incurred on property? In
CIR v. A. Soriano y Cia, respondent owned a parcel of land in
Intramuros, which it later sold to J.M. Tuason & Co. In
computing the income tax due, was respondent allowed to
include as cost of the property the expenditures it incurred in
improving said property (e.g., pile-driving service fee and
architect’s fee)? The Supreme Court said that: “expenditures for
replacements, alterations, improvements or additions which
either prolong the life of the property or increase its value are
capital in nature.” The expenses incurred by respondent
increased the value of the Intramuros property and hence, must
be considered as capital expenditures that formed part of the
cost of the property [which amount was relevant in computing
the income tax due].88
In Atlas Consolidated Mining & Development Corporation v.
CIR, one question was: were the expenses paid by Atlas for the
services rendered by a public relations firm, P.K. MacKer & Co.,
labeled as stockholders relation service fee considered
deductible business expense? The expense in question was
incurred to create a favorable image of the corporation in order
to gain or maintain the patronage of its stockholders and the
public. The Supreme Court held that such expense was not an
88. CIR v. A. Soriano y Cia, GR No. L-24893, 26 March 1971.
A.Y. 2017-2018 Ateneo de Manila University School of Law
ordinary and necessary expense allowed to be deducted from
the corporation’s gross income.
In order to be deductible as a business expense, three
conditions must concur [business test]: (1) the expense must be
ordinary and necessary; (2) it must be paid or incurred within
the taxable year; and (3) it must be paid or incurred in carrying
on a trade or business. Additionally, the taxpayer must
substantially prove by evidence or records the deductions
claimed under the law.
The Supreme Court eventually held that the expense
incurred by Atlas was not a deductible business expense, but a
capital expenditure. The expense incurred to create a favorable
image of the corporation in order to gain or maintain the
patronage of it stockholders and the public, similar to expenses
relating to recapitalization and reorganization of the
corporation, the cost of obtaining stock subscription, promotion
and commission or fees paid for the sale of stock reorganization
are capital expenditures which should be spread out over a
reasonable period of time.89
To be deductible from gross income, an advertising
expense must comply with the following requirements:
(1) the expense must be ordinary and necessary;
(2) it must have been paid or incurred during the
taxable year;
(3) it must have been paid or incurred in carrying on
the trade or business of the taxpayer; and
(4) it must be supported by receipts, records or other
pertinent papers.
In CIR v. General Foods (Phils.), Inc., respondent filed its
income tax return for 1985, claiming a certain amount as
deductible media advertising expense for the product “Tang.”
Respondent and the CIR were in agreement that the subject
89. Atlas Consolidated Mining & Development Corporation v. CIR, GR Nos. L-
26911 and L-26924, 27 January 1981.
76
advertising expense was paid or incurred within the relevant
taxable year and was incurred in carrying on a trade or
business. Hence, it was necessary. However, as to whether it
was ordinary, their views were in conflict. The CIR maintained
that the subject advertising expense was not ordinary for failure
to comply with two requirements set by US jurisprudence: (1)
the amount incurred must be reasonable, and (2) the amount
incurred must not be a capital outlay to create “goodwill” for
the product and/or the corporation’s business. [Otherwise, the
expense must be considered a capital expenditure to be spread
out over a reasonable time.]
“There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising expense.
There being no hard and fast rule on the matter, the right to a
deduction depends on a number of factors such as but not
limited to: the type and size of business in which the taxpayer
is engaged; the volume and amount of its net earnings; the
nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of these,
among other factors and properly weighted, that will yield a
proper evaluation.” Here, the Supreme Court held that the
advertising expense for a single product (Tang) was
inordinately large. Even if it was necessary, it could not be
considered an ordinary expense. In order to be deductible, a
business expense must be both ordinary and necessary. The
Supreme Court also found that the subject advertising expense
was a capital expenditure which should be spread out over a
reasonable period of time.
“Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of services and
(2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayer’s trade or business or
for the industry or profession which the taxpayer is a member
77 Guide Notes on Income Tax
[or as in the present case, for the protection of brand franchise].
If the expenditures are for the advertising of the first kind, then,
except as to the question of the reasonableness of amount, there
is no doubt such expenditures are deductible as business
expenses. If, however, the expenditures are for advertising of
the second kind, then normally they should be spread out over
a reasonable period of time.”90
2. Interest
Q: Interest on indebtedness is an allowable deduction from
gross income. How about interest on taxes?
At issue in CIR v. Prieto was the deductibility from gross income
of the amount paid by Prieto for interest on her delinquent
donor’s tax. Under the law, for interest to be deductible: (1)
there must be an indebtedness; (2) there should be interest upon
it; and (3) what is claimed as an interest deduction was paid or
accrued within the year. Was “interest on taxes” within the
contemplation of “interest on indebtedness”? The Supreme
Court held that although interest payment for delinquent taxes
was not deductible as tax under now Section 34(C) [taxes], the
taxpayer was not precluded from claiming said interest
payment as deduction under now Section 34(B) [interest]. 91
At issue in CIR v. Palanca was the deductibility from gross
income of the amount paid by Palanca for interest on his
delinquent estate and inheritance taxes. The CIR argued that
the deductibility of “interest on indebtedness” could not extend
to “interest on taxes.” The Supreme Court held that no
distinction could be made between interest on debts and
interest on taxes with respect to its deductibility. “Although
taxes already due are not the same as debts, they are, however,
obligations that may be considered as such.”92
90. CIR v. General Foods (Phils.), Inc., GR No. 143672, 24 April 2003.
91. CIR v. Prieto, GR No. L-13912, 30 September 1960.
2D SEM.
3. Taxes

Q: When are taxes allowed to be deducted from gross income?
At issue in Esso Standard Eastern, Inc. v. CIR was the
classification of the margin fees paid by ESSO to the Central
Bank on its profit remittances to its New York head office in the
taxable years 1959 and 1960. ESSO sought the refund of the
amount it paid as margin fees contending that these fees were
deductible from gross income either as a tax or as an ordinary
and necessary business expense. The Supreme Court held that
the margin fees were not taxes, as they were imposed by the
State in the exercise of its police power and not the power of
taxation. The margin fees were an exaction designed to curb the
excessive demands upon the country’s international reserve.
The High Court also stated that the margin fees were not an
ordinary and necessary business expense, because ESSO had
not shown that the remittance to the head office of part of its
profits was made in furtherance of its own trade or business. “If
at all, the margin fees were incurred for purposes proper to the
conduct of the corporate affairs of Standard Vacuum Oil
Company in New York, but certainly not in the Philippines.” 93
4. Losses

Q: When are losses allowed to be deducted from gross income?
Decided in 1969, the case of Fernandez Hermanos, Inc. v. CIR dealt
with the allowance or disallowance of deductions from gross
income. Petitioner was an investment company and for the
years 1950 to 1954 and 1957, petitioner received deficiency
income tax assessments. At issue was the allowance and
disallowance of certain deductible items from petitioner’s gross
income.
(1) Losses in Mati Lumber. Co - Petitioner owned shares
of stock in Mati Lumber Co. In its 1950 return,
92. CIR v. Palanca, GR No. L-16626, 29 October 1966.
93. Esso Standard Eastern, Inc. v. CIR, GR Nos. 28508-9, 7 July 1989.
A.Y. 2017-2018 Ateneo de Manila University School of Law
petitioner wrote off as worthless securities a sum
representing the cost of shares of stock that it
owned in Mati Lumber Co. The Supreme Court
found that in 1949, Mati Lumber Co. had ceased
operations, even if it still had its sawmill and
equipment of some value. “There was adequate
basis for the writing off of the stock as worthless
securities. Assuming that the Company would
later somehow realize some proceeds from its
sawmill and equipment, which were still existing
as claimed by the Commissioner, and that such
proceeds would later be distributed to its
stockholders such as the taxpayer, the amount so
received by the taxpayer would then properly be
reportable as income of the taxpayer in the year it
is received.”
(2) Losses in or bad debts of Palawan Manganese Mines,
Inc. – In 1951, petitioner lent financial assistance to
Palawan Manganese Mines, Inc. Later, petitioner
sought to write off the sum advanced to its related
company, either as a loss or a bad debt. The
Supreme Court found that petitioner gave
advances to its related company without
expectation of repayment. The advances were
investments and not loans. No bad debt could arise
where there was no valid and subsisting debt.
Palawan Manganese Mines, Inc. was “still in
operation in 1951 and 1952 and the taxpayer
continued to give it advances in those years, and,
therefore, the alleged debt or investment could not
properly be considered worthless and deductible
in 1951, as claimed by the taxpayer. Furthermore,
neither under [now Section 34(D) of the 1997 Tax
Code] providing for deduction by corporations of
losses actually sustained and charged off during
the taxable year nor under [now Section 34(E) of
the 1997 Tax Code] thereof providing for
deduction of bad debts actually ascertained to be
worthless and charged off within the taxable year,
78
can there be a partial writing off of a loss or bad
debt, as was sought to be done here by the
taxpayer. For such losses or bad debts must be
ascertained to be so and written off during the
taxable year, are therefore deductible in full or not
at all, in the absence of any express provision in the
Tax Code authorizing authorizing partial
deductions.”
(3) Losses in Balamban Coal Mines – In 1950 and 1951,
petitioner spent sums for the operation of its
Balamban coal mines in Cebu. Such sums were
claimed by petitioner as losses in its returns for
said years, as it made no sales of coal during the
covered years. The Supreme Court held that some
definite event should fix the time when the loss
was sustained and that here, it was petitioner’s
actual abandonment of the mines in 1952. The
losses were deductible in 1952, when the mines
were abandoned, and not in 1950 and 1951, when
they were still in operation.
(4) Losses in Hacienda Dalupiri and Hacienda Samal –
Petitioner operated for business purposes
Hacienda Dalupiri and Hacienda Samal. The
haciendas were mostly cattle farms, and
petitioner’s income or losses were determined on
the basis of inventories. The Supreme Court
accepted “the method adopted by the taxpayer as
a farmer breeding livestock, reporting on the basis
of receipts and disbursements.”
(5) Depreciation of petitioner’s buildings – During the
years 1950 and 1954, petitioner claimed a
depreciation allowance for its buildings at the
annual rate of 10%. The Supreme Court found that
petitioner “did not submit adequate proof of the
correctness of [its] claim that the depreciable assets
or buildings in question had a useful life only of 10
years so as to justify its 10% depreciation per
annum claim.” The 10% annual depreciation rate
79 Guide Notes on Income Tax
was held to be excessive. The depreciation
allowance in excess of 3% annually was
disallowed.
(6) Depletion of petitioner’s mines – Petitioner acquired
mines from Palawan Manganese Mines, Inc. A
year later, petitioner deducted 1/5 of the value of
said mines from its gross income. In computing its
depletion allowance, petitioner took into
consideration its capital investment, i.e., alleged
value of its contractual rights and titles to mining
claims, minus an outright 1/5 of the capital
investment every year, regardless of whether it
had actually mined the product and sold the
products. The Supreme Court sustained the
argument that petitioner could not use the “capital
investment” method as a method of depletion
because: (1) depletion allowance was an allowance
for the exhaustion of the capital value of deposits
by production [and not of the capital investment],
and (2) the Tax Code proviso “when the allowance
for depletion shall equal the capital invested no
further allowance shall be granted” meant that the
“capital investment” was a limitation of the
amount of depletion that could be claimed. “The
outright deduction by the taxpayer of 1/5 of the
cost of the mines, as if it were a “straight line” rate
of depreciation, was correctly held by the Tax
Court not to be authorized by the Tax Code.” 94
In China Banking Corporation v. Court of Appeals, petitioner
made an equity investment in First CBC Capital (Asia) Ltd., a
Hong Kong subsidiary engaged in financing and investment
with deposit-taking function. In 1986, the subsidiary became
insolvent. Accordingly, in its 1987 income tax return, petitioner
wrote off as being worthless its investment in said subsidiary
and treated it as a bad debt or as an ordinary loss deductible
94. Fernandez Hermanos, Inc. v. CIR, GR Nos. L-21551, L-21557, L-24972, and L-
24978, 30 September 1969.
2D SEM.
from its gross income. Was petitioner’s equity investment in its
subsidiary a capital asset or an ordinary asset? Here, the
Supreme Court found that petitioner’s equity investment was:
(1) not an indebtedness, (2) not an ordinary asset, but (3) a
capital asset. [An investment by way of shares of stock would
be an ordinary asset only to a dealer in securities or a person
engaged in the purchase and sale of, or an active trader in
securities.] Assuming that petitioner’s investment had indeed
become worthless, the loss sustained would be a capital loss,
not an ordinary loss. Consequently, “[t]he capital loss sustained
by CBC can only be deducted from capital gains if any derived
by it during the same taxable year that the securities have
become ‘worthless.”95
5. Bad Debts
Q: What are the requisites for deductibility of bad debts?
Decided in 1969, the case of Fernandez Hermanos, Inc. v. CIR dealt
with the allowance or disallowance of deductions from gross
income. Petitioner was an investment company and for the
years 1950 to 1954 and 1957, petitioner received deficiency
income tax assessments. At issue was the allowance and
disallowance of certain deductible items from petitioner’s gross
income.
(1) Losses in Mati Lumber. Co - Petitioner owned shares
of stock in Mati Lumber Co. In its 1950 return,
petitioner wrote off as worthless securities a sum
representing the cost of shares of stock that it
owned in Mati Lumber Co. The Supreme Court
found that in 1949, Mati Lumber Co. had ceased
operations, even if it still had its sawmill and
equipment of some value. “There was adequate
basis for the writing off of the stock as worthless
securities. Assuming that the Company would
later somehow realize some proceeds from its
95. China Banking Corporation v. Court of Appeals, GR No. 125508, 19 July 2000.
A.Y. 2017-2018 Ateneo de Manila University School of Law
sawmill and equipment, which were still existing
as claimed by the Commissioner, and that such
proceeds would later be distributed to its
stockholders such as the taxpayer, the amount so
received by the taxpayer would then properly be
reportable as income of the taxpayer in the year it
is received.”
(2) Losses in or bad debts of Palawan Manganese Mines,
Inc. – In 1951, petitioner lent financial assistance to
Palawan Manganese Mines, Inc. Later, petitioner
sought to write off the sum advanced to its related
company, either as a loss or a bad debt. The
Supreme Court found that petitioner gave
advances to its related company without
expectation of repayment. The advances were
investments and not loans. No bad debt could arise
where there was no valid and subsisting debt.
Palawan Manganese Mines, Inc. was “still in
operation in 1951 and 1952 and the taxpayer
continued to give it advances in those years, and,
therefore, the alleged debt or investment could not
properly be considered worthless and deductible
in 1951, as claimed by the taxpayer. Furthermore,
neither under [now Section 34(D) of the 1997 Tax
Code] providing for deduction by corporations of
losses actually sustained and charged off during
the taxable year nor under [now Section 34(E) of
the 1997 Tax Code] thereof providing for
deduction of bad debts actually ascertained to be
worthless and charged off within the taxable year,
can there be a partial writing off of a loss or bad
debt, as was sought to be done here by the
taxpayer. For such losses or bad debts must be
ascertained to be so and written off during the
taxable year, are therefore deductible in full or not
at all, in the absence of any express provision in the
Tax Code authorizing authorizing partial
deductions.”
80
(3) Losses in Balamban Coal Mines – In 1950 and 1951,
petitioner spent sums for the operation of its
Balamban coal mines in Cebu. Such sums were
claimed by petitioner as losses in its returns for
said years, as it made no sales of coal during the
covered years. The Supreme Court held that some
definite event should fix the time when the loss
was sustained and that here, it was petitioner’s
actual abandonment of the mines in 1952. The
losses were deductible in 1952, when the mines
were abandoned, and not in 1950 and 1951, when
they were still in operation.
(4) Losses in Hacienda Dalupiri and Hacienda Samal –
Petitioner operated for business purposes
Hacienda Dalupiri and Hacienda Samal. The
haciendas were mostly cattle farms, and
petitioner’s income or losses were determined on
the basis of inventories. The Supreme Court
accepted “the method adopted by the taxpayer as
a farmer breeding livestock, reporting on the basis
of receipts and disbursements.”
(5) Depreciation of petitioner’s buildings – During the
years 1950 and 1954, petitioner claimed a
depreciation allowance for its buildings at the
annual rate of 10%. The Supreme Court found that
petitioner “did not submit adequate proof of the
correctness of [its] claim that the depreciable assets
or buildings in question had a useful life only of 10
years so as to justify its 10% depreciation per
annum claim.” The 10% annual depreciation rate
was held to be excessive. The depreciation
allowance in excess of 3% annually was
disallowed.
(6) Depletion of petitioner’s mines – Petitioner acquired
mines from Palawan Manganese Mines, Inc. A
year later, petitioner deducted 1/5 of the value of
said mines from its gross income. In computing its
depletion allowance, petitioner took into
81 Guide Notes on Income Tax
consideration its capital investment, i.e., alleged
value of its contractual rights and titles to mining
claims, minus an outright 1/5 of the capital
investment every year, regardless of whether it
had actually mined the product and sold the
products. The Supreme Court sustained the
argument that petitioner could not use the “capital
investment” method as a method of depletion
because: (1) depletion allowance was an allowance
for the exhaustion of the capital value of deposits
by production [and not of the capital investment],
and (2) the Tax Code proviso “when the allowance
for depletion shall equal the capital invested no
further allowance shall be granted” meant that the
“capital investment” was a limitation of the
amount of depletion that could be claimed. “The
outright deduction by the taxpayer of 1/5 of the
cost of the mines, as if it were a “straight line” rate
of depreciation, was correctly held by the Tax
Court not to be authorized by the Tax Code.”96
In Philippine Refining Company v. Court of Appeals, a
deficiency income tax assessment was issued against petitioner
for the year 1985. Petitioner protested on the ground that the
assessment was based on erroneous disallowances of bad debts
and interest expense. The Supreme Court affirmed respondent
court’s finding that petitioner did not satisfy the requirements
for worthlessness of a debt as to the 13 accounts disallowed as
deductions. Apart from the self-serving testimony of
petitioner’s financial consultant, petitioner did not present any
evidence to substantiate its claim.
For debts to considered worthless and thereby qualify as
bad debts making them deductible, the taxpayer must show
that: “(1) there is a valid and subsisting debt; (2) the debt must
be actually ascertained to be worthless and uncollectible during
the taxable year; (3) the debt must be charged off during the
96. Fernandez Hermanos, Inc. v. CIR, GR Nos. L-21551, L-21557, L-24972, and L-
24978, 30 September 1969.
2D SEM.
taxable year; and (4) the debt must arise from the business or
trade of the taxpayer. Additionally, before a debt can be
considered worthless, the taxpayer must also show that it is
indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by
the taxpayer to prove that he exerted diligent efforts to collect
the debts, viz: (1) sending of statement of accounts; (2) sending
of collection letters; (3) giving the account to a lawyer for
collection; and (4) filing a collection case in court.”97
In China Banking Corporation v. Court of Appeals, petitioner
made an equity investment in First CBC Capital (Asia) Ltd., a
Hong Kong subsidiary engaged in financing and investment
with deposit-taking function. In 1986, the subsidiary became
insolvent. Accordingly, in its 1987 income tax return, petitioner
wrote off as being worthless its investment in said subsidiary
and treated it as a bad debt or as an ordinary loss deductible
from its gross income. Was petitioner’s equity investment in its
subsidiary a capital asset or an ordinary asset? Here, the
Supreme Court found that petitioner’s equity investment was:
(1) not an indebtedness, (2) not an ordinary asset, but (3) a
capital asset. [An investment by way of shares of stock would
be an ordinary asset only to a dealer in securities or a person
engaged in the purchase and sale of, or an active trader in
securities.] Assuming that petitioner’s investment had indeed
become worthless, the loss sustained would be a capital loss,
not an ordinary loss. Consequently, “[t]he capital loss sustained
by CBC can only be deducted from capital gains if any derived
by it during the same taxable year that the securities have
become ‘worthless.”98
In Philex Mining Corporation v. CIR, petitioner entered into
an agreement with Baguio Gold Mining Company for the
former to manage and operate the latter’s mining claim in the
Benguet Province. The agreement was denominated as Power
of Attorney. In the course of managing and operating the
project, petitioner made advances of cash and property to
97. Philippine Refining Company v. Court of Appeals, GR No. 118794, 8 May 1996.
98. China Banking Corporation v. Court of Appeals, GR No. 125508, 19 July 2000.
A.Y. 2017-2018 Ateneo de Manila University School of Law
Baguio Gold. However, the mine suffered continuing losses
over the years which resulted to petitioner’s withdrawal as
manager of the mine and in the eventual cessation of mine
operations. In its 1982 income tax return, petitioner deducted
from its gross income a sum representing “loss on settlement of
receivables from Baguio Gold against reserves and
allowances.” The CIR disallowed the amount as deductible bad
debt and assessed petitioner a deficiency income tax. The
Supreme Court found that petitioner’s advances were
investments in a partnership known as the Sto. Niño Mine. “The
advances were not ‘debts’ of Baguio Gold to petitioner
inasmuch as the latter was under no unconditional obligation
to return the same to the former under the ‘Power of Attorney.’
Petitioner failed to substantiate its assertion that the advances
were subsisting debts of Baguio Gold that could be deducted
from its gross income.99
6. Depreciation
Q: In order to be allowed as a deductible expense from gross
income, how must depreciation allowance be computed?
In Basilan Estates, Inc. v. CIR, petitioner was a domestic
corporation engaged in the coconut industry. In 1953, petitioner
received a deficiency income tax assessment partly due to
disallowed deductions from its gross income in the form of
depreciation, travelling and miscellaneous expenses. One issue
tackled was whether depreciation should be determined on the
acquisition cost or on the reappraised value of the assets. The
Supreme Court ruled that the income tax law did not authorize
the depreciation of an asset beyond its acquisition cost.
“Depreciation is the gradual diminution in the useful
value of tangible property resulting from wear and tear and
normal obsolescence. The term is also applied to amortization
of the value of intangible assets, the use of which in the trade or
business is definitely limited in duration. Depreciation
commences with the acquisition of the property and its owner
99. Philex Mining Corporation v. CIR, GR No. 148187, 16 April 2008.
82
is not bound to see his property gradually waste, without
making provision out of earnings for its replacement. It is
entitled to see that from earnings the value of the property
invested is kept unimpaired, so that at the end of any given
term of years, the original investment remains as it was in the
beginning. xxx
[However], the recovery, free of income tax, of an amount
more than the invested capital in an asset will transgress the
underlying purpose of a depreciation allowance. For then what
the taxpayer would recover will be not only the acquisition cost,
but also some profit. Recovery in due time thru depreciation of
investment made is the philosophy behind depreciation
allowance; the idea of profit on the investment made has never
been the underlying reason for the allowance of a deduction for
depreciation.”100
Decided in 1969, the case of Fernandez Hermanos, Inc. v.
CIR dealt with the allowance or disallowance of deductions
from gross income. Petitioner was an investment company and
for the years 1950 to 1954 and 1957, petitioner received
deficiency income tax assessments. At issue was the allowance
and disallowance of certain deductible items from petitioner’s
gross income.
(1) Losses in Mati Lumber. Co - Petitioner owned shares
of stock in Mati Lumber Co. In its 1950 return,
petitioner wrote off as worthless securities a sum
representing the cost of shares of stock that it
owned in Mati Lumber Co. The Supreme Court
found that in 1949, Mati Lumber Co. had ceased
operations, even if it still had its sawmill and
equipment of some value. “There was adequate
basis for the writing off of the stock as worthless
securities. Assuming that the Company would
later somehow realize some proceeds from its
sawmill and equipment, which were still existing
as claimed by the Commissioner, and that such
100. Basilan Estates, Inc. v. CIR, GR No. L-22492, 5 September 1967.
83 Guide Notes on Income Tax
proceeds would later be distributed to its
stockholders such as the taxpayer, the amount so
received by the taxpayer would then properly be
reportable as income of the taxpayer in the year it
is received.”
(2) Losses in or bad debts of Palawan Manganese Mines,
Inc. – In 1951, petitioner lent financial assistance to
Palawan Manganese Mines, Inc. Later, petitioner
sought to write off the sum advanced to its related
company, either as a loss or a bad debt. The
Supreme Court found that petitioner gave
advances to its related company without
expectation of repayment. The advances were
investments and not loans. No bad debt could arise
where there was no valid and subsisting debt.
Palawan Manganese Mines, Inc. was “still in
operation in 1951 and 1952 and the taxpayer
continued to give it advances in those years, and,
therefore, the alleged debt or investment could not
properly be considered worthless and deductible
in 1951, as claimed by the taxpayer. Furthermore,
neither under [now Section 34(D) of the 1997 Tax
Code] providing for deduction by corporations of
losses actually sustained and charged off during
the taxable year nor under [now Section 34(E) of
the 1997 Tax Code] thereof providing for
deduction of bad debts actually ascertained to be
worthless and charged off within the taxable year,
can there be a partial writing off of a loss or bad
debt, as was sought to be done here by the
taxpayer. For such losses or bad debts must be
ascertained to be so and written off during the
taxable year, are therefore deductible in full or not
at all, in the absence of any express provision in the
Tax Code authorizing authorizing partial
deductions.”
(3) Losses in Balamban Coal Mines – In 1950 and 1951,
petitioner spent sums for the operation of its
Balamban coal mines in Cebu. Such sums were
2D SEM.
claimed by petitioner as losses in its returns for
said years, as it made no sales of coal during the
covered years. The Supreme Court held that some
definite event should fix the time when the loss
was sustained and that here, it was petitioner’s
actual abandonment of the mines in 1952. The
losses were deductible in 1952, when the mines
were abandoned, and not in 1950 and 1951, when
they were still in operation.
(4) Losses in Hacienda Dalupiri and Hacienda Samal –
Petitioner operated for business purposes
Hacienda Dalupiri and Hacienda Samal. The
haciendas were mostly cattle farms, and
petitioner’s income or losses were determined on
the basis of inventories. The Supreme Court
accepted “the method adopted by the taxpayer as
a farmer breeding livestock, reporting on the basis
of receipts and disbursements.”
(5) Depreciation of petitioner’s buildings – During the
years 1950 and 1954, petitioner claimed a
depreciation allowance for its buildings at the
annual rate of 10%. The Supreme Court found that
petitioner “did not submit adequate proof of the
correctness of [its] claim that the depreciable assets
or buildings in question had a useful life only of 10
years so as to justify its 10% depreciation per
annum claim.” The 10% annual depreciation rate
was held to be excessive. The depreciation
allowance in excess of 3% annually was
disallowed.
(6) Depletion of petitioner’s mines – Petitioner acquired
mines from Palawan Manganese Mines, Inc. A
year later, petitioner deducted 1/5 of the value of
said mines from its gross income. In computing its
depletion allowance, petitioner took into
consideration its capital investment, i.e., alleged
value of its contractual rights and titles to mining
claims, minus an outright 1/5 of the capital
A.Y. 2017-2018 Ateneo de Manila University School of Law
investment every year, regardless of whether it
had actually mined the product and sold the
products. The Supreme Court sustained the
argument that petitioner could not use the “capital
investment” method as a method of depletion
because: (1) depletion allowance was an allowance
for the exhaustion of the capital value of deposits
by production [and not of the capital investment],
and (2) the Tax Code proviso “when the allowance
for depletion shall equal the capital invested no
further allowance shall be granted” meant that the
“capital investment” was a limitation of the
amount of depletion that could be claimed. “The
(2) Losses in or bad debts of Palawan Manganese Mines,
outright deduction by the taxpayer of 1/5 of the
cost of the mines, as if it were a “straight line” rate
of depreciation, was correctly held by the Tax
Court not to be authorized by the Tax Code.”101
7. Depletion of Oil and Gas Wells and Mines.
Q: In order to be allowed as a deductible expense from gross
income, how must depletion allowance be computed?
Decided in 1969, the case of Fernandez Hermanos, Inc. v. CIR dealt
with the allowance or disallowance of deductions from gross
income. Petitioner was an investment company and for the
years 1950 to 1954 and 1957, petitioner received deficiency
income tax assessments. At issue was the allowance and
disallowance of certain deductible items from petitioner’s gross
income.
(1) Losses in Mati Lumber. Co - Petitioner owned shares
of stock in Mati Lumber Co. In its 1950 return,
petitioner wrote off as worthless securities a sum
representing the cost of shares of stock that it
owned in Mati Lumber Co. The Supreme Court
found that in 1949, Mati Lumber Co. had ceased
101 Fernandez Hermanos, Inc. v. CIR, GR Nos. L-21551, L-21557, L-24972, and L-
24978, 30 September 1969.
84
operations, even if it still had its sawmill and
equipment of some value. “There was adequate
basis for the writing off of the stock as worthless
securities. Assuming that the Company would
later somehow realize some proceeds from its
sawmill and equipment, which were still existing
as claimed by the Commissioner, and that such
proceeds would later be distributed to its
stockholders such as the taxpayer, the amount so
received by the taxpayer would then properly be
reportable as income of the taxpayer in the year it
is received.”
Inc. – In 1951, petitioner lent financial assistance to
Palawan Manganese Mines, Inc. Later, petitioner
sought to write off the sum advanced to its related
company, either as a loss or a bad debt. The
Supreme Court found that petitioner gave
advances to its related company without
expectation of repayment. The advances were
investments and not loans. No bad debt could arise
where there was no valid and subsisting debt.
Palawan Manganese Mines, Inc. was “still in
operation in 1951 and 1952 and the taxpayer
continued to give it advances in those years, and,
therefore, the alleged debt or investment could not
properly be considered worthless and deductible
in 1951, as claimed by the taxpayer. Furthermore,
neither under [now Section 34(D) of the 1997 Tax
Code] providing for deduction by corporations of
losses actually sustained and charged off during
the taxable year nor under [now Section 34(E) of
the 1997 Tax Code] thereof providing for
deduction of bad debts actually ascertained to be
worthless and charged off within the taxable year,
85 Guide Notes on Income Tax
can there be a partial writing off of a loss or bad
debt, as was sought to be done here by the
taxpayer. For such losses or bad debts must be
ascertained to be so and written off during the
taxable year, are therefore deductible in full or not
at all, in the absence of any express provision in the
Tax Code authorizing authorizing partial
deductions.”
(3) Losses in Balamban Coal Mines – In 1950 and 1951,
petitioner spent sums for the operation of its
Balamban coal mines in Cebu. Such sums were
claimed by petitioner as losses in its returns for
said years, as it made no sales of coal during the
covered years. The Supreme Court held that some
definite event should fix the time when the loss
was sustained and that here, it was petitioner’s
actual abandonment of the mines in 1952. The
losses were deductible in 1952, when the mines
were abandoned, and not in 1950 and 1951, when
they were still in operation.
(4) Losses in Hacienda Dalupiri and Hacienda Samal –
Petitioner operated for business purposes
Hacienda Dalupiri and Hacienda Samal. The
haciendas were mostly cattle farms, and
petitioner’s income or losses were determined on
the basis of inventories. The Supreme Court
accepted “the method adopted by the taxpayer as
a farmer breeding livestock, reporting on the basis
of receipts and disbursements.”
(5) Depreciation of petitioner’s buildings – During the
years 1950 and 1954, petitioner claimed a
depreciation allowance for its buildings at the
annual rate of 10%. The Supreme Court found that
petitioner “did not submit adequate proof of the
correctness of [its] claim that the depreciable assets
102. Fernandez Hermanos, Inc. v. CIR, GR Nos. L-21551, L-21557, L-24972, and L-
24978, 30 September 1969.
2D SEM.
or buildings in question had a useful life only of 10
years so as to justify its 10% depreciation per
annum claim.” The 10% annual depreciation rate
was held to be excessive. The depreciation
allowance in excess of 3% annually was
disallowed.
(6) Depletion of petitioner’s mines – Petitioner acquired
mines from Palawan Manganese Mines, Inc. A
year later, petitioner deducted 1/5 of the value of
said mines from its gross income. In computing its
depletion allowance, petitioner took into
consideration its capital investment, i.e., alleged
value of its contractual rights and titles to mining
claims, minus an outright 1/5 of the capital
investment every year, regardless of whether it
had actually mined the product and sold the
products. The Supreme Court sustained the
argument that petitioner could not use the “capital
investment” method as a method of depletion
because: (1) depletion allowance was an allowance
for the exhaustion of the capital value of deposits
by production [and not of the capital investment],
and (2) the Tax Code proviso “when the allowance
for depletion shall equal the capital invested no
further allowance shall be granted” meant that the
“capital investment” was a limitation of the
amount of depletion that could be claimed. “The
outright deduction by the taxpayer of 1/5 of the
cost of the mines, as if it were a “straight line” rate
of depreciation, was correctly held by the Tax
Court not to be authorized by the Tax Code.”102
8. Charitable and Other Contributions.
Q: When may charitable contributions be treated as deductible
A.Y. 2017-2018 Ateneo de Manila University School of Law
expense from gross income?
In Roxas v. Court of Tax Appeals, the late Roxas Spouses
bequeathed several properties to their grandchildren. To
manage said properties, a partnership called Roxas y Cia was
formed. For the years 1953 and 1955, the CIR disallowed
deductions from gross income of various contributions made
by Roxas y Cia.
(1) Contributions to the Christmas funds of the Pasay
City Police, Pasay City Firemen and Baguio City
Police – The Supreme Court held that these were
not deductible because the Christmas funds were
not spent for public purpose, but as Christmas gifts
to the families of the members of said entities. A
contribution to a government entity was
deductible when used exclusively for pubic
purposes.
(2) Contribution to the Manila Police trust fund – The
Court said that this was an allowable deduction as
said trust fund belonged to the Manila Police, a
government entity, intended to be used exclusively
for its public functions. As above, a contribution to
a government entity was deductible from gross
income when used exclusively for public
purposes.103
SEC. 35. ALLOWANCE OF PERSONAL EXEMPTION FOR
INDIVIDUAL TAXPAYER. —SECTION 35 HAS BEEN REPEALED BY
R.A. NO. 10963
Q: How are personal and additional exemptions computed and
paid?
The 1997 Tax Code took effect on 1 January 1998. One of the
changes introduced by the 1997 Tax Code was the increased
personal and additional exemptions which could be availed of
by an individual taxpayer for purposes of computing his
103. Roxas v. Court of Tax Appeals, GR No. L-25043, 26 April 1968.
86
income tax liability for a given taxable year. In Pansacola v. CIR,
Pansacola filed his income tax return for the taxable year 1997.
Later, Pansacola filed a claim for tax refund or credit of a certain
amount on the ground that the exemptions under the 1997 Tax
Code, taking effect on 1 January 1998, could be availed of by
him for the taxable year 1997. Succinctly, the Supreme Court
held that the 1997 Tax Code could not be applied retroactively.
“What the law should consider for the purpose of determining
the tax due from an individual taxpayer is his status and
qualified dependents at the close of the taxable year and not at
the time the return is filed and the tax due thereon is paid.” In
other words, since the 1997 Tax Code took effect on 1 January
1998, the increased amounts of personal and additional
exemptions indicated therein could only be allowed as
deductions from an individual taxpayer’s income for the
taxable year 1998 to be filed in 1999.
“Section 31 defines ‘taxable income’ as the pertinent items
of gross income specified in the NIRC, less the deductions
and/or personal and additional exemptions, if any, authorized
for such types of income by the NIRC or other special laws. As
defined under Section 22(P), ‘taxable year’ means the calendar
year, upon the basis of which the net income is computed under
Title II of the NIRC. Section 43 also supports the rule that the
taxable income of an individual shall be computed on the basis
of the calendar year. In addition, Section 45 provides that the
deductions provided for the taxable year in which they are ‘paid
or accrued’ or ‘paid or incurred.”
In this case, the Supreme Court had occasion to explain
the nature of personal and additional exemptions as “fixed
amounts to which certain individual taxpayers (citizens,
resident aliens) are entitled. Personal exemptions are the
theoretical personal, living and family expenses of an
individual allowed to be deducted from the gross or net income
of an individual taxpayer. They are arbitrary amounts which
have been calculated by our lawmakers to be roughly
equivalent to the minimum of subsistence, taking into account
87 Guide Notes on Income Tax
the personal status and additional qualified dependents of the
taxpayer.”104
SEC. 36. ITEMS NOT DEDUCTIBLE. —
(A) GENERAL RULE. — IN COMPUTING NET INCOME, NO
DEDUCTION SHALL IN ANY CASE BE ALLOWED IN RESPECT
TO —
(1) PERSONAL, LIVING OR FAMILY EXPENSES;
(2) ANY AMOUNT PAID OUT FOR NEW BUILDINGS OR FOR
PERMANENT IMPROVEMENTS, OR BETTERMENTS
MADE TO INCREASE THE VALUE OF ANY PROPERTY OR
ESTATE;
THIS SUBSECTION SHALL NOT APPLY TO
INTANGIBLE DRILLING AND DEVELOPMENT COSTS
INCURRED IN PETROLEUM OPERATIONS WHICH ARE
DEDUCTIBLE UNDER SUBSECTION (G) (1) OF SECTION
34 OF THIS CODE.
(3) ANY AMOUNT EXPENDED IN RESTORING PROPERTY
OR IN MAKING GOOD THE EXHAUSTION THEREOF
FOR WHICH AN ALLOWANCE IS OR HAS BEEN MADE;
OR
(4) PREMIUMS PAID ON ANY LIFE INSURANCE POLICY
COVERING THE LIFE OF ANY OFFICER OR EMPLOYEE,
OR OF ANY PERSON FINANCIALLY INTERESTED IN ANY
TRADE OR BUSINESS CARRIED ON BY THE TAXPAYER,
INDIVIDUAL OR CORPORATE, WHEN THE TAXPAYER IS
DIRECTLY OR INDIRECTLY A BENEFICIARY UNDER
SUCH POLICY. 

