Taxation Law 1 handout

7/21/2019 Taxation Law 1 handout

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Table of Contents

Chapters Page

I. Basic Principle of Taxation

8

a. Inherent limitation of Taxation 8b. Constitutional limitation of Taxation 12c. Exemption from Estate Tax of by Virtue of Incidental purpose

1d. International !uridical Taxation 21e. "octrine of E#uitable $ecoupment 2%

II. Taxable Persons &2

a. Indi'idual &2b. Corporations &c. Trust and Estate (1

III. Kinds of Income (

a. )IT (&b. *IT (%c. +IT (,d. -CIT (e. PCIT (8

f. I/ET (8

IV. Sources of Income (0

a. Interest (0b. ale of hares and "i'idend %1c. er'ices %&d. $oyalties and $entals %(e. ale of $eal Property %,f. ale of Personal Property

V. Capital and Ordinary Asset

CHAPTER 1



Basic Principles in Taxation

The power to tax is an inherent prerogative of sovereignty; it can be

exercised and enforced even without constitutional or statutory provision. This

power is inherent in the national government but not in the local government units

(LGU’s). Since LGUs have no inherent power to tax, it cannot impose taxes upon

their respective inhabitants unless the power to tax is expressly granted to them by

them by the Constitutional by law passed by Congress.

The power to tax depends on the existence of the State; the moment the State exist,

automatically, the power of taxation also exists.

Inherent Limitation of Taxation

The following are inherent limitation of taxation:

1.It should be for public purpose;

2. It is inherently legislative;

3.Government is tax exempt;

4.Territoriality; and

5.International comity.

Q. What if Congress appropriate money for development of a property belonging to

a private person, is the appropriation valid?

A. The SC ruled in Pascual vs. Secretary of Public Work and Highways (G.R. No. L-10405, December 29, 1960) that “It is general rule that the legislative is without

power to appropriate public revenue for anything but a public purpose.” It is the

essential character of the direct object of expenditure, which must determine its

validity as justifying a tax, and not the magnitude of the interest to be affected nor

the degree to which the general advantage of the community, and, thus the public

welfare may be ultimately benefited by their promotion. Incident to the public or to

the State, which results from the promotion of private interest and the property of

private enterprises or business, does not justify their aid by the public money.

Q. May the government tax itself?

A.First determine who the taxing authority is. If the taxing authority are LGU’s,

the answer is no RA 7160, the local Government Code (LGC), expressly prohibits

LGUs from levying tax from the national government, its agencies and

instrumentalities and other LGUs

Under Sec. 133 (o) of the LGC, “the taxing power of the LGUs shall not extend to

taxes, fees, charges of any kind, on the national government, its agencies and

instrumentalities (except income from public utility under their jurisdiction).



Basco vs. PAGCOR

197 SCRA 52

The city of Manila, being a mere Municipal Corporation, has no inherent power to

tax. LGUs have no power to tax instrumentalities of the national government.PAGCOR, being an instrumentality of the national government, is therefore exempt

from local taxes, otherwise, its operations might be burdened, impeded, or

subjected to control by a mere LGU.

Mactan Cebu International Airport vs. Marcos

261 SCRA 667

Mactan cannot invoke Sec 133 (o), LGC; it refers to local taxation, And since the

last par of Sec 234 unequivocally withdrew upon the effectivity of the LGC

exemption from payment of real property taxes granted to natural person and juridical person including Government-Owned and Controlled Corporations

(GOCCs) except as provided in the said section, and the petitioner is, undoubtedly

a GOCC, it is necessarily follows that its exemption from tax granted in sec 14 of its

charter, RA 6958, has been withdrawn.

Take note that if the taxing authority is the national government the answer to the

previous question is yes. Pursuant to the provisions of National Internal Revenue

Code (NIRC), RA 8424, it can levy tax upon GOCCs (see Section 27C NIRC),

agencies and instrumentalities although income derived from the exercised of

essential government functions are exempt (see Section 32B7b of NIRC).

Q. What is the source of power to tax of LGUs outside the Autonomous Region

and those within the Autonomous Region?

A. Those LGUs outside the Autonomous Region derive its power to tax from the

1987 Constitution, Section 5 of Article X states that “Each local government unit

shall have the power to create its own sources of revenues and to levy taxes, fees

and charges subject to such guidelines and limitations as the Congress may

provide, consistent with the basic policy of local autonomy. Such taxes, fees and

charges shall accrue exclusively to the local governments.” This Constitutional

provision is a self-executing provision.

However, this rule is applicable only to LGUsoutside the Autonomous Regions

(Muslim Mindanao and the Cordilleras). The authority to tax of LGUswithin

Autonomous Region is not delegated by the constitutional provision but by the

organic act creating the LGUs with autonomous region. This is implied under

Article X, Section 20 second number of the 1987 Constitution. It states that

“Within its territorial jurisdiction and subject to the provision of this Constitution



and national laws, the organic act of autonomous regions shall provide for

legislative powers over: xxx) (2) Creation of sources of revenues.”

This constitutional provision merely authorizes the Congress to pass the Organic

act of Autonomous Region, which shall provide for legislative powers to levy taxes

upon their inhabitants. Section 20, Article X of the 1987 Constitution is not a self-

executing provision as compared to Article X section 5 of the Constitution.

Therefore, the LGUs power to tax is based on 1987 constitution subject only to

such guidelines and limitation as the Congress may provide. The power to tax

LGUs within Autonomous Region is based on the Organic act, which the 1987

Constitution authorizes Congress to pass The limitation and guidelines under LGC

is applicable only to LGUs outside the Autonomous Region.

Q. The LGC embodies local taxation, is it not the source of authority of the

LGUs to levy taxes?

A. No, as stated, the 1987 Constitution is the source of the taxing power of theLGUs (Except the autonomous region); it serves only as a guidelines and limitation

provided for the Congress in the exercise of LGUs power to tax.

Territoriality

Taxation is territorial in such a manner that the taxing authority cannot impose

taxes on subject beyond its territorial jurisdiction. However, taxing authority may

determine the tax situs.

Philippine Match Co. vs. The City of Cebu

G.R. No.L-30745 January 18, 1978

The sales in the instant case were in the city and the matches sold were stored in

the city. The fact that the matches were delivered to customers, whose places of

business were outside of the city, would not place those sales beyond the city’s

taxing power. Those sales formed part of the merchandising business being

assigned on by the company in the city. In essence, they are the same as the sled

of matches fully consummated in the city.

Furthermore, because the seller’s place of business is in Cebu City, it cannot be

sensibly argued that such sales sold be considered as transactions subject to the

taxing power of political subdivisions where the customers resided and accepteddelivery of the matches sold.

International Comity

State must recognize the generally accepted tenets of international law.

CIR vs. Lednicky

G.R. Nos. L-18169, L-18262 & L-21434, July 31, 1964



To allow an alien resident to deduct from his gross income whatever taxes he pays

to his own government amounts to conferring on the latter the power to reduce the

tax income of the Philippine government simply by increasing the tax rates on the

alien resident. Every time the rate of taxation imposed upon an alien resident is

increased by his government, his deduction, from Philippine taxes would

correspondingly increase and the proceeds for the Philippines diminished, therebysubordinating our own taxes to those levied by a foreign government. Such a result

is incompatible with the status of the Philippines as an independent and sovereign

state.

Constitutional Limitations on Power to Tax

The constitutional limitation on the power to tax are the following:

1.Due process;

2.Equal protection;

3.Non-impairment of contract;4.Non-imprisonment for non-payment of poll tax; and

5.Freedom of religion.

Due process

This prohibition refers to Section 1 of Article III of 1987 Constitution which states

that :No persons shall be deprived of life, liberty, or property without due process of

law, xxx. “The due process clause as a limitation to the power to tax refers bothto

substantive and procedural due process.

Substantive due process requires that a tax statute must be within theconstitutional authority to pass, and that it must be reasonable, fair, and just.

For instance, when the Congress passes a law exempting the 13th moth pay from

tax but with the concurrence of only majority of the quorum, the law would be

invalid because the Constitution requires “that any grant of tax exemption shall be

passed with the concurrence of the majority of all the members of the Congress”.

Hence, the constitutional provision is violated by not following the required

majority.

Procedural due process, on the other hand, requires notice and hearing or at least

the opportunity to be heard.

Q. If procedural due process requires notice and hearing, does it follow that the

adverse party in a proceeding must always be notified?

A. No. As a rule, notice and hearing or opportunity to be heard is necessary only

when expressly required by law. Where there is no such requirement, notice and

opportunity to be heard are dispensable.



Example:

Before October 1, 1995, one can serve temporary restraining order without

notifying the adverse party. If a person is a suspect in a criminal case, he has the

right to have an opportunity to be heard if there is a law requiring such process:

otherwise, it is dispensable.

Another example is in case of search warrants: a person to be searched is not

notified. The person searched cannot claim that there is violation of due process

because there is no law requiring a person to be searched should be notified.

Fortunately, majority of proceedings requires

Equal Protection Clause

This is also based on Section 1 of Article III of 1987 Constitution. It states “ xxx nor

any person shall be denied of equal protection of the laws.” As a rule taxpayers of

the same footing are treated alike, both as to privileges conferred and liabilities

imposed. Difference in treatment is allowed only when based on substantialdistinction. Difference in treatment not based on substantial distinction is frowned,

upon as “class legislation”.

The equal protection clause is violated when taxpayers belonging to the same

classification are treated differently from one another, and when taxpayers

belonging to different classifications are treated alike.

Q. If a tax ordinance is applied to only one entity or taxpayer, is there a

violation of the equal protection clause?

A. It depends. If the ordinance is intended to apply to a specific taxpayer and to no

one else regardless of whether or not other entities belonging to the same class are

established in the future, it is a violation of the equal protection clause. But if the

ordinance is intended to apply also in the future, then the tax ordinance is valid

even if in the meantime it applies only to an entity or taxpayer for the simple

reason that there is so far only one member of the class subject to the tax

measure.

Ormoc Sugar Company vs. Ormoc City

GRN L-23794 February 17, 1968

When the taxing ordinance was enacted, Ormoc Sugar Co., Inc. was the only sugarcentral in the City. A reasonable classification should be in terms applicable to

future conditions as well. The taxing ordinance should not be singular and

exclusive as to exclude any subsequently established sugar central.

Q. What are the requirements of reasonable classification?

A. Equal protection clause applies only to persons or things identically situated

and do not bar a reasonable classification of the subject of legislation. A



classification is reasonable where (1) it is based on substantial distinctions which

make real differences; (2)these are germane to the purpose of the law; (3)the

classification applies not only to present conditions but also to future conditions

which are substantially identical to those of the present; (4)the classification applies

only to those who long to the same class (Ormoc sugar,supra).

Non-Impairment of Contract Clause

This prohibition is based on Section 10 Article III of the 1987 Constitution which

states that “No law impairing the obligation of contracts shall be passed.”

Obligations arise from law contracts quasi-contracts, acts or omissions punishable

by law (delicts) and quasi-delict. The Constitution prohibits impairment only when

the obligation is based on contracts;hence it is not applicable to franchise.

Franchise is granted by congress always under a condition that it can be amended,

altered or repealed anytime if public interest so requires. Considering that the non-

impairment clause does not apply to franchise, such provision for amendment,

alteration or repeal is not a violation of said constitutional injunction.

In addition, it applies only where one party is the government and the other is a

private individual. Therefore, this prohibition does not apply when both parties are

private individuals.

Q. How can sources of obligation be determined?

A. When the law established the obligation the law itself is the source of the

obligation. However, when the law merely recognizes or acknowledge the existence

of an obligation generated by an act which may constitute a contract, quasi-

contract or delict and its only purpose is to regulate such obligation, then the actitself is the source of the obligation and not the law.

Q. Considering that the obligation to pat tax is based on law, how does then

the non-impairment clasue server s a limitation on the power to tax?

A. As a rule, the obligation to tax is based on law. But when, for instance, a

taxpayer enters into a compromise with the bureau of Internal Revenue (BIT), the

obligation of the tax payer becomes one based on contract. This is an instance

where the non-impairment clause may be invoked. A law which changes the term of

this compromise agreement by making new conditions, or change those in the

contract or dispenses with those expressed impairs the obligation; consequently, itimpairs the contract between BIR and the taxpayer.

Non-Imprisonment for Non-payment of Poll Tax

Poll Tax is imposed on persons without qualification. Hence, a tax based on

property, ownership, income or age is not a poll tax. A good example of this tax is

community tax under Sec 162 of the LGC.



Q. Why is non-imprisonment for non-payment of a poll tax a limitation on the

power to tax?

A. Because payment is optional, it is not mandatory or obligatory. The only penalty

for non-payment of a poll tax is fine not imprisonment thereby limiting the power to

tax.

Freedom of Religion

Section 5 of Article III of the 1987, Constitution states that “No law shall be made

respecting an establishment of religion xxx.” If respecting an establishment of

religion is prohibited with much more reason that a creation of religious

establishment is prohibited. Corollary, Section 5 of Article II of the 1987

Constitution observes the separation of Church and State.

Q. What happens if the government establishes a religion?

A. If it will establish a religion, it will require a special appropriation from theNational Treasury; therefore, it will violate Section 5 of Article III of the 1987

Constitution.

Exemption from Real Estate Tax by Virtue of Incident Purpose

To fully understand this concept, four Supreme Court decisions should be fully

scrutinized:

1.Herrera vs. QC Board of Assessment Appeals;

2.Abra Valley College vs. Aquino;

3.Province of Abra vs. Hernando; and

4.Philippine Lung Center vs. QC Board of assessment Appeal.

In these four cases we have to know the governing constitution at the time the

cause of action arouses; otherwise, we will not understand the relevance of these

cases.

In Herrera vs. QC, the governing constitution is the 1935 Constitution ; in Province

of Abra vs. Hernando, the 1973 Constitution, Abra Valley vs. Aquino, the 1935

Constitution; and in Philippine Lung Center vs. QC, the 1987 Constitution.

Q. What is the importance of determining the prevailing Constitution at the

time the cause of action arises?

A. The requirements for exemption of the entity involved are different. In 1935

Constitution, the exemption from real estate tax requires that the real property

should be exclusively used for the entity exempted. In 1987, and 1973

Constitutions, the requirements is “exclusively, actually and directly.”

Q . Who are the entities covered under these constitutions?



A. in 1987 and 1935 Constitutions, the entities covered of such exemption are

religious, charitable and education. In 1973 Constitution, it only provides for

charitable and religious institutions.

Take note that under NIRC or in any other Philippine statutes, there is no such

thing as exemption by virtue of incidental purpose. This principle refers only to one

and only tax; the real property tax. This principle originated in the Supreme Courtdecision in the case of Herrera vs. QC.

Herrera vs. QCBAA

GRN L-15270, September 30, 1961

The entity involve here is a charitable institution. QC wanted to collect real

property tax because St, Catherine hospital sometime collects fees from certain

patients. It also operates midwifery and nursing school, and dormitory. Quezon

City contends that the real property must be used exclusively using the land from

charitable purpose; hence, liable for real property tax.

The Supreme Court ruled the exemption from real property tax by virtue of

incidental purpose. The exemption granted was to all properties of St, Catherine

whether for paying or non-paying patient, whether it is used by the nursing school,

midwifery school and dormitory.

This is the case were the SC coined the term exemption by virtue of incidental

purpose from real property tax.

The provincial prosecutor filled a petition declaratory relief. The issue is whether or

not the property of the Roman Catholic in Bangued, Abra is exempt or not exempt

from real property tax. In this case, the judge merely stated that the RomanCatholic of Bangued is exempt without conducting a hearing. Take notice that this

case is under the 1973 Constitution. The petitioner went to SC and filed certiorari

for violation of the procedural process on the part of the Province of Abra.

The SC stated that if only the judge had read the 1973 Constitution, he should

have known the difference between the 1935 and the 1973 Constitution and he

could not have summarily dismissed the case. There is a substantial distinction

between the 1935 nag 1973 Constitution. In the 1935 institution, the requirement

for exemption for real property is “exclusively” while the 1973 Constitution requires

“actually, directly and exclusively.” The SC remanded to the court of origin for

further hearing.

The important thing in this case is that the SC had already noticed the great

difference of the substantial distinction between exemptions from real property

taxes.

Abra Valley College vs. Aquino

GRN L-49336, August 31, 1981



The entity involve in this case is an educational institution and the cause of action

arouse under the 1935 Constitution. The school entered into a contract of lease as

a lessor. The lessees are Northern Marketing Corporation in the ground floor and

the director of school in the second floor. The Province of Abra contended that the

property was not exclusively used for educational purposes and it tried to collect

real property tax.

The SC ruled that the provincial government of Abra is partially correct. With

regard to the lease where the lessee is a domestic corporation, it is not exempt

because it has nothing to do with the operation of the entity of the school. But with

regard with the lease to the director of the school, it is still exempt based on

exemption by virtue of incidental purpose. In other words, it merely reiterated its

prior ruling in the Herrera case.

However, the ruling here is not the same as Herrera, the exemption granted in

Herrera is total while in this case, the exemption is partial. Take note that both

cases arouse under the 1935 constitution.

Philippine Lung Center vs. QC

G.R. No. 144104, June 29, 2004

The cause of action arouses under 1987 Constitution. The petitioner is a charitable

institution. QC contended that the petitioner is liable for real property tax because

the ground floor was leased to drugstore, clinic, and grocery and the vacant land

was leased planters of orchid. QC further contended that under the 1987

Constitution, the real property exemption entities must be used “actually, directly

and exclusively.” For charitable purpose and the petitioner failed to fall within theexemption because of leases to private entities and the acceptance of paying

patients. The Lung Center invoked the SC ruling in the case of Herrera.

The SC ruled that the Herrera ruling is no longer applicable because the cause of

action arouse under the 1935 Constitution. However, the SC ruled that the

property leased to private entities should be assessed real estate tax but those

which are used by patient paying or non-paying is exempt from tax.

Analysis

When the SC rejected the Herrera ruling, it is correct. But when it ruled that the

property leased to private entities should be assessed real estate tax but those

which are used by patient, paying or non-paying, are exempt from tax, it impliedly

reiterated its ruling in Abra Valley vs. Aquino where the SC reiterated the

exemption by virtue of incidental purpose enunciated in Herrera.

Q. Is exemption by virtue of incidental purpose still applicable in this case?

A. It may be answered in two ways:



1. Yes. In Philippine Lung Center vs. QC, the SC adhered to this policy.

Implied, it goes back to the principle of exemption by virtue of incidental

purpose. The SC adopted the case of Abra Valley vs. Aquino where it reiterated

the ruling in Herrera on exemption by virtue of incidental purpose.

2.No. This principle originated from a SC decision in the case of Herrera

during the time where the 1935 Constitution says that real property must be“exclusively” used for educational, religious or charitable purposes. With the

additional requirement under the 1987 Constitution, it must be used

“actually, directly and exclusively.” The Herrera ruling is no longer controlling

because of the principle that the governing law in an action is the law or

constitution t the time the cause of action arouse. The Herrera ruling was

decided under the 1935 Constitution while the Phil. Lung Center is under the

1987 Constitution. In addition, Philippine Lung Centers expressly reject the

Herrera ruling in which the principle of exemption by virtue of incidental

purpose originated.

International Juridical Double Taxation

The principle of international juridical double taxation is enunciated by the

Supreme Court in the case of Commissioner of Internal Revenue vs. Johnson and

Johnson, infra. The discussion of this principle has been incorporated in the

digested case below.

CIR vs. Johnson and Johnson (Philippines)

GRN 127605, June 25, 1999

This is a landmark decision because the SC enunciated, for the first time, the principle of international juridical double taxation.

In this case, Johnson and Johnson (Philippines) and Johnson and Johnson (USA),

a non-resident foreign corporation (NRFC), entered into a agreement allowing

Johnson and Johnson Philippines to use its trademark, trade name, goodwill and

the secret formula. In turn, the domestic corporation (DC) will pay a certain sum of

money known in law as royalty. The income earner in this case is SC Johnson and

Johnson USA. This income is subjected to income tax in the Philippines and US.

In this case, the SC coined the term international juridical double taxation because

a particular income is subjected to two income taxes; the Philippine income tax lawand the income tax law under Federal Revenue Code of US.

The income earned by SC Johnson USA was subjected to Philippine income tax

law. Johnson withheld income tax of 25% of the royalties transmitted to the

Johnson USA. After payment, the SC Johnson discovered that under the subtitle

the “Most Favored Nation,” the rate of income tax is 10% if it was paid under similar

circumstances they filed a claim of refund.



According to Court of Appeals (CA) and Court of Tax Appeals (CT), the meaning of

“under similar circumstances” includes the receipt of royalty in the payment of

income tax. There is also similar provision in the RP-Germany Tax Treaty was they

are paying 10%. Hence, they are only liable for 10% tax.

The SCreversed the ruling. The payment under “similar circumstance” under the

most favored nation shall be construed as about “matching tax credit.”

Q. What is the tax credit provided for in this case?

A. The German nationals and corporations earning income with the Philippines

pay income tax in the Philippines. In the RP-Germany Tax Treaty, German

nationals and corporation pays income tax in the Philippines as well as in they

home country. They will pay income tax in the Philippines for the royalty or any

income they earned from sources within the Philippines. As agreed, in the RP-

Germany Tax Treaty, whatever income tax they had paid in the Philippines, 20%

will constitute as tax credit in the payment of income tax in Germany. Take note

that tax credits are deducted from the tax due and not from gross income.

The German nationals and corporations under the treaty, are allowed to pay 10%

income tax. The SC explained that in RP-US treaty, there is no such matching tax

credit system provide for in that treaty. The claim for refund of the Johnson and

Johnson USA was denied because the “Most Favored Clause” does not apply to

them; this clause refers to the tax credit system as agreed upon in the treaty. There

is no tax credit system agreed upon between the Philippines and the United States

in the RP-US tax treaty.

Necessity of Tax Treaty

The SC declared that there is a necessity to enter into a tax treaty in order to

minimize the burden of international juridical double taxation. In a treaty, what

could be agreed upon are the following;

1.Tax exemption;

2.Tax credit and

3.The rate may be lowered (as opined by Prof. Francis Sababan) (Tax

Deduction)

A taxpayer may be liable because of the provision of the statue. But by the virtue of

a treaty, the states can agree that a party or a taxpayer of either or both countrymay be exempt from tax.

In this case, the gross come tax (GIT) on NRFC is 30% (see 28B1 as amended by

RA 9337).by virtue of the treaty, it may be lowered to 25%, or they could agree on

exemption. In tax credit, a tax paid in source country may be credited to the tax

paid in their residence country.



We have to remember that the tax credit should be deductedafter the tax had

been computed. This is different from deduction; it is deducted from the

gross income not from the tax due.

Existence of Juridical Double Taxation

For purposes of income taxation, there are two kinds of taxability of income in

international precept: an income of citizen, or domestic corporation is subject to

income tax not only in their own country but also in another country where the

income came from. The best example is Philippines and United State. Therefore, a

resident citizen of Philippine is taxable, under Philippine law as well as USA law if

the income is derived in the latter (see section 23A of NIRC) and vice versa.

For instance, if an American earned income from sources within the Philippines

,like in this case, they will pay not only income tax in the Philippines by also in the

United States. Also, if a resident citizen of the Philippines earned income in United

State, in the Philippines, they are still subject to Philippine tax law.

We have the second group; the income tax of a citizen and domestic corporation is

only limited on income within its country, and if they earn income from outside the

country, they are not liable; hence, exempt. One good example is the country of

Switzerland. To illustrate, if Switzerland entitles earned income from sources in the

Philippines, under our law, they will have to pay income tax in the Philippines, but

in Switzerland, they are exempt. In this case, double taxation is not possible

because when they go on their own country, they are exempt.

International juridical double taxation happens only if both countries are within

the first group where an entity is taxable from its home country and the country of

where the income is earned. Usually, countries which tax its citizens and domestic

corporation within and without its countries are Philippines, USA, Germany and

Japan. They belong to the same class as far as application of income tax. Hence,

juridical double taxation will apply. For the second group, this principle is unlikely

to happen.

Doctrine of Equitable Recoupment and Set-Off

As a rule, do not interchange the doctrine of set off or compensation in taxation

with the doctrine of equitable recoupment.

Doctrines of set-off or compensation in taxation was taken from the New Civil

Code and was changed to compensation or set-off in taxation. In this doctrine, the

taxpayer has a claim against the government but the government is claiming a tax

from the taxpayer.



For instance, the government initiated an expropriation proceeding. The

government is obliged to pay the taxpayer for just compensation, for example

500,000.00 pesos. On the other hand, the taxpayer is obliged to pay tax, for

instance, an income tax amount to 100,000.00 pesos. The government will collect

the income tax of 100,000.00 pesos, and then the taxpayer may say, “Why not pay

me not 500,000.00 pesos but 400,000.00 pesos.” The taxpayer, in this example, is

requesting the application of compensation under the New Civil Code.

The doctrine of equitable recoupment is different from doctrine of set-off. Under

thedoctrine of equitable recoupment, the taxpayer is entitled to claim for a

refund which was already barred by law on prescription, and subsequently, he was

obliged again to pay income tax.

To illustrate, a taxpayer is liable only to pay income tax of 10,000.00 pesos, instead

of paying such income tax, he paid an income tax of 100,000.00 pesos. Therefore,

he is entitled to a claim for 90,000.00 pesos refund. For failure to claim the

refund, his right to claim has prescribed.

Subsequently, the taxpayer is being obliged again to pay income tax of 100,000.00

pesos. Can the taxpayer tell the BIR,“I do not deny my liability for this year of

100,000.00 pesos income tax but I have a claim of 90,000.00 pesos tax refund

which I failed to recover because of prescription, may I request that the 90,000.00

pesos be credited so that I am going to pay only 10,000.00 pesos?”If doctrine of

equitable of recoupment is applicable, the request will probably be granted.

Take note that the doctrine of equitable recoupment is not allowed in our country.

The prohibition is an absolute prohibition. The reason is that to allow such

prohibition, the government will be tempted to delay the collection of tax and the

taxpayer will be also tempted to delay payment of their tax liability. Secondly, ifthis doctrine will become applicable in our jurisdiction, the government will be

bombarded with so many claims for tax credit.

The study of set off in taxations is best illustrated in the following cases:

1.Republic vs, Mambulao Lumber;

2.Domingo vs. Garlitos;

3.Francia vs.CIR;

4.CALTEX vs. CIR; and

5.Philex Mining vs. COA.

Republic vs. Mambulao

GRN L-177725, February 28, 1962

The tax being claimed by the government against Mambulao is forest charges (Take

note that by virtue of E.O. 37 issued by Pres. Aquino, forest charges was abolished in

1987). Mambulao lumber refused to pay the forest charges alleging that the

government did not use reforestation charges under RA 115 for reforestation which



they had consistently paid in past year. Mambulao contended that their liability to

pay forest charges should be offset from the reforestation charges they had paid

considering that the government did not spend it for reforestation. In summary,

Mambulao is claiming the application of the principle set-off or compensation

under the New Civil Code.

The SC did not agree on the contention of Mambulao. According to SC, thegovernment and Mambulao are not mutually debtors and creditors with one

another and that a tax is not a debt to be a subject matter of set off or

compensation.

Q. What do we mean by the word “mutual”?

A.“Mutual” means that the cause of action must arouse from the same source.

Considering the causes of action of the parties in this case came from different

sources, it is not a proper subject matter of a set off. Moreover, tax is not a debt.

The subject matter of a compensation or set-off under the Civil Code should be adebt; therefore, set off or compensation was not allowed in this case.

Domingo vs. Garlitos

GRN L-18994, June 29, 1963

The government is trying to collect from the estate of the decedent inheritance tax

and estate tax. (Take note that we do not have inheritance tax as well as donee’s

tax. These were abolished in 1974 by virtue of PD 6_). The surviving spouse is the

administratrix of the estate and contended that her late husband has a claim

against the government for the services rendered as cadastral surveyor. Theadministratrix, in turn is invoking the application of doctrine of set-off or

compensation in taxation under the New Civil Code.

The SC ruled that set off is allowed in this case on the ground that both demands

are due, demandable and fully liquidated.Fully liquidated means that the amount

is already determined up to the last centavo. Why is it fully liquidated? The

amount due is already determined because the Congress enacts RA 2700 for the

appropriation of sum of money to the estate of the decedent for his service

rendered as cadastral surveyor.

Take note that inheritance tax is not a debt. Normally, this would not have been a

subject matter of compensation or set-off. Also, the causes of action arouse from

different sources.

Q. Why did the SC ruled otherwise although the facts of the case are almost

identical with the case of Mambulao? What is the compelling reason why the

SC ruled in this manner?



compensation because RA 6952 expressly states that set-off or compensation

should not be made against the funds of OPSF. With this reasoning, the claim for

set-off was rejected by SC.

Philex Mining vs. CIR

GRN 125704, August 28, 1998

The tax being collected in this case is excise tax under title VI of NIRC (Take note

that excise tax is not covered in the bar exam for the simple reason that most of this

provision are about the rates. During this time, forest charges were abolished

because under the excise tax law one of the subject matters is mining companies like

Philex Mining). Philex, on the other hand, alleged that they have a pending claim

for refund under the VAT law. In sum, Philex do not deny their liability to pay

excise tax but invokes the principle of set-off or compensation in taxation.

The SC did not agree with Philex. The SC reiterated its prior pronouncement in

Mambulao, Francia and CALTEX where government and taxpayer are not mutuallycreditors and debtors with each other. In addition, the SC added that the demand

must be due and demandable. In this case, the claim for refund of Philex is not

yet granted, hence, it cannot be determined how much is the actual amount to be

refunded. It cannot be a subject matter of set off or compensation simply because

the amount is not yet determined.

Philex mining invoked the application of Itogon case. However, nowadays, the

claim for refund with the BIR is not automatic. It has to be assessed and studied

before it will be granted. Unlike in old days, it would seem refund is automatic. If

the refund is not yet granted, then the amount is not yet fully liquidated. Corollary,the claim for application of set off is denied.

This was asked in the 2000 bar.

Discussions

We will notice that in these five cases, with the exception of Domingo vs. Garlitos,

compensation or set off was denied. In all these cases where compensation was

denied, there is a common ground; a tax is not a debt because the subject matters

under the Civil Code of compensation must be a debt. Secondly, the SC keeps on

repeating that the taxpayer and the government are not mutually creditors and

debtors with each other.

However, in all of these cases where set off was denied by the government, there is

always a second reason after reiterating the rule in the case of Mambulao. To

begin with, in the case of Francia, the SC, after reiterating the Mambulao ruling, it

ruled the money was already paid in the PNB account of Francia. In CALTEX, we

have the same reason. In addition, the SC states that RA 6952 do not allow set off



or compensation to be made against the fund of OPSF. Lastly, in Philex mining, we

have the same ruling, but in addition, the SC added that the claim for refund is not

yet granted. In the application of principle of set off or compensation, the amount

must be fully liquidated. It follows that set-off or compensation should be denied

because the refund is not yet granted.

In Domingo vs. Garlitos, although the parties are not mutually creditors anddebtors, yet, the SC ruled otherwise simply because of the very unique

circumstance that Congress enacted RA 2700 appropriating money to the estate of

decedent.



CHAPTER II

Taxable Persons

In the study of income tax, we have to familiarize the following:

1.Different kinds of income taxpayers;

2.Different kinds of income taxes;

3.Sources of income; and

4.Capital and ordinary assets.

Generally, there are three taxable persons under Section 22A (if the section number

is not followed by a certain law, it refers to NIRC), they are the following:

1.Individuals;2.Corporation; and

3.Estates and Trusts.

There are only three taxable persons because estates and trusts are similarly

situated. Although under Civil Code, they are not similar, for purposes of income

tax, these two are similarly situated or in the same footing.

To sum up, there are seven individuals and there are three corporations. Estates

and trusts are like individuals so there are also seven estates and trusts.

Individuals

The seven individuals are the following:

1.Resident citizen (RC);

2.Nonresident citizen (NRC);

3.OFW and seaman;

4.Resident alien(RA);



5.Nonresident alien engaged in trade or business (NRAE);

6.Nonresident alien not engaged in trade or business (NRANB); and

7.Aliens employed by MOPs:

a.Multinational companies, either regional area or regional operating

headquarters;

b.Offshore banking; and

c.Petroleum Service Contractor or subcontractor (AEMOP).

Take note that the first three individuals are Filipinos and the last four are all

foreigners.

Q. What is the relevance of the classification?

A. It is important to determine the classification of income taxpayer to know

whether he is liable to pay income tax or not. The only income taxpayer out of the

individuals who is liable to pay taxes within and without is the RC; the other six

are liable only for income derived within the Philippines.

Resident Citizen

We go to the first one; the RC. There are two categories:

1.A Filipino citizen residing in the Philippines; and

2.Filipinosabroad without the intention to reside permanently in abroad.

This is implied under 22E1. Included in the term areFilipinos abroadwith

the intention to reside permanently abroad but failed to establish to theSatisfaction of the CIR of their intention to reside permanently in abroad.

Q. Is a Filipino living abroad a NRC? What is the determining factor?

A. No. The determining factor is whether he has the intention to reside there

permanently.

Q. If a Filipino is living abroad, is it possible that he is still a RC for purposes

of tax?

A. Yes, if he does not have the intention to stay permanently.

Nonresident Citizen

With the advent of OCWs, Section 22E number 3 and 4 and certain portion of

number 2 are no longer controlling. Therefore, there are only two groups of NRC:



1.Filipino citizen who is in abroad who establishes to the satisfaction of the

commissioner (CIR) of his intention to reside permanently in abroad; and

2.Filipino citizen who is an immigrant of another country.

OCW and Seaman

OCWs refer to land-based Filipino citizens working abroad with the benefit of a

contract. Of course, seamen are sea-based. If we will read labor statutes, it

speaks of OFWs and not OCWs to give protection for those working without the

benefit of a working contract.

Q. Are the provisions on NIRC referring to OCWs applicable to Filipinos

working abroad without a working contract?

A.No. NIRC speaks of OCWs and not of OFWs.

There are two groups in this category; one is the land-based worker. The only

requirement is that they have aworking permit or contract.But if the Filipino is

working abroad as seaman, the additional requirement is that the seaman must be

a member of a complement of an international vessel engaged “exclusively” in

international travel. Underscore this phrase in Section 23C, 29A1b

Q. Suppose the Filipino is working without a working contract, of course, he

is not an OCW, what will be the status then?

A. ________________________ importance is that a resident

_____________________________ within and without nonresident citizen and OCW are

taxable only o sources within.

A Filipino seaman is deemed to be a OCW for purposes of taxation if he receives

compensation for services rendered abroad as a member of a complement of a

vessel engaged exclusively in international trade.

Consequently, if he is not a member of the complement or even if he is, but the

vessel where he works is not exclusively engage in international trade, said seaman

is not deemed an OCW. He is either RC or NRC depending on where he stays most

of the time during the taxable year. If he stays in the Philippines most of the time

during the taxable year, he is considered a RC, otherwise, a NRC.

Resident Alien

Resident aliens are those individuals whose residence is within the Philippines and

who is not a citizen thereof (Section 22F).

Q. Is the intention of the foreigner to reside I the Philippines necessary?



A.No. What is necessary is that he resides in the Philippines because Section 5

of RR-2 provides that RA is neither a traveller nor a sojourner, meaning a tourist.

Nonresident Alien Engaged in Trade or Business

The terms “nonresident alien” means an individual whose residence is not within

the Philippines ad who is not a citizen thereof (Section 22G).

When we say “engage or not engaged,” we are referring to an individual taxpayer.

Use this phrase to NRA becausethere is no RA engaged in trade. As far as

individuals are concerned, when we say “engaged or not engaged in trade,” this

refers only to NRA. We do not use this terms to other individuals. Why as far as

individuals? We have another concept when it comes to corporation.

There are three kinds of NRAE stated in Section 25A1 and RR-2-98.

1.NRA engaged in trade or business in the Philippines;

2.NRA who stay in the Philippines an aggregate of more than 180 days in one

calendar year; and

3.NRA who exercise profession here in the Philippines (see RR 2-98).

Foreigners who stay in the Philippines for an aggregate period of more than 180 in

one calendar year are deemed to be NRAE; underscore the 180 in one calendar

year in Section 25A1.

Q. Supposed a foreigner stayed in the Philippines for 100 days in 2005 and

100 days in 1006, is he NRAE?

A.No. The stay of the foreigner of more than 180 days must be within the same

calendar year.

Nonresident Alien not Engaged in Trade or Business

NRANE is included in income tax simply because there is a possibility that they

may derive income from sources within the Philippines. NRANE is subject to tax,on their gross income received from sources within the Philippines. This is the

only individual subject to gross income tax (GIT).

Aliens Employed in Multinational Organization Offshore Banking Units,

Petroleum Service Contractor



AEMOP are subject to final income tax (FIT) of 15% on their gross income received

from the employer. RR-2-98 requires thatonly alien individuals occupying

managerial and technical positionsare required to pay FIT of 15%.

However, if AEMOP derives income from other sources within the Philippines, it

shall be subject to NIT. Why? This is because of second paragraph of Section 25E

which states “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.”

Alien employed in multinational organizations and offshore baking may be

classified as RA, NRAE or NRANE if they derived income other than their

compensation from their employers. In case of alien employed I petroleum serve,

they are either NRAE or NRANE because Section 22E, first sentence, states that

they are permanent resident of a foreign country.

Take note that the same treatment applies to the Filipinos employed and occupyingthe same position as those aliens employed and occupying the same position as

those AEMOPs.

Corporations

There are three kinds of corporations as a taxable person:

1.Domestic Corporations (DC);

2.Resident Foreign Corporations (RFC); and

3.Nonresident Foreign Corporation (NRFC).

Domestic Corporations

Section 22C states “The term “domestic”, when applied to a corporation, means

created or organized, in the Philippines or under its law. DCs are those created or

organized in the Philippines or under its laws. It is taxable on all income derived

from sourceswithin andwithoutthe Philippines (see Section 23E). Corollary, its

counterpart is the RC, which is also taxable from sources within and without (see

Section23A).

Resident Foreign Corporation

The terms “resident foreign corporation” applies to a foreign corporation engaged in

trade or business within the Philippines (Section 22H). RFCs are taxable only

from sources within.



