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INCOME TAX REVIEWER

I. Definition Of Income Tax income tax law of the Phils. today


enacted to simplify & restructure certain
Income tax is referred to as - provisions of the NIRC
A tax on all yearly profits arising fr. property,
professions, trades or offices, or VAT Law (E.O. 39, 1987) : first attempt to
A tax on a persons income, emoluments, restructure tax system, tax administration
profits & the like. (FAILED)
It may be succinctly defined as a tax on SNITS (1992) : another attempt at restructuring
income, whether gross or net, realized in one
taxable year.
D. Sources of Income Tax Law: NIRC as amended

A. Nature of Income Tax


II. Meaning Of Income/ Sources/
Income tax is generally regarded as an excise tax.
It is not levied upon persons, property, funds or Kinds
profits but upon the RIGHT of a person to receive
income or profits. A. Definition of income/ differentiate fr. capital

B. Purpose of Income tax: Fiscal/Non-fiscal Sec. 36, Rev. Reg. 2


1. to provide large amounts of revenue;
1. to offset regressive sales & consumption
Income in the broad sense - all wealth w/c flows
taxes;
into the taxpayer other than as a mere return of
2. To mitigate the evils arising fr. the capital; includes the forms of income
inequalities in the distribution of income & specifically described as gains & profits, including
wealth w/c are considered deterrents to gains derived fr. the sale or other disposition of
social progress, by a progressive scheme of capital assets.
taxation.
Gross Income - income ( in the broad sense) less
Income tax is regarded as the best measure of income w/c is by statutory provision or otherwise
a persons ability to pay. exempt fr. the tax imposed by law.
Net Income - gross income less statutory
C. Brief Historical Background of Phil. deductions
Income Tax Income means -
accession to wealth
1. United States Revenue Act of 1913 gain
Extended to the Phils. w/c was then a territorial flow of wealth
possession of the US
administered & enforced by internal revenue Conwi vs. CTA 213 SCRA 83
officers of the Phil. Government
Facts: Pets., Filipino citizens &
employees of P&G, were assigned to work
2. Revenue Act of 1916, War Revenue Act of
abroad in 1970 & 1971, during w/c they were
1917
paid US $ as compensation. When they filed
amended Revenue Act of 1913 their ITR in 1970 & 1971, they computed the
tax due by applying the $-P conversion based
3. Act No. 2833 on the floating rate ordained under BIR Ruling
enacted by the Phil. legislature under authority No. 70-027. In 1973 however, they filed
conferred by 1917 Act amended ITRs for 70 & 71 using the par value
of the peso as prescribed in RA # 265. They
4. CA No. 466 ( National Internal Revenue thus claim tax refunds or tax credits, w/c was
Code of 1939) denied by CTA. It is to be noted that Pets. did
revised, amended & codified into a single tax not remit any portion of their income into the
code all the internal revenue laws embodied in Phils. during their stints abroad.
the 1939 NIRC & amendatory laws &
Issue: WON income of Pets. were still
decrees
taxable in the absence of remittances or
was amended several times
acceptance of their salaries into the country
5. PD 1158 ( NIRC of 1977) Held: Yes the foreign earnings are taxable.
Income may be defined as an amount of
consolidated & codified into a single tax
money coming to a person or corporation w/in
code all the internal revenue laws embodied in
a specified time, whether as payment for
the NIRC & amendatory laws & decrees
services, interest or profit fr. investment. The
$ earnings of Pets. are the fruit of their labors
6. PD 1994 (NIRC of 1986) in the foreign subsidiaries of P&G. It was a
APP 1
INCOME TAX REVIEWER
definite amount of money w/c came to them Held: NO. A wife may make a separate return
w/in a specified period of time of 2 years as of her own income only when she has a
payment for their services. Sec. 21 of the NIRC separate estate managed by herself as her
states that a tax shall be imposed upon own separate property & receives an income of
taxable net income received during each more than P 3T. The essential difference
taxable year fr. all sources by every individual, between capital & income is that capital is a
whether a citizen of the Phils. residing therein fund of property existing at an instant time;
or abroad. income is a flow of services rendered by that
capital by the payment of money fr. it or any
other benefit rendered by a fund of capital in
CIR vs. BOAC 149 SCRA 395 relation to such fund through a period of time.
Capital is wealth, income is service of wealth.
Facts: British Overseas Airways Corp. is
a 100% British-owned corp. organized &
existing under the laws of the UK. It had no Fisher vs. Trinidad 43 Phil 973
landing rights in the Phil. & had no CPCN . Facts: The Philippine American Drug Co.
Although it did not carry passengers &/or cargo was a duly organized corp. existing under Phil.
to or fr. the Phil., it maintained a general sales laws. Fisher was a stockholder of said
agent , Warner Barnes & Co. Ltd. & later corporation w/ a share of stock dividends
Qantas Airways w/c was responsible for selling worth P 24,800 in 1919. He was made to pay
BOAC tickets covering passengers & cargoes. under protest w/ the CIR.
CIR assessed deficiency taxes w/c was Issue: WON the stock dividends are
protested by BOAC. income & thus taxable
Issue: WON the revenue derived by Held: NO. Stock dividends are not income. An
BOAC fr. sales of tickets in the Phil. for air income is the return in money fr. ones
transportation, while having no landing rights business, labor or capital invested. Only when
here, constitute income fr. Phil. sources & a cash dividend is given or such that dividend
accordingly taxable normally payable in money, & when so paid,
Held: Income means cash received or its then only does the stockholder realize a profit
equivalent. It is the amount of money coming or gain; w/c becomes his separate property, &
to a person w/in a specific time. It is distinct fr. thus derive an income fr. the capital that he
capital, for while the latter is a fund, income is invested. Until that is done, the increased
a flow. As used in our laws, income is a flow of assets belong to the corporation & not to the
wealth. The source of an income is the individual stockholders. The stockholder who
property, activity or service that produced the receives a stock dividend has received nothing
income. For the source of income to be but a representation of his increased interest in
considered as coming fr. the Phil., it is the capital of the corporation.
sufficient that income is derived fr. activity
w/in the Phils. In BOACs case, the sale of B. Sources of Income
tickets in the Phils. is the activity that produces
the income. The tickets exchanged hands here 1. Capital/labor/exchange of capital
& payments were made in Phil currency. Thus,
the flow of wealth should share the burden of Query: What produces income?
supporting the government. Answer:

Madrigal vs. Rafferty 38 Phil 414 Commissioner vs. BOAC, supra


Facts: In Madrigals ITR, he declared his Held: The source of income is the property,
total net income to be P 296T. Subsequently, activity or service that produced the income.
he submitted a claim that said amount was the For the source of income to be considered as
income of the conjugal partnership existing coming fr. the Phil., it is sufficient that the
between himself & his wife, & that in income is derived fr. activity w/in the Phil. In
computing & assessing the additional income the case of BOAC, the sale of tickets in the Phil.
tax provided by act of Congress, the income is the activity that produces the income. The
declared should be divided into two equal tickets exchanged hands here & payments for
parts. fares were also made in Phil. currency. The
Issue: WON additional income tax site of the source of income is the Phil. & the
should be assessed by dividing income into flow of wealth proceeded fr., & occurred w/in
two equal parts, bec. of the conjugal Phil. territory, enjoying the protection accorded
partnership existing between the Madrigal by the Phil. government. Thus, said flow of
spouses wealth should share the burden of supporting
the government.

APP 2
INCOME TAX REVIEWER
ORDINARY GAIN is gain derived fr. the sale or
exchange of an asset w/c is not capital. (see S20(z)
2. Income derived fr. whatever source
supra)

SEC. 32. Gross Income. - SEC. 39. Capital Gains and Losses. -
(A) General Definition. - Except when otherwise provided in this (A) Definitions. - As used in this Title -
Title, gross income means all income derived from whatever
source, x x x (1) Capital Assets. - the term 'capital assets' means property
held by the taxpayer (whether or not connected with his trade
or business), but does not include stock in trade of the
The words used in the law disclose a legislative taxpayer or other property of a kind which would properly be
policy to include all income not expressly included in the inventory of the taxpayer if on hand at the
exempted w/in the class of taxable income close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his
under our laws, irrespective of the voluntary or
trade or business, or property used in the trade or business,
involuntary action of the taxpayer in producing
of a character which is subject to the allowance for
the gains, & whether derived fr. legal or illegal depreciation provided in Subsection (F) of Section 34; or real
sources. property used in trade or business of the taxpayer.
Income tax is source blind. (2) Net Capital Gain. - The term 'net capital gain' means the
excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges.
Queries: Why is income tax source blind? Are the
ff. items income? (3) Net Capital Loss. - The term 'net capital loss' means the
excess of the losses from sales or exchanges of capital assets
1. found treasure over the gains from such sales or exchanges.
2. punitive damages/damages for breach of (B) Percentage Taken into Account. - In the case of a taxpayer,
promise or alienation of affection other than a corporation, only the following percentages of
3. worthless bad debts subsequently collected the gain or loss recognized upon the sale or exchange of a
4. tax refund capital asset shall be taken into account in computing net
capital gain, net capital loss, and net income:
5. non-cash benefits
(1)One hundred percent (100%) if the capital asset has been
6. income fr. illegal sources held for not more than twelve (12) months; and
7. psychological benefits of work (2)Fifty percent (50%) if the capital asset has been held for
8. give-away prizes/scholarships/fellowships more than twelve (12) months;
(C) Limitation on Capital Losses. - Losses from sales or
exchanges of capital assets shall be allowed only to the extent
C. Kinds/ Classification of Income or Gain of the gains from such sales or exchanges. If a bank or trust
(not in Maams SPIT outline but I think she just omitted it
bec. she proceeded to letter D. Ella) company incorporated under the laws of the Philippines, a
substantial part of whose business is the receipt of deposits,
sells any bond, debenture, note, or certificate or other
1. Passive Income evidence of indebtedness issued by any corporation (including
one issued by a government or political subdivision thereof),
refers to those items of gross income earned by with interest coupons or in registered form, any loss resulting
the taxpayer w/o his active/direct participation from such sale shall not be subject to the foregoing limitation
in the earning process. and shall not be included in determining the applicability of
Ex. dividends, royalties, prizes & winnings such limitation to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a
Sec. 22(z), RA 8424 The term 'ordinary income' includes corporation, sustains in any taxable year a net capital loss,
any gain from the sale or exchange of property which is not a such loss (in an amount not in excess of the net income for
capital asset or property described in Section 39(A)(1). Any such year) shall be treated in the succeeding taxable year as a
gain from the sale or exchange of property which is treated or loss from the sale or exchange of a capital asset held for not
considered, under other provisions of this Title, as 'ordinary more than twelve (12) months.
income' shall be treated as gain from the sale or exchange of (E) Retirement of Bonds, Etc. - For purposes of this Title,
property which is not a capital asset as defined in Section amounts received by the holder upon the retirement of bonds,
39(A)(1). debentures, notes or certificates or other evidences of
The term 'ordinary loss' includes any loss from the sale or indebtedness issued by any corporation (including those
exchange of property which is not a capital asset. Any loss issued by a government or political subdivision thereof) with
from the sale or exchange of property which is treated or interest coupons or in registered form, shall be considered as
considered, under other provisions of this Title, as 'ordinary amounts received in exchange therefor.
loss' shall be treated as loss from the sale or exchange of (F) Gains or losses from Short Sales, Etc. - For purposes of this
property which is not a capital asset. Title -
(1) Gains or losses from short sales of property shall be
considered as gains or losses from sales or exchanges of
2. Capital Gain/Ordinary Gain capital assets; and
GAIN - transaction resulting in increases of wealth (2) Gains or losses attributable to the failure to exercise
capable of pecuniary estimation privileges or options to buy or sell property shall be
considered as capital gains or losses.
CAPITAL GAIN is the gain derived fr. the sale or
exchange of capital assets.
Sec. 6 (e), NIRC Authority of the Commissioner to
prescribe real property values .

APP 3
INCOME TAX REVIEWER
The Commissioner is hereby authorized to divide the Philippines allowance for depreciation provided in 30 (f) NIRC), will not
into different zones or areas & shall, upon consultation w/ be subject to the percentage provisions of 34(b) & losses fr.
competent appraisers both fr. private & public sectors, such transactions will not be subject to the limitations on
determine the fair market value of real properties located in losses provided in 30 (c).
each zone or area. For purposes of computing any internal
revenue tax, the value of the property shall be w/cever is
higher of: Tuazon vs. Lingad 58 SCRA 170
1. The fair market value as determined by the Commissioner, Facts: In 1948, pet. inherited 2 parcels
or
of land, w/c he subdivided into 29 lots &
2. The fair market value as shown in the schedule of values of leased 28. In 1950, he sold the lots on an
the Provl. or City Assessors.
installment basis to their occupants. Lot 29
was subsequently subdivided & paved, & were
Sec. 122, Rev. Reg. 2 Losses fr. sales or exchanges of also sold on a 10 yr. annual amortization basis.
property. No deduction is allowed in respect of losses fr.
He reported his income fr. the sale of the lots
sales of exchanges of property, directly or indirectly,-
as long-term capital gain. In 1957, he treated
1. Between members of a family (whole or half siblings,
spouse, ancestors & lineal descendants);
his income fr. the sale of the small lots as
capital gains & included only 1/2 as taxable
2. Between an individual & a corporation more than 50% in
value of the outstanding stock of w/c is owned, directly or income. He deducted the real estate dealers
indirectly by or for such individual except in the case of tax he paid in 1957 due to the rentals fr. his 28
distributions in liquidation; lots & other properties. BIR charged him w/
3. Between two corporations more than 50% in value of the deficiency income, considering the sale as
outstanding stock of each of w/c is owned, directly or ordinary gains & not capital.
indirectly, by or for the same individual, if either one of the
corps. w/ respect to the taxable year of the corp. preceding Issue: WON properties inherited by
the date of the sale or exchange was, under the law petitioner should be regarded as capital assets
applicable to such taxable year, a personal holding company
Held: NO. When pet. inherited the properties,
or a foreign personal holding company, except in the cases
of distributions in liquidation; he got not only the duty to respect any
4. Between a grantor & a fiduciary of any trust;
contract thereon but also the correlative right
to receive & enjoy the fruits of the business &
5. Between the fiduciary of a trust & the fiduciary of another
trust, if the same person is a grantor w/ respect to each the property w/c the decedent had established.
trust; or Also, pet. owned other properties w/c he
6. Between a fiduciary of a trust & a beneficiary of such trust. rented out, fr. w/c he periodically derived a
substantial income, & for w/c he had to pay
the real estate dealers tax, w/c he used to
Sec. 131, Rev. Reg. 2 Losses fr. wash sales of stock or
securities deduct fr. his gross income. Under the
a) A taxpayer cannot deduct any loss claimed to have been
circumstances, pets sale of the lots forming
sustained fr. the sale of stock or securities, if, w/in a period part of his rental business cannot be
beginning thirty days before the date of such sale or characterized as other than sales of non-
disposition & ending thirty days after such date he has capital, or ordinary assets. (remember
acquired, or has entered into a contract to acquire, exceptions in S33).
substantially identical stock or securities. However, this
prohibition does not apply in the case of a dealer in stock or
securities if the sale or other disposition of stock or securities
Calasanz vs. Com. 144 SCRA 644
is made in the ordinary course of business of such dealer XXX
Facts: Petitioner inherited fr. her father
Sec. 132, Rev. Reg. 2 Definition of capital assets . an agricultural land in Rizal. In order to
The law provides that the term capital assets shall be held to liquidate her inheritance, she had the land
mean property held by the taxpayer (WON connected w/ his surveyed, introduced improvements thereon &
trade or business) . . . Same as Sec. 33, NIRC . sold the lots at a profit. In their joint ITR, they
The term capital asset includes all classes of property not disclosed a profit of P 31,060 fr. the sale of the
specifically excluded by S30 (a). subdivided lots, & reported 50% thereof as
The exclusion fr. the term capital assets by property used in taxable capital gains. Revenue examiner
the trade or business of the taxpayer of a character w/c is adjudged pets. as engaged in business as real
subject to the allowance for depreciation in S30 (f) NIRC - estate dealers, required them to pay real
is limited to property used by the taxpayer in the trade or estate dealers tax & assessed a deficiency
business at the time of the sale or exchange (&) income tax on profits derived fr. the sale based
it has no application to gains or losses arising fr. the sale of on the rates for ordinary income.
real property used in the trade or business to the extent that
such gain or loss is allocable to the land, as distinguished fr. Issue: WON pets. are real estate dealers
depreciable improvements upon the land. liable for real estate dealers tax
To such gain or loss allocable to the land, the limitations of
WON gains realized fr. the sale of the
34(b) & (c) apply ( such limitation may be inapplicable to a
dealer in real estate, but, if so, it is bec. he holds the land lots are taxable as ordinary income
primarily for sale to customers in the ordinary course of his Held: YES in both . The activities of pet. are
trade or business, not bec. the land is subject to the no different fr. those invariably employed by
APP 4
INCOME TAX REVIEWER
one engaged in the business of selling real The increase in value, i.e., the gain, can be
estate. There was extensive development taxed only when a disposition of the property
such that pets. did not sell the land in the has occurred, w/c is of such nature as to
condition in w/c they acquired it. A constitute a realization of such gain fr. the
original capital invested in the property.
considerable amount was expended to cover
The realization of income may take the form of
the cost of the improvements. It has been
actual receipt of cash or property or
held that a property ceases to be a capital constructive receipt of the income.
asset if the amount expended to improve it is 3. The gain must not be excluded by law fr.
double its original cost, as in the CAB, for the taxation.
extensive improvements indicates that the Incomes that are exempt fr. the tax by law are
seller held the property primarily for sale to its not considered in determining gross income.
customers in the ordinary course of business. Deductions, in contrast, are subtracted fr. gross
And since they are engaged in the business of income to arrive at taxable net income.
real estate, it follows that the property sold
falls w/in the exception in the definition of 2. Recognition/ Realization of income for
capital assets in S33, NIRC. tax purposes

Gonzales vs. CTA 14 SCRA 79 Queries: When is income realized?


Facts: Expropriation proceedings were
SEC. 43. General Rule. - The taxable income shall be
conducted on property owned by petitioners, computed upon the basis of the taxpayer's annual accounting
w/c they inherited fr. their mother. Upon the period (fiscal year or calendar year, as the case may be) in
amounts received fr. the government, the pets. accordance with the method of accounting regularly employed
were ascertained to have made a capital gain in keeping the books of such taxpayer, but if no such method
of P 213,328.82 & each of them to have of accounting has been so employed, or if the method
employed does not clearly reflect the income, the
received the amount of P 89T as share in the
computation shall be made in accordance with such method
interest. Petitioners were each credited the as in the opinion of the Commissioner clearly reflects the
amount of P 86T as payment of their income income. If the taxpayer's annual accounting period is other
tax. Subsequently, pets. asked for a refund of than a fiscal year, as defined in Section 22(Q), or if the
the amount of P 24T saying that the P 89T they taxpayer has no annual accounting period, or does not keep
received as share in the interest would have books, or if the taxpayer is an individual, the taxable income
shall be computed on the basis of the calendar year.
been computed as capital gain & not ordinary
gain.
SEC. 44. Period in which Items of Gross Income Included.
Issue: WON P 89T received as interest - The amount of all items of gross income shall be included in
on the value of the land expropriated is the gross income for the taxable year in which received by the
taxable as ordinary income taxpayer, unless, under methods of accounting permitted
under Section 43, any such amounts are to be properly
Held: YES. The acquisition by the govt. of accounted for as of a different period. In the case of the
private prop. through the exercise of eminent death of a taxpayer, there shall be included in computing
domain is embraced w/in the meaning of the taxable income for the taxable period in which falls the date
term sale or disposition of property & the of his death, amounts accrued up to the date of his death if
definition of gross income in S 29. The not otherwise properly includible in respect of such period or
a prior period.
transfer of property through condemnation
proceedings is a sale or exchange & the profit
fr. the txn constitutes capital gain. However, Sec. 51, Rev. Reg. No. 2 When income is to be reported .
for income tax purposes, interest does not Gains, profits, & income are to be included in the gross income
for the taxable year in w/c they are received by the taxpayer,
form part of the price paid by the govt. & thus
UNLESS they are included when they accrue to him in
not part of capital gain. Interest is the accordance w/ the approved method of accounting followed
compensation for the delay in the return of by him.
such capital. If a person sues in one year on a pecuniary claim or for
property, & money or property is received on a judgment
therefor in a later year, income is realized in THAT YEAR,
D. Taxable Income assuming that the money or property would have been
1. Requisites for taxability income in the earliest year if then received. This is true of a
recovery for patent infringement.
Bad debts or accounts charged off subsequent to March 1,
1. There must be gain. 1913, bec. of the fact that they were determined to be
There must be in fact income. A txn whereby worthless, w/c are subsequently recovered, whether or not by
nothing of exchangeable value comes to or is suit, constitute income for THAT YEAR IN WHICH
received by the taxpayer does not give rise to RECOVERED, regardless of the date when amounts were
taxable income. charged off.
2. The gain must be realized or received.
Sec. 52, Rev. Reg. No. 2 Income constructively received.

APP 5
INCOME TAX REVIEWER
Income w/c is only in 1959 & that the rates of depreciation
credited to the account of, or applied by the BIR were unfair & inaccurate.
set apart for Issue: WON the assessment of
a taxpayer & w/c is drawn upon him at any time is subject to deficiency taxes were accurate
tax for the YEAR DURING WHICH SO CREDITED OR SET
APART, although not actually reduced to possession. Held: The assessment was valid. Pet.s denial
To constitute receipt in such a case, the income must be & explanation of the non-receipt of the
credited to the taxpayer w/o any substantial limitation or remaining unreported income for 1957 was not
restriction as to the - substantiated by the president nor by his 1957
time or manner of payment or personal income tax return in order to
condition upon w/c payment is to be made. establish that the rental income w/c he
A BOOK ENTRY, if made, should indicate an absolute transfer fr. allegedly collected & received in 1957 were
one account to another. If the income is credited but is set reported therein. The w/drawal in 1958 of the
apart, such income must be unqualifiedly subject to the deposits in court pertaining to the 1957 rental
demand of the taxpayer. income is no sufficient justification for the non-
When a corporation contingently credits Ees w/ bonus stock, declaration of said income in 1957, since the
BUT the stock is not available to such Ees until some future
deposit was resorted to due to the refusal of
date, the mere crediting on the books of the corporation does
NOT constitute receipt. pet, to accept the same, & was not the fault of
its tenants. Pet. is thus deemed to have
constructively received such rentals in 1957.
Sec. 53, Rev. Reg. No. 2 Examples of constructive
receipt
(1) Interest Coupons. When interest coupons - Republic vs. de la Rama 18 SCRA 861
have matured &
Facts: In 1951, the estate of the late
are payable,
Esteban de la Rama filed its ITR for the year
but have not been cashed,
1950. Later, BIR claims that the estate had
such interest payment, though not collected when due &
received in 1950 cash dividends fr. the De La
payable, -
Rama Steamship Co. Inc. w/c was not declared
is nevertheless available for the taxpayer &
in the ITR. BIR claims that the cash dividends
should therefore be included in his gross income for the were applied in the deceaseds account w/ the
YEAR DURING WHICH SUCH COUPONS MATURED.
former & this constituted constructive receipt
This is true if the coupons are exchanged for other property
by the estate or heirs.
instead of eventually being cashed. Defaulted coupons are
income for the year in w/c paid. Issue: WON there was constructive
(2) Share of profits. The distributive share of the profits of a payment & thus constructive receipt by the
partner in a gen. partnership duly registered is regarded as estate
received by him, although not distributed.
(3) Interest on bank deposits. Interest credited on savings bank
Held: There was no constructive receipt of the
deposits, even though the bank nominally has a rule, seldom dividends. Income tax is assessed on income
or never enforced, that it may require so many days notice in that has been received. In this case, income
advance of cashing depositors checks, is INCOME TO THE was not received due to failure to deliver,
DEPOSITOR WHEN CREDITED. either actually or constructively. The debts to
(4) Credit to shareholders of building & loan. An amount w/c they were applied were not proven to have
credited to shareholders of a bldg. & loan assoc., when such existed. The first debt was not proven to exist
credit passes w/o restriction to the shareholder, has a taxable
& the second debt was due fr. Hijos de I. de la
status as INCOME FOR THE YEAR OF THE CREDIT. Where
the amount of such accumulations has not become available Rama, an entity separate & distinct fr. the
to the shareholder until the maturity of a share, the amount principal owner thereof. Constructive delivery
of any share in excess of the aggregate amount paid in by the occurs only when it is shown that the debts to
shareholder is INCOME FOR THE YEAR OF THE MATURITY OF w/c the dividends were applied actually
THE SHARE. existed, were legally demandable &
chargeable to the deceased.
Limpan vs. Com. 17 SCRA 703 a. When is income realized?
Facts: Limpan Investment Co., a corp. Realization of income for tax purposes
engaged in leasing real properties, filed its
ITRs for 1956 & 1957. After an investigation,
b. Tests to determine realization of
the BIR found that pet. had underdeclared its
income (Lukban, pp. 44-46)
rental incomes & had claimed excessive
depreciation of its buildings. Thus deficiency
income taxes & surcharges were demanded Severance test
against them. Pet. argues that the rents in Substantial alteration of interest test
question were not received in 1957, but were Flow of wealth test
turned over by the president to the company

APP 6
INCOME TAX REVIEWER
c. Kinds/Classification of taxable
income or gain i. Gross income/ receipts/
meaning in taxation/ in
1. Capital gain (sale of capital asset)
financial accounting
2. Ordinary gain ii. Net income/ net taxable
3. Business income: Service concern/ income/ in taxation/ in
Manufacturing/Merchandising accounting
4. Income fr. trade or practice of profession iii. Presumed gain/ income
5. Passive income
6. Other forms of gain: ex. found treasure Sec. 24 (D) Capital Gains from Sale of Real Property.
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on
3. Income Tax Base/ Meaning/ Kinds the gross selling price or current fair market value as
a. Approaches in income recognition: determined in accordance with Section 6(E) of this Code,
whichever is higher, is hereby imposed upon capital gains
presumed to have been realized from the sale, exchange,
Schedular vs. global approach or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de
retro sales and other forms of conditional sales, by
Tan vs. del Rosario individuals, including estates and trusts: Provided, That the
tax liability, if any, on gains from sales or other dispositions
Facts: These are two consolidated special of real property to the government or any of its political
civil actions for prohibition challenging: 1) the subdivisions or agencies or to government-owned or
constitutionality of RA 7496, also known as the controlled corporations shall be determined either under
Simplified Net Income Taxation Scheme Section 24 (A) or under this Subsection, at the option of the
(SNITS), amending certain provisions of the taxpayer.
NIRC; 2) the validity of Sec.6, Rev. Reg. No. 2- (2) Exception. - The provisions of paragraph (1) of this
93 promulgated by the BIR pursuant to the Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or disposition
said law. Petitioners are taxpayers claiming to
of their principal residence by natural persons, the proceeds
be adversely affected by the implementation of which is fully utilized in acquiring or constructing a new
of the law. In the 1st case, the petitioners principal residence within eighteen (18) calendar months
assert that the RA violates: 1) Art. VI, Sec. from the date of sale or disposition, shall be exempt from
26(1) w/c states, Every bill passed by the the capital gains tax imposed under this Subsection:
Congress shall embrace only one subject w/c Provided, That the historical cost or adjusted basis of the
real property sold or disposed shall be carried over to the
shall be expressed in the title thereof.; 2) Art.
new principal residence built or acquired: Provided, further,
VI, Sec. 28(1) w/c states, The rule of taxation That the Commissioner shall have been duly notified by the
shall be uniform & equitable. The Congress taxpayer within thirty (30) days from the date of sale or
shall evolve a progressive system of disposition through a prescribed return of his intention to
taxation.; & 3) Art. III, Sec.1, w/c states, No avail of the tax exemption herein mentioned: Provided,
person shall be deprived of property w/o still further, That the said tax exemption can only be
availed of once every ten (10) years: Provided, finally,
due process of law, nor shall any person be that if there is no full utilization of the proceeds of sale or
denied the equal protection of the laws. In disposition, the portion of the gain presumed to have been
the 2nd case, the petitioners contend that the realized from the sale or disposition shall be subject to
BIR exceeded its rule-making authority in capital gains tax. For this purpose, the gross selling price or
implementing the Rev. Reg. fair market value at the time of sale, whichever is higher,
shall be multiplied by a fraction which the unutilized
Held: RA is constitutional; Rev. Reg. is valid. amount bears to the gross selling price in order to
Its title is sufficiently descriptive of the subject determine the taxable portion and the tax prescribed under
of the law. What may be apparent fr. the paragraph (1) of this Subsection shall be imposed thereon.
amendatory law is the legislative intent to
increasingly shift the income tax system
towards the schedular approach in the income c. Income tax rates
taxation of individual taxpayers & to maintain SEC. 24. Income Tax Rates.
the present global treatment on taxable (A) Rates of Income Tax on Individual Citizen and Individual
corporations. This classification is neither Resident Alien of the Philippines.
arbitrary nor inappropriate. Further, the due (1) An income tax is hereby imposed:
process clause may be correctly invoked only (a) On the taxable income defined in Section 31 of this Code,
when there is a clear contravention of inherent other than income subject to tax under Subsections (B), (C)
or constitutional limitations in the exercise of and (D) of this Section, derived for each taxable year from all
sources within and without the Philippines be every individual
the tax power. No such transgression is
citizen of the Philippines residing therein;
evident in the CAB.
(b) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C)
b. Bases of income tax and (D) of this Section, derived for each taxable year from all

APP 7
INCOME TAX REVIEWER
sources within the Philippines by an individual citizen of the (2) Cash and/or Property Dividends - A final tax at the following
Philippines who is residing outside of the Philippines including rates shall be imposed upon the cash and/or property
overseas contract workers referred to in Subsection(C) of dividends actually or constructively received by an individual
Section 23 hereof; and from a domestic corporation or from a joint stock company,
(c) On the taxable income defined in Section 31 of this Code, insurance or mutual fund companies and regional operating
other than income subject to tax under Subsections (b), (C) headquarters of multinational companies, or on the share of
and (D) of this Section, derived for each taxable year from all an individual in the distributable net income after tax of a
sources within the Philippines by an individual alien who is a partnership (except a general professional partnership) of
resident of the Philippines. which he is a partner, or on the share of an individual in the
net income after tax of an association, a joint account, or a
The tax shall be computed in accordance with and at the rates
joint venture or consortium taxable as a corporation of which
established in the following schedule:
he is a member or co-venturer:
Not over P10,000 5%
Over P10,000 but not over P30,000P500+10% of the Six percent (6%) beginning January 1, 1998;
excess over P10,000
Eight percent (8%) beginning January 1, 1999;
Over P30,000 but not over P70,000P2,500+15% of the
Ten percent (10% beginning January 1, 2000.
excess over P30,000
Over P70,000 but not over P140,000 P8,500+20% of the
excess over P70,000 Provided, however, That the tax on dividends shall apply only on
income earned on or after January 1, 1998. Income forming
Over P140,000 but not over P250,000 P22,500+25% of the
part of retained earnings as of December 31, 1997 shall not,
excess over P140,000
even if declared or distributed on or after January 1, 1998, be
Over P250,000 but not over P500,000 P50,000+30% of the subject to this tax.
excess over P250,000
(C) Capital Gains from Sale of Shares of Stock not Traded in the
Over P500,000 . P125,000+34% of the Stock Exchange. - The provisions of Section 39(B)
excess over P500,000 in 1998. notwithstanding, a final tax at the rates prescribed below is
Provided, That effective January 1, 1999, the top marginal rate hereby imposed upon the net capital gains realized during the
shall be thirty-three percent (33%) and effective January 1, taxable year from the sale, barter, exchange or other
2000, the said rate shall be thirty-two percent (32%). disposition of shares of stock in a domestic corporation,
For married individuals, the husband and wife, subject to the except shares sold, or disposed of through the stock
provision of Section 51 (D) hereof, shall compute separately exchange.
their individual income tax based on their respective total Not over P100,000.. 5%
taxable income: Provided, That if any income cannot be On any amount in excess of P100,000 10%
definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be
divided equally between the spouses for the purpose of (D) Capital Gains from Sale of Real Property. -
determining their respective taxable income. (1) In General. - The provisions of Section 39(B)
(B) Rate of Tax on Certain Passive Income. notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax
in accordance with Section 6(E) of this Code, whichever is
at the rate of twenty percent (20%) is hereby imposed upon
higher, is hereby imposed upon capital gains presumed to
the amount of interest from any currency bank deposit and
have been realized from the sale, exchange, or other
yield or any other monetary benefit from deposit substitutes
disposition of real property located in the Philippines,
and from trust funds and similar arrangements; royalties,
classified as capital assets, including pacto de retro sales and
except on books, as well as other literary works and musical
other forms of conditional sales, by individuals, including
compositions, which shall be imposed a final tax of ten
estates and trusts: Provided, That the tax liability, if any, on
percent (10%); prizes (except prizes amounting to Ten
gains from sales or other dispositions of real property to the
thousand pesos (P10,000) or less which shall be subject to
government or any of its political subdivisions or agencies or
tax under Subsection (A) of Section 24; and other winnings
to government-owned or controlled corporations shall be
(except Philippine Charity Sweepstakes and Lotto winnings),
determined either under Section 24 (A) or under this
derived from sources within the Philippines: Provided,
Subsection, at the option of the taxpayer.
however, That interest income received by an individual
taxpayer (except a nonresident individual) from a depository (3) Exception. - The provisions of paragraph (1) of this
bank under the expanded foreign currency deposit system Subsection to the contrary notwithstanding, capital gains
shall be subject to a final income tax at the rate of seven and presumed to have been realized from the sale or disposition
one-half percent (7 1/2%) of such interest income: Provided, of their principal residence by natural persons, the proceeds
further, That interest income from long-term deposit or of which is fully utilized in acquiring or constructing a new
investment in the form of savings, common or individual trust principal residence within eighteen (18) calendar months
funds, deposit substitutes, investment management accounts from the date of sale or disposition, shall be exempt from
and other investments evidenced by certificates in such form the capital gains tax imposed under this Subsection:
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be Provided, That the historical cost or adjusted basis of the
exempt from the tax imposed under this Subsection: Provided, real property sold or disposed shall be carried over to the
finally, That should the holder of the certificate pre-terminate new principal residence built or acquired: Provided, further,
the deposit or investment before the fifth (5 th) year, a final tax That the Commissioner shall have been duly notified by the
shall be imposed on the entire income and shall be deducted taxpayer within thirty (30) days from the date of sale or
and withheld by the depository bank from the proceeds of the disposition through a prescribed return of his intention to
long-term deposit or investment certificate based on the avail of the tax exemption herein mentioned: Provided, still
remaining maturity thereof: further, That the said tax exemption can only be availed of
once every ten (10) years: Provided, finally, that if there is
Four (4) years to less than five (5) years - 5%;
no full utilization of the proceeds of sale or disposition, the
Three (3) years to less than (4) years - 12%; and portion of the gain presumed to have been realized from
Less than three (3) years - 20% the sale or disposition shall be subject to capital gains tax.

APP 8
INCOME TAX REVIEWER
For this purpose, the gross selling price or fair market value shall be subject to the tax prescribed under Subsections (C)
at the time of sale, whichever is higher, shall be multiplied and (D) of Section 24.
by a fraction which the unutilized amount bears to the (B) Nonresident Alien Individual Not Engaged in Trade or
gross selling price in order to determine the taxable portion Business Within the Philippines. - There shall be levied,
and the tax prescribed under paragraph (1) of this collected and paid for each taxable year upon the entire
Subsection shall be imposed thereon. income received from all sources within the Philippines by
every nonresident alien individual not engaged in trade or
SEC. 25. Tax on Nonresident Alien Individual. - business within the Philippines as interest, cash and/or
property dividends, rents, salaries, wages, premiums,
(A) Nonresident Alien Engaged in trade or Business Within the
annuities, compensation, remuneration, emoluments, or other
Philippines. -
fixed or determinable annual or periodic or casual gains,
(1) In General. - A nonresident alien individual engaged in trade profits, and income, and capital gains, a tax equal to twenty-
or business in the Philippines shall be subject to an income five percent (25%) of such income. Capital gains realized by a
tax in the same manner as an individual citizen and a resident nonresident alien individual not engaged in trade or business
alien individual, on taxable income received from all sources in the Philippines from the sale of shares of stock in any
within the Philippines. A nonresident alien individual who shall domestic corporation and real property shall be subject to the
come to the Philippines and stay therein for an aggregate income tax prescribed under Subsections (C) and (D) of
period of more than one hundred eighty (180) days during Section 24.
any calendar year shall be deemed a 'nonresident alien doing
(C) Alien Individual Employed by Regional or Area Headquarters
business in the Philippines'. Section 22 (G) of this Code
and Regional Operating Headquarters of Multinational
notwithstanding.
Companies. - There shall be levied, collected and paid for
(2) Cash and/or Property Dividends from a Domestic each taxable year upon the gross income received by every
Corporation or Joint Stock Company, or Insurance or Mutual alien individual employed by regional or area headquarters
Fund Company or Regional Operating Headquarter or and regional operating headquarters established in the
Multinational Company, or Share in the Distributable Net Philippines by multinational companies as salaries, wages,
Income of a Partnership (Except a General Professional annuities, compensation, remuneration and other
Partnership), Joint Account, Joint Venture Taxable as a emoluments, such as honoraria and allowances, from such
Corporation or Association., Interests, Royalties, Prizes, and regional or area headquarters and regional operating
Other Winnings. - Cash and/or property dividends from a headquarters, a tax equal to fifteen percent (15%) of such
domestic corporation, or from a joint stock company, or from gross income: Provided, however, That the same tax
an insurance or mutual fund company or from a regional treatment shall apply to Filipinos employed and occupying the
operating headquarter of multinational company, or the share same position as those of aliens employed by these
of a nonresident alien individual in the distributable net multinational companies. For purposes of this Chapter, the
income after tax of a partnership (except a general term 'multinational company' means a foreign firm or entity
professional partnership) of which he is a partner, or the engaged in international trade with affiliates or subsidiaries or
share of a nonresident alien individual in the net income after branch offices in the Asia-Pacific Region and other foreign
tax of an association, a joint account, or a joint venture markets.
taxable as a corporation of which he is a member or a co-
(D) Alien Individual Employed by Offshore Banking Units. -
venturer; interests; royalties (in any form); and prizes (except
There shall be levied, collected and paid for each taxable year
prizes amounting to Ten thousand pesos (P10,000) or less
upon the gross income received by every alien individual
which shall be subject to tax under Subsection (B)(1) of
employed by offshore banking units established in the
Section 24) and other winnings (except Philippine Charity
Philippines as salaries, wages, annuities, compensation,
Sweepstakes and Lotto winnings); shall be subject to an
remuneration and other emoluments, such as honoraria and
income tax of twenty percent (20%) on the total amount
allowances, from such off-shore banking units, a tax equal to
thereof: Provided, however, that royalties on books as well as
fifteen percent (15%) of such gross income: Provided,
other literary works, and royalties on musical compositions
however, That the same tax treatment shall apply to Filipinos
shall be subject to a final tax of ten percent (10%) on the
employed and occupying the same positions as those of aliens
total amount thereof: Provided, further, That cinematographic
employed by these offshore banking units.
films and similar works shall be subject to the tax provided
under Section 28 of this Code: Provided, furthermore, That (E) Alien Individual Employed by Petroleum Service Contractor
interest income from long-term deposit or investment in the and Subcontractor. - An Alien individual who is a permanent
form of savings, common or individual trust funds, deposit resident of a foreign country but who is employed and
substitutes, investment management accounts and other assigned in the Philippines by a foreign service contractor or
investments evidenced by certificates in such form prescribed by a foreign service subcontractor engaged in petroleum
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from operations in the Philippines shall be liable to a tax of fifteen
the tax imposed under this Subsection: Provided, finally, that percent (15%) of the salaries, wages, annuities,
should the holder of the certificate pre-terminate the deposit compensation, remuneration and other emoluments, such as
or investment before the fifth (5 th) year, a final tax shall be honoraria and allowances, received from such contractor or
imposed on the entire income and shall be deducted and subcontractor: Provided, however, That the same tax
withheld by the depository bank from the proceeds of the treatment shall apply to a Filipino employed and occupying
long-term deposit or investment certificate based on the the same position as an alien employed by petroleum service
remaining maturity thereof: contractor and subcontractor.
Any income earned from all other sources within the Philippines
Four (4) years to less than five (5) years - 5%; by the alien employees referred to under Subsections (C), (D)
and (E) hereof shall be subject to the pertinent income tax, as
Three (3) years to less than four (4) years - 12%; and
the case may be, imposed under this Code.
Less than three (3) years - 20%.

SEC. 26. Tax Liability of Members of General Professional


(3) Capital Gains. - Capital gains realized from sale, barter or Partnerships. - A general professional partnership as such
exchange of shares of stock in domestic corporations not shall not be subject to the income tax imposed under this
traded through the local stock exchange, and real properties Chapter. Persons engaging in business as partners in a

APP 9
INCOME TAX REVIEWER
general professional partnership shall be liable for income tax such as raw materials used, direct labor and manufacturing
only in their separate and individual capacities. overhead, freight cost, insurance premiums and other costs
For purposes of computing the distributive share of the incurred to bring the raw materials to the factory or
partners, the net income of the partnership shall be computed warehouse.
in the same manner as a corporation. In the case of taxpayers engaged in the sale of service, 'gross
Each partner shall report as gross income his distributive share, income' means gross receipts less sales returns, allowances
actually or constructively received, in the net income of the and discounts.
partnership.
(B) Proprietary Educational Institutions and Hospitals. -
CHAPTER IV - TAX ON CORPORATIONS Proprietary educational institutions and hospitals which are
nonprofit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof:
SEC. 27. Rates of Income tax on Domestic Corporations. Provided, that if the gross income from unrelated trade,
- business or other activity exceeds fifty percent (50%) of the
(A) In General. - Except as otherwise provided in this Code, an total gross income derived by such educational institutions or
income tax of thirty-five percent (35%) is hereby imposed hospitals from all sources, the tax prescribed in Subsection
upon the taxable income derived during each taxable year (A) hereof shall be imposed on the entire taxable income. For
from all sources within and without the Philippines by every purposes of this Subsection, the term 'unrelated trade,
corporation, as defined in Section 22(B) of this Code and business or other activity' means any trade, business or other
taxable under this Title as a corporation, organized in, or activity, the conduct of which is not substantially related to
existing under the laws of the Philippines: Provided, That the exercise or performance by such educational institution or
effective January 1, 1998, the rate of income tax shall be hospital of its primary purpose or function. A 'Proprietary
thirty-four percent (34%); effective January 1, 1999, the rate educational institution' is any private school maintained and
shall be thirty-three percent (33%); and effective January 1, administered by private individuals or groups with an issued
2000 and thereafter, the rate shall be thirty-two percent permit to operate from the Department of Education, Culture
(32%). and Sports (DECS), or the Commission on Higher Education
In the case of corporations adopting the fiscal-year accounting (CHED), or the Technical Education and Skills Development
period, the taxable income shall be computed without regard Authority (TESDA), as the case may be, in accordance with
to the specific date when specific sales, purchases and other existing laws and regulations.
transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally (C) Government-owned or Controlled-Corporations, Agencies or
for each month of the period. Instrumentalities. - The provisions of existing special or
The reduced corporate income tax rates shall be applied on the general laws to the contrary notwithstanding, all corporations,
amount computed by multiplying the number of months agencies, or instrumentalities owned or controlled by the
covered by the new rates within the fiscal year by the taxable Government, except the Government Service Insurance
income of the corporation for the period, divided by twelve. System (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the Philippine
Provided, further, That the President, upon the recommendation Charity Sweepstakes Office (PCSO) and the Philippine
of the Secretary of Finance, may effective January 1, 2000, Amusement and Gaming Corporation (PAGCOR), shall pay
allow corporations the option to be taxed at fifteen percent such rate of tax upon their taxable income as are imposed by
(15%) of gross income as defined herein, after the following this Section upon corporations or associations engaged in s
conditions have been satisfied: similar business, industry, or activity.
(1) A tax effort ratio of twenty percent (20%) of Gross National
Product (GNP);
(D) Rates of Tax on Certain Passive Incomes. -
(2) A ratio of forty percent (40%) of income tax collection to
total tax revenues; (1) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes and from Trust Funds and
(3) A VAT tax effort of four percent (4%) of GNP; and Similar Arrangements, and Royalties. - A final tax at the rate
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector of twenty percent (20%) is hereby imposed upon the amount
Financial Position (CPSFP) to GNP. of interest on currency bank deposit and yield or any other
The option to be taxed based on gross income shall be available monetary benefit from deposit substitutes and from trust
only to firms whose ratio of cost of sales to gross sales or funds and similar arrangements received by domestic
receipts from all sources does not exceed fifty-five percent corporations, and royalties, derived from sources within the
(55%). Philippines: Provided, however, That interest income derived
by a domestic corporation from a depository bank under the
The election of the gross income tax option by the corporation
expanded foreign currency deposit system shall be subject to
shall be irrevocable for three (3) consecutive taxable years
a final income tax at the rate of seven and one-half percent (7
during which the corporation is qualified under the scheme.
1/2%) of such interest income.
For purposes of this Section, the term 'gross income' derived
(2) Capital Gains from the Sale of Shares of Stock Not
from business shall be equivalent to gross sales less sales
Traded in the Stock Exchange . - A final tax at the rates
returns, discounts and allowances and cost of goods sold.
prescribed below shall be imposed on net capital gains
"Cost of goods sold' shall include all business expenses
realized during the taxable year from the sale, exchange or
directly incurred to produce the merchandise to bring them to
other disposition of shares of stock in a domestic corporation
their present location and use.
except shares sold or disposed of through the stock
For a trading or merchandising concern, 'cost of goods' sold exchange:
shall include the invoice cost of the goods sold, plus import
Not over P100,000. 5%
duties, freight in transporting the goods to the place where
the goods are actually sold, including insurance while the Amount in excess of P100,000.. 10%
goods are in transit. (3) Tax on Income Derived under the Expanded Foreign
For a manufacturing concern, 'cost of goods manufactured and Currency Deposit System . - Income derived by a
sold' shall include all costs of production of finished goods, depository bank under the expanded foreign currency deposit

APP 10
INCOME TAX REVIEWER
system from foreign currency transactions with local In the case of taxpayers engaged in the sale of service, 'gross
commercial banks, including branches of foreign banks that income' means gross receipts less sales returns, allowances,
may be authorized by the Bangko Sentral ng Pilipinas (BSP) to discounts and cost of services. 'Cost of services' shall mean all
transact business with foreign currency depository system direct costs and expenses necessarily incurred to provide the
units and other depository banks under the expanded foreign services required by the customers and clients including (A)
currency deposit system, including interest income from salaries and employee benefits of personnel, consultants and
foreign currency loans granted by such depository banks specialists directly rendering the service and (B) cost of
under said expanded foreign currency deposit system to facilities directly utilized in providing the service such as
residents, shall be subject to a final income tax at the rate of depreciation or rental of equipment used and cost of supplies:
ten percent (10%) of such income. Provided, however, That in the case of banks, 'cost of
Any income of nonresidents, whether individuals or services' shall include interest expense.
corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax. SEC. 28. Rates of Income Tax on Foreign Corporations.
(4) Intercorporate Dividends. - Dividends received by a (A) Tax on Resident Foreign Corporations.
domestic corporation from another domestic corporation shall (1) In General. - Except as otherwise provided in this Code, a
not be subject to tax. corporation organized, authorized, or existing under the laws of
(5) Capital Gains Realized from the Sale, Exchange or any foreign country, engaged in trade or business within the
Disposition of Lands and/or Buildings. - A final tax of six Philippines, shall be subject to an income tax equivalent to
percent (6%) is hereby imposed on the gain presumed to thirty-five percent (35%) of the taxable income derived in the
have been realized on the sale, exchange or disposition of preceding taxable year from all sources within the Philippines:
lands and/or buildings which are not actually used in the provided, That effective January 1, 1998, the rate of income tax
business of a corporation and are treated as capital assets, shall be thirty-four percent (34%); effective January 1, 1999,
based on the gross selling price of fair market value as the rate shall be thirty-three percent (33%), and effective
determined in accordance with Section 6(E) of this Code, January 1, 2000 and thereafter, the rate shall be thirty-two
whichever is higher, of such lands and/or buildings. percent (32%).
In the case of corporations adopting the fiscal-year accounting
(E) Minimum Corporate Income Tax on Domestic Corporations. - period, the taxable income shall be computed without regard
(1) Imposition of Tax. - A minimum corporate income tax of two to the specific date when sales, purchases and other
percent (2%0 of the gross income as of the end of the transactions occur. Their income and expenses for the fiscal
taxable year, as defined herein, is hereby imposed on a year shall be deemed to have been earned and spent equally
corporation taxable under this Title, beginning on the fourth for each month of the period.
taxable year immediately following the year in which such The reduced corporate income tax rates shall be applied on the
corporation commenced its business operations, when the amount computed by multiplying the number of months
minimum income tax is greater than the tax computed under covered by the new rates within the fiscal year by the taxable
Subsection (A) of this Section for the taxable year. income of the corporation for the period, divided by twelve.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the Provided, however, That a resident foreign corporation shall be
minimum corporate income tax over the normal income tax as granted the option to be taxed at fifteen percent (15%) on
computed under Subsection (A) of this Section shall be carried gross income under the same conditions, as provided in
forward and credited against the normal income tax for the Section 27 (A).
three (3) immediately succeeding taxable years. (2) Minimum Corporate Income Tax on Resident Foreign
(3) Relief from the Minimum Corporate Income Tax Under Corporations. - A minimum corporate income tax of two
Certain Conditions. - The Secretary of Finance is hereby percent (2%) of gross income, as prescribed under Section 27
authorized to suspend the imposition of the minimum (E) of this Code, shall be imposed, under the same conditions,
corporate income tax on any corporation which suffers losses on a resident foreign corporation taxable under paragraph (1)
on account of prolonged labor dispute, or because of force of this Subsection.
majeure, or because of legitimate business reverses. (3) International Carrier. - An international carrier doing
The Secretary of Finance is hereby authorized to promulgate, business in the Philippines shall pay a tax of two and one-half
upon recommendation of the Commissioner, the necessary percent (2 1/2%) on its 'Gross Philippine Billings' as defined
rules and regulation that shall define the terms and conditions hereunder:
under which he may suspend the imposition of the minimum (a) International Air Carrier. - 'Gross Philippine Billings' refers to
corporate income tax in a meritorious case. the amount of gross revenue derived from carriage of
(4) Gross Income Defined. - For purposes of applying the persons, excess baggage, cargo and mail originating from the
minimum corporate income tax provided under Subsection (E) Philippines in a continuous and uninterrupted flight,
hereof, the term 'gross income' shall mean gross sales less irrespective of the place of sale or issue and the place of
sales returns, discounts and allowances and cost of goods payment of the ticket or passage document: Provided, That
sold. "Cost of goods sold' shall include all business expenses tickets revalidated, exchanged and/or indorsed to another
directly incurred to produce the merchandise to bring them to international airline form part of the Gross Philippine Billings if
their present location and use. the passenger boards a plane in a port or point in the
For a trading or merchandising concern, 'cost of goods sold' Philippines: Provided, further, That for a flight which
shall include the invoice cost of the goods sold, plus import originates from the Philippines, but transshipment of
duties, freight in transporting the goods to the place where passenger takes place at any port outside the Philippines on
the goods are actually sold including insurance while the another airline, only the aliquot portion of the cost of the
goods are in transit. ticket corresponding to the leg flown from the Philippines to
the point of transshipment shall form part of Gross Philippine
For a manufacturing concern, cost of 'goods manufactured and
Billings.
sold' shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing (b) International Shipping. - 'Gross Philippine Billings' means
overhead, freight cost, insurance premiums and other costs gross revenue whether for passenger, cargo or mail
incurred to bring the raw materials to the factory or originating from the Philippines up to final destination,
warehouse. regardless of the place of sale or payments of the passage or
freight documents.