(B) LOSSES FROM SALES OR EXCHANGES OF PROPERTY. — IN
COMPUTING NET INCOME, NO DEDUCTIONS SHALL IN
ANY CASE BE ALLOWED IN RESPECT OF LOSSES FROM
SALES OR EXCHANGES OF PROPERTY DIRECTLY OR
INDIRECTLY —
(1) BETWEEN MEMBERS OF A FAMILY. FOR PURPOSES OF
104. Pansacola v. CIR, GR No. 159991, 16 November 2006.
2D SEM.
THIS PARAGRAPH, THE FAMILY OF AN INDIVIDUAL
SHALL INCLUDE ONLY HIS BROTHERS AND SISTERS
(WHETHER BY THE WHOLE OR HALF-BLOOD), SPOUSE,
ANCESTORS, AND LINEAL DESCENDANTS; OR
(2) EXCEPT IN THE CASE OF DISTRIBUTIONS IN
LIQUIDATION, BETWEEN AN INDIVIDUAL AND
CORPORATION MORE THAN FIFTY PERCENT (50%) IN
VALUE OF THE OUTSTANDING STOCK OF WHICH IS
OWNED, DIRECTLY OR INDIRECTLY, BY OR FOR SUCH
INDIVIDUAL; OR
(3) EXCEPT IN THE CASE OF DISTRIBUTIONS IN
LIQUIDATION, BETWEEN TWO CORPORATIONS MORE
THAN FIFTY PERCENT (50%) IN VALUE OF THE
OUTSTANDING STOCK OF WHICH IS OWNED,
DIRECTLY OR INDIRECTLY, BY OR FOR THE SAME
INDIVIDUAL IF EITHER ONE OF SUCH CORPORATIONS,
WITH RESPECT TO THE TAXABLE YEAR OF THE
CORPORATION PRECEDING THE DATE OF THE SALE OF
EXCHANGE WAS UNDER THE LAW APPLICABLE TO
SUCH TAXABLE YEAR, A PERSONAL HOLDING
COMPANY OR A FOREIGN PERSONAL HOLDING
COMPANY;
(4) BETWEEN THE GRANTOR AND A FIDUCIARY OF ANY
TRUST; OR
(5) BETWEEN THE FIDUCIARY OF AND THE FIDUCIARY OF
A TRUST AND THE FIDUCIARY OF ANOTHER TRUST IF
THE SAME PERSON IS A GRANTOR WITH RESPECT TO
EACH TRUST; OR
(6) BETWEEN A FIDUCIARY OF A TRUST AND
BENEFICIARY OF SUCH TRUST. 
 

SEC. 37. SPECIAL PROVISIONS REGARDING INCOME AND
DEDUCTIONS OF INSURANCE COMPANIES, WHETHER
DOMESTIC OR FOREIGN. —
(A) SPECIAL DEDUCTION ALLOWED TO INSURANCE
A.Y. 2017-2018 Ateneo de Manila University School of Law
COMPANIES. — IN THE CASE OF INSURANCE COMPANIES,
WHETHER DOMESTIC OR FOREIGN DOING BUSINESS IN
THE PHILIPPINES, THE NET ADDITIONS, IF ANY,
REQUIRED BY LAW TO BE MADE WITHIN THE YEAR TO
RESERVE FUNDS AND THE SUMS OTHER THAN
DIVIDENDS PAID WITHIN THE YEAR ON POLICY AND
ANNUITY CONTRACTS MAY BE DEDUCTED FROM THEIR
GROSS INCOME: PROVIDED, HOWEVER, THAT THE
RELEASED RESERVE BE TREATED AS INCOME FOR THE
YEAR OF RELEASE.
(B) MUTUAL INSURANCE COMPANIES. — IN THE CASE OF
MUTUAL FIRE AND MUTUAL EMPLOYERS' LIABILITY AND
MUTUAL WORKMEN'S COMPENSATION AND MUTUAL
CASUALTY INSURANCE COMPANIES REQUIRING THEIR
MEMBERS TO MAKE PREMIUM DEPOSITS TO PROVIDE FOR
LOSSES AND EXPENSES, SAID COMPANIES SHALL NOT
RETURN AS INCOME ANY PORTION OF THE PREMIUM
DEPOSITS RETURNED TO THEIR POLICYHOLDERS, BUT
SHALL RETURN AS TAXABLE INCOME ALL INCOME
RECEIVED BY THEM FROM ALL OTHER SOURCES PLUS
SUCH PORTION OF THE PREMIUM DEPOSITS AS ARE
RETAINED BY THE COMPANIES FOR PURPOSES OTHER
THAN THE PAYMENT OF LOSSES AND EXPENSES AND
REINSURANCE RESERVES.
(C) MUTUAL MARINE INSURANCE COMPANIES. — MUTUAL
MARINE INSURANCE COMPANIES SHALL INCLUDE IN
THEIR RETURN OF GROSS INCOME, GROSS PREMIUMS
COLLECTED AND RECEIVED BY THEM LESS AMOUNTS
PAID TO POLICYHOLDERS ON ACCOUNT OF PREMIUMS
PREVIOUSLY PAID BY THEM AND INTEREST PAID UPON
THOSE AMOUNTS BETWEEN THE ASCERTAINMENT AND
PAYMENT THEREOF.
(D) ASSESSMENT INSURANCE COMPANIES.— ASSESSMENT
INSURANCE COMPANIES, WHETHER DOMESTIC OR
FOREIGN, MAY DEDUCT FROM THEIR GROSS INCOME THE
ACTUAL DEPOSIT OF SUMS WITH THE OFFICERS OF THE
GOVERNMENT OF THE PHILIPPINES PURSUANT TO LAW,
AS ADDITIONS TO GUARANTEE OR RESERVE FUNDS. 
 
 (A) DEFINITIONS. — AS USED IN THIS TITLE —
88
SEC. 38. LOSSES FROM WASH SALES OF STOCK OR SECURITIES.
—
(A) IN THE CASE OF ANY LOSS CLAIMED TO HAVE BEEN
SUSTAINED FROM ANY SALE OR OTHER DISPOSITION OF
SHARES OF STOCK OR SECURITIES WHERE IT APPEARS
THAT WITHIN A PERIOD BEGINNING THIRTY (30) DAYS
BEFORE THE DATE OF SUCH SALE OR DISPOSITION AND
ENDING THIRTY (30) DAYS AFTER SUCH DATE, THE
TAXPAYER HAS ACQUIRED (BY PURCHASE OR BY
EXCHANGE UPON WHICH THE ENTIRE AMOUNT OF GAIN
OR LOSS WAS RECOGNIZED BY LAW), OR HAS ENTERED
INTO A CONTACT OR OPTION SO TO ACQUIRE,
SUBSTANTIALLY IDENTICAL STOCK OR SECURITIES, THEN
NO DEDUCTION FOR THE LOSS SHALL BE ALLOWED
UNDER SECTION 34 UNLESS THE CLAIM IS MADE BY A
DEALER IN STOCK OR SECURITIES AND WITH RESPECT TO
A TRANSACTION MADE IN THE ORDINARY COURSE OF
THE BUSINESS OF SUCH DEALER.
(B) IF THE AMOUNT OF STOCK OR SECURITIES ACQUIRED (OR
COVERED BY THE CONTRACT OR OPTION TO ACQUIRE) IS
LESS THAN THE AMOUNT OF STOCK OR SECURITIES SOLD
OR OTHERWISE DISPOSED OF, THEN THE PARTICULAR
SHARES OF STOCK OR SECURITIES, THE LOSS FROM THE
SALE OR OTHER DISPOSITION OF WHICH IS NOT
DEDUCTIBLE, SHALL BE DETERMINED UNDER RULES AND
REGULATIONS PRESCRIBED BY THE SECRETARY OF
FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER.
(C) IF THE AMOUNT OF STOCK OR SECURITIES ACQUIRED (OR
COVERED BY THE CONTRACT OR OPTION TO ACQUIRE
WHICH) RESULTED IN THE NON-DEDUCTIBILITY OF THE
LOSS, SHALL BE DETERMINED UNDER RULES AND
REGULATIONS PRESCRIBED BY THE SECRETARY OF
FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER. 