Nonresident Foreign Corporations

The terms “nonresident foreign corporation” applies to a foreign corporation not

engaged in trade or business within the Philippines (Section 221). NRFCs are

taxable only from sources within.

Take note that the corporation the terms “engaged or not engaged in trade or

business” refers to RFC, NREC, it is never applicable to DC if the foreign

corporation is engaged in business, it becomes an RFC; if not, it is a NRFC. In

relation to individuals , the term “engaged or not engaged in trade or business”

refers to RAE or NRANE.

Meaning of Corporation

Section 22B states that Corporation shall include:

1.Partnership;

2.Joint stock companies;

3.Joint accounts;

4.Associations; or

5.Insurance companies.

CIR vs. Batang

102 PHIL 823

The Tax Code defines the term “corporation” as including partnership no matter

how created or organized, thereby indicating a joint venture need not be

undertaken in any of the standards forms, or in conformity with the usual

requirements of the law on partnership, in order that one could be deemed

constituted for the purposes of the tax on corporations.

In the case at bar, while the two respondent companies were registered and

operating separately, they were placed under one sole management called the

“Joint Emergency Operation” for the purpose of economizing in overhead expenses.

Although no legal personality may have been created by the Joint Emergency

Operation, nevertheless, said joint management operated the business affairs of

the two companies as though they constituted a single entity, company or

partnership, thereby obtaining substantial economy and profits in the operation.

The joint venture, therefore, falls under the provisions of Section 84 (b) of the

Internal Revenue Code, and consequently, it is liable to income tax provided for in

Section 24 of the same Code.



The definition of corporation, under NIRC, is broader that the definition of the

Corporation Code. Nonetheless, this definition is for taxation purposes only. The

interpretations of the term “no matter how created” in Section 22B is not limited to

partnership; this applies also to corporations.

Q. Is a corporations whose purpose is against the law, a corporation within

the purview of NIRC?

A. Yes. Under the NIRC, any corporations no matter how created is considered a

corporation for taxation purposes.

Q. How about a corporation created under foreign law, is this corporation in

terms of the definition in Section 22B?

A. Yes. Section 22B includes all corporation no matter how created; either by local

law or a foreign law.

Q. How about an organization, can we consider it as a corporation?

A. Yes, although the NIRC is limited to the terms association, organization is

similar to association and operates lie an association. It is considered as an

association which is included I the definition of corporation under Section 22B.

Q. How about a non-stock, non-profit corporation, is this subject to income

tax?

A. Yes. Although a corporation is a non-stock and a non-profit, it may still incurprofit that could be subject to tax. The SC in this case of CIR vs. CTA, 329 SCRA

237, explained this issue.

Q. Is a GPP a corporation in the concept of taxation?

A. No. GPP is not a deemed corporation under NIRC. GPPs 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.

There are two kinds of GPP as enunciated by the SC in the case of Tan vs. Del

Rosario, 237 SCRA 324.

1.GPP which is not deemed corporation under section 22B; and

2.GPP which is deemed corporation. These are GPPs which derived income

from engaging in any trade or business.

The definition of GPPs is not interpreted literally.



Q. A GPP composed of lawyers deposited their attorney’s fee I a bank.

Though some time, it earned income. Can we consider the GPP as deemed

corporation for earning income, hence, liable to income tax?

A. No. Although the GPP earned income, it is still exempt from tax. It does not

earned income by engaging to trade or business. Additionally, the bank interest is

already subject to tax ad this income is not mentioned in the income tax return

(ITR) of the GPP because the bank had already filed another return for the interest.

Hence, the income derived is not within the meaning of engaging in any trade or

business.

Remember that a partner in a GPP, which is exempt from taxation, has to file a

return in their individual capacity. Any interest derived by the GPP, which was

given to the partners, shall be subjected to net income tax (NIT) (see Section 26).

In GPPs which are deemed corporation, the interest earned by the shareholder

shall be subject to FIT (section 24B2).

Q. How about joint venture, as a rule, is it tax-exempt?

A.No. As a rule, joint venture are not tax exempt; unlike GPPs, which as a rule,

is tax exempt. However, if the joint venture is engaged in public construction and

projects engaging in petroleum, coal, geothermal ad other energy operation, then

such joint venture is tax exempt (see Section 22B).

Q. How many individuals are present in a joint venture?

A. There are three persons involved in a joint venture: the two corporations which

combine for a particular purpose, and the joint venture itself. This was discussed

in Batangas vs. Collector, 102 Phil. 822.

Trust and Estate

Although trust and estate is separate thing under the Civil Code, they are

considered the same for purposes of taxation. They are of same category; hence,

they are taxed the same.

Estate is the property of the decedent whether located within or without thePhilippines. During the pendency of the settlement of the estate, there is a

possibility that it may earn income, hence, it shall be liable for income tax. Take

note, tax on the income of the estate and estate tax are two separate taxes. The

first one is discussed under Chapter XI which refers to income tax and the other

one is on Chapter XIX which refers to estate tax.



The status of the estate is the same as the status of the individuals immediately

after his death whether he is a RA, RC, NRA or any of the seven individual. The

tax to be imposed on the income of the estate should be distinguished from the

estate itself which is subject to estate tax.

We go tax on trust.

The status of a trust depends upon the status of the grantor or trustor or creator of

the trust, hence, a trust ca also be a citizen or an alien. The parties of a trust

include the trustor, or creator or grantor; the trustee or the fiduciary; and the

beneficiary.

The trust can be created by the following:

1.Will;

2.Contract; and

3.Agreemet.

Q. Where the trust earns income and such income is not passive, who among

the parties mentioned is liable for the payment of the income tax thereto?

A.It depends. If the trust isirrevocable, thetrust itself is liable for the payment of

income tax. The trustee is liable in behalf of the trust.

If the trust is irrevocable, the liability for the payment of income tax devolves upon

the trustor himself in his capacity as individual taxpayer.



CHAPTER III

KINDS OF INCOME TAX

The kinds of income tax are the following:

1.Net Income Tax (NIT) under Section 24A, 25a1, 26, 27ABC, 28A1-3rd par, 31,

32;

2.Gross Income Tax (GIT) under Section 25B 1st par, 28B1;

3.Final Income Tax (FIT) under 57A, 24B;

4.Minimum Corporation Income Tax (MCIT) of 2% of gross income under

Section 27E, 28A2;

5.Improperly Accumulated Earning Tax (IAET) of 10% under Section 29, RR-2-

2001; and

6.Optional Corporation Income Tax (OPCIT) of 15% of gross income (27 par 8,

4th, 10th par, 28A and last par.



Net Income Tax

The term net income tax was not mentioned in NIRC. However, this kind of tax

was referred to as thetaxable income or thegross income. Section 31 states “The

term taxable income means the pertinent items of gross income specified in this

Code, less the deductions and/or personal and additional exemptions, if any,

authorized for such type of income by this Code or other special law.

Section 31 does not state NIT; however, only NIT allows deductions and exemptions.

No other tax allows the same. Thus, taxable income refers to NIT.

Under revenue regulations, NIT is referred to as “the ordinary way of paying income

tax” or the “normal way of paying income tax.” Accountants use the phrase

“includable in the gross income” or “ payment by the net.”

In computing the NIT, it is important to determine whether there is actual gain or

loss. Gain is the flow of wealth to the taxpayer. NIT is applicable only if there isgain or profit. If there is no profit, NIT is not applicable; otherwise, it is

tantamount to taxing the capital.

Formula

[(Gross Income – Deductions/Exemptions) x rate] – tax credit = NIT

For individuals, tax is progressive. For corporations, tax is fixed at 35% (as

amended by RA 9337).

Q. Who are liable to pay NIT?

A. The following are liable to pay the NIT:

1.RC – Section 24A1a and 31;

2.RC – Section 24A1b and 31;

3.OCW and Seamen – Section 24A1b and 31;

4.RA – Section 24A1c ad 31;

5.NRAE – Section 25A1 (same manner as citizen);

6.DC – Section 27 and 31;7.RFC – Section 28a1; and

8.AEMOP – Section 25CDE for other income.

NRANE and NRFC are the only person not liable to by way of et; the rule is

absolute. NRANE and NRFC are liable for the payment of GIT. They are not liable

for the payment of NIT.



Take note that aliens who come and stay I the Philippines for a aggregate period of

more than 180 days during the taxable calendar year are considered NRAE.

Therefore, if his stay is only 180 days or less, he becomes NRANE, which is taxable

by way of GIT.

AEMOR as a general rule are not liable for NIT but FIT of 15% under Section

25CDE except if they receive income from sources other than from their respectiveemployers. If they receive income other than those which came from their

employers, the same may be subject to NIT (see second paragraph of Section 25E).

Take note that aliens employed in multinational company and onshore banking

may be classified as RA or NRAE if they receive income other than those received

from their employer, his income may be subject to NIT (see Section 25E of NIRC).

Aliens employed in petroleum contractor and subcontractor is always a permanent

resident of foreign country, hence, he may be classified as NRAE or NRANE. If he is

an NRAE his income may be subject to NIT. If NRANE, then GIT of 35%.

It is a rule that when an income is subjected to GIT, it shall not be subjected

to NIT.

The withholding system for NIT is the “Creditable Withholding System”. The

following are creditable I the withholding of tax:

1.Income tax of foreign countries – Section 34C3;

2.Excess input or output tax – Section 110B; and

3.Tax credit certificate – Section 204.

4.Sales discounted granted to senior citizens

Q. What are the requisite in the withholding of NIT of the taxpayer?

A. Withholding of NIT depends on whether there is a law explicitly stating that the

NIT should be withheld. Absence of such law or if the law is silent with regard to

withholding, the income is not subject to withholding of NIT.

Q. Suppose the taxpayer is RC, he derives income, is he going to included it I

filing of ITR?

A. Determine first if the income is passive. If the income is passive and was

already subjected to FIT, then, the income would no longer appear in the annual

ITR, otherwise, there would be obnoxious double taxation. If the income is not

passive, he should include it in the filing of the ITR.

Gross Income Tax



There are only two taxable persons who are subject to GIT: the NRANE and NRFC.

Formula:

Gross Income

X (Rate)

_______________

GIT (35%)

Q. What is the similarity of GIT and FIT?

A.No deductions ad exemptions are allowed in both cases.

To reiterate, if a taxpayer pays by way of the GIT, he should not pay by way

of the NIT. The rule is absolute.

Distinction

GIT FIT

Applicable only to

NRANE and NRFC –

30%

Applicable to all taxpayers

without distinction

There is only one rate –

35%

Rate varies

GIT is derived by addingup all income multiplied

by 35%

FIT is derived bymultiplying the amount

with the tax rate

Final Income Tax

In FIT, gain is presumed. An income subject to FIT is known as passive income

because nothing is done to receive this income; taxpayer does not exert effort. All

incomes subject to FIT are income within the Philippines provided the law provides

its application. We do not apply FIT in income from sources without because we do

not have withholding agents abroad.

Formula:

Income subject to FIT



X (Rate)

_______________________

FIT

The provisions of FIT is scattered in NIRC. Some applications of FIT are the

following:

1.Tax on Cash and Property Dividends;

2.Interest (ban interests);

3.Royalties;

4.Prizes;

5.Winnings;

6.Capital gains from the sale of shares of stock not traded;

7.Capital gains from the sale/exchange/dispositions of lands and/or buildings

(6%); and

8.Salaries of AEMOP (15%).

In FIT, deductions and exemptions do not apply. If an income is already subject to

FIT, it is no longer subject to GIT or NIT. If the FIT is not paid by the taxpayer, it is

not his liability but of the withholding agent. The exception is in the sale of shares

of stock, which is subject to FIT. Under RR 17-03, the buyer is the final

withholding agent; he pays the FIT. (See Proctor & Gamble vs. COMMISSIONER,

204 SCRA 377)

Q. If an income is not subject to FIT, is the taxpayer tax-exempt?

A.No. It is included I the NIT or GIT.

Minimum Corporate Income Tax

MCIT is applicable to DC and RFC only. (See Sections 27E and 28A2). It cannot

be applied simultaneously with the NIT because MCIT is paid in lieu of the NIT, it is

either one or the other whichever is higher. The rationale in the imposition of

MCIT isto discourage corporations from claiming too many deductions.

Formula:

Gross Income

x 2%

MCIT

Optional Corporate Income Tax

OPCIT is not yet applicable because of the failure of the President of the Philippines

to implement the same.



Improperly Accumulated Earnings

IAET is imposed on corporations with improperly accumulated earnings and profit.

The purpose for its imposition is to discourage the practice of accumulating

earnings and profits in order to avoid the payment of tax on the part of the

shareholders ad to oblige and compel the corporation to declare dividends. The DC

is the only corporation liable for IAET (RR-2-2001).

Kinds of Withholding Tax System

1.Final Withholding System (FIT) – it is final because it is no longer credited to

the net income tax due; ad

2.Creditable Withholding System (Tax Credit) [IT] – it still included to the

income tax due.

3.Substitutive way of filing the return.



CHAPTER IV

SOURCES OF INCOME

The relevance of Section 42 is to identify whether the income is within or without.

Q. Is Section 42 relevant to all taxpayer?

A. No. It is not relevant to RC and DC. But to the rest of taxpayer, it is material

because they are only liable when the income is derived within the Philippines

under Section 23.

So, to all of them, Section 42 is material, but for RC and DC, Section 42 is not

important. Why? Because whether the income is within or without the

Philippines, they are liable for tax. But to the rest, it is important because they are

liable only for income derived within, but for income derived outside the

Philippines, they are exempt.

Interest

Let us go to Section 42 par. A1. I 42A1, there are two income: first, interest from

sources within the Philippines (bank interest derived in the Philippines); and

second, interest on bonds, notes or other interest bearing obligations of residents,

corporate or otherwise, meaning corporation or individual.



Take note of the very broad sweeping statement. What matter here is the status of

the obligor. In an interest and other interest-bearing obligations or any kind of

obligations that yields interest, we have to determine the status of the debtor like in

a interest I a contract of loan. An interest is an income within provided that

obligor-debtor is a President of the Philippines.

Q. Coronally to that debtor, if he is not a resident according to Section 42A1, what is the interest then?

A. The interest is an income from sources without. So, if the debtor is a resident

of the Philippines, whether a DC or individual, it is an income within. But when

the debtor is non-resident, it is an income without.

NDC vs. CIR

151 SCRA 472

In this case, the NDC, a domestic corporation, entered into contract with several

Japanese corporations, which are NRFCs engaged I construction of several ocean

vessels. After the construction of the ship, NDC paid interest of the promissory

notes to the Japanese corporations. The BIR states that Japanese firm is liable to

pay income tax for the interest, received from NDC.

The SC ruled that the source of income is a income within because the NDC, the

obligor in this case, is a resident of the Philippines. SC said that the income is an

income within because the debtor-obligor is a DC whose domicile is within the

Philippines, therefore, it is a resident of the Philippines.

Take note that the petitioner, at first, did not want to pay because the contract is

perfected ad consummated in Japan. The ships were built I Japan ad the down

payment was made I Japan. But, SC stated that the determining factor here is the

status of the residence of the obligor. Who is the obligor? The RC, so it means its

residence is in the Philippines. That is an income within.

Therefore, in the payment of interest like forbearance of money, is an income within

if the debtor is a resident of the Philippines, whether individual or corporation,

because the law says “xxx and other interest-bearing obligation xxx”. This was

asked already in the bar.

So, it is not the place of the perfection of the contract, it is the place of residence of

the obligor. If it is a nonresident, under 42C1, it is an income without the

Philippines. It is important because a NRFC is only liable to pay income tax on

income derived within the Philippines.

Sale of Shares of Stock ad Dividend



Q. In the sale of share of stock, is it a income within or without?

A.It is an income within provided it is shares of stock in a DC. This sale of share

of stock in a DC is classified as income from within regardless of where the said

shares are sold.

Section 42E, second paragraph after the fourth sentence, states that provided,

however, that the sale of shares in a DC it is always an income from sources within

regardless of the place of the sale of the shares. So, it is going to be automatic if it

is a share in a DC.

Q. Supposed it is from a FC?

A.If the shares were sold outside the Philippines, the income is a source without.

If sold within the Philippines, then it is a source from within.

With regard to personal property, which will include shares of stock, it is an income

in that place where it has been sold. Hence, if it is sold in the Philippines, it is

without. This is with regard to shares in a FC because the shares I a DC are

always sources within.

This was already asked in the 1999 bar. If you will be asked in the bar, is the

taxpayer liable? With regard DC ad RC, you do not determine whether the income

is within or without because, for sure, they are always liable whether the income is

within or without. For taxpayers other than these two, you have to determine

whether the income is a income within or without, because if the income is

without, they are exempt.

1999 Bar

Q. An individual is a stockholder in two corporations, one is DC and the

other one is RFC. He sold his shares in both corporations. Is he liable for

the sale of shares in both corporations?

A. For the sale of shares in DC, he is always liable because it is always an income

within. But for the sale of share in a FC, we have to distinguish if it is an income

within or without. Fortunately, in the 1999 bar, the facts of the case say the share

was sold in Manila the one issued by FC. Therefore, the taxpayer is liable.

Q. If before the sale, there DC ad the RFC declared dividends. Is the

receiver liable for the receipt of the dividend declared by the DC?



A. Yes. Because the dividend declared by DC is a automatic one, it is a income

within.

Q. What about the one declared by the RFC?

A. It depends, if 50% of the gross income of such FC for the three-year period

ending with the close of its taxable year preceding the declaration of such

dividends was derived from spuroes within the Philippines, then it is an income

within.

Q. If one or two of the elements are absent, is it an income within?

A.It is a income without the Philippines. Corollarily, either of the two is absent

or both of the elements absent, then it is a income from sources without.

Hence, if the income is a source within, the receiver is liable; if it is an income

without, he is not liable.

It is not a matter of whether the money was received in abroad or in the

Philippines. For DC, it is automatic.

For FC declaring divided may be a income within or without depending if the

elements are present.

Services

Now we go o 42A3. This was asked in the 2000 and 1999 bar. Normally in the bar,

the example is a FC with a branch in the Philippines. But in the 1999 bar, theexample was reversed.

1999 Bar

A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co.

has a subsidiary in HK (HK Co.) and will assign P for a indefinite period to work full

time for HK Co. P will bring his family to reside in HK and will lease out his

residence in the Philippines. The salary of P will be shouldered 50% by A Co.

while the other 50% plus housing, cost of living and educational allowances of P’s

dependents will be shouldered by HK Co. will credit the 50% of P’s sales to P’sPhilippines bank account. P will also sign the contract of the employment in the

Philippines. P will also be receiving rental income for the lease of his Philippine

residence.

Q. Is that Filipino branch manager in HK liable to pay income tax in the

Philippines?



A.It is not taxable. The taxpayer is a OCW. Under Section 23, the liability of

OCWs are only those income derived from sources within. Under section 42, the

income is an income without the Philippines, therefore, he is not liable for income

tax.

In the 1991 bar, the example is a DC, San Miguel manufacturing equipment. It

hired a Singaporean from a NRFC. The Singapore firm will advertise all theproducts in Singapore, and as a result, the Singaporean Corporation received a

compensation from San Miguel.

Q. is the compensation to be paid by San Miguel subject to withholding tax

system?

A.No, because that income is exempt from income tax. The income earner is a

NRFC. It rendered services in Singapore. Being a NRFC, tax liability can only be

from income within, but the income here is an income without because the

payment and the performance were in Singapore.

This is applicable not only to workers but also to entertainers so long as it if

personal or organized service.

Q. Supposed the examiner as, a performer lives in Australia before she

performs in Manila. Can she refuse payment of income tax?

A.No, because the performance was made within the Philippines.

Q. David Pomeranz manifested to reside in the Philippines, hence, a residentalien. Supposed he will be hired in Guam, can he refuse to pay tax in the

Philippines for the performance made in Guam?

A. Yes, because that is an income without and being a foreigner, his liability is

only from sources within.

In conclusion, the place of the performance of the service for personal or labor

services depends on the place of the service.

Royalties & Rentals

We go on number 4 on royalties and rentals. Because of Section 42A4, the

following are sources within:

1. The use of the right or privilege to use in the Philippines any copy right,

patent, design or model or plan, secret formula or process, goodwill,

trademark, trade brand, or other like property or right.



2.The use, or, or the right to use in the Philippines any industrial, commercial

or scientific equipments.

For example, McDonald: the one granting the royalty is a NRFC. It authorized a

Filipino proprietor, DC and partnership. It authorizes to use the trademark.

They established a restaurant using the name McDonald. The agreement is thatthe Filipino will pay a certain sum of money, may be 5% of the gross or 2% of the

net. That is known under law as royalty.

Who is obliged to file the return? The Filipino proprietor is the one obliged to file

the return. What is the income tax of a NRFC? Gross income tax. How much is

the withholding then? It is 35% because the income earner is a NRFC.

Supposed we are franchise owners of Jollibee. The one granting the franchise is a

DC. Under RR 12-2002, the DC pays by way of the net income tax of 35%. How

much is the withholding tax? It is much lower than 35% because thecomputations of NIT there are deductions. In the computation, nowadays, it was

decreased to 15%. Take note of that defense. The reason behind the law is that

after the deductions, the tax rate of 35% will be more or less equivalent to 15%.

Let us go to secret formula. For example KFC, it authorizes the use of the secret

formula for cooing chicken this is subject also to tax. Rubber World (?) was

authorized by Adidas to manufacture shoes. This is also covered. But the most

important is the last phrase, “and other like property or rights.”

Now we go on letter b; the use of, or the right to use in the Philippines any

industrial, commercial or scientific equipments; revenue from Philippines from the

privilege to use scientific, commercial and industrial equipment. One example is

the privilege to use the cellular site in the Philippines by foreign companies.

Now we go to the third one, the supply of scientific, technical, industrial or

commercial knowledge or information. Whatever scientific and technical

knowledge, it is also an income from sources within. Therefore, whatever supplies

of scientific or technical knowledge of a cellular site is an income from sources

within.

We go letter D of number 4. The supply or any assistance that is ancillary andsubsidiary to, and is furnished as a means of enabling the application or

enjoyment of, any such property or right as in mentioned in paragraph (a) any such

equipment as is mentioned in paragraph (b) or any such knowledge or information

as is mentioned in paragraph (c).

Letter 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 purchase from such



nonresident person. For example, a nonresident had sold a machine or equipment

in the Philippines and supplied services including his workers that are an income

from sources within.

Paragraph 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.

Paragraph G. The use of or the right to use.

a.Motion picture films;

b.Films or video tapes for the use in connection with television; and

c.Tapes for use in connection with radio broadcasting.

So the use or the right to use of foreign movies, videos and tapes, whenever used, it

is an income from the Philippines.

Sale of Real Property

Now we go to Section 42A5, the sale of real property.

Q. When do we consider sale of real property an income from sources within?

Without?

A.It is an income within, if the property is located in the Philippines. Therefore,

if it is located abroad, it is an income without. This is the very simple rule withregard to sale of real property.

Sale of Personal Property

Let us see in the sale of personal property. It is covered by Section 42E.

Q. In the sale of personal property, is it income within or without?

A.It depends. If the sale of personal propertywas produced or manufactured in

the Philippines and sold in abroad or manufactured abroad and sold within, it isan income partly within and partly without and that is under Section 42E.

Q. How about personal property purchased within and sold abroad and vice

versa?

A.It shall be treated as derived entirely from sources within the country in which

it was sold.



So those are the determining factor whether an income is a source within or

without.

But let us see the case ofCIR vs. CTA, 127 SCRA 9. The taxpayer is RFC because

it is a FC that has branch in the Philippines. The issue here is the refund for the

overpayment of tax due to erroneous computation of expenses to be as deduction.

The contention is that the business expenses should have been determined of where it was expend.

In DC, the expense is deductible even the income is within or without. For RFC,

deductions are important because it can only claim deduction that must be related

to the trade or business in the Philippines on income within. If it is NRFC, we do

not discuss deductions also because there are no deductions because the tax is

GIT.

In this case, the taxpayer is RFC that is why they are claiming deduction on

expenses. The trouble here is that it is unknown whether it is the expense abroador in the Philippines?

The SC ruled that where an expense is clearly related to the production of

Philippine-derived income or to Philippine operations that expense can be deducted

from the gross income acquired in the Philippines without resorting to

apportionment.

The SC ruled that the overhead expense can be deducted from gross income

acquired in the Philippines by the parent company in connection with the finance,

administration and RND all of which directly benefit its branches all over the world

cannot be allocated with the operation of the Philippines. However, the RFC can

claim as its deductible share a reasonable part of such expense based upon the

ratio of the local or alien gross income versus gross income worldwide.

To illustrate:

Income derived from sources within X 100

Gross income in the whole world

= Percentage of allowed deduction from the worldwide

Section 42B refers to taxable income from sources within the Philippines, meaning,

after all the deductions.



CHAPTER V

CAPITAL AND ORDINARY ASSETS

Now we go to Section 39.

Q. Let us see the 2003 BQ, what is a capital asset? 2005 BQ, do you iclude it

in your ITR, the capital gains?

A.Capital asset is an asset or property, which is not an ordinary asset.

In Section 39A1, cross our the phrase whether or not connected in trade or business. If the property is used in business, it is usually included in the

inventory at the close of the taxable year, hence, it becomes an ordinary asset.

In Section 39A1, cross out the phrase whether or not connected in trade or

business. If the property is used in business, it is usually included in the

inventory at the close of the taxable year; hence, it becomes an ordinary asset.

The following are ordinary asset:



1.Stock in trade of the taxpayers or other property of a kind which would

properly be included in the inventory of the taxpayer if on hand at the close

of taxable year.

2.Property held by the taxpayer primarily for sale to customers in the ordinary

course of his trade or business.

3.Property used in the trade or business of a character which is subject to theallowance for depreciation, provided in Subsection F of Section 34; and

4.Real property used in trade or business of the taxpayer.

All of these are related to business. Hence, those properties that are not

mentioned in the exceptions are classified as capital asset. The capital asset does

not have something to do with the business of the taxpayer.

However, there are examples of capital assets that have something to do with trade

or business; examples are Section 39E, retirement of bonds and short sales under

paragraph F. These are capital assets but it has something to do with business.

However, ordinary asset has always something to do with trade or business.

Q. What do we mean by capital loss, capital gain, and ordinary loss and

ordinary gain?

A. When we say capital gain, it is a gain incurred from sale or exchange of the

taxpayer’s property classified as capital asset. Capital loss are those loss incurred

from sale or exchange from the taxpayer’s property classified as capital asset.

Ordinary loss is a loss incurred from sale or exchange of taxpayer’s property

classified as ordinary asset. Ordinary gains are gains from sale or exchange from

the taxpayer’s property classified as ordinary asset.

Q. What is the relevance of knowing it the property is capital or ordinary

asset?

A. The relevance of knowing whether the property is capital or ordinary is for the

proper application of the following:

1.Holding period under Sect5ion 39B;

2.Section 39C, capital loss shall be to the extent of the capital gain or the

“loss limitation rule”; and

3.The application of the net capital loss carry-over rule under 39D.

This principle can only be applied if the property is a capital asset. This principle

does not apply if the property is an ordinary asset. This is the relevance of

knowing whether the property is capital asset or ordinary asset.



Holding Period/Percentage taken into account

We go to Section 39B, percentage taken into account popularly knownas holding

period.

Q. What is the holding period or percentage taken into account?

A.It is the length of time or the duration of a period by which a capital asset has

been held by an individual taxpayer.

First, the property must be a capital asset. Second, the taxpayer must be an

individual. Why individual? Because 39Bstates “ in case of a taxpayer, other than

a corporation,” so it must be an individual. There are two holding period under

39B: the long-term holding period and the short-term holding period.

Q. What do we mean by long-term period? Short-term?

A. Thelong-term holding period is where an individual taxpayer held the capital

asset for more than 12 months.

Theshort-term holding period is where an individual taxpayer held the capital

asset not exceeding 12 months.

Q. What is the consequence of these periods?

A.Under the long-term holding period, only ½ or 50% of the net capital gains is

subject to income tax. The remaining ½ is exempt from income tax.

Q. Suppose it is a loss, will this rule apply the 50%?

A. Yes, because the law says gain or loss.

Q. What about the short-term?

A.100% of the net capital gains are subject to income tax. If it is a loss, 100% is

subject to deduction.

Q. Do you ignore in your ITR the capital gains, because in short-term, only ½

is subject to income tax? What kinds of income tax?

A.It is the NIT because capital gains shall be included in the ITR in gross income.

The exception, is income with regard to capital asset with the sale of shares and

sale of real property which will not be included in the annual ITR because they are

subject to FIT. Normally, therefore, a capital gain is subject to NIT and there are



only two capital gains that are subject to FIT: sale of shares and share of real

property.

Q. It is safe to say that capital gains are subject to FIT?

A. No. Ordinarily, capital gains shall be included in the annual ITR because

these are subject to NIT.

If the asset is an ordinary one, regardless of whether it was held for more than or

not exceeding twelve months, 100% shall be ordinarily subject to income tax. The

holding period do not apply.

It is worthy to remember that there are kinds of capital asset of which are subject

of holding period. First, capital asset held by corporation because the law says

this is only applicable to a taxpayer other than a corporation. Second, sale of

shares of stock and sale of real property which are subject to FIT; the holding

period does not apply also.

Loss Limitations Rule

Now we go to 39C, the limitation on capital losses, capital loss or the loss-

limitation rule.

All these three terms are only synonyms but what are the effects? Capital loss

can only be deducted from capital gains but not from ordinary gain while an

ordinary loss may be deducted from either capital gain or ordinary gain. That is

the very simple meaning of that.

Q. Is this applicable to corporation?

A. Yes. For two reasons: the phrase “to taxpayer other than a corporation” is not

in 39C, and, second, because the wording of the law itself. It states “if a bank or

trust company incorporation under the laws of the Philippines,” meaning to say, a

bank or trust company, which are domestic because they are incorporated under

Philippines laws, a substantial part of whose business receive deposits, sells bond,

debenture, note or certificate or other indebtedness.

Section 39C, last portions of this paragraph states “the foregoing rule does not

apply,” and what rule? It is the limitation on capital loss rule. Meaning to say, to

other corporations other than this two, limitation on capital losses is still

applicable. So, it is applicable to individual and corporation on two grounds.



Q. Why is it that the capital loss can be deducted from capital gain but not in

ordinary gain? Why is it that the ordinary loss is deducted from capital gains

and ordinary gains?

A.It has something to do with Section 34D. Supposed the deduction in Section

34D is required, the deducted must be connected or directly connected with the

trade or business of the taxpayer. If the capital loss isnot connected with the trade

or business, then it must not be allowed to be deducted from the gross income of

the ordinary gain. It is the reason why a capital loss cannot be deducted from an

ordinary gain because in ordinary gain, the law requires under Section 34D that it

must be connected with the trade or business of the taxpayer. In capital loss, it

has nothing to do with the trade or business.

Q. Do we include in our annual ITR in gross income the capital gains?

A. As rule, yes. If the taxpayer is a businessman, he shall include in this gross

income the capital gains. Together with the capital gain, he needs to include in

the gross income the ordinary gains.

The taxpayer, of course, will claim the deductions. In crediting and applying the

deduction on ordinary losses, it will cover all those mentioned in gross income then

he will deduct all the deduction.

Q. So what are included in the gross income?

A.Capital gains and ordinary gains. And that is the reason why an ordinary loss

is deductible from either capital gains or ordinary gains because you include in the

gross income not only the ordinary gain but also the capital gains.

Net Capital Carry-Over Rule

Let us say, in year 2000, sometime we are not allowed to deduct capital loss

because there was no capital gains. Is there a remedy because of that? There is a

remedy. We have to applythe net capital loss carry over rule.

Meaning to say, in the following year of 2001, we will be allowed to deduct,

provided, in2001, we have capital gains, provided further, that the capital lossincurred in 2000 should not exceed the amount of net income in 2000. So if the

capital loss in2000 is P100,000.00 and the net income was P75,000.00, in 2001,

assuming there is capital gain, we are only allowed up to P75,000.00 deductions,

provided finally, that the holding period shall be under the short-term holding

period.

Q. Is it possible that in 2000 we will not be allowed to claim ordinary loss”



A.Normally, that is quite impossible because it is deductible from either ordinary

gain or capital gain. But there is a possibility in two instances: first, if you do not

have any gain (big),or number two, the ordinary loss is more than the gross

income.

Q. If that is the case, what is the carry over there?

A. The answer is found under Section 34D3, theNet Operation Loss Carry-Over

rule (NOLCO). The carry over there shall lapse for three years except in two cases

that the carry over shall be for five years. The carry over for five year could be

either for oil drilling corporations or a mining corporation. In short, we go to

NOLO, net operation loss carry over rule.

Q. Why it has to be distinguished?

A.First, the carry over in a capital loss shall only be up to the extent of the next

year, so that, if next year, they do not have any capital gain, it will be barred

forever.

Q. How about in an ordinary loss?

A. The carry-over will not be barred as a rule because its prescription is three

years. For instance in 2000, we can claim that in 2001; if not, in 2002; if not, in

2003; certainly, in the fourth and the fifth, but only with respect to oil drilling and

mining corporation, and, provided further, that next year, there is no substantial

change in the ownership of the business.



CHAPTER VI

TAX ON INDIVIDUALS

We go now to Section 22, 23 and 24. In Section 22, these are the definitions. We

will go to that as we go along.

Q. What is the income tax under Section 24A?

A.NIT.

In the Tax Code we will never see the phrase NIT. The net income is

always been referred to as, generally, the taxable income and the other

one, the minority, gross income. In this section, it states, “An income tax

shall be imposed on the taxable income defined in Section 31.”

Q. What do you mean by taxable income?

A. Taxable income means the pertinent items of gross income specified in this

Code, less the deductions and/or personal and additional exemptions, if any,

authorized for such types of income by the Tax Code or other special laws.

Q. Why is it correct to say that it is about NIT?



A. Because the NIT is the only tax which allows deduction to be deducted from

the gross income. Therefore, Section 24A is about the NIT.

This section states that an income tax shall be imposed on the taxable income as

defined under Section 31 but it continuous to state “other than income subject to

tax under Subsection B, C and D of this section.”

Q. What do you mean by that phrase? Are they still subject to NIT?

A.No. It is subject to FIT provided the elements are present.

So, let us go to Letter B. They are subject to FIT because under Subsection A

other that income subject to tax under Subsection B, C, and D, if the elements are

present. It would depend on the surrounding circumstances. It may be the

subject matter of FIT, GIT or the NIT.

Let us go to 24A.

Q. Who are liable by way of the net under 24A1?

A. The following are liable by way of the net:

1.RC;

2.NRC;

3.OCW; and

4.RA;

5.NRAE (25a1)

Q. What about the NRAE? Are they also liable by way of the net? Under

what section?

A. Yes, Under 25A1.

Q. Why?

A. Because 25A1 states that an NRAE is liable to pay income tax in the same

manner as RC on their taxable income. Then again, it mentioned taxable income.

Q. What about NRANE, what is their tax liability?

A.Under 25B. They are subject GIT.

Q. What about alien employed in MOPs?



A.Normally they pay the FIT of 15%.

However, if they received income from other sources, then we will have to follow the

procedure in 25E second paragraph which states that, “ Any income earned from all

other sources within the Philippines by the alien employee referred to under Section

C,D,E hereof, shall be subject to the pertinent income tax, as the case may be,

imposed under this Code.” We have to determine whether the taxpayer is RA,NRAEor NRANE.

If they are RA, normally they pay by way of the NIT because they will fall under

24A1c. When they will be classified as NRAE, they will be classified under 25A1,

which they are liable by way of the net. If they will be classified as NRANE, they

will pay way of gross income tax.

Q. What about the DC, will they pay by way of the net?

A. Yes. Because Section 27A states, “ An income tax xxx is hereby imposed uponthe taxable income xxx”.

Q. How about RFC?

A. Also by way of the net. Section 28A1 states “xxx shall be subject to an income

tax xxx of the taxable income derived xxx”.

Q. What about NRFC?

A.It pays by way of GIT under Section 28B1.

So those were the correlation in payment by way of the net.

Filing of ITR of Husband and the Wife

Now we go on the last paragraph of Section 24A. This rule is applicable for legally

married individual. Read this in relation to Section 51D.

Q. What is the rule in legally married individual, are they going tofile net

income tax return separately or jointly?

A.If the income is pure compensation, Section 24A last paragraph says that they

have to file the return separately.



Let us go to Section 51D, it states about the not pure compensation.

Q. What is the income included under Section 51D?

A.It includes business compensation and compensation income.

Q. How about business income, is it included in the phrase “derived income

purely” from compensation”

A.No. It is not pure compensation.

Q. If one is purely compensation and the other one is business income, how

will you file the return?

A. They should file the return jointly under Section 51D.

Tax on Passive Income

The rates of tax on certain passive income are mentioned under Section 24B.

Q. What are the rates on the passive income received by individuals?

A. Interest, royalties, prizes and other winnings shall be subjected to20% FIT

except to the following:

1.Royalties on books, literary works and musical compositions which shall besubjected to 10% FIT;

2.Prizes of less than P10,000.00 which shall be subject to NIT;

3.Winnings from Lotto and Sweepstake, which shall be subject to NIT.

Bank Interest

In ban interest, for FIT of 20% to be applied, the recipient must be RC, NRC, OCW

or RA except on the following:

1.Interest from long term ban deposit (time deposit) or investments ofindividuals – it is exempt – but if deposit is pre-terminated;

a.4 years to less than 5 years – 5%;

b.3 years to less than 4 years – 12%; and

c.Less than 3 years – 20%.

2.Bank interest from depository bank under EFCDS is subject to 7.5% of such

income.



If the depositor is a corporation, the long-term deposit is not applicable.

The interest must be derived from sources within the Philippines to be considered

passive. This tax applies not only to ban interests but also to deposit substitutes

and trust funds.

Take note that bank interests are not included in the filing of ITR because thrre is a

separate return for bank interests.

Q. If RC or DC deposited money abroad and it earned interest, are they liable

to pay FIT of 20%?

A. An RC or DC depositing money abroad is not liable to pay FIT because the

Philippines has no withholding agent abroad; RC/DC is therefore liable for NIT.