APP 11
INCOME TAX REVIEWER
Not over P100,000 5%
(4) Offshore Banking Units. - The provisions of any law to the On any amount in excess of P100,000. 10%
contrary notwithstanding, income derived by offshore banking (d) Intercorporate Dividends. - Dividends received by a resident
units authorized by the Bangko Sentral ng Pilipinas (BSP) to foreign corporation from a domestic corporation liable to tax
transact business with offshore banking units, including any under this Code shall not be subject to tax under this Title.
interest income derived from foreign currency loans granted
to residents, shall be subject to a final income tax at the rate
of ten percent (10%) of such income. (B) Tax on Nonresident Foreign Corporation. -
Any income of nonresidents, whether individuals or (1) In General. - Except as otherwise provided in this Code, a
corporations, from transactions with said offshore banking foreign corporation not engaged in trade or business in the
units shall be exempt from income tax. Philippines shall pay a tax equal to thirty-five percent (35%)
of the gross income received during each taxable year from all
(5) Tax on Branch Profits Remittances. - Any profit remitted by
sources within the Philippines, such as interests, dividends,
a branch to its head office shall be subject to a tax of fifteen
rents, royalties, salaries, premiums (except reinsurance
(15%) which shall be based on the total profits applied or
premiums), annuities, emoluments or other fixed or
earmarked for remittance without any deduction for the tax
determinable annual, periodic or casual gains, profits and
component thereof (except those activities which are
income, and capital gains, except capital gains subject to tax
registered with the Philippine Economic Zone Authority). The
under subparagraphs (C) and (d): Provided, That effective 1,
tax shall be collected and paid in the same manner as
1998, the rate of income tax shall be thirty-four percent
provided in Sections 57 and 58 of this Code: provided, that
(34%); effective January 1, 1999, the rate shall be thirty-
interests, dividends, rents, royalties, including remuneration
three percent (33%); and, effective January 1, 2000 and
for technical services, salaries, wages premiums, annuities,
thereafter, the rate shall be thirty-two percent (32%).
emoluments or other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains received by a (2) Nonresident Cinematographic Film Owner, Lessor or
foreign corporation during each taxable year from all sources Distributor. - A cinematographic film owner, lessor, or
within the Philippines shall not be treated as branch profits distributor shall pay a tax of twenty-five percent (25%) of its
unless the same are effectively connected with the conduct of gross income from all sources within the Philippines.
its trade or business in the Philippines. (3) Nonresident Owner or Lessor of Vessels Chartered by
(6) Regional or Area Headquarters and Regional Operating Philippine Nationals. - A nonresident owner or lessor of
Headquarters of Multinational Companies. vessels shall be subject to a tax of four and one-half percent
(4 1/2%) of gross rentals, lease or charter fees from leases or
(a) Regional or area headquarters as defined in Section 22(DD)
charters to Filipino citizens or corporations, as approved by
shall not be subject to income tax.
the Maritime Industry Authority.
(b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their taxable (4) Nonresident Owner or Lessor of Aircraft, Machineries and
income. Other Equipment. - Rentals, charters and other fees derived
by a nonresident lessor of aircraft, machineries and other
(7) Tax on Certain Incomes Received by a Resident Foreign
equipment shall be subject to a tax of seven and one-half
Corporation. -
percent (7 1/2%) of gross rentals or fees.
(a) Interest from Deposits and Yield or any other Monetary
(5) Tax on Certain Incomes Received by a Nonresident Foreign
Benefit from Deposit Substitutes, Trust Funds and Similar
Corporation.
Arrangements and Royalties. - Interest from any currency
bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar (a) Interest on Foreign Loans. - A final withholding tax at the
arrangements and royalties derived from sources within the rate of twenty percent (20%) is hereby imposed on the
Philippines shall be subject to a final income tax at the rate of amount of interest on foreign loans contracted on or after
twenty percent (20%) of such interest: Provided, however, August 1, 1986;
That interest income derived by a resident foreign corporation (b) Intercorporate Dividends. - A final withholding tax at the
from a depository bank under the expanded foreign currency rate of fifteen percent (15%) is hereby imposed on the
deposit system shall be subject to a final income tax at the amount of cash and/or property dividends received from a
rate of seven and one-half percent (7 1/2%) of such interest domestic corporation, which shall be collected and paid as
income. provided in Section 57 (A) of this Code, subject to the
(b) Income Derived under the Expanded Foreign Currency condition that the country in which the nonresident foreign
Deposit System. - Income derived by a depository bank under corporation is domiciled, shall allow a credit against the tax
the expanded foreign currency deposit system from foreign due from the nonresident foreign corporation taxes deemed to
currency transactions with local commercial banks including have been paid in the Philippines equivalent to twenty percent
branches of foreign banks that may be authorized by the (20%) for 1997, nineteen percent (19%) for 1998, eighteen
Bangko Sentral ng Pilipinas (BSP) to transact business with percent (18%) for 1999, and seventeen percent (17%)
foreign currency deposit system units, including interest thereafter, which represents the difference between the
income from foreign currency loans granted by such regular income tax of thirty-five percent (35%) in 1997,
depository banks under said expanded foreign currency thirty-four percent (34%) in 1998, and thirty-three percent
deposit system to residents, shall be subject to a final income (33%) in 1999, and thirty-two percent (32%) thereafter on
tax at the rate of ten percent (10%) of such income. corporations and the fifteen percent (15%) tax on dividends
Any income of nonresidents, whether individuals or as provided in this subparagraph;
corporations, from transactions with depository banks under (c) Capital Gains from Sale of Shares of Stock not Traded in the
the expanded system shall be exempt from income tax. Stock Exchange. - A final tax at the rates prescribed below is
(c) Capital Gains from Sale of Shares of Stock Not Traded in the hereby imposed upon the net capital gains realized during the
Stock Exchange. - A final tax at the rates prescribed below is taxable year from the sale, barter, exchange or other
hereby imposed upon the net capital gains realized during the disposition of shares of stock in a domestic corporation,
taxable year from the sale, barter, exchange or other except shares sold, or disposed of through the stock
disposition of shares of stock in a domestic corporation except exchange:
shares sold or disposed of through the stock exchange: Not over P100,000.. 5%

APP 12
INCOME TAX REVIEWER
On any amount in excess of P100,000 10% exemptions, if any, authorized for such types of income by
this Code or other special laws.
SEC. 29. Imposition of Improperly Accumulated Earnings
Tax. - INDIVIDUAL: citizens: resident (NET/WORLDWIDE)
(A) In General. - In addition to other taxes imposed by this Title,
non resident (NET/ WITHIN)
there is hereby imposed for each taxable year on the
improperly accumulated taxable income of each corporation OCW (NET/WITHIN)
described in Subsection B hereof, an improperly accumulated alien: resident (NET/WITHIN)
earnings tax equal to ten percent (10%) of the improperly
non-resident engaged in trade or
accumulated taxable income.
business (NET/WITHIN)
(B) Tax on Corporations Subject to Improperly Accumulated
Earnings Tax. -
non-resident not engaged in trade/
business (GROSS/ WITHIN)
(1) In General. - The improperly accumulated earnings tax
imposed in the preceding Section shall apply to every
corporation formed or availed for the purpose of avoiding CORPORATIONS: domestic (NET/WORLDWIDE)
the income tax with respect to its shareholders or the foreign resident doing business
shareholders of any other corporation, by permitting
(NET /WITHIN)
earnings and profits to accumulate instead of being divided
or distributed. non-resident (not doing business)
(2) Exceptions. - The improperly accumulated earnings tax as
GROSS/ WITHIN
provided for under this Section shall not apply to:
(a) Publicly-held corporations; ESTATES and TRUSTS treated as ind. TP
(b) Banks and other nonbank financial intermediaries; and tax rate on ordinary income/ tax rate for capital
(c) Insurance companies. gain
regular tax rate/ special tax rates
(C) Evidence of Purpose to Avoid Income Tax. - final tax creditable tax
(1) Prima Facie Evidence. - the fact that any corporation is a withholding tax
mere holding company or investment company shall be prima
facie evidence of a purpose to avoid the tax upon its flat rate/ graduation of tax rates
shareholders or members. min marginal rate / max marginal rate
(2) Evidence Determinative of Purpose. - The fact that the automatic increase of tax rates by 1999 and
earnings or profits of a corporation are permitted to 2000
accumulate beyond the reasonable needs of the business shall
be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by the clear 4. Accounting periods & methods of
preponderance of evidence, shall prove to the contrary. accounting for taxable income &
(D) Improperly Accumulated Taxable Income. - For purposes of deductible expenses
this Section, the term 'improperly accumulated taxable
income' means taxable income' adjusted by:
(1) Income exempt from tax; a. Calendar year/ fiscal year
(2) Income excluded from gross income; Accounting period: The accounting period is the
(3) Income subject to final tax; and taxable year. It is a fixed period of time, consisting
(4) The amount of net operating loss carry-over deducted; of 12 months, upon the basis of w/c the taxable
income is computed & the income tax imposed.

And reduced by the sum of:


Sec. 22. Definitions.
(1) Dividends actually or constructively paid; and
(P) The term 'taxable year' means the calendar year, or the
(2) Income tax paid for the taxable year.
fiscal year ending during such calendar year, upon the basis
Provided, however, That for corporations using the calendar of which the net income is computed under this Title. 'Taxable
year basis, the accumulated earnings under tax shall not apply year' includes, in the case of a return made for a fractional
on improperly accumulated income as of December 31, 1997. part of a year under the provisions of this Title or under rules
In the case of corporations adopting the fiscal year accounting and regulations prescribed by the Secretary of Finance, upon
period, the improperly accumulated income not subject to this recommendation of the commissioner, the period for which
tax, shall be reckoned, as of the end of the month comprising such return is made.
the twelve (12)-month period of fiscal year 1997-1998.
(Q) The term 'fiscal year' means an accounting period of
twelve (12) months ending on the last day of any month other
than December.
Classification of tax payers: INDIVIDUAL/
(R) The terms 'paid or incurred' and 'paid or accrued' shall be
CORPORATION/ ESTATE and TRUST construed according to the method of accounting upon the
basis of which the net income is computed under this Title.

CHAPTER VIII - ACCOUNTING PERIODS AND METHODS


SEC. 31. Taxable Income Defined. - The term taxable OF ACCOUNTING
income means the pertinent items of gross income specified in
this Code, less the deductions and/or personal and additional

APP 13
INCOME TAX REVIEWER
SEC. 43. General Rule. - The taxable income shall be adjustment return is required or permitted by rules and
computed upon the basis of the taxpayer's annual accounting regulations prescribed by the Secretary of Finance, upon
period (fiscal year or calendar year, as the case may be) in recommendation of the Commissioner, to be made for a
accordance with the method of accounting regularly employed fractional part of a year, then the income shall be computed
in keeping the books of such taxpayer, but if no such method on the basis of the period for which separate final or
of accounting has been so employed, or if the method adjustment return is made.
employed does not clearly reflect the income, the
computation shall be made in accordance with such method
When is income to be reported?
as in the opinion of the Commissioner clearly reflects the
income. If the taxpayer's annual accounting period is other Income constructively received
than a fiscal year, as defined in Section 22(Q), or if the
taxpayer has no annual accounting period, or does not keep Sec. 51, Rev. Reg. No. 2 When income is to be reported .
books, or if the taxpayer is an individual, the taxable income
shall be computed on the basis of the calendar year. Gains, profits, & income are to be included in the gross income
for the taxable year in w/c they are received by the taxpayer,
UNLESS they are included when they accrue to him in
SEC. 44. Period in which Items of Gross Income Included. accordance w/ the approved method of accounting followed
- The amount of all items of gross income shall be included in by him.
the gross income for the taxable year in which received by the If a person sues in one year on a pecuniary claim or for
taxpayer, unless, under methods of accounting permitted property, & money or property is received on a judgment
under Section 43, any such amounts are to be properly therefor in a later year, income is realized in THAT YEAR,
accounted for as of a different period. In the case of the assuming that the money or property would have been
death of a taxpayer, there shall be included in computing income in the earliest year if then received. This is true of a
taxable income for the taxable period in which falls the date recovery for patent infringement.
of his death, amounts accrued up to the date of his death if
Bad debts or accounts charged off subsequent to March 1,
not otherwise properly includible in respect of such period or
1913, bec. of the fact that they were determined to be
a prior period.
worthless, w/c are subsequently recovered, whether or not by
suit, constitute income for THAT YEAR IN WHICH
SEC. 45. Period for which Deductions and Credits Taken. RECOVERED, regardless of the date when amounts were
- The deductions provided for in this Title shall be taken for charged off.
the taxable year in which 'paid or accrued' or 'paid or
incurred', dependent upon the method of accounting the basis
Sec. 52, Rev. Reg. No. 2 Income constructively received.
of which the net income is computed, unless in order to
clearly reflect the income, the deductions should be taken as Income w/c is
of a different period. In the case of the death of a taxpayer, credited to the account of, or
there shall be allowed as deductions for the taxable period in set apart for
which falls the date of his death, amounts accrued up to the
date of his death if not otherwise properly allowable in respect a taxpayer & w/c is drawn upon him at any time is subject to
of such period or a prior period. tax for the YEAR DURING WHICH SO CREDITED OR SET
APART, although not actually reduced to possession.
To constitute receipt in such a case, the income must be
SEC. 46. Change of Accounting Period. If a taxpayer, other credited to the taxpayer w/o any substantial limitation or
than an individual, changes his accounting period from fiscal restriction as to the -
year to calendar year, from calendar year to fiscal year, or
from one fiscal year to another, the net income shall, with the time or manner of payment or
approval of the Commissioner, be computed on the basis of condition upon w/c payment is to be made.
such new accounting period, subject to the provisions of A BOOK ENTRY, if made, should indicate an absolute transfer fr.
Section 47. one account to another. If the income is credited but is set
apart, such income must be unqualifiedly subject to the
SEC. 47. Final or Adjustment Returns for a Period of Less demand of the taxpayer.
than Twelve (12) Months. When a corporation contingently credits Ees w/ bonus stock,
BUT the stock is not available to such Ees until some future
date, the mere crediting on the books of the corporation does
(A) Returns for Short Period Resulting from Change of NOT constitute receipt.
Accounting Period. - If a taxpayer, other than an individual,
with the approval of the Commissioner, changes the basis
of computing net income from fiscal year to calendar year, Sec. 53, Rev. Reg. No. 2 Examples of constructive
a separate final or adjustment return shall be made for the receipt
period between the close of the last fiscal year for which (1) Interest Coupons. When interest coupons -
return was made and the following December 31. If the
have matured &
change is from calendar year to fiscal year, a separate final
or adjustment return shall be made for the period between are payable,
the close of the last calendar year for which return was but have not been cashed,
made and the date designated as the close of the fiscal such interest payment, though not collected when due &
year. If the change is from one fiscal year to another fiscal payable, -
year, a separate final or adjustment return shall be made
is nevertheless available for the taxpayer &
for the period between the close of the former fiscal year
and the date designated as the close of the new fiscal year. should therefore be included in his gross income for the
YEAR DURING WHICH SUCH COUPONS MATURED.
(B) Income Computed on Basis of Short Period. - Where a
separate final or adjustment return is made under This is true if the coupons are exchanged for other property
Subsection (A) on account of a change in the accounting instead of eventually being cashed. Defaulted coupons are
period, and in all other cases where a separate final or income for the year in w/c paid.

APP 14
INCOME TAX REVIEWER
(2) Share of profits. The distributive share of the profits of a such new method for purposes of taxation, secure the consent
partner in a gen. partnership duly registered is regarded as of the Commissioner of Internal Revenue. For the purposes
received by him, although not distributed. of this section, a change in the method of accounting
(3) Interest on bank deposits. Interest credited on savings bank employed in keeping books means any change in the
deposits, even though the bank nominally has a rule, seldom accounting treatment of items of income or deductions, such
or never enforced, that it may require so many days notice in as a change fr. cash receipts & disbursements method to the
advance of cashing depositors checks, is INCOME TO THE accrual method, or vice versa; a change involving the basis of
DEPOSITOR WHEN CREDITED. valuation employed in the computation of inventories; a
change fr. the cash or accrual method to the long-term
(4) Credit to shareholders of building & loan. An amount
contract method, or vice versa; a change in the long-term
credited to shareholders of a bldg. & loan assoc., when such
contract method fr. the percentage of completion basis to the
credit passes w/o restriction to the shareholder, has a taxable
complete contract basis, or vice versa; or a change involving
status as INCOME FOR THE YEAR OF THE CREDIT. Where
the adoption of, or a change in the use of, any other
the amount of such accumulations has not become available
specialized basis of computing net income such as the crop
to the shareholder until the maturity of a share, the amount
basis. Application for permission to change the method of
of any share in excess of the aggregate amount paid in by the
accounting employed & the basis upon w/c the return is made
shareholder is INCOME FOR THE YEAR OF THE MATURITY OF
shall be filed w/in 90 days after the beginning of the taxable
THE SHARE.
year to be covered by the return. The application shall be
accompanied by a statement specifying all amounts w/c would
Revenue Regulation #2 Provisions be duplicated or entirely omitted as a result of the proposed
Sec. 166. General Rule . The method of accounting change. Permission to change the method of accounting will
regularly employed by the taxpayer in keeping his books, if not be granted unless the taxpayer & the Commissioner of
such method clearly reflects his income is to be followed w/ Internal Revenue agree to the terms & conditions under w/c
respect to the time as of w/c items of gross income & the change will be effected.
deductions are to be accounted for. If the taxpayer does not
regularly employ a method of accounting w/c clearly reflects Sec. 169. Accounting period. Income tax returns, whether
his income, the computation shall be made in such manner as for individuals or for corporations, associations, or
in the opinion of the Commissioner of Internal Revenue clearly partnerships, are required to be made & their income
reflects it. computed for each calendar year ending on December 31 st of
every year. However, corporations, associations, or
Sec. 167. Methods of accounting. It is recognized that no partnerships may w/ the approval of the Commissioner of
uniform method of accounting can be prescribed for all Internal Revenue first secured, file their returns & compute
taxpayers, & the law contemplates that each taxpayer shall their income on the basis of a fiscal year w/c means an
adopt such forms & systems of accounting as are in his accounting period of twelve months ending on the last day of
judgment best suited to his purpose. Each taxpayer is any month other than December. But in no instance shall
required by law to make a return of his true income. He individual taxpayers be authorized to establish a fiscal year as
must, therefore, maintain such accounting records as will basis for filing their returns & computing their income.
enable him to do so. Any approved standard method of
accounting w/c reflects taxpayers income may be adopted. Sec. 170. When included in gross income. Except as
Among the essentials are the following: otherwise provided in section 39 in the case of the death of a
In all cases in w/c the production, purchase, or sale of taxpayer, gains, profits, & income are to be included in the
merchandise of any kind is an income-producing factor, gross income for the taxable year in w/c they are received by
inventories of the merchandise on hand (including finished the taxpayer, unless they are included as of a different period
goods, work in process, raw materials, & supplies) should be in accordance w/ the approved method of accounting followed
taken at the beginning & end of the year & used in computing by him. If a taxpayer has died, there shall also be included in
the net income of the year in accordance w/ sections 144 to computing net income for the taxable period in w/c he died
151 of these regulations. amounts accrued up to the date of his death if not otherwise
Expenditures made during the year should be properly classified properly includible [allowable] in respect of such period or a
as between capital & income; that is to say, expenditures for prior period, regardless of the fact that the decedent may
items of plant, equipment, etc., w/c have a useful life have kept his books & made his returns on the basis of cash
extending substantially beyond the year should be charged to receipts & disbursements.
a capital account & not to an expense account; &
In any case in w/c the cost of capital assets is being recovered Sec. 171. Paid or incurred & paid or accrued. The
through deductions for wear & tear, depletion, or terms paid or incurred & paid or accrued will be construed
obsolescence, any expenditure (other than ordinary repairs) according to the method of accounting upon the basis of w/c
made to restore the property or prolong its useful life should the net income is computed by the taxpayer. The deductions
be added to the property account or charged against the & credits must be taken for the taxable year in w/c paid or
appropriate reserve & not to current expenses. accrued or paid or incurred, unless in order clearly to
reflect the income such deductions or credits should be taken
as of a different period. If a taxpayer desires to claim a
Sec. 168. Changes in accounting methods . The true deduction or a credit as of a period other than the period in
income, computed under the law, shall in all cases be entered w/c it was paid or accrued or paid or incurred, he shall
in the return. If for any reason the basis of reporting income attach to his return a statement setting forth his request for
subject to tax is changed, the taxpayer shall attach to his consideration of the case by the Commissioner of Internal
return a separate statement setting forth for the taxable year Revenue together w/ a complete statement of the facts upon
& for the preceding year the classes of items differently w/c he relies. However, in his income tax return he shall take
treated under the two systems, specifying in particular all the deduction or credit only for the taxable period in w/c it
amounts duplicated or entirely omitted as the result of such was actually paid or incurred, or paid or accrued, as the
change case may be. Upon the audit of the return, the Commissioner
A taxpayer who changes the method of accounting employed in of Internal revenue will decide whether the case is w/in the
keeping his book shall, before computing his income upon exception provided by the law, & the taxpayer will be advised

APP 15
INCOME TAX REVIEWER
as to the period for w/c the deduction or credit is properly or to be realized when payment is completed, bears to the
allowable. total contract price.
The provisions of paragraph (a) of this section in general are not (B) Sales of Realty and Casual Sales of Personality. - In the case
applicable w/ respect to the taxable period during w/c the (1) of a casual sale or other casual disposition of personal
taxpayer dies. In such case, there shall also be allowed as property (other than property of a kind which would properly
deductions & credits for such taxable period amounts accrued be included in the inventory of the taxpayer if on hand at the
& credits for such taxable period amounts accrued up to the close of the taxable year), for a price exceeding One thousand
date of his death if not otherwise allowable w/ respect to such pesos (P1,000), or (2) of a sale or other disposition of real
period or a prior period, regardless of the fact that the property, if in either case the initial payments do not exceed
decedent was required to keep his books & make his returns twenty-five percent (25%) of the selling price, the income
on the basis of cash receipts & disbursements. may, under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner, be returned on the basis and in the manner
Sec. 172. Change of accounting period. If a corporation,
above prescribed in this Section. As used in this Section, the
including a duly registered general co-partnership, desires to
term 'initial payments' means the payments received in cash
change its accounting period fr. fiscal year to calendar year or
or property other than evidences of indebtedness of the
fr. calendar year to fiscal year, or fr. one fiscal year to
purchaser during the taxable period in which the sale or other
another, it shall at any time not less than thirty days prior to
disposition is made.
the date fixed in section 46(b) of the Code for the filing of its
return on the basis of its original accounting period submit a (C) Sales of Real Property Considered as Capital Asset by
written application to the Commissioner of Internal Revenue Individuals. - An individual who sells or disposes of real
designating the proposed date for the closing of its new property, considered as capital asset, and is otherwise
taxable year, together w/ a statement of the date on w/c the qualified to report the gain therefrom under Subsection (B)
books of account were opened & closed each year for the may pay the capital gains tax in installments under rules and
past three year, the date on w/c the taxable year began & regulations to be promulgated by the Secretary of Finance,
ended as shown on the returns filed for the past three years, upon recommendation of the Commissioner.
& the reasons why the change in accounting period is desired. (D) Change from Accrual to Installment Basis. - If a taxpayer
entitled to the benefits of Subsection (A) elects for any
taxable year to report his taxable income on the installment
basis, then in computing his income for the year of change or
b. How is income recognized under any subsequent year, amounts actually received during any
the ff. situations: such year on account of sales or other dispositions of property
made in any prior year shall not be excluded.
SEC. 50. Allocation of Income and Deductions. - In the
i. Long-term contracts case of two or more organizations, trades or businesses
(whether or not incorporated and whether or not organized in
the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to
SEC. 48. Accounting for Long-term Contracts. - Income
distribute, apportion or allocate gross income or deductions
from long-term contracts shall be reported for tax purposes in
between or among such organization, trade or business, if he
the manner as provided in this Section. As used herein, the
determined that such distribution, apportionment or allocation
term 'long-term contracts' means building, installation or
is necessary in order to prevent evasion of taxes or clearly to
construction contracts covering a period in excess of one (1)
reflect the income of any such organization, trade or business.
year. Persons whose gross income is derived in whole or in
part from such contracts shall report such income upon the
basis of percentage of completion. The return should be
accompanied by a return certificate of architects or engineers iii. Termination of
showing the percentage of completion during the taxable year
of the entire work performed under contract. There should be
leasehold
deducted from such gross income all expenditures made
during the taxable year on account of the contract, account
being taken of the material and supplies on hand at the RR # 2. Sec. 49. Improvements by lessees ---When
beginning and end of the taxable period for use in connection buildings are erected or improvements made by a lessee in
with the work under the contract but not yet so applied. If pursuance of an agreement w/ the lessor & such buildings or
upon completion of a contract, it is found that the taxable net improvements are not subject to removal by the lessee, the
income arising thereunder has not been clearly reflected for lessor may at his option report the income therefr. upon
any year or years, the Commissioner may permit or require an either of the following bases:
amended return. (a) The lessor may report as income at the time when such
buildings or improvements are completed the fair market
value of such buildings or improvements subject to the lease.
ii. Installment sales (completion basis)
(b) The lessor may spread over the life of the lease the
estimated depreciated value of such buildings or
SEC. 49. Installment Basis. improvements at the termination of the lease & report as
income for each of the lease an adequate part thereof. ( Pro-
(A) Sales of Dealers in Personal Property. - Under rules and
rated basis)
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, a person who regularly If for any other reason than a bona fide purchase fr. the lessee
sells or otherwise disposes of personal property on the by the lessor, the lease is terminated so that the lessor comes
installment plan may return as income therefrom in any into possession or control of the prop. prior to the time
taxable year that proportion of the installment payments originally fixed for the termination of the lease, the lessor
actually received in that year, which the gross profit realized receives additional income for the year in w/c the lease is so
terminated to the extent that the value of such buildings or
improvements when he became entitled to such possession

APP 16
INCOME TAX REVIEWER
exceeds the amount already reported as income on account of 9. Prizes & winnings;
the erection of such buildings or improvements. No 10. Pensions; &
appreciation in value due to causes other than the premature
11. Partners distributive share of the gross income of
termination of the lease shall be included. Conversely, if the
general professional partnership.
bldg. or improvements are destroyed prior to the expiration of
the lease, the lessor is entitled to deduct as loss for the year (b) Exclusions fr. gross income . The following items shall
when such destruction takes place the amount previously not be included in gross income & shall be exempt fr. taxation
reported as income bec. of the erection of such buildings or under this Title:
improvements, less any salvage value subject to the lease to 1. Life insurance. The proceeds of life insurance policies paid
the extent that such loss was not compensated for by to the heirs or beneficiaries upon the death of the insured,
insurance. If the bldgs. or improvements destroyed were whether in a single sum or otherwise, but if such amounts are
acquired prior to March 1, 1013, the deduction shall be based held by the insurer under an agreement to pay interest
on the cost or the value subject to the lease to the extent thereon, the interest payments shall be included in gross
that such loss was not compensated for by insurance. income.
(2) Amount Received by Insured as Return of Premium. - The
amount received by the insured, as a return of premiums paid
c. Recording income & expense/ by him under life insurance, endowment, or annuity contracts,
Keeping of books either during the term or at the maturity of the term
mentioned in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. _ The value of property
i. Computing gross/ net acquired by gift, bequest, devise, or descent: Provided,
income however, That income from such property, as well as gift,
bequest, devise or descent of income from any property, in
ii. Allocating income & cases of transfers of divided interest, shall be included in
expense gross income.
iii. Matching principle/ cash (4) Compensation for Injuries or Sickness. - amounts received,
method/ accrual/ mixed through Accident or Health Insurance or under Workmen's
Compensation Acts, as compensation for personal injuries or
iv. Acctg. method w/c clearly sickness, plus the amounts of any damages received, whether
reflects income by suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the
extent required by any treaty obligation binding upon the
Sec. 22 (R), NIRC. The terms 'paid or incurred' and 'paid Government of the Philippines.
or accrued' shall be construed according to the method of (6) Retirement Benefits, Pensions, Gratuities, etc.-
accounting upon the basis of which the net income is
computed under this Title.
(a) Retirement benefits received under Republic Act No. 7641
and those received by officials and employees of private firms,
whether individual or corporate, in accordance with a
v. Differences bet. tax acctg./
reasonable private benefit plan maintained by the employer:
financial acctg. Provided, That the retiring official or employee has been in
the service of the same employer for at least ten (10) years
and is not less than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits granted under
III. ITEMS OF GROSS INCOME AND this subparagraph shall be availed of by an official or
EXCLUSIONS employee only once. For purposes of this Subsection, the
term 'reasonable private benefit plan' means a pension,
gratuity, stock bonus or profit-sharing plan maintained by an
Sec. 31. Taxable income Defined . The term taxable employer for the benefit of some or all of his officials or
income means the pertinent items of gross income specified employees, wherein contributions are made by such employer
in this Code, less the deductions, and/ or personal and for the officials or employees, or both, for the purpose of
additional exemptions if any, authorized by such types of distributing to such officials and employees the earnings and
income by this Code or other special laws. principal of the fund thus accumulated, and wherein its is
provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to,
Sec. 32. Gross Income.
any purpose other than for the exclusive benefit of the said
(a) General definition. Gross income means all income fr. officials and employees.
whatever source derived, including (but not limited to) the
(b) Any amount received by an official or employee or by his
following items:
heirs from the employer as a consequence of separation of
1. Compensation for services in whatever form paid, including such official or employee from the service of the employer
fees, salaries, wages, commissions, & similar items; because of death sickness or other physical disability or for
2. Gross income derived fr. the conduct of trade or business or any cause beyond the control of the said official or employee.
the exercise of profession; (c) The provisions of any existing law to the contrary
3. Gains derived fr. dealings in property; notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or
4. Interests; nonresident citizens of the Philippines or aliens who come to
5. Rents; reside permanently in the Philippines from foreign government
6. Royalties; agencies and other institutions, private or public.
7. Dividends;
8. Annuities;

APP 17
INCOME TAX REVIEWER
(d) Payments of benefits due or to become due to any person (h) Gains from Redemption of Shares in Mutual Fund. -
residing in the Philippines under the laws of the United States Gains realized by the investor upon redemption of shares
administered by the United States Veterans Administration. of stock in a mutual fund company as defined in Section
(e) Benefits received from or enjoyed under the Social Security 22 (BB) of this Code.
System in accordance with the provisions of Republic Act No.
8282.
(f) Benefits received from the GSIS under Republic Act No. A. Income fr. whatever source derived
8291, including retirement gratuity received by government
officials and employees.
1. Income tax is source blind.
(7) Miscellaneous Items.
2. Treatment of special items:
(a) Income Derived by Foreign Government. - Income derived
from investments in the Philippines in loans, stocks, bonds or a. Recovery of accounts
other domestic securities, or from interest on deposits in previously written off
banks in the Philippines by (i) foreign governments, (ii)
financing institutions owned, controlled, or enjoying b. Forgiveness of indebtedness
refinancing from foreign governments, and (iii) international (Sec. 50 RR 2)
or regional financial institutions established by foreign
governments. c. Tax refunds
(b) Income Derived by the Government or its Political d. Found treasure
Subdivisions. - Income derived from any public utility or from
the exercise of any essential governmental function accruing
to the Government of the Philippines or to any political
3. Items of gross income
subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational,
A. Compensation for services,
artistic, literary, or civic achievement but only if:
including fees, commission & similar
(i) The recipient was selected without any action on his
items
part to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future
services as a condition to receiving the prize or award. 1. Taxable compensation income
Pursuant to an Er-Ee relationship
(d) Prizes and Awards in sports Competition. - All prizes and
awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines Sec.32 (A), NIRC. See above.
or abroad and sanctioned by their national sports
associations.
Sec. 2.78 1 (A) RR 2-98
(e) 13th Month Pay and Other Benefits. - Gross benefits received
by officials and employees of public and private entities:
Provided, however, That the total exclusion under this De Leon:
subparagraph shall not exceed Thirty thousand pesos
(P30,000) which shall cover: Compensation for personal services is usually
made in money but it may also be paid for in
(i) Benefits received by officials and employees of the national
and local government pursuant to Republic Act No. 6686; kind, or both in money & kind
If payment is made in cash, the full amount
(ii) Benefits received by employees pursuant to Presidential
received is subject to tax.
Decree No. 851, as amended by Memorandum Order No. 28,
dated August 13, 1986; If services are paid for w/ something other than
money, the FMV of the thing taken in payment
(iii) Benefits received by officials and employees not covered by
Presidential decree No. 851, as amended by Memorandum
is the amount to be included as income.
Order No. 28, dated August 13, 1986; and If the services were rendered at a stipulated
price, in the absence of evidence to the
(iv) Other benefits such as productivity incentives and
Christmas bonus: Provided, further, That the ceiling of Thirty
contrary, such price shall be presumed to be
thousand pesos (P30,000) may be increased through rules the FMV of the compensation received.
and regulations issued by the Secretary of Finance, upon Examples of compensation in kind:
recommendation of the Commissioner, after considering 1. Compensation paid in company stocks is to
among others, the effect on the same of the inflation rate at be treated as if the company had sold the
the end of the taxable year. stock for its FMV & paid the EE in cash.
2. Where living quarters are furnished in
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, addition to a cash salary, the rental value
Medicare and Pag-ibig contributions, and union dues of should be reported as income.
individuals. 3. When meals are given an EE, the value
(g) Gains from the Sale of Bonds, Debentures or other thereof constitutes income subject to tax.
Certificate of Indebtedness. - Gains realized from the same or
4. Promissory notes &/or other evidences of
exchange or retirement of bonds, debentures or other
indebtedness constitute income according to
certificate of indebtedness with a maturity of more than five
(5) years.
the amount of their FMV.

APP 18
INCOME TAX REVIEWER
a. Factors to consider in income (8) Holiday and vacation expenses;
recognition: (9) Educational assistance to the employee or his dependents;
and
i. Convenience of the employer
(10) Life or health insurance and other non-life insurance
rule premiums or similar amounts in excess of what the law
allows.
Sec. 2.78 1(A-2, 6a) , RR 2-98
(C) Fringe Benefits Not Taxable. - The following fringe
benefits are not taxable under this Section:
ii. Factor of restricted preference
(1) fringe benefits which are authorized and exempted from tax
iii. Forced savings / forced under special laws;
consumption (2) Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization benefit
plans;
b. Treatment of the following
(3) Benefits given to the rank and file employees, whether
compensation income: granted under a collective bargaining agreement or not; and
i. Fringe benefits to managerial & (4) De minimis benefits as defined in the rules and regulations
supervisory Ees EXCLUDED to be promulgated by the Secretary of Finance, upon
FR. COMPENSATION INCOME/ recommendation of the Commissioner.
taxed separately. The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, such rules and
regulations as are necessary to carry out efficiently and fairly
SEC. 33. Special Treatment of Fringe Benefit.- the provisions of this Section, taking into account the peculiar
(A) Imposition of Tax.- A final tax of thirty-four percent nature and special need of the trade, business or profession
(34%) effective January 1, 1998; thirty-three percent (33%) of the employer.
effective January 1, 1999; and thirty-two percent (32%)
effective January 1, 2000 and thereafter, is hereby imposed
on the grossed-up monetary value of fringe benefit furnished Revenue Regulation 3-98
or granted to the employee (except rank and file employees
as defined herein) by the employer, whether an individual or a ii. Fringe benefits not taxable:
corporation (unless the fringe benefit is required by the nature
of, or necessary to the trade, business or profession of the
See Sec. 33 C above.
employer, or when the fringe benefit is for the convenience or iii. Treatment of the ff. items for
advantage of the employer). The tax herein imposed is rank & file Ees:
payable by the employer which tax shall be paid in the same
manner as provided for under Section 57 (A) of this Code.
The grossed-up monetary value of the fringe benefit shall be 1. Non-cash benefits: free use of facilities
determined by dividing the actual monetary value of the fringe
benefit by sixty-six percent (66%) effective January 1, 1998; 2. Meals & lodging/ living quarters
sixty-seven percent (67%) effective January 1, 1999; and 3. Imputed rent/ use of household durable
sixty-eight percent (68%) effective January 1, 2000 and 4. transportation / representation & living
thereafter: Provided, however, That fringe benefit furnished to allowance
employees and taxable under Subsections (B), (C), (D) and
(E) of Section 25 shall be taxed at the applicable rates 5. other fringe benefits
imposed thereat: Provided, further, That the grossed -Up
value of the fringe benefit shall be determined by dividing the
Meaning of rank & file:
actual monetary value of the fringe benefit by the difference
between one hundred percent (100%) and the applicable
rates of income tax under Subsections (B), (C), (D), and (E) Sec. 22 (AA), NIRC. The term 'rank and file employees'
of Section 25. shall mean all employees who are holding neither managerial
nor supervisory position as defined under existing provisions
of the Labor Code of the Philippines, as amended.
(B) Fringe Benefit defined.- For purposes of this Section, the
term 'fringe benefit' means any good, service or other Sec. 2.78-1 RR 2-98
benefit furnished or granted in cash or in kind by an employer
to an individual employee (except rank and file employees as
defined herein) such as, but not limited to, the following: Exempt fr. Tax
(1) Housing;
(2) Expense account; Collector vs. Henderson
(3) Vehicle of any kind; Facts: Arthur Henderson is the president of
(4) Household personnel, such as maid, driver and others; the American International Underwriters for
(5) Interest on loan at less than market rate to the extent of the Philippines w/c represents a group of
the difference between the market rate and actual rate American insurance companies engaged in the
granted; business of general insurance (except life
6) Membership fees, dues and other expenses borne by the insurance). He receives a basic annual salary
employer for the employee in social and athletic clubs or
of P30,000 & allowance for house rental &
other similar organizations;
utilities (light, water, telephone, etc.).
(7) Expenses for foreign travel;
Although he & his wife are childless & are only

APP 19
INCOME TAX REVIEWER
two in the family, they lived in a large the company decided to give the heirs the
apartment provided for by his employer. As proceeds out of gratitude.
company president, he & his wife had to
entertain & put up houseguests for the
company. The BIR now seeks to collect taxes c. Income earner & the applicable
on the allowances for rental & utilities tax rates
expenses.
Held: The exigencies of Hendersons high i. Regular compensation
executive position, not to mention social income modified gross
standing, demanded & compelled them to live
in a more spacious & pretentious quarters like
the ones they had occupied. Although Only ind. taxpayers earn comp. income
entertaining & putting up houseguests & Applicable rates:
guests of the ER were not Hendersons
predominant occupation as president, he & his Citizens, Res Alien & Non-Res. Alien
wife had to do so. That is why his ER engaged in trade or business:
(corporation) had to grant him allowances for
rental & utilities in addition to his annual basic SEC. 24. Income Tax Rates.
salary in order to take care of those extra
(A) Rates of Income Tax on Individual Citizen and Individual
expenses for rental & utilities in excess of their Resident Alien of the Philippines.
personal needs. Hence, the fact that the (1) An income tax is hereby imposed:
taxpayers had to live or did not have to live in
the apartments chosen by the ER is of no
(a) On the taxable income defined in Section 31 of this Code,
moment, for no part of the allowances in other than income subject to tax under Subsections (B), (C)
question redounded to their personal benefit or and (D) of this Section, derived for each taxable year from all
was retained by them. Their bills for rental & sources within and without the Philippines be every individual
utilities were paid directly by the ER to the citizen of the Philippines residing therein;
creditors. Henderson is entitle to a ratable (b) On the taxable income defined in Section 31 of this Code,
value of the allowances, & only a reasonable other than income subject to tax under Subsections (B), (C)
amount they would have spent for house and (D) of this Section, derived for each taxable year from all
sources within the Philippines by an individual citizen of the
rentals & utilities should be the amount subject
Philippines who is residing outside of the Philippines including
to tax, & the excess considered as expenses of overseas contract workers referred to in Subsection(C) of
the corporation. Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (b), (C)
Pirovano vs. Commissioner and (D) of this Section, derived for each taxable year from all
Facts: Pirovano was president & general sources within the Philippines by an individual alien who is a
resident of the Philippines.
manager of the De la Rama Steamship
The tax shall be computed in accordance with and at the rates
Company until the time of his death. The
established in the following schedule:
company had insured his life w/ various
insurance companies for a total sum of Not over P10,000 5%
P1,000,000, w/ itself as the beneficiary. After
Over P10,000 but not over P30,000P500+10% of the
Pirovanos death, the company renounced its excess over P10,000
rights over the proceeds of the insurance
Over P30,000 but not over P70,000 P2,500+15% of the
policies in favor of Pirovanos children. The excess over P30,000
CIR collected a donees gift tax fr. the children. Over P70,000 but not over P140,000..8,500+20% of the
The latter contest the imposition on the ground excess over P70,000
that the act of the company was not motivated Over P140,000 but not over P250,000 P22,500+25% of the
solely by its sense of gratitude but was made excess over P140,000
for compensation for Pirovanos services to the Over P250,000 but not over P500,000 P50,000+30% of the
company. excess over P250,000
Held: A donation made out of gratitude for Over P500,000 P125,000+34% of the
excess over P500,000 in 1998.
past services is subject to the donees gift tax.
Art. 726, NCC provides that when a person
gives to another a thing on account of the Provided, That effective January 1, 1999, the top marginal rate
latters merit or of the services rendered by shall be thirty-three percent (33%) and effective January 1,
2000, the said rate shall be thirty-two percent (32%).
him provided they do not constitute a
For married individuals, the husband and wife, subject to the
demandable debt, the conveyances remain a
provision of Section 51 (D) hereof, shall compute separately
gift or donation. In the CAB, it was their individual income tax based on their respective total
emphasized in the Directors resolution that taxable income: Provided, That if any income cannot be
definitely attributed to or identified as income exclusively

APP 20
INCOME TAX REVIEWER
earned or realized by either of the spouses, the same shall be Not over P100,000.. 5%
divided equally between the spouses for the purpose of On any amount in excess of P100,000 10%
determining their respective taxable income.
(B) Rate of Tax on Certain Passive Income.
(D) Capital Gains from Sale of Real Property. -
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax
(1) In General. - The provisions of Section 39(B)
at the rate of twenty percent (20%) is hereby imposed upon
notwithstanding, a final tax of six percent (6%) based on the
the amount of interest from any currency bank deposit and
gross selling price or current fair market value as determined
yield or any other monetary benefit from deposit substitutes
in accordance with Section 6(E) of this Code, whichever is
and from trust funds and similar arrangements; royalties,
higher, is hereby imposed upon capital gains presumed to
except on books, as well as other literary works and musical
have been realized from the sale, exchange, or other
compositions, which shall be imposed a final tax of ten
disposition of real property located in the Philippines,
percent (10%); prizes (except prizes amounting to Ten
classified as capital assets, including pacto de retro sales and
thousand pesos (P10,000) or less which shall be subject to
other forms of conditional sales, by individuals, including
tax under Subsection (A) of Section 24; and other winnings
estates and trusts: Provided, That the tax liability, if any, on
(except Philippine Charity Sweepstakes and Lotto winnings),
gains from sales or other dispositions of real property to the
derived from sources within the Philippines: Provided,
government or any of its political subdivisions or agencies or
however, That interest income received by an individual
to government-owned or controlled corporations shall be
taxpayer (except a nonresident individual) from a depository
determined either under Section 24 (A) or under this
bank under the expanded foreign currency deposit system
Subsection, at the option of the taxpayer.
shall be subject to a final income tax at the rate of seven and
one-half percent (7 1/2%) of such interest income: Provided, (2) Exception. - The provisions of paragraph (1) of this
further, That interest income from long-term deposit or Subsection to the contrary notwithstanding, capital gains
investment in the form of savings, common or individual trust presumed to have been realized from the sale or disposition
funds, deposit substitutes, investment management accounts of their principal residence by natural persons, the proceeds
and other investments evidenced by certificates in such form of which is fully utilized in acquiring or constructing a new
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be principal residence within eighteen (18) calendar months from
exempt from the tax imposed under this Subsection: Provided, the date of sale or disposition, shall be exempt from the
finally, That should the holder of the certificate pre-terminate capital gains tax imposed under this Subsection: Provided,
the deposit or investment before the fifth (5 th) year, a final tax That the historical cost or adjusted basis of the real property
shall be imposed on the entire income and shall be deducted sold or disposed shall be carried over to the new principal
and withheld by the depository bank from the proceeds of the residence built or acquired: Provided, further, That the
long-term deposit or investment certificate based on the Commissioner shall have been duly notified by the taxpayer
remaining maturity thereof: within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the
Four (4) years to less than five (5) years - 5%;
said tax exemption can only be availed of once every ten (10)
Three (3) years to less than (4) years - 12%; and years: Provided, finally, that if there is no full utilization of the
Less than three (3) years - 20% proceeds of sale or disposition, the portion of the gain
presumed to have been realized from the sale or disposition
shall be subject to capital gains tax. For this purpose, the
(2) Cash and/or Property Dividends - A final tax at the following
gross selling price or fair market value at the time of sale,
rates shall be imposed upon the cash and/or property
whichever is higher, shall be multiplied by a fraction which the
dividends actually or constructively received by an individual
unutilized amount bears to the gross selling price in order to
from a domestic corporation or from a joint stock company,
determine the taxable portion and the tax prescribed under
insurance or mutual fund companies and regional operating
paragraph (1) of this Subsection shall be imposed thereon.
headquarters of multinational companies, or on the share of
an individual in the distributable net income after tax of a
partnership (except a general professional partnership) of
which he is a partner, or on the share of an individual in the 5% - 34% (1998) 33% (1999) 32% (2000)/
net income after tax of an association, a joint account, or a modified gross
joint venture or consortium taxable as a corporation of which Non-resident Alien NETB 25% gross
he is a member or co-venturer: compensation income (no deductions/
exemption allowed)
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999; Note: special cases: alien employed by regional
Ten percent (10% beginning January 1, 2000. HQ of multination, offshore banking units/
petroleum service contractor 15% final tax
Provided, however, That the tax on dividends shall apply only on
income earned on or after January 1, 1998. Income forming i. Final tax on fringe benefit
part of retained earnings as of December 31, 1997 shall not,
(NON-RANK and FILE) at the ff.
even if declared or distributed on or after January 1, 1998, be
subject to this tax. rates:

(C) Capital Gains from Sale of Shares of Stock not Traded in the 34% 1998, 33% 1999, 32% 2000 based on the
Stock Exchange. - The provisions of Section 39(B) grossed up monetary value of fringe benefit.
notwithstanding, a final tax at the rates prescribed below is The FINAL TAX w/held & pd. by Ees at ff. rates:
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, 1. Res. Cit & Res. Aliens 34% 1998; 33%
except shares sold, or disposed of through the stock 1999; 32% 2000.
exchange.

APP 21
INCOME TAX REVIEWER
2. Aliens employed by regional HQ of a 031-91 (Feb. 25, 1991)
multinational corp. 15%
Facts: The Refugee Services Philippines, Inc.
3. Non-res. alien NOT engaged in trade or
(RSP), through Josefina Mendoza, requested for
business: 25%
tax exemption fr. the BIR on the ground that it
is a non-stock, non-profit organization
TAX BASE: grossed up monetary value of fringe implementing projects for the United Nations
benefits High Commissioner for Refugees (UNHCR).
Held: Tax exemption denied. Art. 18 of the
Note: The grossed up monetary value of the fringe Convention on the Privileges & Immunities of
benefit shall be determined by dividing the actual the United Nations is specific as to who are the
monetary value of the fringe benefit by the tax employees or officials entitled to tax
rate.
exemption. Only officials of the United Nations
& of the specialized agencies of the UN whose
Please read: Rev. Reg. 3-98 names are included in the list of officials w/c
shall fr. time to time be communicated & made
known to the governments of the member-
2. Exclusions fr. gross income nations are exempt fr. the payment of income
tax. In this case, there is no showing that the
RSP & its employees had been included in such
a. Compensation for injuries or list. The amounts that RSP receives fr. the UN
sickness represent the consideration for the services it
renders under a contract w/ it. Such being the
case, RSPs relationship w/ UNHCR is by virtue
of a contract, & not as conferred under the
provisions of the UN Charters.
042-91 (March 13, 1991)
Sec. 32 (b,4), NIRC. Compensation for injuries or
sickness. Amounts received, through Accident or Health Facts: The Consuelo Zobel Alger Foundation
Insurance or under Workmens Compensation Acts, as (CZAF), a U.S. corporation not engaged in
compensation for personal injuries or sickness, plus the business in the Philippines, requested for
amounts of any damages received whether by suit or confirmation of its opinion to the effect that
agreement on account of such injuries or sickness. the gross amount of interest derived by it fr. its
Philippine currency bank deposits in the
Philippines is subject to a 15% w/holding tax.
b. Income exempt under treaty Held: Pursuant to Sec. 25(b)(1), NIRC, foreign
corporations not engaged in trade or business
Sec. 32 (b,5), NIRC. Income exempt under treaty. in the Philippines shall pay a tax equal to 35%
Income of any kind, to the extent required by any treaty of gross income received during each taxable
obligation binding upon the Government of the Philippines. year fr. all sources w/in the Philippines such as
interest, dividends, rents, royalties, etc.
However, Art. 12(2) of the RP-US Tax Treaty
Garrison vs. CA provides that interest derived by a resident of
Held: The exemption granted to the one of the contracting States fr. sources w/in
petitioners by the Military Bases Agreement fr. the other contracting State shall not be taxed
payment of income tax is not absolute. By the by the other contracting State at a rate in
explicit terms of the MBA, it exists only as excess of 15% of the gross amount of such
regards income derived fr. their employment interest. Such being the case, the CZAFs
in the Philippines in connection w/ the interest income derived fr. its Philippine
construction, maintenance, operation or currency bank deposits is subject to a 15% tax
defense of the bases; it does not exist in rate pursuant to Art. 12(2) of the RP-US Tax
respect of other income, i.e. obtained or Treaty.
proceeding fr. Philippine sources or sources
other than U.S. sources. Obviously, w/ respect
to the latter form of income, the petitioners & Read at least one tax treaty.
all other American nationals who are residents
of the Philippines are legally bound to pay the
c. 13th month pay & other benefits
tax thereon.

BIR Rulings:

APP 22
INCOME TAX REVIEWER
Sec. 32 (B, 7, e). 13th Month Pay and Other Benefits. - reside permanently in the Philippines from foreign government
Gross benefits received by officials and employees of public agencies and other institutions, private or public.
and private entities: Provided, however, That the total (d) Payments of benefits due or to become due to any person
exclusion under this subparagraph shall not exceed Thirty residing in the Philippines under the laws of the United States
thousand pesos (P30,000) which shall cover: administered by the United States Veterans Administration.
(i) Benefits received by officials and employees of the national (e) Benefits received from or enjoyed under the Social Security
and local government pursuant to Republic Act No. 6686; System in accordance with the provisions of Republic Act No.
(ii) Benefits received by employees pursuant to Presidential 8282.
Decree No. 851, as amended by Memorandum Order No. 28, (f) Benefits received from the GSIS under Republic Act No.
dated August 13, 1986; 8291, including retirement gratuity received by government
(iii) Benefits received by officials and employees not covered by officials and employees.
Presidential decree No. 851, as amended by Memorandum
Order No. 28, dated August 13, 1986; and
Sec. 2.78.1 (B, 1-12) RR 2-98
(iv) Other benefits such as productivity incentives and
Christmas bonus: Provided, further, That the ceiling of Thirty
thousand pesos (P30,000) may be increased through rules
and regulations issued by the Secretary of Finance, upon
a. Retirement benefits under RA
recommendation of the Commissioner, after considering 7641 and
among others, the effect on the same of the inflation rate at Retirement benefits received
the end of the taxable year.
by officials & Ees of pvt. firms fr.
a reasonable plan.
i. Items to be included/ Limitation
ii. Requirements for exclusion b. Separation pay/ cause beyond
Ees control (question of fact/
must be determined on the
B. Pensions/ Retirement benefits/ basis of prevailing facts &
Separation pay circumstances)

1. Taxable items : Pensions must not be asked for or INITIATED by the


2. Exclusions Ee
was not of his own making
Sec. 32 (B,6, 1-f). Retirement Benefits, Pensions, c. Similar benefits received fr.
Gratuities, etc.- foreign govt.
d. Benefits recvd fr. US Veterans
(a) Retirement benefits received under Republic Act No. 7641 Admin
and those received by officials and employees of private firms,
whether individual or corporate, in accordance with a e. Benefits fr. SSS/GSIS
reasonable private benefit plan maintained by the employer:
Provided, That the retiring official or employee has been in
the service of the same employer for at least ten (10) years Commissioner vs. CA
and is not less than fifty (50) years of age at the time of his
Facts: GCL Retirement Plan is an EE
retirement: Provided, further, That the benefits granted under
this subparagraph shall be availed of by an official or trust maintained by the ER. Purpose of the
employee only once. For purposes of this Subsection, the plan is to provide for retirement pensions,
term 'reasonable private benefit plan' means a pension, disability & death benefits to the EE. GCL
gratuity, stock bonus or profit-sharing plan maintained by an made investments but 15% of that was w/held
employer for the benefit of some or all of his officials or as final w/holding tax. Is GCL entitled to
employees, wherein contributions are made by such employer
for the officials or employees, or both, for the purpose of
refund.
distributing to such officials and employees the earnings and Held: RA 4917 specifically provides that
principal of the fund thus accumulated, and wherein its is retirement benefits received by officials & Ees
provided in said plan that at no time shall any part of the
of private firms are exempt from all taxes. In
corpus or income of the fund be used for, or be diverted to,
any purpose other than for the exclusive benefit of the said so far as Ees trusts are concerned, RA 4917
officials and employees. should be read together w/ Sec 53(b) w/c
(b) Any amount received by an official or employee or by his provides that the tax imposed by this Title
heirs from the employer as a consequence of separation of shall not apply to ees trusts w/c forms part of
such official or employee from the service of the employer a pension, stock bonus, or income-sharing plan
because of death sickness or other physical disability or for of an ER. for the benefit of the some or all of
any cause beyond the control of the said official or employee.
his EEs. EEs trust & benefit plans provide
(c) The provisions of any existing law to the contrary eco. assistance to EEs upon occurrence of
notwithstanding, social security benefits, retirement gratuities,
some contingency. The tax advantage was
pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to conceived in order to encourage the formation

APP 23
INCOME TAX REVIEWER
& establishment of such private plans for the received by govt officials & Ees w/c is
benefit of EEs. another exclusion fr. gross income under Sec.
28(b,7f).
Employees Trusts
1. BIR Ruling # 014-91 & 029-91, 085-91, & 020-91
The tax imposed on estates & trusts does not apply
to income of an EEs trust provided the ff. Under Sec. 28(b) (7) (B) of the NIRC, any amt. received by an
conditions are satisfied: official or employee by his heirs fr. his employer as a
consequence of separation of such official or EE fr. the ERs
1. The EEs trust forms part of a service due to death, sickness, or other physical disability or
pension for any cause beyond the control of the said official or Ee is
exempt fr. taxes regardless of age or length of service. The
stock bonus or phrase for any cause beyond the control of the said official or
profit-sharing plan Ee connotes involuntariness on the part of the official or EE.
The separation fr. the service of the official or EE must not be
of the ER (Corp. or business partnership) for asked for or initiated by him.
the benefit of some or all of its EEs 2. BIR Ruling # 021-91
2. Contributions made to the trust by such ER, Amounts paid specifically either as advance or reimbursements
EE or both for the purpose of distributing to such for transportation, representation & other bona fide ordinary
EEs the earnings & principal of the fund & necessary expenses incurred or reasonably expected to be
accumulated by the trust in accordance w/ such incurred by the employee in the performance of his duties are
plan; not compensation subject to w/holding tax if the ff.,
3. Such contributions were made for the conditions are satisfied:
purpose of distributing the earnings & principal of a. It is ordinary & necessary traveling & representation or
the fund accumulated by the trust; & entertainment expenses paid or incurred by the Ee in the
pursuit of the trade or business of the ER
4. The trust instrument makes it impossible, at
any time prior to the satisfaction of all liabilities w/ b. The EE is required to & does, make an
respect to EEs under the trust, for part of the accounting/liquidation for such expense in accordance w/ the
corpus or income to be (w/in the taxable year or specific req.s of substantiation for each category of expense.
thereafter) If the reimbursements or advances exceed the actual expenses,
the excess if not returned to the ER constitutes taxable
used for or compensation.
diverted to
purposes other than for the exclusive
C. PASSIVE INCOME
benefit of the EEs
Zialcita case 1. Interest income (Sec. 32 A, 4)
Facts: On Aug. 23, 1990, a resolution of the ct. a. Taxable interest income
en banc was issued regarding the amounts i. Sources of interest
claimed by Atty. Zialcita on the occasion of his income
retirement. The terminal leave pay of Atty.
Zialcita received by virtue of his compulsory
retirement can never be considered a part of 1. interest on bank deposit/deposit substitute/
his salary subject to the payment of income fr. trust fund & similar arrangement
tax but falls under the phrase other similar 2. interest on lending/interest income fr. bonds
benefits received by retiring Ees & workers... & 3. interest on uncollected salary
thus exempt fr. the payment of IT. 4. Int. on foreign bonds/ govt. bonds
The dispositive portion of the Res. 5. in on T-bills
provides that Atty. Z is to be refunded the amt. 6. int. earned fr. deposit maintained under FCD
w/c was deducted fr. his terminal leave pay & system
the ct. declared that henceforth, no w/holding
tax shall be deducted by any office of this Rev. Reg. 10-98: interest income of pawnshop operators
Court fr. the terminal leave pay benefits of all
retirees similarly situated...
ii. Meaning of the ff.
CIR filed a motion for clarification &/or items:
reconsideration.
Held: Terminal leave pay is exempt fr. IT. W/in Sec. 22 (V) NIRC. The term 'bank' means every banking
the purview of the NIRC provisions, compulsory institution, as defined in Section 2 of RA No. 337, as
retirement may be considered as a cause amended, otherwise known as the General banking Act. A
beyond the control of said official or Ee. bank may either be a commercial bank, a thrift bank, a
development bank, a rural bank or specialized government
Consequently, the amt. he received by way of
bank.
commutation of his accumulated leave credits
(Y) The term 'deposit substitutes' shall mean an alternative
fall w/in Sec. 28 (b, 7b) NIRC. Or it may from of obtaining funds from the public (the term 'public'
likewise be viewed as a retirement gratuity means borrowing from twenty (20) or more individual or