SEC. 39. CAPITAL GAINS AND LOSSES. —
89 Guide Notes on Income Tax
(1) CAPITAL ASSETS. — THE TERM 'CAPITAL ASSETS'
MEANS PROPERTY HELD BY THE TAXPAYER (WHETHER
OR NOT CONNECTED WITH HIS TRADE OR BUSINESS),
BUT DOES NOT INCLUDE STOCK IN TRADE OF THE
TAXPAYER OR OTHER PROPERTY OF A KIND WHICH
WOULD PROPERLY BE INCLUDED IN THE INVENTORY
OF THE TAXPAYER IF ON HAND AT THE CLOSE OF THE
TAXABLE YEAR, OR PROPERTY HELD BY THE
TAXPAYER PRIMARILY FOR SALE TO CUSTOMERS IN
THE ORDINARY COURSE OF HIS TRADE OR BUSINESS,
OR PROPERTY USED IN THE TRADE OR BUSINESS, OF A
CHARACTER WHICH IS SUBJECT TO THE ALLOWANCE
FOR DEPRECIATION PROVIDED IN SUBSECTION (F) OF
SECTION 34; OR REAL PROPERTY USED IN TRADE OR
BUSINESS OF THE TAXPAYER.
(2) NET CAPITAL GAIN. — THE TERM 'NET CAPITAL
GAIN' MEANS THE EXCESS OF THE GAINS FROM SALES
OR EXCHANGES OF CAPITAL ASSETS OVER THE
LOSSES FROM SUCH SALES OR EXCHANGES.
(3) NET CAPITAL LOSS. — THE TERM 'NET CAPITAL LOSS'
MEANS THE EXCESS OF THE LOSSES FROM SALES OR
EXCHANGES OF CAPITAL ASSETS OVER THE GAINS
FROM SUCH SALES OR EXCHANGES. 
 (E) RETIREMENT OF BONDS, ETC. — FOR PURPOSES OF THIS
(B) PERCENTAGE TAKEN INTO ACCOUNT — IN THE CASE OF
A TAXPAYER, OTHER THAN A CORPORATION, ONLY THE
FOLLOWING PERCENTAGES OF THE GAIN OR LOSS
RECOGNIZED UPON THE SALE OR EXCHANGE OF A
CAPITAL ASSET SHALL BE TAKEN INTO ACCOUNT IN
COMPUTING NET CAPITAL GAIN, NET CAPITAL LOSS, AND
NET INCOME.
(1) One hundred percent (100%) if the capital asset has
been held for not more than twelve (12) months;
and
(2) FIFTY PERCENT (50%) IF THE CAPITAL ASSET HAS
BEEN HELD FOR MORE THAN TWELVE (12) MONTHS;
(C) LIMITATION ON CAPITAL LOSSES. — LOSSES FROM
SALES OR EXCHANGE CAPITAL ASSETS SHALL BE
2D SEM.
ALLOWED ONLY TO THE EXTENT OF THE GAINS FROM
SUCH SALES OR EXCHANGES. IF A BANK OR TRUST
COMPANY INCORPORATED UNDER THE LAWS OF THE
PHILIPPINES, A SUBSTANTIAL PART OF WHOSE BUSINESS
IS THE RECEIPT OF DEPOSITS, SELLS ANY BOND,
DEBENTURE, NOTE, OR CERTIFICATE OR OTHER
EVIDENCE OF INDEBTEDNESS ISSUED BY ANY
CORPORATION (INCLUDING ONE ISSUED BY A
GOVERNMENT OR POLITICAL SUBDIVISION THEREOF),
WITH INTEREST COUPONS OR IN REGISTERED FORM, ANY
LOSS RESULTING FROM SUCH SALE SHALL NOT BE
SUBJECT TO THE FOREGOING LIMITATION AND SHALL
NOT BE INCLUDED IN DETERMINING THE APPLICABILITY
OF SUCH LIMITATION TO OTHER LOSSES.
(D) NET CAPITAL LOSS CARRY-OVER. — IF ANY TAXPAYER,
OTHER THAN A CORPORATION, SUSTAINS IN ANY
TAXABLE YEAR A NET CAPITAL LOSS, SUCH LOSS (IN AN
AMOUNT NOT IN EXCESS OF THE NET INCOME FOR SUCH
YEAR) SHALL BE TREATED IN THE SUCCEEDING TAXABLE
YEAR AS A LOSS FROM THE SALE OR EXCHANGE OF A
CAPITAL ASSET HELD FOR NOT MORE THAN TWELVE (12)
MONTHS.
TITLE, AMOUNTS RECEIVED BY THE HOLDER UPON THE
RETIREMENT OF BONDS, DEBENTURES, NOTES OR
CERTIFICATES OR OTHER EVIDENCES OF INDEBTEDNESS
ISSUED BY ANY CORPORATION (INCLUDING THOSE
ISSUED BY A GOVERNMENT OR POLITICAL SUBDIVISION
THEREOF) WITH INTEREST COUPONS OR IN REGISTERED
FORM, SHALL BE CONSIDERED AS AMOUNTS RECEIVED IN
EXCHANGE THEREFOR.
(F) GAINS OR LOSSES FROM SHORT SALES, ETC. — FOR
PURPOSES OF THIS TITLE —
(1) GAINS OR LOSSES FROM SHORT SALES OF PROPERTY
SHALL BE CONSIDERED AS GAINS OR LOSSES FROM
SALES OR EXCHANGES OF CAPITAL ASSETS; AND
(2) GAINS OR LOSSES ATTRIBUTABLE TO THE FAILURE TO
EXERCISE PRIVILEGES OR OPTIONS TO BUY OR SELL
A.Y. 2017-2018 Ateneo de Manila University School of Law
PROPERTY SHALL BE CONSIDERED AS CAPITAL GAINS
OR LOSSES.
1. Capital Assets
Q: What are capital assets?
In Calasanz v. CIR, Mrs. Calasanz inherited from her father an
agricultural land located in Cainta. She had the land surveyed
and subdivided into lots. Improvements were introduced to
make the lots saleable. Soon after, the lots were sold to the
public at a profit. In their joint income tax return, the Calasanz
Spouses disclosed a profit realized from the sale of the
subdivided lots. The Calasanz Spouses treated the lots as capital
assets. Subsequently, a deficiency assessment was issued
against the Calasanz Spouses for real estate dealer’s tax and
income tax on profits derived from the sale of the lots based on
the rates for ordinary income. Was the inherited land a capital
asset or an ordinary asset? The Supreme Court agreed with the
contentions of the CIR and held that the Calasanz Spouses were
deemed to be in the real estate business for having been
involved in a series of real estate transactions pursued for
profit. “[I]nherited property is by itself neutral and the fact that
the ultimate purpose is to liquidate is of no moment for the
important inquiry is what the taxpayer did with the property.”
The lots were ordinary assets and hence, the profits realized
therefrom were ordinary gains taxable in full.
“The statutory definition of capital assets [in now Section
39 of the 1997 Tax Code] is negative in nature. If the asset is not
among the exceptions, it is a capital asset; conversely, assets
falling within the exceptions are ordinary assets. And
necessarily, any gain resulting from the sale or exchange of an
asset is a capital gain or an ordinary gain depending on the kind
of asset involved in the transaction.
However, there is no rigid rule or fixed formula by which
it can be determined with finality whether property sold by a
105. Calasanz v. CIR, GR No. L-26824, 9 October 1986.
90
taxpayer was held primarily for sale to customers in the
ordinary course of his trade or business or whether it was sold
as a capital asset. Although several factors or indices have been
recognized as helpful guides in making a determination, none
of these is decisive; neither is the presence nor the absence of
these factors conclusive. Each case must in the last analysis rest
upon its own peculiar facts and circumstances.”
Also a property initially classified as a capital asset may
thereafter be treated as an ordinary asset if a combination of the
factors indubitably tend to show that the activity was in
furtherance of or in the course of the taxpayer’s trade or
business.”105
In China Banking Corporation v. Court of Appeals, petitioner
made an equity investment in First CBC Capital (Asia) Ltd., a
Hong Kong subsidiary engaged in financing and investment
with deposit-taking function. In 1986, the subsidiary became
insolvent. Accordingly, in its 1987 income tax return, petitioner
wrote off as being worthless its investment in said subsidiary
and treated it as a bad debt or as an ordinary loss deductible
from its gross income. Was petitioner’s equity investment in its
subsidiary a capital asset or an ordinary asset? Here, the
Supreme Court found that petitioner’s equity investment was:
(1) not an indebtedness, (2) not an ordinary asset, but (3) a
capital asset. [An investment by way of shares of stock would
be an ordinary asset only to a dealer in securities or a person
engaged in the purchase and sale of, or an active trader in
securities.] Assuming that petitioner’s investment had indeed
become worthless, the loss sustained would be a capital loss,
not an ordinary loss. Consequently, “[t]he capital loss sustained
by CBC can only be deducted from capital gains if any derived
by it during the same taxable year that the securities have
become ‘worthless.”106
2. Percentage Taken into Account
Q: What is the rationale behind Section 39(B) of the 1997 Tax
106. China Banking Corporation v. Court of Appeals, GR No. 125508, 19 July 2000.
91 Guide Notes on Income Tax
Code?
In Ferrer v. CIR, petitioner was the sole proprietor of the La
Suiza Bakery. He owned the bakery from 1951 until 1955, when
he sold the same to Pons. The assets of the bakery consisted of
accounts receivable, raw materials, wrapping supplies,
firewood, unexpired insurance, goodwill, machinery and
equipment, and furniture and fixtures. Petitioner paid his
income tax for 1955, but later sought the refund of a certain sum.
He claimed that the bakery was a capital asset which he held
for more than 12 months, so that the profit from its sale was a
long term capital gain, and hence, only 50% of it was taxable.
The issue was whether the sale of the bakery was a sale of a
capital asset, or whether the business was to be comminuted
into its component parts, each part to be tested against the
definition of capital asset. The Supreme Court found that “the
sale of the ‘La Suiza Bakery’ was a sale not of a single asset but
of individual assets that made up the business. And since
petitioner failed to point out what part of the price he had
received could be fairly attributed to each asset, the Tax Court
correctly denied his claim.”
The High Court had occasion to explain the proviso on
“Percentage taken into account” found in now Section 39(A)-(B)
of the 1997 Tax Code, thus:
Parenthetically, it may be noted that tax rates are
graduated upwards as the total amount of income
increases. But capital assets are generally held for a
period in excess of a year. When held for more than
a year, the profit or loss realized is reported for tax
purposes only in the year that the asset was sold or
exchanged even though the increment might have
developed over several years or was the result of
years of effort. Since the gain is taxed all in one year,
a higher rate of tax would necessarily be paid *sic*;
similarly, only a limited amount of any loss than if
a part of the gain were reported each year the asset
was held. In an attempt to compensate for this, only
107. Ferrer v. CIR, GR No. L-16021, 31 August 1962.
2D SEM.
a percentage of the gain on such sales is required to
(sic) be deducted in the year in which realized.107
SEC. 40. DETERMINATION OF AMOUNT AND RECOGNITION OF
GAIN OR LOSS. —
(A) COMPUTATION OF GAIN OR LOSS. — THE GAIN FROM
THE SALE OR OTHER DISPOSITION OF PROPERTY SHALL BE
THE EXCESS OF THE AMOUNT REALIZED THEREFROM
OVER THE BASIS OR ADJUSTED BASIS FOR DETERMINING
GAIN, AND THE LOSS SHALL BE THE EXCESS OF THE BASIS
OR ADJUSTED BASIS FOR DETERMINING LOSS OVER THE
AMOUNT REALIZED. THE AMOUNT REALIZED FROM THE
SALE OR OTHER DISPOSITION OF PROPERTY SHALL BE THE
SUM OF MONEY RECEIVED PLUS THE FAIR MARKET VALUE
OF THE PROPERTY (OTHER THAN MONEY) RECEIVED;
(B) BASIS FOR DETERMINING GAIN OR LOSS FROM SALE OR
DISPOSITION OF PROPERTY. — THE BASIS OF PROPERTY
SHALL BE —
(1) THE COST THEREOF IN THE CASE OF PROPERTY
ACQUIRED ON OR AFTER MARCH 1, 1913, IF SUCH
PROPERTY WAS ACQUIRED BY PURCHASE; OR
(2) THE FAIR MARKET PRICE OR VALUE AS OF THE DATE
OF ACQUISITION, IF THE SAME WAS ACQUIRED BY
INHERITANCE; OR
(3) IF THE PROPERTY WAS ACQUIRED BY GIFT, THE BASIS
SHALL BE THE SAME AS IF IT WOULD BE IN THE HANDS
OF THE DONOR OR THE LAST PRECEDING OWNER BY
WHOM IT WAS NOT ACQUIRED BY GIFT, EXCEPT THAT
IF SUCH BASIS IS GREATER THAN THE FAIR MARKET
VALUE OF THE PROPERTY AT THE TIME OF THE GIFT
THEN, FOR THE PURPOSE OF DETERMINING LOSS, THE
BASIS SHALL BE SUCH FAIR MARKET VALUE; OR
(4) IF THE PROPERTY WAS ACQUIRED FOR LESS THAN AN
ADEQUATE CONSIDERATION IN MONEY OR MONEY'S
WORTH, THE BASIS OF SUCH PROPERTY IS THE
A.Y. 2017-2018 Ateneo de Manila University School of Law 92

AMOUNT PAID BY THE TRANSFEREE FOR THE RECOGNIZED IF PROPERTY IS

PROPERTY; OR TRANSFERRED TO A CORPORATION BY A
PERSON IN EXCHANGE FOR STOCK OR
(5) THE BASIS AS DEFINED IN PARAGRAPH (C)(5) OF THIS
UNIT OF PARTICIPATION IN SUCH A
SECTION, IF THE PROPERTY WAS ACQUIRED IN A
CORPORATION OF WHICH AS A RESULT
TRANSACTION WHERE GAIN OR LOSS IS NOT
OF SUCH EXCHANGE SAID PERSON,
RECOGNIZED UNDER PARAGRAPH (C)(2) OF THIS
ALONE OR TOGETHER WITH OTHERS,
SECTION.
NOT EXCEEDING FOUR (4) PERSONS,
(C) EXCHANGE OF PROPERTY. — GAINS CONTROL OF SAID
(1) GENERAL RULE. — EXCEPT AS HEREIN PROVIDED, CORPORATION: PROVIDED, THAT
UPON THE SALE OR EXCHANGE OR PROPERTY, THE STOCKS ISSUED FOR SERVICES SHALL
ENTIRE AMOUNT OF THE GAIN OR LOSS, AS THE CASE NOT BE CONSIDERED AS ISSUED IN
MAY BE, SHALL BE RECOGNIZED. RETURN FOR PROPERTY.

(2) EXCEPTION. — NO GAIN OR LOSS SHALL BE (3) EXCHANGE NOT SOLELY IN KIND. —
RECOGNIZED IF IN PURSUANCE OF A PLAN OF (a) IF, IN CONNECTION WITH AN
MERGER OR CONSOLIDATION — EXCHANGE DESCRIBED IN THE ABOVE
(a) A CORPORATION, WHICH IS A PARTY TO EXCEPTIONS, AN INDIVIDUAL, A
A MERGER OR CONSOLIDATION, SHAREHOLDER, A SECURITY HOLDER OR
EXCHANGES PROPERTY SOLELY FOR A CORPORATION RECEIVES NOT ONLY
STOCK IN A CORPORATION, WHICH IS A STOCK OR SECURITIES PERMITTED TO
PARTY TO THE MERGER OR BE RECEIVED WITHOUT THE
CONSOLIDATION; OR RECOGNITION OF GAIN OR LOSS, BUT
ALSO MONEY AND/OR PROPERTY, THE
(b) A SHAREHOLDER EXCHANGES STOCK GAIN, IF ANY, BUT NOT THE LOSS, SHALL
IN A CORPORATION, WHICH IS A PARTY BE RECOGNIZED BUT IN AN AMOUNT
TO THE MERGER OR CONSOLIDATION, NOT IN EXCESS OF THE SUM OF THE
SOLELY FOR THE STOCK OF ANOTHER MONEY AND FAIR MARKET VALUE OF
CORPORATION ALSO A PARTY TO THE SUCH OTHER PROPERTY RECEIVED:
MERGER OR CONSOLIDATION; OR PROVIDED, THAT AS TO THE
(c) A SECURITY HOLDER OF A SHAREHOLDER, IF THE MONEY AND/OR
CORPORATION, WHICH IS A PARTY TO OTHER PROPERTY RECEIVED HAS THE
THE MERGER OR CONSOLIDATION, EFFECT OF A DISTRIBUTION OF A
EXCHANGES HIS SECURITIES IN SUCH TAXABLE DIVIDEND, THERE SHALL BE
CORPORATION, SOLELY FOR STOCK OR TAXED AS DIVIDEND TO THE
SECURITIES IN SUCH CORPORATION, A SHAREHOLDER AN AMOUNT OF THE
PARTY TO THE MERGER OR GAIN RECOGNIZED NOT IN EXCESS OF
CONSOLIDATION. HIS PROPORTIONATE SHARE OF THE
UNDISTRIBUTED EARNINGS AND
NO GAIN OR LOSS SHALL ALSO BE
93 Guide Notes on Income Tax
PROFITS OF THE CORPORATION; THE
REMAINDER, IF ANY, OF THE GAIN
RECOGNIZED SHALL BE TREATED AS A
CAPITAL GAIN.
(b) IF, IN CONNECTION WITH THE
EXCHANGE DESCRIBED IN THE ABOVE
EXCEPTIONS, THE TRANSFEROR
CORPORATION RECEIVES NOT ONLY
STOCK PERMITTED TO BE RECEIVED
WITHOUT THE RECOGNITION OF GAIN
OR LOSS BUT ALSO MONEY AND/OR
OTHER PROPERTY, THEN (I) IF THE
CORPORATION RECEIVING SUCH
MONEY AND/OR OTHER PROPERTY
DISTRIBUTES IT IN PURSUANCE OF THE
PLAN OF MERGER OR CONSOLIDATION,
NO GAIN TO THE CORPORATION SHALL
BE RECOGNIZED FROM THE EXCHANGE,
BUT (II) IF THE CORPORATION
RECEIVING SUCH OTHER PROPERTY
AND/OR MONEY DOES NOT DISTRIBUTE
IT IN PURSUANCE OF THE PLAN OF
MERGER OR CONSOLIDATION, THE
GAIN, IF ANY, BUT NOT THE LOSS TO THE
(5) BASIS —
CORPORATION SHALL BE RECOGNIZED
BUT IN AN AMOUNT NOT IN EXCESS OF
THE SUM OF SUCH MONEY AND THE
FAIR MARKET VALUE OF SUCH OTHER
PROPERTY SO RECEIVED, WHICH IS NOT
DISTRIBUTED. 
 THE PROPERTY, STOCK OR SECURITIES
(4) ASSUMPTION OF LIABILITY. —
(a) IF THE TAXPAYER, IN CONNECTION
WITH THE EXCHANGES DESCRIBED IN
THE FOREGOING EXCEPTIONS,
RECEIVES STOCK OR SECURITIES WHICH
WOULD BE PERMITTED TO BE RECEIVED
WITHOUT THE RECOGNITION OF THE
GAIN IF IT WERE THE SOLE
2D SEM.
CONSIDERATION, AND AS PART OF THE
CONSIDERATION, ANOTHER PARTY TO
THE EXCHANGE ASSUMES A LIABILITY
OF THE TAXPAYER, OR ACQUIRES FROM
THE TAXPAYER PROPERTY, SUBJECT TO
A LIABILITY, THEN SUCH ASSUMPTION
OR ACQUISITION SHALL NOT BE
TREATED AS MONEY AND/OR OTHER
PROPERTY, AND SHALL NOT PREVENT
THE EXCHANGE FROM BEING WITHIN
THE EXCEPTIONS.
(b) IF THE AMOUNT OF THE LIABILITIES
ASSUMED PLUS THE AMOUNT OF THE
LIABILITIES TO WHICH THE PROPERTY IS
SUBJECT EXCEED THE TOTAL OF THE
ADJUSTED BASIS OF THE PROPERTY
TRANSFERRED PURSUANT TO SUCH
EXCHANGE, THEN SUCH EXCESS SHALL
BE CONSIDERED AS A GAIN FROM THE
SALE OR EXCHANGE OF A CAPITAL
ASSET OR OF PROPERTY WHICH IS NOT A
CAPITAL ASSET, AS THE CASE MAY BE. 

(a) THE BASIS OF THE STOCK OR
SECURITIES RECEIVED BY THE
TRANSFEROR UPON THE EXCHANGE
SPECIFIED IN THE ABOVE EXCEPTION
SHALL BE THE SAME AS THE BASIS OF
EXCHANGED, DECREASED BY (1) THE
MONEY RECEIVED, AND (2) THE FAIR
MARKET VALUE OF THE OTHER
PROPERTY RECEIVED, AND INCREASED
BY (A) THE AMOUNT TREATED AS
DIVIDEND OF THE SHAREHOLDER AND
(B) THE AMOUNT OF ANY GAIN THAT
WAS RECOGNIZED ON THE EXCHANGE:
PROVIDED, THAT THE PROPERTY
A.Y. 2017-2018 Ateneo de Manila University School of Law
RECEIVED AS 'BOOT' SHALL HAVE AS
BASIS ITS FAIR MARKET VALUE:
PROVIDED, FURTHER, THAT IF AS PART
OF THE CONSIDERATION TO THE
TRANSFEROR, THE TRANSFEREE OF
PROPERTY ASSUMES A LIABILITY OF THE
TRANSFEROR OR ACQUIRES FORM THE
LATTER PROPERTY SUBJECT TO A
LIABILITY, SUCH ASSUMPTION OR
ACQUISITION (IN THE AMOUNT OF THE
LIABILITY) SHALL, FOR PURPOSES OF
THIS PARAGRAPH, BE TREATED AS
MONEY RECEIVED BY THE TRANSFEROR
ON THE EXCHANGE: PROVIDED,
FINALLY, THAT IF THE TRANSFEROR
RECEIVES SEVERAL KINDS OF STOCK OR
SECURITIES, THE COMMISSIONER IS
HEREBY AUTHORIZED TO ALLOCATE
THE BASIS AMONG THE SEVERAL
CLASSES OF STOCKS OR SECURITIES.
(b) THE BASIS OF THE PROPERTY
TRANSFERRED IN THE HANDS OF THE
TRANSFEREE SHALL BE THE SAME AS IT
WOULD BE IN THE HANDS OF THE
TRANSFEROR INCREASED BY THE
AMOUNT OF THE GAIN RECOGNIZED TO
THE TRANSFEROR ON THE TRANSFER. 
 (c) THE TERM 'CONTROL', WHEN USED IN
(6) DEFINITIONS. —
(a) THE TERM 'SECURITIES' MEANS BONDS
AND DEBENTURES BUT NOT 'NOTES" OF
WHATEVER CLASS OR DURATION.
(b) THE TERM 'MERGER' OR
'CONSOLIDATION', WHEN USED IN THIS
SECTION, SHALL BE UNDERSTOOD TO
MEAN: (I) THE ORDINARY MERGER OR
CONSOLIDATION, OR (II) THE
ACQUISITION BY ONE CORPORATION OF
94
ALL OR SUBSTANTIALLY ALL THE
PROPERTIES OF ANOTHER
CORPORATION SOLELY FOR STOCK:
PROVIDED, THAT FOR A TRANSACTION
TO BE REGARDED AS A MERGER OR
CONSOLIDATION WITHIN THE PURVIEW
OF THIS SECTION, IT MUST BE
UNDERTAKEN FOR A BONA FIDE
BUSINESS PURPOSE AND NOT SOLELY
FOR THE PURPOSE OF ESCAPING THE
BURDEN OF TAXATION: PROVIDED,
FURTHER, THAT IN DETERMINING
WHETHER A BONA FIDE BUSINESS
PURPOSE EXISTS, EACH AND EVERY STEP
OF THE TRANSACTION SHALL BE
CONSIDERED AND THE WHOLE
TRANSACTION OR SERIES OF
TRANSACTION SHALL BE TREATED AS A
SINGLE UNIT: PROVIDED, FINALLY ,
THAT IN DETERMINING WHETHER THE
PROPERTY TRANSFERRED CONSTITUTES
A SUBSTANTIAL PORTION OF THE
PROPERTY OF THE TRANSFEROR, THE
TERM 'PROPERTY' SHALL BE TAKEN TO
INCLUDE THE CASH ASSETS OF THE
TRANSFEROR.
THIS SECTION, SHALL MEAN
OWNERSHIP OF STOCKS IN A
CORPORATION POSSESSING AT LEAST
FIFTY-ONE PERCENT (51%) OF THE
TOTAL VOTING POWER OF ALL CLASSES
OF STOCKS ENTITLED TO VOTE.
(d) THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE
COMMISSIONER, IS HEREBY
AUTHORIZED TO ISSUE RULES AND
REGULATIONS FOR THE PURPOSE
95 Guide Notes on Income Tax 2D SEM.
'SUBSTANTIALLY ALL' AND FOR THE Corporation to which all the assets and obligations of the
PROPER IMPLEMENTATION OF THIS former had been transferred. The New Corporation was not
SECTION. 
 
 dissolved after the merger agreement in 1959. In fact, the New
Corporation continued to operate the places of amusement
Q: Cite an example of a tax-free exchange. originally owned by the Old Corporation and transferred to the
New Corporation for decades.108
Under the old corporation law, it was not possible for a
corporation to extend its life beyond the time fixed in its SEC. 41. INVENTORIES. — WHENEVER IN THE JUDGMENT OF THE
original articles of incorporation, by mere amendment of the COMMISSIONER, THE USE OF INVENTORIES IS NECESSARY IN
same. In CIR v. Rufino, in the year 1959, a merger agreement was ORDER TO DETERMINE CLEARLY THE INCOME OF ANY TAXPAYER,
concluded between Eastern Theatrical Co., Inc. (“Old INVENTORIES SHALL BE TAKEN BY SUCH TAXPAYER UPON SUCH
Corporation”) and Eastern Theatrical, Inc. (“New BASIS AS THE SECRETARY OF FINANCE, UPON
Corporation”). Under said agreement, the Old Corporation RECOMMENDATION OF THE COMMISSIONER, MAY, BY RULES
would merge with the New Corporation by transferring all its AND REGULATIONS, PRESCRIBE AS CONFORMING AS NEARLY AS
business, assets, goodwill, and liabilities to the latter, which in MAY BE TO THE BEST ACCOUNTING PRACTICE IN THE TRADE OR
exchange would issue and distribute to the shareholders of the BUSINESS AND AS MOST CLEARLY REFLECTING THE INCOME.
Old Corporation one share in the New Corporation for each IF A TAXPAYER, AFTER HAVING COMPLIED WITH THE
share held by them in the Old Corporation. In determining TERMS AND A CONDITIONS PRESCRIBED BY THE
whether such exchange was tax free pursuant to now Section COMMISSIONER, USES A PARTICULAR METHOD OF VALUING ITS
40(C)(2) of the 1997 Tax Code, the Supreme Court held that: INVENTORY FOR ANY TAXABLE YEAR, THEN SUCH METHOD
“The basic consideration, of course, is the purpose of the SHALL BE USED IN ALL SUBSEQUENT TAXABLE YEARS UNLESS:
merger, as this would determine whether the exchange of
properties involved therein shall be subject or not to the capital i. WITH THE APPROVAL OF THE
gains tax. The criterion laid down by the law is that the merger COMMISSIONER, A CHANGE TO A
DIFFERENT METHOD IS AUTHORIZED; OR
‘must be undertaken for a bona fide business purpose and not
solely for the purpose of escaping the burden of taxation.’ xxx ii. THE COMMISSIONER FINDS THAT THE
It has been suggested that one certain indication of a scheme to NATURE O THE STOCK ON HAND (E.G., ITS
evade the capital gains tax is the subsequent dissolution of the SCARCITY, LIQUIDITY, MARKETABILITY
new corporation after the transfer to it of the properties of the AND PRICE MOVEMENTS) IS SUCH THAT
old corporation and the liquidation of the former soon INVENTORY GAINS SHOULD BE
thereafter. This highly suspect development is likely to be a CONSIDERED REALIZED FOR TAX
mere subterfuge aimed at circumventing the requirements of PURPOSES AND, THEREFORE, IT IS
[now Section 40(C)(2) of the 1997 Tax Code] while seeming to NECESSARY TO MODIFY THE VALUATION
be a valid corporate combination.” METHOD FOR PURPOSES OF
ASCERTAINING THE INCOME, PROFITS, OR
Here, the Supreme Court found that the purpose of the
LOSS IN A MOVE REALISTIC MANNER:
merger was to continue the business of the Old Corporation,
PROVIDED, HOWEVER, THAT THE
whose corporate life was about to expire, through the New

108. CIR v. Rufino, GR Nos. L-33665-68, 27 February 1987.
A.Y. 2017-2018 Ateneo de Manila University School of Law
COMMISSIONER SHALL NOT EXERCISE
HIS AUTHORITY TO REQUIRE A CHANGE
IN INVENTORY METHOD MORE OFTEN
THAN ONCE EVERY THREE (3 YEARS:
PROVIDED, FURTHER, THAT ANY CHANGE
IN AN INVENTORY VALUATION METHOD
MUST BE SUBJECT TO APPROVAL BY THE
SECRETARY OF FINANCE. 
 PHILIPPINES;
SEC. 42. INCOME FROM SOURCES WITHIN THE PHILIPPINES. —
(A) GROSS INCOME FROM SOURCES WITHIN THE
PHILIPPINES. — THE FOLLOWING ITEMS OF GROSS
INCOME SHALL BE TREATED AS GROSS INCOME FROM
SOURCES WITHIN THE PHILIPPINES:
(1) INTERESTS. — INTERESTS DERIVED FROM SOURCES
WITHIN THE PHILIPPINES, AND INTERESTS ON
BONDS, NOTES OR OTHER INTEREST-BEARING
OBLIGATION OF RESIDENTS, CORPORATE OR
OTHERWISE;
(2) DIVIDENDS. — THE AMOUNT RECEIVED AS
DIVIDENDS: 

(a) FROM A DOMESTIC CORPORATION; AND
(b) FROM A FOREIGN CORPORATION,
UNLESS LESS THAN FIFTY PERCENT
(50%) OF THE GROSS INCOME OF SUCH
FOREIGN CORPORATION FOR THE
THREE-YEAR PERIOD ENDING WITH THE
CLOSE OF ITS TAXABLE YEAR
PRECEDING THE DECLARATION OF
SUCH DIVIDENDS OR FOR SUCH PART OF
SUCH PERIOD AS THE CORPORATION
HAS BEEN IN EXISTENCE) WAS DERIVED
FROM SOURCES WITHIN THE
PHILIPPINES AS DETERMINED UNDER
THE PROVISIONS OF THIS SECTION; BUT
ONLY IN AN AMOUNT WHICH BEARS
THE SAME RATION TO SUCH DIVIDENDS
96
AS THE GROSS INCOME OF THE
CORPORATION FOR SUCH PERIOD
DERIVED FROM SOURCES WITHIN THE
PHILIPPINES BEARS TO ITS GROSS
INCOME FROM ALL SOURCES. 