Q. What about NRAE, is he liable for 20% FIT on interest?

A. Yes. Under Section 25A2.

Q. How about the NRANE?

A.He shall be liable for 15% GIT (in accordance to Sec. 25B).

Q. What if the depositors is alien employed in MOPs?

A.It depends on whether the alien is classified as RA, NRAE or NRANE.

For alien employed in multinational companies and offshore banking, they may be

classified as the following:

1. RA – FIT 20%

2.NRAE – FIT 20%

3.NRANE – GIT 35%

For aliens employed in petroleum constructor, it can only be NRAE or NRANE

because the law says “xxx permanent resident of foreign corporation”; hence, thefollowing rates:

1.NRAE - FIT 20%

2.NRANE – GIT 35%



Summary

INDIVIDUAL TAX RATE

RC FIT 20%

NRC FIT 20%

OCW FIT 20%

RA FIT 20%

NRAE FIT 20%

NRANE GIT 30%

MOPs If RA, NRAE – FIT 20% If NRANE – GIT 25%

Prizes

Prizes are those derived from contests and promotions. If individuals receive it, it

is passive income; hence, FIT applies. FIT on prizes applies to individuals only

because if it is received by a corporation, it is no longer passive.

Q. What if the prize is received by corporation, is it exempt from tax?

A. Not really. Since, the law is silent, it shall be included in the NIT for DC and

RFC or GIT for NRFC.

Q. What are the requisites for application of 20% FIT on prizes?

A. The following are the requisites:

1.It must be an income derived from the Philippines; and

2.It must be more than P10,000.00.

If the prize is less than P10,000.00, NIT applies.

Q. Are all prizes subject to income tax?

A. No. There are prizes, which are exempt from income tax, namely: (excluded

from gross income)



1.Under Section 32B7c, prizes and awards made primarily in recognition of

religious, charitable, scientific, educational, artistic, literary or civic

achievement are exclusion from the gross income if the following conditions

concur:

i. If the recipient was selected without action on his part to enterthe contract or proceeding; and

ii. The recipient is not required to render substantial future

services as a condition to receiving the prize or award.

2.RA 7549 says: “ All prizes and awards granted to athletes in local and

international sports competition and local tournaments, whether held in the

Philippines or abroad and sanctioned by their national sports association are

likewise exclusions from the gross income.”

Winnings

The requirement for FIT of 20% to apply is that the income must be derived from

sources within. Take note that the P10,000.00 requirement on prizes does not

apply in winnings. Winnings from lotto and sweepstake are not subject to FIT;

however, that income shall be included in the NIT.

If the recipient is a corporation, the income is not passive; hence, NIT or GIT

applies. Also, the law is silent as to this kind of income, hence, DC and RFC will

be liable for NIT and NRFC will be liable for GIT.

Royalties

For the FIT of 20% to apply, the royalty must come from sources within. However,

royalties received by RC,NRC, OCW and RA on boos, literary and musical

compositions the rate of 10% FIT apply. For NRAE, it is always 20% regardless if it

royalties on books, literary and musical compositions as mentioned under Section

25A2. It says “in any form”, so the 10% rate is not applicable. For NRANE, the

35% GIT is applicable.

If aliens employed in MOPs, we have to classify them whether they are RA,NRAE orNRANE. Once classified, apply the rule above.

If the recipient of royalties is a DC, the 20% FIT also applies as mentioned in

Section 27D1. Preferential rate of 10% is also not applicable. For RFC, we have

Section 28A7a, 20% FIT is applicable. The 10% preferential rate also does not

apply. For NRFC, 35% GIT is applicable.



Tax on Dividend

Tax on dividends includes the topic under Section 73. The dividend must come

only from the surplus profits of the corporation. A dividend is defined under

Section 73 formerly Section 66, paragraph A and explained in case of Manning vs.

CIR.

Q. What is dividend?

A.Dividend is any distribution made by a corporation to its shareholders out of its

earnings or profits and payable to its shareholders whether in money or property.

[Sec 73A].

Q. What are the kinds of dividends?

A. Dividends are classified as the following:

1.Stock dividend;

2.Cash;

3.Property;

4.Disguised; and

The last two are not relevant to NIRC.

Q. What is a disguised dividend?

A. It is the amount paid by a DC to NRFC for the services rendered by the latter

to the former, when the amount paid exceeds the value of the services rendered.

Manning vs. CIR

66 SCRA 14

The company claimed to have declared stock dividend. The shares of stock of one

of the stockholders were redistributed to the remaining stockholders and they are

claiming that it was a stock dividend. The SC rules that it was not a dividend

because it came not from the profit of the corporation but from the share of stock

from one of stock of the stockholders. It was not a dividend because a dividend

should come from the profit of the corporation.

Q. How can a corporation transfer its profits to the stockholders?

A. Thru stock dividend, cash dividend and property dividend.



Q. In the 2003 bar, it was asked: “What do you mean by stock dividend?”

A. Stock dividend is a mode of transfer of surplus profit to the authorized capital

stock of the corporation.

Assuming there are five incorporators. Each of them contributed 10 million pesos.

After successful operation, the DC earned a surplus profit of 1 million. How ca

the corporation divide the profits? There are only three: cash, property and stock

dividend. Liquidating dividend was not included here. Under Section 24B2, it

refers to cash dividend and property dividend.

Let us go to stock dividend. There are five incorporators and the surplus profit is

one million. Dividing the profit, each incorporator will receive P200,000.00

because they own same share of stock. If property dividend, they will also receive

the same property, let us say, motor vehicle.

In stock dividend, the one million will be transferred to the authorized capital of 50million to make it 51 million.

Q. In 2003 bar, the question is what is a stock dividend? Is it subject to

income tax?

A.No. It is not subject to income tax because the profits did not go to the hands

of the stockholders. Second, the controlling interests before and after the

declaration of the stock dividend remains the same.

Before the declaration of the stock dividend, the controlling interest of eachincorporator is 20%. After the declaration of the stock dividend, the controlling

interest of each stockholder is still 20%.

Pursuant to the rule that stock dividend is not subject to income, there is an

exemption of payment of FIT under Section 73B; if the issuance of stock dividend

is equivalent to redemption or cancellation. In simple language, when the

corporation purchased the stock dividend, Section 73B says it is subject to income

tax to be paid as taxable income.

Q. Who is now liable?

A. The stockholder because it is the seller. We have to remember that in a

common term, normally, it is the creditor or the oblige that is the one liable to pay

income tax unless there is agreement to the contrary.

So tht stockholder is the one liable and that is the subject matter in the case of

ANSCOR vs. CIR 301 SCRA 152. The SC ruled that in case of redemption, the

stockholder cannot escape the payment of income tax.



We go not to cash dividend and property dividend. We will notice that under

Section 24B2, the one subject to FIT is either cash dividend or property dividend.

Q. Stock dividend was never mentioned under Section 24B2, why?

A.Because it is not subject to FIT.

Q. Why is it not in the exceptional instance under Section 73B that it is

subject to income tax yet it was not mentioned there?

A. {It was not mentioned in exceptional circumstance under Section 73B because

the income tax liability of the stockholder shall be based on the taxable income, so

the income tax is NIT.}

(Because the general rule is that, it is not subject to income tax by way of

exemption 73B states) stock dividend is not included in Section 24B2 because it

refers to FIT while Section 73B refers to NIT. When the provision of NIRC speaks of

the NIT and FIT, on the same income, these taxes cannot be imposed

simultaneously; hence, it has to be separated.

Going back to Section 24B2, the FIT on taxable dividend: this refers either to cash

dividend or property dividend. In stock dividend, it is not a taxable divided

because as a rule it is exempt from income tax.

Q. What is the requirement for the imposition of FIT under Section 24B2?

A.One requirement for the imposition of FIT on dividend is that it must be issued

by a DC. (Exemption: Regional operating headquarters because it is a RFC.)

Q. Is the term dividend limited to the dividend mentioned under the

Corporation Code?

A. No. It may include a share of a partner in a partnership, or a unit of

participation in an association. So the term dividend is not limited to the

definition under the corporation code. So it may include the share of partner in a

partnership, including the share of members of an association.

Q. Who is now liable to pay the FIT of 10%?

A. They are mentioned under Section 24A: RC, NRCF, OCW and RA.

Q. How about NRAE?



A. According to Section 25A2, NRAE is also subject to FIT on dividends but not of

10% but of 20%.

Q. Supposed the stockholder is NRANE?

A.It is the GIT of 30% under Section 25B.

Q. Supposed the stockholder is MOPs?

A. We have to consult Section 25E last paragraph. If these aliens create income

from other sources, the law says these incomes shall be subject to the pertinent

income tax. So, we have to determine whether the MOPs are NRAE or NRANE. If

NRAE they will be subject under Section 25A2; if NRANE, GIT of 35% under

Section 25B.

Q. What about if the stockholder is a DC?

A. According to Section 27D4, it is not subject to income tax and, therefore,

exempt.

Q. What if the stockholder is RFC?

A. According to Section 28A7d, it is not subject to income tax, therefore, exempt.

Q. How about NRFC?

A. According to Section 28B5b, the FIT of 30% or maybe, if the “tax-deemed paidcredit rule” is present, the rate of 15%.

Now these are the tax rate for cash and property dividend. But for stock

dividends, they are exempt except only on cancellation or redemption.

Supposed the one issuing a dividend is a foreign corporation, it does not matter

whether it is a resident or nonresident. For the dividend issued by DC, according

to Section 42A2a it is always an income within. But if is issued by a foreign

corporation, take note that under Section 42A2b there is no further distinction, so

long as it was issued by foreign corporation, it may be an income within or an income

without.

If the one issuing a dividend is a foreign corporation, we have to determine whether

it is an income within or without because most of the taxpayers are exempt from

income tax.

Q. When can it be an income within or without?



A. The answer is found under Section 42A2b. If the two elements are present at

least 50% of the foreign corporation declaring dividend is an income from sources

within from the three-year period preceding the declaration of dividend, it is a

source within. If one or both of these two elements, the 50% and the three-year

period, is not present, then the dividend issued by the FC is an income without.

If it is an income without, most of the taxpayers mentioned under Section 23are example except the RC and DC. If it is an income within because the two

elements are present all of them are liable to pay by way of the net except NRFC

and NRANE, which pays by way of the gross income tax.

Q. What about the MCIT. Is it possible to pay the MCIT in dividends?

A. Yes. For DC receiving dividend from a foreign corporation they are liable to pay

by way of the net whether it is an income within or without. If the NIT is lower the

MCIT, the DC has to pay MCIT.

For RFC receiving taxable dividend from sources without it is exempt, so we do notapply the MCIT. If the taxable dividend is from sources within, the RFC is liable

by way of the NIT, and if it is lower than the MCIT, then the latter shall be applied.

In 24B2, it speaks that if the taxable dividend was earned before January 1, 1998,

nonetheless, it is exempt because beginning 1987 down to 1998; individuals are

exempt from FIT from the receipt of a taxable dividend from a DC.

Dividend: DC to Individual

ISSUER RECIPIENT APPLICABLE TAXDC RC FIT 10%

DC NRC FIT 10%

DC OCW FIT 10%

DC RA FIT 10%

DC NRAE FIT 20%

DC NRANE GIT 25%

DC AEMOP

DC RA/NRAE FIT 10%/20%

DC NRANE GIT 30%

Intercorporate Dividend

ISSUER RECIPIENT APPLICABLE TAX

DC DC Exempt

DC RFC Exempt

DC NRFC FIT 15%/30%

FC DC NIT 30%



FC RFC If income within, NIT; if

without, exempt

FC NRFC If income within, GIT; if

without, exempt

Tax on Sale of Shares

We go to Section 24C. The first to be understood under Section 24C is the phrase:

“The provisions of the section 39B notwithstanding xxx”.

Q. What is Section 39B all about?

A. It is about the holding period entitled: “Percentage taken into account.”

Q. What is the relevance of that?

A.Because both 39B and 24C speaks of a capital assets. When it is a capital

asset, the holding period applies.

However, we have to remember that the holding period do not apply in the

following:

1.Sale of shares which are capital assets;

2.Sale of real property which are capital assets;

3.Capital assets of corporation.

Q. Why does the capital assets of a corporation not subject to holding

period?

A.Section 39B states: “taxpayer other than the corporation.”

Q. What is holding period?

A. It is the length of time where the taxpayer held the property. If it is held more

than 12 months and if the elements are present, 50% of the net capital gains areexempt; the remaining ½ is subject to income tax. So that is why the holding

period does not apply to the sale of shares because the basis there is not the

holding period but rather how much is the gain.

Q. How much is the rate?



A. For the first P100,000.00 (of the net capital gain) it is 5% and in excess of

P100,000.00 it is 10%. So the basis here is not the holding period but the net

capital gains.

Income tax to be applied to sale of shares:

1.FIT depending upon the elements;2.NIT;

3.GIT;

4.MCIT;

5.Percentage tax to be based on gross income.

Now, the trouble here is that the law is only explicit about the application of the

percentage tax under Section 127 and also the application of FIT.

Let us go to the elements of the application of the FIT:

1.The share of the stock being sold as shares in a DC;

2.These shares are classified as capital asset;

3.These shares are not listed and transacted under the local stock exchange;

and

4.The seller is the stockholder itself.

If these elements are present, the FIT applies regardless of who is the taxpayer.

And as a matter of fact, it is the only income tax where the FIT applies even if the

taxpayer is a NRFC or NRANE.

Q. Who are liable to the FIT considering that Section 24C does not mention

any taxpayer?

A. Those mentioned under Section 24A: RC, NRC, OCW and RA.

Q. How about the NRAE?

A. We have Section 25A3.

Q. How about NRANE?

A. In the last portion of Section 25B says it shall be subject to the 5%/10% tax

prescribed under Section 24C.

If that is the case, all the individuals will pay a uniform income tax of 5%/10% in

share of stocks sold by DC, if the elements are present.



Q. What happen now to alien employed in MOPs? Are we going to determine

whether they are not RA, NRAE, or NRANE?

A. No more because whether they are engaged or not, they will be liable for the

same rate.

Q. How about DC?

A.For DC, we have Section 27D2; we have the same rate.

Q. How about RFC?

A. We have Section 27A7c.

Q. NRFC?

A. We have Section 28B5c.

In other words, all income taxpayers will be liable for the FIT of 5% or the 10%.

That is if the elements are present.

Let us see the first element: It must be shares in a DC.

Q. What if the share is owned by a foreign corporation, whether resident or

non-resident?

A. We have to determine whether it is an income within or without.

If it is a sale from a DC, it is always an income from sources within and that is

according to Section 42E second paragraph saying “that gain from the sale of

shares of stock in a DC shall be treated as derived entirely from sources within the

Philippines regardless of where the said shares are sold.”

Q. What about the shares of stock in a foreign corporation?

A. We see Section 42E second paragraph saying “Gains, profits and income derived from the purchase of personal property within ad 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 from sources within the country it was sold.”

So if the shares in foreign corporation are sold in the Philippines, it is an income

within; if sold outside, it is an income without.



If it is an income without because the shares in a foreign corporation were sold

outside the Philippines, most of the taxpayer is exempt from income tax under

Section 23. Only two taxpayers are liable: the RC and DC, they have to pay by

way of the NIT.

With regard to whether it is an income within or without, most of the taxpayer pays

by way of the net except the NRANE and NRFC which pays by way of the gross. Soif one of the elements is not present and the gains are still an income within, most

of the taxpayer pays by way of the net except the two which pays by way of the

gross.

Second element, the shares of stock must be a capital asset.

Q. When is a share considered a capital asset?

A. It was answered in China Bank vs. CIR, 336 SCRA 178. The shares of stock

can only be classified as ordinary asset if it is being sold by dealers or brokers ofshares that is an ordinary asset.

It means to say that those shares not being sold by dealers, those shares are

capital assets. If the share is classified as capital assets, assuming all other

elements are present, the FIT of 5% or the 10% will be applied.

Q. Suppose it is an ordinary asset, what will be the rule?

A. The rule will be the same, if it is an income within, (the share in a DC), most of

the taxpayers will be liable for NIT except only to NRFC and NRANE, which will beliable for GIT.

If it is an ordinary but an income without (shares in a foreign corporation), most of

the taxpayers are exempt except only the DC and RC which will be liable for NIT.

Let us go to the third elements: the sale of shares are not transacted and listed in

a local stock exchange..

Q. Supposed it is listed, what tax should be applied?

A.It is the percentage tax under Section 127.

UnderRA 7717, if it is listed and transacted in the local stock market, the

percentage tax, which is a nature of a business tax under Section 127, will apply.

Q. If Section 127 will be applied, is the percentage tax in lieu of the other

income tax?



A. Yes. Because RA 7717 says that percentage tax shall be in lieu of all

corporate and individual income tax.

Therefore, if the shares are transacted and listed in a local stock exchange the FIT

of 5% or 10% will not apply but the percentage tax under Section 127. If it is not

transacted and listed in a local stock exchange, the 5% or 10% FIT will apply.

Tax on Distributive Shares in a GPP

We go now to distribution of shares to a partner in a GPP. In the first paragraph of

Section 26, it says that GPP is exempt from corporate income tax. Take note of the

phrase “as such”.

Q. What happens to the shares of profits of a partner in a GPP, is it exempt?

A. Accordingly, the law says the distributive shares shall be included in the gross

income; the partner will be liable for NIT.

Q. If the GPP is deemed to be a corporation, what tax should be applied?

A. The FIT mentioned under Section 24B2.

Tax on Sale on Realty

Again, the provision begins with the phrase ‘The provisions of the Section 29B

notwithstanding xxx”, meaning the provision on holding period does not apply to

the sale of realty which is subject to FIT.

Q. Why is that phrase mentioned?

A. Because both Section 24D1 and 39B speak of capital assets, and for the sale of

realty, it is not subject to the holding period because the basis of the income tax is

not for how long was the property possessed by the taxpayer but of how much of

the 6% of the gross selling price or the fair market value of the realty. Hence, the

holding period does not apply.

Holding period applies only to personal property which is capital asset except sale

of shares for real property whether it is capital asset or ordinary asset the holding

period does not apply. There is no way that the holding period will be applied to a



real property. Therefore,the holding period applies only to personal

property.

Q. What are the elements of payment of the FIT on sale of real property?

A. These were enumerated under Section 24D1:

1.The real property must be located in the Philippines;

2.The real property must be capital assets; and

3.The seller is any kind of individual.

According to Section 27D5, DC is also subject to this tax.

If all the elements are present, the FIT will apply except for RFC and NRFC. Even

if the elements are present, the FIT will not apply to RFC and NRFC because the

law is silent, hence, the NIT (for RFC) or GIT (for NRFC) will be applied.

Therefore, if all the elements are present, the general rule is that the FIT of 6% will

be applied except when the taxpayer is RFC or a NRFC.

Going back to the first element, the realty must be located in the Philippines.

Q. Supposed the real property was located abroad, does a FIT apply?

A. No. According to Section 42, it is an income without. If it is an income

without, in line with Section 23, most of the taxpayers are exempt except the RC

and the DC, which will be liable for NIT. We do not apply the FIT outside thecountry.

If it is located in the Philippines and the other elements are present, the FIT of 6%

will be applied except the RFC and the NRFC, which will be liable for NIT and GIT

respectively.

We go on the second element: it must be a capital asset. Assuming all other

elements are present, the FIT will apply. Again, except the RFC and NRFC.

Q. When can we consider the real property a capital asset?

A. RR 7-2003 says that realty is capital asset if not ordinary. The following are

ordinary assets (the BIR merely copies Section 39A1 but added the phrase “real

property”):

1.Real property held by the taxpayer property included in the inventory of the

taxpayer if on hand at the close of a taxable year;



2.Real property held by the taxpayer primarily for sale to customers in the

ordinary course of his trade or business. It refers also to realtors;

3.Real property, which is a subject matter of depreciation except a parcel of

land. Depreciation do not apply in parcel of land, we apply it other than the

parcel of land;

4.Real property used in trade or business of the taxpayer.

Those are the ordinary assets. Other real properties not included in these

enumerations are capital assets.

Q. If the realty is an ordinary asset and located abroad, what tax will be

applied?

A. If the real property is located abroad, it is necessary to determine whether the

real property is an ordinary or capital assets. Most of the taxpayers are exempt

from income tax except RC and DC, which will be liable by way of the net.

Q. What if it is an ordinary asset, assuming it is located in the Philippines,

what tax should be applied?

A. Most of the taxpayer will be liable by way of the net except the NRANE and

NRFC, which will be liable by way of the gross.

Q. How about the NRANE, is it also liable for the FIT of 6% for sale of realty,

assuming all the elements are present?

A. Yes. Section 25B last sentence says, “Capital gains realized by NRANE xxx

real property shall be subject to the income tax prescribed under Subsection D of

Section 24.” The GIT will not apply but the FIT 6%.

Hence, for NRANE if the elements are not present and the income from sale of real

property is an income within, the GIT will apply.

We go to the last elements: the seller must be any kind of individual. As stated

earlier, any kind of individual shall be liable for FIT of 6%, assuming other elements

are present. For corporations, the DC is the only liable for this tax under Section27D5. For RFC and NRFC, the FIT of 6% do not apply. RFC is liable for NIT and

NRFC will be liable for GIT even if all the elements are present as long it is an

income within.

Q. What is the difference if the seller is an individual or a corporation?



A. Section 27D5 says that the FIT will be applied on real property which refers to

land or building. For any kind of individual, it includes any kinds of real property

enumerated under Article 415 of the Civil Code.

Q. Assuming all the elements are present and the seller is a RC, is there a

possibility that the NIT will be applied?

A. Yes. If the buyer is the government, or any of its political subdivisions or

agencies or to GOCC, taxpayer is given the choice to pay the FIT of 6% or the NIT.

Q. If you are the lawyer of an individual who is selling his real property to

the government which is located in the Philippines, will you advise the

payment of the FIT of 6% or the NIT?

A. It depends. Determine whether there is substantial profit or not. If sale of

realty will incur loss, e.g. the price of the land is one million and the government bought it for P750,000.00, then it is better to apply the NIT because there is no

profit; hence, the NIT will not apply simply because NIT presupposes that there is

profit. If there is a substantial profit, e.g. the land was sold for two million pesos,

the rate will be the 32%; therefore, it is advisable to pay the 6% FIT.

If the buyer is government, the option can only be exercised by those enumerated

under Section 24A. It cannot be exercised other than those mentioned under 24A.

Q. Who can exercise such options?

A. Under Section 24A, it says RC,NRC, OCW and RA.

For NRAE, it can only be taxed for FIT, assuming the elements are present, under

Section 25A3. For NRANE, if the elements are present, it is still the FIT as

mentioned in the last portion of Section 25B. For aliens employed in MOPs, there

is no need to distinguish whether they are resident alien or not, they have to pay

____.

For DC under 27D5, we have the same elements except that it is only limited to

lands and building. For RFC, it is the NIT because the law is silent. For NRFC, it

is the GIT of 35%.

Q. What about in involuntary sale, like auction sale, do we apply this tax?

A. Yes. Because the law says, sale, barter or other modes of disposition.

However, while it is true that auction sale is considered in the phrase, “and other

modes of disposition”, RR-4-99 says that if the mortgagee is a ban or a financing



institution, the property was sold to an auction and the elements are present, the

FIT does not apply because the owner has the right of redemption.

Q. Supposed the owner did not redeem the property and the title was

transferred to the buyer at the auction sale, is he now liable to pay FIT?

A. From the time the title was transferred, the seller is now liable to pay the FIT

because there is now a sale or a disposition of the real property and there is

change of ownership..

If the property was redeemed, then, this tax does not apply because there is no

change of ownership. If the mortgagee is not the bank, the FIT will apply because

the law says‘xxx and other modes of disposition.”

This tax must be correlated with Section 100 of the Tax Code; the donor’s tax will

apply provided the real property is not the one mentioned in 24D1.

Q. A parcel of land located in Metro Manila worth one million pesos for only

P600,000.00 was sold to a relative. Can we apply the donor’s tax?

A. Yes. If the realty is other than the one mentioned in 24D1.

If the real property is located in the Philippines, it is a capital asset and the seller

is any individual, the donor’s tax do not apply.

Q. Why?

A. Because Section 100 says “xxx other than real property referred to in Section

24D1 xxx”. Clearly, the FIT of 6% is preferred than the donor’s tax, if the elements

are present.

Q. Is sale of real property subject to VAT?

A. The answer is provided for in Section 106A1a. That the sale of realty is

subject to VAT provided it is the one held by the taxpayer primarily for sale to

customers or held for lease in the ordinary course of business. This is no other

than if the seller is a realtor.

Q. If a taxpayer receives a real property from a relative and he resells that,

is he liable to VAT?

A. No. The realty must be for sale to customer in the ordinary course of

business. In other words, VAT is only applicable if the seller is a realtor.

Q. When it is subject to VAT, do we apply the FIT of 6%?



A. No, because the elements there is conflicting.

Q. Why is it conflicting?

A. If the seller is a realtor, the realty property is not a capital asset but rather an

ordinary asset because it belongs to the same enumeration under RR 7-2003 as

copies under Section 39A1. Hence, if it is an ordinary asset, the FIT of 6% will not

apply.

Q. If it is not subject to FIT, does it mean it is exempt from income tax?

A. No. It is subject to NIT.

Q. Is it a violation of the equal protection clause?

A. No. If it is subject to FIT because it is a capital asset, there is no way that VAT will be imposed. The rule is absolute. It is no longer subject to VAT the moment it

is subject to FIT.

Q. But is the other way around true?

A. No. If the VAT has been applied although FIT does not apply, the NIT will be

applied. However, if the FIT of 6% applies, it will not be subject to VAT. The rule is

absolute.

We go to Section 24D2.

If the purpose of selling the real property is to acquire new principal residence, if

the elements are present, there is a chance that the taxpayer may be exempt from

FIT of 6%.

The elements are as follows:

1.The real property being sold is a residential property;

2.The seller must inform the BIR within 30 days from the date of the

transaction;

3.The proceeds of the sale is fully utilized in acquiring or construction a new

principal residence within eighteen months from date of sale/disposal;4.The historical cost will be carried over to the real property;

5.The privileged can only be availed once on every 10 years;

6.Exemption available to those with principal residence in Philippines.

Let us say an individual sold his residential place worth 10 million pesos but he

had purchased a new realty for a total cost of six million used for residential

purposes. The balance of four million will be subject to FIT.



Q. Supposed it is a contract of barter or exchange, do we apply the FIT of

6%?

A. Yes.

Q. Who is the one liable for FIT?

A. Both parties will be liable for FIT because both of the parties are considered

seller and buyer at the same time.

Under RR 13-99, the Barangay Captain must certify that the property being sold

was used for residential purposes.

Summary:

Seller Imposable Tax

Individ

ual

If elements are present; FIT

If not – NIT or GIT

Corporations

DC FIT

RFC FIT

NRFC FIT

CHAPTER VII

TAX ON DOMESTIC CORPORATIONS

Q. What are the income taxes to be paid by DC?



A. Supposedly there are five income taxes. However, the OPCIT is not yet

implemented. The GIT will also not be applied because GIT is only applicable to

NRFC. Therefore, the following shall be applied to DC:

1.NIT under Section 27 A, B and C. Under Section 27A, it refers to taxable

income, so it refers to the NIT;

2.FIT under Section 27 D1, D2, D3 and D5;3.MCIT under Section 27E; and

4.IAET.

So there are four income taxes.

Q. But do we apply these income taxes simultaneously?

A. No, because the MCIT and the NIT cannot be applied simultaneously. It

should be either of the two, whichever is higher.

Tax on Educational Institutions

In Section 27B, it speaks of a DC which is a nonprofit proprietary educational

institution, and because it speaks of educational institution, we have to go over to

other tax statutes providing for the tax liability of educational institutions from a

particular tax. We have the following:

1.Article XIV Section 4 paragraph 3 of the 1987 Constitution;

2.Article VI of Section 28 paragraph 3 of the 1987 Constitution;

3.Section 234B of LGC;4.Section 30H and I of NIRC;

5.Section 101A3 of NIRC;

6.Section 109 (m) now paragraph (H) of NIRC as amended by RA 9337; and

7.Section 193 of LGC.

All of these provisions speak about educational institution.

Article XIV, Section 3 of 1987 Constitution states that “ All revenues and assets of

non-stock and non-profit educational institutions used actually, directly, and

exclusively for educational purposes shall be exempt from taxes and duties.”

First, the provision is redundant. It is enough to say that it exempt from all kind

of taxes because when you say all kinds of taxes, automatically, it includes the

exemption from custom duties because custom duties is a form of tax.

Q. A non-profit, non-stock educational institution earns profit from the

operation of drugstore, hospital and dormitory. Is this educational

institution exempt from tax?



A. No. It must be proven that the revenue was used actually, directly and

exclusively for educational purpose. In addition, of Section 30 says that

educational institution is exempt from income tax received by them “as such.”

Meaning, the exemption of the school shall only with regard to an income received

by them as an educational institution. Further, the last paragraph qualifies that

income of whatever kind and character from any sale of real or personal property or

from any of their activities conducted for profit regardless of the disposition madeof such income is subject to income tax.

This income should be subject to income tax because it is an activity conducted for

profit, and it is not an income received by the educational institution as such.

Q. Other commentator says that the last paragraph of Section 30 of NIRC is

unconstitutional; does it mean that in the given problem the educational

institutional is now exempt from tax?

A.No. Assuming arguendo that Section 30 is unconstitutional, nonetheless, alaw is presumed constitutional until it has been invalidated by the SC. There is a

need for declaration of unconstitutionality of the SC before the law may become

inoperative. A law may be unconstitutional but still valid until there is a final

decision by SC that the said law is null and void. Therefore, Section 30 is very

much enforceable.

There is no conflict between Section 30 of NIRC and Article XIV of the 1987

Constitution; the former speaks in particular, the income tax, while the latter

speaks in general.

Therefore, if we are lawyer of a non-stock and non-profit educational institution, we

must invoke Section 30 of NIRC because we do not have to prove that the income is

actually, directly and exclusively used for educational purposes.

Let us go now totax on proprietary education institutions embodied under

Section 27B.

Q. What is the income tax being referred to in Section 27B?

A. NIT because it speaks of “taxable income”. It refers to NIT, not of 35%, but10%. So schools, if the elements are present, are not liable to pay NIT of 30%, but

10%. The requirements are the following:

1.The school must be non-profit, proprietary educational institution;

2.The gross income from unrelated trade, business or other activity does not

exceed 50%; meaning exactly 50% or more of the gross income must not

come from unrelated activities. So, if the school earned 51% of its gross

income from selling “balut”, then it cannot avail the 10% NIT;



3.It must be duly accredited by CHED, TESDA and DECS.

4.Private institution.

If these elements are present, the non-profit, proprietary institution will only be

liable for 10% tax and not 30% NIT.

Q. What does the term “unrelated trade or business” mean?

A. Unrelated trade or business means any trade or business of other activity, the

conduct of which is not substantially related to the exercise of or performance by

such educational institution and hospital of its primary purpose or functions.

Guide

1.Stock, profit educational institution – 30% NIT, it is a regular DC, Section

27A;

2.Stock, non-profit educational institution – 10% Section 27 B;

3.Non-stock, Non-profit education institution – 3exempt (Section 30 H & I);

and

4.Non-stock, profit educational institution – There is no such animal.

Q. But if the school wants to be exempt from real estate tax, what are the

requirements?

A. The real property mustbe actually, directly and exclusively used for

educational purposes as stated under Section 28 paragraph 3 of Article VI of 1987

Constitution. It has an identical provision under Section 234b of LGC. But thisSection 234b is more specific; it speaks of exemption from real property tax. This

was asked in the 2006 bar.

2006 Bar

Q. The Constitution provides “charitable institutions, churches, parsonages or

convents appurtenant thereto, mosques, and non-profit cemeteries and all lands,

buildings, and improvements actually, directly and exclusively used for religious,

charitable or educational purposes shall be exempt from taxation.” This provision

exempts charitable institution and religious institutions from what kind of taxes?Choose the best answer. Explain 5%

1.From all kinds of taxes, i.e., income, VAT, customs duties, local taxes and

real property tax;

2.From income tax only;

3.From value-added tax only;

4.From real property tax only; and



5.From capital gains tax only.

A.Obviously, the answer is real property tax only.

In exemption from real property tax, we claim Section 28 paragraph 3 of Article VI

of 1987 Constitution or Section 234b of the LGC. We do not invoke Section 4

paragraph 3 of Article XIV of the Constitution because the former is more specific;

it refers to real property tax.

We go to Section 101 (3); donor’s tax on gifts in favour of an educational institution.

This is in the nature of a deduction but this also refers to the exemption of the

educational institution with regard to the donor. But strictly speaking, this

section refers to deductions.

Q. If a donor donated a real property to educational institution, what are the

requirements for its deductibility? In short, what are the grounds for

exemption?

A. The following are the requirements:

1.Not more than 30% of said gifts shall be used by such done for

administration purposes;

2.It is a non-stock, non-profit educational institution;

3.It pays no dividend;

4.Governed by trustees who received no compensation;

5.It devotes all its income to accomplishment and promotion of the purposes

enumerated in its Article of Incorporation.

In taxation, when law says: “exemption” or “exclusion”, they are the same because

tax will not apply. So strictly speaking, this section refers to deduction; the

donor’s tax does not apply, so it is exempt from donor’s tax.

Q. Is an educational institution exempt from VAT?

A. It depends. For government educational institutions, it is automatically

exempt from VAT. There is no requirement at all.

With respect to private educational institution, under paragraph (h), formerly

paragraph (m), of Section 109 of NIRC as amended by RA 9337, educational

services rendered by a private education institution must be duly accredited by

DECS, CHED and TESDA before it can be exempt from VAT. The accreditation is

necessary for private educational institution while it is not necessary for

government educational institution. For private educational institution, the

amendatory laws says “it must be duly accredited by DECS, CHED and TESDA.”



Q. What is the amendment:

A. It includes TESDA. But for government education institutional like PUP and

UP, there is no further requirement. It is going to be automatic; it is exempt from

tax.

Q. Are schools exempt from local tax?

A. Section 193 of LGC says it is exempt provided it is non-stock and non-profit.

In the exemption from income tax, donor’s tax, VAT, real estate tax, including local

tax, we do not invoke Article XIV Section 4 paragraph 3 of the 1987 Constitution.

We invoke other statutes.

Q. Does it mean that Article XIV Section 4 paragraph 3 is already an

obsolete or a dead law? Where can we apply this provision?

A. It is very much applicable. If the tax statute is totally silent about the

exemption of the educational institution for a particular tax, and then we could

invoke Article XIV Section 4 paragraph 3 of the 1987 Constitution.

Tax on GOCCs

We go to Section 27C, GOCCs are now subject to income tax except the following:

1.GSIS

2.SSS

3.PHIC

4.PCSO

RA 9337 now removed PAGCOR from exemption; hence, it is now taxable. So the

general rule is thatGOCC are liable to pay NIT except the four mentioned

above.

Q. Is PUP subject to income tax?

A.No. The governing rule on government educational institution is Section 30

paragraph I.

Q. Supposed you are the lawyer of a GOCC, which is not exempt from tax

under Section 27C, are you going to allow the BIR to collect?



A. Not really. We have to determine the nature of the income of the GOCC. We

have Section 32B7b, which states thatincome derived from any public utility or from

the exercise of any essential governmental function accruing to the Government of the

Philippines or to any political subdivision thereof. This is about exclusions from

gross income, and, thus, exempt. This is exclusion in the computation of the

gross income.

For GOCC, the net income from the exercise of governmental function or from any

public utility like telephone and water, the income is exempt from income tax

because it is exclusion.

The best example is the case of NAPOCOR found in BIR ruling in November 2000.

In this case of NAPOCOR, the BIR wants to impose income tax to NAPOCOR simply

because it is not one of those enumerated under Section 27C. The BIR officer

argued that that it is not exempt from income tax under Section 27C. However,

NAPOCRO was able to prove that 100% of its income came from the exercise of public utility, which is the electricity. Subsequently, the Office of the

Commissioner ruled that it is exempt notwithstanding it is not one of those exempt

those under 27C because all of its income are exclusion in the gross income.

The second one isthe exercise of essential governmental function. It is also

exclusion, and, therefore, exempt. That is applicable for GOCCs which has

proprietary function. However, those GOCCs under Section 27C, it is always

exempt whether it is exercising its essential government functions or earning as a

public utility. Those GOCC which are normally liable for income tax, the

determination of whether an income came from proprietary or governmentalfunction is relevant.

That will answer the question,“May the government tax itself?” This is with regard

to the national government imposing tax on itself.

Q. What about the LGUs, can the national government tax the LGUs?

A. Yes. There is no prohibition with regard to that.

Q. How about the other way around, the LGUs taxing the nationalgovernment or another LGUs?

A. No. Section 133 paragraph (o) of LGC prohibits LGUs from taxing the

national government.

Q. Is that prohibition absolute?



A. Not really because Section 154 of the LGC states that LGUs may fix the rates

for the operation of public utilities owned, operated and maintained by them within

their jurisdiction.

We have numerous cases about this topic.

Basco vs. PAGCOR

G.R. No. 91649 May 14, 1991

The City of Manila imposes tax on PAGCOR. PAGCOR objected the tax on so

many grounds and one of these objections is that PAGCOR is a government agency.

It invoked Section 133 paragraph (o) of Local Tax Code PD 231. The SC agreed

with PAGCOR that Manila being a LGU cannot impose tax on PAGCOR because it

is prohibited by the Local Tax Code and also of so many grounds. Hence, the SC

declared the tax ordinance of City of Manila null and void for being contrary to law.

Mactan Cebu International Airport vs. City of CebuGRN 120082 September 11, 1996

The City Government of Cebu tried to collect real property tax from Mactan Cebu

International Airport. Mactan Cebu invoked Section 133 paragraph (o) of LGC and

also invoked the SC ruling in Basco vs. PAGCOR. Unfortunately, the SC was

misled. But fortunately, it has a correct conclusion: Mactan Airport should pay

real estate tax.

The argument of lawyers of City of Cebu was not discussed by the SC. That is why

the ruling of the MIAA vs. City of Paranaque, the SC was misled again.

Q. Was the argument of Mactan Cebu correct?

A. Absolutely no. We cannot invoke the case of Basco because it is not about

real property tax; it is about local tax. We cannot invoke Section 133 paragraph

(o) because it governs only local taxation. It does not apply to real estate taxation.