APP 24
INCOME TAX REVIEWER
corporate lenders at any one time) other than deposits, Held: The loan agreement is strictly between
through the issuance, endorsement, or acceptance of debt Mitsubishi as creditor & Atlas as seller of
instruments for the borrowers own account, for the purpose
copper concentrates. The terms & the
of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their reciprocal nature of their obligations make it
agent or dealer. These instruments may include, but need not implausible that Mitsubishi was a mere agent
be limited to bankers' acceptances, promissory notes, of Eximbank. The loan & sales contract bet.
repurchase agreements, including reverse repurchase Mitsu & Atlas does not contain any direct or
agreements entered into by and between the Bangko Sentral inferential reference to Eximbank whatsoever.
ng Pilipinas (BSP) and any authorized agent bank, certificates
Therefore, the interest income fr. the loans
of assignment or participation and similar instruments with
recourse: Provided, however, That debt instruments issued for extended to Atlas by Mitsu is NOT excludable
interbank call loans with maturity of not more than five (5) fr. gross income taxation, is not exempt fr.
days to cover deficiency in reserves against deposit liabilities, w/holding tax.
including those between or among banks and quasi-banks,
shall not be considered as deposit substitute debt
instruments. cc. Applicable tax rate

ex. promissory notes; repurchase i. Interest on bank deposit/


agreements deposit substitute
exception: Debt instruments issued for
interbank call loans w/ maturity of not more From trust fund & similar arrangement (PESO-
than 5 days. deposit) Within
20% (FINAL TAX) w/held by payer-bank Citizen/
resident alien
iii. Treatment of bonds 25% (FINAL) Nonresident alien NETB
issued at a
20% (FINAL) corp.
premium/ at a
discount
ii. interest income fr. long term
adjustment to int. income/ recognition of deposit or investment in the
income upon retirement of bond.
form of savings, common ind.
trust fund, deposit substitutes,
iv. Interest on investment management
insurance proceeds accounts & other investment
evidenced by certificates in
such form prescribed by the
b. Exclusions
BSP shall be exempt fr. tax
imposed under this
Sec. 32 (b,7) NIRC. Miscellaneous Items. Subsection.
(a) Income Derived by Foreign Government. - Income derived
from investments in the Philippines in loans, stocks, bonds or
other domestic securities, or from interest on deposits in * Denomination P10,000 issued
banks in the Philippines by by banks ONLY
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying
Sec. 22 (FF), NIRC. The term 'long-term deposit or
refinancing from foreign governments, and
investment certificates' shall refer to certificate of time
(iii) international or regional financial institutions established by deposit or investment in the form of savings, common or
foreign governments. individual trust funds, deposit substitutes, investment
management accounts and other investments with a maturity
period of not less than five (5) years, the form of which shall
Com. vs. Mitsubishi Metal be prescribed by the Bangko Sentral ng Pilipinas (BSP) and
Facts: Atlas Consolidated borrowed fr. issued by banks only (not by nonbank financial intermediaries
and finance companies) to individuals in denominations of Ten
Mitsubishi Metal the amount of $20 M. Atlas, in
thousand pesos (P10,000) and other denominations as may
turn, undertook to sell Mitsubishi all the copper be prescribed by the BSP.
concentrates produced fr. said machine for a
period of 15 years. Mitsubishi then borrowed fr.
Sec. 24 (B,1). Rate of Tax on Certain Passive Income.
the Export-Import Bank of Japan. Atlas paid
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax
interest to Mitsubishi totaling P13,966.79 for
at the rate of twenty percent (20%) is hereby imposed upon
the years 74 to 75. CIR imposed a 15% tax the amount of interest from any currency bank deposit and
thereon. Mitsubishi is now applying for a tax yield or any other monetary benefit from deposit substitutes
credit on the ground that it was merely a and from trust funds and similar arrangements; royalties,
financing institution owned, controlled & except on books, as well as other literary works and musical
financed by the Japanese Govt. compositions, which shall be imposed a final tax of ten

APP 25
INCOME TAX REVIEWER
percent (10%); prizes (except prizes amounting to Ten Three (3) years to less than four (4) years - 12%; and
thousand pesos (P10,000) or less which shall be subject to Less than three (3) years - 20%.
tax under Subsection (A) of Section 24; and other winnings
(except Philippine Charity Sweepstakes and Lotto winnings),
derived from sources within the Philippines: Provided, Note:
however, That interest income received by an individual
taxpayer (except a nonresident individual) from a depository
bank under the expanded foreign currency deposit system Exemption applies only to ind. TPs except
shall be subject to a final income tax at the rate of seven and nonresident alien NETB. They are taxed at
one-half percent (7 1/2%) of such interest income: Provided, 35%. For corporate taxpayers, no exemption.
further, That interest income from long-term deposit or Pre-termination will subject the interest to tax/
investment in the form of savings, common or individual trust tax rate based on the remaining maturity.
funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be iii. Interest earned by non-stock
exempt from the tax imposed under this Subsection: Provided, non-profit educational
finally, That should the holder of the certificate pre-terminate institutions
the deposit or investment before the fifth (5 th) year, a final tax
shall be imposed on the entire income and shall be deducted
and withheld by the depository bank from the proceeds of the Finance Dept. Order 137-87
long-term deposit or investment certificate based on the Educ. inst. means a non-stock, non-profit corporation
remaining maturity thereof: association duly registered under Phil. law, & operated
Four (4) years to less than five (5) years - 5%; exclusively for educational purposes, maintained &
Three (3) years to less than (4) years - 12%; and administered by private individual or group offering formal
education issued permit to operate by the DECS.
Less than three (3) years - 20%.
Revenues derived fr. & assets used in the operation of
cafeterias/canteens, dormitories, bookstores are exempt fr.
Sec. 25 (A,2) Cash and/or Property Dividends from a taxation provided they are owned & operated by the
Domestic Corporation or Joint Stock Company, or educational institution as ancillary activities & the same are
Insurance or Mutual Fund Company or Regional located w/in the school premises.
Operating Headquarter or Multinational Company, or
Share in the Distributable Net Income of a Partnership
(Except a General Professional Partnership), Joint Dept. of Finance Order 149-95 Re: Exemption of Non-
Account, Joint Venture Taxable as a Corporation or stock Non-Profit Educational Entities
Association., Interests, Royalties, Prizes, and Other Amending Finance department Order 137-87
Winnings. - Cash and/or property dividends from a domestic Non-stock, non-profit educational institutions are exempt fr.
corporation, or from a joint stock company, or from an taxes on all their revenues & assets used actually, directly &
insurance or mutual fund company or from a regional exclusively for educational purposes. However, they shall be
operating headquarter of multinational company, or the share subject to internal revenue tax on such educational institution
of a nonresident alien individual in the distributable net of its educational purposes or function.
income after tax of a partnership (except a general
Interest income shall be exempt fr. taxation only when used
professional partnership) of which he is a partner, or the
directly, exclusively for educational purposes. To substantiate
share of a nonresident alien individual in the net income after
this claim, the institution must submit an annual information
tax of an association, a joint account, or a joint venture
return & duly audited financial statement. A certification of
taxable as a corporation of which he is a member or a co-
actual utilization & the Board resolution on the proposed
venturer; interests; royalties (in any form); and prizes (except
project to be funded out of the money deposited in banks.
prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (B)(1) of
Section 24) and other winnings (except Philippine Charity
iv. Other interest income
Sweepstakes and Lotto winnings); shall be subject to an
income tax of twenty percent (20%) on the total amount interest fr. lending (business) regular tax rate
thereof: Provided, however, that royalties on books as well as interest income fr. bonds final tax rate
other literary works, and royalties on musical compositions interest on uncollected salary regular rate
shall be subject to a final tax of ten percent (10%) on the
interest on foreign bonds regular if taxable
total amount thereof: Provided, further, That cinematographic
films and similar works shall be subject to the tax provided interest on government bonds 20% final
under Section 28 of this Code: Provided, furthermore, That interest on T-bills 20% final
interest income from long-term deposit or investment in the int. earned fr. deposit maintained under FCD
form of savings, common or individual trust funds, deposit (foreign currency) system 7 %
substitutes, investment management accounts and other int. on foreign loan contracted by a nonresident
investments evidenced by certificates in such form prescribed foreign corp. on or after Aug. 1, 1986 20%
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from Final tax.(Sec. 28 B, 5-a) NIRC.
the tax imposed under this Subsection: Provided, finally, that
should the holder of the certificate pre-terminate the deposit
or investment before the fifth (5 th) year, a final tax shall be
imposed on the entire income and shall be deducted and 2. Rentals/Leases
withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the
remaining maturity thereof: a. Lease of tangible personal
property
Four (4) years to less than five (5) years - 5%;

APP 26
INCOME TAX REVIEWER
Operating lease/finance lease ii. Taxes & other obligations
Leasehold Improvements assumed by the lessee
iii. Leasehold improvements by
Rev. Regulation No. 19-86
the lessee
Sec. 2.01/1 Operating lease, defined.--- An operating
lease is a contract under w/c the asset is not wholly
amortized during the primary period of the lease, & where the
lessor DOES NOT rely solely on the rentals during the primary
When is rental income recognized?
period for his profits, but looks for the recovery of the balance
of his costs & for the rest of his profits fr. the sale or re-lease Rev. Regulation No. 2
of the returned assets at the end of the primary lease period.
Sec. 74. Rentals ---Where a leasehold is acquired for business
Sec. 2.01/2 Finance lease, defined --- Finance lease or purposes for a specified sum, the purchaser may take as a
full payout lease is a contract involving payment over an deduction in his return an adequate part of such sum each
obligatory period (also called primary or basic period) of year, based on the number of years the lease has to run.
specified rental amounts for the use of a lessors property, Taxes paid by a tenant to or for a landlord for business
sufficient in total to amortize the capital outlay of the lessor & property are ADDITIONAL RENT & constitute a deductible
to provide for the lessors borrowing costs & profits. The item to the tenant & TAXABLE INCOME to the landlord; the
obligatory period refers to the primary or basic non-cancelable amount of the tax being deductible by the latter. The cost
period of the lease w/c in no case shall be less than 730 days. borne by the lessee in erecting buildings or making permanent
The lessee, not the lessor, exercises the choice of the asset & improvements on ground of w/c he is a lessee is held to be a
is normally responsible for maintenance, insurance, & such capital investment & not deductible as a business expense. In
other expenses pertinent to the use, preservation & operation order to return to such taxpayer his investment of capital, an
of the asset. Finance leases may be extended, after the annual deduction may be made fr. gross income of an amount
expiration of the primary period, by non-cancelable secondary equal to the cost of such improvements divided by the
or subsequent periods w/ the rentals significantly reduced. number of years remaining of the term of the lease, & such
The residual value shall in no instance be less than five per deduction shall be in lieu of a deduction for depreciation. If
centum (5%) of the lessors acquisition cost of the leased the remainder of the term of lease is greater than the
asset. probable life value of the buildings erected, or of the
improvements made, this deduction shall take the form of an
Sec. 4.02/2 Compelling persuasive factors . A contract or allowance for depreciation.
agreement purported to be a lease shall be treated as Sec. 49. Improvements by lessees ---When buildings are
conditional sales contract if one or more of the following erected or improvements made by a lessee in pursuance of an
compelling persuasive factors are present: agreement w/ the lessor & such buildings or improvements
(A) The lessee is given the option to purchase the asset at any are not subject to removal by the lessee, the lessor may at his
time during the obligatory period of the lease, notw/standing option report the income therefr. upon either of the following
that the option price is equivalent to or higher than the bases:
current fair market value of the asset; (a) The lessor may report as income at the time when such
(B) The lessee acquires automatic ownership of the asset upon buildings or improvements are completed the fair market
payment of the stated amount of rentals w/c under the value of such buildings or improvements subject to the lease.
contract he is required to make; (completion basis)
(C) Portions of the periodic rental payments are credited to the (b) The lessor may spread over the life of the lease the
purchase price of the asset; estimated depreciated value of such buildings or
improvements at the termination of the lease & report as
(D) The receipts of payment indicate that the payments made
income for each of the lease an adequate part thereof. ( Pro-
were partial or full payments of the asset.
rated basis)
Sec. 4.03/3 Absence of compelling persuasive factors . In
If for any other reason than a bona fide purchase fr. the lessee
the absence of the above compelling persuasive factors or
by the lessor, the lease is terminated so that the lessor comes
contrary implication, an intent warranting treatment of a
into possession or control of the prop. prior to the time
transaction for tax purposes as a purchase & sale rather than as
originally fixed for the termination of the lease, the lessor
a lease or rental agreement, may in general be said to exist if,
receives additional income for the year in w/c the lease is so
for example, one or more of the following conditions are
terminated to the extent that the value of such buildings or
present:
improvements when he became entitled to such possession
exceeds the amount already reported as income on account of
(a) Portions of the periodic payments are made specifically the erection of such buildings or improvements. No
applicable to an equity to be acquired by the lessee. appreciation in value due to causes other than the premature
(b) The prop. may be acquired under a purchase option, at a termination of the lease shall be included. Conversely, if the
price w/c is nominal in relation to the value of the prop. at the bldg. or improvements are destroyed prior to the expiration of
time when the option may be exercised, as determined at the the lease, the lessor is entitled to deduct as loss for the year
time of entering into the original agreement, or w/c is a when such destruction takes place the amount previously
relatively small amount when compared w/ the total payments reported as income bec. of the erection of such buildings or
w/c are required to be made. improvements, less any salvage value subject to the lease to
the extent that such loss was not compensated for by
insurance. If the bldgs. or improvements destroyed were
acquired prior to March 1, 1013, the deduction shall be based
b. Lease of real property on the cost or the value subject to the lease to the extent
c. Tax treatment of that such loss was not compensated for by insurance.

i. Advance rental/ long-term


lease iv. VAT added to the rental/
paid by the lessee

APP 27
INCOME TAX REVIEWER
(a) Interest on Foreign Loans. - A final withholding tax at the
rate of twenty percent (20%) is hereby imposed on the
Limpan vs. Commissioner amount of interest on foreign loans contracted on or after
Facts: The BIR discovered that Limpan August 1, 1986;
Investment Co. underdeclared its rental (b) Intercorporate Dividends. - A final withholding tax at the
rate of fifteen percent (15%) is hereby imposed on the
incomes for taxable years 1956 & 1957.
amount of cash and/or property dividends received from a
Limpan, however, argued that it was not domestic corporation, which shall be collected and paid as
supposed to declare said rental income for 56 provided in Section 57 (A) of this Code, subject to the
bec. the previous owners of the leased bldg. condition that the country in which the nonresident foreign
still have to collect part of the total rentals. It corporation is domiciled, shall allow a credit against the tax
also claimed that only a part of the amount of due from the nonresident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to twenty percent
P81,690.00 for 57 was turned over to the
(20%) for 1997, nineteen percent (19%) for 1998, eighteen
company by their President, Isabelo Lim. Also, percent (18%) for 1999, and seventeen percent (17%)
one of its tenants deposited in court his rentals thereafter, which represents the difference between the
amounting to P10,800.00. regular income tax of thirty-five percent (35%) in 1997,
thirty-four percent (34%) in 1998, and thirty-three percent
Held: Limpan, having admitted through its (33%) in 1999, and thirty-two percent (32%) thereafter on
own witness that it had NOT declared more corporations and the fifteen percent (15%) tax on dividends
than 1/2 of the amt. found by the internal as provided in this subparagraph;
revenue examiners as unreported rental (c) Capital Gains from Sale of Shares of Stock not Traded in the
income for 56 & more than 1/3 of the amount Stock Exchange. - A final tax at the rates prescribed below is
ascertained by the examiners as unreported hereby imposed upon the net capital gains realized during the
rental income for 57 contrary to its original taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation,
claim to the revenue authorities. except shares sold, or disposed of through the stock
exchange:
d. Applicable rate Not over P100,000.. 5%
On any amount in excess of P100,000 10%.
i. Normal/ regular rate
ii. Except the ff. nonresident
foreign corps. Nonresident cinematographic film owner
LESSOR or distributor 25% of gross income
Nonres owner or lessor of vessels chartered by
Sec. 28, (B), NIRC. Tax on Nonresident Foreign Phil. nationals 4 % of gross rentals
Corporation. - Nonres owner/ lessor of aircraft, machinery &
(1) In General. - Except as otherwise provided in this Code, a other equipmt. 7 % gross rentals or fees.
foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to thirty-five percent (35%)
3. Royalties
of the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends, a. What are royalties?
rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or b. How are royalties earned?
determinable annual, periodic or casual gains, profits and c. Applicable rates:
income, and capital gains, except capital gains subject to tax
under subparagraphs (C) and (d): Provided, That effective 1, Individual taxpayers
1998, the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be thirty-
three percent (33%); and, effective January 1, 2000 and Sec. 24 (B,1) NIRC. (B) Rate of Tax on Certain Passive
thereafter, the rate shall be thirty-two percent (32%). Income.
(2) Nonresident Cinematographic Film Owner, Lessor or (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax
Distributor. - A cinematographic film owner, lessor, or at the rate of twenty percent (20%) is hereby imposed upon
distributor shall pay a tax of twenty-five percent (25%) of its the amount of interest from any currency bank deposit and
gross income from all sources within the Philippines. yield or any other monetary benefit from deposit substitutes
(3) Nonresident Owner or Lessor of Vessels Chartered by and from trust funds and similar arrangements; royalties,
Philippine Nationals. - A nonresident owner or lessor of except on books, as well as other literary works and musical
vessels shall be subject to a tax of four and one-half percent compositions, which shall be imposed a final tax of ten
(4 1/2%) of gross rentals, lease or charter fees from leases or percent (10%); prizes (except prizes amounting to Ten
charters to Filipino citizens or corporations, as approved by thousand pesos (P10,000) or less which shall be subject to
the Maritime Industry Authority. tax under Subsection (A) of Section 24; and other winnings
(4) Nonresident Owner or Lessor of Aircraft, Machineries and (except Philippine Charity Sweepstakes and Lotto winnings),
derived from sources within the Philippines: Provided,
Other Equipment. - Rentals, charters and other fees derived
by a nonresident lessor of aircraft, machineries and other however, That interest income received by an individual
taxpayer (except a nonresident individual) from a depository
equipment shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees. bank under the expanded foreign currency deposit system
shall be subject to a final income tax at the rate of seven and
(5) Tax on Certain Incomes Received by a Nonresident Foreign one-half percent (7 1/2%) of such interest income: Provided,
Corporation. - further, That interest income from long-term deposit or
investment in the form of savings, common or individual trust

APP 28
INCOME TAX REVIEWER
funds, deposit substitutes, investment management accounts iv. For domestic & resident foreign
and other investments evidenced by certificates in such form corp.
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this Subsection: Provided,
finally, That should the holder of the certificate pre-terminate Sec. 27 (D,1). Rates of Tax on Certain Passive Incomes.
the deposit or investment before the fifth (5 th) year, a final tax -
shall be imposed on the entire income and shall be deducted (1) Interest from Deposits and Yield or any other Monetary
and withheld by the depository bank from the proceeds of the Benefit from Deposit Substitutes and from Trust Funds and
long-term deposit or investment certificate based on the Similar Arrangements, and Royalties. - A final tax at the rate
remaining maturity thereof: of twenty percent (20%) is hereby imposed upon the amount
Four (4) years to less than five (5) years - 5%; of interest on currency bank deposit and yield or any other
Three (3) years to less than (4) years - 12%; and monetary benefit from deposit substitutes and from trust
funds and similar arrangements received by domestic
Less than three (3) years - 20%. corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived
Sec. 25 (A,2), NIRC. Cash and/or Property Dividends by a domestic corporation from a depository bank under the
from a Domestic Corporation or Joint Stock Company, expanded foreign currency deposit system shall be subject to
or Insurance or Mutual Fund Company or Regional a final income tax at the rate of seven and one-half percent (7
Operating Headquarter or Multinational Company, or 1/2%) of such interest income.
Share in the Distributable Net Income of a Partnership
(Except a General Professional Partnership), Joint
Sec. 28 (7,a) Tax on Certain Incomes Received by a
Account, Joint Venture Taxable as a Corporation or
Resident Foreign Corporation.
Association., Interests, Royalties, Prizes, and Other
Winnings. - Cash and/or property dividends from a domestic (a) Interest from Deposits and Yield or any other Monetary
corporation, or from a joint stock company, or from an Benefit from Deposit Substitutes, Trust Funds and Similar
insurance or mutual fund company or from a regional Arrangements and Royalties. - Interest from any currency
operating headquarter of multinational company, or the share bank deposit and yield or any other monetary benefit from
of a nonresident alien individual in the distributable net deposit substitutes and from trust funds and similar
income after tax of a partnership (except a general arrangements and royalties derived from sources within the
professional partnership) of which he is a partner, or the Philippines shall be subject to a final income tax at the rate of
share of a nonresident alien individual in the net income after twenty percent (20%) of such interest: Provided, however,
tax of an association, a joint account, or a joint venture That interest income derived by a resident foreign corporation
taxable as a corporation of which he is a member or a co- from a depository bank under the expanded foreign currency
venturer; interests; royalties (in any form); and prizes (except deposit system shall be subject to a final income tax at the
prizes amounting to Ten thousand pesos (P10,000) or less rate of seven and one-half percent (7 1/2%) of such interest
which shall be subject to tax under Subsection (B)(1) of income.
Section 24) and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an
income tax of twenty percent (20%) on the total amount 20% FINAL tax
thereof: Provided, however, that royalties on books as well as
other literary works, and royalties on musical compositions
shall be subject to a final tax of ten percent (10%) on the v. for nonres foreign corp.
total amount thereof: Provided, further, That cinematographic 34% - 1998
films and similar works shall be subject to the tax provided 33% - 1999
under Section 28 of this Code: Provided, furthermore, That
32% - 2000
interest income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed 4. Dividends
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from
the tax imposed under this Subsection: Provided, finally, that a. What is dividend income?
should the holder of the certificate pre-terminate the deposit i. How is dividend income earned
or investment before the fifth (5 th) year, a final tax shall be
imposed on the entire income and shall be deducted and ii. Kinds of dividend income
withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the
a. Cash dividend
remaining maturity thereof: b. Stock dividend/
stock rights
Four (4) years to less than five (5) years - 5%;
c. Property
Three (3) years to less than four (4) years - 12%; &
dividends
Less than three (3) years - 20%.
d. Liquidating
dividends
i. all royalties 20% FINAL tax
b. Disguised dividend/ payments
ii. except: royalties on books, as equivalent to dividend distribution
well as other literary works &
musical composition 10% excessive compensation/ rental in lieu of
dividends
FINAL tax
iii. 25% - nonres alien NETB

APP 29
INCOME TAX REVIEWER
Sec. 73 (C), NIRC. Dividends Distributed are Deemed assessment to Leonor asking for payment. The
Made from Most Recently Accumulated Profits. - Any assessment not being paid, the Dep. Comm. of
distribution made to the shareholders or members of a
IR again sent a letter to Lourdes & again it said
corporation shall be deemed to have been made form the
most recently accumulated profits or surplus, and shall that they should assess Leonor. The DCIR
constitute a part of the annual income of the distributee for demanded Leonor to pay the tax but still was
the year in which received. not paid. hence, the Rep. filed w/ CFI a
(D) Net Income of a Partnership Deemed Constructively complaint vs. the heirs of Esteban seeking to
Received by Partners. - The taxable income declared by a collect fr. each heir the proportionate share in
partnership for a taxable year which is subject to tax under the IT liability of the estate.
Section 27 (A) of this Code, after deducting the corporate
income tax imposed therein, shall be deemed to have been Held: Where the dividends were not received
actually or constructively received by the partners in the same by the estate or the heirs; neither of them is
taxable year and shall be taxed to them in their individual liable for the payment of income tax therefor.
capacity, whether actually distributed or not. There would be constructive receipt of the
dividends if the debts to w/c they were applied
Rev. Reg. 2, Secs. 250-253 really exist. In CAB, no constructive receipt as
The distinction between a stock dividend w/c does not, & one the first debt was contested, & the second
w/c does , constitute income taxable to the shareholder is the debt was due fr. Hijos de la Rama an entity
distinction between a stock dividend w/c works no change in separate & distinct fr. Esteban.
the corporate entity, the same interest in the same corp.
being represented after the distribution by more shares of
precisely the same character, & a stock dividend where there
either has been a change of corporate identity or a change in
the nature of the shares issued as dividends whereby the Commissioner vs. Manning
proportional interest of the shareholders after the distribution
is essentially different fr. his former interest. A stock dividend Facts: MANTRASCO has authorized capital
constitutes income if it gives the shareholder an interest stock dividend into 25,000 common shares,
different fr. that w/c his former stock holdings represented. A 24,700 owned by Reese; & the rest at 100
stock dividend does not constitute income if the new shares shares owned by Manning, McDonald, &
confer no different rights or interest than did the old - the
new certificates + the old representing the same
Simmons. Pursuant to a Trust Agreement, after
proportionate interest in the net assets of the corp. as did the Reese died, the 24,700 shares were reacquired
old. by Mantrasco. Consequently, the same shares
A true stock dividend is not subject to tax on its receipt in the were distributed equally to M, M & S while
hands of the recipient. Nevertheless, if a corporation after the payment to the estate of Reese fr. the
distribution of a stock dividend, proceeds to cancel or redeem companies profit was gradually made fr. 1953-
its stock at such time & in such manner as to make the 63.
distribution & cancellation or redemption essentially
equivalent to the distribution of a taxable dividend, the Held: Where corporate earnings are used to
amount received in redemption or cancellation of the stock purchase outstanding stock treated as treasury
shall be treated as a taxable dividend. stock as a technical but prohibited device to
avoid effects of income taxation, distribution of
Republic vs. Dela Rama said corporate earnings in the form of stock
dividends will subject stockholders receiving
Facts: The estate of the late Esteban de la them to income tax. When the company parted
Rama was the subject of Special Proceedings w/ a portion of their earnings to buy the
of the CFI of Iloilo. The exec-administrator, corporate holdings of Reese, they were in
Hervas, filed on March 12, 1951 income tax ultimate effect & result making a distribution
returns of the estate corresponding to tax yr. of such earnings to M, M & S.
1950 declaring a net income of P22, 796.59.
P3,919.00 was assessed & paid as income tax.
The BIR later claimed that it had found out that Note: Distribution of partners share in the net
there had been received by the estate in 1950 income of a taxable partnership is equivalent to
distribution of dividends in a corp.
fr. the Dela Rama Steamship Co. cash
dividends amounting to P86,800 & was not
declared in the ITR. The BIR then made an c. Exclusions
assessment as deficiency IT vs. the estate
i. Income exempt under a tax
P56,032.50 (37355.00 as deficiency &
treaty
18,677.50 as 50% surcharge).
ii. Passive income of foreign
The Collector of IR wrote a letter 2/29/56
government
to Mrs. Lourdes de la Rama -Osmena informing
her of the assessment & asking payment
thereof. On 3/13/56, the latters counsel Sec. 32 (B, 7, a), NIRC. Income Derived by Foreign
contended that the assessment should be sent Government. - Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic
to Leonor de la Rama who was appointed as
securities, or from interest on deposits in banks in the
administratrix of the estate. CIR sent the
APP 30
INCOME TAX REVIEWER
Philippines by (i) foreign governments, (ii) financing under Workmen's Compensation Acts, as compensation for
institutions owned, controlled, or enjoying refinancing from personal injuries or sickness, plus the amounts of any
foreign governments, and (iii) international or regional damages received, whether by suit or agreement, on account
financial institutions established by foreign governments. of such injuries or sickness.

Sec. 63 RR 2.
5. Annuities & proceeds fr. life insurance

a. Taxable income/computation 6. Prizes & winnings/ Awards/ Rewards


Art. 2021 NCC. The aleatory contract of life annuity binds the
debtor to pay an annual pension or income during the life of a. Taxable items
one or more determinate persons in consideration of a capital
consisting of money or other property, whose ownership is i. gambling
transferred to him at once w/ the burden of the income. winnings/contests/raffle
Sec. 32 (a,8) NIRC. Gross income. (a) General definition. prizes
- Gross income means all income fr. whatever source derived,
including ( but not limited to ) the following items: ii. small town lottery winnings
(8) Annuities iii. rewards under Sec. 282
NIRC/ informers reward
10% FINAL w/holding tax
b. Exclusions
i. Proceeds of Life insurance
Sec. 32 (a, 9) NIRC. Gross income. (a) General definition.
What is insurance? Is casualty insurance a life - Gross income means all income fr. whatever source derived,
insurance contract? including ( but not limited to ) the following items:
Are proceeds of non-life or property insurance (9) Prizes & winnings
taxable? Pre-need contracts?

Sec. 32 (b,1) NIRC. Exclusions fr. gross income . - The ff.


b. Exclusions/ Exemptions
items shall not be included in gross income & shall be exempt
fr. taxation under this Title: i. Phil. Charity Sweepstakes and
(1) Life Insurance. - The proceeds of life insurance policies paid lotto winnings
to the heirs or beneficiaries upon the death of the insured,
Sec. 24. (B) Rate of Tax on Certain Passive Income.
whether in a single sum or otherwise, but if such amounts are
held by the insurer under an agreement to pay interest (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax
thereon, the interest payments shall be included in gross at the rate of twenty percent (20%) is hereby imposed upon
income. the amount of interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes
Sec. 62 Rev. Reg. 2. Proceeds of life insurance are excluded
and from trust funds and similar arrangements; royalties,
fr. gross income bec. they partake more of indemnity or
except on books, as well as other literary works and musical
compensation rather than gain to the recipient. In case of a
compositions, which shall be imposed a final tax of ten
transfer for a valuable consideration, by assignment or
percent (10%); prizes (except prizes amounting to Ten
otherwise, of a life insurance, endowment or annuity contract
thousand pesos (P10,000) or less which shall be subject to
or any interest therein only the actual value of such
tax under Subsection (A) of Section 24; and other winnings
consideration & the amount of the premiums & other sums
(except Philippine Charity Sweepstakes and Lotto winnings),
subsequently paid by the transferee shall be tax-exempt.
derived from sources within the Philippines: Provided,
however, That interest income received by an individual
taxpayer (except a nonresident individual) from a depository
ii. Return of premium paid
bank under the expanded foreign currency deposit system
What is cash surrender value? shall be subject to a final income tax at the rate of seven and
Computing income in annuity contracts one-half percent (7 1/2%) of such interest income: Provided,
further, That interest income from long-term deposit or
Sec. 32 (b,2) NIRC. Exclusions fr. gross income . - The ff. investment in the form of savings, common or individual trust
items shall not be included in gross income & shall be exempt funds, deposit substitutes, investment management accounts
fr. taxation under this Title: and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
(2) Amount Received by Insured as Return of Premium. - The
exempt from the tax imposed under this Subsection: Provided,
amount received by the insured, as a return of premiums paid
finally, That should the holder of the certificate pre-terminate
by him under life insurance, endowment, or annuity contracts,
the deposit or investment before the fifth (5 th) year, a final tax
either during the term or at the maturity of the term
shall be imposed on the entire income and shall be deducted
mentioned in the contract or upon surrender of the contract.
and withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the
remaining maturity thereof:
iii. Compensation for injuries or
sickness
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Sec. 32. B. (4) Compensation for Injuries or Sickness . - Less than three (3) years - 20%
amounts received, through Accident or Health Insurance or

APP 31
INCOME TAX REVIEWER
ii. Prizes and awards in sports
competition SEC. 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means property
held by the taxpayer (whether or not connected with his trade
or business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly be
Sec. 32 (b, 7d) NIRC. Exclusions fr. gross income . - The
included in the inventory of the taxpayer if on hand at the
ff. items shall not be included in gross income & shall be
close of the taxable year, or property held by the taxpayer
exempt fr. taxation under this Title:
primarily for sale to customers in the ordinary course of his
(7) Miscellaneous items: trade or business, or property used in the trade or business,
(d) Prizes and Awards in sports Competition. - All prizes of a character which is subject to the allowance for
and awards granted to athletes in local and international depreciation provided in Subsection (F) of Section 34; or real
sports competitions and tournaments whether held in the property used in trade or business of the taxpayer.
Philippines or abroad and sanctioned by their national sports (2) Net Capital Gain. - The term 'net capital gain' means the
associations. excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges.

iii. Prizes & awards/ religious/ (3) Net Capital Loss. - The term 'net capital loss' means the
excess of the losses from sales or exchanges of capital assets
charitable/ scientific/ artistic/ over the gains from such sales or exchanges.
literary
(B) Percentage Taken into Account. - In the case of a taxpayer,
other than a corporation, only the following percentages of
the gain or loss recognized upon the sale or exchange of a
Requisites for exclusion capital asset shall be taken into account in computing net
capital gain, net capital loss, and net income:
Sec. 32 (b, 7c) NIRC . Exclusions fr. gross income . - The (1)One hundred percent (100%) if the capital asset has been
ff. items shall not be included in gross income & shall be held for not more than twelve (12) months; and
exempt fr. taxation under this Title: (2)Fifty percent (50%) if the capital asset has been held for
(7) Miscellaneous items: more than twelve (12) months;
(c) Prizes and Awards. - Prizes and awards made primarily in (C) Limitation on Capital Losses. - Losses from sales or
recognition of religious, charitable, scientific, educational, exchanges of capital assets shall be allowed only to the extent
artistic, literary, or civic achievement but only if: of the gains from such sales or exchanges. If a bank or trust
(i) The recipient was selected without any action on his company incorporated under the laws of the Philippines, a
part to enter the contest or proceeding; and substantial part of whose business is the receipt of deposits,
sells any bond, debenture, note, or certificate or other
(ii) The recipient is not required to render substantial
evidence of indebtedness issued by any corporation (including
future services as a condition to receiving the prize or
one issued by a government or political subdivision thereof),
award.
with interest coupons or in registered form, any loss resulting
from such sale shall not be subject to the foregoing limitation
and shall not be included in determining the applicability of
such limitation to other losses.
7. Gifts/Bequests/Devises
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a
Tax treatment of remunerative donation corporation, sustains in any taxable year a net capital loss,
Extended/ but income from such property such loss (in an amount not in excess of the net income for
taxable such year) shall be treated in the succeeding taxable year as a
loss from the sale or exchange of a capital asset held for not
more than twelve (12) months.
Sec. 32 (B, 3) NIRC. (E) Retirement of Bonds, Etc. - For purposes of this Title,
amounts received by the holder upon the retirement of bonds,
3. Gifts, Bequests, and Devises. _ The value of property debentures, notes or certificates or other evidences of
acquired by gift, bequest, devise, or descent: Provided, indebtedness issued by any corporation (including those
however, That income from such property, as well as gift, issued by a government or political subdivision thereof) with
bequest, devise or descent of income from any property, in interest coupons or in registered form, shall be considered as
cases of transfers of divided interest, shall be included in amounts received in exchange therefor.
gross income.
(F) Gains or losses from Short Sales, Etc. - For purposes of this
8. Other types of passive income Title -
1. Gains or losses from short sales of property shall be
considered as gains or losses from sales or exchanges of
a. Found treasure regular rate capital assets; and
b. Refund of tax or recovery of bad debt 2. Gains or losses attributable to the failure to exercise
privileges or options to buy or sell
previously deducted regular tax
rate
c. Damages 1. Types of gain/kinds of property
a. Kinds/Classification of taxable
income or gain
C. Gains derived from dealings in property

APP 32
INCOME TAX REVIEWER
What is capital gain? What is ordinary To such gain or loss allocable to the land, the limitations of
gain/ income? 34(b) & (c) apply ( such limitation may be inapplicable to a
dealer in real estate, but, if so, it is bec. he holds the land
primarily for sale to customers in the ordinary course of his
trade or business, not bec. the land is subject to the
(Z) The term 'ordinary income' includes any gain from the sale
allowance for depreciation provided in 30 (f) NIRC), will not
or exchange of property which is not a capital asset or
be subject to the percentage provisions of 34(b) & losses fr.
property described in Section 39(A)(1). Any gain from the sale
such transactions will not be subject to the limitations on
or exchange of property which is treated or considered, under
losses provided in 30 (c).
other provisions of this Title, as 'ordinary income' shall be
treated as gain from the sale or exchange of property which is
not a capital asset as defined in Section 39(A)(1). The term
'ordinary loss' includes any loss from the sale or exchange of c. Short term asset/ long term
property which is not a capital asset. Any loss from the sale or asset
exchange of property which is treated or considered, under
(A) Definitions. - As used in this Title -
other provisions of this Title, as 'ordinary loss' shall be treated
as loss from the sale or exchange of property which is not a (1) Capital Assets. - the term 'capital assets' means property
capital asset. held by the taxpayer (whether or not connected with his trade
or business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the
b. What is NET capital gain? NET
close of the taxable year, or property held by the taxpayer
capital loss? primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business,
of a character which is subject to the allowance for
(I cant find Sec. 16 (e) in the CTRA and Sec. 22 (Z) is depreciation provided in Subsection (F) of Section 34; or real
repetition its coming back to me repetition the property used in trade or business of the taxpayer.
only thing I can see Obiter Master)
(2) Net Capital Gain. - The term 'net capital gain' means the
excess of the gains from sales or exchanges of capital assets
Sec. 122, Rev. Reg. 2 Losses fr. sales or exchanges of over the losses from such sales or exchanges.
property. No deduction is allowed in respect of losses fr. (3) Net Capital Loss. - The term 'net capital loss' means the
sales of exchanges of property, directly or indirectly,- excess of the losses from sales or exchanges of capital assets
7. Between members of a family (whole or half siblings, over the gains from such sales or exchanges.
spouse, ancestors & lineal descendants);
8. Between an individual & a corporation more than 50% in
value of the outstanding stock of w/c is owned, directly or
indirectly by or for such individual except in the case of
distributions in liquidation;
9. Between two corporations more than 50% in value of the
outstanding stock of each of w/c is owned, directly or Tuazon vs. Lingad 58 SCRA 170
indirectly, by or for the same individual, if either one of the
corps. w/ respect to the taxable year of the corp. preceding Facts: In 1948, pet. inherited 2 parcels
the date of the sale or exchange was, under the law of land, w/c he subdivided into 29 lots &
applicable to such taxable year, a personal holding company leased 28. In 1950, he sold the lots on an
or a foreign personal holding company, except in the cases
installment basis to their occupants. Lot 29
of distributions in liquidation;
was subsequently subdivided & paved, & were
10. Between a grantor & a fiduciary of any trust;
also sold on a 10 yr. annual amortization basis.
11. Between the fiduciary of a trust & the fiduciary of
He reported his income fr. the sale of the lots
another trust, if the same person is a grantor w/ respect to
each trust; or as long-term capital gain. In 1957, he treated
12. Between a fiduciary of a trust & a beneficiary of such
his income fr. the sale of the small lots as
trust. capital gains & included only 1/2 as taxable
income. He deducted the real estate dealers
tax he paid in 1957 due to the rentals fr. his 28
Sec. 132, Rev. Reg. 2 Definition of capital assets .
lots & other properties. BIR charged him w/
The law provides that the term capital assets shall be held to
mean property held by the taxpayer (WON connected w/ his
deficiency income, considering the sale as
trade or business) . . . Same as Sec. 33, NIRC . ordinary gains & not capital.
The term capital asset includes all classes of property not Issue: WON properties inherited by
specifically excluded by S30 (a). petitioner should be regarded as capital assets
The exclusion fr. the term capital assets by property used in
the trade or business of the taxpayer of a character w/c is Held: NO. When pet. inherited the properties,
subject to the allowance for depreciation in S30 (f) NIRC - he got not only the duty to respect any
is limited to property used by the taxpayer in the trade or contract thereon but also the correlative right
business at the time of the sale or exchange (&) to receive & enjoy the fruits of the business &
it has no application to gains or losses arising fr. the sale of the property w/c the decedent had established.
real property used in the trade or business to the extent that Also, pet. owned other properties w/c he
such gain or loss is allocable to the land, as distinguished fr. rented out, fr. w/c he periodically derived a
depreciable improvements upon the land. substantial income, & for w/c he had to pay
the real estate dealers tax, w/c he used to

APP 33
INCOME TAX REVIEWER
deduct fr. his gross income. Under the was paid by the Govt. in the form of tax
circumstances, pets sale of the lots forming exempt bonds does not operate to exempt said
part of his rental business cannot be income fr. tax. The income fr. the sale of the
characterized as other than sales of non- land in question & the bonds are 2 different &
capital, or ordinary assets. (remember distinct taxable items so that the exemption
exceptions in S33). does not operate to exempt the other, unless
the law expressly so provides. The tax here is
on the income derived fr. the sale of E.
Calasanz vs. Com. 144 SCRA 644 Rodriguezs prop. to the Govt. not the income
Facts: Petitioner inherited fr. her father derived fr. the sale or exchange of the bonds.
an agricultural land in Rizal. In order to
liquidate her inheritance, she had the land 2. Computation of gain/loss
surveyed, introduced improvements thereon &
sold the lots at a profit. In their joint ITR, they
SEC. 40. Determination of Amount and Recognition of
disclosed a profit of P 31,060 fr. the sale of the
Gain or Loss. -
subdivided lots, & reported 50% thereof as
(A) Computation of Gain or Loss. - The gain from the sale or
taxable capital gains. Revenue examiner other disposition of property shall be the excess of the
adjudged pets. as engaged in business as real amount realized therefrom over the basis or adjusted basis for
estate dealers, required them to pay real determining gain, and the loss shall be the excess of the basis
estate dealers tax & assessed a deficiency or adjusted basis for determining loss over the amount
income tax on profits derived fr. the sale based realized. The amount realized from the sale or other
on the rates for ordinary income. disposition of property shall be the sum of money received
plus the fair market value of the property (other than money)
Issue: WON pets. are real estate dealers received;
liable for real estate dealers tax (B) Basis for Determining Gain or Loss from Sale or
Disposition of Property. - The basis of property shall be -
WON gains realized fr. the sale of the
(1) The cost thereof in the case of property acquired on or after
lots are taxable as ordinary income
March 1, 1913, if such property was acquired by purchase; or
Held: YES in both . The activities of pet. are (2) The fair market price or value as of the date of acquisition, if
no different fr. those invariably employed by the same was acquired by inheritance; or
one engaged in the business of selling real (3) If the property was acquired by gift, the basis shall be the
estate. There was extensive development same as if it would be in the hands of the donor or the last
such that pets. did not sell the land in the preceding owner by whom it was not acquired by gift, except
condition in w/c they acquired it. A that if such basis is greater than the fair market value of the
property at the time of the gift then, for the purpose of
considerable amount was expended to cover determining loss, the basis shall be such fair market value; or
the cost of the improvements. It has been
(4) If the property was acquired for less than an adequate
held that a property ceases to be a capital consideration in money or money's worth, the basis of such
asset if the amount expended to improve it is property is the amount paid by the transferee for the
double its original cost, as in the CAB, for the property; or
extensive improvements indicates that the (5) The basis as defined in paragraph (C)(5) of this Section, if
seller held the property primarily for sale to its the property was acquired in a transaction where gain or loss
customers in the ordinary course of business. is not recognized under paragraph (C)(2) of this Section.
And since they are engaged in the business of (C) Exchange of Property. -
real estate, it follows that the property sold (1) General Rule. - Except as herein provided, upon the sale or
falls w/in the exception in the definition of exchange or property, the entire amount of the gain or loss,
capital assets in S33, NIRC. as the case may be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation -
Rodriguez vs. Collector
(a) A corporation, which is a party to a merger or consolidation,
Facts: The Govt. paid P1,238,204.00 to E.
exchanges property solely for stock in a corporation, which is
Rodriguez Inc. as payment for its land w/c was a party to the merger or consolidation; or
expropriated by the govt. Of the said amount, (b) A shareholder exchanges stock in a corporation, which is a
P625,315.90 were in the form of tax-exempt party to the merger or consolidation, solely for the stock of
govt. bonds. Nung bayaran na ng tax, E. another corporation also a party to the merger or
Rodriguez Inc. did not include the sum of P625 consolidation; or
thou, believing it to be exempt fr. taxation. (c) A security holder of a corporation, which is a party to the
Ergo, the CIR assessed E. Rodriguez w/ a merger or consolidation, exchanges his securities in such
deficiency income tax. corporation, solely for stock or securities in such corporation,
a party to the merger or consolidation.
Held: There can be no question that E. No gain or loss shall also be recognized if property is transferred
Rodriguez is taxable on its income derived fr. to a corporation by a person in exchange for stock or unit of
the sale of its prop. to the Govt. The fact that participation in such a corporation of which as a result of such
a portion of the purchase price of the prop. exchange said person, alone or together with others, not

APP 34
INCOME TAX REVIEWER
exceeding four (4) persons, gains control of said corporation: (b) The basis of the property transferred in the hands of the
Provided, That stocks issued for services shall not be transferee shall be the same as it would be in the hands of
considered as issued in return for property. the transferor increased by the amount of the gain recognized
(3) Exchange Not Solely in Kind. - to the transferor on the transfer.
(a) If, in connection with an exchange described in the above
exceptions, an individual, a shareholder, a security holder or a (6) Definitions. -
corporation receives not only stock or securities permitted to (a) The term 'securities' means bonds and debentures but not
be received without the recognition of gain or loss, but also 'notes" of whatever class or duration.
money and/or property, the gain, if any, but not the loss, (b) The term 'merger' or 'consolidation', when used in this
shall be recognized but in an amount not in excess of the sum Section, shall be understood to mean: (i) the ordinary merger
of the money and fair market value of such other property or consolidation, or (ii) the acquisition by one corporation of
received: Provided, That as to the shareholder, if the money all or substantially all the properties of another corporation
and/or other property received has the effect of a distribution solely for stock: Provided, That for a transaction to be
of a taxable dividend, there shall be taxed as dividend to the regarded as a merger or consolidation within the purview of
shareholder an amount of the gain recognized not in excess of this Section, it must be undertaken for a bona fide business
his proportionate share of the undistributed earnings and purpose and not solely for the purpose of escaping the burden
profits of the corporation; the remainder, if any, of the gain of taxation: Provided, further, That in determining whether a
recognized shall be treated as a capital gain. bona fide business purpose exists, each and every step of the
(b) If, in connection with the exchange described in the above transaction shall be considered and the whole transaction or
exceptions, the transferor corporation receives not only stock series of transaction shall be treated as a single unit:
permitted to be received without the recognition of gain or Provided, finally , That in determining whether the property
loss but also money and/or other property, then (i) if the transferred constitutes a substantial portion of the property of
corporation receiving such money and/or other property the transferor, the term 'property' shall be taken to include
distributes it in pursuance of the plan of merger or the cash assets of the transferor.
consolidation, no gain to the corporation shall be recognized (c) The3term 'control', when used in this Section, shall mean
from the exchange, but (ii) if the corporation receiving such ownership of stocks in a corporation possessing at least fifty-
other property and/or money does not distribute it in one percent (51%) of the total voting power of all classes of
pursuance of the plan of merger or consolidation, the gain, if stocks entitled to vote.
any, but not the loss to the corporation shall be recognized
(d) The Secretary of Finance, upon recommendation of the
but in an amount not in excess of the sum of such money and
Commissioner, is hereby authorized to issue rules and
the fair market value of such other property so received,
regulations for the purpose 'substantially all' and for the
which is not distributed.
proper implementation of this Section.

(4) Assumption of Liability. -


(a) If the taxpayer, in connection with the exchanges described a. Cost of basis of the property
in the foregoing exceptions, receives stock or securities which
sold
would be permitted to be received without the recognition of
the gain if it were the sole consideration, and as part of the
consideration, another party to the exchange assumes a
liability of the taxpayer, or acquires from the taxpayer SEC. 39. Capital Gains and Losses. -
property, subject to a liability, then such assumption or (A) Definitions. - As used in this Title -
acquisition shall not be treated as money and/or other (1) Capital Assets. - the term 'capital assets' means property
property, and shall not prevent the exchange from being held by the taxpayer (whether or not connected with his trade
within the exceptions. or business), but does not include stock in trade of the
(b) If the amount of the liabilities assumed plus the amount of taxpayer or other property of a kind which would properly be
the liabilities to which the property is subject exceed the total included in the inventory of the taxpayer if on hand at the
of the adjusted basis of the property transferred pursuant to close of the taxable year, or property held by the taxpayer
such exchange, then such excess shall be considered as a primarily for sale to customers in the ordinary course of his
gain from the sale or exchange of a capital asset or of trade or business, or property used in the trade or business,
property which is not a capital asset, as the case may be. of a character which is subject to the allowance for
(5) Basis - depreciation provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer.
(a) The basis of the stock or securities received by the
transferor upon the exchange specified in the above exception (2) Net Capital Gain. - The term 'net capital gain' means the
shall be the same as the basis of the property, stock or excess of the gains from sales or exchanges of capital assets
securities exchanged, decreased by (1) the money received, over the losses from such sales or exchanges.
and (2) the fair market value of the other property received, (3) Net Capital Loss. - The term 'net capital loss' means the
and increased by (a) the amount treated as dividend of the excess of the losses from sales or exchanges of capital assets
shareholder and (b) the amount of any gain that was over the gains from such sales or exchanges.
recognized on the exchange: Provided, That the property (B) Percentage Taken into Account. - In the case of a
received as 'boot' shall have as basis its fair market value: taxpayer, other than a corporation, only the following
Provided, further, That if as part of the consideration to the percentages of the gain or loss recognized upon the sale or
transferor, the transferee of property assumes a liability of the exchange of a capital asset shall be taken into account in
transferor or acquires form the latter property subject to a computing net capital gain, net capital loss, and net income:
liability, such assumption or acquisition (in the amount of the
(1)One hundred percent (100%) if the capital asset has been
liability) shall, for purposes of this paragraph, be treated as
held for not more than twelve (12) months; and
money received by the transferor on the exchange: Provided,
finally, That if the transferor receives several kinds of stock or (2)Fifty percent (50%) if the capital asset has been held for
securities, the Commissioner is hereby authorized to allocate more than twelve (12) months;
the basis among the several classes of stocks or securities.

APP 35
INCOME TAX REVIEWER
b. Cost or basis of prop. corporation, solely for stock or securities in such corporation,
exchanged in corporate a party to the merger or consolidation.
readjustment No gain or loss shall also be recognized if property is transferred
to a corporation by a person in exchange for stock or unit of
participation in such a corporation of which as a result of such
Section 39 (C, 5) NIRC---Basis.-- exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation:
(a) The basis of the stock or securities received by the Provided, That stocks issued for services shall not be
transferor upon the exchange specified in the above exception considered as issued in return for property.
shall be the same as the basis of the property, stock or
securities exchanged, decreased by (1) the money received,
and (2) the fair market value of the other property received, Meaning of merger/ consolidation/ control/
and increased by (a) the amount treated as dividend of the
shareholder and (b) the amount of any gain that was securities
recognized on the exchange: Provided, That the property
received as 'boot' shall have as basis its fair market value:
Provided, further, That if as part of the consideration to the
transferor, the transferee of property assumes a liability of the Sec. 40 (C, 6) Definitions. -
transferor or acquires form the latter property subject to a (a) The term 'securities' means bonds and debentures but not
liability, such assumption or acquisition (in the amount of the 'notes" of whatever class or duration.
liability) shall, for purposes of this paragraph, be treated as
(b) The term 'merger' or 'consolidation', when used in this
money received by the transferor on the exchange: Provided,
Section, shall be understood to mean: (i) the ordinary merger
finally, That if the transferor receives several kinds of stock or
or consolidation, or (ii) the acquisition by one corporation of
securities, the Commissioner is hereby authorized to allocate
all or substantially all the properties of another corporation
the basis among the several classes of stocks or securities.
solely for stock: Provided, That for a transaction to be
(b) The basis of the property transferred in the hands of the regarded as a merger or consolidation within the purview of
transferee shall be the same as it would be in the hands of this Section, it must be undertaken for a bona fide business
the transferor increased by the amount of the gain recognized purpose and not solely for the purpose of escaping the burden
to the transferor on the transfer. of taxation: Provided, further, That in determining whether a
bona fide business purpose exists, each and every step of the
transaction shall be considered and the whole transaction or
c. Recognition of gain/loss in series of transaction shall be treated as a single unit:
exchange of prop. Provided, finally , That in determining whether the property
transferred constitutes a substantial portion of the property of
the transferor, the term 'property' shall be taken to include
i. General rule the cash assets of the transferor.
(c) The3term 'control', when used in this Section, shall mean
ownership of stocks in a corporation possessing at least fifty-
one percent (51%) of the total voting power of all classes of
stocks entitled to vote.
Sec. 39 (C). Limitation on Capital Losses. - Losses from (d) The Secretary of Finance, upon recommendation of the
sales or exchanges of capital assets shall be allowed only to Commissioner, is hereby authorized to issue rules and
the extent of the gains from such sales or exchanges. If a regulations for the purpose 'substantially all' and for the
bank or trust company incorporated under the laws of the proper implementation of this Section.
Philippines, a substantial part of whose business is the receipt
of deposits, sells any bond, debenture, note, or certificate or
other evidence of indebtedness issued by any corporation
Commissioner vs. Rufino
(including one issued by a government or political subdivision Facts: There are two corporations in this
thereof), with interest coupons or in registered form, any loss case---both are named Eastern Theatrical Co.
resulting from such sale shall not be subject to the foregoing
We will call them E1 for the old corporation &
limitation and shall not be included in determining the
applicability of such limitation to other losses. E2 for the new corpo. In a special meeting of
stockholders of E1, a resolution was passed
authorizing E1 to MERGE w/ E2 by transferring
Sec. 136 RR 2.
its business, assets, goodwill, & liabilities to
the latter. In exchange, E2 would issue &
ii. Exception: Where no gain distribute to the shareholders of E1 one share
or loss shall be recognized for each share held by them in the said corpo.
The merger was necessary to continue the
Sec. 40(C, 2) Exception. - No gain or loss shall be recognized
if in pursuance of a plan of merger or consolidation-
exhibition of moving pictures at the Lyric &
Capitol Theaters even after the corporate
(a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is
existence of E1, in view of its pending booking
a party to the merger or consolidation; or contracts & CBA w/ its Ees. The CIR declared
(b) A shareholder exchanges stock in a corporation, which is a that the merger was not undertaken for a bona
party to the merger or consolidation, solely for the stock of fide business purpose but merely TO AVOID
another corporation also a party to the merger or LIABILITY for the capital gains tax on the
consolidation; or exchange of the old for the new shares of
(c) A security holder of a corporation, which is a party to the stock. CIR then imposed deficiency
merger or consolidation, exchanges his securities in such

APP 36
INCOME TAX REVIEWER
assessments on capital gains taxes on the (& NOT 91) w/c shall be declared for income
stocks received by the shareholders of E1. tax purposes in their tax returns to be filed on
Held: No taxable gain was derived by the or before April 15, 93. Likewise, Rev. Reg. No.
shareholders fr. the transaction. There was a 1-92 shall take effect on compensation income
valid merger although the actual transfer of earned or received fr. Jan. 1, 92.
the properties subject of the Deed of However, in a decision in the
Assignment was not made on the date of the consolidated cases of Reynaldo V. Umali vs.
merger. The merger in question involved a Hon. Jesus P. Estanislao, Sec. of Finance & Hon.
pooling of resources aimed at the continuation Jesus U. Ong, CIR & Rene B. Gorospe, et al, vs.
& expansion of business & so came under the CIR, promulgated May 29, 92, the Supreme
letter & intendment of the NIRC, as amended, Court held that---
EXEMPTING fr. the capital gains tax exchanges WHEREFORE, Secs. 1, 3 & 5 of Rev.
of property effected under lawful corporate Reg. No. 1-92 w/c provide that the regulations
combinations. The fact is that the merger shall take effect on compensation income
merely deferred the claim for taxes w/c may be earned or received fr. 1 Jan. 92 are hereby SET
asserted by the govt later, when gains are ASIDE. They should take effect on
REALIZED & benefits are distributed among compensation income earned or received fr. 1
the stockholders as a result of the merger. Jan. 91.
Collector vs. Binalbagan Estate Since this decision is promulgated after
Facts: Binalbagan & Isabela Sugar Co. 15 April 92, the individual taxpayers entitled
proposed to MERGE their assets to form a NEW to the increased exemptions on compensation
CORP., BISCOM, w/ a capital stock of 400 Thous income earned during a calendar year 91 who
Non Par value shares. The assets of both may have filed their income tax returns on or
merging companies were assessed & the before 15 April 92 (later extended to 24 April
market value of Binalbagans tangible assets 1992) w/o the benefit of such increased
was fixed as P2,541,134.69, & the sugar quota exemptions, are entitled to the corresponding
at P5/picul or P1,482,629.28. On the basis of tax refunds &/or credits, & respondents are
such, the merger was realized w/ Binalbagan ordered to effect such refunds &/or credits. No
being allocated 216,000 shares in exchange for costs.
its tangible assets & sugar quota. In 1948, The BIR is filing a motion for recon of
Binalbagans equity was reduced to 176,945 the aforementioned decision.
when it gave away 29,055 shares to 3 small
sugar centrals. In 1951, these shares were sold Accordingly, pending resolution of our
for P6.1 M payable in installments--- (P1.5 in Motion for Recon, the basic personal &
51; P350 Thous + interest in 52; A total of additional exemptions allowable to individual
P15 thou for 53). The income tax was paid. For taxpayers for income tax purposes under Sec.
1951, Binalbagan deducted the book value of 29 (L) of the NIRC before its amendment by RA
its tangible assets at P824,559.91 fr. the initial No. 7167 shall still apply for purposes of
payment of P1.5 M. 50% of the remainder was w/holding of income tax on wages as well as in
reported as income or gain fr. the sale of the computation of the second installment
capital assets. In 54, CIR assessed deficiency payable on or before July 15, 92 of individual
income tax for 51, 52, & 53. income tax for taxable year 91.
Held: Where 2 corporations merged their
assets to form a new corporation, each
receiving non par value shares corresponding iii. Exception: Where gain is
to their assets contributed, it is held that the recognized but not the loss
basis in computing the taxable gain fr. the sale aa. Exchange not solely in kind
of its shares of stock in the new corporation is
Sec. 39 (C, 3) NIRC Exchange Not Solely in Kind.
the fair market value of its assets given in
(a) If, in connection with an exchange described in the above
exchange for said shares at the time of said
exceptions, an individual, a shareholder, a security holder or a
exchange. corporation receives not only stock or securities permitted to
be received without the recognition of gain or loss, but also
money and/or property, the gain, if any, but not the loss,
Revenue Memo Order 26-92
shall be recognized but in an amount not in excess of the sum
On Dec. 26, 91 & Jan. 3, 92, Revenue of the money and fair market value of such other property
Reg. No. 1-92 & Rev. Mem. Circ. No. 1-92 were received: Provided, That as to the shareholder, if the money
and/or other property received has the effect of a distribution
respectively issued by this Office clarifying that
of a taxable dividend, there shall be taxed as dividend to the
the increased basic personal & additional shareholder an amount of the gain recognized not in excess of
exemptions under the amendatory provisions his proportionate share of the undistributed earnings and
of RA 7167 shall apply to earnings/income of profits of the corporation; the remainder, if any, of the gain
individual taxpayers starting taxable year 92 recognized shall be treated as a capital gain.