(3) SERVICES. — COMPENSATION FOR LABOR OR
PERSONAL SERVICES PERFORMED IN THE
(4) RENTALS AND ROYALTIES. — RENTALS AND
ROYALTIES FROM PROPERTY LOCATED IN THE
PHILIPPINES OR FROM ANY INTEREST IN SUCH
PROPERTY, INCLUDING RENTALS OR ROYALTIES FOR
—

(a) THE USE OF OR THE RIGHT OR
PRIVILEGE TO USE IN THE PHILIPPINES
ANY COPYRIGHT, PATENT, DESIGN OR
MODEL, PLAN, SECRET FORMULA OR
PROCESS, GOODWILL, TRADEMARK,
TRADE BRAND OR OTHER LIKE
PROPERTY OR RIGHT;
(b) THE USE OF, OR THE RIGHT TO USE IN
THE PHILIPPINES ANY INDUSTRIAL,
COMMERCIAL OR SCIENTIFIC
EQUIPMENT;
(c) THE SUPPLY OF SCIENTIFIC, TECHNICAL,
INDUSTRIAL OR COMMERCIAL
KNOWLEDGE OR INFORMATION;
(d) THE SUPPLY OF ANY ASSISTANCE THAT
IS ANCILLARY AND SUBSIDIARY TO,
AND IS FURNISHED AS A MEANS OF
ENABLING THE APPLICATION OR
ENJOYMENT OF, ANY SUCH PROPERTY
OR RIGHT AS IS MENTIONED IN
PARAGRAPH (A), ANY SUCH EQUIPMENT
AS IS MENTIONED IN PARAGRAPH (B)
OR ANY SUCH KNOWLEDGE OR
97 Guide Notes on Income Tax
INFORMATION AS IS MENTIONED IN
PARAGRAPH (C);
(e) THE SUPPLY OF SERVICES BY A
NONRESIDENT PERSON OR HIS
EMPLOYEE IN CONNECTION WITH THE
USE OF PROPERTY OR RIGHTS
BELONGING TO, OR THE INSTALLATION
OR OPERATION OF ANY BRAND,
MACHINERY OR OTHER APPARATUS
PURCHASED FROM SUCH NONRESIDENT
PERSON;
(f) TECHNICAL ADVICE, ASSISTANCE OR
SERVICES RENDERED IN CONNECTION
WITH TECHNICAL MANAGEMENT OR
ADMINISTRATION OF ANY SCIENTIFIC,
INDUSTRIAL OR COMMERCIAL
UNDERTAKING, VENTURE, PROJECT OR
SCHEME; AND
(g) THE USE OF OR THE RIGHT TO USE: 
 ACTUALLY INCURRED TO PROVIDE FUNDS FOR USE IN
i. MOTION PICTURE FILMS;
ii. FILMS OR VIDEO TAPES FOR USE IN
CONNECTION WITH TELEVISION;
(C) GROSS INCOME FROM SOURCES WITHOUT THE
AND
iii. TAPES FOR USE IN CONNECTION
WITH RADIO BROADCASTING.
(5) SALE OF REAL PROPERTY. — GAINS, PROFITS AND
INCOME FROM THE SALE OF REAL PROPERTY
LOCATED IN THE PHILIPPINES; AND
(6) SALE OF PERSONAL PROPERTY. — GAINS; PROFITS
AND INCOME FROM THE SALE OF PERSONAL
PROPERTY, AS DETERMINED IN SUBSECTION (E) OF
THIS SECTION. 
 SECTION;
(B) TAXABLE INCOME FROM SOURCES WITHIN THE
PHILIPPINES. —
(1) GENERAL RULE. — FROM THE ITEMS OF GROSS
2D SEM.
INCOME SPECIFIED IN SUBSECTION (A) OF THIS
SECTION, THERE SHALL BE DEDUCTED THE EXPENSES,
LOSSES AND OTHER DEDUCTIONS PROPERLY
ALLOCATED THERETO AND A RATABLE PART OF
EXPENSES, INTERESTS, LOSSES AND OTHER
DEDUCTIONS EFFECTIVELY CONNECTED WITH THE
BUSINESS OR TRADE CONDUCTED EXCLUSIVELY
WITHIN THE PHILIPPINES WHICH CANNOT
DEFINITELY BE ALLOCATED TO SOME ITEMS OR CLASS
OF GROSS INCOME: PROVIDED, THAT SUCH ITEMS OF
DEDUCTIONS SHALL BE ALLOWED ONLY IF FULLY
SUBSTANTIATED BY ALL THE INFORMATION
NECESSARY FOR ITS CALCULATION. THE REMAINDER,
IF ANY, SHALL BE TREATED IN FULL AS TAXABLE
INCOME FROM SOURCES WITHIN THE PHILIPPINES.
(2) EXCEPTION. — NO DEDUCTIONS FOR INTEREST PAID
OR INCURRED ABROAD SHALL BE ALLOWED FROM
THE ITEM OF GROSS INCOME SPECIFIED IN
SUBSECTION (A) UNLESS INDEBTEDNESS WAS
CONNECTION WITH THE CONDUCT OR OPERATION
OF TRADE OR BUSINESS IN THE PHILIPPINES.
PHILIPPINES. — THE FOLLOWING ITEMS OF GROSS
INCOME SHALL BE TREATED AS INCOME FROM SOURCES
WITHOUT THE PHILIPPINES:
(1) INTERESTS OTHER THAN THOSE DERIVED FROM
SOURCES WITHIN THE PHILIPPINES AS PROVIDED IN
PARAGRAPH (1) OF SUBSECTION (A) OF THIS
SECTION;
(2) DIVIDENDS OTHER THAN THOSE DERIVED FROM
SOURCES WITHIN THE PHILIPPINES AS PROVIDED IN
PARAGRAPH (2) OF SUBSECTION (A) OF THIS
(3) COMPENSATION FOR LABOR OR PERSONAL SERVICES
PERFORMED WITHOUT THE PHILIPPINES;
(4) RENTALS OR ROYALTIES FROM PROPERTY LOCATED
A.Y. 2017-2018 Ateneo de Manila University School of Law
WITHOUT THE PHILIPPINES OR FROM ANY INTEREST
IN SUCH PROPERTY INCLUDING RENTALS OR
ROYALTIES FOR THE USE OF OR FOR THE PRIVILEGE OF
USING WITHOUT THE PHILIPPINES, PATENTS,
COPYRIGHTS, SECRET PROCESSES AND FORMULAS,
GOODWILL, TRADEMARKS, TRADE BRANDS,
FRANCHISES AND OTHER LIKE PROPERTIES; AND
(5) GAINS, PROFITS AND INCOME FROM THE SALE OF
REAL PROPERTY LOCATED WITHOUT THE
PHILIPPINES.
(D) TAXABLE INCOME FROM SOURCES WITHOUT THE
PHILIPPINES. — FROM THE ITEMS OF GROSS INCOME
SPECIFIED IN SUBSECTION (C) OF THIS SECTION, THERE
SHALL BE DEDUCTED THE EXPENSES, LOSSES, AND OTHER
DEDUCTIONS PROPERLY APPORTIONED OR ALLOCATED
THERETO AND A RATABLE PART OF ANY EXPENSE, LOSS
OR OTHER DEDUCTION WHICH CANNOT DEFINITELY BE
ALLOCATED TO SOME ITEMS OR CLASSES OF GROSS
INCOME. THE REMAINDER, IF ANY, SHALL BE TREATED IN
FULL AS TAXABLE INCOME FROM SOURCES WITHOUT THE
PHILIPPINES.
(E) INCOME FROM SOURCES PARTLY WITHIN AND PARTLY
WITHOUT THE PHILIPPINES.— ITEMS OF GROSS INCOME,
EXPENSES, LOSSES AND DEDUCTIONS, OTHER THAN
THOSE SPECIFIED IN SUBSECTIONS (A) AND (C) OF THIS
SECTION, SHALL BE ALLOCATED OR APPORTIONED TO
SOURCES WITHIN OR WITHOUT THE PHILIPPINES, UNDER
THE RULES AND REGULATIONS PRESCRIBED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION OF
THE COMMISSIONER. WHERE ITEMS OF GROSS INCOME
ARE SEPARATELY ALLOCATED TO SOURCES WITHIN THE
PHILIPPINES, THERE SHALL BE DEDUCTED (FOR THE
PURPOSE OF COMPUTING THE TAXABLE INCOME
THEREFROM) THE EXPENSES, LOSSES AND OTHER
DEDUCTIONS PROPERLY APPORTIONED OR ALLOCATED
THERETO AND A RATABLE PART OF OTHER EXPENSES,
LOSSES OR OTHER DEDUCTIONS WHICH CANNOT
DEFINITELY BE ALLOCATED TO SOME ITEMS OR CLASSES
98
OF GROSS INCOME. THE REMAINDER, IF ANY, SHALL BE
INCLUDED IN FULL AS TAXABLE INCOME FROM SOURCES
WITHIN THE PHILIPPINES. IN THE CASE OF GROSS
INCOME DERIVED FROM SOURCES PARTLY WITHIN AND
PARTLY WITHOUT THE PHILIPPINES, THE TAXABLE
INCOME MAY FIRST BE COMPUTED BY DEDUCTING THE
EXPENSES, LOSSES OR OTHER DEDUCTIONS
APPORTIONED OR ALLOCATED THERETO AND A RATABLE
PART OF ANY EXPENSE, LOSS OR OTHER DEDUCTION
WHICH CANNOT DEFINITELY BE ALLOCATED TO SOME
ITEMS OR CLASSES OF GROSS INCOME; AND THE
PORTION OF SUCH TAXABLE INCOME ATTRIBUTABLE TO
SOURCES WITHIN THE PHILIPPINES MAY BE DETERMINED
BY PROCESSES OR FORMULAS OF GENERAL
APPORTIONMENT PRESCRIBED BY THE SECRETARY OF
FINANCE. GAINS, PROFITS AND INCOME FROM THE SALE
OF PERSONAL PROPERTY PRODUCED (IN WHOLE OR IN
PART) BY THE TAXPAYER WITHIN AND SOLD WITHOUT
THE PHILIPPINES, OR PRODUCED (IN WHOLE OR IN PART)
BY THE TAXPAYER WITHOUT AND SOLD WITHIN THE
PHILIPPINES, SHALL BE TREATED AS DERIVED PARTLY
FROM SOURCES WITHIN AND PARTLY FROM SOURCES
WITHOUT THE PHILIPPINES.
GAINS, PROFITS AND INCOME DERIVED FROM
THE PURCHASE OF PERSONAL PROPERTY WITHIN AND ITS
SALE WITHOUT THE PHILIPPINES, OR FROM THE
PURCHASE OF PERSONAL PROPERTY WITHOUT AND ITS
SALE WITHIN THE PHILIPPINES SHALL BE TREATED AS
DERIVED ENTIRELY FORM SOURCES WITHIN THE
COUNTRY IN WHICH SOLD: PROVIDED, HOWEVER, THAT
GAIN FROM THE SALE OF SHARES OF STOCK IN A
DOMESTIC CORPORATION SHALL BE TREATED AS
DERIVED ENTIRELY FORM SOURCES WITHIN THE
PHILIPPINES REGARDLESS OF WHERE THE SAID SHARES
ARE SOLD. THE TRANSFER BY A NONRESIDENT ALIEN OR
A FOREIGN CORPORATION TO ANYONE OF ANY SHARE OF
STOCK ISSUED BY A DOMESTIC CORPORATION SHALL
NOT BE EFFECTED OR MADE IN ITS BOOK UNLESS: (1) THE
TRANSFEROR HAS FILED WITH THE COMMISSIONER A
99 Guide Notes on Income Tax
BOND CONDITIONED UPON THE FUTURE PAYMENT BY
HIM OF ANY INCOME TAX THAT MAY BE DUE ON THE
GAINS DERIVED FROM SUCH TRANSFER, OR (2) THE
COMMISSIONER HAS CERTIFIED THAT THE TAXES, IF ANY,
IMPOSED IN THIS TITLE AND DUE ON THE GAIN REALIZED
FROM SUCH SALE OR TRANSFER HAVE BEEN PAID. IT
SHALL BE THE DUTY OF THE TRANSFEROR AND THE
CORPORATION THE SHARES OF WHICH ARE SOLD OR
TRANSFERRED, TO ADVISE THE TRANSFEREE OF THIS
REQUIREMENT.
(F) DEFINITIONS. — AS USED IN THIS SECTION THE WORDS
'SALE' OR 'SOLD' INCLUDE 'EXCHANGE' OR 'EXCHANGED';
AND THE WORD 'PRODUCED' INCLUDES 'CREATED',
'FABRICATED', 'MANUFACTURED', 'EXTRACTED',
'PROCESSED', 'CURED' OR 'AGED'.
Q: Give examples of income from sources within the
Philippines.
In CIR v. British Overseas Airways Corporation, BOAC was a
British Government-owned corporation engaged in the
international airline business. As such, it operated air
transportation service and sold transportation tickets over the
routes of the other airline members. For the years 1959 to 1971,
BOAC had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or cargo to and
from the Philippines, although from 1959 to 1971, BOAC
maintained a general sales agent in the country which was
responsible for selling BOAC tickets covering passengers and
cargoes. The CIR issued an assessment against BOAC for
deficiency income taxes for the years 1959 to 1971 for the sale of
tickets in the Philippines for air transportation. Was BOAC a
resident foreign corporation doing business in the Philippines?
The Supreme Court held affirmatively. BOAC, during the
periods covered by the subject assessments, maintained a
general sales agent in the Philippines which performed
109. CIR v. British Overseas Airways Corporation, GR Nos. L-65773-74, 30 April
1987.
2D SEM.
activities in the exercise of the functions normally incident to,
and in progressive pursuit of, the purpose and object of its
organization as an international air carrier. BOAC was held to
be engaged in business in the Philippines through its local agent
during the period covered by the assessments.
Did BOAC’s income from the sale of tickets in the
Philippines come from sources within the Philippines? The
source of an income is the property, activity or service that
produced the income. The Supreme Court stated that in
BOAC’s case, the sale of tickets in the Philippines was the
activity that produced the income. “The tickets exchanged
hands here and payment for fares were also made here in
Philippine currency. The situs of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded
by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government.”109
Suggest to read also: (1) CIR v. Air India, GR No. 72443,
29 January 1988, and (2) CIR v. American Airlines, Inc., GR No.
67938, 19 December 1989. These cases involved similar factual
backgrounds as CIR v. British Overseas Airways Corporation,
although of different taxable periods.
In National Development Company v. CIR, NDC entered
into contracts with several Japanese shipbuilding companies for
the construction of 12 ocean-going vessels. The purchase price
was to come from proceeds of bonds issued by the Central
Bank. After the initial payments made, 14 promissory notes
were signed for the balance by the NDC and as required by the
shipbuilders, guaranteed by the Republic of the Philippines.
Pursuant thereto, the remaining payments and the interests
thereon were remitted in due time by NDC to Tokyo. The
vessels were eventually completed and delivered to NDC in
Tokyo. Were the Japanese shipbuilders liable to pay tax on the
interest remitted to them? NDC argued that the Japanese
A.Y. 2017-2018 Ateneo de Manila University School of Law
shipbuilders were not subject to tax because all related
activities, i.e., the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery
to NDC, were done in Tokyo. The Supreme Court noted that
the law did not speak of activity, but of source. “The law
specifies: ‘Interest derived from sources within the Philippines,
and interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise.’ Nothing there
speaks of the ‘act or activity’ of non-resident corporations in the
Philippines, or place where the contract is signed. The residence
of the obligor who pays the interest rather than the physical
location of the securities, bonds or notes or the place of
payment, is the determining factor of the source of interest
income.” Thus, the Japanese shipbuilders were liable to pay tax
on the interest remitted to them. [National Development Company
v. CIR, GR No. L-53961, 30 June 1987.]
In CIR v. Baier-Nickel, respondent was a non-resident
German citizen who was employed as a commission agent of
JUBANITEX, which was a domestic corporation. It was agreed
that respondent would receive 10% sales commission on all
sales actually concluded and collected through her efforts. In
1995, respondent received a certain sum representing her sales
commission income from which JUBANITEX withheld the
corresponding 10% withholding tax and remitting such amount
to the BIR. Respondent filed a claim for tax refund on the
contention that her sales commission income was not taxable in
the Philippines because the same was a compensation for her
services rendered in Germany and therefore considered as
income from sources outside the Philippines. Was respondent’s
sales commission income taxable in the Philippines? The
Supreme Court held affirmatively. Pursuant to Sections 23(D)
and 25 of the 1997 Tax Code, non-resident aliens, whether or
not engaged in trade or business, are subject to Philippine
income taxation on their income received from all sources
within the Philippines. What is thus meant by “source” of
income? Source of income relates to the property, activity or
110. CIR v. Baier-Nickel, GR No. 153793, 29 August 2006.
100
service that produced the income. “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, or the place of payment, but
the place where the services were actually rendered.” Here, the
Supreme Court found that respondent failed to show
substantial evidence, or “that relevant evidence that a
reasonable mind might accept as adequate to support the
conclusion that it was in Germany where she performed the
income producing service which gave rise to the reported
monthly sales in the months of March and May to September of
1995. She thus failed to discharge the burden of proving that her
income was from sources outside the Philippines and exempt
from the application of our income tax law. Hence, the claim for
tax refund should be denied.”110
1. Taxable Income From Sources Within the Philippines
Q: May a Philippine subsidiary share in its foreign parent
company’s overhead expenses?
* In CIR v. Court of Tax Appeals, Smith Kline and French
Overseas Company, a multinational company engaged in the
importation, manufacture and sale of pharmaceuticals, drugs
and chemicals, maintained a branch in the Philippines. The
Philippine branch sought to claim as deduction from gross
income its share in the head office overhead expenses for the
year 1971. Pursuant to then Section 37(b) of the Revenue Code
and Section 160 of the relevant regulations, the Philippine
branch could claim as its deductible share a ratable part of such
expenses based upon the ratio of the Philippine branch’s gross
income to the total gross income, worldwide, of the
multinational company. The Supreme Court explained that:
“where an expense is clearly related to the production of
Philippine-derived income or to Philippine operations (e.g.
salaries of Philippine personnel, rental of office building in the
Philippines), that expense can be deducted from the gross
101 Guide Notes on Income Tax
income acquired in the Philippines without resorting to
apportionment.
The overhead expenses incurred by the parent company
in connection with finance, administration, and research and
development, all of which directly benefit its branches all over
the world, including the Philippines, fall under a different
category however. These are items which cannot be definitely
allocated or identified with the operations of the Philippine
branch.”
Here, the Supreme Court allowed a deduction from gross
income of the Philippine branch’s share in the head office
overhead expenses in accordance with the audited financial
statements of the multinational corporation and the Philippine
branch.111
CHAPTER VIII — ACCOUNTING PERIODS
AND METHODS OF ACCOUNTING
SEC. 43. GENERAL RULE. — THE TAXABLE INCOME SHALL BE
COMPUTED UPON THE BASIS OF THE TAXPAYER'S ANNUAL
ACCOUNTING PERIOD (FISCAL YEAR OR CALENDAR YEAR, AS THE
CASE MAY BE) IN ACCORDANCE WITH THE METHOD OF
ACCOUNTING REGULARLY EMPLOYED IN KEEPING THE BOOKS OF
SUCH TAXPAYER, BUT IF NO SUCH METHOD OF ACCOUNTING HAS
BEEN SO EMPLOYED, OR IF THE METHOD EMPLOYED DOES NOT
CLEARLY REFLECT THE INCOME, THE COMPUTATION SHALL BE
MADE IN ACCORDANCE WITH SUCH METHOD AS IN THE OPINION
OF THE COMMISSIONER CLEARLY REFLECTS THE INCOME. IF THE
TAXPAYER'S ANNUAL ACCOUNTING PERIOD IS OTHER THAN A
FISCAL YEAR, AS DEFINED IN SECTION 22(Q), OR IF THE
TAXPAYER HAS NO ANNUAL ACCOUNTING PERIOD, OR DOES NOT
KEEP BOOKS, OR IF THE TAXPAYER IS AN INDIVIDUAL, THE
TAXABLE INCOME SHALL BE COMPUTED ON THE BASIS OF THE
CALENDAR YEAR.
SEC. 44. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.
111. CIR v. Court of Tax Appeals, GR No. L-54108, 17 January 1984.
2D SEM.
— THE AMOUNT OF ALL ITEMS OF GROSS INCOME SHALL BE
INCLUDED IN THE GROSS INCOME FOR THE TAXABLE YEAR IN
WHICH RECEIVED BY THE TAXPAYER, UNLESS, UNDER METHODS
OF ACCOUNTING PERMITTED UNDER SECTION 43, ANY SUCH
AMOUNTS ARE TO BE PROPERLY ACCOUNTED FOR AS OF A
DIFFERENT PERIOD. IN THE CASE OF THE DEATH OF A TAXPAYER,
THERE SHALL BE INCLUDED IN COMPUTING TAXABLE INCOME
FOR THE TAXABLE PERIOD IN WHICH FALLS THE DATE OF HIS
DEATH, AMOUNTS ACCRUED UP TO THE DATE OF HIS DEATH IF
NOT OTHERWISE PROPERLY INCLUDIBLE IN RESPECT OF SUCH
PERIOD OR A PRIOR PERIOD.
SEC. 45. PERIOD FOR WHICH DEDUCTIONS AND CREDITS
TAKEN. — THE DEDUCTIONS PROVIDED FOR IN THIS TITLE
SHALL BE TAKEN FOR THE TAXABLE YEAR IN WHICH 'PAID OR
ACCRUED' OR 'PAID OR INCURRED', DEPENDENT UPON THE
METHOD OF ACCOUNTING THE BASIS OF WHICH THE NET
INCOME IS COMPUTED, UNLESS IN ORDER TO CLEARLY REFLECT
THE INCOME, THE DEDUCTIONS SHOULD BE TAKEN AS OF A
DIFFERENT PERIOD. IN THE CASE OF THE DEATH OF A TAXPAYER,
THERE SHALL BE ALLOWED AS DEDUCTIONS FOR THE TAXABLE
PERIOD IN WHICH FALLS THE DATE OF HIS DEATH, AMOUNTS
ACCRUED UP TO THE DATE OF HIS DEATH IF NOT OTHERWISE
PROPERLY ALLOWABLE IN RESPECT OF SUCH PERIOD OR A PRIOR
PERIOD.
SEC. 46. CHANGE OF ACCOUNTING PERIOD. — IF A TAXPAYER,
OTHER THAN AN INDIVIDUAL, CHANGES HIS ACCOUNTING
PERIOD FROM FISCAL YEAR TO CALENDAR YEAR, FROM
CALENDAR YEAR TO FISCAL YEAR, OR FROM ONE FISCAL YEAR TO
ANOTHER, THE NET INCOME SHALL, WITH THE APPROVAL OF THE
COMMISSIONER, BE COMPUTED ON THE BASIS OF SUCH NEW
ACCOUNTING PERIOD, SUBJECT TO THE PROVISIONS OF SECTION
47.
SEC. 47. FINAL OR ADJUSTMENT RETURNS FOR A PERIOD OF
LESS THAN TWELVE (12) MONTHS. —
(A) RETURNS FOR SHORT PERIOD RESULTING FROM
CHANGE OF ACCOUNTING PERIOD. — IF A TAXPAYER,
A.Y. 2017-2018 Ateneo de Manila University School of Law
OTHER THAN AN INDIVIDUAL, WITH THE APPROVAL OF
THE COMMISSIONER, CHANGES THE BASIS OF
COMPUTING NET INCOME FROM FISCAL YEAR TO
CALENDAR YEAR, A SEPARATE FINAL OR ADJUSTMENT
RETURN SHALL BE MADE FOR THE PERIOD BETWEEN THE
CLOSE OF THE LAST FISCAL YEAR FOR WHICH RETURN
WAS MADE AND THE FOLLOWING DECEMBER 31. IF THE
CHANGE IS FROM CALENDAR YEAR TO FISCAL YEAR, A
SEPARATE FINAL OR ADJUSTMENT RETURN SHALL BE
MADE FOR THE PERIOD BETWEEN THE CLOSE OF THE LAST
CALENDAR YEAR FOR WHICH RETURN WAS MADE AND
THE DATE DESIGNATED AS THE CLOSE OF THE FISCAL
YEAR. IF THE CHANGE IS FROM ONE FISCAL YEAR TO
ANOTHER FISCAL YEAR, A SEPARATE FINAL OR
ADJUSTMENT RETURN SHALL BE MADE FOR THE PERIOD
BETWEEN THE CLOSE OF THE FORMER FISCAL YEAR AND
THE DATE DESIGNATED AS THE CLOSE OF THE NEW
FISCAL YEAR.
(B) INCOME COMPUTED ON BASIS OF SHORT PERIOD. —
WHERE A SEPARATE FINAL OR ADJUSTMENT RETURN IS
MADE UNDER SUBSECTION (A) ON ACCOUNT OF A
CHANGE IN THE ACCOUNTING PERIOD, AND IN ALL
OTHER CASES WHERE A SEPARATE FINAL OR
ADJUSTMENT RETURN IS REQUIRED OR PERMITTED BY
RULES AND REGULATIONS PRESCRIBED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION OF
THE COMMISSIONER, TO BE MADE FOR A FRACTIONAL
PART OF A YEAR, THEN THE INCOME SHALL BE COMPUTED
ON THE BASIS OF THE PERIOD FOR WHICH SEPARATE
FINAL OR ADJUSTMENT RETURN IS MADE.
SEC. 48. ACCOUNTING FOR LONG-TERM CONTRACTS. —
INCOME FROM LONG-TERM CONTRACTS SHALL BE REPORTED
FOR TAX PURPOSES IN THE MANNER AS PROVIDED IN THIS
SECTION. AS USED HEREIN, THE TERM 'LONG-TERM CONTRACTS'
MEANS BUILDING, INSTALLATION OR CONSTRUCTION
CONTRACTS COVERING A PERIOD IN EXCESS OF ONE (1) YEAR.
PERSONS WHOSE GROSS INCOME IS DERIVED IN WHOLE OR IN
PART FROM SUCH CONTRACTS SHALL REPORT SUCH INCOME
102
UPON THE BASIS OF PERCENTAGE OF COMPLETION. THE RETURN
SHOULD BE ACCOMPANIED BY A RETURN CERTIFICATE OF
ARCHITECTS OR ENGINEERS SHOWING THE PERCENTAGE OF
COMPLETION DURING THE TAXABLE YEAR OF THE ENTIRE WORK
PERFORMED UNDER CONTRACT. THERE SHOULD BE DEDUCTED
FROM SUCH GROSS INCOME ALL EXPENDITURES MADE DURING
THE TAXABLE YEAR ON ACCOUNT OF THE CONTRACT, ACCOUNT
BEING TAKEN OF THE MATERIAL AND SUPPLIES ON HAND AT THE
BEGINNING AND END OF THE TAXABLE PERIOD FOR USE IN
CONNECTION WITH THE WORK UNDER THE CONTRACT BUT NOT
YET SO APPLIED. IF UPON COMPLETION OF A CONTRACT, IT IS
FOUND THAT THE TAXABLE NET INCOME ARISING THEREUNDER
HAS NOT BEEN CLEARLY REFLECTED FOR ANY YEAR OR YEARS,
THE COMMISSIONER MAY PERMIT OR REQUIRE AN AMENDED
RETURN.
SEC. 49. INSTALLMENT BASIS. —
(A) SALES OF DEALERS IN PERSONAL PROPERTY. — UNDER
RULES AND REGULATIONS PRESCRIBED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION OF
THE COMMISSIONER, A PERSON WHO REGULARLY SELLS
OR OTHERWISE DISPOSES OF PERSONAL PROPERTY ON
THE INSTALLMENT PLAN MAY RETURN AS INCOME
THEREFROM IN ANY TAXABLE YEAR THAT PROPORTION
OF THE INSTALLMENT PAYMENTS ACTUALLY RECEIVED
IN THAT YEAR, WHICH THE GROSS PROFIT REALIZED OR
TO BE REALIZED WHEN PAYMENT IS COMPLETED, BEARS
TO THE TOTAL CONTRACT PRICE.
(B) SALES OF REALTY AND CASUAL SALES OF PERSONALITY.
— IN THE CASE (1) OF A CASUAL SALE OR OTHER CASUAL
DISPOSITION OF PERSONAL PROPERTY (OTHER THAN
PROPERTY OF A KIND WHICH WOULD PROPERLY BE
INCLUDED IN THE INVENTORY OF THE TAXPAYER IF ON
HAND AT THE CLOSE OF THE TAXABLE YEAR), FOR A PRICE
EXCEEDING ONE THOUSAND PESOS (P1,000), OR (2) OF A
SALE OR OTHER DISPOSITION OF REAL PROPERTY, IF IN
EITHER CASE THE INITIAL PAYMENTS DO NOT EXCEED
TWENTY-FIVE PERCENT (25%) OF THE SELLING PRICE, THE
INCOME MAY, UNDER THE RULES AND REGULATIONS
103 Guide Notes on Income Tax
PRESCRIBED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, BE
RETURNED ON THE BASIS AND IN THE MANNER ABOVE
PRESCRIBED IN THIS SECTION. AS USED IN THIS
SECTION, THE TERM 'INITIAL PAYMENTS' MEANS THE
PAYMENTS RECEIVED IN CASH OR PROPERTY OTHER
THAN EVIDENCES OF INDEBTEDNESS OF THE PURCHASER
DURING THE TAXABLE PERIOD IN WHICH THE SALE OR
OTHER DISPOSITION IS MADE.
(C) SALES OF REAL PROPERTY CONSIDERED AS CAPITAL
ASSET BY INDIVIDUALS. — AN INDIVIDUAL WHO SELLS
OR DISPOSES OF REAL PROPERTY, CONSIDERED AS
CAPITAL ASSET, AND IS OTHERWISE QUALIFIED TO
REPORT THE GAIN THEREFROM UNDER SUBSECTION (B)
MAY PAY THE CAPITAL GAINS TAX IN INSTALLMENTS
UNDER RULES AND REGULATIONS TO BE PROMULGATED
BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER.
(D) CHANGE FROM ACCRUAL TO INSTALLMENT BASIS. — IF
A TAXPAYER ENTITLED TO THE BENEFITS OF SUBSECTION
(A) ELECTS FOR ANY TAXABLE YEAR TO REPORT HIS
TAXABLE INCOME ON THE INSTALLMENT BASIS, THEN IN
COMPUTING HIS INCOME FOR THE YEAR OF CHANGE OR
ANY SUBSEQUENT YEAR, AMOUNTS ACTUALLY RECEIVED
DURING ANY SUCH YEAR ON ACCOUNT OF SALES OR
OTHER DISPOSITIONS OF PROPERTY MADE IN ANY PRIOR
YEAR SHALL NOT BE EXCLUDED.
SEC. 50. ALLOCATION OF INCOME AND DEDUCTIONS. — IN THE
CASE OF TWO OR MORE ORGANIZATIONS, TRADES OR
BUSINESSES (WHETHER OR NOT INCORPORATED AND WHETHER
OR NOT ORGANIZED IN THE PHILIPPINES) OWNED OR
CONTROLLED DIRECTLY OR INDIRECTLY BY THE SAME
INTERESTS, THE COMMISSIONER IS AUTHORIZED TO
DISTRIBUTE, APPORTION OR ALLOCATE GROSS INCOME OR
DEDUCTIONS BETWEEN OR AMONG SUCH ORGANIZATION,
TRADE OR BUSINESS, IF HE DETERMINED THAT SUCH
DISTRIBUTION, APPORTIONMENT OR ALLOCATION IS
NECESSARY IN ORDER TO PREVENT EVASION OF TAXES OR
2D SEM.
CLEARLY TO REFLECT THE INCOME OF ANY SUCH
ORGANIZATION, TRADE OR BUSINESS.
CHAPTER IX — RETURNS AND PAYMENT
OF TAX
SEC. 51. INDIVIDUAL RETURN. —
(A) REQUIREMENTS. —
(1) EXCEPT AS PROVIDED IN PARAGRAPH (2) OF THIS
SUBSECTION, THE FOLLOWING INDIVIDUALS ARE
REQUIRED TO FILE AN INCOME TAX RETURN:
(a) EVERY FILIPINO CITIZEN RESIDING IN
THE PHILIPPINES;
(b) EVERY FILIPINO CITIZEN RESIDING
OUTSIDE THE PHILIPPINES, ON HIS
INCOME FROM SOURCES WITHIN THE
PHILIPPINES;
(c) EVERY ALIEN RESIDING IN THE
PHILIPPINES, ON INCOME DERIVED
FROM SOURCES WITHIN THE
PHILIPPINES; AND
(d) EVERY NONRESIDENT ALIEN ENGAGED
IN TRADE OR BUSINESS OR IN THE
EXERCISE OF PROFESSION IN THE
PHILIPPINES. 