LRT vs. CBAA

GRN 127316 October 12, 2000

The City Government of Manila tried to collect real property tax from LRT becausethe stations of LRT have railroads and stations. These are real property because

these are attached to the immovable. The LRT did not argue that the government

owns the real property; it argues that it exclusively used for public use.

Q. Did the SC agreed with that?



A. No. Because the SC ruled that those real properties are not exclusively used

for public use because if we want to use the same, we have to pay; it is not for

public use. Hence, it is subject to real estate tax.

MIAA vs. City of Paranaque

July 20, 2006

The City of Paranaque was trying to collect real property tax from MIAA. CTA

ruled in favor of the City of Paranaque that it should pay real property tax.

The SC ruled that MIAA is not owned by the government; it is not controlled by

government; the airport is not an agency of the government; the airport is a mere

instrumentality of the government. The SC declared that the MIAA is exempt

invoking Section 133 (0) of LGC. The City of Paranaque, being an LGU,cannot

impose tax on instrumentality of the government.

Before the LGC, we should look at PD 231, Revised Local Autonomy Act and PD

464, Principles under local taxation cannot apply to real estate tax. But the other

commentator will say, it is now within the LGC. Nonetheless, although they are in

the same law, these two books are well separated from each other. It means to say

that the law wants to preserve the old principle thatwhatever governs the local

taxation cannot apply to real property tax.

See the dissenting opinion of Justice Tinga, which point out the correct answer.

Q. Is it correct to say that GOCCs is not liable real property tax?

A. The SC said in MIAA case that there is no debate that GOCCs are liable to pay

real property tax. But in the instant case, they ruled otherwise because the one

taxed is not owned by the government but it is an instrumentality of the

government; hence, it isnot taxable applying Section 133 (o) of LGC (which is

erroneous because laws on local tax under LGC is not applicable in laws on tax on

real properties under LGC).

Tax on Bank Interest

Section 27D1 is about ban interest earned by DC and royalty. We have to compare

this to 24B1; the one earned by individuals.

Q. What are the differences between the two?



A. On bank interest, the long-term holding period under Section 24B1 does not

apply if the depositor is a DC. With respect to royalty, the lower rate of 10% on

individual does not apply if the income earner is a DC.

Tax Under Expanded Foreign Currency Deposit System

Section 27D3, tax on income under expanded foreign currency deposit system, was

substantially amended by RA 9337; we do not read Section 27D3 but we have to

read RA 9337. Section 27D3 is identical paragraph in Section 28A7b which is

amended by RA 9337. But even under RA 9337, it is worded identically.

Q. Who is liable for this tax?

A. In income tax derived under EFCDS, it is the ban which could be either a DC

or RFC. For DC 27D3; for RFC it is 28A7b. It is a bank, which is either a DC or

RFC authorized by the Banko Sentral ng Pilipinas to transact business not only in

the Philippine currency but also in acceptable foreign currency.

Q. Normally what is the income tax imposed on the bank?

A. It is the NIT because it is under the topic of DC which normally pays by way of

the net and also it under the topic of RFC Section 28A which nor5mally pays also

by 3way of the NIT.

The first paragraph nowadays, unlike before, provides for two things; it provides

exemption from income tax. The first paragraph under RA 9337 speaks ofexemption but the latter portion of the first paragraph speaks also of income tax

liability.

Q. What now is the first portion?

A. The first portion of the first paragraph speaks now of exemption and the last

paragraph speaks of the income liability of the excluded foreign currency deposit,

the bank itself, whether the DC or RFC, if transacting business of acceptable

foreign currency because it is also allowed to transact Philippine currency. When

it transacts business in acceptable foreign currency and it earns income, referringto the expanded, the bank, it earns income from the following:

1.Nonresident;

2.Local commercial bank;

3.Branches of foreign ban authorized by the Banko Sentral ng Pilipinas to

transact business in the Philippines;

4.Other offshore banking units;

5.Other depositary banks under the EFCDS.



When the bank earns income from these five entities, and it must be an acceptable

foreign currency transaction, the bank is exempt.

However, in the last portion, of the second paragraph, in foreign currency loans,

where the creditor is the ban, the expanded, and the borrower is aresident, the

income tax is FIT of 10% when the borrower is resident except to offshore banking

unit and expanded because an offshore is also aresident because it is RFC.

Now, to the expanded, it is also a resident because it is doing business in the

Philippines, and it is a RFC the FIT of 10% will not apply.

Q. And what did the RA 9337 says?

A. The Secretary of Finance will determine on whether it is subject to income tax

or it will be exempt. He has the discretion to determine if the foreign currency loan

is on offshore or expanded.

So if the Secretary of Finance says “Oh, exempt yan” because it is a foreign

currency loan, it is also a foreign currency transaction. In short, in the first

paragraph, it is always the expanded, the bank itself, which is the income earner

in transacting business with the abovementioned:

Second paragraph, the incomer earner is no longer the bank but the nonresidents.

If the nonresident earn income in the expanded and the law says it is exempt from

income tax, it is exempt from income tax.


We go to Section 27D4. The stockholder here is a DC, it earns dividend from

another DC, the law is clear, and it is exempt from income tax because the law

says “it is not subject to income tax.”

Q. What if stockholder is a DC ad it earned income by receiving taxable

dividends from a RFC?

A. It is not exempt because it is not the one mentioned under Section 28A7d; it

is liable for NIT.

Q. What if it is the other way around, it is the RFC, which is the stockholder

in a DC?

A. It is exempt under Section 28A7d.



Minimum Corporate Income Tax

MCIT under Section 27E and 28A2 is applicable only to DC and RFC. This tax is

applied in lieu of the NIT if it is lower than 2% of the gross income; we apply the

2% and not the NIT. For NRFC, it is not applicable because it pays way of the

gross.

Q. What is the ratio decidendi of the enactment of MCIT?

A. To discourage, prohibit or prevent the corporations from claiming too much

deductions.

If we are officer of a DC or RFC and we claim too much deduction, the probability

is that the 2% of the gross income will be higher than the NIT. Hence, it prevents

the DC or RFC from claiming too much deductions.

This is applicable for DC and RFC operating already for a period of four years. The

formula for this tax is shown below:

Gross Income x 2% = MCIT

But the most important thing here isMCIT carry-over rule. This is the third

carry-over under income tax law: the first one is under 39D, theNet Capital Loss

Carry-Over Rule, and the second one is under Section 34D3, theNet Operating

Loss Carry-Over Rule.

For example, in 2000, the net income tax of a DC which is already operating for

four years is higher than the MCIT, we do not begin computing the carry over

(assuming the corporation is adopting a calendar year). We begin computing the

carry-over, if in 2000 the MCIT of 2% is higher than the NIT. Now, if in 2000, the

MCIT is P200,000.00, the NIT is P120,000.00. So, the tax liability will be the

MCIT of 2%, which is P200,000.00.

Q. What is the carry over there?

A. The carry-over is the difference of P200,000.00 andP120,000.00 which is

P80,000.00. In 2001, the DC can claim credit or the so-called carry-over.

Q. How?



A. If in 2001, the NIT is higher than the MCIT, e.g. NIT is P300,000.00 and MCIT

of 2% is P200,000.00. So, the DC pays the NIT because it is higher than the

MCIT.

Q. Do you pay exactly P300,000.00?

A. No. It will be P300,000.00 minus P80,000.00; that is the so-called carry-over.

Therefore, the DC will pay not P300,000.00 but only P220,000.00.

But if in 2001, if the one, which is higher, is the MCIT, the DC cannot claim carry-

over credit. But the credit can be applied in 2002 because the carry over is up to

three years. But if in 2002 MCIT is higher than the NIT, still, the DC will not be

allowed to the carry-over. In 2003, supposed the MCIT is still higher than the NIT,

the DC cannot claim the carry over.

Q. In 2004, if the NIT is higher than the MCIT, can the DC claim the carry

over?

A. No, simply because that is beyond the three-year period. However, the carry-

over from 2001, 2002 and 2003 on a cumulative basis may be claimed as a credit

but not the one in 2000.

Improperly Accumulated Earnings Tax

This is only income tax that does not mention gross income.

Q. This tax is applicable to what kind of corporation?

A. It is only applicable only to DC.

Q. How would you justify that Section 29 does not distinguish?

A. It is provided for in RR 2-2001 that it is only applicable to DC. We do not

apply rule “if the law does not distinguish, the court should not distinguish” because

of RR 2-2001.

This tax was abolished in 1987 by virtue of EO 37. Why is it abolished?

Because the FIT on dividend received by individual from DC was also abolished in

1987. This tax was abolished because it is more of a sanction than of an income

tax.

Q. Why is this tax more of a sanction than of an income tax?

A. Because corporations are obliged to declare dividends.



The tax on taxable dividend was revived in 1998. Together with this revival, IAET

was also revived. On the revival on the FIT on dividend, the IAET was also revived

so that DC will be obliged to issue dividends.

Q. Are there instances where corporations liable to pay IAET exempt from

this tax?

A. Yes. Those corporations who accumulated profits for “reasonable needs of the

business” are exempt from this tax. This is the first group exempt from this kind

of tax under RR 2-2001.

Q. Give example of “reasonable needs of the business”?

A. Example is expenses for expansion of business.

In other words, there are two groups of exemption. The first one is that DC ca

prove that the accumulation of profits was used for “reasonable needs of the

business.” In relation to this is the case ofCYAMIDE vs. CIR, 322 SCRA 639

saying that the failure to declare dividend is not justified if the corporation merely

asserted that the earnings was withheld for “reasonable needs of the business”

without any documentary evidence to prove the same.

In other words, normally the DC will be liable for IAET. But if the was able to

prove that it used the earnings for “reasonable needs of the business” they are

exempt for this tax.

Under the second group, these are the DCs that are totally exempt regardless of whether or not it will be for “reasonable needs of the business”. These are the

following:

1.Publicly held corporations;

2.Banks and other nonbank financial intermediaries; and

3.Insurance companies.

Q. What is the antonym of publicly-held corporation?

A. Closely-held corporations (hindi privately-held corporation).

Q. What is the distinction between the two?

A. It is closely-held when at least 50% of stocks are owned by not more than 20

stockholders under RR 2-2001, if it exceeds20 stockholders, then it is publicly-held

corporation.



Q. Aside from those mention under Section 29, what are the other exempt

from this tax?

A. Under RR 2-2001, it provides for additional entities exempt from this tax:

1.Taxable partnership;

2.Non-taxable partnership;

3.GPP; and

4.Enterprise under PEZA.

Q. Suppose until now 2006, the DC did not declare dividend for the calendar

year of 2005, can it be compelled to declare dividend?

A. No. RR 2-2001 provides for 1-year grace period. Hence, the DC will be

compelled to declare dividend only on January 2007.

Q. Assuming the DC is not exempt under the first and the second group, are

you going to allow the BIR to collect this tax assuming the grace period had

lapsed already?

A. Not really. We have to determine whether the taxable income is adjusted by:

1.Income exempt from tax;

2.Income excluded from gross income;

3.Income subject to final tax;

4.The amount of net operating loss carry-over deducted;

And reduced by the sum of:

1.Dividends actually or constructively paid;

2.Income tax paid for the taxable year.

Consequently, even if the grace period had lapsed but if the income was already

subjected to FIT, or exempt from tax or excluded from the gross income deducted

from the carry-over, the IAET may be adjusted. Strictly speaking, Section 29D are

deductions although the law says “adjusted by” from the imposition of IAET.

There are cases which are already embodied under RR 2-2001 such as ManilaMerchant Wine 127 SCRA 483 and Tuason vs. CIR 173 SCRA 397.

Q. Suppose the profits to be declared as dividend was invested to US

treasury bills, is the DC liable for IAET?

A. Yes. When the profit was invested for another investment, which is not

considered “reasonable needs” (Manila Merchant Wine case).



Q. If the profits were invested with the same line of business, e.g. from

realty to another realty corporation, is the DC liable for IAET?

A. No. The SC ruled in Tuason vs. CIR that since the profit was invested in the

same line of business; that is included in the meaning “reasonable needs.”

However, if it was proven that merely ½ of the profit was not used for the

investment, the balance was subjecte3d to this tax.

These doctrines are now embodied under RR 2-2001.



CHAPTER VIII

TAX ON RESIDENT FOREIGN CORPORTIONS

RFC’s are foreign corporation engaged in trade or business within the Philippines.

Normally, all paragraphs under 28A speak about RFC simply because the title of

Section 28A speak is “Resident Foreign Corporation.” In other words, all the

sentences under 28A from 1-7, refers to RFC and under 28B from 1-5, refers to

NRFC.

Q. Normally, what is the income tax to be paid by RFC?

A. Section 28A1 says that “it subject to income tax xxx of the taxable income xxx.”

Normally, it is liable by way of the net.

RFC pays three income taxes out of the six income taxes: NIT, MCIT and FIT.

RFC is liable for NIT of 35% as amended by RA 9337 under Section28A1 up to the

third paragraph, and the second NIT is 28A6b which speaks of 10% NIT on

regional operating headquarters. Second kind of income tax to be paid is the

MCIT and that is under 28A2, and third the FIT under Sections 28A3, 28A4, 28A5

and 28A7 small letters a, b and c; letter d is an exemption. It is not liable for

OPCIT under Section 28A1 last paragraph because of the failure of this one.

So out the three, it can only pay simultaneously the NIT and FIT, or MCIT and FIT

because the NIT and MCIT cannot be applied simultaneously.

Gross Philippine Billing

We go to 28A3 in relation to RR 15-2002, the Gross Philippine Billing that is the

nature of Fit of 2-1/2%. This is only applicable to common carriers, which are

RFC; it could only be either a ship or an airplane. When a common carrier is an

international one but it is a DC, we do not apply this tax. If the common carrier is

NRFC, they also do not pay this tax, the 2 ½ %.



Normally, since this is under the topic of RFC, it pays by way of the NIT. Now, the

law says, the RFC pays the 2 ½ %, which is the nature of FIT if the following

elements are present.

If the following elements are not present, the income tax to be paid by RFC is NIT of

35% if it is an income within. If it is an income without, then it is exempt.

Hence, the application of 2 ½ % occurs only when the elements are present and itdepends on whether it is an airplane or a ship. For an airline company, it should

be classified as RFC. But RR 15-2002 says the RFC can only be a RFC if it has a

landing rights and it is known asonline airline company. If it has no landing

rights, it is an offline, and if it is anoffline, it is a NRFC not liable to pay this tax

but liable to pay the gross income of 30%.

RR 15-2002 and Section 28A3 superseded and abrogated the old cases of BOAC,

Air India, American Airline and Japan Airline. These jurisprudence are now

substantially modified. Why? In these old cases, the airlines have no landing

rights in the Philippines but have office in the Philippines selling tickets anddocuments. The ruling in this cases is that the 2 ½% can still be applied in Gross

Philippine Billings because the law says then that “Gross Philippine Billings

includes gross revenue realized from uplifts anywhere in the world by any

international carrier doing business in the Philippines of passage documents sold

therein, whether for passenger, excess baggage or mail provided the cargo or mail

originates from the Philippines.”

Q. Is the rulings in these cases were totally abrogated?

A. No. Because the ruling here which says that if the ticket were sold in thePhilippines is an income within that follows from the provision under Section 42A3,

the place of the performance of the service. Since the place of the performance of

service is in Manila, it is an income within. To that certain extent, those ruling is

still applicable.

But those decisions are no longer controlling. It is only controlling with respect to

the application of Section 42A3. With regard to the Philippine Gross Billing, those

decisions are substantially abrogated. The new law now says that the trip must

originate from the Philippines; in this case it originated in foreign port. That is

why RR 15-2002 clarified it; to be considered as a RFC, which will be liable to 2 ½

%; it must have landing rights which is known asonline.

If the airline has no landing rights it will not be considered RFC but NRFC which

will be liable for 30% GIT.

The Gross Philippine Billings, which is the nature of a FIT, is applicable on

international common carrier, either a ship or an airplane, provided the elements



are present. But normally, since they are RFC, they are liable by way of the NIT of

30%.

The Gross Philippine Billing will be applicable in the following instances:

1.The gross revenue from carriage of passenger, excess baggage, cargo and

mail originating from the Philippines in a continuous and uninterruptedflight irrespective of place of tickets or documents;

2.In cases of revalidation, endorsement and exchange to another international

airline and the flight is originating in the Philippines, we have to apply the 2

½%; and

3.In cases of transshipment that occurred in any point outside the Philippines

from trips originating from the Philippines the 2 ½% shall only be applied to

the proportion of the trip as to the place of transshsipment.

Lets go to the first instance: the carriage of persons, excess baggage, cargo and

mail.

Q. What are the elements for the application? Are RFCs engaged in carrying

passengers, excess baggage, cargo and mail liable to pay the 21/2%?

A. No. We have to determine the following elements:

1.The trip must be originated from the Philippines;

2.It must be continuous and uninterrupted;

3.Irrespective of the sale of ticket and passage documents.

Q. The airline is RFC, meaning it has landing rights in the Philippines;normally the requirement is that the trip originated in the Philippines.

Suppose the passengers did not board in the NAIA in Paranaque but in

Singapore. What happen now in the sale of ticket if if this airline is RFC, do

we apply the 2 ½%?

A. No. It has to comply with the requirement that the passenger must originate

from the Philippines.

Q. Why is it not liable for 2 ½%?

A. Because the passenger boarded in Singapore. Since, it is an international

common carrier, although a RFC, it has also branch in other countries other than

the Philippines.

Q. What happens now to the income of sale of ticket to the passenger, is it

subject to 2 ½%?



A. No. Because it fail to comply with the requirement.

Q. Is it liable to any income tax?

A. Yes. If the source of income is within the Philippines, meaning the sale of the

ticket commenced in the Philippines, then the RFC will be liable for NIT of 30%.

Q. Supposed it boarded, the airplane of RFC, from foreign country but the

ticket was purchased in Hong Kong, is the RFC liable for any tax?

A. No. It should be exempt in line of Section 23F in relation to Section 42, that

the place of performance of the sale of ticket without the Philippines, it is an

income without. RFC are only liable for income within.

Q. Suppose the ticket was soled in the City of Makati, where the passenger

boarded in Singapore, is the RFC liable for 2 ½%?

A. No. The 30% NIT will be applied.

Q. What do we mean by the provision “irrespective of the place of sale or

issue and the place of payment of the ticket or passage document?”

A. When the passenger boarded in the city of Paranaque and the sale of ticket

was made in the City of Manila, the 2 ½% will be applied.

That goes also with excess baggage, cargo and the mail. We have the sameelements:

1.The trip must be originated from the Philippines;

2.It must be continuous and uninterrupted;

3.Irrespective of the sale of ticket and passage documents.

RR 15-2002 says that if the stopover does not exceed 48 hours, nonetheless, the

flight is still continuous and uninterrupted. Assuming the other elements are

present, the 2 ½ % will be applied.

Q. If the stopover is more than 48 hours, and other elements are present, do

we apply the 2 ½ %?

A. No. RR 15-2002 says the flight is interrupted, and even if the other elements

are present, we do not apply the 2 ½%.

Q. Is the RFC exempt from any tax?



A. It depends. If it is an income within, the RFC will be liable for 30% NIT

because it is a RFC. If it is an income without, meaning the ticket was sold

outside the Philippines, it is exempt in view of Section 23F.

Q. What do you mean by the element “irrespective of the sale of ticket and

passage documents”?

A. If the other elements are present, the 2 ½% will be applied. If one or all the

elements is not present, then place of sale of ticket now becomes material.

We go on the second instance, revalidation, exchange and endorsement.

Exchange:

Two passengers going to abroad, the other one will go on December, the other will

be on January.

P1. Palit tayo.

P2.Okay lang.

P3.Oryt.

That is exchange. But the exchange must beto another airline because if it is with

the3 same airline, the 2 ½% will not apply.

Endorsement:

P1.Di na ko babalik sa ‘tate, ayoko na , o ikaw pinsan babalik ka ron?

P2.Oo, pero wala pa kong ticket,

P1.(Nagendorse, parang tsee). Sa yon na to.”

But it must be to another airline.

Revalidation:

“Yung mga nahuli ng byahe, o wala, irevalidate,” but to another airline.

The 2 ½% will apply but it must be to another airline and the trip must beoriginated from the Philippines because the passenger must originate from a port

within the Philippines.

We go the third one,transshipment. For example, Philippines to USA, halfway of

the trip is Guam before going to California. The transhipment occurred in Guam

but the law says to another airline and that the trip must originate from the

Philippines. So the passenger must originate from the Philippines.



Q. So where is the application of 2 ½%?

A. It must apply only from the cost of ticket from the Philippines to Guam before

the transhipment to another airline.

Q. What happen to the proportionate cost of ticket from Guam to USA?

A. Of course, the 2 ½ % will not be applied.

Q. Is it subject to income tax?

A. If it is an income within, NIT of 30%. If it is income without because the ticket

was purchased outside the Philippines, the it is exempt.

Q. What if the port of origin is NAIA and the port of transhipment is inCebu, do we apply the 2 ½%?

A. No. Because the transhipment did not occur outside the Philippines.

With regard to theshipping lines, there is only one instance of application of the 2

½ %” the gross revenue from carriage of passenger, cargo and mail originating from

the Philippines up to final destination, regardless of the place of sale or payments

of the passenger or freight documents.

Offshore Banking Units

Section 28A4 is ame3nded by RA 9337. An offshore banking unit is always a RFC

because it is a branch of a foreign corporation authorized by the Banko Sentral ng

Pilipinas to transact business but only in acceptable foreign currencies. They do

not transaction Philippine money. We will notice that whether it is the expanded

or offshore, it refers only to acceptable foreign currencies. We have two foreign

currencies: first, acceptable foreign currencies and second, unacceptable foreign

currencies. Nowadays, all banks in the entire world accept Philippine currency.

Q. Why do we not accept other foreign currencies?

A. For practical reasons. For example, currencies from nations of former USSR,

we do not accept their money. P1,000.00 worth of money will be equivalent to

around 6 trucks of their money. It is not practical to carry one truck of money.

Since offshore bank is a RFC, it is always subject to income tax. The laws says, as

amended by RA 9337, in the first paragraph under the amendatory law, “where the



offshore bank earns income, it is exempt from income tax provided the other parties

to which the offshore bank earned income, are the following(see below), but only

limited to acceptable foreign currency.” For expanded unauthorized to transact

business in Philippine money, are they exempt? No. They are not exempt when

earning income from income tax from transacting business even assuming the

parties are those enumerated below:

1.Nonresidents;

2.Local commercial banks author5ized by Banko Sentral to operate in the

Philippines;

3.Braches of foreign banks authorized by Banko Sentral to transact in the

Philippines;

4.Other offshore banks.

We will notice that there are only four here; for expanded there are five. What is

missing here is other depositary bank under expanded. But the last portion of the

first paragraph is very much similar to expanded where it says “where the offshoreban is the lender of money, the borrower is a resident of the Philippines, except the

offshore and expanded,” the income tax is FIT of 10%.

In second paragraph, if a non-resident, whether individual or corporation, earned

income from transacting business with the offshore bank, it is exempt

Tax on Branch Profits Remittances

Foreign corporations have the following choices in conducting business in the

Philippines:

1.Establish a branch and the governing statute as far as income taxation is

concern is Section 28A5; or

2.The foreign corporation may purchase stock in a DC and be a stockholder;

or

3.It might establish a subsidiary in the Philippines.

Q. What do we mean to “establish a subsidiary in the Philippines”?

A. The foreign corporation will organize a corporation in the Philippines and

become a stockholder of that corporation. Since it is established under the

Philippine laws, the said corporation is a DC.

For the second and third options, being a stockholder or creating a subsidiary, the

governing statute will be Section 28B5b, the intercorporate dividend.

If the foreign corporation chooses to establish a branch, the law says that the

branch is always a RFC simply because it is under the topic of RFC in Section 28A.



Now, if this foreign corporation establishes a branch in the Philippines and the

branch now remits income in the foreign corporation in abroad, this is the income

subject to this income tax.

Q. Is this in lieu of the NIT of 30%?

A. No. This is in addition to the corporation income tax of 30% being a RFC.

Q. What is the 15% FIT to be paid by the branch to the mother company in

abroad?

A. This is the profit remitted by a branch to its head office in abroad.

Q. How do we multiply the 15% FIT?

A. The proper procedure is to go to Banko Sentral ng Pilipinas and apply for a

form of remittance and multiply 15% in the total profits applied or earmarked for

remittance without any deduction for the tax component thereof. For example, the

branch will remit one million pesos to its head office, thenP150,000.00 will be paid

as branch profit remittance tax.

Q. What are the branches that are not subject to this income tax?

A. Branches registered under Philippine Economic Zone Authority are not subject

to branch profit remittance tax. However, the law says “it must be connected with

the conduct of its trade or business in the Philippines.”

We have two interpretations here. First, if the mother foreign corporation is

selling motor vehicle, the branch must also be selling motor vehicle; otherwise, if

the foreign corporation abroad is selling motor vehicle and the branch here in the

Philippines is selling “hopia” this income tax does not apply.

Another interpretation is the case of Marubeni.

Marubeni Corporation vs. CIR

G.R. No. 76573 September 14, 1989

Marubeni Corporation established a branch in the Philippines. But Marubeni

later on entered into a contract with AG&P Corporation where the former bought

shares of stock to latter and Marubeni became a stockholder of AG&P.

Although Marubeni had branch in the Philippines, this branch does not participate

in any capacity whatsoever in the said contract. Hence, the transaction is totally

independent of its branch in the Philippines. When AG&P declared the dividend, it



paid the following income taxes: 10% intercorporate dividend“under the old law,

intercorporate dividend is taxable, not it is exempt”and the branch profit remittance

of 15% arguing that Marubeni is a RFC because it has a branch in the Philippines.

Issue: Is the payment of branch profits remittances of 15% correct?

Ruling: The SC says it is not correct because the branch did not participate in anycapacity so it is erroneous to pay the 15% branch profits remittance tax because

the law says, “it must be effective connected with the conduct of its trade or business

in the Philippines.”

These interpretations are both correct. Hence, if the mother corporation abroad is

selling motor vehicle and establishes a branch here in the Philippines and sells

“balut” and “one-day old chick,” this income tax will not apply. Therefore, they are

exempt.

CHAPTER IX TAX ON NONRESIDENT FOREIGN CORPORATIONS

Paragraph B of Section28 speaks of NRFC and, according to Section 221, these are

foreign corporation not engaged in trade or business in the Philippines.

Q. What are the income taxes to be paid by NRFC?

A. GIT and FIT. There are only two income taxes out of six income taxes. FIT ismentioned in Section 28B2, 3, 4 and 5 paragraph a, b and c.

First in the list is Section 28B2; lessor in movies.

Q. Who is the lessor here?

A. The NRFC, which will be liable for FIT of 25%.

Q. Supposed the lessor is DC, what will be the income tax?

A. NIT of 30% under Section 27A.

Lets go to Section 28B3; the lessor of vessels chartered by Philippine nationals.


A. The NRFC.



Q. Supposed the lessor of the vessel is a DC, what will be the income tax?

A. The NIT of 30%.

Q. What if the lessor is a RFC, what will be the income tax?

A. The NIT of 30% under Section 28A.

Let us go to Section28B4, the lessor of the aircraft, machines and other equipment.


A. The NRFC.

Q. If the lessor is a DC or RFC, what is the income tax?

A. The NIT of 30%.

That is the way to understand that.

Let us go to Section28B5: interest on foreign loans. We have to correlate this to

Section 32B7a.

Q. Who is the lender of money here?

A. The NRFC.

Q. What about the lender in Section 32B7a?

A. It is the foreign government, financing institutions owned, controlled or

enjoying refinancing from foreign governments and international or regional

financial institution established by foreign government.

Q. So if the lender of money is a plain and simple NRFC, is the interest on

loans subject to income tax?

A. Yes. FIT of 20% under Section 28B5a.

Q. If the lender of the money is a foreign government, is the interest subject

to income tax?

A. No, because it is exclusion under Section 32B7a; thus, exempt.



Mitsubishi vs. CIR

181 SCRA 214

The borrower of the money here is Atlas Mining Corp. a DC. The lender of money

is Mitsubishi but sine the money borrowed by Atlas was substantial, the former

obtained a loan from Exim Bank. The trouble arouse when Mitsubishi claims that

it is tax-exempt because Exim Bank under the present law, Section 32B7a, it is

exempt. But Mitsubishi is governed nowadays by Section 28B5a because it is a

plan and simple NRFC. However, BIR claimed that interest of loans is subject to

income tax because the lender of the money is Mitsubishi. However, Mitsubishi

claims tht the real lender of money was Exim Bank because they only borrowed

money from the latter, which is tax-exempt because the latter is owned by

Japanese government.

The SC invoked the principle ofres inter alios acta (the contract is only binding

between the parties), under the provision of Article 1311 of Civil Code. The

contract is only between Atlas and Mitsubishi. The fact that Mitsubishi borrowedmoney from Exim Bank is of no moment because it was not mentioned in the

contract. When Mitsubishi secured the loans, it was in its own independent

capacity as a private entity and not as a conduit of Exim Bank.

That is material because if the parties are those mentioned in Section 32B7a, the

interest is foreign loans is considered to be exclusion from gross income, hence,

exempt.


Let us go to Section 28B5b.

Q. What are the intercorporate dividends mentioned under the NIRC?

A. We have the following:

1.DC to DC under Section 27D4;

2.DC to RFC, meaning the stockholder is the RFC, under Section 28A7d;

3.DC to NRFC under 28B5b.

The first two are exempt while in number three it is not. When a NRFC received

dividend from a DC, it is now subject to FIT of 30% as increased by RA 9337 from

32% to 25%, subject to a lower rate of 15%.

In this topic, we must visit the case of Marubeni, Proctor and Gamble and Wander

cases.

Marubeni Corporation vs. CIR



G.R. No. 76573 September 14, 1989

Marubeni paid a FIT of 10% for intercorporate dividend having in mind that

Marubeni is a RFC. At that time, RFC is liable for FIT of 10% for intercorporate

dividend but now it is exempt under Section 28A7d.

The SC ruled that the payment is not correct because Marubeni is not RFC but aNRFC. Since it is a NRFC, it is liable for 35%. The claim for tax refund by

Marubeni, the 10% intercorporate dividend and branch profit tax of 15% with a

total of 25%, was indirectly granted by SC. However, in the ultimate analysis it

was denied because it was not given to them because the 25% was applied by the

SC to the payment of FIT on dividend pursuant to the tax treaty between Japan

and Philippines; the rate of 35% has been lowered to 25%.

The moral lesson here is that although Marubeni has a branch here in the

Philippines, but the fact that the branch did not participate in the transaction,

Marubeni is still considered a NRFC.

Q. What is the significance of determination whether it is a RFC or NRFC?

A. Under the present law, RFC is exempt for intercorproate dividend.

Q. When do we apply the 30% and the 15%?

CIR vs. Proctor and Gamble

160 SCRA 560

PGC Philippines is a corporation duly organized and existing under Philippines

laws; it is engaged in business in the Philippines and is wholly-owned subsidiary

of PGC USA, a NRFC, PGC Philippines declared cash dividends in favour of its

parent corporation, PGC USA, which was subjected to 35% tax. PGC Philippines

discovered that there was an overpayment because only 15% should be paid based

on the “tax-sparing rule”, so it filed a refund of 20%.

The SC denied the claim on two grounds:

1.PGC Philippines is not the proper party to claim reimbursement of thealleged overpaid taxes. The real party in interest is PGC USA because PGC

Philippines is a mere withholding agent; and

2.No complete requirements were submitted in order that the tax-sparing rule

may be applied. PGC Philippines failed to present income tax return to its

mother corporation when the dividends were received.

The“tax-sparing rule”is also known as the“tax-deemed paid credit rule”or

the“reciprocity rule.” There is only tax credit by virtue of the technical



provision of the Internal Federal Revenue Code of USA; a “tax-deemed paid credit”

of 20%. Do not forget the word “deemed.”

Under USA law, a DC and its citizen in USA is liable to pay income tax for income

derived within and without USA. On this particular, PGC USA will pay income tax

in the Philippines as well as in the USA for that same income, and the laws in USA

considers that the tax is “deemed” paid.’’

Since there is such provision, the NRFC (PGC USA) will not be liable for 30% under

the Philippines laws but only 15% for the intercorporate dividend.

Q. When will the 30% intercorporate dividend apply?

A. If the laws of the NRFC does not provide for the “tax –deemed paid credit rule”,

the 30% will be applied. If there is such provision under the foreign laws, then the

15% will be applied.

CIR vs. Proctor and Gamble

204 SCRA 377 (On MR)

The SC reversed itself on two grounds:

1.The withholding agent is the proper party to claim refund because it is who

is liable to pay tax (who is required to deduct and withholding any tax).

PGC Philippines will be liable for the tax as withholding agent. If it failed to

withhold the tax; hence, the withholding agent having sufficient legalinterest can bring a suit for refund of taxes if it believed were illegally

collected from it; and

2.NIRC does not require actual proof of payment as long as there is payment.

What is necessary is that the other country recognized or allows tax credit

in the amount equivalent to 20%.

It requires that USA shall allows a credit against the tax due. PGC USA is deemed

to have paid tax credit in an amount equivalent to 20% waived by the Philippines.

The US Tax Code shows that it grants PGC USA a tax credit for the amount of

dividend tax actually paid from the dividend remittances to PGC USA; hence, the

15% shall be applicable.

Q. What if the law of residence of the NRFC is totally silent about the “tax-

deemed credit rule”, what should be the tax rate, 35% or 15%?

CIR vs. Wander Philippines, Inc.



G.R. No. L-68375 April 15, 1988

Wander Philippines, Inc. is a DC organized under Philippine laws, which is wholly

owned subsidiary of the Glaro S.A. Ltd., a NRFC. Wander declared dividend and

withheld 35% FIT for intercorporate dividend. Subsequently, it filed a claim for

refund contending Switzerland does not impose tax on its citizen on income earned

from sources abroad. BIR contended that the law in Switzerland is silent as to

existence of “tax-deemed paid credit rule.” Hence, the 25% should be applied.

The SC did not agree with the BIR and applied the 15%. There is no “tax-deemed

paid credit rule” because there is no law on the matter. Switzerland does not tax

its DC for income derived from sources without. Hence, with more reason that the

15% preferential rate should be applied.

There are two reasons why there is no “tax-deemed paid credit rule”: first, there is

a law, but law is silent, and second, there is no law at all requiring payment of tax

from sources without.

Guide on applicability of 35% and 15%

There are two types of country with respect to _________: first, countries where its

citizens and DCs are liable from sources within and without like USA,

Philippines ,Germany and Japan, and second, countries where its citizens and DCs

are liable only for income earned from sources within, lie Switzerland, but for

_______ without, they are exempt.

Q. If the country belongs to the second _______ is there a possibility that the

35% will be applied?

A. None.

Q. When can we therefore apply the 35%?

A. When the corporations belong the first group, meaning, that the country of the

NRFC tax it ________ from sources within and without, and that their country does

not provide for the “tax-deemed paid credit rule” as stated in Proctor and Gamble.

Q. When can we apply the 15% rate?

A. We can apply the 15% in both groups. On the first group, if there is “tax-

deemed paid credit” on the foreign law, we apply 15%; the second group, we apply

the 15% rate because of the Wonder case.

Q. So which is better for a foreign corporation, establish a branch, establish

a subsidiary or become a stockholder of a DC?



A. It depends. The first one to consider is the rate of 35% or 15%. Determine if

the laws resident country provides for “tax-deemed paid credit rule” and belongs to

the first or second group. If it belongs to the first group and does not provide for

the “tax-deemed paid credit rule” then 25% will be applied, it might be better to

establish a branch. If the resident country of the foreign corporation belongs to the

second group, or in the first group but provide for “tax-deemed paid credit rule”

then it might be better become a stockholder of a DC.

CHAPTER X

EXEMPTIONS FROM TAX ON CORPORATIONS

Section 30 states that “the following organizations shall not be taxed under this

title in respect to income received by them as such.”

Q. What is the exemption being referred to under Section 30?

A. It refers to tax on income because Section 30 says “under this title” referring to

Title II – Tax on Income. Consequently, it refers to the exemption from income tax.

Q. Does it also refer to association?

A. Yes. According to BIR ruling, associations are also corporations.

Q. Are those mentioned under Section 30 the only entities exempt from

income tax?

A. No. The following entities are also exempt:

1. Section 27C states that SSS, GSIS, PSO and PHIC are exempt from tax.

PAGCOR was not removed from exemption;

2.Those mentioned under Section 32B7b are also exempt;3.GPP; and

4.Joint ventures for the purpose of undertaking construction project or

engaging in petroleum, coal geothermal and other energy operations with the

government are also exempt.

Q. What is the difference between the exemption under Section 27C and

Section 30? Why is it not within the same provision?



A. In Section 27C, the exemption is absolute. In Section 30, the exemption is

only for income received by them “as such”; hence, the exemption is relative.

Consequently, we cannot include those mentioned under Section 27C in Section

30.

Q. How about those mentioned under Section 22B?

A. Joint ventures are not exempt as a rule; it is exempt only by way of exemption.

Normally, Joint ventures are subject to income tax. Therefore, this cannot also be

included under Section 30.

Ordinarilly, GPP is exempt from income tax. However, the qualification for

exemption of GPP is different than those under Section 30. In Section 30, the

exemption is only for income received by them “as such”. This is qualified by the

last paragraph. There are three kinds of transaction under the last paragraph where these organizations are liable for income tax because it states

“Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organization xxx”:

1.Sale of real property;

2.Sale of personal property; and

3.Activities conducted for profit regardless of the disposition of the proceeds.

For example under letter D of Section 30, if the employee contributes money for the

development the cemetery, it is exempt from tax because it is an income received“as such”.

The exemption is not absolute because if the organization does the activities

mentioned in the last paragraph, it is now liable for income tax regardless of the

disposition of the proceeds. To illustrate, if in front of the cemetery the

organization sell “bulalo”, then it will be subject to income tax because it is an

activity conducted for profit.

Q. What are the requirements of mutual banks and cooperative for

exemption under Section 30?

A. The requirements are the following:

1.Mutual savings bank not having a capital stock represented by shares; and

2.Cooperative bank without capital stock organized and operated for mutual

purposes and without profit.