APP 37
INCOME TAX REVIEWER
(b) If, in connection with the exchange described in the above the outstanding stock of which is owned, directly or
exceptions, the transferor corporation receives not only stock indirectly, by or for the same individual if either one of such
permitted to be received without the recognition of gain or corporations, with respect to the taxable year of the
loss but also money and/or other property, then (i) if the corporation preceding the date of the sale of exchange was
corporation receiving such money and/or other property under the law applicable to such taxable year, a personal
distributes it in pursuance of the plan of merger or holding company or a foreign personal holding company;
consolidation, no gain to the corporation shall be recognized (4) Between the grantor and a fiduciary of any trust; or
from the exchange, but (ii) if the corporation receiving such
(5) Between the fiduciary of and the fiduciary of a trust and the
other property and/or money does not distribute it in
fiduciary of another trust if the same person is a grantor
pursuance of the plan of merger or consolidation, the gain, if
with respect to each trust; or
any, but not the loss to the corporation shall be recognized
but in an amount not in excess of the sum of such money and (6) Between a fiduciary of a trust and beneficiary of such
the fair market value of such other property so received, trust.
which is not distributed.

Illegal transactions
bb. Other transactions where
gain is recognized but not the
iv. Gains & losses attributable
loss
(to) taxpayers failure to
exercise privileges or
Wash sales/ compared w/ short selling options to buy/sell prop.

SEC. 38. Losses from Wash Sales of Stock or Securities. d. Exclusions:


-
(A) In the case of any loss claimed to have been sustained from Gains derived fr. buying & selling
any sale or other disposition of shares of stock or securities shares of stock listed & traded
where it appears that within a period beginning thirty (30) through the local exchange
days before the date of such sale or disposition and ending
thirty (30) days after such date, the taxpayer has acquired (by excluded/ exempt from income tax but subject
purchase or by exchange upon which the entire amount of to percentage tax
gain or loss was recognized by law), or has entered into a
contact or option so to acquire, substantially identical stock or SEC. 127. Tax on Sale, Barter or Exchange of Shares of
securities, then no deduction for the loss shall be allowed Stock Listed & Traded through the Local Stock
under Section 34 unless the claim is made by a dealer in stock Exchange or through initial Public Offering-
or securities and with respect to a transaction made in the (A) Tax of Sale, Barter or Exchange of Shares of Stock Listed &
ordinary course of the business of such dealer. Traded Through the Local Stock Exchange
(B) If the amount of stock or securities acquired (or covered by There shall be levied, assessed & collected on every
the contract or option to acquire) is less than the amount of
sale, barter, exchange
stock or securities sold or otherwise disposed of, then the
particular shares of stock or securities, the loss form the sale or other disposition of
or other disposition of which is not deductible, shall be shares of stock
determined under rules and regulations prescribed by the listed & traded through the local stock exchange
Secretary of Finance, upon recommendation of the
other than the sale by a dealer in securities,
Commissioner.
a tax at the rate of
(C) If the amount of stock or securities acquired (or covered by
the contract or option to acquire which) resulted in the non- 1/2 of 1% of the gross selling price or
deductibility of the loss, shall be determined under rules and gross value in money of the shares of stock
regulations prescribed by the Secretary of Finance, upon sold, bartered, exchanged or otherwise disposed
recommendation of the Commissioner.
w/c shall be paid by the seller or transferor.

Transactions bet. related taxpayers (B) Tax on Shares of Stock Sold or Exchanged through Initial
Who are related taxpayers? Public Offering -
There shall be levied, assessed & collected on every
Sec. 36 NIRC. (B) Losses from Sales or Exchanges of sale, barter, exchange or other disposition
Property. - In computing net income, no deductions shall in through initial public offering of shares of stock
any case be allowed in respect of losses from sales or in closely held corporations, as defined herein,
exchanges of property directly or indirectly
a tax at the rates provided hereunder
(1) Between members of a family. For purposes of this
based on the gross selling price or
paragraph, the family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood), gross value in money of
spouse, ancestors, and lineal descendants; or the shares of stock
(2) Except in the case of distributions in liquidation, between an sold bartered, exchanged or otherwise disposed in
individual and corporation more than fifty percent (50%) in accordance w/ the proportion of shares of stock sold,
value of the outstanding stock of which is owned, directly or bartered, exchanged or otherwise disposed
indirectly, by or for such individual; or to the total outstanding shares of stock after the listing in
(3) Except in the case of distributions in liquidation, between the local stock exchange:
two corporations more than fifty percent (50%) in value of

APP 38
INCOME TAX REVIEWER
Up to 25% : 4%
Over 25% but not over 33 1/3% : 2% (1 ) Return on Capital Gains Realized fr. Sale of Shares of Stock
Over 33 1/3% : 1% Listed & Traded in the Local Stock Exchange
It shall be the duty
The tax herein imposed shall be of every stock broker who effected the sale
paid by the issuing corporation in primary offering subject to the tax imposed herein
or by the seller in secondary offering. to collect the tax & remit the same
to the Bureau of Internal Revenue
For purpose of this Section, w/in five (5) banking days fr. the date of collection thereof
&
the term closely held corporation means
to submit on Mondays of each week
any corporation at least 50% in value of the outstanding
capital stock or to the secretary of the stock exchange,
at least 50% of the total combined voting power of of w/c he is a member,
all classes of stock entitled to vote a true & complete return
is owned directly or indirectly by or for not more than 20 w/c shall contain a declaration of all his transactions
individuals. effected through him during the preceding week &
taxes collected by him & turned over
For purposes of determining whether the corporation is a closely to the Bureau of Internal Revenue.
held corporation insofar as such determination is based on
stock ownership, the following rules shall be applied:
(2) Return of Public Offering of Shares of Stock
In case of primary offering,
(1) Stock Now Owned by Individuals
the corporate issuer shall
Stock owned
file the return & pay the corresponding tax
directly or indirectly
w/in thirty (30) days fr. the date of listing of the shares of
by or for a corporation, partnership, estate or trust
stock in the local stock exchange.
shall be considered as being owned proportionately by its
In the case of secondary offering,
shareholders, partners or beneficiaries.
the provision of Subsection (C)(1) of this Section
shall apply as to the time & manner of the payment of the
(2) Family & Partnership Ownership
tax.
An individual shall be considered as owning the stock owned,
directly or indirectly,
(D) Common Provisions
by or for his family,
Any gain derived
or by or for his partner. fr. the sale, barter, exchange or other disposition
of shares of stock
For purposes of this par.,
under this Section
the family of an individual shall be exempt fr. the tax imposed
includes only his brothers & sisters (whether by whole or in Sections 24(C), 27(D)(2), 28(A)(8)(c), & 28(B)(5)(c) of
half-blood), this Code &
spouse, ancestors & lineal descendants. fr. the regular individual or corporate income tax.

(3) Options - If any person has an option to acquire stock, such Tax paid under this Section shall not be deductible for income
stock shall be considered as owned by such person. For tax purposes .
purposes of this paragraph, an option to acquire such an
option & each one of a series of options shall be considered
as an option to acquire such stock. e. Applicable tax rate
(4) Constructive Ownership as Actual Ownership -
Stock constructively owned by reason of the application of
paragraph (1) or (3) hereof shall, SEC. 24. Income Tax Rates.
for purposes of applying paragraph (1) or (2), (A) Rates of Income Tax on Individual Citizen and Individual
be treated as actually owned by such person; Resident Alien of the Philippines.
but stock constructively owned by the individual (1) An income tax is hereby imposed:

by reason of the application of paragraph (2) hereof (a) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C)
shall not be treated as owned by him and (D) of this Section, derived for each taxable year from all
for purposes of again applying such paragraph sources within and without the Philippines be every individual
in order to make another citizen of the Philippines residing therein;
the constructive owner of such stock. (b) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C)
and (D) of this Section, derived for each taxable year from all
(C) Return on Capital Gains Realized fr. Sale of Shares of Stocks sources within the Philippines by an individual citizen of the
- Philippines who is residing outside of the Philippines including

APP 39
INCOME TAX REVIEWER
overseas contract workers referred to in Subsection(C) of (2) Cash and/or Property Dividends - A final tax at the following
Section 23 hereof; and rates shall be imposed upon the cash and/or property
(c) On the taxable income defined in Section 31 of this Code, dividends actually or constructively received by an individual
other than income subject to tax under Subsections (b), (C) from a domestic corporation or from a joint stock company,
and (D) of this Section, derived for each taxable year from all insurance or mutual fund companies and regional operating
sources within the Philippines by an individual alien who is a headquarters of multinational companies, or on the share of
resident of the Philippines. an individual in the distributable net income after tax of a
partnership (except a general professional partnership) of
The tax shall be computed in accordance with and at the rates
which he is a partner, or on the share of an individual in the
established in the following schedule:
net income after tax of an association, a joint account, or a
joint venture or consortium taxable as a corporation of which
Not over P10,000 5% he is a member or co-venturer:
Over P10,000 but not over P30,000P500+10% of the
excess over P10,000 Six percent (6%) beginning January 1, 1998;
Over P30,000 but not over P70,000P2,500+15% of the Eight percent (8%) beginning January 1, 1999;
excess over P30,000
Ten percent (10% beginning January 1, 2000.
Over P70,000 but not over P140,000.P8,500+20% of the
excess over P70,000
Provided, however, That the tax on dividends shall apply only on
Over P140,000 but not over P250,000P22,500+25% of the income earned on or after January 1, 1998. Income forming
excess over P140,000 part of retained earnings as of December 31, 1997 shall not,
Over P250,000 but not over P500,000P50,000+30% of the even if declared or distributed on or after January 1, 1998, be
excess over P250,000 subject to this tax.
Over P500,000 P125,000+34% of the (C) Capital Gains from Sale of Shares of Stock not Traded in the
excess over P500,000 in 1998. Stock Exchange. - The provisions of Section 39(B)
Provided, That effective January 1, 1999, the top marginal rate notwithstanding, a final tax at the rates prescribed below is
shall be thirty-three percent (33%) and effective January 1, hereby imposed upon the net capital gains realized during the
2000, the said rate shall be thirty-two percent (32%). taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation,
For married individuals, the husband and wife, subject to the except shares sold, or disposed of through the stock
provision of Section 51 (D) hereof, shall compute separately exchange.
their individual income tax based on their respective total
taxable income: Provided, That if any income cannot be Not over P100,000.. 5%
definitely attributed to or identified as income exclusively On any amount in excess of P100,000 10%
earned or realized by either of the spouses, the same shall be (D) Capital Gains from Sale of Real Property. -
divided equally between the spouses for the purpose of
(1) In General. - The provisions of Section 39(B)
determining their respective taxable income.
notwithstanding, a final tax of six percent (6%) based on the
(B) Rate of Tax on Certain Passive Income. gross selling price or current fair market value as determined
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax in accordance with Section 6(E) of this Code, whichever is
at the rate of twenty percent (20%) is hereby imposed upon higher, is hereby imposed upon capital gains presumed to
the amount of interest from any currency bank deposit and have been realized from the sale, exchange, or other
yield or any other monetary benefit from deposit substitutes disposition of real property located in the Philippines,
and from trust funds and similar arrangements; royalties, classified as capital assets, including pacto de retro sales and
except on books, as well as other literary works and musical other forms of conditional sales, by individuals, including
compositions, which shall be imposed a final tax of ten estates and trusts: Provided, That the tax liability, if any, on
percent (10%); prizes (except prizes amounting to Ten gains from sales or other dispositions of real property to the
thousand pesos (P10,000) or less which shall be subject to government or any of its political subdivisions or agencies or
tax under Subsection (A) of Section 24; and other winnings to government-owned or controlled corporations shall be
(except Philippine Charity Sweepstakes and Lotto winnings), determined either under Section 24 (A) or under this
derived from sources within the Philippines: Provided, Subsection, at the option of the taxpayer.
however, That interest income received by an individual (2) Exception. - The provisions of paragraph (1) of this
taxpayer (except a nonresident individual) from a depository Subsection to the contrary notwithstanding, capital gains
bank under the expanded foreign currency deposit system presumed to have been realized from the sale or disposition
shall be subject to a final income tax at the rate of seven and of their principal residence by natural persons, the proceeds
one-half percent (7 1/2%) of such interest income: Provided, of which is fully utilized in acquiring or constructing a new
further, That interest income from long-term deposit or principal residence within eighteen (18) calendar months from
investment in the form of savings, common or individual trust the date of sale or disposition, shall be exempt from the
funds, deposit substitutes, investment management accounts capital gains tax imposed under this Subsection: Provided,
and other investments evidenced by certificates in such form That the historical cost or adjusted basis of the real property
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be sold or disposed shall be carried over to the new principal
exempt from the tax imposed under this Subsection: Provided, residence built or acquired: Provided, further, That the
finally, That should the holder of the certificate pre-terminate Commissioner shall have been duly notified by the taxpayer
the deposit or investment before the fifth (5 th) year, a final tax within thirty (30) days from the date of sale or disposition
shall be imposed on the entire income and shall be deducted through a prescribed return of his intention to avail of the tax
and withheld by the depository bank from the proceeds of the exemption herein mentioned: Provided, still further, That the
long-term deposit or investment certificate based on the said tax exemption can only be availed of once every ten (10)
remaining maturity thereof: years: Provided, finally, that if there is no full utilization of the
proceeds of sale or disposition, the portion of the gain
Four (4) years to less than five (5) years - 5%; presumed to have been realized from the sale or disposition
Three (3) years to less than (4) years - 12%; and shall be subject to capital gains tax. For this purpose, the
gross selling price or fair market value at the time of sale,
Less than three (3) years - 20% whichever is higher, shall be multiplied by a fraction which the

APP 40
INCOME TAX REVIEWER
unutilized amount bears to the gross selling price in order to collected and paid for each taxable year upon the entire
determine the taxable portion and the tax prescribed under income received from all sources within the Philippines by
paragraph (1) of this Subsection shall be imposed thereon. every nonresident alien individual not engaged in trade or
business within the Philippines as interest, cash and/or
property dividends, rents, salaries, wages, premiums,
SEC. 25. Tax on Nonresident Alien Individual. -
annuities, compensation, remuneration, emoluments, or other
(A) Nonresident Alien Engaged in trade or Business Within the fixed or determinable annual or periodic or casual gains,
Philippines. - profits, and income, and capital gains, a tax equal to twenty-
(1) In General. - A nonresident alien individual engaged in trade five percent (25%) of such income. Capital gains realized by a
or business in the Philippines shall be subject to an income nonresident alien individual not engaged in trade or business
tax in the same manner as an individual citizen and a resident in the Philippines from the sale of shares of stock in any
alien individual, on taxable income received from all sources domestic corporation and real property shall be subject to the
within the Philippines. A nonresident alien individual who shall income tax prescribed under Subsections (C) and (D) of
come to the Philippines and stay therein for an aggregate Section 24.
period of more than one hundred eighty (180) days during (C) Alien Individual Employed by Regional or Area Headquarters
any calendar year shall be deemed a 'nonresident alien doing and Regional Operating Headquarters of Multinational
business in the Philippines'. Section 22 (G) of this Code Companies. - There shall be levied, collected and paid for
notwithstanding. each taxable year upon the gross income received by every
(2) Cash and/or Property Dividends from a Domestic alien individual employed by regional or area headquarters
Corporation or Joint Stock Company, or Insurance or Mutual and regional operating headquarters established in the
Fund Company or Regional Operating Headquarter or Philippines by multinational companies as salaries, wages,
Multinational Company, or Share in the Distributable Net annuities, compensation, remuneration and other
Income of a Partnership (Except a General Professional emoluments, such as honoraria and allowances, from such
Partnership), Joint Account, Joint Venture Taxable as a regional or area headquarters and regional operating
Corporation or Association., Interests, Royalties, Prizes, and headquarters, a tax equal to fifteen percent (15%) of such
Other Winnings. - Cash and/or property dividends from a gross income: Provided, however, That the same tax
domestic corporation, or from a joint stock company, or from treatment shall apply to Filipinos employed and occupying the
an insurance or mutual fund company or from a regional same position as those of aliens employed by these
operating headquarter of multinational company, or the share multinational companies. For purposes of this Chapter, the
of a nonresident alien individual in the distributable net term 'multinational company' means a foreign firm or entity
income after tax of a partnership (except a general engaged in international trade with affiliates or subsidiaries or
professional partnership) of which he is a partner, or the branch offices in the Asia-Pacific Region and other foreign
share of a nonresident alien individual in the net income after markets.
tax of an association, a joint account, or a joint venture (D) Alien Individual Employed by Offshore Banking Units. -
taxable as a corporation of which he is a member or a co- There shall be levied, collected and paid for each taxable year
venturer; interests; royalties (in any form); and prizes (except upon the gross income received by every alien individual
prizes amounting to Ten thousand pesos (P10,000) or less employed by offshore banking units established in the
which shall be subject to tax under Subsection (B)(1) of Philippines as salaries, wages, annuities, compensation,
Section 24) and other winnings (except Philippine Charity remuneration and other emoluments, such as honoraria and
Sweepstakes and Lotto winnings); shall be subject to an allowances, from such off-shore banking units, a tax equal to
income tax of twenty percent (20%) on the total amount fifteen percent (15%) of such gross income: Provided,
thereof: Provided, however, that royalties on books as well as however, That the same tax treatment shall apply to Filipinos
other literary works, and royalties on musical compositions employed and occupying the same positions as those of aliens
shall be subject to a final tax of ten percent (10%) on the employed by these offshore banking units.
total amount thereof: Provided, further, That cinematographic
(E) Alien Individual Employed by Petroleum Service Contractor
films and similar works shall be subject to the tax provided
and Subcontractor. - An Alien individual who is a permanent
under Section 28 of this Code: Provided, furthermore, That
resident of a foreign country but who is employed and
interest income from long-term deposit or investment in the
assigned in the Philippines by a foreign service contractor or
form of savings, common or individual trust funds, deposit
by a foreign service subcontractor engaged in petroleum
substitutes, investment management accounts and other
operations in the Philippines shall be liable to a tax of fifteen
investments evidenced by certificates in such form prescribed
percent (15%) of the salaries, wages, annuities,
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from
compensation, remuneration and other emoluments, such as
the tax imposed under this Subsection: Provided, finally, that
honoraria and allowances, received from such contractor or
should the holder of the certificate pre-terminate the deposit
subcontractor: Provided, however, That the same tax
or investment before the fifth (5 th) year, a final tax shall be
treatment shall apply to a Filipino employed and occupying
imposed on the entire income and shall be deducted and
the same position as an alien employed by petroleum service
withheld by the depository bank from the proceeds of the
contractor and subcontractor.
long-term deposit or investment certificate based on the
remaining maturity thereof: 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
Four (4) years to less than five (5) years - 5%;
the case may be, imposed under this Code.
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
SEC. 26. Tax Liability of Members of General Professional
Partnerships. - A general professional partnership as such
(3) Capital Gains. - Capital gains realized from sale, barter or shall not be subject to the income tax imposed under this
exchange of shares of stock in domestic corporations not Chapter. Persons engaging in business as partners in a
traded through the local stock exchange, and real properties general professional partnership shall be liable for income tax
shall be subject to the tax prescribed under Subsections (C) only in their separate and individual capacities.
and (D) of Section 24.
For purposes of computing the distributive share of the
(B) Nonresident Alien Individual Not Engaged in Trade or partners, the net income of the partnership shall be computed
Business Within the Philippines. - There shall be levied, in the same manner as a corporation.

APP 41
INCOME TAX REVIEWER
Each partner shall report as gross income his distributive share, In the case of taxpayers engaged in the sale of service, 'gross
actually or constructively received, in the net income of the income' means gross receipts less sales returns, allowances
partnership. and discounts.

CHAPTER IV - TAX ON CORPORATIONS (B) Proprietary Educational Institutions and Hospitals. -


Proprietary educational institutions and hospitals which are
nonprofit shall pay a tax of ten percent (10%) on their taxable
SEC. 27. Rates of Income tax on Domestic Corporations.
income except those covered by Subsection (D) hereof:
-
Provided, that if the gross income from unrelated trade,
(A) In General. - Except as otherwise provided in this Code, an business or other activity exceeds fifty percent (50%) of the
income tax of thirty-five percent (35%) is hereby imposed total gross income derived by such educational institutions or
upon the taxable income derived during each taxable year hospitals from all sources, the tax prescribed in Subsection
from all sources within and without the Philippines by every (A) hereof shall be imposed on the entire taxable income. For
corporation, as defined in Section 22(B) of this Code and purposes of this Subsection, the term 'unrelated trade,
taxable under this Title as a corporation, organized in, or business or other activity' means any trade, business or other
existing under the laws of the Philippines: Provided, That activity, the conduct of which is not substantially related to
effective January 1, 1998, the rate of income tax shall be the exercise or performance by such educational institution or
thirty-four percent (34%); effective January 1, 1999, the rate hospital of its primary purpose or function. A 'Proprietary
shall be thirty-three percent (33%); and effective January 1, educational institution' is any private school maintained and
2000 and thereafter, the rate shall be thirty-two percent administered by private individuals or groups with an issued
(32%). permit to operate from the Department of Education, Culture
In the case of corporations adopting the fiscal-year accounting and Sports (DECS), or the Commission on Higher Education
period, the taxable income shall be computed without regard (CHED), or the Technical Education and Skills Development
to the specific date when specific sales, purchases and other Authority (TESDA), as the case may be, in accordance with
transactions occur. Their income and expenses for the fiscal existing laws and regulations.
year shall be deemed to have been earned and spent equally
for each month of the period. (C) Government-owned or Controlled-Corporations, Agencies or
The reduced corporate income tax rates shall be applied on the Instrumentalities. - The provisions of existing special or
amount computed by multiplying the number of months general laws to the contrary notwithstanding, all corporations,
covered by the new rates within the fiscal year by the taxable agencies, or instrumentalities owned or controlled by the
income of the corporation for the period, divided by twelve. Government, except the Government Service Insurance
Provided, further, That the President, upon the recommendation System (GSIS), the Social Security System (SSS), the
of the Secretary of Finance, may effective January 1, 2000, Philippine Health Insurance Corporation (PHIC), the Philippine
allow corporations the option to be taxed at fifteen percent Charity Sweepstakes Office (PCSO) and the Philippine
(15%) of gross income as defined herein, after the following Amusement and Gaming Corporation (PAGCOR), shall pay
conditions have been satisfied: such rate of tax upon their taxable income as are imposed by
this Section upon corporations or associations engaged in s
(1) A tax effort ratio of twenty percent (20%) of Gross National similar business, industry, or activity.
Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to
total tax revenues; (D) Rates of Tax on Certain Passive Incomes. -

(3) A VAT tax effort of four percent (4%) of GNP; and (1) Interest from Deposits and Yield or any other Monetary
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Benefit from Deposit Substitutes and from Trust Funds and
Sector Financial Position (CPSFP) to GNP. Similar Arrangements, and Royalties. - A final tax at the rate
of twenty percent (20%) is hereby imposed upon the amount
The option to be taxed based on gross income shall be available of interest on currency bank deposit and yield or any other
only to firms whose ratio of cost of sales to gross sales or monetary benefit from deposit substitutes and from trust
receipts from all sources does not exceed fifty-five percent funds and similar arrangements received by domestic
(55%). corporations, and royalties, derived from sources within the
The election of the gross income tax option by the corporation Philippines: Provided, however, That interest income derived
shall be irrevocable for three (3) consecutive taxable years by a domestic corporation from a depository bank under the
during which the corporation is qualified under the scheme. expanded foreign currency deposit system shall be subject to
For purposes of this Section, the term 'gross income' derived a final income tax at the rate of seven and one-half percent (7
from business shall be equivalent to gross sales less sales 1/2%) of such interest income.
returns, discounts and allowances and cost of goods sold.
"Cost of goods sold' shall include all business expenses (2) Capital Gains from the Sale of Shares of Stock Not Traded in
directly incurred to produce the merchandise to bring them to the Stock Exchange. - A final tax at the rates prescribed below
their present location and use. shall be imposed on net capital gains realized during the
For a trading or merchandising concern, 'cost of goods' sold taxable year from the sale, exchange or other disposition of
shall include the invoice cost of the goods sold, plus import shares of stock in a domestic corporation except shares sold
duties, freight in transporting the goods to the place where or disposed of through the stock exchange:
the goods are actually sold, including insurance while the
goods are in transit.
Not over P100,000. 5%
For a manufacturing concern, 'cost of goods manufactured and
sold' shall include all costs of production of finished goods, Amount in excess of P100,000.. 10%
such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs (3) Tax on Income Derived under the Expanded Foreign
incurred to bring the raw materials to the factory or Currency Deposit System. - Income derived by a depository
warehouse. bank under the expanded foreign currency deposit system
from foreign currency transactions with local commercial
banks, including branches of foreign banks that may be

APP 42
INCOME TAX REVIEWER
authorized by the Bangko Sentral ng Pilipinas (BSP) to discounts and cost of services. 'Cost of services' shall mean all
transact business with foreign currency depository system direct costs and expenses necessarily incurred to provide the
units and other depository banks under the expanded foreign services required by the customers and clients including (A)
currency deposit system, including interest income from salaries and employee benefits of personnel, consultants and
foreign currency loans granted by such depository banks specialists directly rendering the service and (B) cost of
under said expanded foreign currency deposit system to facilities directly utilized in providing the service such as
residents, shall be subject to a final income tax at the rate of depreciation or rental of equipment used and cost of supplies:
ten percent (10%) of such income. Provided, however, That in the case of banks, 'cost of
Any income of nonresidents, whether individuals or services' shall include interest expense.
corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax. SEC. 28. Rates of Income Tax on Foreign Corporations. -
(4) Intercorporate Dividends. - Dividends received by a (A) Tax on Resident Foreign Corporations. -
domestic corporation from another domestic corporation shall (1) In General. - Except as otherwise provided in this Code, a
not be subject to tax. corporation organized, authorized, or existing under the laws
(5) Capital Gains Realized from the Sale, Exchange or of any foreign country, engaged in trade or business within
Disposition of Lands and/or Buildings. - A final tax of six the Philippines, shall be subject to an income tax equivalent to
percent (6%) is hereby imposed on the gain presumed to thirty-five percent (35%) of the taxable income derived in the
have been realized on the sale, exchange or disposition of preceding taxable year from all sources within the Philippines:
lands and/or buildings which are not actually used in the provided, That effective January 1, 1998, the rate of income
business of a corporation and are treated as capital assets, tax shall be thirty-four percent (34%); effective January 1,
based on the gross selling price of fair market value as 1999, the rate shall be thirty-three percent (33%), and
determined in accordance with Section 6(E) of this Code, effective January 1, 2000 and thereafter, the rate shall be
whichever is higher, of such lands and/or buildings. thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting
(E) Minimum Corporate Income Tax on Domestic Corporations. - period, the taxable income shall be computed without regard
(1) Imposition of Tax. - A minimum corporate income tax of two to the specific date when sales, purchases and other
percent (2%0 of the gross income as of the end of the transactions occur. Their income and expenses for the fiscal
taxable year, as defined herein, is hereby imposed on a year shall be deemed to have been earned and spent equally
corporation taxable under this Title, beginning on the fourth for each month of the period.
taxable year immediately following the year in which such The reduced corporate income tax rates shall be applied on the
corporation commenced its business operations, when the amount computed by multiplying the number of months
minimum income tax is greater than the tax computed under covered by the new rates within the fiscal year by the taxable
Subsection (A) of this Section for the taxable year. income of the corporation for the period, divided by twelve.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the Provided, however, That a resident foreign corporation shall be
minimum corporate income tax over the normal income tax as granted the option to be taxed at fifteen percent (15%) on
computed under Subsection (A) of this Section shall be carried gross income under the same conditions, as provided in
forward and credited against the normal income tax for the Section 27 (A).
three (3) immediately succeeding taxable years. (2) Minimum Corporate Income Tax on Resident Foreign
(3) Relief from the Minimum Corporate Income Tax Under Corporations. - A minimum corporate income tax of two
Certain Conditions. - The Secretary of Finance is hereby percent (2%) of gross income, as prescribed under Section 27
authorized to suspend the imposition of the minimum (E) of this Code, shall be imposed, under the same conditions,
corporate income tax on any corporation which suffers losses on a resident foreign corporation taxable under paragraph (1)
on account of prolonged labor dispute, or because of force of this Subsection.
majeure, or because of legitimate business reverses. (3) International Carrier. - An international carrier doing
The Secretary of Finance is hereby authorized to promulgate, business in the Philippines shall pay a tax of two and one-half
upon recommendation of the Commissioner, the necessary percent (2 1/2%) on its 'Gross Philippine Billings' as defined
rules and regulation that shall define the terms and conditions hereunder:
under which he may suspend the imposition of the minimum (a) International Air Carrier. - 'Gross Philippine Billings' refers to
corporate income tax in a meritorious case. the amount of gross revenue derived from carriage of
(4) Gross Income Defined. - For purposes of applying the persons, excess baggage, cargo and mail originating from the
minimum corporate income tax provided under Subsection (E) Philippines in a continuous and uninterrupted flight,
hereof, the term 'gross income' shall mean gross sales less irrespective of the place of sale or issue and the place of
sales returns, discounts and allowances and cost of goods payment of the ticket or passage document: Provided, That
sold. "Cost of goods sold' shall include all business expenses tickets revalidated, exchanged and/or indorsed to another
directly incurred to produce the merchandise to bring them to international airline form part of the Gross Philippine Billings if
their present location and use. the passenger boards a plane in a port or point in the
For a trading or merchandising concern, 'cost of goods sold' Philippines: Provided, further, That for a flight which
shall include the invoice cost of the goods sold, plus import originates from the Philippines, but transshipment of
duties, freight in transporting the goods to the place where passenger takes place at any port outside the Philippines on
the goods are actually sold including insurance while the another airline, only the aliquot portion of the cost of the
goods are in transit. ticket corresponding to the leg flown from the Philippines to
the point of transshipment shall form part of Gross Philippine
For a manufacturing concern, cost of 'goods manufactured and
Billings.
sold' shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing (b) International Shipping. - 'Gross Philippine Billings' means
overhead, freight cost, insurance premiums and other costs gross revenue whether for passenger, cargo or mail
incurred to bring the raw materials to the factory or originating from the Philippines up to final destination,
warehouse. regardless of the place of sale or payments of the passage or
freight documents.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances,

APP 43
INCOME TAX REVIEWER
(4) Offshore Banking Units. - The provisions of any law to the On any amount in excess of P100,000. 10%
contrary notwithstanding, income derived by offshore banking (d) Intercorporate Dividends. - Dividends received by a resident
units authorized by the Bangko Sentral ng Pilipinas (BSP) to foreign corporation from a domestic corporation liable to tax
transact business with offshore banking units, including any under this Code shall not be subject to tax under this Title.
interest income derived from foreign currency loans granted
(B) Tax on Nonresident Foreign Corporation. -
to residents, shall be subject to a final income tax at the rate
of ten percent (10%) of such income. (1) In General. - Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in the
Any income of nonresidents, whether individuals or
Philippines shall pay a tax equal to thirty-five percent (35%)
corporations, from transactions with said offshore banking
of the gross income received during each taxable year from all
units shall be exempt from income tax.
sources within the Philippines, such as interests, dividends,
(5) Tax on Branch Profits Remittances. - Any profit remitted by rents, royalties, salaries, premiums (except reinsurance
a branch to its head office shall be subject to a tax of fifteen premiums), annuities, emoluments or other fixed or
(15%) which shall be based on the total profits applied or determinable annual, periodic or casual gains, profits and
earmarked for remittance without any deduction for the tax income, and capital gains, except capital gains subject to tax
component thereof (except those activities which are under subparagraphs (C) and (d): Provided, That effective 1,
registered with the Philippine Economic Zone Authority). The 1998, the rate of income tax shall be thirty-four percent
tax shall be collected and paid in the same manner as (34%); effective January 1, 1999, the rate shall be thirty-
provided in Sections 57 and 58 of this Code: provided, that three percent (33%); and, effective January 1, 2000 and
interests, dividends, rents, royalties, including remuneration thereafter, the rate shall be thirty-two percent (32%).
for technical services, salaries, wages premiums, annuities,
(2) Nonresident Cinematographic Film Owner, Lessor or
emoluments or other fixed or determinable annual, periodic or
Distributor. - A cinematographic film owner, lessor, or
casual gains, profits, income and capital gains received by a
distributor shall pay a tax of twenty-five percent (25%) of its
foreign corporation during each taxable year from all sources
gross income from all sources within the Philippines.
within the Philippines shall not be treated as branch profits
unless the same are effectively connected with the conduct of (3) Nonresident Owner or Lessor of Vessels Chartered by
its trade or business in the Philippines. Philippine Nationals. - A nonresident owner or lessor of
vessels shall be subject to a tax of four and one-half percent
(6) Regional or Area Headquarters and Regional Operating
(4 1/2%) of gross rentals, lease or charter fees from leases or
Headquarters of Multinational Companies.
charters to Filipino citizens or corporations, as approved by
the Maritime Industry Authority.
(a) Regional or area headquarters as defined in Section 22(DD)
(4) Nonresident Owner or Lessor of Aircraft, Machineries and
shall not be subject to income tax.
Other Equipment. - Rentals, charters and other fees derived
(b) Regional operating headquarters as defined in Section
by a nonresident lessor of aircraft, machineries and other
22(EE) shall pay a tax of ten percent (10%) of their taxable
equipment shall be subject to a tax of seven and one-half
income.
percent (7 1/2%) of gross rentals or fees.
7. Tax on Certain Incomes Received by a Resident Foreign
(5) Tax on Certain Incomes Received by a Nonresident Foreign
Corporation.
Corporation. -
(a) Interest from Deposits and Yield or any other Monetary
(a) Interest on Foreign Loans. - A final withholding tax at the
Benefit from Deposit Substitutes, Trust Funds and Similar
rate of twenty percent (20%) is hereby imposed on the
Arrangements and Royalties. - Interest from any currency
amount of interest on foreign loans contracted on or after
bank deposit and yield or any other monetary benefit from
August 1, 1986;
deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the (b) Intercorporate Dividends. - A final withholding tax at the
Philippines shall be subject to a final income tax at the rate of rate of fifteen percent (15%) is hereby imposed on the
twenty percent (20%) of such interest: Provided, however, amount of cash and/or property dividends received from a
That interest income derived by a resident foreign corporation domestic corporation, which shall be collected and paid as
from a depository bank under the expanded foreign currency provided in Section 57 (A) of this Code, subject to the
deposit system shall be subject to a final income tax at the condition that the country in which the nonresident foreign
rate of seven and one-half percent (7 1/2%) of such interest corporation is domiciled, shall allow a credit against the tax
income. due from the nonresident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to twenty percent
(b) Income Derived under the Expanded Foreign Currency
(20%) for 1997, nineteen percent (19%) for 1998, eighteen
Deposit System. - Income derived by a depository bank under
percent (18%) for 1999, and seventeen percent (17%)
the expanded foreign currency deposit system from foreign
thereafter, which represents the difference between the
currency transactions with local commercial banks including
regular income tax of thirty-five percent (35%) in 1997,
branches of foreign banks that may be authorized by the
thirty-four percent (34%) in 1998, and thirty-three percent
Bangko Sentral ng Pilipinas (BSP) to transact business with
(33%) in 1999, and thirty-two percent (32%) thereafter on
foreign currency deposit system units, including interest
corporations and the fifteen percent (15%) tax on dividends
income from foreign currency loans granted by such
as provided in this subparagraph;
depository banks under said expanded foreign currency
deposit system to residents, shall be subject to a final income (c) Capital Gains from Sale of Shares of Stock not Traded in the
tax at the rate of ten percent (10%) of such income. Stock Exchange. - A final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
Any income of nonresidents, whether individuals or
taxable year from the sale, barter, exchange or other
corporations, from transactions with depository banks under
disposition of shares of stock in a domestic corporation,
the expanded system shall be exempt from income tax.
except shares sold, or disposed of through the stock
(c) Capital Gains from Sale of Shares of Stock Not Traded in the exchange:
Stock Exchange. - A final tax at the rates prescribed below is
Not over P100,000.. 5%
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other On any amount in excess of P100,000 10%
disposition of shares of stock in a domestic corporation except
shares sold or disposed of through the stock exchange:
Not over P100,000 5% i. Special rates:

APP 44
INCOME TAX REVIEWER
Stock transactions sale of domestic shares corporate income tax on any corporation which suffers
classified as capital assets but not traded and losses on account of prolonged labor dispute, or because of
listed in the Phil. Stock Exch. 5% - 10% force majeure, or because of legitimate business reverses.
Sale of real prop classified as capital asset 6% The Secretary of Finance is hereby authorized to promulgate,
FINAL TAX based on gross selling price or zonal upon recommendation of the Commissioner, the necessary
value whichever is higher rules and regulation that shall define the terms and conditions
Sale of land and building by a corp. 6% FINAL under which he may suspend the imposition of the minimum
TAX based on gross selling price or zonal value corporate income tax in a meritorious case.
whichever is higher (4) Gross Income Defined. - For purposes of applying the
minimum corporate income tax provided under Subsection (E)
hereof, the term 'gross income' shall mean gross sales less
ii. Regular tax on NET CAPITAL sales returns, discounts and allowances and cost of goods
GAIN sold. "Cost of goods sold' shall include all business expenses
directly incurred to produce the merchandise to bring them to
their present location and use.
D. Gross income derived from the Conduct of For a trading or merchandising concern, 'cost of goods sold'
Trade or Business or the Exercise of a shall include the invoice cost of the goods sold, plus import
Profession; duties, freight in transporting the goods to the place where
the goods are actually sold including insurance while the
goods are in transit.
1. Computation of taxable income fr. For a manufacturing concern, cost of 'goods manufactured and
business/ conduct of trade or sold' shall include all costs of production of finished goods,
profession. such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or
warehouse.

Sec. 43, Rev. Reg. 2. Gross income fr. business . In the In the case of taxpayers engaged in the sale of service, 'gross
case of a income' means gross receipts less sales returns, allowances,
discounts and cost of services. 'Cost of services' shall mean all
a) manufacturing, direct costs and expenses necessarily incurred to provide the
b) merchandising, or services required by the customers and clients including (A)
c) mining business, salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of
gross income means the total sales, less the cost of goods
facilities directly utilized in providing the service such as
sold, plus any income fr. investments & fr. incidental or
depreciation or rental of equipment used and cost of supplies:
outside operations or sources. In determining the gross
Provided, however, That in the case of banks, 'cost of
income, subtractions should not be made for depreciation,
services' shall include interest expense.
depletion, selling expenses or losses, or for items not
ordinarily used in computing the cost of goods sold.
a. Merchandising
Sec. 45, Rev. Reg. 2. Gross income of farmers. - A farmer
Gross Sales less returns and discounts less Cost of
reporting on the basis of receipts & disbursements (in w/c no
Sales less Expenses = NET INCOME
inventory to determine profits is used) shall include in his
gross income for the taxable year
1. the amount of cash or the value of merchandise or other b. Manufacturing
property received fr. the sale of livestock & produce w/c
Gross sales less returns and discounts less cost of
were raised during the taxable year or prior years,
goods manufactured and sold less expenses = NET
2. the profits fr. the sale of any livestock or other items w/c INCOME
were purchased, &
3. gross income fr. all other sources. xxx xxx xxx
c. Service concern/ Conduct of trade
Gross receipts less cost of service less expenses =
Sec. 27 (E) Minimum Corporate Income Tax on Domestic
NET INCOME
Corporations. - d. Practice of Profession
(1) Imposition of Tax. - A minimum corporate income tax of Gross professional fees less expenses = NET
two percent (2%0 of the gross income as of the end of the INCOME
taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such e. Farming/Agribusiness
corporation commenced its business operations, when the
minimum income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year. f. Performance of the functions of a
(2) Carry Froward of Excess Minimum Tax. - Any excess of the public office
minimum corporate income tax over the normal income tax
as computed under Subsection (A) of this Section shall be
(Sec.22 (s) , NIRC supra.)
carried forward and credited against the normal income tax
for the three (3) immediately succeeding taxable years. g. other types of business
(3) Relief from the Minimum Corporate Income Tax Under
Certain Conditions. - The Secretary of Finance is hereby
authorized to suspend the imposition of the minimum 2. Exclusions

APP 45
INCOME TAX REVIEWER
a. Income exempt under a treaty (c) Those covered by international agreements to w/c the
Philippines is a signatory;
(d) Those covered by the non-impairment clause of the
Sec. 32 (B 5) Income Exempt under Treaty. - Income of Constitution; &
any kind, to the extent required by any treaty obligation (e) Those that will be approved by the President of the
binding upon the Government of the Philippines. Philippines upon the recommendation of the Minister of
Finance.
b. Income derived by the govt. or its
political subd. fr. the exercise of E.O. 93
any essential govt. function. SECTION 1. The provisions of any general or special law to the
contrary notw/standing, all tax & duty incentives granted to
the government & private entities are hereby w/drawn,
Sec. 32 (B 7) NIRC except:
(7) Miscellaneous Items. - a) those covered by the non-impairment clause of the
Constitution;
(a) Income Derived by Foreign Government. - Income
derived from investments in the Philippines in loans, stocks, b) those conferred by effective international agreements to w/c
bonds or other domestic securities, or from interest on the Govt. of the Rep. of the Phil. is a signatory;
deposits in banks in the Philippines by (i) foreign c) those enjoyed by enterprises registered w/:
governments, (ii) financing institutions owned, controlled, or
(i) the Board of Investments pursuant to PD No. 1789,
enjoying refinancing from foreign governments, and (iii)
as amended;
international or regional financial institutions established by
foreign governments. (ii) the Export Processing Zone Authority pursuant to PD
No. 66, as amended;
(b) Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility or from (iii) the Phil Veterans Investment Development
the exercise of any essential governmental function accruing Corporation Industrial Authority pursuant to PD
to the Government of the Philippines or to any political 358 as amended;
subdivision thereof. d) those enjoyed by the copper mining industry pursuant to the
provisions of LOI No. 1416;
P.D. 1931 e) those conferred under the four basic codes namely:
SECTION 1. The provisions of special or general law to the
(i) the Tariff & Customs Code, as amended;
contrary notw/standing, all exemptions fr. the payment of
duties, taxes, fees, imposts & other charges heretofore (ii) the National Internal Revenue Code, as amended;
granted in favor of government-owned or controlled (iii) the Local Tax Code, as amended;
corporations including their subsidiaries, are hereby w/drawn. (iv) the Real Property Tax Code, as amended;
SEC. 2. The President of the Philippines &/or the Minister of
f) those approved by the President upon the recommendation of
Finance, upon the recommendation of the Fiscal Incentives
the Fiscal Incentives Review Board.
Review Board created under Presidential Decree No. 776, is
hereby empowered to restore, partially or totally, the
exemptions w/drawn by Sec. 1 above or otherwise revise the SEC. 2. The Fiscal Incentives Review Board, created under PD
scope & coverage of any applicable tax & duty, taking into No. 776, as amended, is hereby authorized to:
account, among others, any or all of the following: a) restore tax &/or duty exemptions w/drawn hereunder in
1) The effect on the relative price levels; whole or in part;
2) The relative contribution of the corporation to the b) revise the scope & coverage of tax &/or duty exemption;
revenue generation effort; c) impose conditions for the restoration of tax &/or duty
3) The nature of the activity in w/c the corporation is exemption;
engaged in; or d) prescribe the date or period of effectivity of the restoration of
tax &/or duty exemption;
4) In general, the greater national interest to be served.
e) formulate & submit to the President for approval, a complete
SEC. 3. The Ministry of Finance shall promulgate the necessary
system for the grant of subsidies to deserving beneficiaries, in
rules & regulations to effectively implement the provisions of
lieu of or in combination w/ the restoration of tax & duty
this Decree.
exemptions or preferential treatment in taxation, indicating
the source of funding therefor, eligible beneficiaries & the
PD 1955 terms & conditions for the grant thereof taking into
SECTION 1. The provisions of special or general law to the consideration the international commitments of the Philippines
contrary notw/standing, all exemptions fr. or any preferential & the necessary precautions such that the grant of subsidies
treatment in the payment of duties, taxes, fees, imposts & does not become the basis for countervailing action.
other charges heretofore granted to private business
enterprise &/or persons engaged in any economic activity are Sec. 4 (3), Art XIV, Constitution--All revenues & assets of
hereby w/drawn, except those enjoyed by the following: non-stock, non-profit educational institutions used actually,
directly & exclusive for educational purposes shall be exempt
(a) Those registered by the Board of Investments under PD No. fr. taxes & duties. Upon the dissolution or cessation of the
1789, as amended by BP Blg. 391, & those registered by the corporate existence of such institutions, their assets shall be
Export Processing Zone Authority under PD No. 66, as disposed of in the manner provided by law.
amended by PD Nos. 1449, 1776, 1776-A, & 1786; Sec. 4 (4), Art. XIV, Constitution-- Subject to conditions
(b) The copper mining industry in accordance w/ the provisions prescribed by law, all grants, endowments, donations or
of LOI 1416; contributions used actually, directly, & exclusively for
educational purposes shall be exempt fr. tax.

APP 46
INCOME TAX REVIEWER
Sec. 28 (3), Art. VI, Constitution--Charitable institutions,
churches & parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, & all lands, buildings, & SEC. 42. Income from Sources Within the Philippines.-
improvements, actually, directly & exclusively used for (A) Gross Income From Sources Within the Philippines . -
religious, charitable or educational purposes shall be exempt The following items of gross income shall be treated as gross
fr. taxation. income from sources within the Philippines:
(1) Interests. - Interests derived from sources within the
Finance Dept. Order 137-87 Philippines, and interests on bonds, notes or other interest-
bearing obligation of residents, corporate or otherwise;
Educ. inst. means a non-stock, non-profit corporation
association duly registered under Phil. law, & operated (2) Dividends. - The amount received as dividends:
exclusively for educational purposes, maintained &
administered by private individual or group offering formal (a) from a domestic corporation; and
education issued permit to operate by the DECS. (b) from a foreign corporation, unless less than fifty percent
Revenues derived fr. & assets used in the operation of (50%) of the gross income of such foreign corporation for the
cafeterias/canteens, dormitories, bookstores are exempt fr. three-year period ending with the close of its taxable year
taxation provided they are owned & operated by the preceding the declaration of such dividends or for such part of
educational institution as ancillary activities & the same are such period as the corporation has been in existence) was
located w/in the school premises. derived from sources within the Philippines as determined
under the provisions of this Section; but only in an amount
which bears the same ration to such dividends as the gross
Dept. of Finance Order 149-95 Re: Exemption of Non- income of the corporation for such period derived from
stock Non-Profit Educational Entities sources within the Philippines bears to its gross income from
Amending Finance department Order 137-87 all sources.
Non-stock, non-profit educational institutions are exempt fr. (3) Services. - Compensation for labor or personal services
taxes on all their revenues & assets used actually, directly & performed in the Philippines;
exclusively for educational purposes. However, they shall be (4) Rentals and royalties. - Rentals and royalties from
subject to internal revenue tax on such educational institution property located in the Philippines or from any interest in such
of its educational purposes or function. property, including rentals or royalties for -
Interest income shall be exempt fr. taxation only when used (a) The use of or the right or privilege to use in the Philippines
directly, exclusively for educational purposes. To substantiate any copyright, patent, design or model, plan, secret formula
this claim, the institution must submit an annual information or process, goodwill, trademark, trade brand or other like
return & duly audited financial statement. A certification of property or right;
actual utilization & the Board resolution on the proposed
project to be funded out of the money deposited in banks. (b) The use of, or the right to use in the Philippines any
industrial, commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial
10. Partners distributive share of the knowledge or information;
gross income of gen. professional (d) The supply of any assistance that is ancillary and subsidiary
partnership to, and is furnished as a means of enabling the application or
enjoyment of, any such property or right as is mentioned in
paragraph (a), any such equipment as is mentioned in
What is a gen. prof. partnership? paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
exercising their common profession, no part
(e) The supply of services by a nonresident person or his
of the income is derived from engaging in any
employee in connection with the use of property or rights
trade or business.
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such
Sec. 22. (B) The term 'corporation' shall include partnerships, nonresident person;
no matter how created or organized, joint-stock companies, (f) Technical advice, assistance or services rendered in
joint accounts (cuentas en participacion), association, or connection with technical management or administration of
insurance companies, but does not include general professional any scientific, industrial or commercial undertaking, venture,
partnerships and a joint venture or consortium formed for the project or scheme; and
purpose of undertaking construction projects or engaging in (g) The use of or the right to use:
petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a service (i) Motion picture films;
contract with the Government. 'General professional (ii) Films or video tapes for use in connection with
partnerships' are partnerships formed by persons for the sole television; and
purpose of exercising their common profession, no part of the (iii) Tapes for use in connection with radio broadcasting.
income of which is derived from engaging in any trade or
business.
(5) Sale of Real Property. - gains, profits and income from
the sale of real property located in the Philippines; and
(6) Sale of Personal Property. - gains; profits and income
IV. Situs of the sources of income from the sale of personal property, as determined in
Subsection (E) of this Section.
A. Meaning of situs in income
taxation/determining factors in fixing (B) Taxable Income From Sources Within the Philippines.
the situs of income under Phil. tax law -
(1) General Rule. - From the items of gross income specified
in Subsection (A) of this Section, there shall be deducted the
1. Classification of income as to source
APP 47
INCOME TAX REVIEWER
expenses, losses and other deductions properly allocated of general apportionment prescribed by the Secretary of
thereto and a ratable part of expenses, interests, losses and Finance. Gains, profits and income from the sale of personal
other deductions effectively connected with the business or property produced (in whole or in part) by the taxpayer within
trade conducted exclusively within the Philippines which and sold without the Philippines, or produced (in whole or in
cannot definitely be allocated to some items or class of gross part) by the taxpayer without and sold within the Philippines,
income: Provided, That such items of deductions shall be shall be treated as derived partly from sources within and
allowed only if fully substantiated by all the information partly from sources without the Philippines.
necessary for its calculation. The remainder, if any, shall be Gains, profits and income derived from the purchase of personal
treated in full as taxable income from sources within the property within and its sale without the Philippines, or from
Philippines. the purchase of personal property without and its sale within
(2) Exception. - No deductions for interest paid or incurred the Philippines shall be treated as derived entirely form
abroad shall be allowed from the item of gross income sources within the country in which sold: Provided, however,
specified in subsection (A) unless indebtedness was actually That gain from the sale of shares of stock in a domestic
incurred to provide funds for use in connection with the corporation shall be treated as derived entirely form sources
conduct or operation of trade or business in the Philippines. within the Philippines regardless of where the said shares are
sold. The transfer by a nonresident alien or a foreign
(C) Gross Income From Sources Without the Philippines. corporation to anyone of any share of stock issued by a
- The following items of gross income shall be treated as domestic corporation shall not be effected or made in its book
income from sources without the Philippines: unless: (1) the transferor has filed with the Commissioner a
bond conditioned upon the future payment by him of any
(1) Interests other than those derived from sources within the
income tax that may be due on the gains derived from such
Philippines as provided in paragraph (1) of Subsection (A) of
transfer, or (2) the Commissioner has certified that the taxes,
this Section;
if any, imposed in this Title and due on the gain realized from
(2) Dividends other than those derived from sources within the such sale or transfer have been paid. It shall be the duty of
Philippines as provided in paragraph (2) of Subsection (A) of the transferor and the corporation the shares of which are
this Section; sold or transferred, to advise the transferee of this
(3) Compensation for labor or personal services performed requirement.
without the Philippines; (F) Definitions. - As used in this Section the words 'sale' or
(4) Rentals or royalties from property located without the 'sold' include 'exchange' or 'exchanged'; and the word
Philippines or from any interest in such property including 'produced' includes 'created', 'fabricated,' 'manufactured',
rentals or royalties for the use of or for the privilege of using 'extracted,' 'processed', 'cured' or 'aged.'
without the Philippines, patents, copyrights, secret processes
and formulas, goodwill, trademarks, trade brands, franchises
and other like properties; and a. Gross/ taxable Income fr. sources
(5) Gains, profits and income from the sale of real property w/in the Phils.
located without the Philippines.