(2) THE FOLLOWING INDIVIDUALS SHALL NOT BE
REQUIRED TO FILE AN INCOME TAX RETURN;
(a) AN INDIVIDUAL WHOSE TAXABLE
INCOME DOES NOT EXCEED TWO
HUNDRED FIFTY THOUSAND
PESOS (P250,000) UNDER SECTION
24(A)(2)(A): PROVIDED, THAT A
CITIZEN OF THE PHILIPPINES AND ANY
ALIEN INDIVIDUAL ENGAGED IN
BUSINESS OR PRACTICE OF PROFESSION
WITHIN THE PHILIPPINE SHALL FILE AN
A.Y. 2017-2018 Ateneo de Manila University School of Law 104

INCOME TAX RETURN, REGARDLESS OF FINANCE, UPON RECOMMENDATION OF THE

THE AMOUNT OF GROSS INCOME; COMMISSIONER.
(b) AN INDIVIDUAL WITH RESPECT TO PURE (4) THE INCOME TAX RETURN SHALL BE FILED IN
COMPENSATION INCOME, AS DEFINED DUPLICATE BY THE FOLLOWING PERSONS:
IN SECTION 32 (A)(1), DERIVED FROM
(a) A RESIDENT CITIZEN — ON HIS INCOME
SOURCES WITHIN THE PHILIPPINES, THE
FROM ALL SOURCES;
INCOME TAX ON WHICH HAS BEEN
CORRECTLY WITHHELD UNDER THE (b) A NONRESIDENT CITIZEN — ON HIS
PROVISIONS OF SECTION 79 OF THIS INCOME DERIVED FROM SOURCES
CODE: PROVIDED, THAT AN WITHIN THE PHILIPPINES;
INDIVIDUAL DERIVING (c) A RESIDENT ALIEN — ON HIS INCOME
COMPENSATION CONCURRENTLY FROM DERIVED FROM SOURCES WITHIN THE
TWO OR MORE EMPLOYERS AT ANY PHILIPPINES; AND
TIME DURING THE TAXABLE YEAR
SHALL FILE AN INCOME TAX RETURN: (d) A NONRESIDENT ALIEN ENGAGED IN
PROVIDED, FURTHER, THAT AN TRADE OR BUSINESS IN THE
INDIVIDUAL WHOSE COMPENSATION PHILIPPINES — ON HIS INCOME
INCOME DERIVED FROM SOURCES DERIVED FROM SOURCES WITHIN THE
WITHIN THE PHILIPPINES EXCEEDS PHILIPPINES.
SIXTY THOUSAND PESOS (P60,000) (5) THE INCOME TAX RETURN (ITR) SHALL
SHALL ALSO FILE AN INCOME TAX CONSIST A MAXIMUM OF FOUR (4) PAGES IN
RETURN; PAPER OR ELECTRONIC FORM, AND SHALL
(c) AN INDIVIDUAL WHOSE SOLE INCOME ONLY CONTAIN THE FOLLOWING
HAS BEEN SUBJECTED TO FINAL INFORMATION:
WITHHOLDING TAX PURSUANT TO (a) PERSONAL PROFILE AND
SECTION 57(A) OF THIS CODE; AND INFORMATION;
(d) A MINIMUM WAGE EARNER AS DEFINED (b) TOTAL GROSS SALES, RECEIPTS
IN SECTION 22 (HH) OF THIS CODE OR OR INCOME FROM
AN INDIVIDUAL WHO IS EXEMPT FROM COMPENSATION FOR SERVICES
INCOME TAX PURSUANT TO THE RENDERED, CONDUCT OF TRADE
PROVISIONS OF THIS CODE AND OTHER OR BUSINESS OR THE EXERCISE
LAWS, GENERAL OR SPECIAL OF A PROFESSION, EXCEPT
(3) THE FORGOING NOTWITHSTANDING, ANY INCOME SUBJECT TO FINAL TAX
INDIVIDUAL NOT REQUIRED TO FILE AN INCOME TAX AS PROVIDED UNDER THIS CODE;
RETURN MAY NEVERTHELESS BE REQUIRED TO FILE (c) ALLOWABLE DEDUCTIONS
AN INFORMATION RETURN PURSUANT TO RULES AND UNDER THIS CODE;
REGULATIONS PRESCRIBED BY THE SECRETARY OF
(d) TAXABLE INCOME AS DEFINED IN
105 Guide Notes on Income Tax
SECTION 31 OF THIS CODE; AND
(e) INCOME TAX DUE AND PAYABLE.
(B) WHERE TO FILE. — EXCEPT IN CASES WHERE THE
COMMISSIONER OTHERWISE PERMITS, THE RETURN
SHALL BE FILED WITH AN AUTHORIZED AGENT BANK,
REVENUE DISTRICT OFFICER, COLLECTION AGENT OR
DULY AUTHORIZED TREASURER OF THE CITY OR
MUNICIPALITY IN WHICH SUCH PERSON HAS HIS LEGAL
RESIDENCE OR PRINCIPAL PLACE OF BUSINESS IN THE
PHILIPPINES, OR IF THERE BE NO LEGAL RESIDENCE OR
PLACE OF BUSINESS IN THE PHILIPPINES, WITH THE
OFFICE OF THE COMMISSIONER.
(C) WHEN TO FILE. —
(1) THE RETURN OF ANY INDIVIDUAL SPECIFIED ABOVE
SHALL BE FILED ON OR BEFORE THE FIFTEENTH (15TH)
DAY OF APRIL OF EACH YEAR COVERING INCOME FOR
THE PRECEDING TAXABLE YEAR.
(2) INDIVIDUALS SUBJECT TO TAX ON CAPITAL GAINS;
(a) FROM THE SALE OR EXCHANGE OF
SHARES OF STOCK NOT TRADED THRU A
LOCAL STOCK EXCHANGE AS
PRESCRIBED UNDER SECTION 24(C)
SHALL FILE A RETURN WITHIN THIRTY
(30) DAYS AFTER EACH TRANSACTION
AND A FINAL CONSOLIDATED RETURN
ON OR BEFORE APRIL 15 OF EACH YEAR
COVERING ALL STOCK TRANSACTIONS
OF THE PRECEDING TAXABLE YEAR; AND
(B) FROM THE SALE OR DISPOSITION OF
REAL PROPERTY UNDER SECTION 24(D)
SHALL FILE A RETURN WITHIN THIRTY
(30) DAYS FOLLOWING EACH SALE OR
OTHER DISPOSITION. 
 WITHHELD CORRECTLY BY THE SAID EMPLOYER (TAX
(D) HUSBAND AND WIFE. — MARRIED INDIVIDUALS,
WHETHER CITIZENS, RESIDENT OR NONRESIDENT
ALIENS, WHO DO NOT DERIVE INCOME PURELY FROM
COMPENSATION, SHALL FILE A RETURN FOR THE
2D SEM.
TAXABLE YEAR TO INCLUDE THE INCOME OF BOTH
SPOUSES, BUT WHERE IT IS IMPRACTICABLE FOR THE
SPOUSES TO FILE ONE RETURN, EACH SPOUSE MAY FILE A
SEPARATE RETURN OF INCOME BUT THE RETURNS SO
FILED SHALL BE CONSOLIDATED BY THE BUREAU FOR
PURPOSES OF VERIFICATION FOR THE TAXABLE YEAR.
(E) RETURN OF PARENT TO INCLUDE INCOME OF CHILDREN.
— THE INCOME OF UNMARRIED MINORS DERIVED FROM
PROPERLY RECEIVED FROM A LIVING PARENT SHALL BE
INCLUDED IN THE RETURN OF THE PARENT, EXCEPT (1)
WHEN THE DONOR'S TAX HAS BEEN PAID ON SUCH
PROPERTY, OR (2) WHEN THE TRANSFER OF SUCH
PROPERTY IS EXEMPT FROM DONOR'S TAX.
(F) PERSONS UNDER DISABILITY. — IF THE TAXPAYER IS
UNABLE TO MAKE HIS OWN RETURN, THE RETURN MAY BE
MADE BY HIS DULY AUTHORIZED AGENT OR
REPRESENTATIVE OR BY THE GUARDIAN OR OTHER
PERSON CHARGED WITH THE CARE OF HIS PERSON OR
PROPERTY, THE PRINCIPAL AND HIS REPRESENTATIVE OR
GUARDIAN ASSUMING THE RESPONSIBILITY OF MAKING
THE RETURN AND INCURRING PENALTIES PROVIDED FOR
ERRONEOUS, FALSE OR FRAUDULENT RETURNS. 