Q. What is the “lodge system” mentioned in Section 30C?



A. Lodge system means operating in an inter-country level.

The most important enumeration under Section 30 is the one mentioned under

letter E because one of the exempt entities is the religious organization. But the

exemption is not automatic. There are three requirements: first, it must be

nonstock; second, it must be operated exclusively from religious purpose; and

third, 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, including the “sakristan.”

Base on this requirement, it is impossible for a religious institution to be exempt

from income tax. The requirements are very strict, and if it will be applied, most

religious entities are not exempt, hence, liable to income tax.

CHAPTER XI

COMPUTATION OF GROSS INCOME

Taxable income is the pertinent items in the gross income less allowable

deductions and personal exemption. If this is the case, this is about the payment

of the NIT. Under the Tax Code, NIT is being referred to as the taxable income or

the gross income. Under Revenue Regulations, it is also called the ordinary way of

paying income tax or the normal way of paying income tax. Hence, if we come

across with the terms taxable income, we are talking about the NIT.

Now we go to the Section 32A.

Q. What is the meaning of the term gross income in this Section?

A. Gross income here shall refer to the payment of NIT. Hence, Section 32 is

about payment of the NIT.



First thing to remember, if an income is mentioned in this section, it does not

exclusively refer to the payment of the NIT. We have to determine what kind of

income it is.

For example, in number one, wages and salary, it does not necessarily follows that

it is included in the payment of NIT because this section states that “The followingshall be included in the computation of the gross income except as provided for in this

code xxx.” Take note, that this is the one mentioned in the computation of the

annual ITR for individual.

However, the following shall not be included in the computation of the gross income

in the filing of the annual net income returns:

1.Income which are exclusions;

2.Income which are exempt;

3.Income subject to FIT; and4.Income subject to GIT.

Therefore, if the taxpayer is not allowed to pay by way of the NIT, Section 32A does

not apply.

Q. Who are those not allowed to pay by way of the net?

A. The NRFC and NRANE.

If an income is mentioned in this section, it does not follow that it is subject toincome tax. Nor it follows that it is the one to be included in the annual ITR.

First, in the list is wages and salary. It is the wages and salary that is not

included in the four mentioned above. The moment the taxpayer is a NRANE or a

NRFC, automatically, Section 32A does not apply because they are only allowed to

pay the GIT.

Q. Assuming the taxpayer is paying by way of the net, he received wages and

salary, should it be included in the computation of the annual ITR?

A. Yes, but the rule is not absolute.

For Filipinos, whether resident or non-resident, they pay by way of the NIT.

Filipinos employed in multinational, off-shore and petroleum, as a rule, they pay by

way of FIT of 15% on their wages and salary. However, if the Filipino is employed

in multinational, they have the option to pay by way of the net or the final income

tax irrespective whether or not they are holding a managerial position under

Section 25C as amended by RR 12-2001. If the Filipino is deployed in offshore



bank and petroleum service contractor, the Filipino has no other option but to pay

by way of the FIT.

Q. Assuming that the FIT applies, should it be included in the annual ITR?

A. No, because there is a separate return for that. Also, if the taxpayer pays by

way of the GIT, this section does not apply.

We go to gross income from the exercise of business or profession.

If the taxpayer earned income and he is paying by way of the NIT, all income from

the exercise of the business or profession is subject to the net. That should be

included in the annual ITR in the gross income.

The third one is dealings with property.

Te law did not distinguish on whether the property is real or personal.

Q. Let us say the taxpayer earned income from dealings with personal

property, will it be included in the NIT assuming the taxpayer is paying by

way of the NIT?

A. Yes. Whether the gain is capital gain or ordinary gain, the same shall be

included in the computation. However, if the personal property is a sale of share

subject to FIT, the return there shall be accomplished by the taxpayer himself but

separate from his annual ITR.

Q. In the sale of real property, do we include it in the annual ITR?

A. Yes, provided the sale of the real property is subject to the NIT. If it is a capital

asset located in the Philippines we do not include this in the annual ITR because

there is a separate return for this. It is subject to FIT.

We go to interest. The law did not distinguish on whether this is an interest on

loan or bank interest.

Q. Is it the interest which was derived in the Philippines?

A. No. If the interest is derived from the bank within the Philippines, it is not

included because there should be a separate return for FIT to be accomplished by

the bank officer.

Q. If a taxpayer earns interest from PNB, is it included in the computation

of gross income?



A. It depends. If the PNB is located abroad, the interest shall be included in the

NIT, if within the Philippines, FIT.

Take note that this is only limited to RC and DC because to all other income earner,

they are exempt from interest earned from ban abroad.

We go to rent.

Assuming the taxpayer is paying by way of the net, this is always included in the

computation of the gross income unless the income earner is a NRANE or NRF.

This is subject to the GIT.

We go to royalties.

Take note that royalties have no definition under the tax code or in the revenue

regulations.

Q. What is the distinction of sale of service from royalties?

A. If it is royalties which is derived from the Philippines, it is not subject to NIT; if

it is sale of services and was derived from the Philippines, it is subject to NIT.

Q. If we are the composers of Sugarfree and Sugar Babes, do we include the

royalties received from these bands?

A. For Sugarfree, we do not include that because it is subject to FIT; for SugarBabe, it is included in NIT because it is an income from sources without.

On annuity, normally it is subject to NIT and will be included in the ITR. We will

discuss this in Section 32B2.

We go to prizes and winnings.

With regard to prized, the one to be included in the ITR is the one derived outside

the country. Also, for income derived within the country, if the prize does not

exceeds ten thousand pesos. Also, those received by DC whether it is an income within or without the Philippines. For winnings, the only one subject to NIT is the

winnings derived outside the country and this is only with regard to RC and DC.

For pensions which are not exempt, then, it is included in the NIT. This will be

discussed under Section 32B2.

Lastly, shares of partner in GPP.



Q. Is the share of the partners will be included in the ITR?

A. Not really. Section 32A11 is the one mentioned under Section 26 third

paragraph where the GPP is exempt. The share of the partner is subject to the

NIT because the law says it shall be3 included in the computation of the gross

income.

If the GPP is deemed to be a corporation, it is not the one mentioned in

Section32A11 because it is subject to FIT.

Exclusions from computation of Gross Income

We go to Section 32B1.

Q. Are proceeds of life insurance subject or exempt from NIT?

A. We have to determine whether the proceeds of life insurance are under Section

32B1 or 32B2.

In Section 32B1,it says that the proceeds of life insurance is an exclusion provided

it is payable upon the death of the insured. The only qualification that it is an

exclusion is when it is payable upon the death of the insured. It does not matter

on who is the beneficiary and whether the beneficiary is appointed as revocable or

irrevocable. The most important thing is tht it is payable upon the death. It does

not matter whether it will be paid in lump sum or in instalment so long as it is

payable upon the death of the insured.

However, this exclusion provides a provision: “If such amounts are held by theinsurer under an agreement to pay interest thereon, the interest payment shall be

included in the gross income.”

For example, in addition to one million as life insurance proceeds, the beneficiary

also received fifty thousand as interest; then, the latter is not exclusion. The fifty

thousand is subject to gross income but the entire one million is exclusion.


This is proceeds of life insurance when the insured is still alive. As a matter offact, it is called thereturn of the premium.

Let us say, the life insurance contract is ten years, after ten years, the insurance

now matures, then the insured will collect the proceeds.

Q. If the proceed is one million, how much will be exclusion?



A. We have to determine how much is the premium paid in the whole ten years.

If the insured had paid a total of one hundred thousand, then the one included in

the exclusion is only one hundred thousand. The remaining nine hundred

thousand is subject to income tax and that is so-calledannuityunder Section

32A8. It is only the return of the premium which is subject to exclusions.

2003 and 2005 Bar

Q. Is it subject to estate tax?

A. The related provision is Section 85E. The following are requirements:

First, this is only applicable if the person is insured himself and he is the one who

died. The rule does not apply if the person insured the life of another one. If the

proceed is included in the computation of the gross estate, the proceeds is exempt

from payment of NIT because it is an exclusion.

Second, if beneficiary of the insured is the estate, execution or administrator, the

proceed of the life insurance shall always be included in the gross estate, whether

the appoint of the estate as a beneficiary is revocable or irrevocable.

If the beneficiary is other than the estate, we have to determine whether the

designation of the beneficiary is revocable or irrevocable. Assuming the first

requirement has been complie3d with and the appointment of the beneficiary is

other than the estate and the designation is irrevocable, it should be included in

the gross estate, and, therefore, subject to estate tax.

If the appointment of the beneficiary is other than the estate and the designation isirrevocable, it will not be included in the gross estate and therefore, exempt.

We go to contract of donations.

Q. Why is it, that property by virtue of donation is exempt from income tax?

A. It is exempt because these are exclusions. It does not matter whether the

subject matter is donated is real or personal. Hence, donee is exempt from income

tax because donation is exclusions.

We go to compensation under Workmen’s Compensation Act.

With regard to “health and accident insurance,” here, it is only the one mentioned

in Workmen’s Compensation Act. We cannot say that this is different from the

Workmen’s Compensation Act because under the word “or” after the word accident,

there is no comma. It means to say that this is the only one mentioned under the

Workmen’s Compensation Act. Take note in statutory construction, in

enumeration without comma, it means that it mention only one thing.



But that is not the only one which is deemed exclusion under number four. It

includes amounts received by nature of injury or illness, including damages on

account of such injury or illness.

Q. Suppose the taxpayer died, is it the one mentioned here?

A. Yes. Under independent civil actions under the Civil Code, the term injury

includes death.

We go to number five; income under treaty. These are also exclusion under the

law.

We have number six; the concept of retirement pay, separation pay and terminal

leave benefits. Unfortunately, the tax code is silent on terminal leaves benefits.

First, we have to determine whether the sum of money we receive is a retirementpay, separation pay or a terminal pay because the requirement for classifying it for

exclusion varies. They have the different requirements.

Retirement pay is the sum of money received when the employee reached the

maximum age for employment. Separation pay is the amount received by virtue

of illness, injury, sickness, physical disability or other injury. Terminal leaveis

the unused vacation and sick leave converted into cash money.

The governing rules for retirement pay is Section 32B6 a, c, d, e and f; in other

words, all other enumeration under 32B6 except paragraph b.

For separation pay, it is Section 32B6, b and c. For terminal leave, it all depends

on whether it is granted on a yearly basis or upon retirement or separation. If

granted on a yearly basis, we have Section 2.78.1 par. A7 of RR 2-98 and

Executive Order 291 of the former Pres. Estrada, RMC 16-2000. If granted in a

yearly basis, we have the following cases: In Re Atty. Zialcita, 190 SCRA 851,

Borromeo vs. Civil Service 199 SCRA 911, Castaneda vs. CA, 203 SCRA 70.

Retirement Benefits

The proper way to read it is to begin at Section 32B6c. Never mind the statement

there “if receive by resident or nonresident citizen of the Philippines xxx” because we

already have Section 23. It further states “from foreign government agencies and

other institution, private or public” which means to say, retirement benefits given

by foreign government agencies and foreign corporation, public or private. Why

foreign corporation? Because it is says “and other institution, private or public.”

Hence, it includes foreign corporation, whether public or private.



If we receive retirement benefits from foreign government or foreign corporation

located in the City of Makati, it is automatically deemed exclusions. There are no

requirements with respect to the years of service and age of the retiree. The

reason is that we copy this provision from US, Canada, Germany and England

where the retirement age is forty.

If the one granting the benefits is the Philippine government or DC under Section33B6 d and e, the PVAO, SSS and GSIS, these are all exclusion without any

qualification.

The following retirement benefits are exempt from tax:

1.RA 7641 – Retirement benefits received under this law pertains to private

firms without retirement trust fund.

2.RA 4917 – Retirement benefits pursuant to RA 4917 received by official and

employees of private firms whether individual or corporate in accordance

with a “reasonable private benefit plan” maintained by the employerprovided the following requirements are met:

a.Retiring employee has been in the service of the same employer for the

past 10 years;

b.He is not less than 50 years of age at the time of his retirement;

c.He avails of the benefits only once;

d.The private benefit plan is approved by the BIR [RR-2-98].

If the retirement benefit is given by private institution by virtue of Sec. 32B6a,

determine if there is a private benefit plan. If there is a private benefit plan, there

are requirements for exemption. If there is no private benefit plan, the

requirements are different.

RA 7641 applies to private firms without retirement plan. The following are

the requirements:

1.The first has no retirement trust fund;

2.Retiring employee is at least 60 years old but not more than 65;

3.The benefits are equivalent to 15 days salary and ½ of the 13th month pay

for every year of service; and

4.The employee has been in the service for 5 years. Here the source of the

benefit is the management.

RA 4917 applies to private firms with retirement plan. The requirements are:

1.Retiring employee has been in the service of the same employer for the past

10 years;

2.He is not less than 50 years of age at the time of his retirement;

3.He avails of the benefits only once; and



4.The private benefit plan is approved by the4 BIR [RR-2-98].

Situation: SMC engineer will retire. He claims retirement pay only once. Later

on, same engineer, after retirement, became a consultant of SMC. Then he retired

again. This time he cannot claim the exemption anymore.

Separation Pay [Sec 32B6c]

If an employee is terminated because of justifiable reason, there is no separation

pay. It is important to know if the separation pay is derived from a foreign

government because the phrase “other similar benefits” under Sec. 32B6c, the

separation pay is deemed included.

It does not matter, however, if the separation pay is given by the Philippine3

government or a private institution if the separation pay is give due to causes such

as:

1.Death, sickness, injury or other physical disability; or

2.Any cause beyond the control of the employee: in these cases, the exclusion

is automatic.

The moment separation pay is received on account of death, sickness or other

physical disability or for causes beyond the control of an employee, it is

automatically excluded. No more other qualifications.

If, however, grounds are other than the above-stated, a qualification is to be made

of whether or not the cause is beyond the control of the employee.

Example: The management installed a labor-saving device for cost-cutting, and

the personnel manager ask an employee to voluntary resign; that is retrenchment.

In this case, the employee is still entitled to separation pay because the cause for

termination is still beyond the employee’s control.

When the management lay off employees because of bankruptcy, it is beyond the

employees control, hence, entitled to separation pay. When an employee is

terminated from failing eyesight, it is still not subject to income tax, it is still an

illness.

When an employee voluntarily resigns but the CBA provides separation pay, the

separation pay is subject to income tax because the cause is other than the causes

provided by law.

Terminal Leave Benefits



It is given on a yearly basis upon retirement. If given on a yearly basis, determine

whether sick leave or vacations leave.

Rule if Sick Leave:If sick leave given in a yearly basis, it is subject to income tax.

Rule if Vacation Leave:If vacation leave, it is subject to income tax except if it is

10 days or less, in which case it is exempt.

RR-2-98 [January 1999] - covers only private sector

EO 291 [Under ERAP Administration adopted in RMC-16-200] – covers government

terminal leave benefits.

Q. Does it matter if the worker received it from the government?

A. Yes.

Private Sector - given on a yearly basis, subject toincome tax

Government Sector - vacation leave, regardless of number

of days is not subject to income tax

Q. How about if given in retirement?

A. We have three rulings:

1.In Re: Zialcita, 190 SCRA 851

2.Borromeo vs. Civil Service Commission, 199 SCRA 9113.CIR vs. Castaneda

In Re: Zialcita

190 SCRA 851

Zialcita is a retiree of DOJ. The DOJ withhold the sum of money. Zialcita did not

agree to the deduction. He claimed that it is exclusion. He cited PD 220 which

provides that terminal leave benefits received by employees of the government and

the private sectors are exempt from tax. It is under the phrase “other similar benefits received by the retiring employee” (similar to the retirement benefit pay).

The SC agreed with Zialcita. It ruled that it is in the nature of retirement pay.

Note: Ruling is based on the old law, but it is still relevant in the new law because

what was changed is only the section number. The SC committed a mistake that

is in the nature of a retirement pay, SEC 28, but the ruling is still correct.



However, it added in the dispositive portion that the exemption applies only to DOJ

employees.

This ruling is modified in the case of Borromeo. The ruling was that the

exemption is applicable to all government employees.

Borromeo vs. Civil Service Commission

199 SCRA 911

Borromeo is an officer of the Civil Service Commission. The issues in this case

were:

1.WON the terminal leave benefits of Borromeo is subject to tax;

2.WON his terminal leave pay should be computed on the basis of his highest

monthly salary including allowance or on the basis of the highest monthly

salary without said allowances should be subject to tax.

The SC ruled that is should not be subject to tax. It reiterated the ruling in

Zialcita; it should be exempt from tax. This case however, modified the ruling in

Zialcita in the sense that the income tax exemption to DOJ employees was applied

to workers of the other branches of the government.

CIR vs. Castaneda

203 SCRA 70

Castaneda is a Labor Attache of Philippine Embassy in London.

Issue: WON terminal leave pay received by a government official or employee or

his retirement from government service is subject to income tax.

Ruling: The SC held that the terminal leave pay received by t\retiring employee is

tax exempt, not being part of the gross salary or income but of retirement benefit,

citing the ruling in the case of Zialcita.

Note, however, that in all 3 cases, the petitioners were all government employees.

Q. Suppose a worker from a private corporation receives the terminal leave

benefits, is it exempt from tax?

A. Yes. Under PD 220, it is provided that terminal leave benefits received by a

worker in the private as well as public sector are exempt from tax.



Note: PD 220 argued in Zialcita is not abandoned or superseded; it still

forms part of the law of the land.

Monetization of Leave Credits of Government Officials and Employees

EO 291 [Under ERAP Administration adopted in RMC-16-200] with respect to

terminal leave benefits received by government employees is ALWAYS EXEMPT

FROM TAX, no qualification.

Income derived by Foreign Government (Sec 32B7a)

Income derived from investments in the Philippines in loans, stocks, bonds or other

domestic securities, or from interest on deposits in banks in the Philippines by

1.Foreign governments

2.Financing institutions owned, controlled or enjoying refinancing from

foreign governments, and

3.International or regional financial institutions established by foreign

Governments

Situation: The foreign government of Brunei is a stockholder of a DC

(Development Ban of the Philippines). It deposited money in a bank in Makati. Is

it subject to income tax? No. It is exclusion; exempt.

Income Derived by the Government or its Political Subdivisions [Sec 32B7b]

Income derived from any public utility or from the exercise of any essential

governmental function accruing to the Government of the Philippines or to anypolitical subdivisions thereof is an exclusion from gross income.

Note: The exemption from income tax under this section pertains only to income

derived by the government or any of its political subdivision from:

1.Public utility; and

2.The exercise of any essential governmental function.

Consequently, income from sources other that those mentioned are subject to

income tax.

Do not confuse Sec 37B7b with Sec 27D which states that: ‘all GOCCs, agencies or

instrumentalities of the government are taxable, with the exemption of GSIS, SSS,

PHIC and PAGCOR’. Even if they are not among the four specifically enumerated,

GOCC can still be exempt if it derived income from public utility and the exercise of

any essential governmental function. There is no conflict between the two

provisions.



Also on the issue of whether or not the government may tax itself, correlate this

provision with Sec 133 (o), LGC [RA7160] which states that LGU cannot impose

taxes on the national government or any of its political subdivisions.

Prizes and Awards [Sec 32B7c]

Prizes and awards made primarily in recognition of religious, charitable, scientific,

educational, artistic, literary, or civic achievements(are exclusion from the gross

income) but only if:

1.The recipient was selected without any action on his part to enter the

contest of proceeding; and

2.The recipient is not required to render substantial future services as acondition to receiving the prize or award.

Prizes and Awards in Sports Competition [Sec 32B7d]

All prizes and awards granted to athletes in local and international sports

competitions and tournaments whether held in the Philippines or abroad and

sanctioned by their national sports associations (are exclusions from gross

income).

Note:Requirements for exemption:

1.Granted to athletes in local and international sports competitions and

tournaments;

2.Whether held in the Philippines or abroad; and

3.Sanctioned by their national sports associations.

Example: In the case of Grand Master Antonio, his award was sanctioned by the

National Sports Association (NSA) hence exempt from tax.

In the case of Onyok Velasco, the proper answer at that time would be it is notexempt from tax (because it was not sanctioned by the NSA, it was sanctioned by

the Philippine Olympic Committee).

Q. Is the amendment from Philippine Olympic Committee to National Sports

Association important?

A. Yes, because it covers all associations under the umbrella of NSA.



13th Month Pay and Other Benefits [Sec 32B7c)

Gross benefits received by officials and employees of public and private entities (are

exclusion from gross income): Provided, That the total exclusions under this

subparagraph shall not exceed P30,000.00 (may be increased by the Sec of

Finance) which shall cover:

1.Benefits received by officials and employees of the national and local

government pursuant to Act No. 6686;

2.Benefits received by officials and employees pursuant to PD 851;

3.Benefits received by officials and employees not covered by PD 851, as

amended by Memorandum Order No. 29, dated August 13, 1986; and

4.Other benefits such as productivity incentives and Christmas bonus:

Provided, further, That the ceiling of P30,000.00 may be increased through

rules and regulations issued by the Secretary of Finance, upon

recommendation of the Commissioner, after considering, among others, the

effect on the same of the inflation rate at the end of the taxable year.

GSIS, SSS, PhilHealth and Other Contributions [Sec 32Bf]

GSIS, SSS, Medicare and Pag-ibig and union dues of individuals (are exclusions

from gross income).

First, deduct this from the gross income. It is not included in the gross income for

the purpose of computing the net income tax. Contributions from GSIS, SSS, PAG-

IBIG, should not be included in the gross income.

If certificate of indebtedness has a maturity of more than 5 years it is excluded,

exempt; if lower than 5 years, subject to FIT (5%/ 12%/ 20%). [This is similar to

FIT on interest on bank deposit under Sec 24B1]

Gains from Redemption of Shares in Mutual Fund [Sec 32B7h]

Gains realized by the investor upon redemption of shares of stock in a mutual fund

company as defined in Sec 22BB of this Code (are exclusions from gross income).

Take note that interests on government securities are now taxable.



CHAPTER XII

TAX ON ESTATE AND TRUST

The status of estate shall depend upon the status of the decedent immediately

before his death whether he is a RC, or any of the seven kind of the taxpayers.

Same thing is true with trust; the status of the trust will depend upon the status of

the grantor, or trustor or creator of the trust.

We go to estate.

We are talking here if a person dies and he has properties. While the property is

being partitioned among the heirs, the property left is brief only; there is no income

tax to talk about. Here, we are talking of person who dies with substantialamount of property, e.g., a Manila boy who has manufacturing company of hotdog,

chorizo de bilbao, footlong and hotdog de ocho, or maybe, he died owning a bakery

producing money or maybe he owns a plantation of eggplant 12 inches long!

Before the property could be partitioned, it will take some time especially when

there are oppositors which are usually children outside the wedlock. Pending the



settlement of the estate, judicial, extrajudicial or no settlement at all, the estate

earns income managed by the administrator, executor or the heirs.

While the property is being partitioned, it earns an income. Let us say, our

example, the eggplant plantation, the eggplant 12 inches long, were being sold in

Japan.

Q. If the estate earns an income from the sale of the eggplant 12 inches

long, does it mean that the executor or administrator will pay the income

tax?

A. Here we have a very unique rule. With regard to the income of the estate,

there are three possibilities:

1.The income tax imposed on individual. It is as if the income earner is an

individual.

2.The corporate income tax. It is as if the income earner is a corporation;and

3.The income tax to be paid by the estate through the executor or

administrator.

Let us say the estate shall be settled through judicial proceedings. During the

pendency of the judicial settlement, the applicable income tax should be the one to

be paid by the estate represented by the executor or administrator or the heirs. As

a matter of fact, it is the only income where the applicable income tax is the one to

be imposed on estate.

We have three instances where the tax is not imposed on the estate itself:

1.During extrajudicial settlement;

2.When there is no settlement at all, and

3.When the judicial settlement is already final and executor, but the heirs did

not partition the property.

In these three instances, we have different rules. We do not apply here the income

tax on estate.

There are two possibilities here. If there will be a creation of unregistered

partnership; meaning, the heirs contributed money, property or industry with the

intention to divide the profit, then there is a creation of unregistered partnership.

Here, we will apply corporation income tax because as a rule under Section 22B, a

partnership is also a corporation; hence, we have to apply the corporate income

tax.



The other instance is where there is no contribution of money, property or industry.

The heirs merely divide the profit. For instance, in the eggplant plantation, there

are only two compulsory heirs, and they divide the profits among themselves,

there is only a creation of co-ownership. Since co-ownership cannot be deemed a

corporation, the income tax shall be imposed on different co-owners in their

individual capacity. Therefore, the income tax is to be imposed upon the

individual.

These are supported by SC rulings: for creation of unregistered partnership, we

have Evangelista vs. CIR, 102 Phil 114, Reyes vs.CIR, 24 SCRA 198,Ona vs.

Bautista, 45 SCRA 74, and AFISCO vs. CIR 301 SCRA 2; for creation of co-

ownership, we have Obillos vs. CIR,139 SCRA 436, Pascual vs. CIR 160 SCRA 566.

We go to Section 61.

If the income tax to be imposed shall be the one to be paid by the estate, meaning,

this is during the pendency of the judicial settlement. Section 61 says that itshould be paid in the same manner with that of individual.

Q. Is it really the same with that of individual?

A. It is similar but it is not identical. There are distinctions: on the personal

exemption, an individual may claim personal exemption depending on whether he

is legally married, single or head of the family, while if the estate is the one liable,

Section 62 governs; that the personal exemption shall always be an exemption

similar to a single individual of twenty thousand pesos whether or not the decedent

is legally married, single or head of the family.

If the income tax of the income tax is the estate itself, there are special deductions

provided for inSection 61. By virtue of Section 61, the following are special

deductions:

1.Distribution of profit to the heirs;

The option of the administrator or the executor here is to give partial distribution of

the income. If he does not distribute anything within the taxable year, he could

not claim special deduction of distribution. If he gave all the profits to the heirs,

he is not going to file income tax to be paid by the state because the gross incomeof the estate will become zero. If he will give only partial, for example 30% of the

income, this will constitute special deduction from the gross income of the estate.

On the part of the heirs, they will be liable for the income received from the estate.

With more reason if all of the income were given to them, they have to pay income

tax in their own individual capacity as individual.



Supposed the administrator did not give any income to the heirs within the taxable

period, he could not claim special deductions for distribution but the heirs upon

receipt of their shares, they are no longer liable to pay income tax for that.

2.Payment made by the administrator to the creditor of the decedent; and

3.Expense to preserve the estate of the decedent.

These special deductions with the special personal exemption shall apply only to

the income tax of the estate if the income taxpayer is the estate itself. If the

corporate income tax or the income tax on individual should be applied, these

special exemption and deductions does not apply.

We go to second one, thetrust.

There are three parties in a contract of trust: the grantor or trustor or creator, the

trustee or the fiduciary, and cestui que trust or the beneficiary.

Q. When can trust be held liable to pay income tax?

A. A trust can be held liable to pay income tax when it is irrevocable trust.

When the trust is revocable or for the benefit of the grantor, the income tax to be

paid by the trust does not apply.

Q. If the trust is liable because it is irrevocable, who is the one obliged to

file the return and pay the tax?

A. The one obliged to file the return and remit the tax is the trustee but not on

its own capacity but in behalf of the trust itself.

If the trust is irrevocable, the provision of Section 61 and 62 shall be applied on

personal exemption and special deductions. Those are also applicable. But if it is

the liability of the grantor, he shall file the tax return on his own behalf, in his own

individual capacity or personal liability; not in behalf of the trust. Then there will

be exemption with regard to Section 61 and 62.

Q. The lessor lease a parcel of land to the lessee for free in the conditionthat any improvement introduced by the lessee to the parcel of land shall be

transferred to the lessor after the termination of the lease. Assuming there

is improvement introduced by the lessee and the lease is terminated, how

will the lessor report that income? Should he report that for only one year?

A. In RR 2 issued in 1949, it gives two options to the lessor. If the contract is for

25 years, the value of the property will be spread into 25 years. Supposed the



value of the land is 25 million, for every year, he will report 1 million. Second, he

can choose to report that for only one year but he has to pay income tax for that.

CHAPTER XIII

TAX ON FRINGE BENEFITS

Section 33 speaks of managerial employee although this benefit is also given to a

rank-and file. Please do not have the notion that a fringe benefits is only given to a

managerial employee. This is also awarded to a rank-and-file.

Q. What is the definition of managerial worker?

A. RR 3-98 merely copied the provisions of the implementing rules of the Labor

Code. We have an identical concept of managerial employer on what is managerial

and rank-and-file.

If fringe benefits were given to managerial worker, the income tax is a FIT of 32%,

and, therefore, deductions and exemptions are not allowed; 25% to NRANE and

15% to aliens employed in MOPs. When it is awarded to managerial employee is it

FIT.

If it is awarded to rank-and-file, we do not say that it is exempt, Section 33C3 says

“the following are exempt from tax” but we have to continue reading, it says “ the

following are exempt from tax under this section only” and one of them is no. 3, the

one give to rank-and-file.

Q. Are rank-and-file exempt?

A. Yes. But only from FIT on fringe benefits. But under RR 3-98, a rank-and-file

receiving fringe benefit is subject to NIT. Therefore, there are deduction and there

are exemptions.

There is a great difference between the fringe benefits received by managers which

are subject to FIT while the fringe benefits received by rank-and-file which is

subject to NIT.

2003 Bar

Q. Who is the one liable to pay the FIT on fringe benefits?



A. The one liable is the managerial employee not the employer, notwithstanding

the statement under Section 33A because it says that “The tax herein imposed is

payable by the employer which tax shall be paid in the same manner as provided

for under Section 57A of this Code.”

Reading Sections 57 and 58, the management of the employee is a mere final

withholding agent to file the return and remit the tax in behalf of the taxpayer, thistime the managerial employee. Hence, the employer is only acting as mere

withholding agent.

Section 33 does not says that it is the liability of the management but it says it is

payable. To pay and to be held liable are two different things. The liability falls

upon the managerial worker but the one obliged by law to file the return is the

management. The management is a mere withholding agent.

The rule now is that the management is one liable to file the final income tax

return and remit the tax in behalf of the managerial employee. But there are twoinstances there where the managerial worker is exempt:

1.If it is for the convenience of the management;

2.If it is necessary to the trade and business of the management.

This is now provided for in RR 3-98.

1998 BQ

Q. A worker enjoys free housing. If that will be leased, the value would beP10,000.00 per month. Is the rental exempt from income tax?

A. It depends. We have to distinguish if the worker is a managerial employee or a

rank-and-file.

For rank-and-file employee, RR 2-98 says that if he is enjoying free housing, he is

exempt from income tax provided it is for the convenience of the management.

One example of “for the convenience of the management” if the free housing is very

near to the premises of the management so that anytime he may be called to work.

For managerial, RR 3-98 says that the free housing is exempt provided it is for the

convenience of the management, and the free housing must be within 50 meters

perimeter from the place of the management.

There are two methods of multiplication in the revenue regulations; first, to

multiply 100% of the benefits, and, second, to multiply 50% of the benefits.



The management provides free housing but the management merely leased the

house. Let us if the value of the lease is P10,000.00, the managerial employee is

liable but only to 50% or ½ of the housing.

Section 33B enumerated the fringe benefits. Most of them are self explanatory but

some are not.

Section 33B2 says about expense account.

Q. What do we mean by expense account?

A. These are the expenses incurred by managerial worker to be reimbursed by the

management. That is expense account.

Section 33B5 says about interest on loan. This is interest in loan which is lower

than the prevailing rate in the marker.

Q. If the managerial employee borrowed money from the management at the

rate 4%. What would be the fringe benefits?

A. Since the prevailing rate was fixed by RR 3-98 at 12%, the difference between

4% and 12% is a fringe benefit where the worker is liable for FIT.

Section 33B10 says about life or health insurance and other non-life insurance

premiums. In relation to this, we have to study Section 36A4.

Q. If the management insures the life of the worker;; can the management

claim the premium it has paid to the insurance company as a deduction?

A. It depends if the employee is a rank-and-file or a managerial employee. If he is

a rank-and-file worker, we have Section 36A4; if he is manager, we have Section

33B10.

The management can claim deduction for the premium it has paid for the life and

health of the managerial employee provided, it must be in excess what the law

apply.

Q. What does it mean?

A. GSIS and SSS laws are amended that there is now an obligation among the

management to have a ___________ insurance over the life of the worker. IF the

insurance paid by the management is more that was allowed by GSIS and SSS

laws, then the difference is fringe benefits.

Q. Can it be claimed as deduction by the management?



A. Yes. Under Section 34A1ai last phrase, the fringe benefits awarded by the

management to the managerial worker may be claimed as a deduction as business

expense provided that the FIT has been paid already.

First, it must be an insurance which ism ore than the law allows. Second, the FIT

on fringe benefits should have been paid already.

Q. What if it is a rank-and-file, my the employer claim the premium as a

deduction?

A. Section 36A4 is worded in a qualified manner. The management cannot claim

the premium if it is the beneficiary, directly or indirectly. Therefore, if it is not the

beneficiary, directly or indirectly, it could claim the premium as a deduction.

2005 BQ

Q. What do we mean by de minimis benefits?

A. De minimis benefits are benefits of minimal value which is exempt from both

FIT and NIT.

Contributions fro the retirement plan and hospitalization by the employer is also

exempt from FIT on fringe benefits because as provided for under Section 33C, it

says that “the following are exempt from income tax under this section.”

CHAPTER XIV

ALLOWABLE DEDUCTION

Section 34 is the longest provision under the Philippine laws. These deduction

from Section 34A to 34 M could only be availed if the income taxpayer is paying by

way of the net. The rule is absolute: this will not apply to taxpayer paying by way

of the gross.

Q. Why is it only applicable to taxpayer paying by way of the net?

A. Section 34 refers to taxable income subject to income tax under Section 24A,

25A1, 26, 27ABC and 28A1. These provisions refer to the payment of the net

because it all refers to the payment of taxable income.



These sections refers to RC, NRC, RA, OCW, NRAE, DC, RFC and partners in a

GPP.

Q. If the taxpayer is a pure compensation income earner, what can it claim

as a deduction?

A. If the taxpayer is a pure compensation income earner, the only deduction it

can claim is the one mentioned under Section 34M. Meaning, he can only _______

deduction of the premium. Other than this, it is cannot claim deduction under

Section 34. Provided, it is with regard to health and hospitalization insurance.

Provided further, that the premium incurred does not exceed P2,400.00 and the

family has a gross income of not more than P250,000.00.

However, do not be misled that it is the only that _________ claim as deduction, we

have another one but not under Section 34 but Section 35; the personal as

_____________ the additional exemption. That is the nature of a deduction to bededucted from the gross income.

For pure compensation earner, he could claim a deduction of premium for insuring

his health and hospitalization. Take note, life insurance is not included in this

deduction.

Expenses

A lot of thing must be explained under this subsection because it has to be

correlated to other provision.

The following are elements under this deduction:

1.The deduction should be incurred within the taxable period;

2.It must be ordinary and necessary expenses; and

3.It must be for the maintenance, development of the trade and business of

the management.

Q. If the management awarded fourteenth month pay of 75 million, can it be

allowed as business expense deduction?

A. No. The amount of 75 million is too much. The law requires that it should be

reasonable and 75 million is not reasonable.

Q. If the taxpayer is an individual, what will be deadline of filing of return

for 2005?



A. On or before April 15, 2006.

Q. The deduction must be within the same taxable year. If that individual

incurred expenses on February 2006, can he claim deduction for the said

expense?

A. No, because that was incurred outside the taxable period. It must be

incurred in any month of 2005.

However, that expense may be allowed as deduction fro the taxable year of 2006.

Q. What about corporation? Supposed the corporation using the fiscal year

which ends on March 31, the deadline here is July 15. Will be allowed to

claim the expense on February 2006 as deduction?

A. Yes, because that is within the taxable period which ends on March 31, 2006.

For ordinary and necessary expenses, the taxpayer must prove that the expense is

incurred within the taxable period.

We go on Section 34A1ai, there are three items here: 1) reasonable allowance for

salaries and wages; 2) other forms of compensation; and 3) monetary gross up

value of the fringe benefits provided the FIT has been paid already.

_________________ the list,reasonable wages and salaries, did it ___________

much? No.

Q. ____________ a representative of San Miguel and now in the office of the

BIR. He is claiming deduction of ___________ of Danny Siegle amounting to

P600,000.00 a __________. Is the salary of Danny Siegle a reasonable one to

be claimed as deduction?

A. ____. The average salary of employee nowadays is P20,000.00 to P30,000.00.

P600,000.00 is way above the table.

___________forms of compensation,the requirement is of course, by virtue of BIRruling, it must be also reasonable. The one mentioned under Tax Code says “for

personal services actually rendered.” Underscore the word “actually.”

Aguinaldo vs. CIR

112 SCRA 136



AIC was manufacturing fish nets. The management acquired a parcel of land. But

the sale of parcel of land was through a real estate broker. The management

earned income on the said transaction and give special bonus on its employees.

The special bonus is being claimed the management as business expense ___

deduction.

The SC ruled that the special bonus cannot be claimed as business expensededuction. The worker did not render actual service because it was proven that the

sale was course through estate broker. The SC merely invokes Section 34A1ai.

The special bonus was disallowed as deduction.

Let us go to themonetary grossed up value of fringe benefits provided the FIT

has been paid already. What is the fringe benefit here? It is the one received by

the managerial employee. Otherwise, the law will not say the payment of FIT.

Let us go totravelling expenses away from home in the pursuit of trade or

business.

Q. Supposed the management will provide travelling allowance to the

employee because he is living in a far away place maybe Farview or

Faranaque. Is this the travelling expense referred to Section 34A1aii?

A. No.

The one mentioned here are those travel in the pursuit of business away from

home here and abroad, for example in Baguio or Davao or Singapore.

Q. Is the travelling expense in a foreign travel a deduction although it has

nothing to do with trade or business?

A. Yes. We have Section 33B7, the travelling expense for foreign travel. Under

RR 3-98, travelling expenses for foreign travel by the managerial worker is only a

fringe benefit if it is not in the pursuit of trade or business.

If that is the case, it is a fringe benefit it can be claimed as deduction not under

Section 34A1aii but under Section 34A1aii last phrase, the monetary gross up

value of fringe benefits provided the FIT has been paid already.