Sec. 42. (B) Taxable Income From Sources Within the


(D) Taxable Income From Sources Without the Philippines. -
Philippines. - From the items of gross income specified in
Subsection (C) of this Section there shall be deducted the (1) General Rule. - From the items of gross income specified in
expenses, losses, and other deductions properly apportioned Subsection (A) of this Section, there shall be deducted the
or allocated thereto and a ratable part of any expense, loss or expenses, losses and other deductions properly allocated
other deduction which cannot definitely be allocated to some thereto and a ratable part of expenses, interests, losses and
items or classes of gross income. The remainder, if any, shall other deductions effectively connected with the business or
be treated in full as taxable income from sources without the trade conducted exclusively within the Philippines which
Philippines. cannot definitely be allocated to some items or class of gross
income: Provided, That such items of deductions shall be
allowed only if fully substantiated by all the information
(E) Income From Sources Partly Within and Partly necessary for its calculation. The remainder, if any, shall be
Without the Philippines.- Items of gross income, expenses, treated in full as taxable income from sources within the
losses and deductions, other than those specified in Philippines.
Subsections (A) and (C) of this Section, shall be allocated or
apportioned to sources within or without the Philippines, (2) Exception. - No deductions for interest paid or incurred
under the rules and regulations prescribed by the Secretary of abroad shall be allowed from the item of gross income
Finance, upon recommendation of the Commissioner. Where specified in subsection (A) unless indebtedness was actually
items of gross income are separately allocated to sources incurred to provide funds for use in connection with the
within the Philippines, there shall be deducted (for the conduct or operation of trade or business in the Philippines.
purpose of computing the taxable income therefrom) the
expenses, losses and other deductions properly apportioned
or allocated thereto and a ratable part of other expenses, Commissioner vs. JAL, supra
losses or other deductions which cannot definitely be
allocated to some items or classes of gross income. The
Com. vs. BOAC , supra
remainder, if any, shall be included in full as taxable income NDC vs. Com.
from sources within the Philippines. In the case of gross
income derived from sources partly within and partly without Facts: NDC made 14 promissory notes for the
the Philippines, the taxable income may first be computed by balance of the purchase price of 12 vessels it
deducting the expenses, losses or other deductions had contracted a Tokyo firm to build. Said
apportioned or allocated thereto and a ratable part of any balance & interests were timely remitted in
expense, loss or other deduction which cannot definitely be
Tokyo. NDC w/held no tax. The CIR assessed it
allocated to some items or classes of gross income; and the
portion of such taxable income attributable to sources within liable for interest tax. The CTA affirmed. NDC
the Philippines may be determined by processes or formulas

APP 48
INCOME TAX REVIEWER
now contends no tax was due as all the related of w/c an income is realized, for activity may
acts. in the transxn. were done in Tokyo. consist of a single act while business implies
Held: Income fr. sources w/in the Phils. include continuity of transactions. An income may be
interest & other interest-bearing obligations of earned by a corp. in the Phils. although such
residents, corporate or otherwise. The law corp. conducts all its business abroad. The Tax
speaks of source w/c, in CAB, is the NDC, a Code does not require a foreign corp. to be
resident domestic corporation. Nothing in the engaged in business in the Phils. for its income
law speaks of the act or activity of non- fr. sources w/in the Phils. to be taxable.
resident corps. in the Phils. or the place where
the contract is signed. The residence of the b. Gross/ Taxable Income fr. sources
obligor who pays the interest & not the w/o the Phils.
physical location of the securities, bonds or
notes, or the place of payment, is the
determining factor of the source of interest Sec. 42. (C) Gross Income From Sources Without the
Philippines. - The following items of gross income shall be
income. Thus, if the obligor is a Phil. resident,
treated as income from sources without the Philippines:
the interest payment he made can have
(1) Interests other than those derived from sources within the
sources other than w/in the Phils. The interest Philippines as provided in paragraph (1) of Subsection (A) of
is paid not by the bond, note or other interest- this Section;
bearing obligations but by the obligor. (2) Dividends other than those derived from sources within the
Philippines as provided in paragraph (2) of Subsection (A) of
this Section;
Howden vs. Collector (3) Compensation for labor or personal services performed
Facts: Commonwealth, a domestic without the Philippines;
corporation, entered into reinsurance contracts (4) Rentals or royalties from property located without the
w/ British reinsurance companies not engaged Philippines or from any interest in such property including
rentals or royalties for the use of or for the privilege of using
in trade or business in the Phils., whereby
without the Philippines, patents, copyrights, secret processes
former agreed to cede to the latter a portion of and formulas, goodwill, trademarks, trade brands, franchises
the premiums on indemnity insurances it had and other like properties; and
underwritten in the Phils. Howden, another (4) Gains, profits and income from the sale of real property
British corporation, not engaged in trade or located without the Philippines.
business in the Phils. represented said British
companies. Contracts were prepared & signed Sec. 24. (D) Taxable Income From Sources Without the
by the British in London, & sent to Manila for Philippines. - From the items of gross income specified in
Commonwealths signing. Thus, Subsection (C) of this Section there shall be deducted the
Commonwealth remitted P798,297 w/ accrued expenses, losses, and other deductions properly apportioned
interest at P4,985 as Howdens gross income. or allocated thereto and a ratable part of any expense, loss or
other deduction which cannot definitely be allocated to some
Howden filed refund claim for P65,115. items or classes of gross income. The remainder, if any, shall
Howden agreed to pay P977 as income tax on be treated in full as taxable income from sources without the
the P4,985 accrued interest. He invoked a CIR Philippines.
ruling exempting fr. w/holding tax reinsurance
premiums received fr. a domestic insurance
2. General principles of income taxation
company by foreign insurance companies not
in the Philippines and situs of sources
authorized to do business here. Its action to
of income
recover was denied by the CTA.
Held: The income source is the property,
service or activity that produced it. SEC. 23. General Principles of Income Taxation in the
Reinsurance premiums remitted to Howden Philippines . - Except when otherwise provided in this Code:
had for their source the undertaking (an (A) A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the
activity ) to indemnify Commonwealth. This
Philippines;
took place in the Phils. The risks originally
(B) A nonresident citizen is taxable only on income derived from
underwritten by Commonwealth on w/c the
sources within the Philippines;
reinsurance premiums & indemnity were based
(C) An individual citizen of the Philippines who is working and
were all situated in the Phils. The latter deriving income from abroad as an overseas contract worker
contracts were perfected in the Phils. under is taxable only on income derived from sources within the
Art. 11 thereof, the parties intended Phil. law Philippines: Provided, That a seaman who is a citizen of the
to govern by providing for arbitration in Manila. Philippines and who receives compensation for services
Also, the contract provided for the use of Phil. rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as
currency as a medium of exchange & tax
an overseas contract worker;
payment.
(D) An alien individual, whether a resident or not of the
Appellant should not confuse activity Philippines, is taxable only on income derived from sources
that creates income w/ business in the course within the Philippines;

APP 49
INCOME TAX REVIEWER
(E) A domestic corporation is taxable on all income derived from (A) Expenses. -
sources within and without the Philippines; and (1) Ordinary and Necessary Trade, Business or
(F) A foreign corporation, whether engaged or not in trade or Professional Expenses.-
business in the Philippines, is taxable only on income derived (a) In General. - There shall be allowed as deduction from gross
from sources within the Philippines. income all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on or which are
directly attributable to, the development, management,
CIR vs. BOAC AND THE CTA operation and/or conduct of the trade, business or exercise of
FELICIANO, J. dissenting: a profession, including:
(i) A reasonable allowance for salaries, wages, and other forms
Whether the foreign corporate taxpayer is of compensation for personal services actually rendered,
doing business in the Philippines & including the grossed-up monetary value of fringe benefit
therefore a resident foreign corporation, or furnished or granted by the employer to the employee:
not doing business in the Philippines & Provided, That the final tax imposed under Section 33 hereof
therefore a non resident foreign has been paid;
corporation, IT IS LIABLE TO INCOME TAX (ii) A reasonable allowance for travel expenses, here and
ONLY TO THE EXTENT THAT IT DERIVED abroad, while away from home in the pursuit of trade,
business or profession;
INCOME FROM SOURCES WITHIN THE
(iii) A reasonable allowance for rentals and/or other payments
PHILIPPINES.
which are required as a condition for the continued use or
SOURCE OF INCOME RELATE TO THE possession, for purposes of the trade, business or profession,
PROPERTY, ACTIVITY OR SERVICE WHICH of property to which the taxpayer has not taken or is not
taking title or in which he has no equity other than that of a
PRODUCED THE INCOME, not to the flow of
lessee, user or possessor;
money or site of payment
(iv) A reasonable allowance for entertainment, amusement and
Where income taxation of services in recreation expenses during the taxable year, that are directly
involved, the income is sources in the connected to the development, management and operation of
PLACE WHERE THE SERVICE IS RENDERED. the trade, business or profession of the taxpayer, or that are
directly related to or in furtherance of the conduct of his or its
. Income fr. transportation or other services trade, business or exercise of a profession not to exceed such
done outside the Philippine must be treated ceilings as the Secretary of Finance may, by rules and
as derived entirely fr. sources outside the regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the
Philippines
special circumstances, nature and character of the industry,
. Income of a foreign airline for carriage of trade, business, or profession of the taxpayer: Provided, That
passengers & cargo between points located any expense incurred for entertainment, amusement or
outside the Philippines is not an income fr. recreation that is contrary to law, morals public policy or
public order shall in no case be allowed as a deduction.
sources w/in the Philippines although the
tickets are sold here, such tickets being
(b) Substantiation Requirements. - No deduction from gross
merely evidence of the contract of carriage. income shall be allowed under Subsection (A) hereof unless
Under P.D. 1355, international carriers the taxpayer shall substantiate with sufficient evidence, such
as official receipts or other adequate records: (i) the amount
issuing passage documentation in the
of the expense being deducted, and (ii) the direct connection
Philippines for uplifts between points or relation of the expense being deducted to the
outside the Philippine are not charged any development, management, operation and/or conduct of the
Philippine income tax on their Philippine trade, business or profession of the taxpayer.
billings. In place thereof, a 2.5% excise tax (c) Bribes, Kickbacks and Other Similar Payments. - No
on billings in respect of passengers & deduction from gross income shall be allowed under
cargoes originating fr. the Philippine Subsection (A) hereof for any payment made, directly or
regardless of embarkation or debarkation is indirectly, to an official or employee of the national
government, or to an official or employee of any local
imposed. government unit, or to an official or employee of a
government-owned or -controlled corporation, or to an official
or employee or representative of a foreign government, or to
V. Allowable deductions in a private corporation, general professional partnership, or a
determining taxable income similar entity, if the payment constitutes a bribe or kickback.

A. General Principles Governing Tax (2) Expenses Allowable to Private Educational


Deductions Institutions. - In addition to the expenses allowable as
deductions under this Chapter, a private educational
institution, referred to under Section 27 (B) of this Code, may
SEC. 34. Deductions from Gross Income. - Except for at its option elect either: (a) to deduct expenditures otherwise
taxpayers earning compensation income arising from personal considered as capital outlays of depreciable assets incurred
services rendered under an employer-employee relationship during the taxable year for the expansion of school facilities or
where no deductions shall be allowed under this Section other (b) to deduct allowance for depreciation thereof under
than under subsection (M) hereof, in computing taxable Subsection (F) hereof.
income subject to income tax under Sections 24 (A); 25 (A);
26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed (B) Interest.-
the following deductions from gross income;

APP 50
INCOME TAX REVIEWER
(1) In General. - The amount of interest paid or incurred of income taxes paid or incurred during the taxable year to
within a taxable year on indebtedness in connection with the any foreign country; and
taxpayer's profession, trade or business shall be allowed as (b) Partnerships and Estates. - In the case of any such individual
deduction from gross income: Provided, however, That the who is a member of a general professional partnership or a
taxpayer's otherwise allowable deduction for interest expense beneficiary of an estate or trust, his proportionate share of
shall be reduced by an amount equal to the following such taxes of the general professional partnership or the
percentages of the interest income subjected to final tax: estate or trust paid or incurred during the taxable year to a
foreign country, if his distributive share of the income of such
Forty-one percent (41%) beginning January 1, 1998; partnership or trust is reported for taxation under this Title.
Thirty-nine percent (39%) beginning January 1, 1999; and An alien individual and a foreign corporation shall not be allowed
Thirty-eight percent (38%) beginning January 1, 2000; the credits against the tax for the taxes of foreign countries
allowed under this paragraph.
(2) Exceptions. - No deduction shall be allowed in respect of
interest under the succeeding subparagraphs: (4) Limitations on Credit. - The amount of the credit taken
under this Section shall be subject to each of the following
limitations:
(a) If within the taxable year an individual taxpayer reporting
income on the cash basis incurs an indebtedness on which an (a) The amount of the credit in respect to the tax paid or
interest is paid in advance through discount or otherwise: incurred to any country shall not exceed the same proportion
Provided, That such interest shall be allowed a deduction in of the tax against which such credit is taken, which the
the year the indebtedness is paid: Provided, further, That if taxpayer's taxable income from sources within such country
the indebtedness is payable in periodic amortizations, the under this Title bears to his entire taxable income for the
amount of interest which corresponds to the amount of the same taxable year; and
principal amortized or paid during the year shall be allowed as (b) The total amount of the credit shall not exceed the same
deduction in such taxable year; proportion of the tax against which such credit is taken, which
(b)If both the taxpayer and the person to whom the payment the taxpayer's taxable income from sources without the
has been made or is to be made are persons specified under Philippines taxable under this Title bears to his entire taxable
Section 36 (B); or income for the same taxable year.
(c)If the indebtedness is incurred to finance petroleum (5) Adjustments on Payment of Incurred Taxes . - If
exploration. accrued taxes when paid differ from the amounts claimed as
credits by the taxpayer, or if any tax paid is refunded in whole
or in part, the taxpayer shall notify the Commissioner; who
(3) Optional Treatment of Interest Expense. - At the
shall redetermine the amount of the tax for the year or years
option of the taxpayer, interest incurred to acquire property
affected, and the amount of tax due upon such
used in trade business or exercise of a profession may be
redetermination, if any, shall be paid by the taxpayer upon
allowed as a deduction or treated as a capital expenditure.
notice and demand by the Commissioner, or the amount of
tax overpaid, if any, shall be credited or refunded to the
(C) Taxes.- taxpayer. In the case of such a tax incurred but not paid, the
(1) In General. - Taxes paid or incurred within the taxable Commissioner as a condition precedent to the allowance of
year in connection with the taxpayer's profession, trade or this credit may require the taxpayer to give a bond with
business, shall be allowed as deduction, except sureties satisfactory to and to be approved by the
Commissioner in such sum as he may require, conditioned
(a) The income tax provided for under this Title; upon the payment by the taxpayer of any amount of tax
(b) Income taxes imposed by authority of any foreign country; found due upon any such redetermination. The bond herein
but this deduction shall be allowed in the case of a taxpayer prescribed shall contain such further conditions as the
who does not signify in his return his desire to have to any Commissioner may require.
extent the benefits of paragraph (3) of this subsection (6) Year in Which Credit Taken. - The credits provided for in
(relating to credits for taxes of foreign countries); Subsection (C)(3) of this Section may, at the option of the
(c) Estate and donor's taxes; and taxpayer and irrespective of the method of accounting
(d) Taxes assessed against local benefits of a kind tending to employed in keeping his books, be taken in the year which the
increase the value of the property assessed. taxes of the foreign country were incurred, subject, however,
to the conditions prescribed in Subsection (C)(5) of this
Provided, That taxes allowed under this Subsection, when
Section. If the taxpayer elects to take such credits in the year
refunded or credited, shall be included as part of gross
in which the taxes of the foreign country accrued, the credits
income in the year of receipt to the extent of the income tax
for all subsequent years shall be taken upon the same basis
benefit of said deduction.
and no portion of any such taxes shall be allowed as a
deduction in the same or any succeeding year.
(2) Limitations on Deductions. - In the case of a nonresident
(7)Proof of Credits. - The credits provided in Subsection (C)
alien individual engaged in trade or business in the Philippines
(3) hereof shall be allowed only if the taxpayer establishes to
and a resident foreign corporation, the deductions for taxes
the satisfaction of the Commissioner the following:
provided in paragraph (1) of this Subsection (C) shall be
allowed only if and to the extent that they are connected with (a) The total amount of income derived from sources without
income from sources within the Philippines. the Philippines;
(3) Credit Against Tax for Taxes of Foreign Countries . - If (b) The amount of income derived from each country, the tax
the taxpayer signifies in his return his desire to have the paid or incurred to which is claimed as a credit under said
benefits of this paragraph, the tax imposed by this Title shall paragraph, such amount to be determined under rules and
be credited with: regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and
(a) Citizen and Domestic Corporation. - In the case of a citizen computation of such credits.
of the Philippines and of a domestic corporation, the amount (D) Losses. -

APP 51
INCOME TAX REVIEWER
(1) In General.- Losses actually sustained during the taxable (5) taxable years following the loss, and any portion of such
year and not compensated for by insurance or other forms of loss which exceeds, the taxable income of such first year shall
indemnity shall be allowed as deductions: be deducted in like manner form the taxable income of the
next remaining four (4) years.
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or (4) Capital Losses. -
profession, if the loss arises from fires, storms, shipwreck, or (a) Limitation. - Loss from sales or Exchanges of capital assets
other casualties, or from robbery, theft or embezzlement. shall be allowed only to the extent provided in Section 39.
The Secretary of Finance, upon recommendation of the (b) Securities Becoming worthless. - If securities as defined in
Commissioner, is hereby authorized to promulgate rules and Section 22 (T) become worthless during the taxable year and
regulations prescribing, among other things, the time and are capital assets, the loss resulting therefrom shall, for
manner by which the taxpayer shall submit a declaration of purposes of this Title, be considered as a loss from the sale or
loss sustained from casualty or from robbery, theft or exchange, on the last day of such taxable year, of capital
embezzlement during the taxable year: Provided, however, assets.
That the time limit to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor more
(5) Losses From Wash Sales of Stock or Securities . -
than ninety (90) days from the date of discovery of the
Losses from 'wash sales' of stock or securities as provided in
casualty or robbery, theft or embezzlement giving rise to the
Section 38.
loss.
(6) Wagering Losses. - Losses from wagering transactions
(c) No loss shall be allowed as a deduction under this
shall b allowed only to the extent of the gains from such
Subsection if at the time of the filing of the return, such loss
transactions.
has been claimed as a deduction for estate tax purposes in
the estate tax return. (7) Abandonment Losses. -
(a) In the event a contract area where petroleum operations are
(2) Proof of Loss. - In the case of a nonresident alien undertaken is partially or wholly abandoned, all accumulated
individual or foreign corporation, the losses deductible shall exploration and development expenditures pertaining thereto
be those actually sustained during the year incurred in shall be allowed as a deduction: Provided, That accumulated
business, trade or exercise of a profession conducted within expenditures incurred in that area prior to January 1, 1979
the Philippines, when such losses are not compensated for by shall be allowed as a deduction only from any income derived
insurance or other forms of indemnity. The secretary of from the same contract area. In all cases, notices of
Finance, upon recommendation of the Commissioner, is abandonment shall be filed with the Commissioner.
hereby authorized to promulgate rules and regulations (b) In case a producing well is subsequently abandoned, the
prescribing, among other things, the time and manner by unamortized costs thereof, as well as the undepreciated costs
which the taxpayer shall submit a declaration of loss sustained of equipment directly used therein , shall be allowed as a
from casualty or from robbery, theft or embezzlement during deduction in the year such well, equipment or facility is
the taxable year: Provided, That the time to be so prescribed abandoned by the contractor: Provided, That if such
in the rules and regulations shall not be less than thirty (30) abandoned well is reentered and production is resumed, or if
days nor more than ninety (90) days from the date of such equipment or facility is restored into service, the said
discovery of the casualty or robbery, theft or embezzlement costs shall be included as part of gross income in the year of
giving rise to the loss; and resumption or restoration and shall be amortized or
(3) Net Operating Loss Carry-Over. - The net operating loss depreciated, as the case may be.
of the business or enterprise for any taxable year immediately
preceding the current taxable year, which had not been (E) Bad Debts. -
previously offset as deduction from gross income shall be (1) In General. - Debts due to the taxpayer actually
carried over as a deduction from gross income for the next ascertained to be worthless and charged off within the taxable
three (3) consecutive taxable years immediately following the year except those not connected with profession, trade or
year of such loss: Provided, however, That any net loss business and those sustained in a transaction entered into
incurred in a taxable year during which the taxpayer was between parties mentioned under Section 36 (B) of this Code:
exempt from income tax shall not be allowed as a deduction Provided, That recovery of bad debts previously allowed as
under this Subsection: Provided, further, That a net operating deduction in the preceding years shall be included as part of
loss carry-over shall be allowed only if there has been no the gross income in the year of recovery to the extent of the
substantial change in the ownership of the business or income tax benefit of said deduction.
enterprise in that -
(2) Securities Becoming Worthless. - If securities, as
(i) Not less than seventy-five percent (75%) in nominal value of defined in Section 22 (T), are ascertained to be worthless and
outstanding issued shares., if the business is in the name of a charged off within the taxable year and are capital assets, the
corporation, is held by or on behalf of the same persons; or loss resulting therefrom shall, in the case of a taxpayer other
(ii) Not less than seventy-five percent (75%) of the paid up than a bank or trust company incorporated under the laws of
capital of the corporation, if the business is in the name of a the Philippines a substantial part of whose business is the
corporation, is held by or on behalf of the same persons. receipt of deposits, for the purpose of this Title, be considered
"For purposes of this subsection, the term 'not operating loss' as a loss from the sale or exchange, on the last day of such
shall mean the excess of allowable deduction over gross taxable year, of capital assets.
income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net (F) Depreciation. -
operating loss without the benefit of incentives provided for (1) General Rule. - There shall be allowed as a depreciation
under Executive Order No. 226, as amended, otherwise deduction a reasonable allowance for the exhaustion, wear
known as the Omnibus Investments Code of 1987, incurred in and tear (including reasonable allowance for obsolescence) of
any of the first ten (10) years of operation may be carried property used in the trade or business. In the case of property
over as a deduction from taxable income for the next five (5) held by one person for life with remainder to another person,
years immediately following the year of such loss. The entire the deduction shall be computed as if the life tenant were the
amount of the loss shall be carried over to the first of the five absolute owner of the property and shall be allowed to the life

APP 52
INCOME TAX REVIEWER
tenant. In the case of property held in trust, the allowable years, and the depreciation thereon allowed as deduction
deduction shall be apportioned between the income from taxable income: Provided, That the contractor notifies
beneficiaries and the trustees in accordance with the pertinent the Commissioner at the beginning of the depreciation period
provisions of the instrument creating the trust, or in the which depreciation rate allowed by this Section will be used.
absence of such provisions, on the basis of the trust income (6) Depreciation Deductible by Nonresident Aliens
allowable to each. Engaged in Trade or Business or Resident Foreign
(2) Use of Certain Methods and Rates. - The term Corporations. - In the case of a nonresident alien individual
'reasonable allowance' as used in the preceding paragraph engaged in trade or business or resident foreign corporation,
shall include, but not limited to, an allowance computed in a reasonable allowance for the deterioration of Property
accordance with rules and regulations prescribed by the arising out of its use or employment or its non-use in the
Secretary of Finance, upon recommendation of the business trade or profession shall be permitted only when
Commissioner, under any of the following methods: such property is located in the Philippines.
(a) The straight-line method; (G) Depletion of Oil and Gas Wells and Mines. -
(b) Declining-balance method, using a rate not exceeding twice (1) In General. - In the case of oil and gas wells or mines, a
the rate which would have been used had the annual reasonable allowance for depletion or amortization computed
allowance been computed under the method described in in accordance with the cost-depletion method shall be granted
Subsection (F) (1); under rules and regulations to be prescribed by the Secretary
(c) The sum-of-the-years-digit method; and of finance, upon recommendation of the Commissioner.
Provided, That when the allowance for depletion shall equal
(d) any other method which may be prescribed by the
the capital invested no further allowance shall be granted:
Secretary of Finance upon recommendation of the
Provided, further, That after production in commercial
Commissioner.
quantities has commenced, certain intangible exploration and
(3) Agreement as to Useful Life on Which Depreciation development drilling costs: (a) shall be deductible in the year
Rate is Based. - Where under rules and regulations incurred if such expenditures are incurred for non-producing
prescribed by the Secretary of Finance upon recommendation wells and/or mines, or (b) shall be deductible in full in the
of the Commissioner, the taxpayer and the Commissioner year paid or incurred or at the election of the taxpayer, may
have entered into an agreement in writing specifically dealing be capitalized and amortized if such expenditures incurred are
with the useful life and rate of depreciation of any property, for producing wells and/or mines in the same contract area.
the rate so agreed upon shall be binding on both the taxpayer
'Intangible costs in petroleum operations' refers to any cost
and the national Government in the absence of facts and
incurred in petroleum operations which in itself has no salvage
circumstances not taken into consideration during the
value and which is incidental to and necessary for the drilling
adoption of such agreement. The responsibility of establishing
of wells and preparation of wells for the production of
the existence of such facts and circumstances shall rest with
petroleum: Provided, That said costs shall not pertain to the
the party initiating the modification. Any change in the agreed
acquisition or improvement of property of a character subject
rate and useful life of the depreciable property as specified in
to the allowance for depreciation except that the allowances
the agreement shall not be effective for taxable years prior to
for depreciation on such property shall be deductible under
the taxable year in which notice in writing by certified mail or
this Subsection.
registered mail is served by the party initiating such change to
the other party to the agreement: Any intangible exploration, drilling and development expenses
allowed as a deduction in computing taxable income during
Provided, however, that where the taxpayer has adopted such
the year shall not be taken into consideration in computing
useful life and depreciation rate for any depreciable and
the adjusted cost basis for the purpose of computing
claimed the depreciation expenses as deduction from his
allowable cost depletion.
gross income, without any written objection on the part of the
Commissioner or his duly authorized representatives, the (2) Election to Deduct Exploration and Development
aforesaid useful life and depreciation rate so adopted by the Expenditures. - In computing taxable income from mining
taxpayer for the aforesaid depreciable asset shall be operations, the taxpayer may at his option, deduct exploration
considered binding for purposes of this Subsection. and development expenditures accumulated as cost or
adjusted basis for cost depletion as of date of prospecting, as
(4) Depreciation of Properties Used in Petroleum
well as exploration and development expenditures paid or
Operations. - An allowance for depreciation in respect of all
incurred during the taxable year: Provided, That the amount
properties directly related to production of petroleum initially
deductible for exploration and development expenditures shall
placed in service in a taxable year shall be allowed under the
not exceed twenty-five percent (25%) of the net income from
straight-line or declining-balance method of depreciation at
mining operations computed without the benefit of any tax
the option of the service contractor.
incentives under existing laws. The actual exploration and
However, if the service contractor initially elects the declining- development expenditures minus twenty-five percent (25%)
balance method, it may at any subsequent date, shift to the of the net income from mining shall be carried forward to the
straight-line method. succeeding years until fully deducted.
The useful life of properties used in or related to production of The election by the taxpayer to deduct the exploration and
petroleum shall be ten (10) years of such shorter life as may development expenditures is irrevocable and shall be binding
be permitted by the Commissioner. in succeeding taxable years.
Properties not used directly in the production of petroleum shall 'Net income from mining operations', as used in this Subsection,
be depreciated under the straight-line method on the basis of shall mean gross income from operations less 'allowable
an estimated useful life of five (5) years. deductions' which are necessary or related to mining
(5) Depreciation of Properties Used in Mining Operations. operations. 'Allowable deductions' shall include mining, milling
- an allowance for depreciation in respect of all properties and marketing expenses, and depreciation of properties
used in mining operations other than petroleum operations, directly used in the mining operations. This paragraph shall
shall be computed as follows: not apply to expenditures for the acquisition or improvement
(a) At the normal rate of depreciation if the expected life is ten of property of a character which is subject to the allowance
(10) years or less; or for depreciation.

(b) Depreciated over any number of years between five (5)


years and the expected life if the latter is more than ten (10)

APP 53
INCOME TAX REVIEWER
In no case shall this paragraph apply with respect to amounts (c) Donations to Accredited Nongovernment Organizations. - the
paid or incurred for the exploration and development of oil term 'nongovernment organization' means a non profit
and gas. domestic corporation:
The term 'exploration expenditures' means expenditures paid or (1) Organized and operated exclusively for scientific, research,
incurred for the purpose of ascertaining the existence, educational, character-building and youth and sports
location, extent or quality of any deposit of ore or other development, health, social welfare, cultural or charitable
mineral, and paid or incurred before the beginning of the purposes, or a combination thereof, no part of the net income
development stage of the mine or deposit. of which inures to the benefit of any private individual;
The term 'development expenditures' means expenditures paid (2) Which, not later than the 15 th day of the third month after
or incurred during the development stage of the mine or other the close of the accredited nongovernment organizations
natural deposits. The development stage of a mine or other taxable year in which contributions are received, makes
natural deposit shall begin at the time when deposits of ore or utilization directly for the active conduct of the activities
other minerals are shown to exist in sufficient commercial constituting the purpose or function for which it is organized
quantity and quality and shall end upon commencement of and operated, unless an extended period is granted by the
actual commercial extraction. Secretary of Finance in accordance with the rules and
(3) Depletion of Oil and Gas Wells and Mines Deductible regulations to be promulgated, upon recommendation of the
by a Nonresident Alien individual or Foreign Commissioner;
Corporation. - In the case of a nonresident alien individual (3) The level of administrative expense of which shall, on an
engaged in trade or business in the Philippines or a resident annual basis, conform with the rules and regulations to be
foreign corporation, allowance for depletion of oil and gas prescribed by the Secretary of Finance, upon recommendation
wells or mines under paragraph (1) of this Subsection shall be of the Commissioner, but in no case to exceed thirty percent
authorized only in respect to oil and gas wells or mines (30%) of the total expenses; and
located within the Philippines. (4) The assets of which, in the even of dissolution, would be
distributed to another nonprofit domestic corporation
(H) Charitable and Other Contributions. - organized for similar purpose or purposes, or to the state for
(1) In General. - Contributions or gifts actually paid or made public purpose, or would be distributed by a court to another
within the taxable year to, or for the use of the Government organization to be used in such manner as in the judgment of
of the Philippines or any of its agencies or any political said court shall best accomplish the general purpose for which
subdivision thereof exclusively for public purposes, or to the dissolved organization was organized.
accredited domestic corporation or associations organized and Subject to such terms and conditions as may be prescribed by
operated exclusively for religious, charitable, scientific, youth the Secretary of Finance, the term 'utilization' means:
and sports development, cultural or educational purposes or (i) Any amount in cash or in kind (including administrative
for the rehabilitation of veterans, or to social welfare expenses) paid or utilized to accomplish one or more
institutions, or to non-government organizations, in purposes for which the accredited nongovernment
accordance with rules and regulations promulgated by the organization was created or organized.
Secretary of finance, upon recommendation of the
(ii) Any amount paid to acquire an asset used (or held for
Commissioner, no part of the net income of which inures to
use) directly in carrying out one or more purposes for
the benefit of any private stockholder or individual in an
which the accredited nongovernment organization was
amount not in excess of ten percent (10%) in the case of an
created or organized.
individual, and five percent (%) in the case of a corporation,
of the taxpayer's taxable income derived from trade, business
or profession as computed without the benefit of this and the An amount set aside for a specific project which comes within
following subparagraphs. one or more purposes of the accredited nongovernment
organization may be treated as a utilization, but only if at the
(2) Contributions Deductible in Full. - Notwithstanding the
time such amount is set aside, the accredited nongovernment
provisions of the preceding subparagraph, donations to the
organization has established to the satisfaction of the
following institutions or entities shall be deductible in full;
Commissioner that the amount will be paid for the specific
(a) Donations to the Government. - Donations to the project within a period to be prescribed in rules and
Government of the Philippines or to any of its agencies or regulations to be promulgated by the Secretary of Finance,
political subdivisions, including fully-owned government upon recommendation of the Commissioner, but not to
corporations, exclusively to finance, to provide for, or to be exceed five (5) years, and the project is one which can be
used in undertaking priority activities in education, health, better accomplished by setting aside such amount than by
youth and sports development, human settlements, science immediate payment of funds.
and culture, and in economic development according to a
(3) Valuation. - The amount of any charitable contribution of
National Priority Plan determined by the National Economic
property other than money shall be based on the acquisition
and Development Authority (NEDA), In consultation with
cost of said property.
appropriate government agencies, including its regional
development councils and private philantrophic persons and (4) Proof of Deductions. - Contributions or gifts shall be
institutions: Provided, That any donation which is made to the allowable as deductions only if verified under the rules and
Government or to any of its agencies or political subdivisions regulations prescribed by the Secretary of Finance, upon
not in accordance with the said annual priority plan shall be recommendation of the Commissioner.
subject to the limitations prescribed in paragraph (1) of this
Subsection; (I) Research and Development.-
(b) Donations to Certain Foreign Institutions or International (1) In General. - a taxpayer may treat research or
Organizations. - donations to foreign institutions or development expenditures which are paid or incurred by him
international organizations which are fully deductible in during the taxable year in connection with his trade, business
pursuance of or in compliance with agreements, treaties, or or profession as ordinary and necessary expenses which are
commitments entered into by the Government of the not chargeable to capital account. The expenditures so
Philippines and the foreign institutions or international treated shall be allowed as deduction during the taxable year
organizations or in pursuance of special laws; when paid or incurred.

APP 54
INCOME TAX REVIEWER
(2) Amortization of Certain Research and Development irrevocable for the taxable year for which the return is made:
Expenditures. - At the election of the taxpayer and in Provided, That an individual who is entitled to and claimed for
accordance with the rules and regulations to be prescribed by the optional standard deduction shall not be required to
the Secretary of Finance, upon recommendation of the submit with his tax return such financial statements otherwise
Commissioner, the following research and development required under this Code: Provided, further, That except when
expenditures may be treated as deferred expenses: the Commissioner otherwise permits, the said individual shall
(a) Paid or incurred by the taxpayer in connection with his keep such records pertaining to his gross income during the
trade, business or profession; taxable year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon
(b) Not treated as expenses under paragraph 91) hereof; and
recommendation of the Commissioner.
(c) Chargeable to capital account but not chargeable to
(M) Premium Payments on Health and/or Hospitalization
property of a character which is subject to depreciation or
Insurance of an Individual Taxpayer. - the amount of
depletion.
premiums not to exceed Two thousand four hundred pesos
In computing taxable income, such deferred expenses shall be (P2,400) per family or Two hundred pesos (P200) a month
allowed as deduction ratably distributed over a period of not paid during the taxable year for health and/or hospitalization
less than sixty (60) months as may be elected by the taxpayer insurance taken by the taxpayer for himself, including his
(beginning with the month in which the taxpayer first realizes family, shall be allowed as a deduction from his gross income:
benefits from such expenditures). Provided, That said family has a gross income of not more
The election provided by paragraph (2) hereof may be made for than Two hundred fifty thousand pesos (P250,000) for the
any taxable year beginning after the effectivity of this Code, taxable year: Provided, finally, That in the case of married
but only if made not later than the time prescribed by law for taxpayers, only the spouse claiming the additional exemption
filing the return for such taxable year. The method so elected, for dependents shall be entitled to this deduction.
and the period selected by the taxpayer, shall be adhered to Notwithstanding the provision of the preceding Subsections, The
in computing taxable income for the taxable year for which Secretary of Finance, upon recommendation of the
the election is made and for all subsequent taxable years Commissioner, after a public hearing shall have been held for
unless with the approval of the Commissioner, a change to a this purpose, may prescribe by rules and regulations,
different method is authorized with respect to a part or all of limitations or ceilings for any of the itemized deductions under
such expenditures. The election shall not apply to any Subsections (A) to (J) of this Section: Provided, That for
expenditure paid or incurred during any taxable year for which purposes of determining such ceilings or limitations, the
the taxpayer makes the election. Secretary of Finance shall consider the following factors: (1)
adequacy of the prescribed limits on the actual expenditure
(3) Limitations on deduction. - This Subsection shall not requirements of each particular industry; and (2)effects of
apply to: inflation on expenditure levels: Provided, further, That no
(a) Any expenditure for the acquisition or improvement of land, ceilings shall further be imposed on items of expense already
or for the improvement of property to be used in connection subject to ceilings under present law.
with research and development of a character which is subject
to depreciation and depletion; and
1. Meaning Of Deductions/
(b) Any expenditure paid or incurred for the purpose of
Differentiated From Other Terms
ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral, including oil or gas.
(J) Pension Trusts. - An employer establishing or maintaining DEFINITION. Deductions are items or amounts
a pension trust to provide for the payment of reasonable w/c the law allows to be deducted fr. gross income
pensions to his employees shall be allowed as a deduction (in in order to arrive at taxable income.
addition to the contributions to such trust during the taxable
year to cover the pension liability accruing during the year,
allowed as a deduction under Subsection (A) (1) of this 2. Basic Principles In Governing
Section ) a reasonable amount transferred or paid into such Deductions/ Requisites
trust during the taxable year in excess of such contributions,
but only if such amount (1)has not theretofore been allowed
as a deduction, and (2) is apportioned in equal parts over a The taxpayer seeking a deduction must point to
period of ten (10) consecutive years beginning with the year some specific provisions of the statute authorizing
in which the transfer or payment is made. the deduction.
(K) Additional Requirements for Deductibility of Certain deductions are allowed only when there is a clear
Payments. - Any amount paid or payable which is otherwise provision in the statute for the deduction claimed.
deductible from, or taken into account in computing gross He must be able to prove that he is entitled to the
income or for which depreciation or amortization may be deduction authorized or allowed.
allowed under this Section, shall be allowed as a deduction
only if it is shown that the tax required to be deducted and As a rule, if the taxpayer does not w/in any year
withheld therefrom has been paid to the Bureau of Internal deduct certain of his expenses, losses, interest,
Revenue in accordance with this Section 58 and 81 of this taxes or other charges, he cannot deduct them
Code. form the income o the next or any succeeding year.
(L) Optional Standard Deduction. - In lieu of the deductions
allowed under the preceding Subsections, an individual BUSINESS EXPENSE VS. CAPITAL EXPENSE
subject to tax under Section 24, other than a nonresident
alien, may elect a standard deduction in an amount not
Business expenses deductible fr. gross income are
exceeding ten percent (10%) of his gross income. Unless the the ordinary & necessary expenses paid or incurred
taxpayer signifies in his return his intention to elect the during the taxable year in carrying on the
optional standard deduction, he shall be considered as having taxpayers trade, profession or business.
availed himself of the deductions allowed in the preceding Capital expenses are expenses that result in
Subsections. Such election when made in the return shall be obtaining benefits of a permanent nature such as
lands, buildings, & machinery.
APP 55
INCOME TAX REVIEWER
operated exclusively for religious, charitable, scientific, youth
DIFFERENTIATED FROM EXEMPTION / and sports development, cultural or educational purposes or
for the rehabilitation of veterans, or to social welfare
EXCLUSION : basically the taxpayer does not
institutions, or to non-government organizations, in
have to pay at all for items excluded/exempt fr. tax
accordance with rules and regulations promulgated by the
FROM TAX CREDIT: it is the taxpayers rt. to deduct Secretary of finance, upon recommendation of the
fr. income tax due the amt. of tax he has paid to a Commissioner, no part of the net income of which inures to
foreign country subject to limitations. the benefit of any private stockholder or individual in an
amount not in excess of ten percent (10%) in the case of an
Zamora Vs. Collector individual, and five percent (%) in the case of a corporation,
of the taxpayer's taxable income derived from trade, business
Facts: Zamora, owner of Bay View Hotel & or profession as computed without the benefit of this and the
Farmacia Zamora filed his ITR for 51 & 52. following subparagraphs.
The Collector found that he failed to file his
return of the capital gains derived fr. the sale
of certain real properties & claimed dedns w/c 5. Substantiation Requirements
were not allowed. Z appealed to the SC
arguing the CTA erred when it (1) disallowed
P10,478.50 as promotion expenses incurred by
wife for promoting hotel & pharmacy (1/2 of
alleged P20,957 bus. expense);(2) disallowed Sec. 34 (1,b) Substantiation Requirements . - No
3.5% per annum rate of depreciation ;(3) deduction from gross income shall be allowed under
disregarded the price in deed of sale, as costs Subsection (A) hereof unless the taxpayer shall substantiate
with sufficient evidence, such as official receipts or other
of Mla. prop. for det. alleged cap. gains, & (4)
adequate records: (i) the amount of the expense being
applied the Ballantyne Scale of Values in det. deducted, and (ii) the direct connection or relation of the
the cost of said prop. expense being deducted to the development, management,
Held: PROMOTION EXPENSES constitute one of operation and/or conduct of the trade, business or profession
of the taxpayer.
the deductions in conducting a business &
shld. satisfy the requirements of the Tax Code
Sec.30 w/c provides the in computing net inc. 6. Allocation of expenses and
there shall be allowed as dedns all the ord. & deductions
nec. expenses paid or incurred during the
SEC. 50. Allocation of Income and Deductions. - In the
taxable year in carrying on any trade or
case of two or more organizations, trades or businesses
business/c must be substantiated by records. (whether or not incorporated and whether or not organized in
Mrs. Z went abroad on a combined business & the Philippines) owned or controlled directly or indirectly by
medical trip. Not all of her expenses came the same interests, the Commissioner is authorized to
under the ord. & nec. expenses. (Only half of it distribute, apportion or allocate gross income or deductions
are deductible). The SC upheld the CTA when between or among such organization, trade or business, if he
determined that such distribution, apportionment or allocation
it based its decision on the US 1955 PH Federal
is necessary in order to prevent evasion of taxes or clearly to
Taxes Par.14 160-K w/c is based on scientific reflect the income of any such organization, trade or business.
studies & observations for a long period
regarding the useful life of a hotel bldg. The
sale of the properties in JPN notes partly B. Allowable deduction from business
realized a capital gain when converted to PHP income/ trade or practice of profession
Peso.
1. Ordinary/ Necessary Business
3. Kinds Of Deductions Expenses
i. Itemized individual/ corps. SEC. 34. Deductions from Gross Income. - Except for
taxpayers earning compensation income arising from personal
ii. Optional Standard ind. services rendered under an employer-employee relationship
taxpayer only where no deductions shall be allowed under this Section other
iii. Special deductions than under subsection (M) hereof, in computing taxable
income subject to income tax under Sections 24 (A); 25 (A);
26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed
4. Limitations Imposed By Law the following deductions from gross income;
(A) Expenses. -
Example:
(1) Ordinary and Necessary Trade, Business or
Professional Expenses.-
Sec. 34 (H) Charitable and Other Contributions. (a) In General. - There shall be allowed as deduction from gross
(1) In General. - Contributions or gifts actually paid or made income all the ordinary and necessary expenses paid or
within the taxable year to, or for the use of the Government incurred during the taxable year in carrying on or which are
of the Philippines or any of its agencies or any political directly attributable to, the development, management,
subdivision thereof exclusively for public purposes, or to operation and/or conduct of the trade, business or exercise of
accredited domestic corporation or associations organized and a profession, including:

APP 56
INCOME TAX REVIEWER
contract it may prove to be greater than the amount w/c
would ordinarily be paid.
A. Salaries, wages, and other forms
In any event the allowance for compensation paid may not
of compensation for personal exceed what is reasonable under the circumstances. It is in
services general just to assume the reasonable & true compensation is
services actually rendered only such amount as would ordinarily be paid for like services
by are those existing at the date when the contract for
factors to consider to determine
services was made, not those existing at the date when the
reasonableness of amount. contract is questioned.

Sec. 34 (A, 1, a, i). A reasonable allowance for salaries,


wages, and other forms of compensation for personal services Section 71. Treatment of excessive compensation
actually rendered, including the grossed-up monetary value of The income tax liability of the recipient in respect of an
fringe benefit furnished or granted by the employer to the amount of ostensible paid to him as compensation, but
employee: Provided, That the final tax imposed under Section not allowed to be deducted as such by the payer, will depend
33 hereof has been paid; upon the circumstances of each case. Thus, in the case of
payments by corporations, if such payments
Rev. Reg. 6-82 as amended by Rev. Reg. 12-87 Corresponds or bear a close relationship to stockholdings, &
This covers the collection at the source of the Y tax on Are found to be distribution of earnings or profits, the
compensation Y of employed individual taxpayers. The only excessive payments will be treated as dividend
impt. sections in this RR cover the defn. of Compensation (AS If such payments constitute payment for property, they should
INCOME FOR THE EE AND AS DEDUCTIBLE EXPENSE FOR be treated by the payer as capital expenditure & by the
THE ER) & its other forms (traveling, representation, etc.) recipient as part of the purchase price.

Secs. 70-73 Rev. Reg. 2 Section 72. Bonuses to employees. Bonuses to employees
Section 70. Compensation for personal services. will constitute allowable deductions fr. gross income when
such payments are made
Among the ordinary & necessary expenses paid for incurred in
carrying on any trade or business maybe included a in good faith &
reasonable allowance for salaries or other compensation for as additional compensation for the services actually rendered by
personal services actually rendered. The test of deductibility in the employees, provided such payments, when added to the
the area of compensation payments is whether they stipulated salaries do not exceed a reasonable compensation
Are reasonable & for the service rendered.
Are, in fact, purely for service. It is immaterial whether such bonuses are paid
This test & its practical application may be further stated & in cash or
illustrated as follows: in kind or
Any amount paid in the form of compensation, but not in partly cash & partly in kind.
fact as the purchase price services, is not deductible.
An ostensible salary paid by a corporation may be Donations made to employees & others , w/c
distribution of dividend on stock. This is likely to occur in
do no have in them the element of compensation or
the case of a corporation having few shareholders,
practically all of whom draw salaries. If in such a case the are in excess of reasonable compensation for services, are
salaries are in excess of those ordinarily paid for similar not deductible fr. gross income.
services, & the excessive payments corresponds or bear a
close holding to the relationship to the stockholdings of the Section 73. Pensions, compensations for injuries.
officers or employees, it would seem likely that the salaries Amounts paid
are not paid wholly for services rendered, but that
excessive payments are a distribution of earnings upon the for pensions to retired employees or to their families or
stock. others dependent upon them or

An ostensible salary may be in part payment for property. on account of injuries received by employees & lump-sum
This may occur, for example, where a partnership sells our amounts paid or accrued as compensations for injuries,
a corporation, the farmer partners agreeing to continue in are proper deductions as ordinary & necessary expenses
the service of the corporation. In such a case it may be Such deductions are limited to the amount not compensated for
found that the salaries of the farmer partners are not by insurance or otherwise. When the amount of the salary of
merely for services, but in part constitute payment of the an officer or employee is paid for a limited period after his
transfer of the business. death to his widow or heirs in recognition of the services
The form of method of fixing compensation is not decisive rendered by the individual, such payments may be deducted.
as to deductibility. While any form of contingent Salaries paid by ER to employees
compensation invites scrutiny as a possible distribution of who are absent in the military, naval, or other service of the
earnings of the enterprise, it does not follow that payments government
on a contingent basis are to be treated fundamentally on
but who intent to return at the conclusion of such service,
any basis different fr. that applying to compensation at a
are allowable deductions. (relative to pension trust.)
flat rate. Generally speaking, if contingent compensation is
paid pursuant to a free bargain between the employer &
the individual made before the services are rendered, not
influenced by any consideration on the part of the Additional deduction under the Productivity
employer other than that a securing on fair & advantageous Incentive Act.
terms the services of the individual, it should be allowed as
a deduction even though in the actual working out of the
Sec.7 . Benefits & tax incentives -

APP 57
INCOME TAX REVIEWER
(a) Subject to the provs. of Sec.6 hereof (defined what a There is no evid. of any service incurred by
productivity incentive program [PIP]is), a bus. enterprise w/c pets officers w/c cld. be the basis of the grant
adopts a PIP , duly & mutually agreed upon by the parties
to them of a bonus out of the gain realized fr.
to the labor-mgt committee, shall be granted a special
deduction fr. gross Y equivalent to 50% of the total the sale. Doctrine: The taxpayer must show
productivity bonuses given to Ees under the program over & that its claimed deductions must clearly come
above the total allowable ord. & nec. bus. dedn for said w/in the language of the law, since allowances,
bonuses under the NIRC... like exemptions, are matters of legislative.
(b) Grants for manpower training & special studies given to
rank-&-file Ees pursuant to a program prepared by the labor-
mgt. committee for the devt. of skills identified as nec. by the COMMISSIONER VS. ALGUE, supra.
appropriate govt. agency shall also entitle the bus. enterprise
to a special dedn fr. gross Y equiv. to 50 % of the total
grants over & above the allowable ... b. TRAVEL EXPENSES
here and abroad
C.M. HOSKINS VS. COMMISSIONER while away from home
in the pursuit of trade, business or profession
Facts: H was the chairman of the Bd. of Dirs.
of the corp. w/c bears his name. He owns
99.6% of the capital stock. He was also a
Sec. 34. (A, 1, a). (ii) A reasonable allowance for travel
salesman-broker for his co. receiving 50% expenses, here and abroad, while away from home in the
share on the sales commission earned by the pursuit of trade, business or profession;
co. besides his monthly salary for a total
annual compensation of P45,000 plus annual Sec. 66. Rev. No. 2 Traveling expenses.
salary bonus of P40,000 & free use of the co. Traveling expenses as ordinarily understood, include
car & receipt of other allowances & benefits.
transportation expenses &
He also received the addl Y of P99,977.91 as
meals &
his 50% share of the supervisors fee received lodging.
by the co. as managing agent of a real estate
project. If the trip is undertaken for other than business purposes, -
Held: As a general rule bonuses to Ees are the transportation expenses are personal expense, &
deductible as such as addl compensation for the meals & lodgings are living expenses,
the services actually rendered by the Ees when & therefore, not deductible.
such payments when added to the stipulated If the trip solely on business, the reasonable & necessary
salaries do not exceed a reasonable traveling expenses, including transportation expenses, meals
& lodging, becomes business instead of personal expenses.
compensation for the services rendered. In
CAB, the petitioner fails the tests of If then, an individual whose business requires him to travel, -
reasonableness. receives a salary as full compensation for his services w/o
reimbursement for traveling expenses, or
is employed on a commission basis w/ no expenses
KUENZLE VS. COMMISSIONER allowance,
his traveling expenses, including the entire amount expended for
Facts: Comm. assessed K deficiency Y tax on meals & lodging are deductible fr. gross income.
the grd. that the bonuses paid to the Ees were
not reasonable.
If an individual
Held: Not reasonable. In arriving at the receives a salary &
conclusion, the CT. gave due consideration to is also repaid his actual traveling expenses,
all the material factors (SEE ENUMERATION he shall include in gross income, the amount so repaid & may
ABOVE)that to decide accordingly. Policy of deduct such expenses.
giving bonuses in not unreasonable but net
loss resulting fr. it is. If an individual
receives a salary &
AGUINALDO IND. VS. COMMISSIONER also an allowance for meals & lodging,
xxx the amount of the allowance should be included in
Facts: Pet. was engaged in 2 businesses: gross income & the cost of such meals & lodging may be
fishnet mfg. & furniture mfg. It bought a pc. of deducted therefr.. Xxx
land in Munti. for the fishnet industry & then
sold it to move to another location in Mka.
They cited bonuses given to officers of Pet. as c. Repairs
their share of the profit realized fr. the sale was
a deductible expense. to maintain efficient working condition
does not prolong life or add value
Held: Not deductible> Sale was effected
repair and maintenance expense v. capital
through a broker who was paid a commission.
expense

APP 58
INCOME TAX REVIEWER
not taken or is not taking title or in which he has no equity
other than that of a lessee, user or possessor;
Sec. 34., see above na lang please.
Advanced rental/ deposit:
Sec. 68. Rev. Reg. No. 2. Repairs.
The cost of incidental repairs w/c neither Sec. 74, RR No. 2. Rentals.
materially add to the value of the property nor Where a leasehold is acquired for business purposes for a
appreciably prolong its life specified sum, the purchaser may take as deduction in his
return & adequate part of such sum each year based on the
but keep it in an ordinary/efficient operating condition
number of years the lease has to run.
may be deducted as an expense, provided the plans or property
Taxes paid by a tenant to or for a landlord for business property
account is not increased by the amount of such expenditure.

Repairs in the nature of replacement, to the extent that they
are additional rent &
arrest deterioration, &
constitute a deductible item to the tenant & taxable income
appreciably prolong the life of the property to the landlord;
should be charged against the depreciation reserves if such an the amount of the tax being deductible by the latter.
account is kept.
The cost borne by the lessee in
erecting buildings or
Commissioner Vs. Soriano making permanent improvements
Held: Expenditures for replacements, on ground of w/c he is lessee is held to be capital investment &
not deductible as a business expense.
alterations & improvs./additions w/c either
prolong the life of the property or increase its In order to return such taxpayer to his investment of capital, an
annual deduction may be made fr. gross income of an amount
value are capital in nature & are not equal to the cost of such improvements divided by the
deductible. number of years remaining of the terms of the lease, & such
deduction shall be in lieu of deduction for depreciation. If the
remainder of the term of the lease is greater that the
GUTIERREZ VS. COLLECTOR probable life of the buildings erected or of the improvements
made, his deduction shall take the form of an allowance for
Facts: G was primarily engaged in the depreciation.
business of leasing property for w/c he paid
Rev. Reg. 19-86 wala akong kopya eh.
real estate brokers privilege tax. He claimed
dedns for electrical supplies, paint, labor,
cement, tiles, gravel, masonry & labor used to Operating lease/ finance lease/ conditional
repair the taxpayers rental apartments did not sale
increase the value nor prolong its life, but
merely kept the apartments in an ordinary
e. Entertainment/ Presentation
operating condition, hence necessary
Expense
expenditures for the maintenance of his
business.
Sec. 34. A. 1. a. (iv) A reasonable allowance for
Held: Expenses for watching over laborers in entertainment, amusement and recreation expenses during
construction work are not deductible. The the taxable year, that are directly connected to the
activity is more akin to construction work than development, management and operation of the trade,
running a business. Construction costs are business or profession of the taxpayer, or that are directly
related to or in furtherance of the conduct of his or its trade,
capital expenditure.
business or exercise of a profession not to exceed such
ceilings as the Secretary of Finance may, by rules and
d. RENTALS/LEASE and/or other regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the
payments which are required as a
special circumstances, nature and character of the industry,
condition for the continued use or trade, business, or profession of the taxpayer: Provided, That
possession any expense incurred for entertainment, amusement or
recreation that is contrary to law, morals public policy or
public order shall in no case be allowed as a deduction.
for purposes of the trade, business or
profession,
of property to which the taxpayer has not taken When deductible: REQUISITES:
or is not taking title or
in which he has no equity other than that of a
1. Incurred during the taxable year;
lessee, user or possessor
2. Directly connected to the development,
Sec. 34. A, 1, a. (iii) A reasonable allowance for rentals
management and operation of the trade,
and/or other payments which are required as a condition for business or profession of the taxpayer, or that
the continued use or possession, for purposes of the trade, are directly related to or in furtherance of the
business or profession, of property to which the taxpayer has conduct of his trade, business or exercise of a
profession;

APP 59
INCOME TAX REVIEWER
3. Not to exceed such ceilings as the Sec of Fin 2. Promotional expense
may, by rules & regs prescribe, upon 3. Litigation expense
recommendation of the Commissioner, taking
4. Capitalization/ reorganization expense
into acct the needs as well as the special
circumstances, nature & character of the
industry, trade, business or profession of the
taxpayer. h. Special Deductions For Educational
4. Any expense incurred for entertainment, Institutions : Sec. 29 (2) NIRC
amusement or recreation that is contrary to
law, morals, public policy or public order shall in
no case be allowed as a deduction. Sec. 34. A. (2). Expenses Allowable to Private
Educational Institutions. - In addition to the expenses
allowable as deductions under this Chapter, a private
ROXAS vs. CTA educational institution, referred to under Section 27 (B) of this
Code, may at its option elect either: (a) to deduct
Facts: Roxas Y Cia. a partnership formed to expenditures otherwise considered as capital outlays of
manage the prop. left by Do Pedro Roxas depreciable assets incurred during the taxable year for the
deducted fr. its gross Y P40 for tickets to a expansion of school facilities or (b) to deduct allowance for
banquet in honor of Don Sergio Osmena & P28 depreciation thereof under Subsection (F) hereof.
for beer given as gifts to various persons,
claimed as representation expenses.
2. INTEREST EXPENSE
Held: Representation expenses are deductible
fr. gross Y as expenditures incurred in carrying
on a business or trade under the Tax Code , Sec. 34. (B) Interest.-
provided the taxpayer proves that they are (1) In General. - The amount of interest paid or incurred
reasonable in amt., nec., incurred in within a taxable year on indebtedness in connection with the
connection w/ the bus. Not proven in this taxpayer's profession, trade or business shall be allowed as
deduction from gross income: Provided, however, That the
case.
taxpayer's otherwise allowable deduction for interest expense
shall be reduced by an amount equal to the following
f. Expenses Of Farmers/ Those percentages of the interest income subjected to final tax:
Engaged In Agribusiness Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%) beginning January 1, 2000;
A farmer who operates a farm for profit is
entitled to deduct amounts actually expended in (2) Exceptions. - No deduction shall be allowed in respect of
carrying on the business. Deductible: Cost of (1) interest under the succeeding subparagraphs:
tools of short life or small cost & (2)of feeding &
raising livestock in so far as it represents actual (a) If within the taxable year an individual taxpayer reporting
outlay but not including the value of the farm income on the cash basis incurs an indebtedness on which an
produce grown upon the farm & (3) of gasoline or interest is paid in advance through discount or otherwise:
fuel, repairs & upkeep of the transportation eqpt. Provided, That such interest shall be allowed a deduction in
the year the indebtedness is paid: Provided, further, That if
NOT deductible: (1) costs of farm machinery, eqpt
the indebtedness is payable in periodic amortizations, the
& farm bldgs. & (2) amts. expended in the devt. of
amount of interest which corresponds to the amount of the
farm orchards & ranches, prior to the time when principal amortized or paid during the year shall be allowed as
the productive state is reached. Such are regarded deduction in such taxable year;
as investments of capital or capital expenditures &
may be depreciated.
(b)If both the taxpayer and the person to whom the payment
has been made or is to be made are persons specified under
GANCAYCO VS. COLLECTOR Section 36 (B); or
Facts: Deficiency Y taxes levied. Gancayco
claims farming expenses are deductible (for (c)If the indebtedness is incurred to finance petroleum
the devt. & cultivation of his prop). exploration.