(G) SIGNATURE PRESUMED CORRECT. — THE FACT THAT AN
INDIVIDUAL'S NAME IS SIGNED TO A FILED RETURN
SHALL BE PRIMA FACIE EVIDENCE FOR ALL PURPOSES
THAT THE RETURN WAS ACTUALLY SIGNED BY HIM.
SEC. 51-A. SUBSTITUTED FILING OF INCOME TAX
RETURNS BY EMPLOYEES RECEIVING PURELY
COMPENSATION INCOME. — INDIVIDUAL TAXPAYERS
RECEIVING PURELY COMPENSATION INCOME,
REGARDLESS OF AMOUNT, FROM ONLY ONE
EMPLOYER IN THE PHILIPPINES FOR THE CALENDAR
YEAR, THE INCOME TAX OF WHICH HAS BEEN
DUE EQUALS TAX WITHHELD) SHALL NOT BE
REQUIRED TO FILE AN ANNUAL INCOME TAX RETURN.
THE CERTIFICATE OF WITHHOLDING FILED BY THE
RESPECTIVE EMPLOYERS, DULY STAMPED "RECEIVED"
A.Y. 2017-2018 Ateneo de Manila University School of Law
BY THE BIR, SHALL BE TANTAMOUNT TO THE
SUBSTITUTED FILING OF INCOME TAX RETURNS BY
SAID EMPLOYEES.
SEC. 52. CORPORATION RETURNS. —
(A) REQUIREMENTS. — 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 IN ACCORDANCE
WITH THE PROVISIONS OF CHAPTER XII OF THIS TITLE.
THE RETURN SHALL BE FILED BY THE PRESIDENT, VICE-
PRESIDENT OR OTHER PRINCIPAL OFFICER, AND SHALL BE
SWORN TO BY SUCH OFFICER AND BY THE TREASURER OR
ASSISTANT TREASURER. THE INCOME TAX RETURN
SHALL CONSIST A MAXIMUM OF FOUR (4) PAGES
IN PAPER FORM OR ELECTRONIC FORM, BE FILED
BY THE PRESIDENT, VICE-PRESIDENT OR OTHER
PRINCIPAL OFFICER, SHALL BE SWORN TO BY SUCH
OFFICER AND BY THE TREASURER OR ASSISTANT
TREASURER, AND SHALL ONLY CONTAIN THE
FOLLOWING INFORMATION:
(1) CORPORATE PROFILE AND INFORMATION;
(2) GROSS SALES, RECEIPTS OR INCOME FROM
SERVICES RENDERED, OR CONDUCT OF
TRADE OR BUSINESS, EXCEPT INCOME
SUBJECT TO FINAL TAX AS PROVIDED
UNDER THIS CODE;
(3) ALLOWABLE DEDUCTIONS UNDER THIS
CODE;
(4) TAXABLE INCOME AS DEFINED IN SECTION
31 OF THIS CODE; AND
(B) INCOME TAX DUE AND PAYABLE. PROVIDED,
THAT THE FOREGOING PROVISIONS SHALL
NOT AFFECT THE IMPLEMENTATION OF
REPUBLIC ACT NO. 10708 OR TIMTA.
106
(C) TAXABLE YEAR OF CORPORATION. — A CORPORATION
MAY EMPLOY EITHER CALENDAR YEAR OR FISCAL YEAR
AS A BASIS FOR FILING ITS ANNUAL INCOME TAX
RETURN: PROVIDED, THAT THE CORPORATION SHALL
NOT CHANGE THE ACCOUNTING PERIOD EMPLOYED
WITHOUT PRIOR APPROVAL FROM THE COMMISSIONER
IN ACCORDANCE WITH THE PROVISIONS OF SECTION 47
OF THIS CODE.
(D) RETURN OF CORPORATION CONTEMPLATING
DISSOLUTION OR REORGANIZATION. — EVERY
CORPORATION SHALL, WITHIN THIRTY (30) DAYS AFTER
THE ADOPTION BY THE CORPORATION OF A RESOLUTION
OR PLAN FOR ITS DISSOLUTION, OR FOR THE
LIQUIDATION OF THE WHOLE OR ANY PART OF ITS
CAPITAL STOCK, INCLUDING A CORPORATION WHICH
HAS BEEN NOTIFIED OF POSSIBLE INVOLUNTARY
DISSOLUTION BY THE SECURITIES AND EXCHANGE
COMMISSION, OR FOR ITS REORGANIZATION, RENDER A
CORRECT RETURN TO THE COMMISSIONER, VERIFIED
UNDER OATH, SETTING FORTH THE TERMS OF SUCH
RESOLUTION OR PLAN AND SUCH OTHER INFORMATION
AS THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, SHALL, BY
RULES AND REGULATIONS, PRESCRIBE.
THE DISSOLVING OR REORGANIZING
CORPORATION SHALL, PRIOR TO THE ISSUANCE BY THE
SECURITIES AND EXCHANGE COMMISSION OF THE
CERTIFICATE OF DISSOLUTION OR REORGANIZATION,
AS MAY BE DEFINED BY RULES AND REGULATIONS
PRESCRIBED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, SECURE A
CERTIFICATE OF TAX CLEARANCE FROM THE BUREAU OF
INTERNAL REVENUE WHICH CERTIFICATE SHALL BE
SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION.
(E) RETURN ON CAPITAL GAINS REALIZED FROM SALE OF
SHARES OF STOCK NOT TRADED IN THE LOCAL STOCK
EXCHANGE. — EVERY CORPORATION DERIVING CAPITAL
107 Guide Notes on Income Tax
GAINS FROM THE SALE OR EXCHANGE OF SHARES OF
STOCK NOT TRADED THRU A LOCAL STOCK EXCHANGE
AS PRESCRIBED UNDER SECTIONS 24 (C), 25 (A)(3), 27
(E)(2), 28(A)(8)(C) AND 28 (B)(5)(C), SHALL FILE A
RETURN WITHIN THIRTY (30) DAYS AFTER EACH
TRANSACTIONS AND A FINAL CONSOLIDATED RETURN
OF ALL TRANSACTIONS DURING THE TAXABLE YEAR ON
OR BEFORE THE FIFTEENTH (15TH) DAY OF THE FOURTH
(4TH) MONTH FOLLOWING THE CLOSE OF THE TAXABLE
YEAR.
SEC. 53. EXTENSION OF TIME TO FILE RETURNS. — THE
COMMISSIONER MAY, IN MERITORIOUS CASES, GRANT A
REASONABLE EXTENSION OF TIME FOR FILING RETURNS OF
INCOME (OR FINAL AND ADJUSTMENT RETURNS IN CASE OF
CORPORATIONS), SUBJECT TO THE PROVISIONS OF SECTION 56
OF THIS CODE. 
 DEPARTURE UNTIL PROOF OF PAYMENT OF THE TAX IS
SEC. 54. RETURNS OF RECEIVERS, TRUSTEES IN BANKRUPTCY OR
ASSIGNEES. — IN CASES WHEREIN RECEIVERS, TRUSTEES IN
BANKRUPTCY OR ASSIGNEES ARE OPERATING THE PROPERTY OR
BUSINESS OF A CORPORATION, SUBJECT TO THE TAX IMPOSED BY
THIS TITLE, SUCH RECEIVERS, TRUSTEES OR ASSIGNEES SHALL
MAKE RETURNS OF NET INCOME AS AND FOR SUCH
CORPORATION, IN THE SAME MANNER AND FORM AS SUCH
ORGANIZATION IS HEREINBEFORE REQUIRED TO MAKE
RETURNS, AND ANY TAX DUE ON THE INCOME AS RETURNED BY
RECEIVERS, TRUSTEES OR ASSIGNEES SHALL BE ASSESSED AND
COLLECTED IN THE SAME MANNER AS IF ASSESSED DIRECTLY
AGAINST THE ORGANIZATIONS OF WHOSE BUSINESSES OR
PROPERTIES THEY HAVE CUSTODY OR CONTROL. 
 THE TAX UNPAID BECOMES DUE AND PAYABLE,
SEC. 55. RETURNS OF GENERAL PROFESSIONAL PARTNERSHIPS.
— EVERY GENERAL PROFESSIONAL PARTNERSHIP SHALL FILE, IN
DUPLICATE, A RETURN OF ITS INCOME, EXCEPT INCOME EXEMPT
UNDER SECTION 32 (B) OF THIS TITLE, SETTING FORTH THE
ITEMS OF GROSS INCOME AND OF DEDUCTIONS ALLOWED BY
THIS TITLE, AND THE NAMES, TAXPAYER IDENTIFICATION
NUMBERS (TIN), ADDRESSES AND SHARES OF EACH OF THE
PARTNERS. 
 HIMSELF OF THE BENEFIT OF EXEMPTION OF CAPITAL
2D SEM.
SEC. 56. PAYMENT AND ASSESSMENT OF INCOME TAX FOR
INDIVIDUALS AND CORPORATION. —
(A) PAYMENT OF TAX. —
(1) IN GENERAL. — THE TOTAL AMOUNT OF TAX
IMPOSED BY THIS TITLE SHALL BE PAID BY THE
PERSON SUBJECT THERETO AT THE TIME THE RETURN
IS FILED. IN THE CASE OF TRAMP VESSELS, THE
SHIPPING AGENTS AND/OR THE HUSBANDING
AGENTS, AND IN THEIR ABSENCE, THE CAPTAINS
THEREOF ARE REQUIRED TO FILE THE RETURN HEREIN
PROVIDED AND PAY THE TAX DUE THEREON BEFORE
THEIR DEPARTURE. UPON FAILURE OF THE SAID
AGENTS OR CAPTAINS TO FILE THE RETURN AND PAY
THE TAX, THE BUREAU OF CUSTOMS IS HEREBY
AUTHORIZED TO HOLD THE VESSEL AND PREVENT ITS
PRESENTED OR A SUFFICIENT BOND IS FILED TO
ANSWER FOR THE TAX DUE. (2) INSTALLMENT OF
PAYMENT. — WHEN THE TAX DUE IS IN EXCESS OF
TWO THOUSAND PESOS (P2,000), THE TAXPAYER
OTHER THAN A CORPORATION MAY ELECT TO PAY
THE TAX IN TWO (2) EQUAL INSTALLMENTS IN WHICH
CASE, THE FIRST INSTALLMENT SHALL BE PAID AT
THE TIME THE RETURN IS FILED AND THE SECOND
INSTALLMENT, ON OR BEFORE JULY 15 FOLLOWING
THE CLOSE OF THE CALENDAR YEAR. IF ANY
INSTALLMENT IS NOT PAID ON OR BEFORE THE DATE
FIXED FOR ITS PAYMENT, THE WHOLE AMOUNT OF
TOGETHER WITH THE DELINQUENCY PENALTIES. 
(3)
PAYMENT OF CAPITAL GAINS TAX. — THE TOTAL
AMOUNT OF TAX IMPOSED AND PRESCRIBED UNDER
SECTION 24 (C), 24(D), 27(E)(2), 28(A)(8)(C) AND
28(B)(5)(C) SHALL BE PAID ON THE DATE THE RETURN
PRESCRIBED THEREFOR IS FILED BY THE PERSON
LIABLE THERETO: PROVIDED, THAT IF THE SELLER
SUBMITS PROOF OF HIS INTENTION TO AVAIL
GAINS UNDER EXISTING SPECIAL LAWS, NO SUCH
A.Y. 2017-2018 Ateneo de Manila University School of Law
PAYMENTS SHALL BE REQUIRED : PROVIDED,
FURTHER, THAT IN CASE OF FAILURE TO QUALIFY FOR
EXEMPTION UNDER SUCH SPECIAL LAWS AND
IMPLEMENTING RULES AND REGULATIONS, THE TAX
DUE ON THE GAINS REALIZED FROM THE ORIGINAL
TRANSACTION SHALL IMMEDIATELY BECOME DUE
AND PAYABLE, SUBJECT TO THE PENALTIES
PRESCRIBED UNDER APPLICABLE PROVISIONS OF
THIS CODE: PROVIDED, FINALLY, THAT IF THE
SELLER, HAVING PAID THE TAX, SUBMITS SUCH
PROOF OF INTENT WITHIN SIX (6) MONTHS FROM THE
REGISTRATION OF THE DOCUMENT TRANSFERRING
THE REAL PROPERTY, HE SHALL BE ENTITLED TO A
REFUND OF SUCH TAX UPON VERIFICATION OF HIS
COMPLIANCE WITH THE REQUIREMENTS FOR SUCH
EXEMPTION.
(2) INSTALLMENT OF PAYMENT. — WHEN THE TAX DUE
IS IN EXCESS OF TWO THOUSAND PESOS (P2,000), THE
TAXPAYER OTHER THAN A CORPORATION MAY ELECT
TO PAY THE TAX IN TWO (2) EQUAL INSTALLMENTS IN
WHICH CASE, THE FIRST INSTALLMENT SHALL BE
PAID AT THE TIME THE RETURN IS FILED AND THE
SECOND INSTALLMENT, ON OR BEFORE OCTOBER
15 FOLLOWING THE CLOSE OF THE CALENDAR YEAR.
IF ANY INSTALLMENT IS NOT PAID ON OR BEFORE THE
DATE FIXED FOR ITS PAYMENT, THE WHOLE AMOUNT
OF THE TAX UNPAID BECOMES DUE AND PAYABLE,
TOGETHER WITH THE DELINQUENCY PENALTIES.
(3) PAYMENT OF CAPITAL GAINS TAX. — THE TOTAL
AMOUNT OF TAX IMPOSED AND PRESCRIBED UNDER
SECTION 24 (C), 24(D), 27(E)(2), 28(A)(8)(C) AND
28(B)(5)(C) SHALL BE PAID ON THE DATE THE RETURN
PRESCRIBED THEREFOR IS FILED BY THE PERSON
LIABLE THERETO: PROVIDED, THAT IF THE SELLER
SUBMITS PROOF OF HIS INTENTION TO AVAIL
HIMSELF OF THE BENEFIT OF EXEMPTION OF CAPITAL
GAINS UNDER EXISTING SPECIAL LAWS, NO SUCH
PAYMENTS SHALL BE REQUIRED: PROVIDED,
108
FURTHER, THAT IN CASE OF FAILURE TO QUALIFY FOR
EXEMPTION UNDER SUCH SPECIAL LAWS AND
IMPLEMENTING RULES AND REGULATIONS, THE TAX
DUE ON THE GAINS REALIZED FROM THE ORIGINAL
TRANSACTION SHALL IMMEDIATELY BECOME DUE
AND PAYABLE, SUBJECT TO THE PENALTIES
PRESCRIBED UNDER APPLICABLE PROVISIONS OF
THIS CODE: PROVIDED, FINALLY, THAT IF THE
SELLER, HAVING PAID THE TAX, SUBMITS SUCH
PROOF OF INTENT WITHIN SIX (6) MONTHS FROM THE
REGISTRATION OF THE DOCUMENT TRANSFERRING
THE REAL PROPERTY, HE SHALL BE ENTITLED TO A
REFUND OF SUCH TAX UPON VERIFICATION OF HIS
COMPLIANCE WITH THE REQUIREMENTS FOR SUCH
EXEMPTION.
IN CASE THE TAXPAYER ELECTS AND IS
QUALIFIED TO REPORT THE GAIN BY INSTALLMENTS
UNDER SECTION 49 OF THIS CODE, THE TAX DUE
FROM EACH INSTALLMENT PAYMENT SHALL BE PAID
WITHIN (30) DAYS FROM THE RECEIPT OF SUCH
PAYMENTS.
NO REGISTRATION OF ANY DOCUMENT
TRANSFERRING REAL PROPERTY SHALL BE EFFECTED
BY THE REGISTER OF DEEDS UNLESS THE
COMMISSIONER OR HIS DULY AUTHORIZED
REPRESENTATIVE HAS CERTIFIED THAT SUCH
TRANSFER HAS BEEN REPORTED, AND THE TAX
HEREIN IMPOSED, IF ANY, HAS BEEN PAID.

(B) ASSESSMENT AND PAYMENT OF DEFICIENCY TAX. —
AFTER THE RETURN IS FILED, THE COMMISSIONER SHALL
EXAMINE IT AND ASSESS THE CORRECT AMOUNT OF THE
TAX. THE TAX OR DEFICIENCY INCOME TAX SO
DISCOVERED SHALL BE PAID UPON NOTICE AND
DEMAND FROM THE COMMISSIONER.
AS USED IN THIS CHAPTER, IN RESPECT OF A TAX IMPOSED BY
THIS TITLE, THE TERM 'DEFICIENCY' MEANS:
(1) THE AMOUNT BY WHICH THE TAX IMPOSED BY THIS TITLE
109 Guide Notes on Income Tax
EXCEEDS THE AMOUNT SHOWN AS THE TAX BY THE
TAXPAYER UPON HIS RETURN; BUT THE AMOUNT SO
SHOWN ON THE RETURN SHALL BE INCREASED BY THE
AMOUNTS PREVIOUSLY ASSESSED (OR COLLECTED
WITHOUT ASSESSMENT) AS A DEFICIENCY, AND
DECREASED BY THE AMOUNT PREVIOUSLY ABATED,
CREDITED, RETURNED OR OTHERWISE REPAID IN
RESPECT OF SUCH TAX; OR
(2) IF NO AMOUNT IS SHOWN AS THE TAX BY THE TAXPAYER
UPON THIS RETURN, OR IF NO RETURN IS MADE BY THE
TAXPAYER, THEN THE AMOUNT BY WHICH THE TAX
EXCEEDS THE AMOUNTS PREVIOUSLY ASSESSED (OR
COLLECTED WITHOUT ASSESSMENT) AS A DEFICIENCY;
BUT SUCH AMOUNTS PREVIOUSLY ASSESSED OR
COLLECTED WITHOUT ASSESSMENT SHALL FIRST BE
DECREASED BY THE AMOUNTS PREVIOUSLY ABATED,
CREDITED RETURNED OR OTHERWISE REPAID IN RESPECT
OF SUCH TAX.
SEC. 57. WITHHOLDING OF TAX AT SOURCE. —
(A) WITHHOLDING OF FINAL TAX ON CERTAIN INCOMES. —
SUBJECT TO RULES AND REGULATIONS THE SECRETARY
OF FINANCE MAY PROMULGATE, UPON THE
RECOMMENDATION OF THE COMMISSIONER,
REQUIRING THE FILING OF INCOME TAX RETURN BY
CERTAIN INCOME PAYEES, THE TAX IMPOSED OR
PRESCRIBED BY SECTIONS 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E),
27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5),
28(A)(7)(A), 28(A)(7)(B), 28(A)(7)(C), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(A), 28(B)(5)(B), 28(B)(5)(C); 33;
AND 282 OF THIS CODE ON SPECIFIED ITEMS OF INCOME
SHALL BE WITHHELD BY PAYOR-CORPORATION AND/OR
PERSON AND PAID IN THE SAME MANNER AND SUBJECT
TO THE SAME CONDITIONS AS PROVIDED IN SECTION 58
OF THIS CODE.
(B) WITHHOLDING OF CREDITABLE TAX AT SOURCE. — THE
SECRETARY OF FINANCE MAY, UPON THE
RECOMMENDATION OF THE COMMISSIONER, REQUIRE
2D SEM.
THE WITHHOLDING OF A TAX ON THE ITEMS OF INCOME
PAYABLE TO NATURAL OR JURIDICAL PERSONS,
RESIDING IN THE PHILIPPINES, BY PAYOR-
CORPORATION/PERSONS AS PROVIDED FOR BY LAW, AT
THE RATE OF NOT LESS THAN ONE PERCENT (1%) BUT
NOT MORE THAN THIRTY-TWO PERCENT (32%) THEREOF,
WHICH SHALL BE CREDITED AGAINST THE INCOME TAX
LIABILITY OF THE TAXPAYER FOR THE TAXABLE YEAR.
PROVIDED THAT, BEGINNING JANUARY 1, 2019,
THE RATE OF WITHHOLDING SHALL NOT BE
LESS THAN ONE PERCENT (1%) BUT NOT MORE
THAN FIFTEEN PERCENT (15%) OF THE INCOME
PAYMENT.
(C) TAX-FREE COVENANT BONDS. IN ANY CASE WHERE
BONDS, MORTGAGES, DEEDS OF TRUST OR OTHER
SIMILAR OBLIGATIONS OF DOMESTIC OR RESIDENT
FOREIGN CORPORATIONS, CONTAIN A CONTRACT OR
PROVISIONS BY WHICH THE OBLIGOR AGREES TO PAY
ANY PORTION OF THE TAX IMPOSED IN THIS TITLE UPON
THE OBLIGEE OR TO REIMBURSE THE OBLIGEE FOR ANY
PORTION OF THE TAX OR TO PAY THE INTEREST WITHOUT
DEDUCTION FOR ANY TAX WHICH THE OBLIGOR MAY BE
REQUIRED OR PERMITTED TO PAY THEREON OR TO
RETAIN THEREFROM UNDER ANY LAW OF THE
PHILIPPINES, OR ANY STATE OR COUNTRY, THE OBLIGOR
SHALL DEDUCT BONDS, MORTGAGES, DEEDS OF TRUST
OR OTHER OBLIGATIONS, WHETHER THE INTEREST OR
OTHER PAYMENTS ARE PAYABLE ANNUALLY OR AT
SHORTER OR LONGER PERIODS, AND WHETHER THE
BONDS, SECURITIES OR OBLIGATIONS HAD BEEN OR WILL
BE ISSUED OR MARKETED, AND THE INTEREST OR OTHER
PAYMENT THEREON PAID, WITHIN OR WITHOUT THE
PHILIPPINES, IF THE INTEREST OR OTHER PAYMENT IS
PAYABLE TO A NONRESIDENT ALIEN OR TO A CITIZEN OR
RESIDENT OF THE PHILIPPINES. 

SEC. 58. RETURNS AND PAYMENT OF TAXES WITHHELD AT
SOURCE. —
(A) QUARTERLY RETURNS AND PAYMENTS OF TAXES
A.Y. 2017-2018 Ateneo de Manila University School of Law
WITHHELD. — TAXES DEDUCTED AND WITHHELD
UNDER SECTION 57 BY WITHHOLDING AGENTS SHALL BE
COVERED BY A RETURN AND PAID TO, EXCEPT IN CASES
WHERE THE COMMISSIONER OTHERWISE PERMITS, AN
AUTHORIZED TREASURER OF THE CITY OR MUNICIPALITY
WHERE THE WITHHOLDING AGENT HAS HIS LEGAL
RESIDENCE OR PRINCIPAL PLACE OF BUSINESS, OR WHERE
THE WITHHOLDING AGENT IS A CORPORATION, WHERE
THE PRINCIPAL OFFICE IS LOCATED.
THE TAXES DEDUCTED AND WITHHELD BY THE
WITHHOLDING AGENT SHALL BE HELD AS A SPECIAL
FUND IN TRUST FOR THE GOVERNMENT UNTIL PAID TO
THE COLLECTING OFFICERS.
THE RETURN FOR FINAL WITHHOLDING TAX
SHALL BE FILED AND THE PAYMENT MADE WITHIN
TWENTY-FIVE (25) DAYS FROM THE CLOSE OF EACH
CALENDAR QUARTER, WHILE THE RETURN FOR
CREDITABLE WITHHOLDING TAXES SHALL BE FILED AND
THE PAYMENT MADE NOT LATER THAN THE LAST DAY OF
THE MONTH FOLLOWING THE CLOSE OF THE QUARTER
DURING WHICH WITHHOLDING WAS MADE: PROVIDED,
THAT THE COMMISSIONER, WITH THE APPROVAL OF THE
SECRETARY OF FINANCE, MAY REQUIRE THESE
WITHHOLDING AGENTS TO PAY OR DEPOSIT THE TAXES
DEDUCTED OR WITHHELD AT MORE FREQUENT
INTERVALS WHEN NECESSARY TO PROTECT THE
INTEREST OF THE GOVERNMENT.
(B) STATEMENT OF INCOME PAYMENTS MADE AND TAXES
WITHHELD. — EVERY WITHHOLDING AGENT REQUIRED
TO DEDUCT AND WITHHOLD TAXES UNDER SECTION 57
SHALL FURNISH EACH RECIPIENT, IN RESPECT TO HIS OR
ITS RECEIPTS DURING THE CALENDAR QUARTER OR
YEAR, A WRITTEN STATEMENT SHOWING THE INCOME OR
OTHER PAYMENTS MADE BY THE WITHHOLDING AGENT
DURING SUCH QUARTER OR YEAR, AND THE AMOUNT OF
THE TAX DEDUCTED AND WITHHELD THEREFROM,
SIMULTANEOUSLY UPON PAYMENT AT THE REQUEST OF
THE PAYEE, BUT NOT LATE THAN THE TWENTIETH (20TH)
110
DAY FOLLOWING THE CLOSE OF THE QUARTER IN THE
CASE OF CORPORATE PAYEE, OR NOT LATER THAN
MARCH 1 OF THE FOLLOWING YEAR IN THE CASE OF
INDIVIDUAL PAYEE FOR CREDITABLE WITHHOLDING
TAXES. FOR FINAL WITHHOLDING TAXES, THE
STATEMENT SHOULD BE GIVEN TO THE PAYEE ON OR
BEFORE JANUARY 31 OF THE SUCCEEDING YEAR.
(C) ANNUAL INFORMATION RETURN. — EVERY
WITHHOLDING AGENT REQUIRED TO DEDUCT AND
WITHHOLD TAXES UNDER SECTION 57 SHALL SUBMIT TO
THE COMMISSIONER AN ANNUAL INFORMATION
RETURN CONTAINING THE LIST OF PAYEES AND INCOME
PAYMENTS, AMOUNT OF TAXES WITHHELD FROM EACH
PAYEE AND SUCH OTHER PERTINENT INFORMATION AS
MAY BE REQUIRED BY THE COMMISSIONER. IN THE CASE
OF FINAL WITHHOLDING TAXES, THE RETURN SHALL BE
FILED ON OR BEFORE JANUARY 31 OF THE SUCCEEDING
YEAR, AND FOR CREDITABLE WITHHOLDING TAXES, NOT
LATER THAN MARCH 1 OF THE YEAR FOLLOWING THE
YEAR FOR WHICH THE ANNUAL REPORT IS BEING
SUBMITTED. THIS RETURN, IF MADE AND FILED IN
ACCORDANCE WITH THE RULES AND REGULATIONS
APPROVED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, SHALL BE
SUFFICIENT COMPLIANCE WITH THE REQUIREMENTS OF
SECTION 68 OF THIS TITLE IN RESPECT TO THE INCOME
PAYMENTS.
THE COMMISSIONER MAY, BY RULES AND
REGULATIONS, GRANT TO ANY WITHHOLDING AGENT A
REASONABLE EXTENSION OF TIME TO FURNISH AND
SUBMIT THE RETURN REQUIRED IN THIS SUBSECTION.
(D) INCOME OF RECIPIENT. — INCOME UPON WHICH ANY
CREDITABLE TAX IS REQUIRED TO BE WITHHELD AT
SOURCE UNDER SECTION 57 SHALL BE INCLUDED IN THE
RETURN OF ITS RECIPIENT BUT THE EXCESS OF THE
AMOUNT OF TAX SO WITHHELD OVER THE TAX DUE ON
HIS RETURN SHALL BE REFUNDED TO HIM SUBJECT TO
THE PROVISIONS OF SECTION 204; IF THE INCOME TAX
111 Guide Notes on Income Tax
COLLECTED AT SOURCE IS LESS THAN THE TAX DUE ON
HIS RETURN, THE DIFFERENCE SHALL BE PAID IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 56.
ALL TAXES WITHHELD PURSUANT TO THE
PROVISIONS OF THIS CODE AND ITS IMPLEMENTING
RULES AND REGULATIONS ARE HEREBY CONSIDERED
TRUST FUNDS AND SHALL BE MAINTAINED IN A
SEPARATE ACCOUNT AND NOT COMMINGLED WITH ANY
OTHER FUNDS OF THE WITHHOLDING AGENT.
(E) REGISTRATION WITH REGISTER OF DEEDS. — NO
REGISTRATION OF ANY DOCUMENT TRANSFERRING REAL
PROPERTY SHALL BE EFFECTED BY THE REGISTER OF
DEEDS UNLESS THE COMMISSIONER OR HIS DULY
AUTHORIZED REPRESENTATIVE HAS CERTIFIED THAT
SUCH TRANSFER HAS BEEN REPORTED, AND THE CAPITAL
GAINS OR CREDITABLE WITHHOLDING TAX, IF ANY, HAS
BEEN PAID: PROVIDED, HOWEVER, THAT THE
INFORMATION AS MAY BE REQUIRED BY RULES AND
REGULATIONS TO BE PRESCRIBED BY THE SECRETARY OF
FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER, SHALL BE ANNOTATED BY THE
REGISTER OF DEEDS IN THE TRANSFER CERTIFICATE OF
TITLE OR CONDOMINIUM CERTIFICATE OF TITLE:
PROVIDED, FURTHER, THAT IN CASES OF TRANSFER OF
PROPERTY TO A CORPORATION, PURSUANT TO A
MERGER, CONSOLIDATION OR REORGANIZATION, AND
WHERE THE LAW ALLOWS DEFERRED RECOGNITION OF
INCOME IN ACCORDANCE WITH SECTION 40, THE
INFORMATION AS MAY BE REQUIRED BY RULES AND
REGULATIONS TO BE PRESCRIBED BY THE SECRETARY OF
FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER, SHALL BE ANNOTATED BY THE
REGISTER OF DEEDS AT THE BACK OF THE TRANSFER
CERTIFICATE OF TITLE OR CONDOMINIUM CERTIFICATE
OF TITLE OF THE REAL PROPERTY INVOLVED: PROVIDED,
FINALLY, THAT ANY VIOLATION OF THIS PROVISION BY
THE REGISTER OF DEEDS SHALL BE SUBJECT TO THE
PENALTIES IMPOSED UNDER SECTION 269 OF THIS
CODE. 
 