We go toreasonable rentalsfor the continued maintenance and development of

the management.

Examples are payment to PLDT, NAWASA, MERALCO and other utilities. These

are reasonable rentals for the continued maintenance, development and existence

of the management.



Lastly,entertainment expenseprovided it is not contrary to public morals.

It is limited by RR 10-2002. If the taxpayer is selling goods or commodity, the

entertainment expense should not exceed 0.01% of the gross receipt. If the

management is selling services, the entertainment expense should not exceed 1%

of gross receipt.

Here it requires that the entertainment should not be contrary to public morals,

public policy or public order. Hence, if the management present receipts from

Pegasus, the BIR most probably deny, without thinking, the claim for deduction.

We go tokickbacks. Even assuming there are no statements here in the Tax Code

regarding kickbacks, it is still not possible because of the requirement that it

should be ordinary and necessary.

We go to Section 34B2;private educational institution. We will notice that fromall the taxpayer; it is only this one which mentioned under paragraph A of Section

34. But at this time we have to correlate this to another provision, the one

mentioned under Section 27 referring to private educational institution. But it

should have been referred to Section 36A2 and A3. These are the so-calledcapital

outlays.

Ordinarily, capital outlays cannot be claimed as deductions except private

educational institution.

Q. What are capital outlays?

A. Expenses for the construction of the new buildings or expenses for

improvement and restoration to enhance or improve equipment.

For example, during the typhoon, the equipment was destroyed. So the

management will incur expense to improve or restore the facility. The expenses

incurred there are also known as capital outlays.

Ordinarily, this cannot be claimed as deduction by the taxpayer except private

educational institution paying the net income tax. It could be claimed as adeduction as business expense under Section 34A or itemized deduction of

depreciation.

Q. What is the rationale to the option to be exercised by the school?

A. If the capital outlays are substantial, e.g. the gross income is 50 million pesos

and the capital outlay is 80 million, and it will be allowed as business expense, the



30 million can no longer be claimed as business expense on the following year

because there is no carry over because business expense can only be claimed in

one year.

It is good if, let us say, the capital outlay is only 10 million pesos and the gross

income is 50 million because all of the capital outlays will be utilized as deduction.

However, if the amount of the capital outlay is too substantial, like for instance 80

million, it is best to claim that up under depreciation under Section 34F. Why? It

is because in itemized deduction of depreciation, capital outlay may be claimed into

several years depending upon the estimated life span of the facility.

For instance, in our example of 80 million, if the life span of the building is 20

years, under depreciation and if we are going to employ the straight line method,

within the span of 20 years in every year, there could be a deduction for

depreciation of capital outlays of four millions within twenty years. Hence, all of

the capital outlays will be utilized as deduction.

In addition, for DC, even assuming that he will apply the capital outlays of 80

million as deduction, he is still liable for MCIT. Hence, the DC is liable for 2% of

the gross income.

If that is the case, it is better to claim the capital outlays as depreciation under

Section 34F. Take note, however, that it does not apply except to private

educational institution.

Interest

Supposed the taxpayer is businessman and he borrowed money to support his

trade or business and he is going to pay interest on loan.

Q. Who is the one allowed to claim deduction under Section 34B?

A. The debtor.

What is the 38%, now 42%, as amended by RA 9337, under this topic? As

explained by RR 13-2000, when the taxpayer borrow money in January 2005 from

a bank or financing institution, let us say 1 million and assuming the interest is

one hundred thousand pesos, upon the grant of the loan in January 2005, the

taxpayer did not immediately spend the money to the trade or business. Instead,

he deposited the money to a bank. Why? He may earn interest from the bank so

that his liability to pay the interest from the creditor bank will be lessened.

Assuming after depositing the money to a bank, them money earned 50 thousand

pesos.



Q. Considering the taxpayer pay the interest of one hundred thousand, is he

authorized to claim the interest of the entire one hundred thousand?

A. No. First we multiply the 42% with the 50 thousand bank interest so the

result will be 21 thousand. This 21 thousand should be deducted to the one

hundred thousand so that the taxpayer will be allowed to claim an interest of loan

of only 79 thousand pesos.

What are thee “other interests”? Interest on rediscounting of papers, meaning, the

taxpayer will borrow money and the interest will be paid in advance.

For example, in January 2005, a taxpayer borrowed money by way of rediscounting

of papers. Upon the grant of the loan, instead of receiving one million, the interest

of one hundred thousand shall be automatically deducted so he will receive not one

million but nine hundred thousand. That is rediscounting.

Q. Can he claim the interest as a deduction on April 2006?

A. Section 34B provides for a qualification. If the taxpayer is an individual and

using a cash basis method, he may or may not be allowed depending on whether

the principal obligation has been paid already. If the principal obligation has not

been paid, the interest on loan by virtue of rediscounting should not be allowed as

deduction although it was incurred with the taxable year.

However, if the principal obligation was already paid, the taxpayer may be allowed

to claim the interest as deduction. If he pays the obligation by way of instalment,for example, only ½ of the obligation, then only ½ of the interest will be allowed as

a deduction.

Q. What are the interests which are not allowed?

A. Interest on related parties which is enumerated under Section 36B.

What is important in related parties is Section 36B1.

Q. Who are the relatives under the Tax Code?

A. The related parties under the Tax Code include corporations and those related

by consanguinity.

For example Section 36B1, the related parties here are brother, sisters, whether full

blood or half blood, lineal descendants and ascendant.



Q. What about if the taxpayer borrows money from his uncle and he pay

interest, is that covered under allowable deduction?

A. Yes, because an uncle is not a related party under Section 36B1 although he is

a relative.

Correlating this section to Section 99B under donation, a relative includes a

relative by consanguinity within the fourth civil degree.

Interest incurred by oil drillings and mining corporations is not deductible, and,

lastly, when the law says that the taxpayer has the option to claim that as a

deduction of capital expenditure.

For example, the taxpayer will buy a truck worth five hundred thousand pesos if

bought in cash. However, he bought it in instalment, and instead of paying five

hundred thousand pesos, he paid six hundred thousand pesos. The one hundred

thousand pesos constitute as interest for purchasing that by way of instalment.

The one hundred thousand he had paid for the purchase of the truck may be

claimed as a deduction here. Provided it must be incurred within the taxable

period or the law says we capitalize it. What does it mean?

If the truck is now the subject matter of the itemized deduction of depreciation

under Section 34F, if one hundred thousand is going to be capitalized, we have to

depreciate the truck not by virtue of five hundred thousand but by six hundred

thousand pesos.

But if the interest is already claimed as interest in Section 34B as a deduction of

interest, then the one that should be depreciated should be the five hundred

thousand pesos.

So it depends on the choice of the taxpayer.

Q. If you are a taxpayer, are you going to capitalize or you are going to claim

the interest under Section 34B?

A. It is advisable to claim that under depreciation because it can be claimed forseveral years.

Taxes

Section 34C is more controversial than A and B because the first two can only

minimize the payment of income tax by way of deduction. Here, it may be

minimized into two ways: tax deduction under Section 34C1 and 2 and tax credit

under Section 24C3 to 7.



When we say tax deduction, these are the tax deduction incurred by the taxpayer

in the pursuit of trade of business and of course, it must be incurred within the

taxable period.

The classic example of this is the business tax. When we say deduction, it should

be deducted, as a rule to the gross income. When we say tax credit, it is to bededucted in the last step of the formula.

Under income tax law we have numerous tax credits. The one discussed here is

only one of the numerous tax credits. What is it? This is the income tax paid to a

foreign country.

Q. At present, is it only tax credit? What are the other tax credit if any?

A. Of course not. The following are the tax credits: the input tax under VAT

Section 110B last phrase, the different creditable withholding tax, the tax credtcertificate under Section 204.

Going back to the income tax paid to the foreign country, this is only applicable if

the taxpayer is a RC or a DC. Suppose the taxpayer paid income tax but he is a

RC, here we hit three birds in one stone, we have similar provision from the income

tax paid to a foreign country under donor’s tax under Section 101C, under estate

tax, we Section 86E, because the contents here are similar in procedure.

Q. For instance, the taxpayer paid income tax in US. As converted to

Philippine currency, the income tax paid in US is one hundred thousandpesos. Can he claim the entire one hundred thousand pesos?

A. No. We have to follow certain formula.

Taxable income within the Philippines x rate of tax

Taxable income in the entire world

= deductible tax credit

The income in the entire world includes the income within the Philippines. Forindividual, the rate of tax is 32%.

If the result of the above formula is seven thousand pesos, although the taxpayer

paid one hundred thousand pesos, he will only be allowed to claim only seven

thousand pesos.

This is the same procedure for donor’s tax paid in foreign country and estate tax

paid in foreign country.



Q. Which is better to claim that in the beginning of the formula or at the

bottom of the formula?

A. Of course, it is better to deduct it to the tax due.

Under Section 34C1, if the taxpayer failed to avail the privilege of the tax credit

system, that is the time when he will be allowed to claim that as a deduction. This

is very unique because the deduction is allowed even if the taxpayer has no trade

or business. Normally, in deduction, the taxpayer must have trade or business.

Nonetheless, it is better to claim it as a tax credit because the payment of income

tax will be minimized up to the maximum.

Losses

It ____ principle that the losses should be related to the trade or business of the

taxpayer. To a certain extent, the deduction sometimes may not be connected to

the trade or business.

There are two kinds of losses: losses in real sense of the ______ meaning the

taxpayer is a businessman, he purchased a commodity for one hundred thousand

but he was able to dispose that for only fifty one thousand, there was a loss of forty

nine thousand. The other loss refer to the losses by virtue of natural calamity. Of

course, it is not directly related to trade or business. Examples of losses by virtue

of natural calamity are earthquake, typhoon and other.

Q. What are the requirements so that it may be deducted as losses?

A. First, it must not be claimed as a deduction under estate tax under 86A1e.

Second, it must not be compensated by insurance or other forms of

indemnification.

As a matter of fact, this is the only deduction under the income tax which may be

claimed as deduction under the estate tax. Nonetheless, the claim of this

deduction simultaneously is not allowed.

Q. Supposed the loss was allowed by the BIR, and, subsequently, the loss was

compensated by insurance company, what happen to be itemized deduction of

the loss? Will it be cancelled?

A. Of course not. It will remain to be a deduction. However, the amount that

was recovered is subject to income tax.



Here we have thenet-operation loss carry over rule (NOLCO) under Section

34D3. This was discussed under Section 39D on net capital carry over rule.

The ordinary loss may be claimed in the capital gain or ordinary gain, why is it

that there is a carry over? Meaning, in particular year, the taxpayer will not be

allowed to carry over. For example in 2000, the taxpayer will not be allowed to

claim the ordinary loss because the loss is more than the gross income, e.g. grossincome is ten million and the ordinary loss is twenty five million. Hence, there is a

difference of fifteen million. Under the carry over rule, it may be claimed in the

succeeding three years. Hence, if that is incurred in 2000, in 2001, the taxpayer

will be all0wod if there is a profit or gain. If there is none, the taxpayer may claim

it on 2002. Still, if there is none, he will be allowed in 2003. If there is no gain in

2003, he will not be allowed to claim that in 2004. That is beyond the three-year

period with the exception of oil drilling corporation and mining operations. It can

be claimed within five years.

Bad Debts

This was asked in 2003 and 2005 bar.

2003 BQ

Q. What is the tax-benefit rule?

A. The tax-benefit rule is Section 34E first paragraph.

2005 BQ

Q. What do you mean by “up to the extent that the taxpayer had benefited”?

For instance, the taxpayer is the creditor, so he has many account receivables. He

failed to recover those account receivables. The BIR might allow him to claim the

itemized deduction of bad debts.

Supposed the bad debts were allowed and later on he was paid by the debtor, so

the taxpayer was able to recover the amount. What happen now tot he deduction

of the bad debts, will it be cancelled? No more. It remained to be a deduction.Otherwise, the computation of income tax will be affected. The amount so

recovered, the bad debts, is subject to income taxup to the extent that the

taxpayer had benefited.

Example, before the bad debts, the taxpayer paid ten thousand pesos tax due, but

because the bad debt is allowed, the taxpayer was able to claim the tax due of zero.

Hence, he did not pay any tax. Subsequently, he was able to recover the bad



debts, so it remains to a deduction. But the amount so recovered is subject to

income tax up to the extent that the taxpayer has been benefited. Meaning, the tax

payer is only subject to income tax of ten thousand. The amount of ten thousand

pesos is the one included in the computation of the ITR subject to income tax

because that is the amount he has been benefited.

It must be claimed not in the year the deduction was incurred. In a contract ofloan, the taxpayer is the creditor, was entered into in 2003. The deduction must

be claimed on the year it was written off or charged off, so that when the loan was

entered into in 2003 but was only written off or charged off in 2006, meaning to

say, in the book of account. It was now cancelled; it is also in the year 2006 that

the deduction may be claimed. It should not be in year entered into but in the

year it was cancelled after a certain effort to recover the same but he failed to

recover.

So under this deduction, although he incurred the bad debts in 2003 but he

cannot claim that in the year it was written off or charged off, or finally determined worthless or cancelled.

Depreciation and Depletion

When we say depreciation, this is a deduction which refers to ordinary wear and

tear of the facilities, machine equipment, real properties but does not include

parcel of land, which is used to the trade and business of the taxpayer. For

example, delivery van, in factories, the machine; these are subject to depreciation.

Among the deduction, this is unique because the taxpayer can claim this, unlike in

any other deduction, in succeeding years. For example, business expense, the

expense can only be claimed in the year it was incurred. Unlike in depreciation, it

can be claimed into several years depending upon the method and the estimated

life span of the property. That is why in capital outlays in private educational

institution, it can be claimed also in depreciation.

Let us compare it with depletion. If depreciation is about the machine or properties

to be used in the trade or business, depletion in Section 34G refers to natural

resources it self like mineral deposits, deposits of coal and deposits of silver.

Q. Do we use depreciation in the mining business and oil drilling operation?

A. The equipment being used in the drilling and mining operation is subject to

depreciation.

Q. Can we use depletion in other business other than mining corporations

and oil drilling operations?



A. No. This is only about the natural resources.

Depletion is one of the most unique provisions in Section 34 because this is the

only subsection which is not a self-executing provision where its implementation

will depend upon the revenue regulations to be issued by the Secretary of

Department of Finance after recommendation of CIR.

Corollarily, the Secretary issued the RR 12-76 in 1976 implementing the cost

depletion method of depletion.

Donation

1994 BQ

Q. The taxpayer donated a property. The donor claimed deduction from

income tax. Howe do you deduct the donation? Do we deduct it from the

gross income?

A. No. This is the only deduction under the Philippine laws where the law refers

to deduction and yet it will not be deducted from the gross but from the second

step of the formula; the net income or taxable income. So this deduction will be

deducted after the net income or the taxable income has been computed not in the

gross income.

This is the only deduction which should not be deducted from gross income.

Second, the deduction here is only partial that is the rule: the exception, it is total.

Q. What do we mean by partial deduction?

A. The donor can only claim 10% of the taxable income in case of individual and

5% in case of corporation.

Q. An individual donated one million; hence, there is a deduction of 10%.

How do we deduct it?

A. The amount to be deducted is not based on the amount donated but on how

much of 10% of the net income. If it shows that the 10% is six hundred thousand,

so the deduction is six hundred thousand pesos, if fifty thousand, so let it be. The

basis is not the amount of the property donated but rather how much is the 10% of

the net income or the taxable income after applying the deduction.

If the 10% of the net income is one million, then one hundred thousand may be

claimed deduction.



For corporations, take note that it is only 5% of the net income.

1994 BQ

Q. A philanthropist, donated one million pesos to young lady suffering from

a unique disease. Can the donor claim deduction for the contribution or the

donation?

A.No, because in the enumerations, whether for partial or total deductions, there

is no done under Section 34H who is an individual; all of them are entities,

partnerships, corporations or associations. There is no done under Section 34H

which is an individual.

Therefore, the donor can only claim deduction under the income tax if the done is

one of those enumerated under Section 34H. If the done is not there or the donor

is not a corporation, the donor cannot claim this deduction.

The first paragraph of Section 34H, notwithstanding, the long enumeration after it

can be divided into two: first, the done is the government, and, second, DC. For

the government, the requirement is that the done is the Republic of the Philippines

or any of its political subdivision, agencies and instrumentalities of the government

exclusively for public purpose. The second group, the requirement is that no part

of its net income shall inure to the benefit of any private stockholder or individual.

These are the social welfare, education, charitable, religious youth, sports

development and rehabilitation of the veterans.

We have to take note if the requirement was complied with because even if theentity is one among those enumerated, nonetheless, if the requirement was not

complied with, the donor cannot claim deduction.

Total deductions is under the last paragraph; donation to the government or

other entities in accordance with the priority plan of the National Economic

Development Authority. If the purpose of the donation is under the priority plan of

the NEDA, the deduction here is total.

We will notice that some of the donees under partial are also mentioned in total

deduction. Is there a conflict? None, because if the government is the done andthe purpose of the donation is under the priority plan of the NEDA, then the

deduction is total. If the purpose is only for public purpose, then the deduction is

only partial.

DC can also claim total deduction if they are accredited nongovernmental

organization mentioned under Section 34H2b and c.

Research and Development



Among the deductions, this is the one which does not appear under the old law.

This was introduced only in 1998. Formerly, taxpayers claimed this as business

expense. But normally, the BIR deny this claim because of the requirement that it

is ordinary and necessary. Hence, when it was amended, the authors of the

amendment deemed it necessary to provide a separate paragraph. Nevertheless,

there are expenses for the research and development which are not deductible evenif it is for trade or business of the taxpayer under the last portion of Section 341;

expenses to locate a parcel of land. The expenses are not deductible. Also,

expenses to locate mineral deposits are also not deductible.

Pension or Retirement Pay

Q. Who is the one allowed to claim this deduction?

A. The management or the employer for contributing in the private retirement

plan. The management only has to prove that it was incurred in a taxable period.

Optional Standard Deduction

Q. Is this in addition to the other deduction?

A. No. This is in lieu of other deduction and the taxpayer here must be an

individual except NRA.

This is first time that the law does not say if it is a NRAE or NRANE. However, this

refers to NRANE because they are not allowed to pay by way of the net.

Q. What is this deduction?

A. It is 40% of the gross income (para ‘to sa mga tamad!).

Do not confuse this under standard deduction under Section 86A5. This one

under Section 34, it isoptional standard deduction; the one under Section 86

saysstandarddeduction.



CHAPTER XV

PERSONAL AND ADDITIONAL EXEMPTION

This personal as well as additional exemption can only be claimed if the taxpayer is

paying by way of the net income tax.

Under Section 35A, in determining the income tax, it is being referred to Section

24A. Who are the taxpayers under Section 24A? There are only four: RC, NRC,

OCW and RA. Take note that the NRAE is also allowed to pay by way of the net.



Q. Does it mean that the NRAE is not mentioned in Section 24A he is not

allowed to claim personal exemption?

A. Not really. They can claim personal exemption not because of Section 35A but

because of Section 35D.

Q. Why is it that he has to be separated from the rest?

A. Because they are not allowed to claim additional exemption. They are only

allowed to claim personal exemption.

Q. What are the personal exemptions?

A. Section 35A provided for three personal exemptions.

First, single including legally married but judicially decreed as legally separated withno qualified dependent.For those legally separated, under the civil code,

they are still legally married. But under the tax code, those legally separated with

no qualified dependent is considered single. If hey have qualified dependent,

Section 35B, second in the enumeration, they are classified as head of the family.

Hence, they are not considered as legally married under the tax code. They can

only be either head of the family or single.

Q. Who are the qualified dependents?

A. Section 35B last paragraph says it is the legitimate, illegitimate and adopted

children of the taxpayer.

Second group is the head of the family.

There are so many kinds of head of the family. They are provided for in the last

paragraph of Section35A and RR 2-98 and also in Section 35B, second in the

enumeration.

First, we have the head of the family because we have a dependent father, mother

or both. Second, the taxpayer is the head of the family because he has dependent

brother or sister; third, because of the dependent children, not exceeding four;fourth, under RR 2-98, because of the dependent senior citizen, whether a relative

or not; and fifth, because the taxpayer is legally married but judicially decreed

with qualified dependent referring to the children.

The third group is the legally married with the deduction of P________________ for

each married individual, meaning the wife and the husband. Underscore the word

“each”.



We go to Section 35B.

Q. Who among the taxpayers are allowed to claim additional exemption?

A. First, when we say additional exemption, we are only talking of the children.

The qualification is that the children is below 21, unmarried, not gainfully

employed or regardless of age, is incapable of self-support because of mental or

physical defect.

First, only those who are legally married are allowed to claim additional exemption

but only as far as the husband is concern according to revenue regulations. If the

other wants to claim deduction, he should execute a waiver or an affidavit

renouncing in favour of the wife.

Second, the legally married but judicially decreed as legally separated with

qualified dependent. Other than this two, all taxpayers are not allowed.

2006 BQ

Q. Supposed the taxpayer is a widower, can he claim for a deduction?

A. Yes. He is also legally married although his spouse is dead.

Therefore, if the taxpayer is not legally married, he cannot claim for additional

exemption.



CHAPTER XVI

ITEMS NOT DEDUCTIBLE

First, erase the last portion of Section 36B3 because we do not have personal

holding companies nowadays. The personal holding companies were abolished in

1987. EO No. 37 issued by Pres. Aquino has rendered the income tax quite easy

because the income tax on personal holding companies was abolished. However,

the law was not properly amended because Section 36B3 last portion still speaks of

personal holding companies. Consequently, cross out the last portion which

provides for the personal holding company.


Take note that here, on related parties, it does not include relatives by

consanguinity within the fourth civil degree. Therefore, uncles and aunties are

not included. Those included under this subsection are brothers and sisters,

whether full blood or half blood, spouses, ascendants and lineal descendants.

In other words, when the taxpayer sold properties to his brother and he incurred

the loss, that loss is not deductible.

Supposed instead of loss he derived profit or gain; that is subject to income tax.Hence, there is unwritten law written under this subsection: if there is a profit, it

is subject to income tax; if there is a loss it is not subject to deduction.

We have to correlate this to Section 99B on donor’s tax. There, relatives shall

include by consanguinity within the fourth degree of relationship.

Q. The taxpayer sold personal property to his nephew. On that transaction

he incurred a loss. Will he be allowed to claim the loss as deduction?

A. Yes. A nephew is not a relative in view of the above section. It is only limitedto brother, sister, spouse, ascendants and descendants.

We go to Section36B2.

Section 36B2 refers to exchange or sale between individual and corporation where

the individual owns at least majority of the outstanding shares. Take note of the

exemption, it says “except in cases of liquidation,” meaning if a case of liquidation,

the loss is deductible.



Next is Section 36B3.

This is a sale between two corporations and as a result, majority of the shares is

now owned by the individual.

We go to Section 36B4 and B6 (never mind B5).

In a contract of trust, there are three parties: the trustor or grantor or creator, the

trustee or fiduciary, and beneficiary. Meaning there is a sale or exchange between

these parties. Among the combinations, there are only two where the loss is not

deductible.

Section 36B4 speaks of exchange between a grantor and a fiduciary. B6 speaks of

another thing, it says there sale or exchange of a fiduciary of a trust and a

fiduciary of anther trust if same person is the grantor to each trust.

Was Sale

This was asked in 1985 bar.

Q. Why is it that losses in transaction and sale deemed wash sale are not

deductible?

A. There are two reasons why losses from wash are not deductible: first, to avoid

too much speculation in the market, otherwise, there will always be purchase and

sale of stock; second, the taxpayer normally is not telling that truth that heincurred the loss.

Q. What is a wash sale?

A. It is the purchase of stock within 30 days and sale within the same period.

Let us illustrate, on January 20, 2006 a taxpayer purchased share of stock. On

February 5, 2006, he sold it again. That is a wash sale because the distance of the

sale and purchase is only 16 days because to be classified as such, it must be

within the period of 30 days.

Q. What is the subject matter of the sale? Should it be same sale of share

of stock?

A. No. It maybe the same shares or it may be identical or substantially similar

shares of stock. It does not mean that it should be the same shares of stock.

When he incurred a loss; that is a wash sale. Hence, there are two requirements:



it must be done within the period, selling the same or substantially similar share of

stocks.

Why is that he is not allowed to claim the deduction if he incurred a loss? Who

knows if he is telling the truth or not? Nonetheless, gain in wash sale is subject to

income tax.

There is one exception. Losses in wash sale, even assuming it is a wash sale, it is

deductible, the loss, and this about dealers or brokers of shares of stocks. They

are allowed because normally they are telling the truth; they have complete record,

i.e. book of accounts and deed of sale. Therefore, normally, he is telling the

truth.

CHAPTER XVII

DETERMINATION OF GAIN AND LOSS

Section 40 was already asked in 1986, 1987 and 1994 bar.

1987 BQ

Q. Juan de la Cruz, a RC, sold the jewelry for three hundred thousand. Is

there a gain or is there a loss? Will your answer be the same if the subject

matter of the sale is a parcel of land?

A. There is a gain if the amount realized is in excess over the basis or adjusted

basis. There is a loss if the amount realized is not in excess over the basis of the

adjusted basis.

This could be best illustrated by a contract of sale. In a contract of sale, the mount

realized is the selling price. If the selling price is more than the basis, thoseenumerated in Section 40B, there is a gain. We have to determine on how the

seller or transferor acquired the property.

In Section 40B, if the property is acquired by virtue of purchase, the basis shall be

the cost. It is the purchase price when the seller purchased the property, maybe

many years ago plus expense if any. So selling price plus expenses shall be the

cost.



Supposed in our example, if the seller purchased the jewelry for one hundred fifty

thousand plus expenses of two thousand many years ago, the one hundred fifty

two thousand shall be the cost. Since the amount realized is three hundred

thousand pesos, which is more than the cost, there is an income of one hundred

forty eight thousand pesos. That is how to determine gain.

Section 40 applies only if the applicable income tax is the net income tax. We do

not use this method if the applicable tax is the GIT or the FIT except in the sale of

shares.

Therefore, to NRANE and NRFC, Section 40 is totally irrelevant to them. This only

applicable if the taxpayer is liable by way of income tax.

Q. Is the entire one hundred forty eight thousand subject to income tax?

A. It depends. Assuming it is an ordinary asset, therefore, the gain is ordinarygain. 100% of the gain is subject to income tax. If it is a capital gain, assuming

the property is a capital asset, it all depends on whether the long-term or the

short-term holding period will be applicable. If for long-term, 100% of the profit is

subject to income tax; if short-term, 50% shall be subject to income tax, the

remaining half will be exempt.

Q. What about in the sale of realty? Do we apply cost in the sale of realty?

A. If the property is subject to FIT, we do not apply cost as a basis of determining

as to whether there is a gain or profit. If the sale of realty is subject to NIT, cost isapplicable.

Q. What if the property was obtained through crimes such as estafa, robbery

etc., is there a gain? For example, the amount obtained is two hundred

thousand.

A. There is a principle that an income from illegal resource is still subject to

income tax. Under an old CTA ruling, the entire amount of two hundred thousand

pesos is deemed a profit. Unlike if it is acquired by purchase, we have to

determine how much the profit is.


For property acquired by virtue of inheritance, the basis shall be the fair market

value at the time of acquisition.

So if the taxpayer had sold a property by which he acquired that property by way of

inheritance, and he sold that for two hundred thousand, the basis of the cost is the



fair market value of the property at the time he had acquired the same. Let us say,

if the fair market value of the property is only one hundred twenty thousand, and

he sold that for two thousand, then he obtained gain of eighty thousand.

In Section 40B1, the rules we have stated on whether the whole amount is subject

to income tax depending if it is an ordinary or capital gain and whether it is on the

long-term or short-term, if it is areal property whether it is subject to FIT or NIT, isalso applicable here.

We go to Section 40B3. This is about the property acquired by virtue of donation.

To illustrate, a lady received a donation, perhaps jewelry in February 14, 2006,

from her papa. Suppose she sold the jewelry, how much is the profit there? The

basis is under Section 40B3, the basis shall be the same as if it would be in the

hands of the donor who did not acquire that by virtue of donation.

Ordinarily, we have to ask the donor on how he acquired the jewelry. Supposed heacquired that by virtue of purchase; the cost shall be the basis. If he acquired

that by virtue of inheritance, the basis shall be the fair market value at the time of

the acquisition of inheritance.

If he acquired that by virtue of donation, there comes now the trouble because the

codal says “who did not acquire by virtue of donation.” Supposed her papa

acquired the jewelry from his SM, sugar mommy, by way of donation, we have to

determine how the sugar mommy did acquire the jewelry. If the purchase ____ the

basis shall be the cost; if by inheritance, the fair market value. IF the sugar

mommy acquired the jewelry from her DOM, delicious old man, wala ng

katapusang procedure ito! So this codal provision has to be amended.


Property which was acquired by virtue of adequate consideration, it will be the

amount given by the transferee. The property will be disposed for one hundred

thousand. What is the amount given by the transferee? Sixty five thousand, for

example. What will be the basis? It will be the sixty five thousand pesos. Using

that as a basis, the profit there is thirty five thousand. Whatever we had said

under Section 40B1, depending if the asset is capital or ordinary and whether the

property is real property, is applicable.

The next is Section 40B5.

The trouble of Section 40B5, we must first understand Section 40C1-6.

C – 1. The rule is gains are recognized; losses are recognized. When we say gains

are recognized, gains are subject to income tax. When losses are recognized,

losses are deductible.



C – 2. It says here the exception; gains are not recognized. Meaning, gains are

not subject to income tax or exempt from income tax. Losses are not recognized,

losses are not deductible.

Q. What are the elements of this?

A. The elements are the following:

1.The contract is limited to contract of exchange;

2.The parties are members of merger or consolidation; and

3.The subject matter of exchange is only limited or confined to the one

provided for in the law. This is the one enumerated in Section 40C2abc.

There is number four but there is no letter d, the last paragraph of Section

40C2.

We have to determine who among them are the transferors and who among themare the transferees. Why? In the event that the subject matter of the exchange is

not solely in kind, meaning, the subject matter of the exchange is different than

that provided for the law, we have to determine if he is the transferor. If he is the

transferor, the governing rule is Section 40C3b. If it is the transferee, the

governing statute is Section 40C3a.

Under Section 40C2abc, gains and losses are not recognized. But who among

them now are the transferor? If we are facing the book, all entities on the right

side, those are the transferors and all of them are corporations under Section

40C2abc and the last paragraph. Who are the transferees? All those on the left

side are the transferees.

Under Section 40C2a, both of the parties are corporations. Which is the

transferor, the one on the right side, it will transfer the shares of stock. The

transferee is on the left side which will transfer property.

For example, if the transfer of shares of stock worth one million will be given to the

transferee, the latter will transfer a property worth one million and five hundred

thousand. So between the two, apparently, the income earner is the transferor

because it received 1.5M while it only gives 1Mj only. Here, the law says the gain

is not recognized assuming the elements above are present. Meaning, it is exemptfrom income tax, provided, it is a contract of exchange, the parties are members or

merger or consolidation, and the subject matter is limited to shares and property.

Who has the loss here? The transferee. Can it be claimed as deduction? No,

because the elements are present. That is the meaning of non-recognition of the

gain or loss.



Let us say, the subject matter is not the one mentioned in the law. Now we have

Section 40C3 entitle exchange not solely in kind. Underscore the word “not”.

Going back to Section 40C2a, we have to take note of the elements above.

Assuming if the third element was not complied with, for instance, the transferee

instead of receiving shares of stock only, in addition it received other kind ofproperty or cash money. Assuming the transferee earned income, is it still covered

by Section 40C2? No. It is covered by Section 40C3. It is a transferee, so it is

covered by Section 40C3a, the gain is now recognized, meaning, the gain is now

subject to the NIT.

Supposed the transferor corporation will only receive property but in addition it

will receive cash money and share of stocks and assuming it earns income, Section

40C3b applies. It all depends if it is pursuant to the plan of merger or

consolidation. The gain is still not recognized.

All those pattern applies to Section 40C2bc and the last paragraph.

In Section 40C2b, the transferee is a shareholder and the transferor is a

corporation. In both cases, the subject matter of the exchange is shares of stocks;

if the elements are present, whatever gains are not recognized, whatever loss, the

loss is not recognized.

In Section 40C2c, the transferee is security holder and the transferor is a

corporation. The transferor will gain share of stock or security, the security

holder will transfer security. We have the same pattern with Section 40C2a.

We go to the most important, the last paragraph of Section 40C2.

Why is there is no letter d? Because the parties here are not members of merger

or consolidation. Who is the transferor her? Still a corporation. The transferee

is the individual. What will the transferor corporation transfer? Shares of stock.

What will the individual give? Property. After the exchange, what happen to the

relationship between the corporation and the individual? This is a simple case of

individual becoming a stockholder of a corporation.

Instead of purchasing stocks by money to become stockholder, the individual wantsto pay in kind, may be kamote, banana, talong or a parcel of land.

For instance, the parcel of land is only worth one million, but the shares given to

him is worth one million seven hundred thousand. What happen now who earned

an income? Is the income of seven hundred thousand subject to income tax?

The law provides for a qualification in Section 40C2 last paragraph.



If he alone or together with another person, not exceeding four, gained control of

the corporation, and under Section C6, control means at least majority of standing

shares of stock entitled to vote is now owned by that person, meaning he alone

himself, or together with other person not exceeding four persons, then the gain is

not recognized. If these are complied with, we have to ask for certification

exemption from BIR and state the income.

Let us say, the other way around. The individual will give a parcel of land worth

one million seven hundred and exchange it to shares of stock worth one million.

The exemption under Section 40C2 is only temporary. Why temporary?

Supposed the individual is a shareholder of a corporation where he paid in kind,

maybe parcel of land, he has sold the shares, he is now liable to pay income tax.

The recognition or non-recognition is no longer applicable.

The same is true with the corporation, if it will sell the parcel of land; it is now

subject to income tax. Section 40B5 says that it is Section 40C5 which is the

governing statute. It is the other way around. Now the exemption from incometax is no longer applicable.

We go to Section 40C4. If the party assumes the liability of any of the parties in

Section 40C2, it shall not be prevented from being within the exemption. Meaning,

although the parties assumes the liability of any of the parties there, nevertheless,

if the elements are present, the non-recognition of the gain or loss is still applicable

although he is not a member or a party in a merger.

We go to Section 41, the change of inventory to reflect the true income. The law

says the taxpayer is prohibited to change the method of inventory more often than

once in every three years.



CHAPTER XVIII

ACCOUNTING PERIODS AND METHODS

OF ACCOUNTING

We go to Section 43, the use of calendar method.

Q. What are the instances where the taxpayer is allowed to use calendar year

as compared to fiscal year?

A. Only corporation are allowed to use fiscal year. We do not talk of fiscal year if

the taxpayer is an individual because he has no choice but to use the calendar

year.

Section 44 and 45 talks of what should be included in the gross income and what

should be deducted from the gross income. Even if these two provisions were not

stated, of course, income shall be included in the year it has been incurred; the

same with deduction, as a rule, it will be claimed in the year it has been incurred.

Q. Why it is still stated under those sections?

A. because of the importance of the death of a person.

Normally, the period of inclusion of income and deduction is twelve months. But if

a person dies, the taxable period may be lesser than that.

For example, an individual died on July 2006, the taxable period for that individual

will be lesser than 12 months.

Q. What about the period of August to December 2006, what is the taxable

period?

A. That is the taxable period of the estate, the property of the decedent which is

also an income taxpayer.



Section 46 refers to change of taxable period. When we say of changing the

taxable period, we are talking about corporations because individuals are not

allowed.

There are three changes here: fiscal year to calendar year; calendar year to fiscal

year; and fiscal year to fiscal year. In these three cases, the law says that the

taxpayer has to file a separate return indicating the date of changes.

We go to Section 48. This does not appear under the old law. This refers to

method of reporting income known aspercentage of completion. Who are

authorized? It is only applicable to architects and engineers when the completion

exceeds one year.

Section 49 is the method of reporting income by virtue of the so-called instalment

basis orinstalment method. The taxpayer here is disposing the property by way

of instalment.

Q. If he is selling property, is it relevant to know whether he is selling

personal property or real property?

A. Yes. The rules vary if he is selling personal property or real property.

With regard to personal property or movable property, it is important to know

whether the taxpayer is selling that regularly or as Section 49A says “dealer”

because there are requirements to be complied with if the sale by instalment of the

personal property is a casual or isolated basis.

There are two requirements for a sale of personal property in isolated basis:

1.The selling price must exceed one thousand pesos;

2.The initial down payment should not exceed 25% of the selling price.

If the sale is by virtue of a regular sale, like what is being done by businessman,

these two requirements are not present; the taxpayer is now allowed to use the

method of reporting of income known as instalment basis.

With regard to real property, it is not important to know if the sale of real property

is regular or casual because there is only one rule whether the sale is regular or

casual. The rule is that both are applicable for regular and casual sale of real

property and the rules is that the initial down payment should not exceed 25% of

the selling price.

Q. Supposed the initial down payment exceeds 25%, how do we call now that

sale by instalment?



A. It is now known asdeferred sale, and the consequence of that, although the

taxpayer is selling the real property by instalment, he will be held liable to pay the

income tax as if he already received the entire purchase price if it exceeds 25%.

Q. What about the computation of the limitation of the 25%? Is it only

limited to cash money? Supposed it includes checks, bill of exchange and

promissory notes?

A. The answer is now under SC ruling in Banas vs. CIR, 325 SCRA

259.

Banas vs. CIR

325 SCRA 259

There was a sale of parcel of land by way of instalment. But the agreement was the

initial down payment shall be in cash money, the subsequent instalment shall be

simultaneously the cash money and other instalment shall be by virtue of post

dated promissory notes. But in computing the cash money, it did not exceed 25%.

RR 2 enacted in 1949 says that in computing the limitation of the 25%, the one to

be included in the computation should only be the cash money. We do not

consider the value of the post-dated promissory notes check and bill of exchange.

In this case, on the day of the delivery, the buyer exchanged other post-dated

promissory to cash. After the exchange, the initial down payment including the

second which are already in cash money exceeds 25%.