Held: No evid. presented as to the nature of


(5) Optional Treatment of Interest Expense. At the option
the farming expenses, other than Gs of the taxpayer, interest incurred to acquire property used
statement. Collector claims that the expense in trade business or exercise of a profession may be allowed
was for clearing & devt., nec. to place it in a as a deduction or treated as a capital expenditure.
productive state. It is not an ordinary expense
but a capital expenditure.
a. REQUISITES FOR DEDUCTION.
g. Other business expenses.
i. paid or incurred during the
Treatment of the ff.: taxable year;
1. Advertising expense

APP 60
INCOME TAX REVIEWER
ii. On indebtedness in connection Provided, That taxes allowed under this Subsection, when
w/ the taxpayers refunded or credited, shall be included as part of gross
income in the year of receipt to the extent of the income tax
profession, trade or
benefit of said deduction.
business however
(2) Limitations on Deductions. - In the case of a nonresident
iii. Subject to limitation: alien individual engaged in trade or business in the Philippines
and a resident foreign corporation, the deductions for taxes
Interest paid on back-to-back loan shall be reduced
provided in paragraph (1) of this Subsection (C) shall be
by an amount = to the ff. percentages of the in. allowed only if and to the extent that they are connected with
income subj. to final tax: income from sources within the Philippines.
Forty-one percent (41%) beginning January 1, (3) Credit Against Tax for Taxes of Foreign Countries. - If the
1998; taxpayer signifies in his return his desire to have the benefits
Thirty-nine percent (39%) beginning January 1, of this paragraph, the tax imposed by this Title shall be
1999; and credited with:
Thirty-eight percent (38%) beginning January 1, (a) Citizen and Domestic Corporation. - In the case of a citizen
2000; of the Philippines and of a domestic corporation, the amount
of income taxes paid or incurred during the taxable year to
any foreign country; and
b. NON-DEDUCTIBLE INTEREST (b) Partnerships and Estates. - In the case of any such individual
who is a member of a general professional partnership or a
c. INTEREST PAID IN ADVANCE/ beneficiary of an estate or trust, his proportionate share of
INTEREST PERIODICALLY such taxes of the general professional partnership or the
AMORTIZED. estate or trust paid or incurred during the taxable year to a
foreign country, if his distributive share of the income of such
Sec. 34. (2) Exceptions. - No deduction shall be allowed in partnership or trust is reported for taxation under this Title.
respect of interest under the succeeding subparagraphs:
An alien individual and a foreign corporation shall not be allowed
(a) If within the taxable year an individual taxpayer reporting the credits against the tax for the taxes of foreign countries
income on the cash basis incurs an indebtedness on which an allowed under this paragraph.
interest is paid in advance through discount or otherwise:
(4) Limitations on Credit. - The amount of the credit taken
Provided, That such interest shall be allowed a deduction in
under this Section shall be subject to each of the following
the year the indebtedness is paid: Provided, further, That if
limitations:
the indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of the (a) The amount of the credit in respect to the tax paid or
principal amortized or paid during the year shall be allowed as incurred to any country shall not exceed the same proportion
deduction in such taxable year; of the tax against which such credit is taken, which the
taxpayer's taxable income from sources within such country
(b)If both the taxpayer and the person to whom the payment
under this Title bears to his entire taxable income for the
has been made or is to be made are persons specified under
same taxable year; and
Section 36 (B); or
(b) The total amount of the credit shall not exceed the same
(c)If the indebtedness is incurred to finance petroleum
proportion of the tax against which such credit is taken, which
exploration.
the taxpayer's taxable income from sources without the
Philippines taxable under this Title bears to his entire taxable
income for the same taxable year.
d. Optional treatment of interest
expense. (5) Adjustments on Payment of Incurred Taxes. - If accrued
taxes when paid differ from the amounts claimed as credits by
the taxpayer, or if any tax paid is refunded in whole or in part,
Sec. 34. B. (3) Optional Treatment of Interest Expense. - the taxpayer shall notify the Commissioner; who shall
At the option of the taxpayer, interest incurred to acquire redetermine the amount of the tax for the year or years
property used in trade business or exercise of a profession affected, and the amount of tax due upon such
may be allowed as a deduction or treated as a capital redetermination, if any, shall be paid by the taxpayer upon
expenditure. notice and demand by the Commissioner, or the amount of
tax overpaid, if any, shall be credited or refunded to the
taxpayer. In the case of such a tax incurred but not paid, the
3. TAXES Commissioner as a condition precedent to the allowance of
this credit may require the taxpayer to give a bond with
sureties satisfactory to and to be approved by the
Sec. 34 C. Taxes. Commissioner in such sum as he may require, conditioned
(1) In General. - Taxes paid or incurred within the taxable year upon the payment by the taxpayer of any amount of tax
in connection with the taxpayer's profession, trade or found due upon any such redetermination. The bond herein
business, shall be allowed as deduction, except prescribed shall contain such further conditions as the
(a) The income tax provided for under this Title; Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in
(b) Income taxes imposed by authority of any foreign country;
but this deduction shall be allowed in the case of a taxpayer Subsection (C)(3) of this Section may, at the option of the
taxpayer and irrespective of the method of accounting
who does not signify in his return his desire to have to any
extent the benefits of paragraph (3) of this subsection employed in keeping his books, be taken in the year which the
taxes of the foreign country were incurred, subject, however,
(relating to credits for taxes of foreign countries);
to the conditions prescribed in Subsection (C)(5) of this
(c) Estate and donor's taxes; and Section. If the taxpayer elects to take such credits in the year
(d) Taxes assessed against local benefits of a kind tending to in which the taxes of the foreign country accrued, the credits
increase the value of the property assessed. for all subsequent years shall be taken upon the same basis

APP 61
INCOME TAX REVIEWER
and no portion of any such taxes shall be allowed as a interest on earned but unpaid salaries &
deduction in the same or any succeeding year. bonuses of its Ees.
(7)Proof of Credits. - The credits provided in Subsection (C)(3)
hereof shall be allowed only if the taxpayer establishes to the Held: Under the law, in order that interest
satisfaction of the Commissioner the following: may be deductible , it must be paid on
(a) The total amount of income derived from sources without indebtedness. It is imperative that there is
the Philippines; an existing indebtedness w/c may be subject
(b) The amount of income derived from each country, the tax to the payment of interest. The unclaimed
paid or incurred to which is claimed as a credit under said salaries & bonuses do not constitute
paragraph, such amount to be determined under rules and indebtedness w/in the meaning of the law.
regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and
computation of such credits. a. IN GENERAL.

COMMISSIONER VS. PALANCA Taxes paid or incurred within the taxable year in
connection w/ the taxpayers profession, trade or
Facts: Palanca donated shares of stock to his business, shall be allowed as deduction.
son. He was assessed a gift tax, surcharge &
interest for failure to file a return. He claimed a
dedn for interest paid on the donees gift tax. b. NOT DEDUCTIBLE:
The BIR then considered the transfer as made i. Phil. income tax
in contemplation of death & was assessed
ii. Income taxes imposed by
inheritance & estate taxes.
authority of any foreign
Held: Although taxes already due have not country; but this deduction
the same concept as debts strictly speaking, shall be allowed in the case
they are obligations w/c may be considered as of a taxpayer who does not
such. In CIR vs. Prieto, it was held that the signify in his return his
distinction bet. taxes & debts is recognized in desire to have to any extent
this jurisdiction, the variance in their legal the benefits of tax credit.
conception does not extend to the interest paid
iii. Estate and donors taxes, and
on them. Requisites are (1) to (4) given above.
Indebtedness, as used in the Tax Code, is the iv. Taxes assessed vs. local
unconditional & legally enforceable oblign. for benefits of a kind tending to
the payment of money. As Such, a tax may be increase the value of the
deemed as an indebtedness. property assessed.

c. Treatment of tax deducted and


subsequently credited or refunded
shall be included as part of gross
COMMISSIONER VS. PRIETO income in the year of receipt.
Facts: Prieto gave gifts of real prop. to her 4 d. Limitations on Deductions
kids. CIR assessed gift taxes, interests &
Nonresident alien/ resident foreign corp.
compromises thereon. P now claims the
connected w/ income fr. sources w/in the Phils.
interest as dedn.
Held: For interest to be allowed as dedn fr.
e. Tax CREDIT.
gross Y, it must be shown that there be
indebtedness, interest upon such & that what
is claimed as int. dedn should have been paid Sec. 34. C. (3) Credit Against Tax for Taxes of Foreign
or incurred w/in the yr. RR No. 2, Countries. - If the taxpayer signifies in his return his desire
implementing 30(a) providing that no dedn to have the benefits of this paragraph, the tax imposed by this
shld. be allowed for amts. representing Title shall be credited with:
interest, surcharge & penalties incident to DQ (a) Citizen and Domestic Corporation. - In the case of a citizen
is inapplicable to cases where the taxpayer of the Philippines and of a domestic corporation, the amount
of income taxes paid or incurred during the taxable year to
seeks to come under 30(b) w/c provides for any foreign country; and
dedn of interest on indebtedness.
(b) Partnerships and Estates. - In the case of any such individual
who is a member of a general professional partnership or a
beneficiary of an estate or trust, his proportionate share of
KUENZLE VS. COLLECTOR such taxes of the general professional partnership or the
Facts: Kuenzle is a domestic corp. engaged in estate or trust paid or incurred during the taxable year to a
foreign country, if his distributive share of the income of such
the importation of textiles, hardware, etc. It partnership or trust is reported for taxation under this Title.
deducted fr. its gross Y certain items such as

APP 62
INCOME TAX REVIEWER
An alien individual and a foreign corporation shall not be allowed paid in a foreign country subject to limitation. It is
the credits against the tax for the taxes of foreign countries allowed to lessen the rigor of Intl double or
allowed under this paragraph. multiple taxation

(4) Limitations on Credit. - The amount of the credit taken


Distinct fr. Tax Deduction
under this Section shall be subject to each of the following
limitations:
(a) The amount of the credit in respect to the tax paid or TAX CREDIT TAX DEDUCTION
incurred to any country shall not exceed the same proportion
Tax deducted fr. tax deducted fr.
of the tax against which such credit is taken, which the
income tax itself computing the
taxpayer's taxable income from sources within such country
taxable income
under this Title bears to his entire taxable income for the
same taxable year; and all taxes, as a only three kinds of
(b) The total amount of the credit shall not exceed the same general rule are foreign taxes may
proportion of the tax against which such credit is taken, which allowed as be claimed as
the taxpayer's taxable income from sources without the deduction w/ the credits against
Philippines taxable under this Title bears to his entire taxable exception of the 7 Phil. income tax
income for the same taxable year. kinds of taxes i.e. foreign
expressly income, war-
(5) Adjustments on Payment of Incurred Taxes . - If
excluded profits & excess-
accrued taxes when paid differ from the amounts claimed as profits tax.
credits by the taxpayer, or if any tax paid is refunded in whole
or in part, the taxpayer shall notify the Commissioner; who
shall redetermine the amount of the tax for the year or years Sec. 34. C. (4) Limitations on Credit . - The amount of the
affected, and the amount of tax due upon such credit taken under this Section shall be subject to each of the
redetermination, if any, shall be paid by the taxpayer upon following limitations:
notice and demand by the Commissioner, or the amount of (a) The amount of the credit in respect to the tax paid or
tax overpaid, if any, shall be credited or refunded to the incurred to any country shall not exceed the same proportion
taxpayer. In the case of such a tax incurred but not paid, the of the tax against which such credit is taken, which the
Commissioner as a condition precedent to the allowance of taxpayer's taxable income from sources within such country
this credit may require the taxpayer to give a bond with under this Title bears to his entire taxable income for the
sureties satisfactory to and to be approved by the same taxable year; and
Commissioner in such sum as he may require, conditioned (b) The total amount of the credit shall not exceed the same
upon the payment by the taxpayer of any amount of tax proportion of the tax against which such credit is taken, which
found due upon any such redetermination. The bond herein the taxpayer's taxable income from sources without the
prescribed shall contain such further conditions as the Philippines taxable under this Title bears to his entire taxable
Commissioner may require. income for the same taxable year.
(6) Year in Which Credit Taken. - The credits provided for in
Subsection (C)(3) of this Section may, at the option of the
taxpayer and irrespective of the method of accounting v. Other requirements.
employed in keeping his books, be taken in the year which the
taxes of the foreign country were incurred, subject, however, When there are adjustments on payment of
to the conditions prescribed in Subsection (C)(5) of this incurred taxes.
Section. If the taxpayer elects to take such credits in the year
in which the taxes of the foreign country accrued, the credits vi. When crediting allowed.
for all subsequent years shall be taken upon the same basis
and no portion of any such taxes shall be allowed as a vii. Substantiation requirements/
deduction in the same or any succeeding year. Proof of credit.
(7)Proof of Credits. - The credits provided in Subsection (C)
(3) hereof shall be allowed only if the taxpayer establishes to
the satisfaction of the Commissioner the following: Secs. 80-83 Rev. Reg. 2
(a) The total amount of income derived from sources without Sec. 80. RR No. 2. Taxes in General .- As a general rule,
the Philippines; taxes are deductible w/ the exception of those w/ respect to
(b) The amount of income derived from each country, the tax w/c the law does not permit deduction. However, in the case
paid or incurred to which is claimed as a credit under said of a nonresident alien individual & a foreign corporation,
paragraph, such amount to be determined under rules and deduction is allowed only if & to the extent that the taxes for
regulations prescribed by the Secretary of Finance; and w/c deduction is claimed are connected w/ the income fr.
sources w/in RP.
(d) All other information necessary for the verification and
computation of such credits. Import duties paid to the proper customs officers, & business
occupation, license privilege, excise & stamp taxes & any
other taxes of every name & nature paid directly to the
Government of the RP or to any political sub. thereof, are
i. Tax credit v. tax deduction deductible. The word taxes means taxes. Proper & no
ii. Taxpayers entitled to tax credit deduction should be allowed for amounts representing
interest, surcharge or penalties incident to delinquency..
iii. Taxes allowed as credit. Postage is not a tax. Automobile registration fees are
considered taxes. taxes are deductible as such only by the
iv. Limitations on credit. person upon whom they are imposed. Thus the merchants
Tax Credit- refers to the tax payers right to deduct sales tax imposed by law upon sales is not deductible by the
fr. the income tax due the amount of the tax he has

APP 63
INCOME TAX REVIEWER
individual purchaser even though the tax may be billed to him Sec. 34. (D) Losses.
as a separate item. (1) In General.- Losses actually sustained during the taxable
In computing the net income of an individual, no deduction is year and not compensated for by insurance or other forms of
allowed for the tax is imposed upon his interest as a indemnity shall be allowed as deductions:
shareholder of a bank or other corporation. w/c are paid by
the corporation w/o reimbursements fr. the taxpayer. The (a) If incurred in trade, profession or business;
amount s paid should not be included in the income of the
(b) Of property connected with the trade, business or
shareholder.
profession, if the loss arises from fires, storms, shipwreck, or
In the case of corporate bonds or other obligations containing a other casualties, or from robbery, theft or embezzlement.
tax-free covenant clause, the corporation paying the tax or
The Secretary of Finance, upon recommendation of the
any part of it, for someone else, pursuant to its agreement is
Commissioner, is hereby authorized to promulgate rules and
not entitled to deduct such payment fr. gross income on any
regulations prescribing, among other things, the time and
ground.
manner by which the taxpayer shall submit a declaration of
loss sustained from casualty or from robbery, theft or
Sec. 81. RR. No. 2. Income tax imposed by the embezzlement during the taxable year: Provided, however,
government.- The law does not permit the deduction of the That the time limit to be so prescribed in the rules and
income tax paid or accrued in favor of the government & in regulations shall not be less than thirty (30) days nor more
no case may the taxpayer avail of such deduction. than ninety (90) days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the
loss.
Sec. 82. RR No. 2 Income, war-profits & excess profits
taxes imposed by the au thority of a foreign country. (c) No loss shall be allowed as a deduction under this
Income, war-profits & excess-profits taxes imposed by the Subsection if at the time of the filing of the return, such loss
authority of a foreign country are allowed as deductions only has been claimed as a deduction for estate tax purposes in
if the taxpayer does not signify in his return his desire to have the estate tax return.
to any extent the benefits of the provisions of law allowing
credits against the tax for taxes of foreign countries. (2) Proof of Loss. - In the case of a nonresident alien individual
or foreign corporation, the losses deductible shall be those
actually sustained during the year incurred in business, trade
Sec. 83. RR No. 2 Estate inheritance & gift taxes; taxes
or exercise of a profession conducted within the Philippines,
assessed against local benefits.-Estate, inheritance &
when such losses are not compensated for by insurance or
gift taxes are not deductible.
other forms of indemnity. The secretary of Finance, upon
So-called taxes, property assessments paid for local benefits recommendation of the Commissioner, is hereby authorized to
such as street, sidewalk & other improvements imposed bec. promulgate rules and regulations prescribing, among other
of & measured by some benefit inuring directly to the things, the time and manner by which the taxpayer shall
property against w/c the assessment is to be levied, do not submit a declaration of loss sustained from casualty or from
constitute an allowable deduction fr. gross income tax. A tax robbery, theft or embezzlement during the taxable year:
is considered assessed against local benefits when the Provided, That the time to be so prescribed in the rules and
property subject to the tax is limited to the property regulations shall not be less than thirty (30) days nor more
benefited. than ninety (90) days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the
loss; and
COMMISSIONER VS. LEDNICKY
(3) Net Operating Loss Carry-Over. - The net operating loss of
Facts: The Lednicky spouses are American the business or enterprise for any taxable year immediately
citizens living in the Phils. & have derived all preceding the current taxable year, which had not been
previously offset as deduction from gross income shall be
their Y fr. Phil. sources for the taxable year in
carried over as a deduction from gross income for the next
question. In their amended ITR for 56 they three (3) consecutive taxable years immediately following the
claimed a deduction of P205,939 as paid in year of such loss: Provided, however, That any net loss
1956 to the US Govt. as federal Y tax for said incurred in a taxable year during which the taxpayer was
year. Requested for refund of P112,437. exempt from income tax shall not be allowed as a deduction
under this Subsection: Provided, further, That a net operating
Held: No deduction nor tax credit allowed. loss carry-over shall be allowed only if there has been no
Alien residents who derive their income fr. substantial change in the ownership of the business or
sources w/in the Phils. solely may not deduct enterprise in that -
fr. gross Y the Y tax paid to his home country (i) Not less than seventy-five percent (75%) in nominal
for the taxable year. Such rt. is given only as value of outstanding issued shares., if the business is in
an alternative to his rt. to claim a tax credit for the name of a corporation, is held by or on behalf of
the same persons; or
such foreign Y taxes, such that unless he has a
right to claim such a credit if he chooses, he is (ii) Not less than seventy-five percent (75%) of the paid up
capital of the corporation, if the business is in the name
precluded fr. such deduction. To allow a of a corporation, is held by or on behalf of the same
resident alien to deduct fr. his taxes whatever persons.
he pays to his govt amounts to conferring "For purposes of this subsection, the term 'not operating loss'
upon him the power to reduce the tax due to shall mean the excess of allowable deduction over gross
the Phil govt simply by increasing the tax income of the business in a taxable year.
rates on the alien resident. Provided, That for mines other than oil and gas wells, a net
operating loss without the benefit of incentives provided for
under Executive Order No. 226, as amended, otherwise
5. LOSSES. known as the Omnibus Investments Code of 1987, incurred in

APP 64
INCOME TAX REVIEWER
any of the first ten (10) years of operation may be carried 2. Losses due to involuntary removal of
over as a deduction from taxable income for the next five (5) buildings, machinery, etc. incident to
years immediately following the year of such loss. The entire renewal or replacement;
amount of the loss shall be carried over to the first of the five
3. Losses of the useful value of capital assets
(5) taxable years following the loss, and any portion of such
due to some change in business conditions;
loss which exceeds, the taxable income of such first year shall
be deducted in like manner form the taxable income of the &
next remaining four (4) years. 4. Abandonment losses in petroleum
(4) Capital Losses. - operations.
(a) Limitation. - Loss from sales or Exchanges of capital assets
shall be allowed only to the extent provided in Section 39. Secs. 94 100 / 104 of rev. Reg. No. 2 are incorporated in
(b) Securities Becoming worthless. - If securities as defined in the following topics:
Section 22 (T) become worthless during the taxable year and
are capital assets, the loss resulting therefrom shall, for
purposes of this Title, be considered as a loss from the sale or
exchange, on the last day of such taxable year, of capital c. Requisites for deductibility
assets. 1. Must be that of the taxpayer
2. Must be actually sustained & charged off
(5) Losses From Wash Sales of Stock or Securities. - Losses w/in the taxable year
from 'wash sales' of stock or securities as provided in Section
38. 3. Must be evidenced by a closed & completed
transaction
(6) Wagering Losses. - Losses from wagering transactions shall
b allowed only to the extent of the gains from such 4. Must not be compensated for by insurance
transactions. or other form of indemnity
(7) Abandonment Losses. - 5. A sworn declaration must be filed w/in 45
days after the date of the occurrence of
(a) In the event a contract area where petroleum operations are casualty or robbery, theft or embezzlement
undertaken is partially or wholly abandoned, all accumulated 6. The taxpayer must prove the elements of the
exploration and development expenditures pertaining thereto loss claimed, such as the actual nature &
shall be allowed as a deduction: Provided, That accumulated occurrence of the event & amount of the
expenditures incurred in that area prior to January 1, 1979 loss; &
shall be allowed as a deduction only from any income derived
from the same contract area. In all cases, notices of
7. The loss must be connected w/ the trade or
abandonment shall be filed with the Commissioner. business of the taxpayer.
(b) In case a producing well is subsequently abandoned, the
unamortized costs thereof, as well as the undepreciated costs A casualty loss is not deductible even though the
of equipment directly used therein , shall be allowed as a above requisites are present, if it has been claimed
deduction in the year such well, equipment or facility is as a deduction for estate tax purposes in the estate
abandoned by the contractor: Provided, That if such tax return. (Sec. 93 RR2)
abandoned well is reentered and production is resumed, or if
such equipment or facility is restored into service, the said
costs shall be included as part of gross income in the year of Closed & completed transaction (Sec. 96 RR
resumption or restoration and shall be amortized or 2)
depreciated, as the case may be. The law requires that the loss should be sustained
during the taxable year. A loss is actually sustained
when it is evidenced by a closed & completed
a. Definition transaction. There should be an identifiable event
w/c justifies the loss, such as when there is a
complete destruction of property or when
Sec. 34. D. (1) In General.- Losses actually sustained during
insurance proceedings are finally settled & the loss
the taxable year and not compensated for by insurance or
other forms of indemnity shall be allowed as deductions:
not recoverable therein is finally ascertained.
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or i. CASUALTY LOSS
profession, if the loss arises from fires, storms, shipwreck, or
other casualties, or from robbery, theft or embezzlement. ii. NIRC provision:

Sec. 34. D. 1. b. x x x
b. Types/ Classification of Losses The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules and
regulations prescribing, among other things, the time and
1. Ordinary Losses:/ Business Loss manner by which the taxpayer shall submit a declaration of
loss sustained from casualty or from robbery, theft or
2. Casualty Loss
embezzlement during the taxable year: Provided, however,
3. Capital Loss That the time limit to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor more
Special kinds of losses: than ninety (90) days from the date of discovery of the

1. Losses fr. wash sales of stock or securities;

APP 65
INCOME TAX REVIEWER
casualty or robbery, theft or embezzlement giving rise to the (b) Securities Becoming worthless. - If securities as defined in
loss. Section 22 (T) become worthless during the taxable year and
(c) No loss shall be allowed as a deduction under this are capital assets, the loss resulting therefrom shall, for
Subsection if at the time of the filing of the return, such loss purposes of this Title, be considered as a loss from the sale or
has been claimed as a deduction for estate tax purposes in exchange, on the last day of such taxable year, of capital
the estate tax return. assets.

(2) Proof of Loss. - In the case of a nonresident alien individual Losses fr. sales or exchange of capital assets
or foreign corporation, the losses deductible shall be those
Securities becoming worthless.
actually sustained during the year incurred in business, trade
or exercise of a profession conducted within the Philippines,
when such losses are not compensated for by insurance or FERNANDEZ HERMANOS v. COMM.
other forms of indemnity. The secretary of Finance, upon
In this case, the SC held that there was
recommendation of the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among other adequate basis for allowance of the writing off
things, the time and manner by which the taxpayer shall as worthless securities the stock of a lumber
submit a declaration of loss sustained from casualty or from company, it appearing that it had closed
robbery, theft or embezzlement during the taxable year: operations although it still had its sawmill &
Provided, That the time to be so prescribed in the rules and equipment of some value, for even assuming
regulations shall not be less than thirty (30) days nor more
that the company would later somehow realize
than ninety (90) days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the some proceeds fr. its sawmill & equipment &
loss; and such proceeds would later be distributed to its
stockholders, the amount so received by the
taxpayer would then be properly reportable as
iii. Net operating loss carry-over. income of the taxpayer in the year it is
received. In the meantime, it may properly be
claimed as loss in his tax return pursuant to
(3) Net Operating Loss Carry-Over. - The net operating loss Sec. 29 d,4,b or Sec. 29, e (Bad debts).
of the business or enterprise for any taxable year immediately
preceding the current taxable year, which had not been
previously offset as deduction from gross income shall be v. Other kinds of losses:
carried over as a deduction from gross income for the next
three (3) consecutive taxable years immediately following the
year of such loss: Provided, however, That any net loss Sec. 34. D.
incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction (5) Losses From Wash Sales of Stock or Securities . -
under this Subsection: Provided, further, That a net operating Losses from 'wash sales' of stock or securities as provided in
loss carry-over shall be allowed only if there has been no Section 38.
substantial change in the ownership of the business or (6) Wagering Losses. - Losses from wagering transactions
enterprise in that - shall b allowed only to the extent of the gains from such
(i) Not less than seventy-five percent (75%) in nominal value of transactions.
outstanding issued shares., if the business is in the name of a (7) Abandonment Losses. -
corporation, is held by or on behalf of the same persons; or (a) In the event a contract area where petroleum operations are
(ii) Not less than seventy-five percent (75%) of the paid up undertaken is partially or wholly abandoned, all accumulated
capital of the corporation, if the business is in the name of a exploration and development expenditures pertaining thereto
corporation, is held by or on behalf of the same persons. shall be allowed as a deduction: Provided, That accumulated
"For purposes of this subsection, the term 'not operating loss' expenditures incurred in that area prior to January 1, 1979
shall mean the excess of allowable deduction over gross shall be allowed as a deduction only from any income derived
income of the business in a taxable year. from the same contract area. In all cases, notices of
Provided, That for mines other than oil and gas wells, a net abandonment shall be filed with the Commissioner.
operating loss without the benefit of incentives provided for (b) In case a producing well is subsequently abandoned, the
under Executive Order No. 226, as amended, otherwise unamortized costs thereof, as well as the undepreciated costs
known as the Omnibus Investments Code of 1987, incurred in of equipment directly used therein , shall be allowed as a
any of the first ten (10) years of operation may be carried deduction in the year such well, equipment or facility is
over as a deduction from taxable income for the next five (5) abandoned by the contractor: Provided, That if such
years immediately following the year of such loss. The entire abandoned well is reentered and production is resumed, or if
amount of the loss shall be carried over to the first of the five such equipment or facility is restored into service, the said
(5) taxable years following the loss, and any portion of such costs shall be included as part of gross income in the year of
loss which exceeds, the taxable income of such first year shall resumption or restoration and shall be amortized or
be deducted in like manner form the taxable income of the depreciated, as the case may be.
next remaining four (4) years.

Losses fr. wash sales of stock or securities


iv. CAPITAL LOSS. wagering losses
abandonment losses (petroleum operations.)

Sec. 34. D. (4) Capital Losses. - Plaridel Surety V. Collector of IR


(a) Limitation. - Loss from sales or Exchanges of capital assets
shall be allowed only to the extent provided in Section 39.

APP 66
INCOME TAX REVIEWER
Facts: The Collector of Internal Revenue demolished bldg., was not compensated for by
disallowed a LOSS deduction by the petitioner, insurance or otherwise, its loss should be
said deduction was for the payment of a charged as a deduction fr. gross income.
performance bond w/c Plaridel previously
issued on behalf of certain debtor/principals
who defaulted on their obligation. 6. BAD DEBT
Held: The Court upheld the CIR in
disallowing the deduction bec. the loss Sec. 34. (E) Bad Debts. -
sustained by Plaridel Surety was compensated (1) In General. - Debts due to the taxpayer actually
for (by insurance or) otherwise &, therefore, it ascertained to be worthless and charged off within the taxable
year except those not connected with profession, trade or
has not in fact & in law suffered any loss. The business and those sustained in a transaction entered into
alleged deductible loss was covered by a between parties mentioned under Section 36 (B) of this Code:
judicially enforceable right based on a contract Provided, That recovery of bad debts previously allowed as
an indemnity agreement signed by the deduction in the preceding years shall be included as part of
debtor/principals in favor of the Surety Co., w/c the gross income in the year of recovery to the extent of the
income tax benefit of said deduction.
had not yet exhausted all its available
remedies under the indemnity agreement. (2) Securities Becoming Worthless. - If securities, as
defined in Section 22 (T), are ascertained to be worthless and
charged off within the taxable year and are capital assets, the
loss resulting therefrom shall, in the case of a taxpayer other
CU UNJIENG v. Board of Tax Appeals than a bank or trust company incorporated under the laws of
Facts: Petitioner claimed war losses (actually the Philippines a substantial part of whose business is the
incurred in the years 1945 to 1947) in its 1950 receipt of deposits, for the purpose of this Title, be considered
as a loss from the sale or exchange, on the last day of such
return, after it was advised by the War Damage taxable year, of capital assets.
Commission that no other payments would be
available other than those already effected.
Sec. 36. (B) Losses from Sales or Exchanges of Property.
CIR disallowed the deduction & assessed - In computing net income, no deductions shall in any case be
deficiency taxes. allowed in respect of losses from sales or exchanges of
Held: Petitioner could not deduct the said property directly or indirectly
losses beyond the years when they were (1) Between members of a family. For purposes of this
actually sustained. [The word] Otherwise paragraph, the family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood),
should be construed to refer to compensation spouse, ancestors, and lineal descendants; or
due under a title analogous or similar to
(2) Except in the case of distributions in liquidation, between an
insurance. The loss sustained by the taxpayer individual and corporation more than fifty percent (50%) in
must be covered by judicially enforceable right value of the outstanding stock of which is owned, directly or
arising fr. any of the sources of obligations, indirectly, by or for such individual; or
namely: law, contract, quasi-contract, tort or (3) Except in the case of distributions in liquidation, between
crime, in order that it may be considered two corporations more than fifty percent (50%) in value of
compensated for otherwise than by the outstanding stock of which is owned, directly or
insurance. The approval of the Phil. indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the
rehabilitation Act in 1946 did not authorize the corporation preceding the date of the sale of exchange was
petitioner to postpone for another year, its under the law applicable to such taxable year, a personal
claim for deduction arising fr. the war losses in holding company or a foreign personal holding company;
question. (4) Between the grantor and a fiduciary of any trust; or
COMM. v. PRISCILLA ESTATE INC. (5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor
Facts: Priscilla Estate had a barong-barong in with respect to each trust; or
one of its lots, w/c was being rented at P3,730 (6) Between a fiduciary of a trust and beneficiary of such
per month. The City Engineer of Manila trust.
declared the property a fire hazard & forced
the company to demolish it. The value of the
property was consequently declared by the a. What are bad debts?
Co., as a loss. The Commish of IR disallowed b. Who are related taxpayers?
the deduction & claims that the amount should
c. Requisites for deduction.
form part of the cost of the new bldg.,
constructed in the place of the old structure. 1. Debts due taxpayer
Held: The CIRs contention is erroneous bec. 2. Actually ascertained to be worthless
the removal of the barong-barong was forced 3. Charged off w/in the taxable year
upon the corporation, the fact that the latter 4. Connected w/ profession, trade or business
was earning fr. the said structure & that it had 5. Not those sustained in a transaction entered
no funds to construct a new one belied any into bet. related parties.
intention to demolish the old one. Since the

APP 67
INCOME TAX REVIEWER
d. Treatment recovered bad debts him. Respondent herein has not adequately
previously allowed as deduction. made such showing. The payments made,
some in full, after the accounts had been
characterized as bad debts, merely stresses
included as part of the gross income in the year the undue haste w/ w/c the same had been
of recovery to the extent of the income tax
written off.
benefit of said deduction.
PRC v. CA
e. Securities becoming worthless. Facts: Phil. Refining Company protested the
disallowance by the CIR of bad debts & interest
1. ascertained to be worthless and
expenses w/c the former listed as deductions
2. charged off w/in the taxable year in its return.
3. are capital assets
Held: These particular bad debts were not
4. the loss resulting therefrom shall, in the case
allowable deductions bec. they do not meet
of a taxpayer other than a bank or trust co.
incorporated under the laws of the Phils. a the requirements stated in the Goodrich case.
substantial part of whose business is the There was lack of proof or evidence of good
receipt of deposits, for the purpose of this faith & reasonable ascertainment of collection.
Title, be considered as a loss fr. the sale or Among the accounts disallowed as deductions
exchange, on the last day of such taxable were the ff.:
year, of capital assets.
1. Remoblas store & CM Variety store not a
single document was offered to show that
FERNANDEZ HERMANOS v. COMM the stores were indeed burned, even just a
police report. PRC did not even send
Facts: FH Inc., gave advances to a subsidiary
demand letters.
mining company w/c the latter could not repay
due to its difficulties. FH Inc., wrote off said 2. Aboitiz Shipping Corp. no proof was given
advances w/c were disallowed by the CIR & of PRC policy that gives rebates to clients in
sustained by the Court. case of loss arising fr. fortuitous events, w/c
it now passes off as uncollectible debts;
Held: Under the memorandum agreement, the
mining company was to pay FH Inc., 15% of its 3. AFPCES the mere fact that AFPCES is a
net income, the advances were not loans but govt. agency does not preclude P fr. filing
investments of FH Inc., w/c gave the advances suit since the agency was discharging
w/o actually expecting repayment as debts. proprietary functions.
The loss cannot be written off bec. there is no The taxpayer must be able to
valid & subsisting debt. demonstrate that the debt is not only
uncollectible as of the taxable year but also at
Ascertainment of worthlessness. any time in the future. So when the recovery is
Before a debt can be ascertained to be worthless, merely doubtful, the deduction is not allowed.
the creditor must take reasonable steps to collect Usually the ff. steps are required:
the debt w/in the period of prescription. The duty of
ascertainment requires proof of two facts: 1. Sending of statements of accounts;

That the taxpayer did in fact ascertain the 2. Sending of collection letters;
debt to be worthless in the year for w/c 3. Giving the account to a lawyer for
deduction was sought; & collection; &
That in doing so acted in good faith. 4. Filing a collection case in court.

COLLECTOR v. GOODRICH
Deduction of bad debt subsequently collected
Facts: Goodrich claimed deductions on several A debt w/c was previously found to be worthless
bad debts. Most of the debtors were merely & written off in a prior year & subsequently
sent demand letters. Some debtors mad partial collected does not render the deduction
payments, others later paid the debt in full. unallowable or illegal. The amount of the debt
The CIR disallowed these as deductions. must be reported as income in the taxable year in
w/c it is received.
Held: The claimed deductions should be
rejected. The requirement of ascertainment
7. DEPRECIATION
needs proof of two facts (see above
discussion). Good faith on the part of the
taxpayer is not enough. He must show also Sec.34 (f) NIRC Depreciation. -
that he had reasonably investigated the (1) General Rule. - There shall be allowed as a depreciation
relevant facts & had drawn a reasonable deduction a reasonable allowance for the exhaustion, wear
and tear (including reasonable allowance for obsolescence) of
inference fr. the information thus obtained by
APP 68
INCOME TAX REVIEWER
property used in the trade or business. In the case of property (a) At the normal rate of depreciation if the expected life is ten
held by one person for life with remainder to another person, (10) years or less; or
the deduction shall be computed as if the life tenant were the (b) Depreciated over any number of years between five (5)
absolute owner of the property and shall be allowed to the life years and the expected life if the latter is more than ten (10)
tenant. In the case of property held in trust, the allowable years, and the depreciation thereon allowed as deduction
deduction shall be apportioned between the income from taxable income: Provided, That the contractor notifies
beneficiaries and the trustees in accordance with the pertinent the Commissioner at the beginning of the depreciation period
provisions of the instrument creating the trust, or in the which depreciation rate allowed by this Section will be used.
absence of such provisions, on the basis of the trust income
(6) Depreciation Deductible by Nonresident Aliens Engaged in
allowable to each.
Trade or Business or Resident Foreign Corporations. - In the
(2) Use of Certain Methods and Rates. - The term 'reasonable case of a nonresident alien individual engaged in trade or
allowance' as used in the preceding paragraph shall include, business or resident foreign corporation, a reasonable
but not limited to, an allowance computed in accordance with allowance for the deterioration of Property arising out of its
rules and regulations prescribed by the Secretary of Finance, use or employment or its non-use in the business trade or
upon recommendation of the Commissioner, under any of the profession shall be permitted only when such property is
following methods: located in the Philippines.
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice
the rate which would have been used had the annual
allowance been computed under the method described in a. What is depreciation? what is
Subsection (F) (1); obsolescence?
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the
For the exhaustion, wear and tear (including
Secretary of Finance upon recommendation of the
Commissioner. reasonable allowance for obsolescence) of
property
(3) Agreement as to Useful Life on Which Depreciation Rate is
Based. - Where under rules and regulations prescribed by the
Secretary of Finance upon recommendation of the Definition:
Commissioner, the taxpayer and the Commissioner have
entered into an agreement in writing specifically dealing with (Basilan Estates Inc., v. Comm & Secs. 110
the useful life and rate of depreciation of any property, the 115 RR 2)
rate so agreed upon shall be binding on both the taxpayer and Depreciation - the gradual diminution in the
the national Government in the absence of facts and useful value of tangible property used in the trade
circumstances not taken into consideration during the or business resulting fr. exhaustion, wear & tear, &
adoption of such agreement. The responsibility of establishing normal obsolescence
the existence of such facts and circumstances shall rest with
The term is also applied to amortization of
the party initiating the modification. Any change in the agreed
rate and useful life of the depreciable property as specified in the value of intangible assets the use of w/c in the
the agreement shall not be effective for taxable years prior to trade or business is definitely limited in duration.
the taxable year in which notice in writing by certified mail or The necessity for depreciation allowance arises fr.
registered mail is served by the party initiating such change to the fact that certain property used in the business
the other party to the agreement: gradually approaches a point where its usefulness
Provided, however, that where the taxpayer has adopted such is exhausted. By using the property, a gradual sale
useful life and depreciation rate for any depreciable and is made of it; & the depreciation charged is the
claimed the depreciation expenses as deduction from his measure of the cost w/c has been sold. When then
gross income, without any written objection on the part of the the property is disposed of after years of use, it is
Commissioner or his duly authorized representatives, the no longer the whole thing originally used.
aforesaid useful life and depreciation rate so adopted by the
taxpayer for the aforesaid depreciable asset shall be
considered binding for purposes of this Subsection. b. Requisites for deductibility:
(4) Depreciation of Properties Used in Petroleum Operations. - 1. The allowance for depreciation must be
An allowance for depreciation in respect of all properties reasonable.
directly related to production of petroleum initially placed in
2. It must be for property arising out of its use
service in a taxable year shall be allowed under the straight-
line or declining-balance method of depreciation at the option
or employment in the business or trade, or
of the service contractor. out of its not being used temporarily during
the year.
However, if the service contractor initially elects the declining-
balance method, it may at any subsequent date, shift to the 3. It must be charged off during the taxable
straight-line method. year.
The useful life of properties used in or related to production of 4. A statement on the allowance must be
petroleum shall be ten (10) years of such shorter life as may attached to the return.
be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall Reasonable allowance as used in the Tax Code,
be depreciated under the straight-line method on the basis of includes (but is not limited to) an allowance
an estimated useful life of five (5) years. computed in accordance w/ the regulations
(5) Depreciation of Properties Used in Mining Operations. - an prescribed by the Finance Secretary under any of
allowance for depreciation in respect of all properties used in the ff. methods:
mining operations other than petroleum operations, shall be
1. Straight-line method;
computed as follows:
2. Declining balance method;
APP 69
INCOME TAX REVIEWER
3. Sum-of-the-years digits method; &
4. Any other method prescribed by the Sec. of Illustration:
Finance upon recommendation of the A machine w/ a cost of P50,500 w/c has an
Commissioner. estimated useful life of 10 years & salvage value of
P500 after its useful life should have an annual
c. Who may deduct depreciation depreciation of P5,000 computed as follows:
expense? COST P50,500
Less Salvage Value (500)
Amount subject to depreciation P50,000
In the case of property held by one person for
life with remainder to another person =======
in the case of property held in trust Annual depreciation will be:
P50,000
d. COMPUTATION / methods allowed. 10 years = P5,000

LIMPAN INC., v. COMM. ** No depreciation will be allowed in the case of


Facts: Limpan is the owner of several property w/c has been amortized to its scrap value
& is no longer in use. (Sec. 108, RR 2)
apartment units. CIR assessed deficiency taxes
& reduced depreciation expense at the rate
stated in the petitioners return bec. these Property not subject to depreciation
were excessive. Petitioners witness tried to 1. Inventories or stock in trade;
establish that some of its buildings were old & 2. Land, apart fr. the improvements or physical development
out of style, hence they were entitled to higher added to it;
rates of depreciation. 3. Bodies of minerals w/c through the process of removal suffer
depletion already subj. to depletion allowance);
Held: Findings of the CIR & the CTA should be 4. Automobiles solely for personal purposes;
upheld, the deductions claimed by Limpan
5. Intangibles, the use of w/c in business or trade is not of
were excessive. Depreciation is a question of limited duration; &
fact & is not measured by theoretical yardstick 6. Incidental repairs w/c neither materially add up to the value
but should be determined by a consideration of or prolong the life, but keep it in an ordinary efficient
actual facts. operating condition. Property kept in repair may nevertheless,
be subject of a depreciation allowance.

BASILAN ENTERPRISES INC., v. COMM.


e. Agreement as to useful life/
Facts: BEI claimed deductions for the economic life conditions/
depreciation of its assets up to 1949 on the restrictions
basis of their acquisition cost. As of Jan. 1950,
it changed the depreciable value of said assets f. Special types of depreciable
by increasing it to conform w/ the increase in properties
cost for their replacement. Accdgly, for its
1950 1953 returns, it deducted fr. gross i. Properties used in petroleum
income, the value of depreciations computed operations
on the reappraised value.
ii. Properties used in mining
Held: The income tax law does not authorize operation
the depreciation of an asset beyond its
acquisition cost. Hence a deduction over & iii. Depreciation of properties used
above such cost cannot be claimed or allowed. by nonresident aliens
The reason is that deductions fr. gross income engaged in trade or
are privileges, not matters of right. They are business or resident foreign
not created by implication but upon clear corps.
expression in the law. Moreover, the recovery,
free of income tax , of an amount, more than 8. DEPLETION
the invested capital in an asset, will transgress
the underlying purpose of depreciation
allowance. For then, what the taxpayer would Depletion is the exhaustion of natural resources
recover would be, not only the acquisition cost, like mines & oil & gas wells as a result of
production or severance fr. such mines or wells.
but also some profit. Recovery in due time
through depreciation of investment made is
the philosophy behind depreciation, the idea of Sec. 34. (G) Depletion of Oil and Gas Wells and Mines. -
profit on the investment made has never been (1) In General. - In the case of oil and gas wells or mines, a
the underlying reason for the allowance of a reasonable allowance for depletion or amortization computed
deduction for depreciation.
APP 70
INCOME TAX REVIEWER
in accordance with the cost-depletion method shall be granted case of a nonresident alien individual engaged in trade or
under rules and regulations to be prescribed by the Secretary business in the Philippines or a resident foreign corporation,
of finance, upon recommendation of the Commissioner. allowance for depletion of oil and gas wells or mines under
Provided, That when the allowance for depletion shall equal paragraph (1) of this Subsection shall be authorized only in
the capital invested no further allowance shall be granted: respect to oil and gas wells or mines located within the
Provided, further, That after production in commercial Philippines.
quantities has commenced, certain intangible exploration and
development drilling costs: (a) shall be deductible in the year
incurred if such expenditures are incurred for non-producing a. Depletion of oil and gas wells
wells and/or mines, or (b) shall be deductible in full in the
and mines
year paid or incurred or at the election of the taxpayer, may
be capitalized and amortized if such expenditures incurred are b. Method allowed: COST
for producing wells and/or mines in the same contract area. DEPLETION
'Intangible costs in petroleum operations' refers to any cost
incurred in petroleum operations which in itself has no salvage I. When depletion shall equal
value and which is incidental to and necessary for the drilling the capital invested/ no
of wells and preparation of wells for the production of more deduction
petroleum: Provided, That said costs shall not pertain to the
acquisition or improvement of property of a character subject II. Treatment of intangible
to the allowance for depreciation except that the allowances costs in petroleum products
for depreciation on such property shall be deductible under c. Option to deduct exploration and
this Subsection.
development expenditures
Any intangible exploration, drilling and development expenses
allowed as a deduction in computing taxable income during
the year shall not be taken into consideration in computing What are exploration expenditures?
the adjusted cost basis for the purpose of computing development expenditures?
allowable cost depletion.
(2) Election to Deduct Exploration and Development
Expenditures. - In computing taxable income from mining d. Amount deductible by a
operations, the taxpayer may at his option, deduct exploration nonresident alien individual or
and development expenditures accumulated as cost or foreign corporation
adjusted basis for cost depletion as of date of prospecting, as
well as exploration and development expenditures paid or
incurred during the taxable year: Provided, That the amount Persons entitled to claim depletion allowance (Sec. 3,
deductible for exploration and development expenditures shall Rev. Reg. 5-76)
not exceed twenty-five percent (25%) of the net income from Allowed only to mining entities w/c own an economic interest in
mining operations computed without the benefit of any tax mineral deposits
incentives under existing laws. The actual exploration and Economic interest the taxpayer has acquired by investment
development expenditures minus twenty-five percent (25%) any interest in mineral & secures it, by any form of legal
of the net income from mining shall be carried forward to the relationship, such as but not limited to, operating agreement
succeeding years until fully deducted. & service contract agreement, income derived fr. the
The election by the taxpayer to deduct the exploration and extraction of mineral, to w/c it must look for the return of its
development expenditures is irrevocable and shall be binding capital
in succeeding taxable years. A corporation w/c has no capital investment in the mineral
'Net income from mining operations', as used in this Subsection, deposit does not possess an economic interest merely bec.
shall mean gross income from operations less 'allowable through a contractual relation it possesses a mere pecuniary
deductions' which are necessary or related to mining advantage derived fr. production.
operations. 'Allowable deductions' shall include mining, milling A resident foreign corporation is entitled only to deduct
and marketing expenses, and depreciation of properties depreciation allowance for oil & gas wells located w/in the
directly used in the mining operations. This paragraph shall Philippines.
not apply to expenditures for the acquisition or improvement
of property of a character which is subject to the allowance
for depreciation. Consolidated Mines V. CTA
In no case shall this paragraph apply with respect to amounts
paid or incurred for the exploration and development of oil Facts: Consolidated is a domestic mining corp.
and gas. w/c claimed deductions for depletion, the rates
The term 'exploration expenditures' means expenditures paid or of w/c petr & the CIR disagreed on.
incurred for the purpose of ascertaining the existence, Held: The Tax Code provides in case of mines
location, extent or quality of any deposit of ore or other
for a deduction on depletion - a reasonable
mineral, and paid or incurred before the beginning of the
development stage of the mine or deposit. allowance not to exceed the market value of
The term 'development expenditures' means expenditures paid
the product thereof w/c has been mined &
or incurred during the development stage of the mine or other sold during the year for w/c the return was
natural deposits. The development stage of a mine or other made.
natural deposit shall begin at the time when deposits of ore or
The formula for computing the rate of
other minerals are shown to exist in sufficient commercial
quantity and quality and shall end upon commencement of depletion is:
actual commercial extraction. Cost of mine property
(3) Depletion of Oil and Gas Wells and Mines Deductible by a
Nonresident Alien individual or Foreign Corporation. - In the

APP 71
INCOME TAX REVIEWER
Estimated ore deposit = Rate of a. What items are treated as R& D
depletion per unit of product mined & sold expenses?
Cost of mine property : b. How deduction is computed
1. Mine cost c. Treated as deferred expenses
2. Expenses of development before production (optional) of some R and D
expense
As an income tax concept, depletion is wholly
conditions and limitations
a creation of the statute, solely a matter of
legislative grace, hence the petr has the d. Limitations on deduction/ R & D
burden of justifying the allowance of any provisions shall not apply to:
deduction claimed. The company must i. Any expenditure for the acquisition or
provide the evidence for its assertion that CIR improvement of land, or for the
erred. improvement of property to be used in
connection with research and development
of a character which is subject to
9. RESEARCH AND DEVELOPMENT EXPENSE depreciation and depletion; and
ii. Any expenditure paid or incurred for the
Sec. 34. (I) Research and Development.-
purpose of ascertaining the existence,
location, extent, or quality of any deposit of
(1) In General. - a taxpayer may treat research or development
ore or other mineral, including oil or gas.
expenditures which are paid or incurred by him during the
taxable year in connection with his trade, business or
profession as ordinary and necessary expenses which are not 10.CHARITABLE AND OTHER
chargeable to capital account. The expenditures so treated CONTRIBUTIONS
shall be allowed as deduction during the taxable year when
paid or incurred.
(2) Amortization of Certain Research and Development REV. REG. 13-98.
Expenditures. - At the election of the taxpayer and in
accordance with the rules and regulations to be prescribed by
Sec. 34. (H) Charitable and Other Contributions.
the Secretary of Finance, upon recommendation of the
Commissioner, the following research and development (1) In General. - Contributions or gifts actually paid or made
expenditures may be treated as deferred expenses: within the taxable year to, or for the use of the Government
of the Philippines or any of its agencies or any political
(a) Paid or incurred by the taxpayer in connection with his
subdivision thereof exclusively for public purposes, or to
trade, business or profession;
accredited domestic corporation or associations organized and
(b) Not treated as expenses under paragraph 91) hereof; and operated exclusively for religious, charitable, scientific, youth
(c) Chargeable to capital account but not chargeable to and sports development, cultural or educational purposes or
property of a character which is subject to depreciation or for the rehabilitation of veterans, or to social welfare
depletion. institutions, or to non-government organizations, in
In computing taxable income, such deferred expenses shall be accordance with rules and regulations promulgated by the
allowed as deduction ratably distributed over a period of not Secretary of finance, upon recommendation of the
less than sixty (60) months as may be elected by the taxpayer Commissioner, no part of the net income of which inures to
(beginning with the month in which the taxpayer first realizes the benefit of any private stockholder or individual in an
benefits from such expenditures). amount not in excess of ten percent (10%) in the case of an
individual, and five percent (%) in the case of a corporation,
The election provided by paragraph (2) hereof may be made for of the taxpayer's taxable income derived from trade, business
any taxable year beginning after the effectivity of this Code, or profession as computed without the benefit of this and the
but only if made not later than the time prescribed by law for following subparagraphs.
filing the return for such taxable year. The method so elected,
and the period selected by the taxpayer, shall be adhered to (2) Contributions Deductible in Full. - Notwithstanding the
in computing taxable income for the taxable year for which provisions of the preceding subparagraph, donations to the
the election is made and for all subsequent taxable years following institutions or entities shall be deductible in full;
unless with the approval of the Commissioner, a change to a (a) Donations to the Government. - Donations to the
different method is authorized with respect to a part or all of Government of the Philippines or to any of its agencies or
such expenditures. The election shall not apply to any political subdivisions, including fully-owned government
expenditure paid or incurred during any taxable year for which corporations, exclusively to finance, to provide for, or to be
the taxpayer makes the election. used in undertaking priority activities in education, health,
youth and sports development, human settlements, science
(3) Limitations on deduction. - This Subsection shall not apply and culture, and in economic development according to a
to: National Priority Plan determined by the National Economic
and Development Authority (NEDA), In consultation with
(a) Any expenditure for the acquisition or improvement of land, appropriate government agencies, including its regional
or for the improvement of property to be used in connection development councils and private philantrophic persons and
with research and development of a character which is subject institutions: Provided, That any donation which is made to the
to depreciation and depletion; and Government or to any of its agencies or political subdivisions
(b) Any expenditure paid or incurred for the purpose of not in accordance with the said annual priority plan shall be
ascertaining the existence, location, extent, or quality of any subject to the limitations prescribed in paragraph (1) of this
deposit of ore or other mineral, including oil or gas. Subsection;
(b) Donations to Certain Foreign Institutions or International
Organizations. - donations to foreign institutions or

APP 72
INCOME TAX REVIEWER
international organizations which are fully deductible in b. Deduction with limitation
pursuance of or in compliance with agreements, treaties, or
commitments entered into by the Government of the c. Contributions deductible in full.
Philippines and the foreign institutions or international d. Treatment of the ff. donations:
organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. - the i. Donations to the govt.
term 'nongovernment organization' means a non profit ii. Donations to certain foreign
domestic corporation:
institutions or intl
organizations
(1) Organized and operated exclusively for scientific, research,
educational, character-building and youth and sports iii. Donations to accredited
development, health, social welfare, cultural or charitable non-govt. organizations
purposes, or a combination thereof, no part of the net income
of which inures to the benefit of any private individual; e. valuation of donation
(2) Which, not later than the 15 day of the third month after
th
f. Proof of donation for tax deduction
the close of the accredited nongovernment organizations purposes
taxable year in which contributions are received, makes
utilization directly for the active conduct of the activities
constituting the purpose or function for which it is organized Roxas V. CTA
and operated, unless an extended period is granted by the
Secretary of Finance in accordance with the rules and Facts: Supra
regulations to be promulgated, upon recommendation of the
Held: Contributions to the Christmas Fund of
Commissioner;
the Pasay City Police & Firemen & the Baguio
(3) The level of administrative expense of which shall, on an
annual basis, conform with the rules and regulations to be
City Police are not deductible for the reason
prescribed by the Secretary of Finance, upon recommendation that Christmas Funds were not spent for public
of the Commissioner, but in no case to exceed thirty percent purposes but as gifts to the families of the
(30%) of the total expenses; and members of said entities. Under the Tax Code,
(4) The assets of which, in the even of dissolution, would be a contribution to a govt. entity is deductible
distributed to another nonprofit domestic corporation when used exclusively for public purposes.
organized for similar purpose or purposes, or to the state for
public purpose, or would be distributed by a court to another Contributions to the Phil. Heralds fund
organization to be used in such manner as in the judgment of for Manilas neediest families were disallowed
said court shall best accomplish the general purpose for which on the ground that PH is not a corporation or
the dissolved organization was organized. assn. Contemplated in the Tax Code. It should
Subject to such terms and conditions as may be prescribed by be noted however, that the contributions were
the Secretary of Finance, the term 'utilization' means: not made to the PH but to a group of civic-
(i) Any amount in cash or in kind (including administrative spirited citizens organized by the PH solely for
expenses) paid or utilized to accomplish one or more charitable purposes.
purposes for which the accredited nongovernment
organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for 11.CONTRIBUTION TO A PENSION TRUST
use) directly in carrying out one or more purposes for
which the accredited nongovernment organization was
created or organized. Sec. 34. (J) Pension Trusts. - An employer establishing or
maintaining a pension trust to provide for the payment of
reasonable pensions to his employees shall be allowed as a
An amount set aside for a specific project which comes within
deduction (in addition to the contributions to such trust during
one or more purposes of the accredited nongovernment
the taxable year to cover the pension liability accruing during
organization may be treated as a utilization, but only if at the
the year, allowed as a deduction under Subsection (A) (1) of
time such amount is set aside, the accredited nongovernment
this Section ) a reasonable amount transferred or paid into such
organization has established to the satisfaction of the
trust during the taxable year in excess of such contributions, but
Commissioner that the amount will be paid for the specific
only if such amount (1)has not theretofore been allowed as a
project within a period to be prescribed in rules and
deduction, and (2) is apportioned in equal parts over a period of
regulations to be promulgated by the Secretary of Finance,
ten (10) consecutive years beginning with the year in which the
upon recommendation of the Commissioner, but not to
transfer or payment is made.
exceed five (5) years, and the project is one which can be
better accomplished by setting aside such amount than by
immediate payment of funds. Deduction of lump-sum contribution
(3) Valuation. - The amount of any charitable contribution of REQUISITES FOR DEDUCTIBILITY
property other than money shall be based on the acquisition
cost of said property.
C. ITEMS THAT CANNOT BE DEDUCTED
(4) Proof of Deductions. - Contributions or gifts shall be
allowable as deductions only if verified under the rules and
regulations prescribed by the Secretary of Finance, upon SEC. 36. Items not Deductible.-
recommendation of the Commissioner. (A) General Rule. - In computing net income, no deduction
shall in any case be allowed in respect to
a. What donations or gifts are (1) Personal, living or family expenses;
deductible?