 (3) INCOME RECEIVED BY ESTATES OF DECEASED
2D SEM.
SEC. 59. TAX ON PROFITS COLLECTIBLE FROM OWNER OR OTHER
PERSONS. — THE TAX IMPOSED UNDER THIS TITLE UPON GAINS,
PROFITS, AND INCOME NOT FALLING UNDER THE FOREGOING
AND NOT RETURNED AND PAID BY VIRTUE OF THE FOREGOING
OR AS OTHERWISE PROVIDED BY LAW SHALL BE ASSESSED BY
PERSONAL RETURN UNDER RULES AND REGULATIONS TO BE
PRESCRIBED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER. THE INTENT AND
PURPOSE OF THE TITLE IS THAT ALL GAINS, PROFITS AND
INCOME OF A TAXABLE CLASS, AS DEFINED IN THIS TITLE, SHALL
BE CHARGED AND ASSESSED WITH THE CORRESPONDING TAX
PRESCRIBED BY THIS TITLE, AND SAID TAX SHALL BE PAID BY THE
OWNERS OF SUCH GAINS, PROFITS AND INCOME, OR THE PROPER
PERSON HAVING THE RECEIPT, CUSTODY, CONTROL OR
DISPOSAL OF THE SAME. FOR PURPOSES OF THIS TITLE,
OWNERSHIP OF SUCH GAINS, PROFITS AND INCOME OR LIABILITY
TO PAY THE TAX SHALL BE DETERMINED AS OF THE YEAR FOR
WHICH A RETURN IS REQUIRED TO BE RENDERED.
CHAPTER X — ESTATES AND TRUSTS
SEC. 60. IMPOSITION OF TAX. —
(A) APPLICATION OF TAX. — THE TAX IMPOSED BY THIS
TITLE UPON INDIVIDUALS SHALL APPLY TO THE INCOME
OF ESTATES OR OF ANY KIND OF PROPERTY HELD IN
TRUST, INCLUDING:
(1) 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;
(2) INCOME WHICH IS TO BE DISTRIBUTED CURRENTLY
BY THE FIDUCIARY TO THE BENEFICIARIES, AND
INCOME COLLECTED BY A GUARDIAN OF AN INFANT
WHICH IS TO BE HELD OR DISTRIBUTED AS THE
COURT MAY DIRECT;
A.Y. 2017-2018 Ateneo de Manila University School of Law
PERSONS DURING THE PERIOD OF ADMINISTRATION
OR SETTLEMENT OF THE ESTATE; AND
(4) INCOME WHICH, IN THE DISCRETION OF THE
FIDUCIARY, MAY BE EITHER DISTRIBUTED TO THE
BENEFICIARIES OR ACCUMULATED.
(B) EXCEPTION. — THE TAX IMPOSED BY THIS TITLE SHALL
NOT APPLY TO EMPLOYEE'S TRUST WHICH FORMS PART
OF A PENSION, STOCK BONUS OR PROFIT-SHARING PLAN
OF AN EMPLOYER FOR THE BENEFIT OF SOME OR ALL OF
HIS EMPLOYEES (1) IF CONTRIBUTIONS ARE MADE TO THE
TRUST BY SUCH EMPLOYER, OR EMPLOYEES, OR BOTH FOR
SEC. 61. TAXABLE INCOME. — THE TAXABLE INCOME OF THE
ESTATE OR TRUST SHALL BE COMPUTED IN THE SAME MANNER
THE PURPOSE OF DISTRIBUTING TO SUCH EMPLOYEES
AND ON THE SAME BASIS AS IN THE CASE OF AN INDIVIDUAL,
THE EARNINGS AND PRINCIPAL OF THE FUND
EXCEPT THAT:
ACCUMULATED BY THE TRUST IN ACCORDANCE WITH
SUCH PLAN, AND (2) IF UNDER THE TRUST INSTRUMENT
IT IS IMPOSSIBLE, AT ANY TIME PRIOR TO THE
SATISFACTION OF ALL LIABILITIES WITH RESPECT TO
EMPLOYEES UNDER THE TRUST, FOR ANY PART OF THE
CORPUS OR INCOME TO BE (WITHIN THE TAXABLE YEAR
OR THEREAFTER) USED FOR, OR DIVERTED TO, PURPOSES
OTHER THAN FOR THE EXCLUSIVE BENEFIT OF HIS
EMPLOYEES: PROVIDED, THAT ANY AMOUNT ACTUALLY
DISTRIBUTED TO ANY EMPLOYEE OR DISTRIBUTEE SHALL
BE TAXABLE TO HIM IN THE YEAR IN WHICH SO
DISTRIBUTED TO THE EXTENT THAT IT EXCEEDS THE
AMOUNT CONTRIBUTED BY SUCH EMPLOYEE OR
DISTRIBUTEE.
(C) COMPUTATION AND PAYMENT. —
(1) IN GENERAL. — THE TAX SHALL BE COMPUTED UPON
THE TAXABLE INCOME OF THE ESTATE OR TRUST AND
SHALL BE PAID BY THE FIDUCIARY, EXCEPT AS
PROVIDED IN SECTION 63 (RELATING TO REVOCABLE
TRUSTS) AND SECTION 64 (RELATING TO INCOME
FOR THE BENEFIT OF THE GRANTOR).
(2) CONSOLIDATION OF INCOME OF TWO OR MORE
TRUSTS. — WHERE, IN THE CASE OF TWO OR MORE
TRUSTS, THE CREATOR OF THE TRUST IN EACH
112
INSTANCE IS THE SAME PERSON, AND THE
BENEFICIARY IN EACH INSTANCE IS THE SAME, THE
TAXABLE INCOME OF ALL THE TRUSTS SHALL BE
CONSOLIDATED AND THE TAX PROVIDED IN THIS
SECTION COMPUTED ON SUCH CONSOLIDATED
INCOME, AND SUCH PROPORTION OF SAID TAX
SHALL BE ASSESSED AND COLLECTED FROM EACH
TRUSTEE WHICH THE TAXABLE INCOME OF THE TRUST
ADMINISTERED BY HIM BEARS TO THE
CONSOLIDATED INCOME OF THE SEVERAL TRUSTS.
(A) THERE SHALL BE ALLOWED AS A DEDUCTION IN
COMPUTING THE TAXABLE INCOME OF THE ESTATE OR
TRUST THE AMOUNT OF THE INCOME OF THE ESTATE OR
TRUST FOR THE TAXABLE YEAR WHICH IS TO BE
DISTRIBUTED CURRENTLY BY THE FIDUCIARY TO THE
BENEFICIARIES, AND THE AMOUNT OF THE INCOME
COLLECTED BY A GUARDIAN OF AN INFANT WHICH IS TO
BE HELD OR DISTRIBUTED AS THE COURT MAY DIRECT,
BUT THE AMOUNT SO ALLOWED AS A DEDUCTION SHALL
BE INCLUDED IN COMPUTING THE TAXABLE INCOME OF
THE BENEFICIARIES, WHETHER DISTRIBUTED TO THEM
OR NOT. ANY AMOUNT ALLOWED AS A DEDUCTION
UNDER THIS SUBSECTION SHALL NOT BE ALLOWED AS A
DEDUCTION UNDER SUBSECTION (B) OF THIS SECTION IN
THE SAME OR ANY SUCCEEDING TAXABLE YEAR.
(B) IN THE CASE OF INCOME RECEIVED BY ESTATES OF
DECEASED PERSONS DURING THE PERIOD OF
ADMINISTRATION OR SETTLEMENT OF THE ESTATE, AND
IN THE CASE OF INCOME WHICH, IN THE DISCRETION OF
THE FIDUCIARY, MAY BE EITHER DISTRIBUTED TO THE
BENEFICIARY OR ACCUMULATED, THERE SHALL BE
ALLOWED AS AN ADDITIONAL DEDUCTION IN
COMPUTING THE TAXABLE INCOME OF THE ESTATE OR
TRUST THE AMOUNT OF THE INCOME OF THE ESTATE OR
113 Guide Notes on Income Tax
TRUST FOR ITS TAXABLE YEAR, WHICH IS PROPERLY PAID
OR CREDITED DURING SUCH YEAR TO ANY LEGATEE, HEIR
OR BENEFICIARY BUT THE AMOUNT SO ALLOWED AS A
DEDUCTION SHALL BE INCLUDED IN COMPUTING THE
TAXABLE INCOME OF THE LEGATEE, HEIR OR
BENEFICIARY.
(C) IN THE CASE OF A TRUST ADMINISTERED IN A FOREIGN
COUNTRY, THE DEDUCTIONS MENTIONED IN
SUBSECTIONS (A) AND (B) OF THIS SECTION SHALL NOT
BE ALLOWED: PROVIDED, THAT THE AMOUNT OF ANY
INCOME INCLUDED IN THE RETURN OF SAID TRUST
SHALL NOT BE INCLUDED IN COMPUTING THE INCOME OF
THE BENEFICIARIES.
SEC. 62. EXEMPTION ALLOWED TO ESTATES AND TRUSTS. —
SECTION 62 HAS BEEN REPEALED BY R.A. NO. 10963.
SEC. 63. 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 (1) 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 (2) IN
ANY PERSON NOT HAVING A SUBSTANTIAL ADVERSE INTEREST
IN THE DISPOSITION OF SUCH PART OF THE CORPUS OR THE
INCOME THEREFROM, THE INCOME OF SUCH PART OF THE TRUST
SHALL BE INCLUDED IN COMPUTING THE TAXABLE INCOME OF
THE GRANTOR. 
 

SEC. 64. INCOME FOR BENEFIT OF GRANTOR. —
(A) WHERE ANY PART OF THE INCOME OF A TRUST (1) 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, OR (2) MAY, 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, BE DISTRIBUTED TO THE
GRANTOR, OR (3) IS, OR IN THE DISCRETION OF THE
2D SEM.
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 TAXABLE INCOME OF THE GRANTOR.
(B) AS USED IN THIS SECTION, THE TERM 'IN THE
DISCRETION OF THE GRANTOR' MEANS IN THE
DISCRETION OF THE GRANTOR, EITHER ALONE OR IN
CONJUNCTION WITH ANY PERSON NOT HAVING A
SUBSTANTIAL ADVERSE INTEREST IN THE DISPOSITION
OF THE PART OF THE INCOME IN QUESTION. 
 

SEC. 65. FIDUCIARY RETURNS. — GUARDIANS, TRUSTEES,
EXECUTORS, ADMINISTRATORS, RECEIVERS, CONSERVATORS
AND ALL PERSONS OR CORPORATIONS, ACTING IN ANY
FIDUCIARY CAPACITY, SHALL RENDER, IN DUPLICATE, A RETURN
OF THE INCOME OF THE PERSON, TRUST OR ESTATE FOR WHOM
OR WHICH THEY ACT, AND BE SUBJECT TO ALL THE PROVISIONS
OF THIS TITLE, WHICH APPLY TO INDIVIDUALS IN CASE SUCH
PERSON, ESTATE OR TRUST HAS A GROSS INCOME OF TWENTY
THOUSAND PESOS (P20,000) OR OVER DURING THE TAXABLE
YEAR. SUCH FIDUCIARY OR PERSON FILING THE RETURN FOR HIM
OR IT, SHALL TAKE OATH THAT HE HAS SUFFICIENT KNOWLEDGE
OF THE AFFAIRS OF SUCH PERSON, TRUST OR ESTATE TO ENABLE
HIM TO MAKE SUCH RETURN AND THAT THE SAME IS, TO THE
BEST OF HIS KNOWLEDGE AND BELIEF, TRUE AND CORRECT, AND
BE SUBJECT TO ALL THE PROVISIONS OF THIS TITLE WHICH APPLY
TO INDIVIDUALS: PROVIDED, THAT A RETURN MADE BY OR FOR
ONE OR TWO OR MORE JOINT FIDUCIARIES FILED IN THE
PROVINCE WHERE SUCH FIDUCIARIES RESIDE; UNDER SUCH
RULES AND REGULATIONS AS THE SECRETARY OF FINANCE,
UPON RECOMMENDATION OF THE COMMISSIONER, SHALL
PRESCRIBE, SHALL BE A SUFFICIENT COMPLIANCE WITH THE
REQUIREMENTS OF THIS SECTION.
SEC. 66. FIDUCIARIES INDEMNIFIED AGAINST CLAIMS FOR
TAXES PAID. — TRUSTEES, EXECUTORS, ADMINISTRATORS AND
OTHER FIDUCIARIES ARE INDEMNIFIED AGAINST THE CLAIMS OR
A.Y. 2017-2018 Ateneo de Manila University School of Law
DEMANDS OF EVERY BENEFICIARY FOR ALL PAYMENTS OF TAXES
WHICH THEY SHALL BE REQUIRED TO MAKE UNDER THE
PROVISIONS OF THIS TITLE, AND THEY SHALL HAVE CREDIT FOR
THE AMOUNT OF SUCH PAYMENTS AGAINST THE BENEFICIARY
OR PRINCIPAL IN ANY ACCOUNTING WHICH THEY MAKE AS SUCH
TRUSTEES OR OTHER FIDUCIARIES.
CHAPTER XI — OTHER INCOME TAX
REQUIREMENTS
SEC. 67. COLLECTION OF FOREIGN PAYMENTS. — ALL PERSONS,
CORPORATIONS, DULY REGISTERED GENERAL CO-
PARTNERSHIPS (COMPANIAS COLECTIVAS) UNDERTAKING FOR
PROFIT OR OTHERWISE THE COLLECTION OF FOREIGN PAYMENTS
OF INTERESTS OR DIVIDENDS BY MEANS OF COUPONS, CHECKS
OR BILLS OF EXCHANGE SHALL OBTAIN A LICENSE FROM THE
COMMISSIONER, AND SHALL BE SUBJECT TO SUCH RULES AND
REGULATIONS ENABLING THE GOVERNMENT TO OBTAIN THE
INFORMATION REQUIRED UNDER THIS TITLE, AS THE
SECRETARY OF FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER, SHALL PRESCRIBE.
SEC. 68. INFORMATION AT SOURCE AS TO INCOME PAYMENTS.
— ALL PERSONS, CORPORATIONS OR DULY REGISTERED CO-
PARTNERSHIPS (COMPANIAS COLECTIVAS), IN WHATEVER
CAPACITY ACTING, INCLUDING LESSEES OR MORTGAGORS OF
REAL OR PERSONAL PROPERTY, TRUSTEES, ACTING IN ANY TRUST
CAPACITY, EXECUTORS, ADMINISTRATORS, RECEIVERS,
CONSERVATORS AND EMPLOYEES MAKING PAYMENT TO
ANOTHER PERSON, CORPORATION OR DULY REGISTERED
GENERAL CO-PARTNERSHIP (COMPANIA COLECTIVA), OF
INTERESTS, RENTS, SALARIES, WAGES, PREMIUMS, ANNUITIES,
COMPENSATIONS, REMUNERATIONS, EMOLUMENTS OR OTHER
FIXED OR DETERMINABLE GAINS, PROFITS AND INCOME, OTHER
THAN PAYMENT DESCRIBED IN SECTION 69, IN ANY TAXABLE
YEAR, OR IN THE CASE OF SUCH PAYMENTS MADE BY THE
GOVERNMENT OF THE PHILIPPINES, THE OFFICERS OR
EMPLOYEES OF THE GOVERNMENT HAVING INFORMATION AS
TO SUCH PAYMENTS AND REQUIRED TO MAKE RETURNS IN
114
REGARD THERETO, ARE AUTHORIZED AND REQUIRED TO
RENDER A TRUE AND ACCURATE RETURN TO THE
COMMISSIONER, UNDER SUCH RULES AND REGULATIONS, AND
IN SUCH FORM AND MANNER AS MAY BE PRESCRIBED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER, SETTING FORTH THE AMOUNT OF SUCH GAINS,
PROFITS AND INCOME AND THE NAME AND ADDRESS OF THE
RECIPIENT OF SUCH PAYMENTS: PROVIDED, THAT SUCH
RETURNS SHALL BE REQUIRED, IN THE CASE OF PAYMENTS OF
INTEREST UPON BONDS AND MORTGAGES OR DEEDS OF TRUST
OR OTHER SIMILAR OBLIGATIONS OF CORPORATIONS, AND IN
THE CASE OF COLLECTIONS OF ITEMS, NOT PAYABLE IN THE
PHILIPPINES, OF INTEREST UPON THE BONDS OF FOREIGN
COUNTRIES AND INTEREST FROM THE BONDS AND DIVIDENDS
FROM THE STOCK OF FOREIGN CORPORATIONS BY PERSONS,
CORPORATIONS OR DULY REGISTERED GENERAL CO-
PARTNERSHIPS (COMPANIAS COLECTIVAS), UNDERTAKING AS A
MATTER OF BUSINESS OR FOR PROFIT OR OTHERWISE THE
COLLECTION OF FOREIGN PAYMENTS OF SUCH INTERESTS OR
DIVIDENDS BY MEANS OF COUPONS OR BILLS OF EXCHANGE. 
 

SEC. 69. RETURN OF INFORMATION OF BROKERS. — EVERY
PERSON, CORPORATION OR DULY REGISTERED GENERAL CO-
PARTNERSHIP (COMPANIA COLECTIVA), DOING BUSINESS AS A
BROKER IN ANY EXCHANGE OR BOARD OR OTHER SIMILAR PLACE
OF BUSINESS, SHALL, WHEN REQUIRED BY THE COMMISSIONER,
RENDER A CORRECT RETURN DULY VERIFIED UNDER OATH
UNDER SUCH RULES AND REGULATIONS AS THE SECRETARY OF
FINANCE, UPON RECOMMENDATION OF THE COMMISSIONER,
MAY PRESCRIBE, SHOWING THE NAMES OF CUSTOMERS FOR
WHOM SUCH PERSON, CORPORATION OR DULY REGISTERED
GENERAL CO-PARTNERSHIP (COMPANIA COLECTIVA) HAS
TRANSACTED ANY BUSINESS, WITH SUCH DETAILS AS TO THE
PROFITS, LOSSES OR OTHER INFORMATION WHICH THE
COMMISSIONER, MAY REQUIRE AS TO EACH OF SUCH
CUSTOMERS AS WILL ENABLE THE COMMISSIONER TO
DETERMINE WHETHER ALL INCOME TAX DUE ON PROFITS OR
GAINS OF SUCH CUSTOMERS HAS BEEN PAID.
SEC. 70, RETURNS OF FOREIGN CORPORATIONS. —
115 Guide Notes on Income Tax
(A) REQUIREMENTS. — UNDER RULES AND REGULATIONS
PRESCRIBED BY THE SECRETARY OF FINANCE, UPON THE
RECOMMENDATION OF THE COMMISSIONER, ANY
ATTORNEY, ACCOUNTANT, FIDUCIARY, BANK, TRUST
COMPANY, FINANCIAL INSTITUTION OR OTHER PERSON,
WHO AIDS, ASSISTS, COUNSELS OR ADVISES IN, O WITH
RESPECT TO; THE FORMATION, ORGANIZATION OR
REORGANIZATION OF ANY FOREIGN CORPORATION,
SHALL, WITHIN THIRTY (30) DAYS THEREAFTER, FILE
WITH THE COMMISSIONER A RETURN.
(B) FORM AND CONTENTS OF RETURN. — SUCH RETURN
SHALL BE IN SUCH FORM AND SHALL SET FORTH; UNDER
OATH, IN RESPECT OF EACH SUCH CORPORATION, TO THE
FULL EXTENT OF THE INFORMATION WITHIN THE
POSSESSION OR KNOWLEDGE OR UNDER THE CONTROL
OF THE PERSON REQUIRED TO FILE THE RETURN, SUCH
INFORMATION AS THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, SHALL
PRESCRIBE BY RULES AND REGULATIONS AS NECESSARY
FOR CARRYING OUT THE PROVISIONS OF THIS TITLE.
NOTHING IN THIS SECTION SHALL BE CONSTRUED TO
REQUIRE THE DIVULGING OF PRIVILEGED
COMMUNICATIONS BETWEEN ATTORNEY AND CLIENT.
SEC. 71. DISPOSITION OF INCOME TAX RETURNS, PUBLICATION
OF LISTS OF TAXPAYERS AND FILERS. — AFTER THE ASSESSMENT
SHALL HAVE BEEN MADE, AS PROVIDED IN THIS TITLE, THE
RETURNS, TOGETHER WITH ANY CORRECTIONS THEREOF WHICH
MAY HAVE BEEN MADE BY THE COMMISSIONER, SHALL BE FILED
IN THE OFFICE OF THE COMMISSIONER AND SHALL CONSTITUTE
PUBLIC RECORDS AND BE OPEN TO INSPECTION AS SUCH UPON
THE ORDER OF THE PRESIDENT OF THE PHILIPPINES, UNDER
RULES AND REGULATIONS TO BE PRESCRIBED BY THE SECRETARY
OF FINANCE, UPON RECOMMENDATION OF THE COMMISSIONER.
THE COMMISSIONER MAY, IN EACH YEAR, CAUSE TO BE
PREPARED AND PUBLISHED IN ANY NEWSPAPER THE LISTS
CONTAINING THE NAMES AND ADDRESSES OF PERSONS WHO
HAVE FILED INCOME TAX RETURNS.
SEC. 72. SUIT TO RECOVER TAX BASED ON FALSE OR
2D SEM.
FRAUDULENT RETURNS. — WHEN AN ASSESSMENT IS MADE IN
CASE OF ANY LIST, STATEMENT OR RETURN, WHICH IN THE
OPINION OF THE COMMISSIONER WAS FALSE OR FRAUDULENT
OR CONTAINED ANY UNDERSTATEMENT OR UNDERVALUATION,
NO TAX COLLECTED UNDER SUCH ASSESSMENT SHALL BE
RECOVERED BY ANY SUIT, UNLESS IT IS PROVED THAT THE SAID
LIST, STATEMENT OR RETURN WAS NOT FALSE NOR FRAUDULENT
AND DID NOT CONTAIN ANY UNDERSTATEMENT OR
UNDERVALUATION; BUT THIS PROVISION SHALL NOT APPLY TO
STATEMENTS OR RETURNS MADE OR TO BE MADE IN GOOD FAITH
REGARDING ANNUAL DEPRECIATION OF OIL OR GAS WELLS AND
MINES.
SEC. 73. DISTRIBUTION OF DIVIDENDS OR ASSETS BY
CORPORATIONS. —
(A) DEFINITION OF DIVIDENDS. — THE TERM 'DIVIDENDS'
WHEN USED IN THIS TITLE MEANS ANY DISTRIBUTION
MADE BY A CORPORATION TO ITS SHAREHOLDERS OUT
OF ITS EARNINGS OR PROFITS AND PAYABLE TO ITS
SHAREHOLDERS, WHETHER IN MONEY OR IN OTHER
PROPERTY.
WHERE A CORPORATION DISTRIBUTES ALL OF ITS
ASSETS IN COMPLETE LIQUIDATION OR DISSOLUTION,
THE GAIN REALIZED OR LOSS SUSTAINED BY THE
STOCKHOLDER, WHETHER INDIVIDUAL OR CORPORATE,
IS A TAXABLE INCOME OR A DEDUCTIBLE LOSS, AS THE
CASE MAY BE.
(B) STOCK DIVIDEND. — A STOCK DIVIDEND
REPRESENTING THE TRANSFER OF SURPLUS TO CAPITAL
ACCOUNT SHALL NOT BE SUBJECT TO TAX. HOWEVER, IF
A CORPORATION CANCELS OR REDEEMS STOCK ISSUED
AS A DIVIDEND AT SUCH TIME AND IN SUCH MANNER AS
TO MAKE THE DISTRIBUTION AND CANCELLATION OR
REDEMPTION, IN WHOLE OR IN PART, ESSENTIALLY
EQUIVALENT TO THE DISTRIBUTION OF A TAXABLE
DIVIDEND, THE AMOUNT SO DISTRIBUTED IN
REDEMPTION OR CANCELLATION OF THE STOCK SHALL
BE CONSIDERED AS TAXABLE INCOME TO THE EXTENT
THAT IT REPRESENTS A DISTRIBUTION OF EARNINGS OR
A.Y. 2017-2018 Ateneo de Manila University School of Law
PROFITS.
(C) DIVIDENDS DISTRIBUTED ARE DEEMED MADE FROM
MOST RECENTLY ACCUMULATED PROFITS. — ANY
DISTRIBUTION MADE TO THE SHAREHOLDERS OR
MEMBERS OF A CORPORATION SHALL BE DEEMED TO
HAVE BEEN MADE FORM THE MOST RECENTLY
ACCUMULATED PROFITS OR SURPLUS, AND SHALL
CONSTITUTE A PART OF THE ANNUAL INCOME OF THE
DISTRIBUTEE FOR THE YEAR IN WHICH RECEIVED.
(D) NET INCOME OF A PARTNERSHIP DEEMED
CONSTRUCTIVELY RECEIVED BY PARTNERS. — 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.
(B) RETURN AND PAYMENT OF ESTIMATED INCOME TAX BY
CHAPTER XII — QUARTERLY
CORPORATE INCOME TAX ANNUAL
DECLARATION AND QUARTERLY
PAYMENTS OF INCOME TAXES
SEC. 74. DECLARATION OF INCOME TAX FOR INDIVIDUALS. —
(A) IN GENERAL. — EXCEPT AS OTHERWISE PROVIDED IN
THIS SECTION, EVERY INDIVIDUAL SUBJECT TO INCOME
TAX UNDER SECTIONS 24 AND 25(A) OF THIS TITLE, WHO
IS RECEIVING SELF-EMPLOYMENT INCOME, WHETHER IT
(C) DEFINITION OF ESTIMATED TAX. — IN THE CASE OF AN
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 HIS ESTIMATED INCOME FOR
THE CURRENT TAXABLE YEAR ON OR BEFORE APRIL 15 OF
THE SAME TAXABLE YEAR. IN GENERAL, SELF-
EMPLOYMENT INCOME CONSISTS OF THE EARNINGS
116
DERIVED BY THE INDIVIDUAL FROM THE PRACTICE OF
PROFESSION OR CONDUCT OF TRADE OR BUSINESS
CARRIED ON BY HIM AS A SOLE PROPRIETOR OR BY A
PARTNERSHIP OF WHICH HE IS A MEMBER. NONRESIDENT
FILIPINO CITIZENS, WITH RESPECT TO INCOME FROM
WITHOUT THE PHILIPPINES, AND NONRESIDENT ALIENS
NOT ENGAGED IN TRADE OR BUSINESS IN THE
PHILIPPINES, ARE NOT REQUIRED TO RENDER A
DECLARATION OF ESTIMATED INCOME TAX. THE
DECLARATION SHALL CONTAIN SUCH PERTINENT
INFORMATION AS THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER, MAY, BY
RULES AND REGULATIONS PRESCRIBE. AN INDIVIDUAL
MAY MAKE AMENDMENTS OF A DECLARATION FILED
DURING THE TAXABLE YEAR UNDER THE RULES AND
REGULATIONS PRESCRIBED BY THE SECRETARY OF
FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER.
INDIVIDUALS. — THE AMOUNT OF ESTIMATED INCOME
AS DEFINED IN SUBSECTION (C) WITH RESPECT TO
WHICH A DECLARATION IS REQUIRED UNDER
SUBSECTION (A) SHALL BE PAID IN FOUR (4)
INSTALLMENTS. THE FIRST INSTALLMENT SHALL BE PAID
AT THE TIME OF THE DECLARATION AND THE SECOND
AND THIRD SHALL BE PAID ON AUGUST 15 AND
NOVEMBER 15 OF THE CURRENT YEAR, RESPECTIVELY.
THE FOURTH INSTALLMENT SHALL BE PAID ON OR
BEFORE APRIL 15 OF THE FOLLOWING CALENDAR YEAR
WHEN THE FINAL ADJUSTED INCOME TAX RETURN IS DUE
TO BE FILED.
INDIVIDUAL, THE TERM 'ESTIMATED TAX' MEANS THE
AMOUNT WHICH THE INDIVIDUAL DECLARED AS
INCOME TAX IN HIS FINAL ADJUSTED AND ANNUAL
INCOME TAX RETURN FOR THE PRECEDING TAXABLE
YEAR MINUS THE SUM OF THE CREDITS ALLOWED UNDER
THIS TITLE AGAINST THE SAID TAX. IF, DURING THE
117 Guide Notes on Income Tax
CURRENT TAXABLE YEAR, THE TAXPAYER REASONABLE
EXPECTS TO PAY A BIGGER INCOME TAX, HE SHALL FILE
AN AMENDED DECLARATION DURING ANY INTERVAL OF
INSTALLMENT PAYMENT DATES.
SEC. 75. DECLARATION OF QUARTERLY CORPORATE INCOME
TAX. — EVERY CORPORATION SHALL FILE IN DUPLICATE A
QUARTERLY SUMMARY DECLARATION OF ITS GROSS INCOME
AND DEDUCTIONS ON A CUMULATIVE BASIS FOR THE
PRECEDING QUARTER OR QUARTERS UPON WHICH THE INCOME
TAX, AS PROVIDED IN TITLE II OF THIS CODE, SHALL BE LEVIED,
COLLECTED AND PAID. THE TAX SO COMPUTED SHALL BE
DECREASED BY THE AMOUNT OF TAX PREVIOUSLY PAID OR
ASSESSED DURING THE PRECEDING QUARTERS AND SHALL BE
PAID NOT LATER THAN SIXTY (60) DAYS FROM THE CLOSE OF
EACH OF THE FIRST THREE (3) QUARTERS OF THE TAXABLE YEAR,
WHETHER CALENDAR OR FISCAL YEAR.
SEC. 76. FINAL ADJUSTMENT RETURN. — EVERY CORPORATION
LIABLE TO TAX UNDER SECTION 27 SHALL FILE A FINAL
ADJUSTMENT RETURN COVERING THE TOTAL TAXABLE INCOME
FOR THE PRECEDING CALENDAR OR FISCAL YEAR. IF THE SUM OF
THE QUARTERLY TAX PAYMENTS MADE DURING THE SAID
TAXABLE YEAR IS NOT EQUAL TO THE TOTAL TAX DUE ON THE
ENTIRE TAXABLE INCOME OF THAT YEAR, THE CORPORATION
SHALL EITHER:
(A) PAY THE BALANCE OF TAX STILL DUE; OR
(B) CARRY-OVER THE EXCESS CREDIT; OR
(C) BE CREDITED OR REFUNDED WITH THE EXCESS AMOUNT
PAID, AS THE CASE MAY BE.
IN CASE THE CORPORATION IS ENTITLED TO A TAX
CREDIT OR REFUND OF THE EXCESS ESTIMATED QUARTERLY
INCOME TAXES PAID, THE EXCESS AMOUNT SHOWN ON ITS FINAL
ADJUSTMENT RETURN MAY BE CARRIED OVER AND CREDITED
AGAINST THE ESTIMATED QUARTERLY INCOME TAX LIABILITIES
FOR THE TAXABLE QUARTERS OF THE SUCCEEDING TAXABLE
YEARS. ONCE THE OPTION TO CARRY-OVER AND APPLY THE
EXCESS QUARTERLY INCOME TAX AGAINST INCOME TAX DUE FOR
THE TAXABLE QUARTERS OF THE SUCCEEDING TAXABLE YEARS
2D SEM.
HAS BEEN MADE, SUCH OPTION SHALL BE CONSIDERED
IRREVOCABLE FOR THAT TAXABLE PERIOD AND NO APPLICATION
FOR CASH REFUND OR ISSUANCE OF A TAX CREDIT CERTIFICATE
SHALL BE ALLOWED THEREFOR.
SEC. 77. PLACE AND TIME OF FILING AND PAYMENT OF
QUARTERLY CORPORATE INCOME TAX. —
(A) PLACE OF FILING. — EXCEPT AS THE COMMISSIONER
OTHERWISE PERMITS, THE QUARTERLY INCOME TAX
DECLARATION REQUIRED IN SECTION 75 AND THE FINAL
ADJUSTMENT RETURN REQUIRED I SECTION 76 SHALL BE
FILED WITH THE AUTHORIZED AGENT BANKS OR
REVENUE DISTRICT OFFICER OR COLLECTION AGENT OR
DULY AUTHORIZED TREASURER OF THE CITY OR
MUNICIPALITY HAVING JURISDICTION OVER THE
LOCATION OF THE PRINCIPAL OFFICE OF THE
CORPORATION FILING THE RETURN OR PLACE WHERE ITS
MAIN BOOKS OF ACCOUNTS AND OTHER DATA FROM
WHICH THE RETURN IS PREPARED ARE KEPT.
(B) TIME OF FILING THE INCOME TAX RETURN. — THE
CORPORATE QUARTERLY DECLARATION SHALL BE FILED
WITHIN SIXTY (60) DAYS FOLLOWING THE CLOSE OF EACH
OF THE FIRST THREE (3) QUARTERS OF THE TAXABLE
YEAR. THE FINAL ADJUSTMENT RETURN SHALL BE FILED
ON OR BEFORE THE FIFTEENTH (15 ) DAY OF APRIL, OR ON
TH
OR BEFORE THE FIFTEENTH (15TH) DAY OF THE FOURTH
(4TH) MONTH FOLLOWING THE CLOSE OF THE FISCAL
YEAR, AS THE CASE MAY BE.
(C) (C)TIME OF PAYMENT OF THE INCOME TAX. — THE
INCOME TAX DUE ON THE CORPORATE QUARTERLY
RETURNS AND THE FINAL ADJUSTMENT INCOME TAX
RETURNS COMPUTED IN ACCORDANCE WITH SECTIONS
75 AND 76 SHALL BE PAID AT THE TIME THE
DECLARATION OR RETURN IS FILED IN A MANNER
PRESCRIBED BY THE COMMISSIONER.
A.Y. 2017-2018 Ateneo de Manila University School of Law
CHAPTER XIII — WITHHOLDING ON
WAGES
SEC. 78. DEFINITIONS. — AS USED IN THIS CHAPTER:
(A) WAGES. — THE TERM 'WAGES' MEANS ALL
REMUNERATION (OTHER THAN FEES PAID TO A PUBLIC
OFFICIAL) FOR SERVICES PERFORMED BY AN EMPLOYEE
FOR HIS EMPLOYER, INCLUDING THE CASH VALUE OF ALL
REMUNERATION PAID IN ANY MEDIUM OTHER THAN
CASH, EXCEPT THAT SUCH TERM SHALL NOT INCLUDE
REMUNERATION PAID:
(1) FOR AGRICULTURAL LABOR PAID ENTIRELY IN
PRODUCTS OF THE FARM WHERE THE LABOR IS
PERFORMED, OR
(2) FOR DOMESTIC SERVICE IN A PRIVATE HOME, OR
(3) FOR CASUAL LABOR NOT IN THE COURSE OF THE
EMPLOYER'S TRADE OR BUSINESS, OR
(4) FOR SERVICES BY A CITIZEN OR RESIDENT OF THE
PHILIPPINES FOR A FOREIGN GOVERNMENT OR AN
INTERNATIONAL ORGANIZATION.
IF THE REMUNERATION PAID BY AN EMPLOYER TO AN
EMPLOYEE FOR SERVICES PERFORMED DURING ONE-HALF (1/2)
OR MORE OF ANY PAYROLL PERIOD OF NOT MORE THAN THIRTY-
ONE (31) CONSECUTIVE DAYS CONSTITUTES WAGES, ALL THE
REMUNERATION PAID BY SUCH EMPLOYER TO SUCH EMPLOYEE
FOR SUCH PERIOD SHALL BE DEEMED TO BE WAGES; BUT IF THE
REMUNERATION PAID BY AN EMPLOYER TO AN EMPLOYEE FOR
SEC. 79. INCOME TAX COLLECTED AT SOURCE. —
SERVICES PERFORMED DURING MORE THAN ONE -HALF (1/2) OF
ANY SUCH PAYROLL PERIOD DOES NOT CONSTITUTE WAGES,
THEN NONE OF THE REMUNERATION PAID BY SUCH EMPLOYER
TO SUCH EMPLOYEE FOR SUCH PERIOD SHALL BE DEEMED TO BE
WAGES.
(B) PAYROLL PERIOD. — THE TERM 'PAYROLL PERIOD'
MEANS A PERIOD FOR WHICH PAYMENT OF WAGES IS
ORDINARILY MADE TO THE EMPLOYEE BY HIS EMPLOYER,
AND THE TERM 'MISCELLANEOUS PAYROLL PERIOD'
118
MEANS A PAYROLL PERIOD OTHER THAN, A DAILY,
WEEKLY, BIWEEKLY, SEMI-MONTHLY, MONTHLY,
QUARTERLY, SEMI-ANNUAL, OR ANNUAL PERIOD. 