Issue: Should the taxpayer be allowed to use the instalment because originally,

the limitation of the 25% was complied with? It was not only complied with when

the second instalment was converted to cash money.

The SC ruled that the taxpayer should not be allowed to use the instalment

because the initial down payment consists of more than 25% of the selling price.

Although the ruling is like that, the rule under RR 2 that we do not have to count

the checks and promissory notes is still the rule.

We go to Section 50, the tremendous power of the CIR.

Q. What do we mean by corporation with the same interest?

A. These are several corporations with practically the same stockholders, e.g.

Ayala Group of Companies.



Section 50 says the CIR is allowed to allocate the income and the deductions with

different corporations having the same interest. Take note that there is no

limitation provided for even under the revenue regulations. Hence, this is a great

source of corruption.

CHAPTER XIX

RETURNS AND PAYMENTS

Section 51A1, we are talking here of the NIT return. From the enumeration under

Section 51A1, these are the one obliged to pay by way of the net. But there is oneomitted here, the OCW and seaman.

Q. What is the general rule, do we file an income tax return if he is exempt?

A. No.

Q. What is the exemption?



A. Section 51A2, for citizen and aliens who are exercising trade or business or

profession, they have to file a return regardless of the amount of the gross income.

Another one is the GPP under Section 55.

For the rest, they do not have to file the return if they are exempt.

Generally, if the taxpayer’s gross income does not exceed the personal as well as

additional exemption, the maximum is P60,000.00, he does not file a return.

If the taxpayer is a businessman, even if the income is minimal. He has to file a

return because the law says “regardless of amount of the gross income.”

The following are not obliged to file the return also:

1.Those whose income is subject to FIT; and

2.Those whose income is exempt from income tax.

Now, the limitation of P60,000.00 is removed. For pure compensation earner,

regardless of the income, it is the management who is obliged to file the return

under RR 3-2002.

Place and Filing of Return

Of course, the filing should be made to the BIR, to the RDO of the BIR; if none, to

its authorized banks; if none, to the municipal or city treasurer but they are using

here the “pay as you file” system.

When to File

The filing of the annual ITR is on or before April 15 but that is only with regard to

those using calendar year because Section 77B says that for those using fiscal

year, the deadline for filing of the annual ITR shall be on the fifteen day of the

fourth month following he close of the fiscal year.

The filing of the FIT return for the sale of share and sale of realty subject to FIT

shall be filed within 30 days from the date of the transaction. This is rather an

exemption because the final income tax as well as the creditable will be filed

monthly under Section 58A third paragraph which was amended by RR 12-2001.

The filing of the FIT return and creditable withholding tax return shall be by month

and under RR 12-2001 amending that paragraph, for small-time taxpayer, within

25 days, for large scale taxpayer, within 10 days. That is rather the general rule in

Section 58A third paragraph; the exception is under Section 51C2 that the final

income tax return should be filed within 30 days from the date of the transaction.



For sale of the FIT, return for sale of shares of stock, there must be the filing of the

annual consolidated return. For those using calendar year, that will be on or

before April 15.

Q. Why is it that in the sale of share subject to FIT there is a requirement of

the filing of the annual consolidated return?

A. In the sale of share subject to FIT, this is the only FIT where there must be

determination of whether there is an actual gain or loss because under Section

24C, the basis of the FIT will be on the capital gains. If it is based on net capital

gains, it presupposes that it undergoes the process of determining whether there is

an actual profit or loss.

For example, in January 2005, there was sale of share subject to FIT. The

taxpayers pay the FIT. After several months but within 2005, he had sold again

shares of stock subject to FIT. In September 2005, he sold again shares of stock;

he filed the return and paid the income tax. But when those three transactions will be summed up, the taxpayer will incur loss instead of gain.

Q. Is he allowed to file an annual consolidation before the end of 2005?

A. He should wait on or before April 15, 2006, before it, on March, February or

January.

That is why there is a need to file an annual FIT return to determine in the

ultimate analysis on whether there was a gain or loss.

We go to Section 51D in relation to Section 24A last paragraph. “Not pure” means

it is a mixture of salary and business income or in the alternative, it is purely

business income.

Q. How do the legally married individuals file their return, if that is the

case?

A. It must be joint.

Q. If the income is pure compensation?

A. Section 24A last paragraph says it must be separate.

Section 51E here concerns here a minor. Minority here is belong 18 unlike in

Section 35 that is below 21.



Q. What happen to income of the minor? Do we include that in the income

tax of the parent?

A. The law says it depends if the minor received an income pursuant to the

property given by the parents or not.

If the income is gained pursuant to the property given by the parents, this income

shall be included in the ITR of the parents except that when the donor’s tax has

been paid or it is exempt from donor’s tax.

For instance, the father is an operator of tax and he gave ten units to his son. The

income from those units shall be included to the ITR of the father except when the

donor’s tax has been paid or the property is exempt from donor’s tax.

Supposed the minor earned an income by virtue of his own industry, like a child

actor, the law says the return of the minor shall be filed by the guardian or

normally, it is also the parents.

We go to Section 52, the return to be filed by corporations.

2002 BQ

Q. What about corporations, is it obliged to file how many returns?

A. Five; four for each quarter plus one for the annual.

Q. Should the extension be allowed in filing the return?

A. Yes. But there is no period provided for by law. Section 53 merely says “on

meritorious grounds.”

Section 55 refers to return for GPP. Normally, GPP are exempt, why is it obliged to

file a return? The rationale there is to determine the share of the partner subject

to NIT.

Section 56A1, the Bureau of Custom is authorized to prohibit the departure of a

ship or vessel if the captain of the ship or the owner who failed to pay the taxunder the Revenue Code.

Section 56A2, installment payment of income tax is allowed if the amount of the

income tax is more than two thousand pesos and the second instalment should not

be later than July 15.



Section 56A3, this is being referred to when the taxpayer is claiming exemption

because he is going to use the proceeds of the sale of real property for residential;

the one mentioned under Section 24D2. Here the taxpayer is not yet ready to

comply with the requirements. To avoid payment of interest and penalty, he has to

pay now the FIT of 6%. If his documents are now complete, and, therefore, his

income is exempt, but he paid it already, the law says, he is given 6 months to

claim for a refund. If the taxpayer is using installment of method of reportingincome, within 30 days from the receipt of the installment, the taxpayer has to pay

the tax.

In Section 56b, here we hit three birds in one stone. This is also similar under the

estate tax under Section 93 and donor’s tax under Section 104 last portion. Here,

the rules are practically the same.

It would seem that there were only two paragraphs but there are three instances

there:

1.The taxpayer filed a return, he paid the tax but the tax is not enough. Thetaxpayer might receive notice of deficiency assessment;

2.The taxpayer filed the return but he did not pay the tax; and

3.The taxpayer filed the return, and, therefore, he did not pay the tax.

Section 57A refers to the enumeration of codal provisions subject to FIT. There are

two provisions here which are not subject to FIT but to GIT like Section 25B, but it

is justified because the last portion of this Section is about the FIT in the sales of

shares and realty. Nonetheless, most of the provision under Section 25B is about

the GIT. The other one is Section 28B1; this refers to the gross income tax to be

paid by NRFC. Why is it included here? Because the withholding tax system

under gross income tax is almost similar to the withholding system under the FIT.

The minimum of the withholding is 1%; the maximum is 35% as amended by RA

9337.

Q. What is the maximum under the NIT?

A. 15%. Most of them are 10%.

For FIT and GIT, there is the rate of 35% but for creditable withholding under the

net, the highest withholding is 15%. It is written in the law that the maximum withholding is 35% because the maximum GIT is 35%. This is not true in the NIT

because of the deductions. Remember that in FIT and GIT, the amount of

withholding is totally equal with the rate of the income tax. That is

not the case in NIT.

Take note that Section 57B was already amended to 35%.



Again, do not have the concept that the maximum withholding in NIT is 35%; as

stated, the maximum is 15% because of the deductions.

Section 57C refers to tax-free covenant bonds.

In a contract between an obligor and obligee, or maybe creditor or debtor, it is the

creditor or the obligor who is liable to pay the income tax. The tax liability maybeagreed upon that it is now the debtor or the obligor who will shoulder the tax.

That is why it is called covenant, meaning, by virtue of agreement the debtor might

shoulder the income tax and if the tax has been paid by the creditor, he might

reimburse it.

It is tax free because it is the creditor who is normally liable to pay the income tax

is now tax-free by virtue of the agreement.

Section 58 refers to the filing of the FIT and the creditable withholding tax return,

and, also, the register of deeds might allow the taxpayer to transfer the property but upon payment of income tax.



CHAPTER XX

ESTATE TAX AND DONORS TAX

Q. What are the transfer taxes nowadays?

A. The transfer taxes nowadays are the following:

1.Estate tax under Section 84 to 97;

2.Donor’s tax under Section 98 to 104;

3.The transfer tax for transfer of realty under Section 135 of LGU to be

imposed by provinces and cities.

The estate tax is the oldest tax although many Filipinos are not paying this one.

Before the CTRP, the rate for estate tax is 60% and if the net estate, meaning after

deductions, is more than 1.3 million, there is another progressive rate. Therefore,

practically, we have to give everything of what will be inherited.

However, in 1994, the Congress enacted RA 5499 saying that the rate of 60% will

be lowered to 35%. On January 1, 1998, by virtue of RA 8424, the rate of 35%

was lowered to 20%.



Q. What is the proper scheme to distribute the money to the heirs of a

taxpayer?

1.To create a family corporation.

2.Allow the taxpayer to die and pay the estate tax of the rate of 20%.

3.Except a deed of donation in favour of his children so that he will only be liable for 15% donor’s tax.

4.Execute deed of sale so that income tax should be applied.

A. For family corporations, the trouble is that when the heirs cannot agree. In

addition, the rate now is lowered from 60% to 20%, it is no longer advisable.

For realty, it depends. If the realty is considered to be ordinary asset where the

applicable income tax is the 5% to 32% because he is an individual, it is not

advisable. It is better to execute deed of donation if the done is a relative because

the rate shall only be 15%. If the donees are strangers, it is either of the two, NITof 32% or donor’s tax of 30%.

If the real property is capital asset and within the Philippines, it is better to execute

deed of sale because it is lower than donation 15%, it is lower than estate tax of

20%; it is only a FIT of 6% plus documentary stamp tax of 1½%. It is very much

lower than the NIT, estate tax or the donor’s tax.

If realty is all ordinary, it is better to execute deed of donation if the donees are

relatives. If the donees are not relatives, it is better to execute deed of donation or

allow the taxpayer to die and pay the estate tax because if the donees are

strangers, the taxpayer will pay the flat rate of 30%.

Upon reaching Section 84, we have to correlate this with Section 104 because this

covers the estate tax and donor’s tax. Here, we ought to know who are the

taxpayers under estate tax and donor’s tax.

For estate tax we have four taxpayers; for donor’s tax we have six. By the way, we

do not have inheritance tax and donee’s tax. It was abolished in 1974. Pres.

Marcos issued a presidential decree, and of all the numbers, he chooses the

number 69 abolishing the inheritance tax and donees tax.

For estate tax, the decedent may be classified as the following:

1.RC;

2.NRC;

3.RA; and

4.NRA.

For donor’s tax, the status of the donor may be the following:



1.RC;

2.NRC;

3.RA;

4.NRA;

5.DC; and

6.FC.

For donor’s, we have taxpayer that is a corporation. For estate, we do not have.

Why? A corporation is not capable of natural death. Nonetheless, a corporation

may very well enter into a contract of donation.

Q. What is the relevance of the knowing status of the decedent and donor?

A. With regard to estate tax, the NRA under estate tax and FC and NRA under

donor’s tax; to the rest, Section 104 is totally irrelevant because whether the

property is located within or without, they are still liable to pay the tax.

But for NRA and FC, Section 104 is very material because if they can prove that

the property is outside the Philippines, then they are exempt from tax.

The following are property deemed located within the Philippines under Section

104 first paragraph:

1.Franchise – a legislative enactment authorizing a person to engage in trade

of business. If the franchise is to be exercised in the Philippines, that is a

property deemed located in the Philippines;

2.Shares, obligation and bonds issued by a corporation or sociedad anonima

which is established under Philippine law. In other words, these are shares,

obligations and bonds issued by DC. This is going to be automatic source

from within;

3.Shares, obligation and bonds of FC provided at least 85% of the business of

the FC is located in the Philippines. With regard to shares, obligation and

bonds issued by FC, it is not automatic, there is a qualification. Normally,

it is property without the Philippines. However, if at least 85% of the

business is located in the Philippines, it will become a property deemed

located in the Philippines;

4.Shares, obligation and bonds issued by FC whose shares, obligations and bonds have acquired business situs in the Philippines.

With regard to shares and obligation and bonds of FC, it can only be property

deemed located in the Philippines if at 85% of the business of which is located in

the Philippines or in alternative, the shares, obligation and bonds of the FC have

acquired business situs in the Philippines.



5.Shares or right in any partnership, industry established in the Philippines.

These are deemed located in the Philippines, and if the taxpayer under estate tax is

NRA, and under donor’s tax, the taxpayer is NRA and FC, they are liable because

their liability shall only be on properties deemed located in the Philippines.

We have to remember that with regard to NRA under estate tax and NRA and FCunder donor’s tax, their liability shall only be on properties deemed located in the

Philippines.

While it is true that the liability of NRA under estate tax and NRA and FC under

donor’s tax is only for those property deemed located in the Philippines, for

purposes of filing the estate tax return, Section 86B says that with regard to NRA,

take note this does not apply to donor’s tax, the admistrator or executor of the NRA

shall include in the return all the properties whether located in the Philippines or

abroad.

Q. What is the purpose?

A. In order to allow deductions.

But in the payment of estate tax, NRA shall only be liable for properties located in

the Philippines. But only for the purpose of filing the return, all the properties

should be included.

Going back to Section 104, there is exception there: the property of a NRA and a

FC s located in the Philippines.

There is an exception that they will be exempt. Normally, a NRA which is a donor

or a decedent (including FC), if that is personal property located in the Philippines,

they are liable. However, Section 104, in the middle portion of the first paragraph,

says that if the country of the NRA or the domicile of the FC do not impose or

provide for exemption on intangible personal property owned by Filipinos whoa re

not residing in that foreign country, the NRA or the FC is not liable to pay estate

tax or donor’s tax as the case may be. Provided, that the foreigner or the alien is a

citizen or national of that foreign country and he must be residing there.

So that if a decedent is a foreigner but a resident alien of the Philippines, this

exemption do not apply. What are the requisites? First, the foreign country of the

alien or the foreign country of the FC do not impose or exempt from transfer tax in

intangible personal properties owned who are not residing there. Second, the

foreigner or the alien must be a resident and at the same time a citizen or national

of that foreign country. If these two elements are present, the property located in

the Philippines, the donor or decedent is exempt from transfer tax.



1996 BQ

Q. A German national donated shares of stock in a FC to his Filipina

girlfriend. Is that donation subject to donor’s tax in the Philippines?

A. No. The donor’s tax can only be applied if the shares of stock donated by the

NRA have acquired a business situs in the Philippines or in the alternative, the FC

where the shares of stock came from, at least 85% of the business of that FC is

located in the Philippines. Otherwise, the donor is exempt.

2005 BQ

Q. The decedent is RA. He has properties here in the Philippines, USA and

Europe. To which of the foregoing properties are subject to estate tax?

A. All of the properties are subject to estate tax because the decedent is a RA.

Campos Rueda vs. CIR

42 SCRA 283

The decedent is NRA. The decedent is from Spain who married a national of

Morocco. She has so many properties and all of them are intangible properties but

most of them are shares of stocks in a DC. They are being obliged to pay the tax.

The executor, Campos Rueda claim exemption from payment of estate tax and

inheritance tax claiming the provision of Section 104 that in the country, inMorocco, it provides therein that intangible personal properties owned by Filipinos,

where this Filipinos are not residing in Morocco is exempt from estate tax. The

petitioner is claiming exemption by virtue of this provision. However, the BIR

contends that Morocco is not yet a country because it is a colony of Spain; hence,

the said provision is not applicable.

The SC agreed with Campos Rueda to the issue that Morocco is not yet a country is

immaterial. What matters here is that the foreign laws of Morocco provides for an

exemption. Since the elements are present, Campor Rueda was allowed to claim

exemptions from the payment of inheritance and estate tax.

We have to know the payment of estate tax. The formula is also similar with that of

NIT.

Formula:

Gross Estate [Sec 85]

- Deductions [Sec 86]



Net Estate [Exemptions (1st P200,000.00 Sec 84)]

X Rate [Sec 84]

Estate Tax Due

- Tax Credit if any [Sec 86, 110B, 204]

The estate tax shall be applied to the transfer of property after the death of the

transferor. This is the general rule which is subject to so many exceptions.

Normally, if the property is transferred during the lifetime of the transferor, we

apply the donor’s tax. There are exceptions. Although it was transferred during

the lifetime of the donor, yet we do not apply the donor’s tax but the estate tax.

But when the transfer was made after the death of the transferor, the rules is

absolute; we have to apply estate tax.

Q. What is estate tax?

A. Estate tax is a transfer tax imposed on the transfer of the net estate of thedecedent to the heirs or beneficiaries who are not his heirs.

We go to Section 85A; decedent’s interest.

Included in this paragraph are properties owned by the decedent at the time of his

death. Why is it entitled “property owned by the decedent at the time of his

death”? Instead it says “decedent’s interest.”

The intention of the law is to include all properties, not only at the time owned by

the decedent at the time of his death but also those not owned by the decedent but

he has interest on such property. For example, in a contract of lease, when the

decedent is a lessee, normally, in the absence o agreement upon the death of the

lessee, the contract of lease is terminated.

Supposed the lease is for 5 years, after 2 years, the lessee died. That could be

inherited by the heirs. Hence, the value of the lease shall be included in the gross

estate of the decedent. Is he the owner of that? No. He only has interest over

the property.

With regard to usufruct, normally, a contract of usufruct is terminated upon the

death of either of the parties. If the usufructuary died, then the contract isterminated. Section 87A says the merger of the usufruct to the naked owner is

exempt from estate tax.

Q. Supposed if it is for a fixed period of time, for example five years. After

two years, one of the parties died, will the use of the property be returned to

the naked owner?



A. No. That will be inherited by the heir.

That is supported by Section 88A where it says that the value of the usufruct shall

be determined because it is subject to estate tax.

Therefore, there is no conflict between Section 87A and 88A. Section 87A provides

for exemption while Section 88A provides for the imposition of the estate taxindirectly. Section 87A presupposes a situation where the contract is terminated

upon the death of usufructor. Hence, the property will be returned to the naked

owner, and under Section 87A, that is exempt.

If the usufruct is fixed in a certain period of time, it will not be returned to the

naked owner if the usufructuary died. It will be inherited by the heirs and we have

to determine the value for the purpose of imposition of estate tax. Supposed the

one who dies is the naked owner, Section 85A applies. That is subject to estate

tax.

Hence, the estate does not only include properties owned by the decedent but also

properties wherein he only has interest as stated under Section 85A.


There are two kinds of transfer in contemplation of death:

1.The technical transfer in contemplation of death under SC ruling in Vda. De

Roces vs. Posadas 58 Phil 108, Dizon vs. Posadas 57 Phil 465; and

2.The one provided for in the Tax Code is only a technical transfer in

contemplation of death. It is deemed a transfer in contemplation of death

because of the technical provision because t does not refer anything about

death.

The SC ruling speaks about death.

Vda. De Roces vs. Posadas

58 Phil 108

A taxpayer executed a deed of donation. Almost simultaneously with the execution

of the donation, she also executed the last will and testament. When she died, the

done tried to pay only donor’s tax but the government insist the payment of estate

tax and donor’s tax because the government reason out that these two documents

were executed at almost the same time; and second, the donees in the deed of

donation, were also the same persons in the last will. The BIR concludes that it is

a transfer in contemplation of death.



The SC agreed with the BIR that it is the transfer in contemplation of death

because the execution of the deed of donation was executed almost simultaneously

with the last will and testament. Also, the instituted heirs were also the same

persons, the donees in the deed of donation.

Dizon vs. Posadas57 Phil 465

The father of the family donated parcels of land to his one and only son. After

several days from the execution of the deed of donation, the father died. When the

father died, the son paid the donor’s tax. The BIR claimed inheritance as well as

estate tax.

The SC, again, agreed with Posadas stating that since the death of the donor is

very near to the execution of the deed of execution. Then that is transfer in

contemplation of death.

In these two cases, it is talking indirectly about death.

Q. What about the one in the tax code under Section 85B?

A. This is only a technical provision about the transfer in contemplation of death.

Take note of the last two enumerations at the bottom of the paragraph: upon

transfer of his property, he still possess or he still receives the fruits or income of

the property. Third, the transferor, he himself alone, or together with otherpersons, designate who will receive the income of the property and who will

possess. Those are the technical rules on transfer in contemplation of death.

We go to Section 85C, revocable transfer.

Take note that the transfer of property, the rule is that it is irrevocable, if the

transfer is silent. If that is irrevocable, it is not subject to estate tax. Meaning,

the transferor upon his death or after his death that will not be included in the

gross estate because it is exempt for the reason that the one included in the gross

estate is the revocable.

Q. Why?

A. That is because of the tremendous power that in any time he can revoke,

change or modify the transfer.



For example, the taxpayer made a conditional transfer to his son. Whether or not

the condition was performed, or whether or not there is prior notice, upon the

death of the taxpayer, that will be included in the gross estate.

The remedy is to remove the condition so that it will become irrevocable.

Therefore, exempt from estate tax.

We go to property passing under general power of appointment under Section 85D.

If we read the provision, it is only similar to Section 85B for transfer in

contemplation of death. But we have to understand her that the property here is

under the general power of appointment. This was never asked in the bar because

this is common in United States. We seldom practice here in the Philippines.

Here, we practice the opposite, the fidelcommissary substitution.

The general power of appointment, we can understand it by remembering Article

863 of the Civil Code on the fidelcommissary constitution. There are three parties:the testator, first heirs and the second heir.

According to Section 87D, if the first heir dies, the property now is transferred to

the second heir, the estate of the first heir is exempt from estate tax.

Q. Why is it exempt?

A. It is exempt because the first heir did not choose on who will be the second

heir. It was the privilege of the testator. That is why upon the death of the first

heir, and the property was transferred to the second heir, the estate of the first heir

is exempt from estate tax.

In general power of appointment, there are three parties: testator, first heir and

second heir. If the first heir dies, the property will be transferred to the second

heir. The estate of the first heir under general power of appointment is subject to

estate tax for the property because under American law, the first heir has the

power to choose the second heir. Because of that, it is only logical that his estate

is subject to estate tax. What is subject matter of transaction? The one we had

discussed under Section 85B.

We go to Section 85E. This was asked in 1999, 2000, 2001, 2002, 2003, 2004 and2005 a nagawa din nung 2006, hindi na tinanong; the proceeds of life insurance.

Q. Are proceeds of life insurance subject to income tax? Estate tax under

Section 85E?

A. There are requirements. First, a person who ensured himself, Section 85E will

apply. If the taxpayer ensures the life of another, the rule does not apply.



Second, if the appointed beneficiary is the estate, represented by the executor or

administrator, the proceeds of life insurance, assuming the first requirement is

present, shall be included in the gross estate regardless of whether the

appointment of the estate is revocable or irrevocable.

If the appointed beneficiary is other than the estate, maybe a relative or a friend, it

defends if the appointment of the such beneficiary is revocable or irrevocable. If itis revocable designation of the beneficiary other than the estate, assuming the first

requirement has been complied with, the proceeds shall be included in the gross

estate. Therefore, subject to estate tax. If beneficiary is other than the estate and

it is irrevocable, having the same assumption, it is not subject to estate tax

because it should not be included in the computation of the gross estate.

Q. Why?

A. It is because if the appointment is revocable, insured has tremendous power,

control and influence to modify, change or alter the beneficiary. Because of thattremendous power of control, the law is only logical that when he die, his estate

will be liable to pay estate tax.

When the appointment is irrevocable – where the beneficiary is other than the

estate, because if it is the estate, it does not matter, the estate will be liable

whether it is revocable or irrevocable assuming the first requirement has been

complied with – the insured lossess control to change, modify or alter the

beneficiary. The law is only reasonable that when he died, his estate is not liable to

pay estate tax.

Q. Is it subject to income tax?

A. The governing rule is Section 32B1 and B2.

Section 32B1 speaks of where it is payable upon the death of the insured. Section

32B2 says that it is payable whether the insured is still alive.

When it is payable upon the death of the insured, the only requirement to be

exempt from income tax because that is an exclusion under Section 32B1, it is

payable upon the death of the insured regardless of who is the beneficiary and

regardless of whether the appointment of the beneficiary is revocable or

irrevocable, regardless of whether or not the payment must be lump sum,

amortization or instalment. That does not matter. The only requirement is that it

is payable upon the death.

Q. If it is payable within specific period of time, like ten years, after ten

years the contract matures, the insured will be paid now but he is still alive

and kicking, is the proceed of life insurance exempt?



A. The one to be exempt here is only the equivalent of the return of the premium

which means to say in the span of ten years, if the premium paid is one hundred

thousand and he received one million after ten years, what should be exempt is

only up to the extent of one hundred thousand. The remaining nine hundred

thousand is subject to income tax.

Supposed it is under Section 32B1, when it is payable upon the death, the entire

one million is exempt. However, in Section 32B1 there is a proviso which says if

the insurer held proceeds and earned interest, that interest is no longer exempt.

Q. Is it subject to VAT? Percentage tax?

A. According to Section 108A, it is subject to VAT if it is a non-life insurance

because if it is a life insurance, it is subject to percentage under Section 123 of the

Tax Code.

As a rule, if a business is subject to VAT, it is exempt from percentage tax or vice

versa.

In one BIR ruling, the BIR prompted to impose VAT to movie houses claiming it is

sale of services. However, the BIR failed to see the old law and the new law that if a

business is subject to percentage tax, it is no longer subject to VAT or vice versa.

Movie houses are subject now to amusement tax under Section 125 but that is a

percentage tax because it is under Title V of the Tax Code.

We go to Section 85F; prior interest.

This is no longer important. This is about the codification of 1939 when our

parents were not yet born. If today is 1941, that is important. It says that item

about paragraph B, C, and E – transfer in contemplation of death, revocable

transfer and proceeds of life insurance – whether it happened before and after the

codification of this law in 1939, we have to include that in the gross estate.

However, today is 2006, it is not material anymore.

We go to Section 85G.

We have to correlate this to Section 100. Both provisions are entitled “transfer for

less than the adequate consideration”. What about Section 100? The value is

subject to donor’s tax; for instance, a property was transferred for six hundred

thousand, the value of which is one million. There is a difference of four hundred

thousand is subject to donor’s tax under Section 100. This was asked in the

1999Bar.



Section 85G is entitled transfer for less than the adequate consideration; using the

same example, the balance of four hundred thousand is subject to estate tax.

Q. Do we apply simultaneously the estate tax and donor’s tax for transfer for

less than the adequate consideration?

A. No. We do not impose estate tax and donor’s tax for transfer less than the

adequate consideration.

We have to determine the motive for the transfer of property for less than the

consideration. If the motive of the transferor is for the impending death, the

balance of four hundred thousand shall be subject to estate tax. But if the motive

of the transferor is to donate the property, then it will be subject to donor’s tax.

1999 Bar

Q. A parcel of land located in Manila worth one million was transferred by

the owner, seller for seven hundred thousand because the buyer is a relative.

Do we impose the donor’s tax in the above mentioned fact?

A. We do not say it depends because the facts say that the buyer is a relative.

Under Section 100, the donor’s tax will be applied for a transfer for less than

adequate consideration but it must be other than the real property mentioned in

Section 24D1 (there is no Section 24D, it immediately started with 24D1).

Section 24D1 mentioned about a real property located in the Philippines which is a

capital asset.

We have to determine whether it is a capital asset or not because if it is a capital

asset and located in the Philippines, Section 100 says that the donor’s tax do not

apply. If the realty is the one mentioned under Section 24D1, the tax under the

Internal Revenue Code to be applied is the FIT of 6% as erroneously known as

capital gains tax. Section 24D1 says “this tax is applicable to the sale, barter or

exchange orother modes of disposition” which includes this one.

Q. Will the answer be the same if the subject matter of the sale is not a

parcel of land but shares of stock?

A. The answer will no longer be the same because shares of stock necessarily

follows that it is not the one mentioned in Section 24D1.

Let us see again Section 100 and 85G.



Q. What is the subject matter of transfer for less than adequate

consideration?

A. Under Section 100, it could be any kind of property; real, personal, tangible or

intangible, movable or immovable, so long it is not the one mentioned under

Section 24D1, meaning it is not a real property located in the Philippines which is

a capital asset.

Q. Do we apply it if the property is a real property?

A. Yes, if it is an ordinary asset.

Q. What are properties which are subject matter of the donor’s tax under

Section 100?

A. Any kind of property; personal, immovable provided it is not the one mentionedunder Section 24D1.

Q. What about Section 85G?

A. We have the same rule, any kind of property; real, personal, tangible or

intangible provided it is the one mentioned under Section 85B, C and D.

Q. Supposed the transaction for transfer of a property for less than the

consideration is a sale in good faith or a bon fide sale, does estate tax apply?

A. The estate tax does not apply although it is a transfer for less than

consideration because Section 85G says “except in bona fide sale”, meaning, a

bona fide sale.

Q. In Section 100, is that a defense?

A. No. The phrase “except in bona fide sale” is not present. Even if it is good

faith, the donor’s tax shall be applied.

We go Section 85H. We have to correlate this section to Section 86C.

This section violates the rules of literature in paragraphing because Section 85

says “the following are included” yet paragraph H says “not included”.

First, we must correct certain misconception here. We must make an annotation

that the capital here is used in its generic sense to include paraphernal property.



This provision and Section 86C applies only for those legally married. Supposed

the decedent is single, this section has nothing to do with him. Also, if the

decedent is not legally married, this provision also does not apply.

Section 85H speaks of the separate property of the surviving spouse which could

be either paraphernal or capital. Section 86C speaks of the shares of the

surviving spouse if the absolute community or any other forms of marriagesettlement.

Q. In these two properties, separate property of the surviving spouse and

shares in the marriage settlement, are these properties subject to estate tax,

why?

A. In both cases, these are exempt. In Section 85H, it is exempt because it will

not be included in the gross estate. The second one, under Section 86C, it is also

exempt. Although it is included in the gross estate, later on it will be deducted,

hence, gross minus deductions. Ultimately, it is also exempt.

Q. What is the relevance and including these Sections in the enumerations?

A. The relevance are the following:

1.To determine if the estate is exempt under Section 86B1a; the two hundred

thousand pesos and the 5%. The basis here is the gross value, meaning,

before deduction. Hence, if it is before deduction, it should be included;

2.For informing the BIR the net of a person under Section 89, the gross value

but below twenty thousand pesos. Hence, it must be included;3.Under Section 90A, the minimum requirement for filing the return is the

gross value of the estate which should be at least two hundred thousand

pesos;

4.The certification of the CPA where the gross value exceeds two million pesos.

Remembering all these provisions, all of these speak of the gross value, meaning, it

is before deduction. If it is before deduction, the shares inherited already is

included unlike the shares of separate property of the surviving spouse is

automatically not included in the estate.

Section 86A, B, C, D and E; we have to determine whether the decedent is

taxpayer belongs to Section86A or belongs to Section 86B. We speak of only four

individual here.

We have three under A: first, the RC because he is not only citizen but also a

resident; second, the NRC because he is a citizen; the RA because he is a resident.

Under B, we only have one, the NRA.



Q. What is the relevance of determining the same?

A. If the decedent taxpayers belongs to Section 86B, the deductions provided in

Section 86A4, 5, 6 and 7, the family homes, standard deductions, hospitalization

and medical expenses and retirement pay under RA 4917 are not allowed to be

claimed as deduction.

We start with Section 86A1a-e; expenses, losses and indebtedness.

The first one is funeral expense; actual funeral expense not exceeding two hundred

thousand pesos or 5% of the gross value of the estate. It is possible that the

actual expense value is one hundred sixty pesos yet it may be disallowed if it

exceeds 5% of the gross value of the estate – “The die now pay alter scheme!”

2000 BQ

Q. Is the deduction for death anniversary included in funeral expense?

A. No. Under RR 2-2003, all funeral expenses must be incurred before the

burial. Expenses for death anniversary, it necessary follows that the decedent was

already buried.

Q. What are funeral expenses under RR 2-2003?

A. We have wearing apparel, food and drinks, lodge, expenses to communicate to

the relatives and friends.


Fajunar vs. CIR

358 SCRA 666

The administrator was trying to claim extrajudicial expense for the settlement of

the estate before the RDO in Dumaguete City.

Under Section 86A1b and RR 2-2003, with regard to expense for judicial settlement

of the estate, the requirement both under the Tax Code and the RR is that it must

be pursuant to judicial settlement.

We are through with Section 86C when we discussed Section 85F.



We go to Section 86D.

This is very important. With respect to non-resident alien, the decedent, under

Section 85 and 104, his estate is only liable with regard to property deemed located

in the Philippines. For property outside the Philippines, the estate is exempt.

Remember the rule about the nonresident alien decedent; only the property locateddeemed located in the Philippines hall be subject to tax.

However, under Section 86D, in the filing of the estate tax return, all of his

property, whether located inside or outside the Philippines shall be included in the

estate tax return to be allowed only as deductions because it says nonresident and

not citizens of the Philippines, hence, they must be non-resident alien.

Q. The decedent is a nonresident alien, if you will be the administrator, are

you going to include all properties of the decedent including those outside

the Philippines in filing the estate tax return? Are all those propertiessubject to estate tax?

A. Yes. All of the properties including those outside the Philippines shall be

included in filing the estate tax. However, only those properties within the

Philippines are subject to income tax.

We do not say that only those properties located in the Philippines are those

included in filing of estate tax return. This rule only applies to estate tax but not

in FIT, income tax, donor’s tax or any other tax.

Remember that under estate tax, the question as to whether the property is

included in the filing of return or it is subject to estate tax, the rule is different

because of Section 86D.

We got o Section 86E.

When we reached Section 34C4, this is the estate tax paid in a foreign country. It

will constitute under the formula as a tax credit. Hence, this shall be deducted

under the bottom of the formula.

We go to Section 87 deductions.

Under Section 87a, when the usufructuary die, the use of the property should be

returned to the naked owner and it is exempt from estate tax. But do not confuse

this with Section 88a; determination of the value of the usufruct which means to

say it is subject to estate tax.

Q. Is there a conflict with these two provisions?



A. None. Section 88A is about usufruct with a fixed period of time.

For example the usufruct is for two years and before two years the usufructuray

died, the use of the property will not be returned to the naked owner but to the

heirs of the decedent and the controlling provision is Section 88A. We have to

determine the value of the usufruct because it will be inherited by the heir and it

will be subject to estate tax.


The first sentence is about personal property because the subsequent paragraph

discuss abut the real property. It is the fair market value of the estate at the time

of the decedent. Underscore the word “at the time of the death”.

Q. The decedent died in 1995. In 2001, the BIR assessed the estate where

the personal property, maybe jewelries and shares of stock, is worth tenmillion pesos but at the time of the death of the decedent it is only three

million. Is the assessment of the BIR correct?

A. No. The assessment is wrong. It should be assessed at the time of the death

of the decedent.

Underscore the word “at the time of the death” under the section.

2005 BQ

Q. How do we determine the value of the real property for purposes of estate

tax?

A. The value is determined by the CIR or the provincial or city assessor whichever

is higher.

We have to remember that because we have the same rule for estate tax and

donor’s tax under Section 102 and this provision is only being referred to Section

88B and this refer to the determination of the value of the property.

In addition, we have RR 2-2003; we have the value of shares of stock. We have to

determine whether the stock is listed or not listed in a local stock exchange.

We go to Section 89; notice of death.

Q. If we are the administrator, executor or the heir, do we always notify the

BIR of the death of the person?



A. No. The law says the gross value, meaning before deductions, of the estate

exceeds twenty thousand pesos and within two months, we have to inform the BIR.

Q. Supposed the net estate is eleven thousand, do you notify the BIR in

writing?

A. Yes. If the net estate is eleven thousand, if follows necessarily that the gross

value is several millions because of so many deductions; family home, funeral

expense, standard deduction etc.


Q. If you are the executor, do you always file a return? What are the

requirements?

A. The law says the gross value of the estate should exceed two hundred

thousand pesos.

Q. If the gross estate is two hundred thousand pesos, is the estate liable for

estate tax?

A. No. Because of so many deductions, most probably, the net estate will be

zero.

If the gross value is less than two hundred thousand pesos, as a rule, we do nothave to file a return except if the property consists of registrable properties like

shares of stock, parcel of lands or motor vehicle. Although it is below two hundred

thousand, of course, as a rule, we do not file a return except if the property

consists of registrable properties.

In addition, if the gross value of the estate exceeds two million, it needs a

certification of the CPA.

We will notice whether it is 20 thousand, 200 thousand or 2 million, it is always

the gross estate, meaning, before deductions.

Q. What about if the gross estate is two million pesos, is the estate liable to

pay estate tax especially if the estate belongs to Section 86A?

A. No. We have the same reason; because of too many deductions. Standard

deductions is already one million, if other deduction will be included, most

probably, the net estate will be down to zero.



Q. Where do we file estate tax return and pay the tax?

A. We pay and file the return to the RDO, if there is none, to the authorized

banks; if there is none, to the city or municipal treasurer.

Q. Supposed the decedent is not staying in the Philippines, where does the

administrator file the return?

A. If it will be to the office of the CIR in Diliman, Quezon City.

We file the return within six months from the death of the decedent.

Q. Can we file an extention for filing the return?

A. Yes. But not more than 30 days.


We follow here the “pay-as-you-file” system, meaning, we file the return and then

pay the tax. We will notice here that the date of the payment of the tax is also

within 6 months. That is the same with Section 90C.

Q. What about the payment of the estate tax, can it b extended?

A. It depends, if the partition is judicial or extrajudicial. For judicial, it should

not exceed 5 years; for extrajudicial, it should not exceed two years.

In the event that the extension is granted to pay the tax, the law requires that the

executor or the administrator should file a bond no more than twice the value of

the estate tax.