APP 73
INCOME TAX REVIEWER
(2) Any amount paid out for new buildings or for permanent be in consideration of services or otherwise, are not allowable
improvements, or betterments made to increase the value of salary deductions in his returns of income.
any property or estate; Alimony & an allowance paid under a separation agreement are
This Subsection shall not apply to intangible drilling and not deductible fr. gross income.
development costs incurred in petroleum operations which are
deductible under Subsection (G) (1) of Section 34 of this
Code. COLLECTOR VS. JAMIR
(3) Any amount expended in restoring property or in making Facts: Jamir claimed as dedn the salary of his
good the exhaustion thereof for which an allowance is or has
driver. The CIR assessed the tax due. CTA
been made; or
allowed 3/4s of the salary to be deducted.
(4) Premiums paid on any life insurance policy covering the life
of any officer or employee, or of any person financially Held: It appears that the driver was used for
interested in any trade or business carried on by the taxpayer, personal & business purposes. The SC is not
individual or corporate, when the taxpayer is directly or inclined to disturb the finding of the court the
indirectly a beneficiary under such policy.
Jamir used the car more for business than for
(B) Losses from Sales or Exchanges of Property. - In computing personal purposes.
net income, no deductions shall in any case be allowed in
respect of losses from sales or exchanges of property directly
or indirectly - 2. Capital Expenditure
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include only his
i. Acquisition of asset
brothers and sisters (whether by the whole or half-blood), ii. Repairs that prolong life and
spouse, ancestors, and lineal descendants; or add value
(2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in iii. Addition/ improvement on an
value of the outstanding stock of which is owned, directly or existing asset
indirectly, by or for such individual; or
iv. Compare/ differentiate with
(3) Except in the case of distributions in liquidation, between
ordinary expense
two corporations more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or indirectly,
by or for the same individual if either one of such
Sec. 120 Rev. Reg. 2. Capital expenditure
corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was No deduction fr. gross income may be made
under the law applicable to such taxable year, a personal For any amounts made for the new buildings or for
holding company or a foreign personal holding company; permanent improvements or betterments made to increase
(4) Between the grantor and a fiduciary of any trust; or the value of the taxpayers property, or
(5) Between the fiduciary of and the fiduciary of a trust and the For any amount expended in restoring property or in
fiduciary of another trust if the same person is a grantor with making good the exhaustion thereof for w/c an allowance of
respect to each trust; or depreciation expended for securing a copyright & plates,
w/c remain the property of the person making the
(6) Between a fiduciary of a trust and beneficiary of such
payments, are investment of capital.
trust.
The cost of defending of perfecting title of property, constitutes
a part of the cost on the property & is not a deductible
1. Personal living and other family expense.
expenses The amount expended for architects services is part of the cost
of the building.
Examples: tuition fees, groceries and other
Commissions paid in purchasing securities are an offset against
household expense
the selling price.
Expenses of the administration of an Estate, such as
Sec. 119 Rev. Reg. 2 Personal, living, & family expenses court costs
are not deductible.
attorneys fee &
(1) Insurance paid on a dwelling owned & occupied by executors commissions
a taxpayer is a personal expense & not deductible. are chargeable against the corpus of the estate & are not
(2) Premiums paid for life for life insurance are not allowable deductions.
deductible. Amounts
In the case of a professional man who to be assessed & placed under an agreement between
Rents a property for residential purposes bondholders or shareholders of a corporation.
But incidentally receives his clients, patients, or callers in to be used in a reorganizing of the corporation,
connection w/ his professional work (his place of business are investments of capital an not deductible for any purpose in
being elsewhere), return of income.
no part of the rent is deductible as a business expense. In the case of a corporation, expenses for organizations, such
If, however, he uses part of the house for his office, such as -
portion of the rent as is properly attributed to such office is incorporation fees
deductible.
attorneys fees
Where the father is legally entitled to the services of his minor accountants charges,
children, any allowances w/c he gives them whether said to are ordinary capital expenditures,

APP 74
INCOME TAX REVIEWER
but where such expenditures are limited to purely incidental (6) Between a fiduciary of a trust and beneficiary of such trust.
expenses, a taxpayer may be charge such item against
income in the year in w/c they are incurred.
A holding company w/c guarantees dividend at a specified rate 5. Losses on wash sales
on the stock of the subsidiary corporation for the purpose of
securing new capital for the subsidiary &
increasing the value of its stockholdings in the subsidiary
may not deduct amounts paid in carrying out this guarantee in
computing its net income, but such payments may be added
to the cost of its stock in the subsidiary. SEC. 38. Losses from Wash Sales of Stock or Securities.
-
(A) In the case of any loss claimed to have been sustained from
Commissioner Vs. Soriano any sale or other disposition of shares of stock or securities
where it appears that within a period beginning thirty (30)
Facts: The taxpayer had a piece of land in days before the date of such sale or disposition and ending
Mla. To carry out a project, it hired an architect thirty (30) days after such date, the taxpayer has acquired (by
as a contractor for pile-driving lumber into the purchase or by exchange upon which the entire amount of
grd. The taxpayer sold the prop. & later gain or loss was recognized by law), or has entered into a
claimed as deductible the amt. paid to the contact or option so to acquire, substantially identical stock or
securities, then no deduction for the loss shall be allowed
architect & service fee for pile-driving. under Section 34 unless the claim is made by a dealer in stock
Held: Expenses constitute capital expenditure or securities and with respect to a transaction made in the
w/c the owner/taxpayer was entitled to ordinary course of the business of such dealer.
consider as part of the total cost of its property (B) If the amount of stock or securities acquired (or covered by
in det. the amt. of profit it realized fr. the sale. the contract or option to acquire) is less than the amount of
stock or securities sold or otherwise disposed of, then the
Expenditures for replacements, alterations & particular shares of stock or securities, the loss form the sale
improvements/additions w/c either prolong or other disposition of which is not deductible, shall be
the life of the prop. or increase its value are determined under rules and regulations prescribed by the
capital in nature & therefore are part of the Secretary of Finance, upon recommendation of the
cost. Not deductible. Commissioner.
(C) If the amount of stock or securities acquired (or covered by
the contract or option to acquire which) resulted in the non-
3. Insurance premium payment deductibility of the loss, shall be determined under rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
When deductible
When NOT deductible Sec. 101 Rev. Reg. 2. Capital losses on wash sales of
Insurance premium as fringe benefit stock or securities
Losses on sale or exchange of capital assets are allowed to the
extent provided in Sec 34 of the Code. If any securities w/c
are capital assets become worthless during the taxable year,
4. Losses between related taxpayers
the loss resulting, therefr. shall be considered as a low fr. the
sale or exchange on the last day of such taxable year, of
capital losses assets. Losses on wash sales of stock or
Sec. 36. (B) Losses from Sales or Exchanges of Property.
securities are treated in Sec. 33 of Code 1.
- In computing net income, no deductions shall in any case be
allowed in respect of losses from sales or exchanges of
property directly or indirectly -
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include only his 6. Illegal expense
brothers and sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in
value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual; or Calanoc Vs. Collector
(3) Except in the case of distributions in liquidation, between
two corporations more than fifty percent (50%) in value of Facts: By authority of a solicitors permit,
the outstanding stock of which is owned, directly or indirectly, Calanoc financed & promoted a boxing match
by or for the same individual if either one of such to solicit contributions for orphans & destitute
corporations, with respect to the taxable year of the children. Included in the expenditures was an
corporation preceding the date of the sale of exchange was amt. for police protection.
under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company; Held: The expenditure is disallowed as it is
(4) Between the grantor and a fiduciary of any trust; or illegal. It is a consideration given for the
(5) Between the fiduciary of and the fiduciary of a trust and the performance of the police of functions
fiduciary of another trust if the same person is a grantor with required of them to be rendered under the law.
respect to each trust; or

APP 75
INCOME TAX REVIEWER
Sec. 34. 1. (c) Bribes, Kickbacks and Other Similar E. DEDUCTIONS ALLOWED TO INDIVIDUAL
Payments. - No deduction from gross income shall be TAXPAYERS.
allowed under Subsection (A) hereof for any payment made,
directly or indirectly, to an official or employee of the national
government, or to an official or employee of any local
government unit, or to an official or employee of a
1. Optional standard deduction.
government-owned or -controlled corporation, or to an official Sec. 34. (L) Optional Standard Deduction. - In lieu of the
or employee or representative of a foreign government, or to deductions allowed under the preceding Subsections, an
a private corporation, general professional partnership, or a individual subject to tax under Section 24, other than a
similar entity, if the payment constitutes a bribe or kickback. nonresident alien, may elect a standard deduction in an
amount not exceeding ten percent (10%) of his gross income.
Unless the taxpayer signifies in his return his intention to elect
OTHERS: the optional standard deduction, he shall be considered as
having availed himself of the deductions allowed in the
i. Protection money preceding Subsections. Such election when made in the return
shall be irrevocable for the taxable year for which the return is
ii. Ransom paid to kidnappers for
made: Provided, That an individual who is entitled to and
the release of a corporate claimed for the optional standard deduction shall not be
officer required to submit with his tax return such financial
iii. Revolutionary tax paid to NPA statements otherwise required under this Code: Provided,
further, That except when the Commissioner otherwise
permits, the said individual shall keep such records pertaining
D. DEDUCTIONS ALLOWED FOR SPECIAL to his gross income during the taxable year, as may be
required by the rules and regulations promulgated by the
CORPORATIONS Secretary of Finance, upon recommendation of the
Commissioner.

SEC. 37. Special Provisions Regarding Income and


Deductions of Insurance Companies, Whether in lieu of itemized deductions
Domestic or Foreign. - not exceeding 10% of his gross income
(A) Special Deduction Allowed to Insurance Companies. - What is gross income?
In the case of insurance companies, whether domestic or
foreign doing business in the Philippines, the net additions, if
Sec. 27. E. (4) Gross Income Defined. - For purposes of
any, required by law to be made within the year to reserve
applying the minimum corporate income tax provided under
funds and the sums other than dividends paid within the year
Subsection (E) hereof, the term 'gross income' shall mean
on policy and annuity contracts may be deducted from their
gross sales less sales returns, discounts and allowances and
gross income: Provided, however, That the released reserve
cost of goods sold. "Cost of goods sold' shall include all
be treated as income for the year of release.
business expenses directly incurred to produce the
(B) Mutual Insurance Companies. - In the case of mutual merchandise to bring them to their present location and use.
fire and mutual employers' liability and mutual workmen's
For a trading or merchandising concern, 'cost of goods sold'
compensation and mutual casualty insurance companies
shall include the invoice cost of the goods sold, plus import
requiring their members to make premium deposits to provide
duties, freight in transporting the goods to the place where
for losses and expenses, said companies shall not return as
the goods are actually sold including insurance while the
income any portion of the premium deposits returned to their
goods are in transit.
policyholders, but shall return as taxable income all income
received by them from all other sources plus such portion of For a manufacturing concern, cost of 'goods manufactured and
the premium deposits as are retained by the companies for sold' shall include all costs of production of finished goods,
purposes other than the payment of losses and expenses and such as raw materials used, direct labor and manufacturing
reinsurance reserves. overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or
(C) Mutual Marine Insurance Companies. - Mutual marine
warehouse.
insurance companies shall include in their return of gross
income, gross premiums collected and received by them less In the case of taxpayers engaged in the sale of service, 'gross
amounts paid to policyholders on account of premiums income' means gross receipts less sales returns, allowances,
previously paid by them and interest paid upon those amounts discounts and cost of services. 'Cost of services' shall mean all
between the ascertainment and payment thereof. direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A)
(D)Assessment Insurance Companies.- Assessment
salaries and employee benefits of personnel, consultants and
insurance companies, whether domestic or foreign, may
specialists directly rendering the service and (B) cost of
deduct from their gross income the actual deposit of sums
facilities directly utilized in providing the service such as
with the officers of the Government of the Philippines
depreciation or rental of equipment used and cost of supplies:
pursuant to law, as additions to guarantee or reserve funds.
Provided, however, That in the case of banks, 'cost of
services' shall include interest expense.
1. Insurance companies
2. Mutual insurance companies How to avail of the optional deduction
Who is entitled?
3. Mutual marine insurance
companies 2. Premium payments on health
4. Assessment insurance cos. and/or hospitalization insurance
of an individual taxpayer.

APP 76
INCOME TAX REVIEWER
Sec. 34. (M) Premium Payments on Health and/or year, the taxpayer may claim the corresponding additional
Hospitalization Insurance of an Individual Taxpayer. - exemption, as the case may be, in full for such year.
the amount of premiums not to exceed Two thousand four If the taxpayer dies during the taxable year, his estate may still
hundred pesos (P2,400) per family or Two hundred pesos claim the personal and additional exemptions for himself and
(P200) a month paid during the taxable year for health and/or his dependent(s) as if he died at the close of such year.
hospitalization insurance taken by the taxpayer for himself,
If the spouse or any of the dependents dies or if any of such
including his family, shall be allowed as a deduction from his
dependents marries, becomes twenty-one (21) years old or
gross income: Provided, That said family has a gross income
becomes gainfully employed during the taxable year, the
of not more than Two hundred fifty thousand pesos
taxpayer may still claim the same exemptions as if the spouse
(P250,000) for the taxable year: Provided, finally, That in the
or any of the dependents died, or as if such dependents
case of married taxpayers, only the spouse claiming the
married, became twenty-one (21) years old or became
additional exemption for dependents shall be entitled to this
gainfully employed at the close of such year.
deduction.

(D) Personal Exemption Allowable to Nonresident Alien


Individual. - A nonresident alien individual engaged in trade,
a. Limitation/
business or in the exercise of a profession in the Philippines
ceiling/ conditions for shall be entitled to a personal exemption in the amount equal
deductions to the exemptions allowed in the income tax law in the
country of which he is a subject - or citizen, to citizens of the
b. Who is entitled?
Philippines not residing in such country, not to exceed the
amount fixed in this Section as exemption for citizens or
F. PERSONAL EXEMPTION FOR INDIVIDUAL resident of the Philippines: Provided, That said nonresident
alien should file a true and accurate return of the total income
TAXPAYER.
received by him from all sources in the Philippines, as
required by this Title.
SEC. 35. Allowance of Personal Exemption for Individual
Taxpayer. - 1. Basic personal exemption
(A) In General. - For purposes of determining the tax provided
in Section 24 (A) of this Title, there shall be allowed a basic
personal exemption as follows: Sec. 2.79 (I) 1. a. Rev. Reg. 2-98.
For single individual or married individual judicially decreed as
legally separated with no qualified
dependents P20,000 a. Single individual or
For Head of Family P25,000 married individual judicially decreed as
For each married Individual P32,000 legally separated w/ no qualified dependents
In the case of married individuals where only one of the spouses P20,000
is deriving gross income, only such spouse shall be allowed
the personal exemption.
b. Head of family P 25,000
For purposes of this paragraph, the term 'head of family' means
an unmarried or legally separated man or woman with one or
Dependent Sec. 2.79 (B) (1) (d) Rev Reg. 2-
both parents, or with one or more brothers or sisters, or with 98
one or more legitimate, recognized natural or legally adopted Benefactors of senior citizens
children living with and dependent upon him for their chief Single unmarried parent?
support, where such brothers or sisters or children are not
more than twenty-one (21) years of age, unmarried and not
gainfully employed or where such children, brothers or sisters, c. Each (legally) married individual
regardless of age are incapable of self-support because of 32,000
mental or physical defect.
(B) Additional Exemption for Dependents. - There shall be
allowed an additional exemption of Eight thousand pesos
2. Additional exemption for dependents
(P8,000) for each dependent not exceeding four (4).
The additional exemption for dependent shall be claimed by only Sec. 2.79 (I) (1) (b) Rev Reg. 2-98
one of the spouses in the case of married individuals.
In the case of legally separated spouses, additional exemptions
may be claimed only by the spouse who has custody of the a. How many dependents are
child or children: Provided, That the total amount of additional allowed?
exemptions that may be claimed by both shall not exceed the
maximum additional exemptions herein allowed. b. Who are the qualified
For purposes of this Subsection, a 'dependent' means a dependents? Are senior citizens
legitimate, illegitimate or legally adopted child chiefly qualified dependents? Are
dependent upon and living with the taxpayer if such spurious children covered?
dependent is not more than twenty-one (21) years of age,
unmarried and not gainfully employed or if such dependent,
regardless of age, is incapable of self-support because of Dependent means a legitimate, illegitimate or
mental or physical defect. legally adopted child chiefly dependent upon and
living with the taxpayer if such dependent is not
(C) Change of Status. - If the taxpayer marries or should have more than 21 years of age, unmarried & not
additional dependent(s) as defined above during the taxable gainfully employed or if such dependent,

APP 77
INCOME TAX REVIEWER
regardless of age, is incapable of self-support joint accounts (cuentas en participacion), association, or
because of mental or physical defect. insurance companies, but does not include general
professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects
c. Amount allowed P8,000 each max or engaging in petroleum, coal, geothermal and other energy
of 4 dependents operations pursuant to an operating consortium agreement
under a service contract with the Government. 'General
d. Who may claim the additional professional partnerships' are partnerships formed by
exemption? Maya single parent persons for the sole purpose of exercising their common
claim the deduction? profession, no part of the income of which is derived from
engaging in any trade or business.

3. Change of status of the taxpayer


PARTNERSHIP : includes gen. partnerships &
and the dependent
limited partnerships, whether registered or not,
BUT not gen. professional partnerships
marriage
death JOINT STOCK COMPANIES: constituted when
reaching the age of 21 one a group of individuals, acting jointly, establish
gainfully employed & operate a business enterprise under an artificial
having children name, w/ an invested capital divided into
transferable shares, an elected board of directors,
& other corporate characteristics, BUT w/out
4. personal exemption allowable to
formal governmental authority.
nonresident alien individual
reciprocity
JOINT ACCOUNTS (CUENTAS EN
requirements PARTICIPACION): constituted when one interests
himself in the business of another by contributing
VI. CLASSIFICATION OF INCOME capital thereto, & sharing in the profits or losses in
TAXPAYERS. the proportion agreed upon; not subject to any
formality & may be privately contracted orally or in
A. GENERAL PRINCIPLES OF INCOME writing.
TAXATION IN THE PHILS.
ASSOCIATIONS: include all orgs. w/c have
substantially the same features of a corporation
SEC. 23. General Principles of Income Taxation in the (substantial resemblance in purpose, gen. form &
Philippines . - Except when otherwise provided in this Code:
mode of operations.
(A) A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the
Philippines; JOINT VENTURE: commercial undertaking by two
(B) A nonresident citizen is taxable only on income derived from or more persons, differing from a partnership in
sources within the Philippines; that it relates to the disposition of a single lot of
goods or the completion of a single project; its
(C) An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract worker duration is limited to the period in w/c the goods
is taxable only on income derived from sources within the are soled or the project is carried on.
Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel
Who are large taxpayers?
engaged exclusively in international trade shall be treated as
an overseas contract worker; Revenue Reg. 1-98
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources
within the Philippines; Exceptions general professional partnership
(E) A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and Sec. 22 (B), supra.
(F) A foreign corporation, whether engaged or not in trade or SEC. 26. Tax Liability of Members of General Professional
business in the Philippines, is taxable only on income derived Partnerships. - A general professional partnership as such
from sources within the Philippines. shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a
general professional partnership shall be liable for income tax
B. CORPORATIONS only in their separate and individual capacities.
For purposes of computing the distributive share of the
1. Definition of corp./ corporate partners, the net income of the partnership shall be computed
taxpayer in the same manner as a corporation.
Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
Sec. 22. (B) The term 'corporation' shall include partnerships, partnership.
no matter how created or organized, joint-stock companies,

APP 78
INCOME TAX REVIEWER
thereby obtaining substantial economy &
SEC. 73. Distribution of dividends or Assets by profits in the operation. (Collector vs. BTC)
Corporations.
Thus the Venture w/c has been
(D) Net Income of a Partnership Deemed Constructively
Received by Partners. - The taxable income declared by a
constituted as a single entity whereby Empire
partnership for a taxable year which is subject to tax under & Uniphil agreed to pool their resources for the
Section 27 (A) of this Code, after deducting the corporate dev't of a parcel of land, is a JV w/c is subject
income tax imposed therein, shall be deemed to have been to the 35% under Sec. 24 of the Tax Code.
actually or constructively received by the partners in the same However, the shares of Uniphil & Empire from
taxable year and shall be taxed to them in their individual the profits of the JV are NOT SUBJECT to
capacity, whether actually distributed or not.
income tax since said profits are in the nature
of dividends w/c are not subject to tax under
BIR ruling 254-91, 26-11-1991 Sec. 24(e).
Empire Stateland & Resources, INC (Empire), a
domestic corp. entered into a business tie-up 2. Ordinary partnership as a corporate
w/ Uniphil Marketing (Uniphil) another taxpayer
domestic corp., whereby both firms agreed to
a. Test whether an entity is a taxable
pool their resources together for the purpose
partnership
of developing & constructing condominium
units & selling them to the public. Uniphil was a partnership no matter how organized
to contribute the lot, materials & labor, while
Empire was to supply labor & materials. The Sec. 22 (B), supra.
development & construction of the units & the Sec. 73 (D), supra.
eventual sale thereof was to be undertaken &
managed by Uniphil Empire Venture (Venture), Ona vs. Commissioner
an entity put up by the contracting parties
solely for that venture. Empire will receive Facts: When Bonales died, she left her
30% of the profits of the Venture while Uniphil husband & 5 children. The heirs partitioned
will receive 70%. Empire argues that the the estate in such a way that they had a 1/2
respective shares of Uniphil & Empire in the undivided interest in 10 lots, 6 houses & an
net profits is not subject to income tax, the undetermined amount of damages fr. the
same having been taxes in the hands of Water Damage Commission. Although the
Venture o.w. the same income would be project of partition was approved by the court.
subjected to 35% tax each in the hands of the property remained undivided & the
Venture, Uniphil & Empire or a total tax of 70% husband managed the properties. He either
sold the property or leased them, & then
ISSUE: What is the tax status of Venture? Is it invested the proceeds in real estate &
considered a joint venture (JV) & therefore securities. From these investments, the Onas
taxable as a domestic corp.? received income. They did not, however,
What is the tax treatment of the actually receive their shares in the yearly
distributive shares of Uniphil & Empire in the income as it was left in the hands of their
respective amount of 70% & 30%? father who invested them in real properties &
RULING: To constitute a JV, certain factors are securities.
essential: Held: The heirs formed an unregistered
each party must make a contribution, not partnership. From the moment they allowed
necessarily of capital, but by way of not only the incomes from their respective
services, skill, knowledge, material or shares in the inheritance but even the
money inherited properties themselves to be used by
the husband as a common fund in undertaking
profits must be shared amount the parties; several TXN's or in business, w/ the intention
there must be a JOINT PROPRIETARY of deriving profit to be shared by them
INTEREST, & the right of mutual control proportionally, such act was tantamount to
over the subject matter of the enterprise; actually contributing such income to a
common fund &, in effect, they thereby formed
usually there is a single business TXN an unregistered partnership w/in the purview
rather than a general or continuous TXN of the NIRC.
Likewise, a JV was created when 2 corps.
while registered & operating separately where
placed under one sole management w/c Gatchalian vs. Collector
operated the business affairs of said co.'s as Facts: This is case where the pets.
though they constituted as single entity contributed to buy a sweepstakes ticket.

APP 79
INCOME TAX REVIEWER
Held: The pets. organized a partnership of a Facts: Pascual & Dragon bought a total of
civil nature bec. each of them put up money to five lots in 2 sales. They then sold these lots.
buy a ticket for the sole purpose of dividing From these sales they earned profits. They
equally the prize w/c they may win, as they did paid capital gains tax but the Com. demanded
in fact in the amount of Php 50,000. The they pay corp. income tax for being an
partnership was not only formed, but also, unregistered partnership?
upon winning the prize, one of the pets., in his Held: In the present case, there is no evidence
capacity as a co-partner, collected the prize. that petitioners entered into an agreement to
These circumstances repel the idea that the contribute money, property or industry to a
one formed & organized among them was a common fund, & that they intended to divide
community of property. the profits among themselves. Respondent
Having organized a partnership, the said commissioner &/ or his representative just
entity is one bound to pay the income tax. The assumed these conditions to be present on the
tax should not be pro-rated among them & basis of the fact that petitioners purchased
paid individually resulting in their exemption certain parcels of land & became co-owners
from corporate taxes. thereof.
In Evangelista, there was a series of
Evangelista vs. Collector transactions where petitioners purchased
twenty-four (24) lots showing that the purpose
Facts: The pets. (siblings I suppose) was not limited to the conservation or
borrowed money from their father w/c they preservation of the common fund or even the
used together w/ their own money to buy real properties acquired by them. The character of
properties. Their father was appointed by habituality peculiar to business transactions
them to manage their properties w/ full power engaged in for the purpose of gain was
to lease; collect rents, etc. Then the CIR present.
demanded payment of income tax on corps.,
real estate dealers fixed tax & corporation In the instant case, petitioners bought
residence tax for a period of 9 years. two (2) parcels of land in 1965. They did not
sell the same nor make any improvements
Held: Yes, a partnership was formed. thereon. In 1966, they bought another three
According to the Civil Code (A1767), the (3) parcels of land from one seller. It was only
essential elements of a partnership are: 1968 when they sold the two (2) parcels of
an agreement to contribute money, land after w/c they did not make any additional
property or industry to a common fund; & or new purchase. The remaining three (3)
parcels were sold by them in 1970. The
intent to divide the profits among the
transactions were isolated. The character of
contracting parties.
habituality peculiar to business transactions
The first element is present in this case. for the purpose of gain was not present.
The petitioners agreed to contribute to a
common fund. Hence, the issue narrows down
to their intent in acting as they did. Upon b. Unregistered partnership
consideration of all the facts & circumstances distinguished from Co-ownership
surrounding the case, we are fully satisfied for tax purposes.
that their purpose was to engage in real estate
for monetary gain & divide it among
themselves, because: Obillos. vs. Com.

Said common fund was not something they Facts: Jose Obillos bought two parcels of
found already in existence. It was not land w/c he transferred to the names of his
property inherited by them pro-indiviso. children. After a year, the children sold them
They created it purposely. They borrowed a for a profit, for w/c they paid capital gains tax.
substantial portion thereof in order to The CIR demanded payment of corp. income
establish the common fund. tax & considered the share of each child as his
distributive dividend. This was based on the
They invested the same, not merely in one theory that the children formed an
TXN but in a series of TXN. unregistered partnership.
The properties bought by them were not Held: They formed a co-ownership & not a
devoted to residential purposes, or to other partnership. The Civil Code provides that the
personal uses. Instead, they were leased. sharing of gross returns does not of itself
For over a decade, these conditions existed. establish a partnership, WON the persons
sharing them have a joint or common right or
interest in any of the property from w/c the
Pascual vs. Com. returns are derived. There must be an
APP 80
INCOME TAX REVIEWER
unmistakable intention to form a partnership allowances
or JV. stipends, etc.

All co-ownerships are not deemed 15%,


unreg. partnership. Co-owners who own EXCEPT the amount paid to a partner who is a non-resident
alien whether or not engaged in trade or business in the Phils.
properties w/c produce income should not
w/c shall be subject to a final w/holding tax of 30&.
automatically be considered partners of an
unregistered partnership or a corp. w/in the
SEC. 26. Tax Liability of Members of General Professional
purview of the income tax law.
Partnerships. - A general professional partnership as such
In the CAB, they had no such intention. shall not be subject to the income tax imposed under this
They were co-owners pure & simple. To Chapter. Persons engaging in business as partners in a
consider them as partners would obliterate the general professional partnership shall be liable for income tax
only in their separate and individual capacities.
distinction between co-ownership &
For purposes of computing the distributive share of the
partnership. The pets. were not engaged in a
partners, the net income of the partnership shall be computed
JV by reason of that isolated TXN. Their in the same manner as a corporation.
original plan was to divide the lots for Each partner shall report as gross income his distributive share,
residential purposes. If later they found it not actually or constructively received, in the net income of the
feasible to build their residences on the lots partnership.
bec. of the high cost of construction, then they
had no choice but to resell the same to Sec. 73 (D), supra.
dissolve the co-ownership. The division of the
profit was merely incidental to the dissolution
of the co-ownership w/c was in the nature of d. Joint venture unincorporated/ inc.
things a temporary state.
BIR Ruling 254-91 supra (Case of Empire Uniphil & the
Uniphil Empire JV)
Reyes vs. Com
Facts: Father & son tandem bought a lot
Queries: How is a JV created?
& a building. The building were occupied by
What is the tax treatment of a JV for the
tenants. Father & son divided the income
purposes of income taxation?
coming from the tenants. They even hired an
administrator to collect rents. The Com.
assessed them corp. income tax, surcharge &
compromise for a period of 5 years. 3. Classification of Corporate
Held: Partnership (Evangelista vs. Coll) Taxpayers/ Income Tax Base
applies. However, the difference w/ that case
& the CAB is that in the latter a single TXN a. Domestic (NET WORLDWIDE)
occurred. But the SC ruled that such minor
differentiation does not relieve them from the
Evangelista ruling. Sec. 22. (C) The term 'domestic,' when applied to a
corporation, means created or organized in the Philippines or
Moreover, the case satisfies one of the under its laws.
reqt of partnerships -- an agreement to
contribute money, property or industry to a SEC. 27. Rates of Income tax on Domestic Corporations.
common fund.
A. In General. - Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed
c. Tax liability of partnership &
upon the taxable income derived during each taxable year
partners from all sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided, That
Revenue Reg. 1 - 89. effective January 1, 1998, the rate of income tax shall be
Except as herein otherwise provided, there shall be w/held a thirty-four percent (34%); effective January 1, 1999, the rate
creditable income tax at the rates herein specified for each shall be thirty-three percent (33%); and effective January 1,
class of payee from the ff. items of income payments to 2000 and thereafter, the rate shall be thirty-two percent
persons residing in the Phils. (32%).
Any amount paid or payable periodically or at the end of the In the case of corporations adopting the fiscal-year accounting
taxable year by a gen. professional partnership to the period, the taxable income shall be computed without regard
partners, such as- to the specific date when specific sales, purchases and other
drawings transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally
advances for each month of the period.
sharings

APP 81
INCOME TAX REVIEWER
The reduced corporate income tax rates shall be applied on the System (GSIS), the Social Security System (SSS), the
amount computed by multiplying the number of months Philippine Health Insurance Corporation (PHIC), the Philippine
covered by the new rates within the fiscal year by the taxable Charity Sweepstakes Office (PCSO) and the Philippine
income of the corporation for the period, divided by twelve. Amusement and Gaming Corporation (PAGCOR), shall pay
Provided, further, That the President, upon the recommendation such rate of tax upon their taxable income as are imposed by
of the Secretary of Finance, may effective January 1, 2000, this Section upon corporations or associations engaged in s
allow corporations the option to be taxed at fifteen percent similar business, industry, or activity.
(15%) of gross income as defined herein, after the following
conditions have been satisfied: (D) Rates of Tax on Certain Passive Incomes. -
1. A tax effort ratio of twenty percent (20%) of Gross National (1) Interest from Deposits and Yield or any other Monetary
Product (GNP); Benefit from Deposit Substitutes and from Trust Funds and
2. A ratio of forty percent (40%) of income tax collection to Similar Arrangements, and Royalties. - A final tax at the rate
total tax revenues; of twenty percent (20%) is hereby imposed upon the amount
3. A VAT tax effort of four percent (4%) of GNP; and of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust
4. A 0.9 percent (0.9%) ratio of the Consolidated Public Sector
funds and similar arrangements received by domestic
Financial Position (CPSFP) to GNP.
corporations, and royalties, derived from sources within the
The option to be taxed based on gross income shall be available Philippines: Provided, however, That interest income derived
only to firms whose ratio of cost of sales to gross sales or by a domestic corporation from a depository bank under the
receipts from all sources does not exceed fifty-five percent expanded foreign currency deposit system shall be subject to
(55%). a final income tax at the rate of seven and one-half percent (7
The election of the gross income tax option by the corporation 1/2%) of such interest income.
shall be irrevocable for three (3) consecutive taxable years (2) Capital Gains from the Sale of Shares of Stock Not Traded in
during which the corporation is qualified under the scheme. the Stock Exchange. - A final tax at the rates prescribed below
For purposes of this Section, the term 'gross income' derived shall be imposed on net capital gains realized during the
from business shall be equivalent to gross sales less sales taxable year from the sale, exchange or other disposition of
returns, discounts and allowances and cost of goods sold. shares of stock in a domestic corporation except shares sold
"Cost of goods sold' shall include all business expenses or disposed of through the stock exchange:
directly incurred to produce the merchandise to bring them to Not over P100,000. 5%
their present location and use.
Amount in excess of P100,000.. 10%
For a trading or merchandising concern, 'cost of goods' sold
(3) Tax on Income Derived under the Expanded Foreign
shall include the invoice cost of the goods sold, plus import
Currency Deposit System. - Income derived by a depository
duties, freight in transporting the goods to the place where
bank under the expanded foreign currency deposit system
the goods are actually sold, including insurance while the
from foreign currency transactions with local commercial
goods are in transit.
banks, including branches of foreign banks that may be
For a manufacturing concern, 'cost of goods manufactured and authorized by the Bangko Sentral ng Pilipinas (BSP) to
sold' shall include all costs of production of finished goods, transact business with foreign currency depository system
such as raw materials used, direct labor and manufacturing units and other depository banks under the expanded foreign
overhead, freight cost, insurance premiums and other costs currency deposit system, including interest income from
incurred to bring the raw materials to the factory or foreign currency loans granted by such depository banks
warehouse. under said expanded foreign currency deposit system to
In the case of taxpayers engaged in the sale of service, 'gross residents, shall be subject to a final income tax at the rate of
income' means gross receipts less sales returns, allowances ten percent (10%) of such income.
and discounts. Any income of nonresidents, whether individuals or
(B) Proprietary Educational Institutions and Hospitals. - corporations, from transactions with depository banks under
Proprietary educational institutions and hospitals which are the expanded system shall be exempt from income tax.
nonprofit shall pay a tax of ten percent (10%) on their taxable (4) Intercorporate Dividends. - Dividends received by a
income except those covered by Subsection (D) hereof: domestic corporation from another domestic corporation shall
Provided, that if the gross income from unrelated trade, not be subject to tax.
business or other activity exceeds fifty percent (50%) of the
(5) Capital Gains Realized from the Sale, Exchange or
total gross income derived by such educational institutions or
Disposition of Lands and/or Buildings. - A final tax of six
hospitals from all sources, the tax prescribed in Subsection
percent (6%) is hereby imposed on the gain presumed to
(A) hereof shall be imposed on the entire taxable income. For
have been realized on the sale, exchange or disposition of
purposes of this Subsection, the term 'unrelated trade,
lands and/or buildings which are not actually used in the
business or other activity' means any trade, business or other
business of a corporation and are treated as capital assets,
activity, the conduct of which is not substantially related to
based on the gross selling price of fair market value as
the exercise or performance by such educational institution or
determined in accordance with Section 6(E) of this Code,
hospital of its primary purpose or function. A 'Proprietary
whichever is higher, of such lands and/or buildings.
educational institution' is any private school maintained and
administered by private individuals or groups with an issued
permit to operate from the Department of Education, Culture (E) Minimum Corporate Income Tax on Domestic Corporations. -
and Sports (DECS), or the Commission on Higher Education (1) Imposition of Tax. - A minimum corporate income tax of two
(CHED), or the Technical Education and Skills Development percent (2%0 of the gross income as of the end of the
Authority (TESDA), as the case may be, in accordance with taxable year, as defined herein, is hereby imposed on a
existing laws and regulations. corporation taxable under this Title, beginning on the fourth
(C) Government-owned or Controlled-Corporations, Agencies or taxable year immediately following the year in which such
Instrumentalities. - The provisions of existing special or corporation commenced its business operations, when the
general laws to the contrary notwithstanding, all corporations, minimum income tax is greater than the tax computed under
agencies, or instrumentalities owned or controlled by the Subsection (A) of this Section for the taxable year.
Government, except the Government Service Insurance

APP 82
INCOME TAX REVIEWER
(2) Carry Froward of Excess Minimum Tax. - Any excess of the Income of a Partnership (Except a General Professional
minimum corporate income tax over the normal income tax as Partnership), Joint Account, Joint Venture Taxable as a
computed under Subsection (A) of this Section shall be carried Corporation or Association., Interests, Royalties, Prizes, and
forward and credited against the normal income tax for the Other Winnings. - Cash and/or property dividends from a
three (3) immediately succeeding taxable years. domestic corporation, or from a joint stock company, or from
(3) Relief from the Minimum Corporate Income Tax Under an insurance or mutual fund company or from a regional
Certain Conditions. - The Secretary of Finance is hereby operating headquarter of multinational company, or the share
authorized to suspend the imposition of the minimum of a nonresident alien individual in the distributable net
corporate income tax on any corporation which suffers losses income after tax of a partnership (except a general
on account of prolonged labor dispute, or because of force professional partnership) of which he is a partner, or the
majeure, or because of legitimate business reverses. share of a nonresident alien individual in the net income after
tax of an association, a joint account, or a joint venture
The Secretary of Finance is hereby authorized to promulgate,
taxable as a corporation of which he is a member or a co-
upon recommendation of the Commissioner, the necessary
venturer; interests; royalties (in any form); and prizes (except
rules and regulation that shall define the terms and conditions
prizes amounting to Ten thousand pesos (P10,000) or less
under which he may suspend the imposition of the minimum
which shall be subject to tax under Subsection (B)(1) of
corporate income tax in a meritorious case.
Section 24) and other winnings (except Philippine Charity
(4) Gross Income Defined. - For purposes of applying the Sweepstakes and Lotto winnings); shall be subject to an
minimum corporate income tax provided under Subsection (E) income tax of twenty percent (20%) on the total amount
hereof, the term 'gross income' shall mean gross sales less thereof: Provided, however, that royalties on books as well as
sales returns, discounts and allowances and cost of goods other literary works, and royalties on musical compositions
sold. "Cost of goods sold' shall include all business expenses shall be subject to a final tax of ten percent (10%) on the
directly incurred to produce the merchandise to bring them to total amount thereof: Provided, further, That cinematographic
their present location and use. films and similar works shall be subject to the tax provided
For a trading or merchandising concern, 'cost of goods sold' under Section 28 of this Code: Provided, furthermore, That
shall include the invoice cost of the goods sold, plus import interest income from long-term deposit or investment in the
duties, freight in transporting the goods to the place where form of savings, common or individual trust funds, deposit
the goods are actually sold including insurance while the substitutes, investment management accounts and other
goods are in transit. investments evidenced by certificates in such form prescribed
For a manufacturing concern, cost of 'goods manufactured and by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from
sold' shall include all costs of production of finished goods, the tax imposed under this Subsection: Provided, finally, that
such as raw materials used, direct labor and manufacturing should the holder of the certificate pre-terminate the deposit
overhead, freight cost, insurance premiums and other costs or investment before the fifth (5 th) year, a final tax shall be
incurred to bring the raw materials to the factory or imposed on the entire income and shall be deducted and
warehouse. withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the
In the case of taxpayers engaged in the sale of service, 'gross remaining maturity thereof:
income' means gross receipts less sales returns, allowances,
discounts and cost of services. 'Cost of services' shall mean all
direct costs and expenses necessarily incurred to provide the Four (4) years to less than five (5) years - 5%;
services required by the customers and clients including (A) Three (3) years to less than four (4) years - 12%; and
salaries and employee benefits of personnel, consultants and Less than three (3) years - 20%.
specialists directly rendering the service and (B) cost of
(3) Capital Gains. - Capital gains realized from sale, barter or
facilities directly utilized in providing the service such as
exchange of shares of stock in domestic corporations not
depreciation or rental of equipment used and cost of supplies:
traded through the local stock exchange, and real properties
Provided, however, That in the case of banks, 'cost of
shall be subject to the tax prescribed under Subsections (C)
services' shall include interest expense.
and (D) of Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or
b. Foreign Business Within the Philippines. - There shall be levied,
collected and paid for each taxable year upon the entire
income received from all sources within the Philippines by
Sec. (D) The term 'foreign,' when applied to a corporation, every nonresident alien individual not engaged in trade or
means a corporation which is not domestic. business within the Philippines as interest, cash and/or
property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other
SEC. 25. Tax on Nonresident Alien Individual. fixed or determinable annual or periodic or casual gains,
(A) Nonresident Alien Engaged in trade or Business Within the profits, and income, and capital gains, a tax equal to twenty-
Philippines. - five percent (25%) of such income. Capital gains realized by a
(1) In General. - A nonresident alien individual engaged in trade nonresident alien individual not engaged in trade or business
or business in the Philippines shall be subject to an income in the Philippines from the sale of shares of stock in any
tax in the same manner as an individual citizen and a resident domestic corporation and real property shall be subject to the
alien individual, on taxable income received from all sources income tax prescribed under Subsections (C) and (D) of
within the Philippines. A nonresident alien individual who shall Section 24.
come to the Philippines and stay therein for an aggregate (C) Alien Individual Employed by Regional or Area Headquarters
period of more than one hundred eighty (180) days during and Regional Operating Headquarters of Multinational
any calendar year shall be deemed a 'nonresident alien doing Companies. - There shall be levied, collected and paid for
business in the Philippines'. Section 22 (G) of this Code each taxable year upon the gross income received by every
notwithstanding. alien individual employed by regional or area headquarters
(2) Cash and/or Property Dividends from a Domestic and regional operating headquarters established in the
Corporation or Joint Stock Company, or Insurance or Mutual Philippines by multinational companies as salaries, wages,
Fund Company or Regional Operating Headquarter or annuities, compensation, remuneration and other
Multinational Company, or Share in the Distributable Net emoluments, such as honoraria and allowances, from such

APP 83
INCOME TAX REVIEWER
regional or area headquarters and regional operating
headquarters, a tax equal to fifteen percent (15%) of such
gross income: Provided, however, That the same tax Sec. 22 (I). The term non-resident foreign corp. applies
treatment shall apply to Filipinos employed and occupying the to a foreign corporation NOT engaged in trade or business
same position as those of aliens employed by these w/in the Philippines.
multinational companies. For purposes of this Chapter, the
term 'multinational company' means a foreign firm or entity
engaged in international trade with affiliates or subsidiaries or Marubeni vs. Com.
branch offices in the Asia-Pacific Region and other foreign Facts: Marubeni is a Japanese corp. duly
markets.
licensed in the Phils. to do business. M had
(D) Alien Individual Employed by Offshore Banking Units. - equity investments w/ Atlantic, Gulf & Pacific.
There shall be levied, collected and paid for each taxable year
A,G & P declared & paid cash dividends to M
upon the gross income received by every alien individual
employed by offshore banking units established in the by directly remitting the cash dividend to Ms
Philippines as salaries, wages, annuities, compensation, Tokyo office net of the 10% final intercorporate
remuneration and other emoluments, such as honoraria and dividend tax & 15% branch profit remittance
allowances, from such off-shore banking units, a tax equal to tax. M argues that following the principal-
fifteen percent (15%) of such gross income: Provided, agent relationship theory, it is a resident
however, That the same tax treatment shall apply to Filipinos
employed and occupying the same positions as those of aliens
foreign corp., subject only to the 10% final tax
employed by these offshore banking units. on dividends. It argues that must be
(E) Alien Individual Employed by Petroleum Service Contractor considered a resident foreign corp. because it
and Subcontractor. - An Alien individual who is a permanent is engaged in business in the Phils. through its
resident of a foreign country but who is employed and Phil. branch. It reasons that the Phil. branch &
assigned in the Philippines by a foreign service contractor or the Tokyo head office are one & the same corp.
by a foreign service subcontractor engaged in petroleum entity, whoever made the investment in A,G,
operations in the Philippines shall be liable to a tax of fifteen
& P.
percent (15%) of the salaries, wages, annuities,
compensation, remuneration and other emoluments, such as Held: The gen. rule that a foreign corp. is the
honoraria and allowances, received from such contractor or same juridical entity as its branch office in the
subcontractor: Provided, however, That the same tax
Phils. cannot apply here. This rule is based on
treatment shall apply to a Filipino employed and occupying
the same position as an alien employed by petroleum service the premise that the business of the foreign
contractor and subcontractor. corp. is conducted through its branch office,
Any income earned from all other sources within the Philippines following the principal-agent theory. It is
by the alien employees referred to under Subsections (C), (D) understood that the branch becomes its agent
and (E) hereof shall be subject to the pertinent income tax, as here. So that when the foreign corp. transacts
the case may be, imposed under this Code. business independently of its branch, the
prin.-agent relationship is set aside. The TXN
i. Resident (NET FR. SOURCES becomes one of the foreign corp., not of the
W/IN ONLY) branch. Consequently, the taxpayer is the
foreign corp., not the branch or resident
Sec. 22 (h). The term resident foreign corporation, applies foreign corp. Corollarily, is the business TXN
to a foreign corporation engaged in trade or business w/in the
Philippines.
is conducted through the branch office the
latter becomes the taxpayer & not the foreign
corp.
Com. vs. BOAC In the CAB, the investment was made
Facts: Supra for the purposes peculiarly germane to the
Held: In order that a foreign corp. may be conduct of the corporate affairs of M, but
regarded as doing business w/in a state, there certainly not of the branch in the Phils. It is
must be continuity of conduct & intention to thus clear that M, having made the
establish a continuous business, such as the independent investment attributable only to
appointment of a local agent & not one of a the head office, cannot now claim the
temporary character. BOAC, although it does increments as ordinary consequence of its
not operate any airplane in the Phils., is a trade or business in the Phils.
resident foreign corp. It maintains a general
sales agent in the country w/c is engaged in Com. v. Procter & Gamble 204 S 277
selling & issuing tickets, receiving fare, etc.-
activities in the exercise of the functions Facts: P&G Phils declared dividends payable
normally incident to, & are in progressive to its parent company & sole stockholder, P&G
pursuit of, the purpose & object of its USA; fr. w/c the 35% w/holding tax at source
organization as an international carrier. was deducted. P&G Phils claimed a refund
based on 24(b) (1) allowing a reduced rate at
15% if the country of the domicile of the
ii. Non-resident (GROSS FR. foreign stockholder corporation shall allow
SOURCES W/IN ONLY)

APP 84
INCOME TAX REVIEWER
such corp. a tax credit for taxes deemed paid considered as a full satisfaction of the given
in the Phils. condition.
Held: Sec. 24(b)(1) does not require that the
US must give a deem paid tax credit for the Domestic
dividend tax waived by the Phil. to make the
preferred rate applicable. the law only sources w/in sources w/o
requires that the US shall allow tax credit in an
amount equivalent to 20 % percentage points.
the court interpreted the US Tax Code & ruled
that the US allow such tax credit. Net Income
tax base
A requirement relating to administrative
implementation is not property imposed as a
condition for the applicability, as a matter of Foreign
law, of a particular rate. Nor an interpretation
of a tax statute that produces a revenue flow Sources w/o sources w/in
for the govt is not, for that reason alone, nec.
the correct reading of the statute. resident non-
resident
Com. v. Procter & Gamble 160 S 560
net income gross
Facts: P&G- Phil. declared dividends in favor income
of P&G USA, w/c was subjected to the 35% tax
in 1975. In 1977, P%G Phil. sought a refund
of 20% invoking the tax sparing credit
provision under Sec. 24(b) of NIRC.
Held: P&G Phils is not entitled to the refund.
It is merely a w/holding agent of the govt. the
real party to file the claim should have been c. Branch & Subsidiary of a Foreign
P&G USA. P&G Phil. also failed to meet certain Corporation for income tax
reqts in order that the dividends received by purposes
its non-resident for. com. may be subj. to
preferential tax rate of 15%. Marubeni v. Commissioner
1. It did not show actual amount credited Facts: Marubeni is a foreign corp. organized
to P&G USA by US govt against the under the laws of Japan. It invested in a
income tax due on the dividends received construction business in the Phils. in AG&P.
by it fr. the Phils. AG&P remitted the profits to Marubeni
2. Failed to present ITR of mother co. when w/holding the 15% profit remittance tax. The
dividends were received. CIR ruled that the profit remitted to Marubeni
3. Failed to submit a duly authenticated shld. not be subject to the 15% profit
doc. showing that the US govt credited remittance tax bec. only profits remitted
the P&G USA the 20% tax deemed paid in abroad to its head office w/c are effectively
the Phils. connected w/ its trade or business in the Phils.
are subj. to the tax. Marubeni is now claiming
a refund of the 15% tax paid.
Wander Philippines Held: Marubeni is not liable to pay the 15%
Facts: Wander Phils is a domestic corp. profit remittance tax bec. the profits remitted
organized under Phil. laws. It is wholly owned to it were not income effectively connected w/
subsidiary of the Glaro SA ltd, a Swiss Corp. its business in Japan. ( Note: MC was liable to
not engaged in trade or business in the Phils. pay other kind of tax, as it derived income fr.
It claimed a preferential tax rate on dividends source w/in the Phils. but not a profit
remitted to Glaro. Under Swiss law, no tax is remittance tax).
imposed on dividends received by the Swiss
Corp. fr. corp. domiciled in foreign countries. C. INDIVIDUAL TAXPAYERS
Held: While it is true that the claims for
refund are construed strictly against the SEC. 23. General Principles of Income Taxation in the
claimant, nevertheless, the fact that Philippines. - Except when otherwise provided in this Code:
Switzerland did not impose any tax on the (A) A citizen of the Philippines residing therein is taxable on all
dividends received by Glaro should be income derived from sources within and without the
Philippines;

APP 85
INCOME TAX REVIEWER
(B) A nonresident citizen is taxable only on income derived from basis.
sources within the Philippines; 2. Contract one who leaves the Phils. on
(C) An individual citizen of the Philippines who is working and worker account of a contract of
deriving income from abroad as an overseas contract worker employment w/c is renewed
is taxable only on income derived from sources within the from time to time w/in or during
Philippines: Provided, That a seaman who is a citizen of the the taxable year under such
Philippines and who receives compensation for services circumstances as to require him
rendered abroad as a member of the complement of a vessel to be physically present abroad
engaged exclusively in international trade shall be treated as most of the time during the
an overseas contract worker; taxable year
(D) An alien individual, whether a resident or not of the (physically present abroad most
Philippines, is taxable only on income derived from sources of the time during the taxable
within the Philippines; year = outside of the Phils. for
not less than 180 days during
such taxable year
1. Citizens
a. Resident (NET from SOURCES Sec. 3. Proof of Intention
WITHIN AND WITHOUT) Sec. 4. Manner of filing returns. xxx
b. Non-resident citizen (NET (1) What to include as gross income. The gross income of a
from sources WITHIN ONLY) non-resident citizen derived from sources outside of the
Phils. includes all income enumerated under Sec. 29 of
NIRC, WON such income is exempted from the income tax
Sec. 22. (E) The term 'nonresident citizen' means: in the foreign country where it was derived.
(1) A citizen of the Philippines who establishes to the 2.) Rate of tax.
satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or Y $6000 1%
for employment on a permanent basis.
$6000 Y $60 plus 2% if
(3) A citizen of the Philippines who works and derives income $20,000 excess over $6000
from abroad and whose employment thereat requires him
to be physically present abroad most of the time during the Y$20,000 $340 plus 3% of
taxable year. excess over $20,000
(4) A citizen who has been previously considered as
nonresident citizen and who arrives in the Philippines at any (3) Computation of gross income
time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a nonresident citizen Gross income less:
for the taxable year in which he arrives in the Philippines Personal exemptions ($2000 if single or married but legally
with respect to his income derived from sources abroad separated)
until the date of his arrival in the Philippines. total amt. of national income tax actually paid to the
(5) The taxpayer shall submit proof to the Commissioner to national govt of the foreign country of his residence.
show his intention of leaving the Philippines to reside = GROSS ADJUSTED INCOME
permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section.
Conwi vs. IAC
Sec. 23 (B). A nonresident citizen is taxable only on income Facts: Petitioners are employees of
derived from sources within the Philippines;
Procter & Gamble-Phils. & were assigned to
other subsidiaries of P & G in other countries.
Revenue Reg. 1-79. Regulations Governing the taxation The question is : what exchange rate should be
of non-resident citizens
used. Cir: prevailing free market exchange
Sec. 2. Who are considered as non resident citizens. rate. Pets: par value of the peso as per CB
The term non-resident citizen-
circular:
means one who establishes to the satisfaction of the CIR
the fact of his physical presence abroad w/ the definite Held: For the proper enforcement of the NIRC,
intention to reside therein & the Sec. of Finance is empowered to
shall include any Filipino who leaves the country during the promulgate all needful rules & regulations to
taxable year as : effectively enforce its provisions. Pursuant to
this authority, RMC 7-71 & 41-71 were issued
to provide a uniform rate of exchange for $ &
Php for internal tax revenue purposes.
1. Immigrant one who leaves the Phils. to
reside abroad as an immigrant Pets. argue that since there were no
for w/c a foreign visa as such remittances & acceptances of their salaries &
has been secured. wages in $ into Phils. they are exempt from
2. Permanent one who leaves the Phils. to the coverage of such circulars. Pets. forge
EE reside abroad for employment that they are citizens of the Phils. & their
on a more or less permanent

APP 86
INCOME TAX REVIEWER
income, w/in or w/o & in this case wholly w/o, 1. regional HQs or area HQs of multinational
are subject to income tax. corps.
2. off-shore banking units
3. petroleum service contractors.
c. Filipino overseas workers (NET
from SOURCES WITHIN ONLY)
Sec. 23. (C) An individual citizen of the Philippines who is
D. Fiduciary Taxpayers: Estates & Trusts
working and deriving income from abroad as an overseas 1. Definition of taxable estate & trust/
contract worker is taxable only on income derived from exception
sources within the Philippines: Provided, That a seaman who
is a citizen of the Philippines and who receives compensation
for services rendered abroad as a member of the complement Sec. 22. (J) The term 'fiduciary' means a guardian, trustee,
of a vessel engaged exclusively in international trade shall be executor, administrator, receiver, conservator or any person
treated as an overseas contract worker; acting in any fiduciary capacity for any person.