(C) EMPLOYEE. — THE TERM 'EMPLOYEE' REFERS TO ANY
INDIVIDUAL WHO IS THE RECIPIENT OF WAGES AND
INCLUDES AN OFFICER, EMPLOYEE OR ELECTED OFFICIAL
OF THE GOVERNMENT OF THE PHILIPPINES OR ANY
POLITICAL SUBDIVISION, AGENCY OR INSTRUMENTALITY
THEREOF. THE TERM 'EMPLOYEE' ALSO INCLUDES AN
OFFICER OF A CORPORATION. 

(D) EMPLOYER. — THE TERM 'EMPLOYER' MEANS THE
PERSON FOR WHOM AN INDIVIDUAL PERFORMS OR
PERFORMED ANY SERVICE, OF WHATEVER NATURE, AS
THE EMPLOYEE OF SUCH PERSON, EXCEPT THAT:
(1) IF THE PERSON FOR WHOM THE INDIVIDUAL
PERFORMS OR PERFORMED ANY SERVICE DOES NOT
HAVE CONTROL OF THE PAYMENT OF THE WAGES FOR
SUCH SERVICES, THE TERM 'EMPLOYER' (EXCEPT FOR
THE PURPOSE OF SUBSECTION(A) MEANS THE
PERSON HAVING CONTROL OF THE PAYMENT OF
SUCH WAGES; AND
(2) IN THE CASE OF A PERSON PAYING WAGES ON BEHALF
OF A NONRESIDENT ALIEN INDIVIDUAL, FOREIGN
PARTNERSHIP OR FOREIGN CORPORATION NOT
ENGAGED IN TRADE OR BUSINESS WITHIN THE
PHILIPPINES, THE TERM 'EMPLOYER' (EXCEPT FOR THE
PURPOSE OF SUBSECTION(A) MEANS SUCH PERSON.
(A) REQUIREMENT OF WITHHOLDING. — EVERY EMPLOYER
MAKING PAYMENT OF WAGES SHALL DEDUCT AND
WITHHOLD UPON SUCH WAGES A TAX DETERMINED IN
ACCORDANCE WITH THE RULES AND REGULATIONS TO
BE PRESCRIBED BY THE SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE COMMISSIONER: PROVIDED,
HOWEVER, THAT NO WITHHOLDING OF A TAX SHALL BE
REQUIRED WHERE THE TOTAL COMPENSATION INCOME
119 Guide Notes on Income Tax
OF AN INDIVIDUAL DOES NOT EXCEED THE STATUTORY
MINIMUM WAGE, OR FIVE THOUSAND PESOS (P5,000.00)
PER MONTH, WHICHEVER IS HIGHER. 
 THE REFUND OF CREDIT IS MADE.
(B) TAX PAID BY RECIPIENT. — IF THE EMPLOYER, IN
VIOLATION OF THE PROVISIONS OF THIS CHAPTER, FAILS
TO DEDUCT AND WITHHOLD THE TAX AS REQUIRED
UNDER THIS CHAPTER, AND THEREAFTER THE TAX
AGAINST WHICH SUCH TAX MAY BE CREDITED IS PAID,
THE TAX SO REQUIRED TO BE DEDUCTED AND WITHHELD
SHALL NOT BE COLLECTED FROM THE EMPLOYER; BUT
THIS SUBSECTION SHALL IN NO CASE RELIEVE THE
EMPLOYER FROM LIABILITY FOR ANY PENALTY OR
ADDITION TO THE TAX OTHERWISE APPLICABLE IN
RESPECT OF SUCH FAILURE TO DEDUCT AND WITHHOLD.


(C) REFUNDS OR CREDITS. —
(1) EMPLOYER. — WHEN THERE HAS BEEN AN
OVERPAYMENT OF TAX UNDER THIS SECTION,
REFUND OR CREDIT SHALL BE MADE TO THE
EMPLOYER ONLY TO THE EXTENT THAT THE AMOUNT
OF SUCH OVERPAYMENT WAS NOT DEDUCTED AND
WITHHELD HEREUNDER BY THE EMPLOYER.
(2) EMPLOYEES. —THE AMOUNT DEDUCTED AND
WITHHELD UNDER THIS CHAPTER DURING ANY
CALENDAR YEAR SHALL BE ALLOWED AS A CREDIT TO
THE RECIPIENT OF SUCH INCOME AGAINST THE TAX
IMPOSED UNDER SECTION 24(A) OF THIS TITLE.
REFUNDS AND CREDITS IN CASES OF EXCESSIVE
WITHHOLDING SHALL BE GRANTED UNDER RULES
AND REGULATIONS PROMULGATED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION
OF THE COMMISSIONER.
ANY EXCESS OF THE TAXES WITHHELD OVER THE
TAX DUE FROM THE TAXPAYER SHALL BE RETURNED OR
CREDITED WITHIN THREE (3) MONTHS FROM THE
FIFTEENTH (15 ) DAY OF APRIL. REFUNDS OR CREDITS
TH
MADE AFTER SUCH TIME SHALL EARN INTEREST AT THE
2D SEM.
RATE OF SIX PERCENT (6%) PER ANNUM, STARTING AFTER
THE LAPSE OF THE THREE-MONTH PERIOD TO THE DATE
REFUNDS SHALL BE MADE UPON WARRANTS
DRAWN BY THE COMMISSIONER OR BY HIS DULY
AUTHORIZED REPRESENTATIVE WITHOUT THE
NECESSITY OF COUNTER-SIGNATURE BY THE CHAIRMAN,
COMMISSION ON AUDIT OR THE LATTER'S DULY
AUTHORIZED REPRESENTATIVE AS AN EXCEPTION TO
THE REQUIREMENT PRESCRIBED BY SECTION 49,
CHAPTER 8, SUBTITLE B, TITLE 1 OF BOOK V OF
EXECUTIVE ORDER NO. 292, OTHERWISE KNOWN AS THE
ADMINISTRATIVE CODE OF 1987. 

(D) PERSONAL EXEMPTIONS. — SECTION 79(D) HAS BEEN
REPEALED BY R.A. NO. 10963

(E) WITHHOLDING ON BASIS OF AVERAGE WAGES. — THE
COMMISSIONER MAY, UNDER RULES AND REGULATIONS
PROMULGATED BY THE SECRETARY OF FINANCE,
AUTHORIZE EMPLOYERS TO:
(1) ESTIMATE THE WAGES WHICH WILL BE PAID TO AN
EMPLOYEE IN ANY QUARTER OF THE CALENDAR YEAR;
(2) DETERMINE THE AMOUNT TO BE DEDUCTED AND
WITHHELD UPON EACH PAYMENT OF WAGES TO SUCH
EMPLOYEE DURING SUCH QUARTER AS IF THE
APPROPRIATE AVERAGE OF THE WAGES SO
ESTIMATED CONSTITUTED THE ACTUAL WAGES PAID;
AND 

(3) DEDUCT AND WITHHOLD UPON ANY PAYMENT OF
WAGES TO SUCH EMPLOYEE DURING ;SUCH QUARTER
SUCH AMOUNT AS MAY BE REQUIRED TO BE
DEDUCTED AND WITHHELD DURING SUCH QUARTER
WITHOUT REGARD TO THIS SUBSECTION.
(F) HUSBAND AND WIFE. —SECTION 79(F) HAS BEEN
REPEALED BY R.A. NO. 10963. 

(G) NONRESIDENT ALIENS. — WAGES PAID TO
NONRESIDENT ALIEN INDIVIDUALS ENGAGED IN TRADE
A.Y. 2017-2018 Ateneo de Manila University School of Law
OR BUSINESS IN THE PHILIPPINES SHALL BE SUBJECT TO
THE PROVISIONS OF THIS CHAPTER.
(H) YEAR-END ADJUSTMENT. — ON OR BEFORE THE END OF
THE CALENDAR YEAR BUT PRIOR TO THE PAYMENT OF
THE COMPENSATION FOR THE LAST PAYROLL PERIOD,
THE EMPLOYER SHALL DETERMINE THE TAX DUE FROM
EACH EMPLOYEE ON TAXABLE COMPENSATION INCOME
FOR THE ENTIRE TAXABLE YEAR IN ACCORDANCE WITH
SECTION 24(A). THE DIFFERENCE BETWEEN THE TAX DUE
FROM THE EMPLOYEE FOR THE ENTIRE YEAR AND THE
SUM OF TAXES WITHHELD FROM JANUARY TO
NOVEMBER SHALL EITHER BE WITHHELD FROM HIS
SALARY IN DECEMBER OF THE CURRENT CALENDAR YEAR
OR REFUNDED TO THE EMPLOYEE NOT LATER THAN
JANUARY 25 OF THE SUCCEEDING YEAR.
SEC. 80, LIABILITY FOR TAX. —
(A) EMPLOYER. — THE EMPLOYER SHALL BE LIABLE FOR THE
WITHHOLDING AND REMITTANCE OF THE CORRECT
AMOUNT OF TAX REQUIRED TO BE DEDUCTED AND
WITHHELD UNDER THIS CHAPTER. IF THE EMPLOYER
FAILS TO WITHHOLD AND REMIT THE CORRECT AMOUNT
OF TAX AS REQUIRED TO BE WITHHELD UNDER THE
PROVISION OF THIS CHAPTER, SUCH TAX SHALL BE
COLLECTED FROM THE EMPLOYER TOGETHER WITH THE
PENALTIES OR ADDITIONS TO THE TAX OTHERWISE
APPLICABLE IN RESPECT TO SUCH FAILURE TO WITHHOLD
AND REMIT. 
 COLLECTING OFFICERS.
(B) EMPLOYEE. — WHERE AN EMPLOYEE FAILS OR REFUSES
TO FILE THE WITHHOLDING EXEMPTION CERTIFICATE OR
WILLFULLY SUPPLIES FALSE OR INACCURATE
INFORMATION THEREUNDER, THE TAX OTHERWISE
REQUIRED TO BE WITHHELD BY THE EMPLOYER SHALL BE
COLLECTED FROM HIM INCLUDING PENALTIES OR
ADDITIONS TO THE TAX FROM THE DUE DATE OF
REMITTANCE UNTIL THE DATE OF PAYMENT. ON THE
OTHER HAND, EXCESS TAXES WITHHELD MADE BY THE
EMPLOYER DUE TO:
120
(1) FAILURE OR REFUSAL TO FILE THE WITHHOLDING
EXEMPTION CERTIFICATE; OR
(2) FALSE AND INACCURATE INFORMATION SHALL NOT
BE REFUNDED TO THE EMPLOYEE BUT SHALL BE
FORFEITED IN FAVOR OF THE GOVERNMENT.
SEC. 81. FILING OF RETURN AND PAYMENT OF TAXES
WITHHELD. — EXCEPT AS THE COMMISSIONER OTHERWISE
PERMITS, TAXES DEDUCTED AND WITHHELD BY THE EMPLOYER
ON WAGES OF EMPLOYEES SHALL BE COVERED BY A RETURN AND
PAID TO AN AUTHORIZED AGENT BANK; COLLECTION AGENT,
OR THE DULY AUTHORIZED TREASURER OF THE CITY OR
MUNICIPALITY WHERE THE EMPLOYER HAS HIS LEGAL
RESIDENCE OR PRINCIPAL PLACE OF BUSINESS, OR IN CASE THE
EMPLOYER IS A CORPORATION, WHERE THE PRINCIPAL OFFICE IS
LOCATED.
THE RETURN SHALL BE FILED AND THE PAYMENT MADE WITHIN
TWENTY-FIVE (25) DAYS FROM THE CLOSE OF EACH CALENDAR
QUARTER: PROVIDED, HOWEVER, THAT THE COMMISSIONER
MAY, WITH THE APPROVAL OF THE SECRETARY OF FINANCE,
REQUIRE THE EMPLOYERS TO PAY OR DEPOSIT THE TAXES
DEDUCTED AND WITHHELD AT MORE FREQUENT INTERVALS, IN
CASES WHERE SUCH REQUIREMENT IS DEEMED NECESSARY TO
PROTECT THE INTEREST OF THE GOVERNMENT.
THE TAXES DEDUCTED AND WITHHELD BY EMPLOYERS
SHALL BE HELD IN A SPECIAL FUND IN TRUST FOR THE
GOVERNMENT UNTIL THE SAME ARE PAID TO THE SAID
SEC. 82. RETURN AND PAYMENT IN CASE OF GOVERNMENT
EMPLOYEES. — IF THE EMPLOYER IS THE GOVERNMENT OF THE
PHILIPPINES OR ANY POLITICAL SUBDIVISION, AGENCY OR
INSTRUMENTALITY THEREOF, THE RETURN OF THE AMOUNT
DEDUCTED AND WITHHELD UPON ANY WAGE SHALL BE MADE BY
THE OFFICER OR EMPLOYEE HAVING CONTROL OF THE PAYMENT
OF SUCH WAGE, OR BY ANY OFFICER OR EMPLOYEE DULY
DESIGNATED FOR THE PURPOSE.
SEC. 83. STATEMENTS AND RETURNS. —
121 Guide Notes on Income Tax
(A) REQUIREMENTS. — EVERY EMPLOYER REQUIRED TO
DEDUCT AND WITHHOLD A TAX SHALL FURNISH TO EACH
SUCH EMPLOYEE IN RESPECT OF HIS EMPLOYMENT
DURING THE CALENDAR YEAR, ON OR BEFORE JANUARY
THIRTY-FIRST (31 ) OF THE SUCCEEDING YEAR, OR IF HIS
ST
2D SEM.
PROMULGATED BY THE SECRETARY OF FINANCE, MAY
GRANT TO ANY EMPLOYER A REASONABLE EXTENSION OF
TIME TO FURNISH AND SUBMIT THE STATEMENTS AND
RETURNS REQUIRED UNDER THIS SECTION.

EMPLOYMENT IS TERMINATED BEFORE THE CLOSE OF

SUCH CALENDAR YEAR, ON THE SAME DAY OF WHICH THE
LAST PAYMENT OF WAGES IS MADE, A WRITTEN
STATEMENT CONFIRMING THE WAGES PAID BY THE
EMPLOYER TO SUCH EMPLOYEE DURING THE CALENDAR
YEAR, AND THE AMOUNT OF TAX DEDUCTED AND
WITHHELD UNDER THIS CHAPTER IN RESPECT OF SUCH
WAGES. THE STATEMENT REQUIRED TO BE FURNISHED BY
THIS SECTION IN RESPECT OF ANY WAGE SHALL CONTAIN
SUCH OTHER INFORMATION, AND SHALL BE FURNISHED
AT SUCH OTHER TIME AND IN SUCH FORM AS THE
SECRETARY OF FINANCE, UPON THE RECOMMENDATION
OF THE COMMISSIONER, MAY, BY RULES AND
REGULATION, PRESCRIBE.
(B) ANNUAL INFORMATION RETURNS. — EVERY EMPLOYER
REQUIRED TO DEDUCT AND WITHHOLD THE TAXES IN
RESPECT OF THE WAGES OF HIS EMPLOYEES SHALL, ON OR
BEFORE JANUARY THIRTY-FIRST (31ST) OF THE
SUCCEEDING YEAR, SUBMIT TO THE COMMISSIONER AN
ANNUAL INFORMATION RETURN CONTAINING A LIST OF
EMPLOYEES, THE TOTAL AMOUNT OF COMPENSATION
INCOME OF EACH EMPLOYEE, THE TOTAL AMOUNT OF
TAXES WITHHELD THEREFROM DURING THE YEAR,
ACCOMPANIED BY COPIES OF THE STATEMENT REFERRED
TO IN THE PRECEDING PARAGRAPH, AND SUCH OTHER
INFORMATION AS MAY BE DEEMED NECESSARY. THIS
RETURN, IF MADE AND FILED IN ACCORDANCE WITH
RULES AND REGULATIONS PROMULGATED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION OF
THE COMMISSIONER, SHALL BE SUFFICIENT
COMPLIANCE WITH THE REQUIREMENTS OF SECTION 68
OF THIS TITLE IN RESPECT OF SUCH WAGES.
(C) EXTENSION OF TIME. — THE COMMISSIONER, UNDER
SUCH RULES AND REGULATIONS AS MAY BE