The primary liability to pay the tax devolves upon the executor or the

administrator. But please take note that it is not in the personal capacity of the

administrator or executor; it is only in behalf of the estate. Hence, he must be

reimbursed.

The subsidiary liability to pay the tax falls upon the heirs. Take note that the lawis very clear about it, meaning, if the administrator fails to pay, it is now the

liability of the heir.

2001 BQ

Q. Is the liability of the heirs of the decedent joint or solidary?



A. It is joint because Section 91C says the liability of the heir to pay the tax is

only up to the extent of their shares. Because of that, the liability of the heir

should be considered joint.

We go to Section 92; discharge.

If we are an executor or administrator and we want to be relieved from our liabilityto pay the estate tax, the proper procedure is to write the BIR in writing asking him

to determine now the estate tax so that we are going to pay the estate tax because

we want to be relieved from the liability to pay the estate tax as an executor or

administrator. We have to do that in one year from the filing of the return; if there

is no return yet, one year from the application.

We go to Section 93; deficiency assessment. We are through here when we reached

Section 56B.

We go to Section 94. In this section, if the judgment will distribute the propertiesto the heir, the judge holding the settlement of the estate, the requirement is that

the judge should require the presentation of the certificate of payment of the estate

tax. We do not present the receipt only. In addition, we have to present a

certification in the nature of an affidavit signed by the BIR that in reality the estate

tax has been paid already. That is certificate of payment.

Marcos vs. Sandiganbayan

273 SCRA 47

The issue is whether or not the consent of the judge holding the settlement of the

estate necessary.

The SC said the consent of the judge is not necessary for the simple reason the job

of the BIR is different from the job of the judge having jurisdiction on the

settlement of the estate.

This was asked in 1998 bar.

We go to Section 95; persons who are obliged to inform the BIR of certain acts or

execution of the documents which tends to prove the payment of the estate tax.

For instance, we are a notary public who notarized extrajudicial partition, an

attorney who filed a pleading for the settlement of the estate, a cadastral surveyor

who partitioned the property. We have to inform the BIR.

We go to Section 97; it speaks of when the decedent has bank accounts.



The requirement that the executor, administrator or the heir must be allowed to

withdraw the money, they have to present again the certification of payment of

estate tax; not only the receipt, but also the certification from the BIR officer that

in reality the estate tax has been paid. It is same requirement under Section 94.

There is an exception here. The banks, even without payment of estate tax or

presentation of certificate of payment, they allow the withdrawal of twentythousand pesos. Of course, that is enough to cover the funeral expenses.

However, if the bank account is a checking account, there is a remedy. But this is

illegal and also immoral. Text me if you want to know.

DONOR’S TAX

This is governed by Section 98 up to 104.

With regard to classification of taxpayer’s under donor’s tax, there are six. We

ought to know the formula for appreciation and easy understanding.

Formula:

Gross gift (Section 98B)

-Deductions (Section 101A, B)

Net gift (taxable gift)

X rate

Donor’s tax

-Tax Credit (if any)

However, we do not impose donor’s tax if the net estate is hundred thousand pesos

net gift; under the estate tax, it is two hundred. This time it is only one hundred ,

take note after deduction and tax credit if any.

Tax credits are found under Section 101C which refers to donor’s tax paid to a

foreign country; under Section 110B, the input tax under VAT; and Section 204,

the tax credit certificate.

Gross gifts may be real or personal, tangible or intangible.

The most favourite topic in the bar is thesplitting and thecumulative way of

donating the property. The cumulative is mentioned under Section 99A and also

Section 103A1.



Before we explain the thing, we have to determine why there is such a thing.

Under estate tax, which is a transfer tax, there is no such thing.

The reason is that there are two rates of taxes under Section 99. For donees who

are the relatives of the donors, the rate is a progressive rate of 2% to 15%. When

the donees are strangers, meaning not a relative, the rate is a flat rate of 30%.

Q. Who are the relatives here?

A. Relatives here are the brothers and the sisters, whether whole or half blood,

the spouse, ascendants, descendants; this is the first group. The second group is

the relatives by consanguinity within the fourth degree of relationships. These are

the uncles, aunties and the nephews and nieces.

Please be reminded that under Section 36B1, the second group shall not be

considered a member of the family.

Although a person is a relative, but he is not included in the first group or second

group, he is considered stranger. That is very important because the rate is 30%.

Those are the reasons why there is splitting and cumulative.

RR 2-2003 explains cumulative and splitting. When we say cumulative, several

donations were made in one calendar year. One was made in January 2006, the

other one is May 2006 and the last is August 2006. The methods of filing the

return there since it is all made in one calendar year, is cumulative. How? Under

Section 103, we have to pay within 30 days, pay-as-you-file. For May, and August,

we have to include not only the value of the property donated on May and August

but also those on January although the tax was already paid there.

In splitting, two or more donations were made in two different calendar years.

Q. If a person donated properties, one is December 2005 and the other one

is January 2006 should the value of the property donated in December 2006

be included in the return covering the calendar year 2006?

A. No, because that is splitting.

We will notice that if the done is a stranger – we would like to clarify that splitting

and cumulative applies to both strangers and relatives – but only to the matter of

splitting, cumulative or donating a property only once, it does not matter if the

done is a stranger. The rate of the tax is always 30% because the rate is flat.

What if the done is a relative? Provided that the net gift after deduction is below

ten million and depending amount of the deduction, the rate is may be from 2% to



15%. For instance, we gave a donation to our relatives and after the deductions it

is below tem million. Take note that if after donation of two or three times and if

the net gift is always above ten million, it does not matter also because the rate will

always 15%. But if in splitting, the net gift is below ten million, the rate will now

differ, depending on the amount of deductions and depending on the amount of net

gift.

Therefore, as to the matter of splitting donation, that is only material to donees

who are relatives. If the donees are a stranger, the rate shall always be 30%

because the rate is flat.

In splitting or cumulative, please take note that it can be applied to a stranger. It

may be applied but that is immaterial because the rate is always 30%. Hence, it

does not matter even if the donor’s donated once, twice or thrice. The rate will

always be 30%.

If the done is a relative and if the method used is cumulative, it is beneficial to thegovernment, because the taxpayer-donor will pay more tax. If done is a relative

and the method used is splitting, it is advantageous to the taxpayer because he

pays less tax.

To illustrate, the donation was made in January 2005, after computing the tax, it

is P7,000.00. The same amount was also donated in May 2006 to a relative. But

in filing of the return, the value of the property shall include not only the one

donated in May but also those made in January where the tax is paid already only

for the purpose of increasing the rte.

For example, the BIR said that the tax is seventeen thousand pesos for donation

made in May, the taxpayer will pay only ten thousand pesos because he has paid

the seven thousand.

If that is the method used, it follows that the rate of the tax will be increased

because it is in a cumulative because the computation is not only the property

made in May but also those made in January where the tax has been paid already.

Supposed using the same example using the splitting, let us say, December 2005,

he pays seven thousand. In January 2006, he again made a donation. This time

it is not cumulative because it is not made in the same calendar year. Using thesame example, the tax to be paid by the taxpayer is only fourteen thousand, seven

thousand for December and seven thousand for January.

1995 BQ

Q. The donor donated a property on December 27, 1993. Second donation

was made in January 6, 1994. The BIR said he should file a return for the



cumulative because the donation is only within several days; hence, those

donated in December should be included. Is the BIR correct?

A. No, because cumulative cannot be applied simply because the donations were

made in different years; one was made in 1993 and the other one is in 1994.

2001 BQ

Q. Same fact as above. But after the filing, the net gift is less than one

hundred thousand because of the deduction. The other one is below one

hundred thousand pesos. This is splitting. Do we say now that the taxpayer

will pay less?

A. No, because he is exempt from donor’s tax because the net gift for each

donation is below one hundred thousand pesos net gift.

Q. The donor donated to the Catholic Church thirty thousand pesos, is it

subject to donor’s tax?

A. No. That net gift which is less than one hundred thousand is exempt from

donor’s tax, with more reason if the gross gift is less than one hundred thousand

pesos.

Q. He donated seventy thousand pesos, is it subject to donor’s tax?

A. No. Same reason.

we go to Section 99C.

2003 BQ

Q. Is the donation to a political party exempt from donor’s tax?

A. Yes. While it is true that Section 99C did not say that whether or not it is

exempt, take note that it is being referred in the election code. In the election code

as amended in 1992, under RA 7166 Section 13 therein, if the done is a candidatefor a coalition of political party, the donation shall be exempt from donor’s tax,

provided, that the donation must be property reported to the COMELEC.

We have a statute that it is exempt provided it is duly reported to COMELEC.

Section 100 was discussed in Section 85G.



We go to 101; deductions.

We have to determine whether the donor belongs to Section 101 paragraph A or B.

But first, we have to determine who are the six persons liable for donor’s tax.

It would seem that paragraph A speaks only of one; it says “resident”. But there

are four there, only that number four is debatable and the first three is clear. First,RC, RA and DC because they are resident and the domicile of the corporation is

the Philippines, hence, they are all resident. Number 4 is NRC, he is nonresident.

However, following the pattern in Section 86a, it says that NRC should also be

classified under A because under this section, it speaks of citizens and residents.

Under B, we have two; NRA and FC.

Q. What is the importance of determining whether the taxpayer belongs to A

or B?

A. The requirement of deductibility where the done is classified under Section

101A3, there are five requirements. But if the donor is under B, the requirement

is reduced to only one.

Q. A Chinese, a RA who lives in Manila. He entered into marriage contract,

during the celebration of marriage, the father who is a permanent resident of

Taiwan, donated to the newly wed couple and assuming it is two hundred

thousand pesos. Is a dowry to be deemed a deduction?

A. No. The donor is a NRA because the facts say he is a permanent resident of Taiwan.

Since, the taxpayer belongs to B, dowry is not a deduction.

Going back to Section 101A1 we have a bar question in 1989.

1989 BQ

Q. The father of the family died. The surviving spouse entered into a

marriage contract after several years because she could no longer endure thecold mornings of November (not included in the bar question). During the

celebration of marriage, one of the children donated a property to the mother

and stepfather during the celebration of marriage. Is it a dowry which is a

deduction?



A. No. Under Section 101A1, the donor should be the father or the mother or

both. In the given facts of question, the donor is the daughter. That is not a donor

to be claimed as deduction.

We go to 101A2; donation to the national government, political subdivision,

agencies and instrumentalities of the government, not conducted for profit.

Take note of this because under Section 86A3, donation to the government must be

exclusively for public purpose. Now, it says here it is not conducted for profit.

We go to Section 101A3.

Q. What are the requirements in order that the donor to an educational or

religious entity can claim a deduction?

A. Section 101A3 provides for five requirements:

1.Not more than 30% of the property donated should be used for

administrative purposes;

2.It must be non-stock and non-profit;

3.It must be governed by trustees who does not receive any compensation;

4.The school does not pay dividend;

5.The income shall be only used in accordance in the purposes embodied in

the articles of incorporation.

The done here is not limited to educational or religious institution. The done may

be social welfare, charitable institution, educational, religious includingorganizations for the organization for the rehabilitation of the veterans.

The above requisites apply to all of them when the question is “is it a deduction”?

When it belongs to B, these five requirements are down to only one which is not

more than 30% of the property donated should be used for administrative

purposes.

Q. Why is it that the law requires that not more than 30% of the property

donated should not be used for administrative purposes?

A. If the donated property to the done is used for more than 30% of the property

for administrative purposes, the very purpose for which the donation was made will

b rendered meaningless.

We go Section 102.

In determining the value of the property donated, for purposes of the imposition of

the donor’s tax, both estate tax and donor’s tax provides for the same procedure for



personal as well as real property. They also have common rule for shares of stock

under the revenue regulation. Even under the imposition of the FIT of 6%, we also

apply the same rule.

When we say value determined by the CIR and the one determined by the City or

City Assessor, whichever is higher, normally, the one higher is the one chosen by

the Commissioner. In BIR it is known as the “zonal value”.

We have the last provision, Section 103.

The law says now the filing of the return. But what should be noted here is the

date of the payment of the tax. Tax should be paid within 30 days and the return

should be filed within 30 days. Hence, we have the “pay-as-you-file system”>

Q. Is there an extension in the filing of the return?

A. None. The extension was abolished already by the CTRP.



CHAPTER XXI

TAX REMEDIES

There are remedies for the government and there are remedies for the taxpayer.

For remedies for the government under the NIRC, we have assessment and

collection. Assessment is under Section 203 and Section 222. Collection

normally goes after the assessment.

Q. What is an assessment?

A. It is a notice from the government obliging the taxpayer to pay a tax. Maybe

the taxpayer filed a return but the tax is not enough or he filed a return but did not

pay the tax or perhaps, he did not filed a return and, of course, he did not pay the

tax.

In actual practice, a taxpayer will not receive this one unless he is a big time

taxpayer.

The right of the government to send a taxpayer a notice of assessment compelling

him to pay the tax is subject to prescriptive period of time. But in assessment and

collection under NRC, there are two kinds:

1.Normal or ordinary condition; and

2.Extraordinary or abnormal condition.



Q. What is a normal or ordinary assessment and collection?

A. Normal assessment and collection is governed by Section 203. Under normal,

there is a return filed but the return is not fraudulent and it is not false.

Q. How about abnormal assessment and collection?

A. It is found under Section 222. There was no return filed, or maybe there was

a failure or omission to file a return, or there is a return, but the return is

fraudulent or false as proven by the BIR.

Q. Why is it we have to determine whether it is under normal or abnormal?

A. Because the prescriptive period for assessment and collection differ or vary,

and, also the procedures are different.

The burden of proof on whether it is a fraudulent return or false return lies on the

part of the BIR. Therefore, if the return is erroneous in itself, it is not fraudulent

or false because the burden of proof lies on the part of the BIR.

We will notice that if the return is fraudulent or false, just the same, it is under

abnormal. The matter of whether the return is fraudulent or false does not matter

as far as prescriptive period for assessment and collection whether it is fraudulent

or it is false, just the same, it is under abnormal.

Q. What is the relevance of saying false return and fraudulent return?

A. Because in fraudulent return there is a surcharge of 50%. That does not

apply to false return.

So let us see now the prescriptive period under normal for assessment under

Section 203. The prescriptive period isthree years to be counted on the day the

return has been filed, take note, it is not counted from the day of payment but on

the date the return has been filed.

But under Section 203, there arethree ways of filing the return. First, when the

return has been filed before the deadline, for example, those using calendar year,maybe April 2. Second, if the return was filed on the deadline, meaning April 15.

Lastly, the return was made after the deadline, maybe April 27.

Q. Under these three modes of filing the return, there are how many ways of

counting the period?



A. There are two ways of counting the period. First, when the return has been

filed before of during the deadline. It should be counted on the date of the

deadline. So if the taxpayer filed the return on April 2, we count the deadline not

on April 2 but April 15. With more reason if the taxpayer filed the return on April

15. We have to count the three years on April 15, on the deadline.

But in counting the period, please take note of leap year. There are 366 days in aleap year. So if there is a leap year, the expiration is not on April 15 but on April

14.

The second mode of counting the period is when the return has been filed after the

deadline, in the example, April 27. The reckoning period is the filing of the return.

Q. A taxpayer filed a return in April 2, 2000 for the taxable year 1998 not

1999. How do you count now the prescriptive period for assessment under

normal condition?

A. On April 2, 2000 because the return was filed beyond April 15, 1999.

We do not say the prescriptive period is April 15, 2000 because the return is not

filed before the deadline; the return was filed after the deadline. Section 203 says

that if the return is filed beyond the deadline, it will be reckoned on the day the

return has been filed which is after the deadline.

We go to abnormal assessment under Section 222.

There are two options if it is under abnormal, but, take note, that these options donot apply under normal; first option, assess and then later on collect under

Section 222 first paragraph; and second, collect without assessment but only

through judicial actions.

Q. What are the periods here?

A. Let us go to the first option. The prescriptive period here is ten years to be

reckoned on the day of the discovery of the non-filing of the return, falsity or fraud.

Q. What is the prescriptive period for collection under abnormal pursuantunder the first option?

A. Section 222 paragraph C says five years from the date of final assessment.

Let us go to the second option, without assessment, there shall be collection but

only through judicial action. Since there is no assessment in this option, we

cannot discuss prescriptive period for assessment because there is none.



Prescriptive period for collection here shall be ten years from the date of the

discovery for the non-filing, fraudulent return or false return.

We go back to Section 203, the prescriptive period for collection. Unfortunately, the

Code is totally silent about it. Under the 1939, 1977 and 1985 Code, these laws

are always explicit about the prescriptive period for collection and its provisions

always provides for the prescriptive period under normal. In 1939 Tax Code, it was provided for in Section 318, in 1977 Tax Code, Section 201, in 1985 Tax Code

in Section 202. In all these Codes, the law always provides for prescriptive period

under normal which is five years from the date of the final assessment.

Therefore, it is safe to assume that the prescriptive period for collection under

normal is also five years. Also, the intent of the author shows the same

prescriptive period.

Lastly, if we are going to say that there is prescriptive period for collection under

abnormal and there is no prescriptive period under normal, it is too abnormal! It

would have been normal if it were the other way around.

So, if this will be asked in the bar, feel free to answer five years from the date of

final assessment.

Q. Under normal conditions, if the return was filed on April 15, 2000, can it

be collected in 2007?

A. We have to determine the date of final assessment. Take note that there can

only be collection under normal if there is final assessment. However, in abnormal

circumstance, there can be collection even without final assessment but onlythrough judicial action.

Q. If the final assessment is on February 2, 2001, can it be collected on

2007?

A. No. The period is way beyond five years.

Q. If the final assessment is made on 2003, can it now be collected>

A. Yes, because it is within the five year period.

Summary of Prescription

Prescription

Normal

Assessment 3 years from filing of the return

Collection 5 years from the final assessment

Abnormal



First Option:

Assessment then collect

Assessment: 10 years from the

discovery of omission, fraud of

omission, fraud or falsity

Collection: 5 years from the date of

final assessment

Second Option: Collect without assessment but

only through judicial action

10 years from the discovery ofomission, fraud or falsity. We do not

discuss the prescription of

assessment here because there is no

assessment to speak of.

Procedure for Assessment and Protest under NIRC

The procedure for assessment under Section 228 is pre-assessment and final

assessment. However, under RR 12-99, the procedure is expanded to three. Sothe procedure are the following:

1.Notice of informal conference which should be done before pre-assessment;

2.Preliminary assessment notice which is equivalent to pre-assessment; and

3.Formal letter of demand and notice to pay the tax, which is the synonym of

the final assessment.

In actual practice, the taxpayer will receive many notice of informal notice which is

final. This refers to the notice of informal notice, meaning, the prescriptive period

does not run. Unfortunately, this is not provided for by the Tax Code; this is done by virtue of custom and tradition.

Q. After receiving the notice of informal conference, what is the remedy of

the taxpayer?

A. His remedy is to file a reply within 15 days after the receipt of the notice.

Supposed the taxpayer did not file a reply, two things may happen: the BIR may

repeat the notice of informal or he will immediately issue the preliminary

assessment notice.

Q. Upon receipt of the pre-assessment notice, what is the remedy of the

taxpayer?

A. The remedy of the taxpayer is to file a reply within 15 days after the receipt of

notice. Failure to file a reply by the taxpayer, the BIR may repeat the pre-



assessment or he may declare him in default. If the taxpayer will be declared in

default, the probability is the taxpayer will now receive the final assessment.

Q. Upon the receipt of final assessment or the formal notice and demand, is

it the one appealable to the CTA?

A. No. It is not the one appealable in the CTA because of the doctrine of

exhaustion of administrative remedies. In other words, before the taxpayer may file

an appeal, he must first exhaust the administrative remedy of protest within 30

days form the receipt of the final assessment with the office of BIR. That protest is

known under the law as disputing the final assessment, or the motion for

reconsideration or the motion for reinvestigation.

Q. Supposed the taxpayer received two final assessments, one for income

tax and other one for VAT. If the taxpayer wants to file a protest only on final

assessment under income tax, is he required to pay the tax under VAT?

A. Yes. Under RR 12-99, he is required to pay the tax under VAT where he does

not intend to file a protest.

Q. Is it the so-called payment under protest?

A. No, because the taxpayer is not protesting as to the validity of the final

assessment under the VAT.

2002 BAR

Q. If the taxpayer is going to file a protest, is payment under protest

necessary?

A. Under the Section 228 of NIRC, it is not a requirement because if the taxpayer

filed a protest pursuant to the income tax, he is not obliged to pay for the income

tax. Under local taxation, under Section 195 of the LGC, payment under protest is

also not necessary. Under Section ____ of the Traffic and Custom Code, payment

under protest is also not necessary.

The only time that payment under protest is necessary is protest under real

property tax under Section 252 of the LGC. This is the only one where payment

under protest is necessary; the rest, it is not necessary.

RR 12-99 says that if the taxpayer received two or more final assessments, but if he

does not intend to file a protest on one of final assessment, before he can file a

protest, he should first file the tax in which he does not intent to file a protest.



Going back to NIRC, if the taxpayer is going to file a protest, from the day of the

filing, we have to count 60 days. This rule does not appear under the old law.

This is a standard operating procedure that the protestant should file the

necessary documents in support of his protest. Failure to file the necessary

documents within the 60-day period means that the final assessment becomes

final and executor.

For example, on the 41st day, the taxpayer filed the necessary documents. On that

same day, the 41st day, where the taxpayer had filed the necessary documents, we

have to count 180 days.

Q. What is the purpose of the 180 days?

A. The purpose is for the BIR to decide the protest.

Q. Supposed the 180-days period lapsed and the BIR failed to decide the

protest. What is the implication of the failure to decide the protest by the

BIR?

A. After the lapse of the 180 days period, Section 228 says that the taxpayer has

a remedy of filing an appeal to the CTA in relation with RA 9282.

However, Section 228 does not state the filing period after the BIR failed to decide

the protest within 180-day period of time. Nonetheless, RR 12-99 states that after

the expiration of the 180 day period, within a30 days, the taxpayer must file an

appeal to the CTA.

So whether within the period of 180 days, BIR will decide or will not decide theprotest, just the same, an appeal should be made with the CTA sitting the division

as stated in RA 8292. From the ruling of the CTA sitting in division and when the

decision is against the protestant, the remedy is to file a motion for reconsideration

from the receipt of the decision with the same division which rendered the decision.

From the ruling of the division under motion for reconsideration, an appeal, within

15 days from the receipt of the decision, shall be filed to the CTA sitting en banc.

From the ruling of the CTA sitting en banc, within 15 days from the receipt of the

decision, beginning April 23, 204, the appeal shall be made in the Supreme Court.

Prior that date, the appeal should be filed in CA.

Outline

Notice of Informal

Conference

Pre-Assessment



Final Assessment

Protest and Filing of

Documents

Appeal to CTA sitting

in division

MR to the same

division

Appeal to CTA

en banc

Appeal to SC

Protest under Local Taxation

Under Section 195 of LGC, we have the procedure for protest for local taxation.

Q. What is the procedure for protest under this action?

A. Upon receipt of the notice of assessment issued by the provincial, municipal or

city treasurer, the remedy of the taxpayer is to file a protest within 60 days from the

receipt of the assessment with the same treasurer who issued the assessment.

If the treasurer will not decide within the 60-day period, Section 195 says that the

taxpayer has the right to go to the court of competent jurisdiction and that is no

other than the RTC. Or maybe if the treasurer decides the protest within the 60-

days period, the remedy of the taxpayer is file an appeal within 30 days from the

receipt of the decision to the court of competent jurisdiction and that is no other

than the RTC.

From the decision of the RTC involving local tax cases in its appellate jurisdiction

shall be appealed in CTA sitting en banc. Take note, the CTA in this case, is

sitting in en banc. The general rule is that an appeal made in CTA, it sits indivision. There are only two cases where the CTA automatically sits en banc:

first, decision from RTC involving local tax in its appellate jurisdiction and, second,

decision of Central Board of Assessment Appeal in its appellate jurisdiction. To all

other appeals, it follows the general rule that the CTA sits in division where the

ruling of the division is not yet appealable because the taxpayer still have to file a

motion for reconsideration and the ruling therein under the said MR is not yet

appealable in the SC because the taxpayer has to file an appeal to the CTA sitting

en banc.



Outline

Notice of Assessment

Protest

Appeal to CTA sitting

en banc

Appeal to SC

Protest under Real Property Tax

Under Section 252 of LGC, if the taxpayer received a notice of assessment from the

provincial, or the city treasurer, the remedy of the taxpayer under real estate tax isto pay the tax under protest. Meaning, at the time of the payment, it must be

annotated that it is a payment under protest.

If the payment under protest will be denied by the treasurer, the remedy of the

taxpayer is to file an appeal within 120 days with the Local Board of Assessment

Appeal.

Q. Why?

A. Under Section 252 of LGC says that the remedy is the one under Chapter 3,Book II, Title if which is the one mentioned in Section 226 and 229.

From the decision of the Local Board of Assessment Appeal, within 30 days, an

appeal must be filed in Central Board of Assessment Appeal. From its ruling, the

decision is appealable in CTA sitting en banc within 30 days.

The remedy of protest under Section 252, if the assessment received by the

taxpayer under real estate tax is the one issued by the Provincial or City Assessor’s

Office, we have Section 226 again. The remedy of the taxpayer is to file an appeal

with the Local Board, then from the Local Board, same procedure with that of

Section 252.

Ramie Textile vs. McKay

The taxpayer paid a real property tax. But at the time of payment, he failed to pay

the real property tax under protest. He later on discovered that under special

statute, he is exempt from real estate tax. He filed a protest to recover the money.



The office of the treasurer denied the protest because he did not paid the tax under

protest.

Issue: Whether or not the taxpayer will be allowed to file a protest considering

that the taxpayer did not pay the tax under protest?

The SC begins by saying that we do not deny and acknowledge the requirement ofpayment under protest. But in the case at bar, this rule do not apply here

because at the time of the payment of the tax, the taxpayer believed in good faith

that he was liable and he was able to prove the same.

If a taxpayer paid the tax and he believed that he is liable, how can he pay under

protest? Basically, the taxpayer will not do that. So the requirement of payment

under protest is not absolute.

Outline

Notice of Assessment

Payment under Protest

to Treasurer City or

Provincial Assessor

Appeal to Local

Board

Appeal to Central

Board

Appeal to CTA en

Banc

Appeal to SC

Protest under Tariff and Custom Code

Section 2313 as amended by RA 7631 (there is a typing error in RA 7661 in stating

that it amend Section 2315) provides for the remedy of the taxpayers in cases of

protest.

The old Tariff and Custom Code says if the importer loses the protest, before the

office of the collector, the remedy of the importer is to file a protest before the office

of the same collector. The taxpayer must submit pleading tying to convince him



that the rate of the custom duties to be paid is what the taxpayer believed so,

based on legal grounds.

Suppose the collector denied the protest, the remedy of the importer or the

taxpayer under the Tariff and Custom Code is to file an appeal within 15 days from

the receipt of the decision of the collector denying the protest in the Office of the

Commissioner. For that manner, the decision of the Commissioner, within 30days, the taxpayer should file an appeal to the CTA sitting in division. Then we

have the same procedure: division, MR, CTA en banc then to SC.

Q. Suppose the importer wins the case to the office of the collector, of

course, the importer will no longer file an appeal because he already wins the

case, what is the proper remedy for the government?

A. The old Tariff and Custom Code provides for an automatic appeal to be filed

before the Office of the Commissioner.

In cases of forfeiture, the remedy of the importer is the same: appeal to the office

of the collector, appeal to the Commissioner, appeal to CTA sitting in Division, MR,

CTA en banc, then to SC.

Q. What is forfeiture?

A. The commodity of the importers will be confiscated if he violated the Tariff and

Custom Code and its rules and regulation. For example, the commodities are

ingredients for making illegal drugs. These commodities can be confiscated by

Custom.

If the importer does not agree with the forfeiture and says that although it is used

for manufacturing illegal drugs but it is regulated drug which is not illegal.

Suppose he loses the case in office of collector, we have the same procedure as

mentioned above.

But under the old code, aside for the remedy for forfeiture and protest, where the

government loses the case, there is only one automatic review; and automatic

review for protest. There is no automatic review for forfeiture. In 1987, former

Commissioner Padilla, he issued a memorandum circular requiring an automaticreview. In 1993, Congress enacted RA 7651. It amends Section 2313, the

requiring automatic appeal not only apply to protest but also in forfeiture. When

the government loses the case, the importer wins the case; we have an automatic

appeal under protest and forfeiture. The Congress realized the importance of

automatic appeal.



Supposed the importer lose the case in the office of the collector and government

wins the case, the remedy is to file an appeal within 15 days to the Office of the

Commissioner, then to CTA in division, MR, CTA en banc then SC.

If the government loses the case, RA 7651 provides an automatic review within five

days from the ruling of the collector.

Q. With what office?

A. It depends. If the published value of commodity is five million pesos or more,

the automatic review should be filed to the Office of the Secretary of the

Department of Finance. The ruling from the Office of the Secretary is final and

executor.

When the involved commodity in protest or in forfeiture is less than five million and

the government loses the case, meaning, the importer wins the case, the automatic

review shall be filed to the Office of the Commissioner of Custom within five days.

Two things might happen there, the Commissioner might decide the case, or he

may not decide the case within 30 day period within which to decide the automatic

appeal.

Q. Is the ruling of the Commissioner from the office of the collector still

appealable?

A. If the Commissioner reversed the ruling of the Collector, the ruling of the

Commissioner is final and executor and no longer appealable.

But when he failed to decide the case within 30 days, or he might decide the case

but he merely upheld the ruling of the collector. This decision is automatically

appealed again with the Office of Secretary of Department of Finance. Whatever

will be the ruling of the Secretary that is automatically appealed with CTA sitting

in division.

Outline – If the importer Loses the Case

Protest to Collector

Appeal to

Commissioner

Appeal to CTA in

division



Motion for

Reconsideration

Appeal to CTA en

banc

Appeal to SC

Outline – The Government Loses the Case

Decision from the

Collector

Automatic Review Automatic review to

to Commissioner - Secretary of

less than five Finance – if five

If reversed – final If upheld -

and executor Automatic Appeal

to Secretary of

Finance

Automatic review

to CTA sitting in

division

Going back to Section 228 of NIRC, while pending on protest he did not received a

decision of the protest but he received a notice of collection, this is highly

anomalous because collection can be made only if the assessment is already final

and executor.

Let us say, he received a notice of distraint and levy, the Tax Code is totally silent

about it. However, we have two SC ruling within this subject matter. We have the

cases of Yabes vs. Rojo, 115 SCRA 278 and Union Shipping Lines vs. CIR, 185

SCRA 547.

Yabes vs. Rojo115 SCRA 278

In this case, the taxpayer filed an appeal to CTA allegedly because the BIR deemed

denied the protest because instead of making a decision, it sends a notice of levy.

But almost simultaneously with the appeal filed by the taxpayer, the BIR filed an

ordinary civil action in the CFI.



When the court made a hearing, the taxpayer filed an injunction arguing that two

similar causes of action is pending on two different courts. The SC was

convinced by the taxpayer so the SC issued an injunction ordering the CFI to stop

conducting the hearing and turnover the case to CTA because the remedy availed

by the taxpayer of filing an appeal to the CTA is the proper remedy because he did

not receive the decision over his protest instead he received a notice of collection.

The SC adds that this appeal is filed on time because the counting of period on

which to file an appeal was reckoned on the day the BIR filed an ordinary civil

action in the regular court because on that day, the protest was deemed denied

when they filed an ordinary civil action for the collection of tax with the CFI.

Union Shipping Lines vs. CIR

185 SCRA 547

The taxpayer was waiting for the decision of his protest; however, he did notreceive the same. Instead, he received a notice of collection. He files a motion for

reconsideration or clarification to the BIR asking the BIR of whether or not it has

deemed denied his protest. The BIR did not reply on his motion for

reconsideration.

When he received the notice of summons, instead of answering an answer to the

complaint, he filed an appeal to the CTA stating that the tax is now being collected

in the regular court, his protest has been deemed denied.

Issue:Is the filing of an appeal to the CTA the correct remedy? Was it filed on

time?

Ruling: The SC ruled that filing of an appeal to the CTA is the correct remedy and

it is filed on the time but this time the SC did not ruled that the counting of the

period within which to file an appeal from the day the BIR filed a collection suit the

civil action for collection because if we are going to count the period on that day,

filing of the appeal will be beyond that period. To justify that the appeal was filed

on time, the SC ruled that we have to count it from the day the taxpayer received

the notice of summons.

Q. While the case is pending on appeal in CTA, can the BIR amend the final

assessment?

A. There are two schools of thought because under the Tax Code it is totally

silent. First is the case of Guerrero vs. CIR 19 SCRA 25 and also the case of

Batangas vs. Collector 102 Phil 322.



In the case of Guerrero while the case is pending appeal in the CTA, the final

assessment can be no longer amended because it is no longer the disputed one.

The disputed assessment was the one subject of protest to the Office of

Commissioner.

But in the case of Batangas, the SC ruled otherwise. It says it can be amended

although it is pending on appeal on CTA in order to avoid multiplicity of suit underthe rules of court.

With these two opinion, Justice Vitug is saying that the second one is the better

opinion, which says amendment should be allowed to avoid multiplicity of suit.

We go to Section 204, the power of the Commissioner to enter into a compromise.

Q. Can the Commissioner enter to a compromise agreement involving

criminal cases?

A. Yes, if the case is not yet filed in court, meaning to say, the case is still in the

office of the prosecutor, or if it involves fraud. In civil cases, it can be

compromised in any stage of the proceedings.

2000 Bar

Q. Supposed the BIR filed a civil case in the collection of taxes under the

NIRC in the regular court. If the ruling of the court is final and executor, can

the case still be compromised?

A. No. If that will be allowed, it will be violative of separation of power between

the judiciary and the executive.

The power of compromise, there are only two grounds: financial capacity and the

other one is on all other grounds.

Q. What is the minimum tax to be paid by the taxpayer if the ground for

compromise is financial incapacity?

A. It should be not lower than 10% of the original assessment.

To all other grounds, it should be not lesser than 40% of the original assessment.

Therefore, if the tax liability increased because of interest, surcharges and penalty,

in the matter of computing, the 10% should only be based on the basic tax without

including the interest, penalties and surcharges. We have similar rule for the 40%.



Q. Can it be lowered to 10% or 40%?

A. No, unless it is approved by the Valuation Board.

Q. What is the Valuation Board?

A. It consists of the Commissioner of the BIR including the four deputy

commissioners.

When the taxpayer claim for a refund, nowadays, it is a new rule to eradicate the

syndicate in the BIR, he has to present a proof, a receipt, that he had paid the tax

because it may happen that by virtue of technical provision, the taxpayer is entitled

to tax refund. Now, the taxpayer may only be allowed a tax refund if he had

proven that he, indeed, paid the tax.

Remedies for Collection

We go to Section 205, if the assessment is already final and executor, the taxpayer

will be notified stating among others that “xxx your final assessment is final and

executor, so please pay the tax before November 5, 2006. Xxx”. If the taxpayer

failed to pay the tax notwithstanding the notice of finality of the assessment, the

government will now collect the tax.

The remedy of the government to collect the tax is judicial and administrative

remedy. For judicial, we have civil case and criminal case; for administrative we

have levy, distraint and tax penalty under Section 280.

Q. Is there an order or a sequence for the government to avail of these

remedies?

A. None. The government can proceed on any of these remedies, judicial or

administrative, simultaneously.

Distraint of Property

When we say distraint, it is the personal property which is being compensated. We

have three kinds of distraint: constructive distraint under Section 206, distraint ofthe intangibles under Section 208 and lastly, actual distraint under Section 209.

Q. What is constructive distraint?

A. Constructive distraint involves only the listing to be made by the distraining

officer of the personal property to be distraint with a notice that the taxpayer or



any person in possession of such property should not alter or dispose the property

and he shall be obliged to sign the receipt.

Q. If he refuses to sign, what can the distraining officer do?

A. Under Section 206, it says that the distraining officer should secure the

services of two witnesses in the neighbourhood obliging them to sign the receipt

and they should not allow the taxpayer to transfer, sale or dispose the personal

property.

Q. What are the grounds of constructive distraint?

A. Under Section 206, the enumerations are the same enumeration under Section

6 paragraph D, the taxable period shortened to 12 months. We have the same

answer for grounds for constructive dismissal. So the grounds are the following:

1.When the taxpayer is retiring from business;

2.When the taxpayer intended to leave the Philippines;

3.When the taxpayer remove, hide or conceal his property; and

4.The taxpayer obstructs to collect the tax.

Those are the ground for constructive distraint. We have the same answer if the

question is “What are the grounds for the Commissioner to terminate the taxable

year?” In addition to the above, the answer will include death of the person.

Let us go to distraint of intangibles under Section 208 which refers to shares of

stock, bank accounts and debts and credits. So we do not pursue constructivedistraint on the intangibles.

With regard to the shares of stock, the warrant of distraint should be served only to

the delinquent taxpayer but also to the issuing corporation. Ordinarily, the

corporation will not allow the taxpayer to transfer, dispose or sell the shares of

stock because this is subject matter of distraint or compensation.

With regard to the bank accounts, the warrant of shall be served not only to the

taxpayer but also on the responsible officer of the bank with a warning that the

taxpayer should not be allowed to withdraw his money. But we do not say that in

bank account, the property will be sold at public auction.

Lastly, debts and credits, both creditor and debtor shall be furnished with the copy.

The third group of distraint is the actual distraint under Section 209.

For example the BIR send a notice stating that the final assessment is final and

executor. The BIR now will say, “The assessment is now final and executor, we are



now confiscating your personal property. I have with me the truck, but i am going

to take the property that will suffice the tax delinquency.”

Upon service of warrant of distraint under Section 207A, the distraining office shall

make a written report within 10 days with the BIR. So the property now will be

sold in public auction. Notice to the public shall be made by way of posting.

Publication is not required in this case. It requires posting in two conspicuousplaces stating the amount of the tax liability, penalty, interest, the place of sale and

the date and time of the sale.

In the auction sale of personal property, take note that even under statute, there is

no right of redemption. The rule is absolute, whether it is under the rules of court,

the local government code or the NIRC. There is no right of redemption if the

property being sold is a personal one.

However, the Tax Code speaks ofright of pre-emption. Section 210 says, before

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