SEC. 60. Imposition of Tax. -


2. Aliens (not Filipino citizens)
(A) Application of Tax. - The tax imposed by this Title upon
a. Resident alien (NET from individuals shall apply to the income of estates or of any kind
SOURCES WITHIN ONLY) of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests,
Sec. 22. (F) The term 'resident alien' means an individual and income accumulated or held for future distribution under
whose residence is within the Philippines and who is not a the terms of the will or trust;
citizen thereof. (2) Income which is to be distributed currently by the fiduciary
to the beneficiaries, and income collected by a guardian of an
infant which is to be held or distributed as the court may
b. Non-resident alien direct;
(3) Income received by estates of deceased persons during the
period of administration or settlement of the estate; and
Sec. 22. (G) The term 'nonresident alien' means an
individual whose residence is not within the Philippines and (4) Income which, in the discretion of the fiduciary, may be
who is not a citizen thereof. either distributed to the beneficiaries or accumulated.

(B) Exception. - The tax imposed by this Title shall not apply to
i. Engaged in trade or business employee's trust which forms part of a pension, stock bonus
(NET from SOURCES WITHIN or profit-sharing plan of an employer for the benefit of some
ONLY) or all of his employees (1) if contributions are made to the
trust by such employer, or employees, or both for the purpose
of distributing to such employees the earnings and principal of
180 day test the fund accumulated by the trust in accordance with such
plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect
Sec. 25. (B) Nonresident Alien Individual Not Engaged to employees under the trust, for any part of the corpus or
in Trade or Business Within the Philippines. - There shall income to be (within the taxable year or thereafter) used for,
be levied, collected and paid for each taxable year upon the or diverted to, purposes other than for the exclusive benefit of
entire income received from all sources within the Philippines his employees: Provided, That any amount actually distributed
by every nonresident alien individual not engaged in trade or to any employee or distributee shall be taxable to him in the
business within the Philippines as interest, cash and/or year in which so distributed to the extent that it exceeds the
property dividends, rents, salaries, wages, premiums, amount contributed by such employee or distributee.
annuities, compensation, remuneration, emoluments, or other (C) Computation and Payment. -
fixed or determinable annual or periodic or casual gains,
(1) In General. - The tax shall be computed upon the taxable
profits, and income, and capital gains, a tax equal to twenty-
income of the estate or trust and shall be paid by the
five percent (25%) of such income. Capital gains realized by a
fiduciary, except as provided in Section 63 (relating to
nonresident alien individual not engaged in trade or business
revocable trusts) and Section 64 (relating to income for the
in the Philippines from the sale of shares of stock in any
benefit of the grantor).
domestic corporation and real property shall be subject to the
income tax prescribed under Subsections (C) and (D) of (2) Consolidation of Income of Two or More Trusts. - Where, in
Section 24. the case of two or more trusts, the creator of the trust in each
instance is the same person, and the beneficiary in each
instance is the same, the taxable income of all the trusts shall
ii. not engaged in trade or be consolidated and the tax provided in this Section computed
on such consolidated income, and such proportion of said tax
business (GROSS from
shall be assessed and collected from each trustee which the
SOURCES WITHIN ONLY) taxable income of the trust administered by him bears to the
consolidated income of the several trusts.
Sec. 25. (B) supra.
SEC. 61. Taxable Income. - The taxable income of the estate
or trust shall be computed in the same manner and on the
iii. Special Aliens same basis as in the case of an individual, except that:
employed by:
APP 87
INCOME TAX REVIEWER
(A) There shall be allowed as a deduction in computing the leaves to be accumulated. The govt
taxable income of the estate or trust the amount of the recognizes that for most public servants,
income of the estate or trust for the taxable year which is to
retirement pay is always less than generous. It
be distributed currently by the fiduciary to the beneficiaries,
and the amount of the income collected by a guardian of an is not a part of the gross salary or income of
infant which is to be held or distributed as the court may the govt official but a retirement benefit not
direct, but the amount so allowed as a deduction shall be subj. to income tax.
included in computing the taxable income of the beneficiaries,
whether distributed to them or not. Any amount allowed as a
deduction under this Subsection shall not be allowed as a
deduction under Subsection (B) of this Section in the same or
any succeeding taxable year. 4. Deductions allowed
(B) In the case of income received by estates of deceased
persons during the period of administration or settlement of
the estate, and in the case of income which, in the discretion SEC. 62. Exemption Allowed to Estates and Trusts. - For
of the fiduciary, may be either distributed to the beneficiary or the purpose of the tax provided for in this Title, there shall be
accumulated, there shall be allowed as an additional allowed an exemption of Twenty thousand pesos (P20,000)
deduction in computing the taxable income of the estate or from the income of the estate or trust.
trust the amount of the income of the estate or trust for its
taxable year, which is properly paid or credited during such
year to any legatee, heir or beneficiary but the amount so 5. Revocable trust
allowed as a deduction shall be included in computing the
SEC. 63. Revocable trusts. - Where at any time the power to
taxable income of the legatee, heir or beneficiary.
revest in the grantor title to any part of the corpus of the trust
(C) In the case of a trust administered in a foreign country, the is vested (1) in the grantor either alone or in conjunction with
deductions mentioned in Subsections (A) and (B) of this any person not having a substantial adverse interest in the
Section shall not be allowed: Provided, That the amount of disposition of such part of the corpus or the income
any income included in the return of said trust shall not be therefrom, or (2) in any person not having a substantial
included in computing the income of the beneficiaries. adverse interest in the disposition of such part of the corpus
or the income therefrom, the income of such part of the trust
shall be included in computing the taxable income of the
2. Taxable income of fiduciary grantor.
taxpayers

6. Income for benefit of grantor


SEC. 61. Taxable Income. - supra.

SEC. 64. Income for Benefit of Grantor.-


3. Trust exempt from income tax
(A) Where any part of the income of a trust (1) is, or in the
SEC. 60. Imposition of Tax. - discretion of the grantor or of any person not having a
(B) Exception. - The tax imposed by this Title shall not apply to substantial adverse interest in the disposition of such part of
employee's trust which forms part of a pension, stock bonus the income may be held or accumulated for future distribution
or profit-sharing plan of an employer for the benefit of some to the grantor, or (2) may, or in the discretion of the grantor
or all of his employees (1) if contributions are made to the or of any person not having a substantial adverse interest in
trust by such employer, or employees, or both for the purpose the disposition of such part of the income, be distributed to
of distributing to such employees the earnings and principal of the grantor, or (3) is, or in the discretion of the grantor or of
the fund accumulated by the trust in accordance with such any person not having a substantial adverse interest in the
plan, and (2) if under the trust instrument it is impossible, at disposition of such part of the income may be applied to the
any time prior to the satisfaction of all liabilities with respect payment of premiums upon policies of insurance on the life of
to employees under the trust, for any part of the corpus or the grantor, such part of the income of the trust shall be
income to be (within the taxable year or thereafter) used for, included in computing the taxable income of the grantor.
or diverted to, purposes other than for the exclusive benefit of (B) As used in this Section, the term 'in the discretion of the
his employees: Provided, That any amount actually distributed grantor' means in the discretion of the grantor, either alone or
to any employee or distributee shall be taxable to him in the in conjunction with any person not having a substantial
year in which so distributed to the extent that it exceeds the adverse interest in the disposition of the part of the income in
amount contributed by such employee or distributee. question.

Commissioner v. CA
Facts: Castaneda retired fr. the govt service E. REGISTRATION and TAX IDENTIFICATION
in 1982. He received benefits including NO. of taxpayers
terminal benefits pay fr. w/c the CIR w/held
income tax. Castaneda filed a claim for refund
contending that the cash equivalent of his Sec. 236 (A) Requirements. Every person subject to any
terminal leave is exempt fr. tax. internal revenue tax shall register once w/ the appropriate
Rev. Dist. Officer:
Held: The terminal leave pay received by a 1. Within 10 days fr. date of employment, or
govt official or employee is not subj. to 2. On or before the commencement of the business, or
w/holding income tax. In the exercise of
3. Before payment of any tax due, or
sound policy. the govt encourages unused

APP 88
INCOME TAX REVIEWER
4. Upon filing of a return, statement or declaration as required
in this Code.
VII. EXEMPTION AND APPLICABLE TAX
The registration shall contain the taxpayers name, style, place
of residence, business, and such other information as may be RATES.
required by the commissioner in the form prescribed therefor.
A person maintaining the head office, branch or facility shall
register w/ the RDO having jurisdiction over the head office, A. Corporations
branch or facility. For purposes of this Section, the term 1. TAX-EXEMPT CORPS.
facility may include but not be limited to sales outlets, places
of production, warehouses or storage places.
SEC. 30. Exemptions from Tax on Corporations. - The
Sec. 236 (J). Supplying of TIN. Any person required under following organizations shall not be taxed under this Title in
the authority of this Code to make, render or file a return, respect to income received by them as such:
statement or other document shall be supplied with or (A) Labor, agricultural or horticultural organization not
assigned a TIN which shall indicate in such return, statement organized principally for profit;
or doc filed w/ the BIR for his proper identification for tax (B) Mutual savings bank not having a capital stock represented
purposes, and w/c shall indicate in certain docs, such as, but by shares, and cooperative bank without capital stock
not ltd. to, the ff.: organized and operated for mutual purposes and without
1. sugar quedans, refined sugar release order or similar profit;
instruments; (C) A beneficiary society, order or association, operating fort he
2. domestic bills of lading; exclusive benefit of the members such as a fraternal
3. docs to be registered w/ the Register of Deeds or organization operating under the lodge system, or mutual aid
Assessors office; association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other
4. registration cert. of transportation equipment by land, sea
benefits exclusively to the members of such society, order, or
or air;
association, or nonstock corporation or their dependents;
5. docs to be registered w/ the SEC;
(D) Cemetery company owned and operated exclusively for the
6. bldg. construction permits; benefit of its members;
7. application for loan w/ banks, financial institutions, or (E) Nonstock corporation or association organized and operated
other financial intermediaries; exclusively for religious, charitable, scientific, athletic, or
8. application for mayors permit; cultural purposes, or for the rehabilitation of veterans, no part
9. application for business license w/ the DTI; & of its net income or asset shall belong to or inures to the
benefit of any member, organizer, officer or any specific
10. such other docs w/c may hereafter be required under rules
person;
and regs to be promulgated by the Sec. of Finance, upon
recommendation of the Commissioner. (F) Business league chamber of commerce, or board of trade,
not organized for profit and no part of the net income of
In cases where a registered taxpayer dies, the administrator or
which inures to the benefit of any private stock-holder, or
executor shall register the estate of the decedent in
individual;
accordance w/ subsection A hereof & a new TIN shall be
supplied in accordance w/ the provision of this Sec. (G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
In the case of a nonresident decedent, the exec or admin of the
estate shall register the estate w/ the RDO where he is (H) A nonstock and nonprofit educational institution;
registered; Provided, however, That in case such exec or (I) Government educational institution;
admin is not registered, registration of the estate shall be (J) Farmers' or other mutual typhoon or fire insurance company,
made w/ & the TIN supplied by the RDO having jurisdiction mutual ditch or irrigation company, mutual or cooperative
over his legal residence. telephone company, or like organization of a purely local
Only one TIN shall be assigned to a taxpayer. Any person who character, the income of which consists solely of assessments,
shall secure more than one TIN shall be criminally liable x x x. dues, and fees collected from members for the sole purpose
of meeting its expenses; and
Rev. Memo. Circular 63-91. Issuance of the new TIN to (K) Farmers', fruit growers', or like association organized and
taxpayers and its use on documents and receipts. operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the
Use of new TIN. Only persons required to make, render, or basis of the quantity of produce finished by them;
file a return, statement or document w/ the BIR shall be
supplied w/ or assigned a TIN to be indicated on such
documents. In addition to the persons enumerated in RMO Notwithstanding the provisions in the preceding paragraphs, the
23-91, Filipinos who are immigrants to other countries may income of whatever kind and character of the foregoing
apply for the issuance of a TIN. organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax
The new TIN shall replace the existing imposed under this Code.
TAN
VAT reg. numbers
non-VAT reg. numbers &
REVIEW: EXEMPTIONS UNDER THE CONSTITUTION
w/holding tax agent identification numbers.
Therefore, only the TIN shall be reflected on all documents,
Sec. 28 (3) Art. VI . Charitable institutions, churches, &
papers, &/or records that previously required the
parsonages or convents appurtenant thereto, mosques, non-
indication/reflection of any of the aforementioned numbers.

APP 89
INCOME TAX REVIEWER
profit cemeteries & all lands, buildings & improvements burden is on the claimant to prove he is w/in the terms of the
actually, directly & exclusively used for religious, charitable or statute. In the absence of a clear grant of exemption, the
educational purposes shall be exempt form taxation. Mun. is subject to 20% final w/holding tax on its interest
Sec. 4 (3,4) Art. XIV. All revenues & assets of non-stock non- income on bank deposits.
profit educ. institutions used A,D,E for educ. purposes shall be
exempt fr. taxes & duties. X X X
Proprietary educ. institutions including those cooperatively Hospital de San Juan de Dios v. Pasay City
owned may be entitled to such exemptions subject to the Facts: Petr paid under protest electrical &
limitations provided by law
inspection fees allegedly due the City by virtue
Subject to conditions prescribed by law, all grants,
of an Ordinance that was passed. The hospital
endowments, donations or contributions used A,D, E, for
educ, purposes shall be exempt fr. tax. claimed that as a charitable institution, it was
exempt fr. the payment of the inspection fees
provided in the ordinances. But the Mayor
BIR RULINGS
refused to issue a building permit if the said
fees were not paid.
(173 88) Non-stock non-profit educ. institutions, they are
exempted fr. internal revenue taxes & customs duties, in Held: The lower court erred in not considering
appropriate cases imposed by natl. govt. on all revenues & the hospital as a charitable institution & thus
assets used A,D,E, for educational purposes. exempt fr. the payment of the fees under Sec.
Exempt fr. tax tuition, matriculation & other similar fees; 5 of the said ordinance. The articles of
income fr. bank deposit interests & money market placement incorporation of the hospital show that it has
incident to school operations; canteen owned & operated by
no capital stock & that no part of the net
the school as ancillary activity & located w/in the school
premises; value-added tax on sale of books, school supplies, income inures to the benefit of any individual.
uniform, & other school related items & sale of misc. school A ruling by the Workmens Compensation
items like car stickers. Commissioner said it is a charitable institution
Not exempt fr. tax income fr. trade, business or other activity exempt fr. the scope of the Act. Also, the
not related to the exercise of its educational purpose or hospital cashier attested that it maintains 2
function (i.e. school canteen operated by a concessionaire) free wards at 60 beds each & 6 free beds at
the pediatric ward. Thus there is sufficient
(171 88 ) A technical/vocational school accepting jobs fr. the evidence that the hospital doles out charity &
public in order to fully utilize its machines, income derived is should therefore be exempt.
not exempt fr. tax.
Note: The fact that the hospital is charging
fees for paying beds does not make it lose its
(105 91) The National Tobacco Admin., an attached agency
of the Dept of Agriculture is not exempted fr. paying income character as a charitable institution if the same
tax on gains to be derived fr. the sale of its properties w/c are were used to partly finance the expenses of
no longer needed for its operations. (It is not among those the free wards maintained by the hospital. The
specifically exempted by the Tax Code, Sec. 26) As such it is mere charging of medical & hospital fees fr.
liable to the 5% creditable w/holding tax based on gross those who could afford to pay does not make
selling price or total amount of consideration or its equivalent
an institution one established for profit or gain.
paid to the NTA as seller, gross selling price being, sale price
on the document, the fair market value, or zonal value
w/cever is higher. 1. Minimum Corporate Income Tax
On Domestic & Resident Foreign
(042 91) The amount of tax to be paid by a non-resident Corps. (MCIT)
foreign corporation (non-stock foundation, duly organized
under the laws of the State of Hawaii) , not engaged in
business in the Philippines as to its income derived fr. Phil. Sec. 27. (E) Minimum Corporate Income Tax on
currency bank deposit = shall be 35% of gross income Domestic Corporations. -
received during the taxable year fr. all sources w/in the
(1) Imposition of Tax. - A minimum corporate income tax of two
Philippines such as interest, dividends, rents, royalties etc.
percent (2%0 of the gross income as of the end of the
except capital gains.
taxable year, as defined herein, is hereby imposed on a
However, under the RP-US Tax Treaty, Art. 12; Interest derived corporation taxable under this Title, beginning on the fourth
by a resident of the Contracting States fr. sources w/in the taxable year immediately following the year in which such
other Contracting State shall not be taxed by the other CS at corporation commenced its business operations, when the
a rate in excess of 15 % of the gross amount of such interest. minimum income tax is greater than the tax computed under
Thus, said income fr. its Phil, currency bank deposit is to be Subsection (A) of this Section for the taxable year.
taxed at 15% of gross income.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the
minimum corporate income tax over the normal income tax as
(011 91) Municipal corporation is not exempt form tax on computed under Subsection (A) of this Section shall be carried
interest income fr. time & savings deposits. PD 1931, forward and credited against the normal income tax for the
(6/11/84), has w/drawn all the tax & duty privileges, including three (3) immediately succeeding taxable years.
preferential tax treatment of all units of government; the Natl. (3) Relief from the Minimum Corporate Income Tax Under
govt., all its agencies & political subdivisions as well as Certain Conditions. - The Secretary of Finance is hereby
GOCCs. Also EO 93 (3/10/87) w/drew all tax & duty incentives authorized to suspend the imposition of the minimum
granted to govt., & private entities subject to certain corporate income tax on any corporation which suffers losses
exceptions. With tax exemption laws strictly construed, the

APP 90
INCOME TAX REVIEWER
on account of prolonged labor dispute, or because of force on a resident foreign corporation taxable under paragraph (1)
majeure, or because of legitimate business reverses. of this Subsection.
The Secretary of Finance is hereby authorized to promulgate, (3) International Carrier. - An international carrier doing
upon recommendation of the Commissioner, the necessary business in the Philippines shall pay a tax of two and one-half
rules and regulation that shall define the terms and conditions percent (2 1/2%) on its 'Gross Philippine Billings' as defined
under which he may suspend the imposition of the minimum hereunder:
corporate income tax in a meritorious case. (a) International Air Carrier. - 'Gross Philippine Billings' refers to
(4) Gross Income Defined. - For purposes of applying the the amount of gross revenue derived from carriage of
minimum corporate income tax provided under Subsection (E) persons, excess baggage, cargo and mail originating from the
hereof, the term 'gross income' shall mean gross sales less Philippines in a continuous and uninterrupted flight,
sales returns, discounts and allowances and cost of goods irrespective of the place of sale or issue and the place of
sold. "Cost of goods sold' shall include all business expenses payment of the ticket or passage document: Provided, That
directly incurred to produce the merchandise to bring them to tickets revalidated, exchanged and/or indorsed to another
their present location and use. international airline form part of the Gross Philippine Billings if
For a trading or merchandising concern, 'cost of goods sold' the passenger boards a plane in a port or point in the
shall include the invoice cost of the goods sold, plus import Philippines: Provided, further, That for a flight which
duties, freight in transporting the goods to the place where originates from the Philippines, but transshipment of
the goods are actually sold including insurance while the passenger takes place at any port outside the Philippines on
goods are in transit. another airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to
For a manufacturing concern, cost of 'goods manufactured and
the point of transshipment shall form part of Gross Philippine
sold' shall include all costs of production of finished goods,
Billings.
such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs (b) International Shipping. - 'Gross Philippine Billings' means
incurred to bring the raw materials to the factory or gross revenue whether for passenger, cargo or mail
warehouse. originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage or
In the case of taxpayers engaged in the sale of service, 'gross
freight documents.
income' means gross receipts less sales returns, allowances,
discounts and cost of services. 'Cost of services' shall mean all
direct costs and expenses necessarily incurred to provide the (4) Offshore Banking Units. - The provisions of any law to the
services required by the customers and clients including (A) contrary notwithstanding, income derived by offshore banking
salaries and employee benefits of personnel, consultants and units authorized by the Bangko Sentral ng Pilipinas (BSP) to
specialists directly rendering the service and (B) cost of transact business with offshore banking units, including any
facilities directly utilized in providing the service such as interest income derived from foreign currency loans granted
depreciation or rental of equipment used and cost of supplies: to residents, shall be subject to a final income tax at the rate
Provided, however, That in the case of banks, 'cost of of ten percent (10%) of such income.
services' shall include interest expense. Any income of nonresidents, whether individuals or
corporations, from transactions with said offshore banking
units shall be exempt from income tax.
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(5) Tax on Branch Profits Remittances. - Any profit remitted by
(A) Tax on Resident Foreign Corporations. -
a branch to its head office shall be subject to a tax of fifteen
(1) In General. - Except as otherwise provided in this Code, a (15%) which shall be based on the total profits applied or
corporation organized, authorized, or existing under the laws earmarked for remittance without any deduction for the tax
of any foreign country, engaged in trade or business within component thereof (except those activities which are
the Philippines, shall be subject to an income tax equivalent to registered with the Philippine Economic Zone Authority). The
thirty-five percent (35%) of the taxable income derived in the tax shall be collected and paid in the same manner as
preceding taxable year from all sources within the Philippines: provided in Sections 57 and 58 of this Code: provided, that
provided, That effective January 1, 1998, the rate of income interests, dividends, rents, royalties, including remuneration
tax shall be thirty-four percent (34%); effective January 1, for technical services, salaries, wages premiums, annuities,
1999, the rate shall be thirty-three percent (33%), and emoluments or other fixed or determinable annual, periodic or
effective January 1, 2000 and thereafter, the rate shall be casual gains, profits, income and capital gains received by a
thirty-two percent (32%). foreign corporation during each taxable year from all sources
In the case of corporations adopting the fiscal-year accounting within the Philippines shall not be treated as branch profits
period, the taxable income shall be computed without regard unless the same are effectively connected with the conduct of
to the specific date when sales, purchases and other its trade or business in the Philippines.
transactions occur. Their income and expenses for the fiscal (6) Regional or Area Headquarters and Regional Operating
year shall be deemed to have been earned and spent equally Headquarters of Multinational Companies.
for each month of the period.
(a) Regional or area headquarters as defined in Section 22(DD)
The reduced corporate income tax rates shall be applied on the shall not be subject to income tax.
amount computed by multiplying the number of months (b) Regional operating headquarters as defined in Section
covered by the new rates within the fiscal year by the taxable 22(EE) shall pay a tax of ten percent (10%) of their taxable
income of the corporation for the period, divided by twelve. income.
Provided, however, That a resident foreign corporation shall be (7) Tax on Certain Incomes Received by a Resident Foreign
granted the option to be taxed at fifteen percent (15%) on Corporation. -
gross income under the same conditions, as provided in
(a) Interest from Deposits and Yield or any other Monetary
Section 27 (A).
Benefit from Deposit Substitutes, Trust Funds and Similar
(2) Minimum Corporate Income Tax on Resident Foreign Arrangements and Royalties. - Interest from any currency
Corporations. - A minimum corporate income tax of two bank deposit and yield or any other monetary benefit from
percent (2%) of gross income, as prescribed under Section 27 deposit substitutes and from trust funds and similar
(E) of this Code, shall be imposed, under the same conditions, arrangements and royalties derived from sources within the
Philippines shall be subject to a final income tax at the rate of

APP 91
INCOME TAX REVIEWER
twenty percent (20%) of such interest: Provided, however, the goods are actually sold including insurance while the
That interest income derived by a resident foreign corporation goods are in transit.
from a depository bank under the expanded foreign currency For a manufacturing concern, cost of 'goods manufactured and
deposit system shall be subject to a final income tax at the sold' shall include all costs of production of finished goods,
rate of seven and one-half percent (7 1/2%) of such interest such as raw materials used, direct labor and manufacturing
income. overhead, freight cost, insurance premiums and other costs
(b) Income Derived under the Expanded Foreign Currency incurred to bring the raw materials to the factory or
Deposit System. - Income derived by a depository bank under warehouse.
the expanded foreign currency deposit system from foreign In the case of taxpayers engaged in the sale of service, 'gross
currency transactions with local commercial banks including income' means gross receipts less sales returns, allowances,
branches of foreign banks that may be authorized by the discounts and cost of services. 'Cost of services' shall mean all
Bangko Sentral ng Pilipinas (BSP) to transact business with direct costs and expenses necessarily incurred to provide the
foreign currency deposit system units, including interest services required by the customers and clients including (A)
income from foreign currency loans granted by such salaries and employee benefits of personnel, consultants and
depository banks under said expanded foreign currency specialists directly rendering the service and (B) cost of
deposit system to residents, shall be subject to a final income facilities directly utilized in providing the service such as
tax at the rate of ten percent (10%) of such income. depreciation or rental of equipment used and cost of supplies:
Any income of nonresidents, whether individuals or Provided, however, That in the case of banks, 'cost of
corporations, from transactions with depository banks under services' shall include interest expense.
the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the normal tax rate defined in Sec. 2.27 (E) (1) RR 9-98
Stock Exchange. - A final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other c. Carry forward of excess min tax
disposition of shares of stock in a domestic corporation except
for the 3 immediately succeeding
shares sold or disposed of through the stock exchange:
taxable years.
Not over P100,000 5%
On any amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received by a resident Sec. 27 E. (2) Carry Froward of Excess Minimum Tax. -
foreign corporation from a domestic corporation liable to Any excess of the minimum corporate income tax over the
tax under this Code shall not be subject to tax under this normal income tax as computed under Subsection (A) of this
Title. Section shall be carried forward and credited against the
normal income tax for the three (3) immediately succeeding
taxable years.
REVENUE REGULATION 9-98.

See illustration in RR 9-98


a. When imposed

d. Relief fr. the MCIT


Sec. 2.27 (E) (1) RR 9-98

Sec. 27 (E) (3) Relief from the Minimum Corporate


Conditions: Income Tax Under Certain Conditions. - The Secretary of
beginning on the 4th taxable year immediately Finance is hereby authorized to suspend the imposition of the
minimum corporate income tax on any corporation which
ff. the year in w/c such corp. commenced its
suffers losses on account of prolonged labor dispute, or
business operations,
because of force majeure, or because of legitimate business
when the min income tax is greater than the reverses.
tax regular tax
The Secretary of Finance is hereby authorized to promulgate,
Specific rules: upon recommendation of the Commissioner, the necessary
rules and regulation that shall define the terms and conditions
Sec. 2.77 (E) (5) RR 9-98. under which he may suspend the imposition of the minimum
corporate income tax in a meritorious case.

b. tax rate 2% of gross income as of


the end of the taxable year When corp. suffers losses on account of
prolonged labor dispute,
Or because of force majeure,
Sec. 27 (E). (4) Gross Income Defined. - For purposes of Or because of legit business reverses.
applying the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall mean
e. Exceptions:
gross sales less sales returns, discounts and allowances and
cost of goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce the
merchandise to bring them to their present location and use. Sec. 2.27 (E) (8) RR 9-98

For a trading or merchandising concern, 'cost of goods sold' Sec. 2.28 (A) (2) RR 9-98
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where

APP 92
INCOME TAX REVIEWER
3. IMPOSITION OF IMPROPERLY
ACCUMULATED EARNINGS TAX. Dividends actually or constructively paid; and
Income tax paid for the taxable year.
a. Gen. rule
F. INDIVIDUAL TAXPAYERS EXEMPT FROM
SEC. 29. Imposition of Improperly Accumulated Earnings INCOME TAX
Tax.
(A) In General. - In addition to other taxes imposed by this Title,
there is hereby imposed for each taxable year on the 1. Senior citizens
improperly accumulated taxable income of each corporation RA 7432.
described in Subsection B hereof, an improperly accumulated
earnings tax equal to ten percent (10%) of the improperly Sec. 5 The govt shall provide the ff. assistance to those caring
accumulated taxable income. for & living w/ the senior citizen:
a) the senior citizen shall be treated as dependents provided in
the NIRC & as such, individual tax[payers caring for them, be
they relatives or not shall be accorded the privileges granted
b. Tax rate: 10% of the improperly
by the Code insofar as having dependents are concerned.
accumulated taxable income
b) Ind. or non-governmental institutions establishing homes,
c. When applicable residential communities or retirement villages solely for the
senior citizens shall be accorded the ff.:
1. realty tax holiday for the first 5 years starting fr. the first
Sec. 29. (B) Tax on Corporations Subject to Improperly year of operation;
Accumulated Earnings Tax. -
2. Priority in the bldg. &/ or maintenance of prov. or mun.
(1) In General. - The improperly accumulated earnings tax roads leading to the aforesaid home, res. com. & retirement
imposed in the preceding Section shall apply to every village.
corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the
shareholders of any other corporation, by permitting earnings Rev. Reg. 2-94 7. A qualified senior citizen living w/ & taken
and profits to accumulate instead of being divided or care of by a benefactor whether related to him or not, shall
distributed. be treated as a personal exemption of P12,000 as head of the
family.
(2) Exceptions. - The improperly accumulated earnings tax as
provided for under this Section shall not apply to: For the purpose of claiming personal exemption as head of the
family w/ dependent senior citizen, the identification card
number issued by the OSCA (Office for Senior Citizens Affairs)
(a) Publicly-held corporations;
shall be indicated in the Income Tax Return to be filed by the
(b) Banks and other nonbank financial intermediaries; and benefactor who will be granted the exclusive right to claim
(c) Insurance companies. him as dependent for tax purposes.
Caring for a dependent senior citizen shall not, however, entitle
the benefactor to claim additional exemption allowable to a
(d) Exceptions. married woman or head of a family w/ qualified dependent
children under Section 29 (l) 2.
In Short: Senior citizen as a qualified dependent to enable
Publicly-held corps., single benefactor to claim exemption as head-of-the-family.
Banks and other nonbank financial
intermediaries; and
Insurance companies.
2. Exemptions granted under
International Agreements and tax treaty

e. Evidence of purpose to avoid Reagan v. Com,: supra


income tax
f. Evidence to determine reasonable Com. v. Robertson
needs of business
Facts: The Robertsons are Phil. born US
g. Improperly accumulated taxable citizens working in the US bases in Subic.
income means taxable income They are claiming exemptions under the RP US
adjusted by: Mil. Bases Agreement of 1947 fr. income tax.
The BIR ruled that the Robertsons are not
entitled to the exemption as they are born in
the Phils.
Income exempt fr. tax,
Income excluded fr. gross income; Held: The Robertsons are exempt fr. taxation
Income subject to final tax; & by virtue of the treaty. In order to avail
The amount of net operating loss carry-over oneself of the tax exemption under the RP US
deducted; mil. Bases Agreement: he must be a national
of the US employed in connection w/ the
And reduced by the sum of: const., maintenance, operation or defense of

APP 93
INCOME TAX REVIEWER
the bases residing in the Phils. by reason of (c) A resident alien - on his income derived from sources within
such employment & the income derived is fr. the Philippines; and
the US Govt. The obli. to fulfill in GF a treaty (d) A nonresident alien engaged in trade or business in the
engagement requires that the stipulations be Philippines - on his income derived from sources within the
Philippines.
observed in their spirit as well as accdg. to
their letter & that what has been promised be
performed w/o evasion or subterfuge. (B) Where to File. - Except in cases where the Commissioner
otherwise permits, the return shall be filed with an authorized
agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which such
VIII. FILING OF TAX RETURN/ person has his legal residence or principal place of business in
PAYMENT OF TAX/ the Philippines, or if there be no legal residence or place of
business in the Philippines, with the Office of the
COMPLIANCE REQUIREMENTS. Commissioner.

(C) When to File. -


A. INDIVIDUAL.
(1) The return of any individual specified above shall be filed on
or before the fifteenth (15th) day of April of each year
Sec. 2.83 (4) RR 2-98 covering income for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
SEC. 51. Individual Return. - (a) From the sale or exchange of shares of stock not traded
through a local stock exchange as prescribed under Section
(A) Requirements. - 24(c) shall file a return within thirty (30) days after each
(1) Except as provided in paragraph (2) of this Subsection, the transaction and a final consolidated return on or before April
following individuals are required to file an income tax return: 15 of each year covering all stock transactions of the
(a) Every Filipino citizen residing in the Philippines; preceding taxable year; and
(b) Every Filipino citizen residing outside the Philippines, on his (b) From the sale or disposition of real property under Section
income from sources within the Philippines; 24(D) shall file a return within thirty (30) days following each
sale or other disposition.
(c) Every alien residing in the Philippines, on income derived
from sources within the Philippines; and
(D) Husband and Wife. - Married individuals, whether citizens,
(d) Every nonresident alien engaged in trade or business or in
resident or nonresident aliens, who do not derive income
the exercise of profession in the Philippines.
purely from compensation, shall file a return for the taxable
year to include the income of both spouses, but where it is
(2) The following individuals shall not be required to file an impracticable for the spouses to file one return, each spouse
income tax return; may file a separate return of income but the returns so filed
(a) An individual whose gross income does not exceed his total shall be consolidated by the Bureau for purposes of
personal and additional exemptions for dependents under verification for the taxable year.
Section 35: Provided, That a citizen of the Philippines and any (E) Return of Parent to Include Income of Children. - The
alien individual engaged in business or practice of profession income of unmarried minors derived from properly received
within the Philippine shall file an income tax return, regardless from a living parent shall be included in the return of the
of the amount of gross income; parent, except (1) when the donor's tax has been paid on
(b) An individual with respect to pure compensation income, as such property, or (2) when the transfer of such property is
defined in Section 32 (A)(1), derived from sources within the exempt from donor's tax.
Philippines, the income tax on which has been correctly (F) Persons Under Disability. - If the taxpayer is unable to make
withheld under the provisions of Section 79 of this Code: his own return, the return may be made by his duly
Provided, That an individual deriving compensation authorized agent or representative or by the guardian or other
concurrently from two or more employers at any time during person charged with the care of his person or property, the
the taxable year shall file an income tax return: Provided, principal and his representative or guardian assuming the
further, That an individual whose compensation income responsibility of making the return and incurring penalties
derived from sources within the Philippines exceeds Sixty provided for erroneous, false or fraudulent returns.
thousand pesos (P60,000) shall also file an income tax return;
(c) An individual whose sole income has been subjected to final (G) Signature Presumed Correct. - The fact that an individual's
withholding tax pursuant to Section 57(A) of this Code; and name is signed to a filed return shall be prima facie evidence
(d) An individual who is exempt from income tax pursuant to the for all purposes that the return was actually signed by him.
provisions of this Code and other laws, general or special.

(3) The forgoing notwithstanding, any individual not required to 1. Individual taxpayers
file an income tax return may nevertheless be required to file
an information return pursuant to rules and regulations
prescribed by the Secretary of Finance, upon recommendation SEC. 51. Individual Return. -
of the Commissioner. (A) Requirements. -
(4) The income tax return shall be filed in duplicate by the (1) Except as provided in paragraph (2) of this Subsection, the
following persons: following individuals are required to file an income tax return:
(a) A resident citizen - on his income from all sources; (a) Every Filipino citizen residing in the Philippines;
(b) A nonresident citizen - on his income derived from sources (b) Every Filipino citizen residing outside the Philippines, on his
within the Philippines; income from sources within the Philippines;

APP 94
INCOME TAX REVIEWER
(c) Every alien residing in the Philippines, on income derived (a) From the sale or exchange of shares of stock not traded
from sources within the Philippines; and through a local stock exchange as prescribed under Section
(d) Every nonresident alien engaged in trade or business or in 24(c) shall file a return within thirty (30) days after each
the exercise of profession in the Philippines. transaction and a final consolidated return on or before
April 15 of each year covering all stock transactions of the
preceding taxable year; and
(2) The following individuals shall not be required to file an
income tax return; (b) From the sale or disposition of real property under Section
24(D) shall file a return within thirty (30) days following
(a) An individual whose gross income does not exceed his total
each sale or other disposition.
personal and additional exemptions for dependents under
Section 35: Provided, That a citizen of the Philippines and any
alien individual engaged in business or practice of profession SEC. 74. Declaration of Income Tax for Individuals. -
within the Philippine shall file an income tax return, regardless (A) In General. - Except as otherwise provided in this Section,
of the amount of gross income; every individual subject to income tax under Sections 24 and
(b) An individual with respect to pure compensation income, as 25(A) of this Title, who is receiving self-employment income,
defined in Section 32 (A)(1), derived from sources within the whether it constitutes the sole source of his income or in
Philippines, the income tax on which has been correctly combination with salaries, wages and other fixed or
withheld under the provisions of Section 79 of this Code: determinable income, shall make and file a declaration of his
Provided, That an individual deriving compensation estimated income for the current taxable year on or before
concurrently from two or more employers at any time during April 15 of the same taxable year. In general, self-
the taxable year shall file an income tax return: Provided, employment income consists of the earnings derived by the
further, That an individual whose compensation income individual from the practice of profession or conduct of trade
derived from sources within the Philippines exceeds Sixty or business carried on by him as a sole proprietor or by a
thousand pesos (P60,000) shall also file an income tax return; partnership of which he is a member. Nonresident Filipino
(c) An individual whose sole income has been subjected to final citizens, with respect to income from without the Philippines,
withholding tax pursuant to Section 57(A) of this Code; and and nonresident aliens not engaged in trade or business in the
Philippines, are not required to render a declaration of
(d) An individual who is exempt from income tax pursuant to the
estimated income tax. The declaration shall contain such
provisions of this Code and other laws, general or special.
pertinent information as the Secretary of Finance, upon
recommendation of the Commissioner, may, by rules and
regulations prescribe. An individual may make amendments of
a. Required to file a declaration filed during the taxable year under the rules and
regulations prescribed by the Secretary of Finance, upon
b. Exempt fr. filing return
recommendation of the Commissioner.
(B) Return and Payment of Estimated Income Tax by
Individuals. - The amount of estimated income as defined in
2. Filing of return by husband & wife/
Subsection (C) with respect to which a declaration is required
consolidated but computing under Subsection (A) shall be paid in four (4) installments.
separately The first installment shall be paid at the time of the
declaration and the second and third shall be paid on August
15 and November 15 of the current year, respectively. The
Sec. 51. (D) Husband and Wife. - Married individuals, fourth installment shall be paid on or before April 15 of the
whether citizens, resident or nonresident aliens, who do not following calendar year when the final adjusted income tax
derive income purely from compensation, shall file a return for return is due to be filed.
the taxable year to include the income of both spouses, but (C) Definition of Estimated Tax. - In the case of an
where it is impracticable for the spouses to file one return, individual, the term 'estimated tax' means the amount
each spouse may file a separate return of income but the which the individual declared as income tax in his final
returns so filed shall be consolidated by the Bureau for adjusted and annual income tax return for the preceding
purposes of verification for the taxable year. taxable year minus the sum of the credits allowed under this
Title against the said tax. If, during the current taxable year,
Sec. 2.83 (40 (C) RR 2-98 the taxpayer reasonable expects to pay a bigger income tax,
he shall file an amended declaration during any interval of
installment payment dates.
3. When and where to file regular/
special return/ annual adjusted
Revenue Regulation 7-93 Re: Filing of quarterly return &
return/ quarterly returns payment of income tax quarterly by self-employed
Sec. 51. (B) Where to File. - Except in cases where the taxpayers
Commissioner otherwise permits, the return shall be filed with
an authorized agent bank, Revenue District Officer, Collection Sec. 1 Self-employment income refers to income from the
Agent or duly authorized Treasurer of the city or municipality practice of profession or conduct of trade or business carried
in which such person has his legal residence or principal place on as a sole proprietor or by general partnership of which he
of business in the Philippines, or if there be no legal residence is a member, taxable under SNITS.
or place of business in the Philippines, with the Office of the
Commissioner.
Sec. 2 A return of summary declaration of gross income and
(C) When to File. - deductions for each of the first 3 quarters of the calendar
year, and a final or adjustment return shall be filed by the
(1) The return of any individual specified above shall be filed on individual.
or before the fifteenth (15th) day of April of each year
covering income for the preceding taxable year.
(2) Individuals subject to tax on capital gains;

APP 95
INCOME TAX REVIEWER
Sec. 3 This is lieu of the filing of a declaration of estimated 4. Checks issued by a parent for the tax liability of his/her
income for the current taxable year and the payment of child or vice-versa.
estimated tax under Sec. 67 NIRC. 5. Checks drawn by a corp./partnership for the tax liability of
its officers/partners only; and
The tax returns shall be filed on or before: 6. Other special; arrangements duly approved by the BIR.

First quarterly return : May 15 of the current year b) Out of town checks - drawn on banks outside the local
Second quarterly return : August 15 of the current year area coverage of the CB? PCHC clearing house
Third quarterly return : Nov. 15 of the current year c) Stale checks - dated more than 6 months prior to
presentation
Final return : April 15 of the following year
d) postdated checks
e) unsigned checks ; and
Sec. 5 To determine the taxable income to be reported in the
quarterly returns, the gross income and deductions shall be f) checks with unauthorized erasure/alternations
computed on a cumulative basis. The gross income to be
reported are those subject to tax under Sec. 21 (f) NIRC. The Sec. 3 Checks, including managers or cashiers checks, shall
deduction shall be computed on a cumulative basis. The gross be made payable to the BIR and parenthetical reference to
income to be reported are those subject to tax under Sec. 21 the payor and the kind of tax to be paid.
(F) NIRC. The deductions that shall be allowed for the first 3
quarters shall not include the amount for the personal and
additional exemptions of the individual. It is only in the last
quarter when these amounts for exemptions can be claimed
4. Income of minor children and
as deduction. disabled

Income tax due every quarter shall be computed in accordance Sec. 51. (E) Return of Parent to Include Income of
with Sec. 21 (f) based on the cumulative taxable income for Children. - The income of unmarried minors derived from
the quarters. The amount if income tax to be paid shall be the properly received from a living parent shall be included in the
balance of the income tax after deducting therefrom the total return of the parent, except (1) when the donor's tax has
quarterly tax previously paid and any taxes withheld. been paid on such property, or (2) when the transfer of such
property is exempt from donor's tax.
Any excess of the total quarterly payment and taxes withheld (F) Persons Under Disability. - If the taxpayer is unable to make
over the income tax computed in the final return shall at the his own return, the return may be made by his duly
option of the taxpayer, either be (1) issued a tax refund or tax authorized agent or representative or by the guardian or other
credit certificate, or (2) treated as a credit for the succeeding person charged with the care of his person or property, the
year. principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties
provided for erroneous, false or fraudulent returns.
Revenue Regulation 14-93 payment of taxes by checks &
banks debit memo
5. General professional partnership
Sec. 2 Payment of the internal revenue taxes amounting to
P10,000 or more shall be made in check or bank debit
memos. However, payment for capital gains tax and SEC. 55. Returns of General Professional Partnerships . -
creditable withholding tax by individuals on sales or transfers Every general professional partnership shall file, in duplicate,
of real property classified as capital assets as well as doc a return of its income, except income exempt under Section
stamp tax shall be made only by or through Managers or 32 (B) of this Title, setting forth the items of gross income
Cashiers check or BDM regardless of amount. Provided, that, and of deductions allowed by this Title, and the names,
in the case of check payment, the taxpayer shall issue a Taxpayer Identification Numbers (TIN), addresses and shares
separate check for each kind and nature of tax to be paid. If of each of the partners.
the payment is through a BDM, the kind and nature of the tax
to be paid should also be separately identified by the bank
and reflected in its reports. 6. Fiduciary taxpayers: Estate and trust
7. Payment of tax
Only checks specially issued and drawn for credit to BIR and
collectible within the local clearing facilities of the CB, the Phil. SEC. 56. Payment and Assessment of Income Tax for
Clearing House Corp., other established clearing channels may Individuals and Corporation. -
be accepted as payment for national internal revenue taxes. (A) Payment of Tax. -
However, the following checks are not acceptable:
(1) In General. - The total amount of tax imposed by this Title
shall be paid by the person subject thereto at the time the
a) Accommodation checks - issued/drawn by a party other return is filed. In the case of tramp vessels, the shipping
than the taxpayer except the following: agents and/or the husbanding agents, and in their absence,
the captains thereof are required to file the return herein
provided and pay the tax due thereon before their departure.
1. Managers or cashiers checks. Upon failure of the said agents or captains to file the return
2. Checks drawn against joint or multiple accounts for the and pay the tax, the Bureau of Customs is hereby authorized
payment purposes by anyone of them or either himself or to hold the vessel and prevent its departure until proof of
in behalf of other members thereof. payment of the tax is presented or a sufficient bond is filed to
3. Checks issued by either of the spouses to pay the tax answer for the tax due.
liability of anyone of them.

APP 96
INCOME TAX REVIEWER
(2) Installment of Payment. - When the tax due is in excess of SEC. 52. Corporation Returns. -
Two thousand pesos (P2,000), the taxpayer other than a (A) Requirements. - Every corporation subject to the tax herein
corporation may elect to pay the tax in two (2) equal imposed, except foreign corporations not engaged in trade or
installments in which case, the first installment shall be paid business in the Philippines, shall render, in duplicate, a true
at the time the return is filed and the second installment, on and accurate quarterly income tax return and final or
or before July 15 following the close of the calendar year. If adjustment return in accordance with the provisions of
any installment is not paid on or before the date fixed for its Chapter XII of this Title. The return shall be filed by the
payment, the whole amount of the tax unpaid becomes due president, vice-president or other principal officer, and shall
and payable, together with the delinquency penalties. be sworn to by such officer and by the treasurer or assistant
(3) Payment of Capital Gains Tax. - The total amount of tax treasurer.
imposed and prescribed under Section 24 (c), 24(D), 27(E) (B) Taxable Year of Corporation. - A corporation may employ
(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the either calendar year or fiscal year as a basis for filing its
return prescribed therefor is filed by the person liable thereto: annual income tax return: Provided, That the corporation shall
Provided, That if the seller submits proof of his intention to not change the accounting period employed without prior
avail himself of the benefit of exemption of capital gains under approval from the Commissioner in accordance with the
existing special laws, no such payments shall be required : provisions of Section 47 of this Code.
Provided, further, That in case of failure to qualify for
(C) Return of Corporation Contemplating Dissolution or
exemption under such special laws and implementing rules
Reorganization. - Every corporation shall, within thirty (30)
and regulations, the tax due on the gains realized from the
days after the adoption by the corporation of a resolution or
original transaction shall immediately become due and
plan for its dissolution, or for the liquidation of the whole or
payable, subject to the penalties prescribed under applicable
any part of its capital stock, including a corporation which has
provisions of this Code: Provided, finally, That if the seller,
been notified of possible involuntary dissolution by the
having paid the tax, submits such proof of intent within six (6)
Securities and Exchange Commission, or for its reorganization,
months from the registration of the document transferring the
render a correct return to the Commissioner, verified under
real property, he shall be entitled to a refund of such tax upon
oath, setting forth the terms of such resolution or plan and
verification of his compliance with the requirements for such
such other information as the Secretary of Finance, upon
exemption.
recommendation of the commissioner, shall, by rules and
"In case the taxpayer elects and is qualified to report the gain regulations, prescribe.
by installments under Section 49 of this Code, the tax due
The dissolving or reorganizing corporation shall, prior to the
from each installment payment shall be paid within (30) days
issuance by the Securities and Exchange Commission of the
from the receipt of such payments.
Certificate of Dissolution or Reorganization, as may be defined
No registration of any document transferring real property shall by rules and regulations prescribed by the Secretary of
be effected by the Register of Deeds unless the Commissioner Finance, upon recommendation of the Commissioner, secure a
or his duly authorized representative has certified that such certificate of tax clearance from the Bureau of Internal
transfer has been reported, and the tax herein imposed, if Revenue which certificate shall be submitted to the Securities
any, has been paid. and Exchange Commission.
(B) Assessment and Payment of Deficiency Tax. - After the (D) Return on Capital Gains Realized from Sale of Shares of
return is filed, the Commissioner shall examine it and assess Stock not Traded in the Local Stock Exchange. - Every
the correct amount of the tax. The tax or deficiency income corporation deriving capital gains from the sale or exchange
tax so discovered shall be paid upon notice and demand from of shares of stock not traded through a local stock exchange
the Commissioner. as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2),
As used in this Chapter, in respect of a tax imposed by this Title, 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty
the term 'deficiency' means: (30) days after each transactions and a final consolidated
(1) The amount by which the tax imposed by this Title exceeds return of all transactions during the taxable year on or before
the amount shown as the tax by the taxpayer upon his return; the fifteenth (15th) day of the fourth (4th) month following
but the amount so shown on the return shall be increased by the close of the taxable year.
the amounts previously assessed (or collected without
assessment) as a deficiency, and decreased by the amount SEC. 53. Extension of Time to File Returns . - The
previously abated, credited, returned or otherwise repaid in Commissioner may, in meritorious cases, grant a reasonable
respect of such tax; or extension of time for filing returns of income (or final and
(2) If no amount is shown as the tax by the taxpayer upon this adjustment returns in case of corporations), subject to the
return, or if no return is made by the taxpayer, then the provisions of Section 56 of this Code.
amount by which the tax exceeds the amounts previously SEC. 54. Returns of Receivers, Trustees in Bankruptcy or
assessed (or collected without assessment) as a deficiency; Assignees. - In cases wherein receivers, trustees in
but such amounts previously assessed or collected without bankruptcy or assignees are operating the property or
assessment shall first be decreased by the amounts previously business of a corporation, subject to the tax imposed by this
abated, credited returned or otherwise repaid in respect of Title, such receivers, trustees or assignees shall make returns
such tax. of net income as and for such corporation, in the same
manner and form as such organization is hereinbefore
required to make returns, and any tax due on the income as
Installment payment returned by receivers, trustees or assignees shall be assessed
special returns and collected in the same manner as if assessed directly
against the organizations of whose businesses or properties
B. Corporation. they have custody or control.

SEC. 75. - Declaration of Quarterly Corporate Income


1. Filing quarterly returns/ final Tax. - Every corporation shall file in duplicate a quarterly
adjusted return summary declaration of its gross income and deductions on a
cumulative basis for the preceding quarter or quarters upon
which the income tax, as provided in Title II of this Code,

APP 97
INCOME TAX REVIEWER
shall be levied, collected and paid. The tax so computed shall period between the close of the former fiscal year and the
be decreased by the amount of tax previously paid or date designated as the close of the new fiscal year.
assessed during the preceding quarters and shall be paid not (B) Income Computed on Basis of Short Period. - Where a
later than sixty (60) days from the close of each of the first separate final or adjustment return is made under Subsection
three (3) quarters of the taxable year, whether calendar or (A) on account of a change in the accounting period, and in
fiscal year. all other cases where a separate final or adjustment return is
required or permitted by rules and regulations prescribed by
SEC. 76. - Final Adjustment Return. - Every corporation the Secretary of Finance, upon recommendation of the
liable to tax under Section 27 shall file a final adjustment Commissioner, to be made for a fractional part of a year, then
return covering the total taxable income for the preceding the income shall be computed on the basis of the period for
calendar or fiscal year. If the sum of the quarterly tax which separate final or adjustment return is made.
payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year,
the corporation shall either: 2. When and where to file
(A)Pay the balance of tax still due; or
(B)Carry-over the excess credit; or SEC. 77. Place and Time of Filing and Payment of
(C)Be credited or refunded with the excess amount paid, as the Quarterly Corporate Income Tax. -
case may be. (A)Place of Filing. -Except as the Commissioner other wise
In case the corporation is entitled to a tax credit or refund of permits, the quarterly income tax declaration required in
the excess estimated quarterly income taxes paid, the excess Section 75 and the final adjustment return required I Section
amount shown on its final adjustment return may be carried 76 shall be filed with the authorized agent banks or Revenue
over and credited against the estimated quarterly income tax District Officer or Collection Agent or duly authorized
liabilities for the taxable quarters of the succeeding taxable Treasurer of the city or municipality having jurisdiction over
years. Once the option to carry-over and apply the excess the location of the principal office of the corporation filing the
quarterly income tax against income tax due for the taxable return or place where its main books of accounts and other
quarters of the succeeding taxable years has been made, such data from which the return is prepared are kept.
option shall be considered irrevocable for that taxable period (B)Time of Filing the Income Tax Return. - The corporate
and no application for cash refund or issuance of a tax credit quarterly declaration shall be filed within sixty (60) days
certificate shall be allowed therefor. following the close of each of the first three (3) quarters of
the taxable year. The final adjustment return shall be filed on
SEC. 77. Place and Time of Filing and Payment of or before the fifteenth (15 th) day of April, or on or before the
Quarterly Corporate Income Tax. - fifteenth (15 th) day of the fourth (4 th) month following the
close of the fiscal year, as the case may be.
(A)Place of Filing. -Except as the Commissioner other wise
permits, the quarterly income tax declaration required in (C)Time of Payment of the Income Tax. - The income tax due
Section 75 and the final adjustment return required I Section on the corporate quarterly returns and the final adjustment
76 shall be filed with the authorized agent banks or Revenue income tax returns computed in accordance with Sections 75
District Officer or Collection Agent or duly authorized and 76 shall be paid at the time the declaration or return is
Treasurer of the city or municipality having jurisdiction over filed in a manner prescribed by the Commissioner.
the location of the principal office of the corporation filing the
return or place where its main books of accounts and other
data from which the return is prepared are kept. Com. v. TMX Sales
(B)Time of Filing the Income Tax Return. - The corporate
Facts: TMX filed its quarterly return in the
quarterly declaration shall be filed within sixty (60) days
following the close of each of the first three (3) quarters of first quarter of 1981 & paid the income tax due
the taxable year. The final adjustment return shall be filed on thereon. However, in its Annual Income Tax
or before the fifteenth (15 th) day of April, or on or before the filed for year ended Dec. 31, 1981, it declared
fifteenth (15 th) day of the fourth (4 th) month following the a net loss. TMX is now claiming a refund on
close of the fiscal year, as the case may be. the tax it paid during the first quarter of 1981.
(C)Time of Payment of the Income Tax. - The income tax due The CIR denied the same on the ground that
on the corporate quarterly returns and the final adjustment the claim is now already barred considering
income tax returns computed in accordance with Sections 75
and 76 shall be paid at the time the declaration or return is
that two years have already elapsed between
filed in a manner prescribed by the Commissioner. the time of payment, May, 15, 1981 & the
filing of the claim, March 14, 1984.
SEC. 47. Final or Adjustment Returns for a Period of Less Held: the two year prescriptive period
than Twelve (12) Months. commenced fr. the date of filing the final
(A) Returns for Short Period Resulting from Change of annual return on Apr. 15, 1982, not fr. the filing
Accounting Period. - If a taxpayer, other than an individual, on May 15, 1981. The audit is to be
with the approval of the Commissioner, changes the basis of conducted yearly, it is the final adjusted return
computing net income from fiscal year to calendar year, a
separate final or adjustment return shall be made for the
where the figures of the gross receipts &
period between the close of the last fiscal year for which deductions have been audited & adjusted that
return was made and the following December 31. If the is truly reflective of the results of the
change is from calendar year to fiscal year, a separate final or operations of a business enterprise. Thus, it is
adjustment return shall be made for the period between the only when the adjustment return covering the
close of the last calendar year for which return was made and
whole year is filed that the taxpayer would
the date designated as the close of the fiscal year. If the
change is from one fiscal year to another fiscal year, a know whether a tax is still due or refund can
separate final or adjustment return shall be made for the

APP 98
INCOME TAX REVIEWER
be claimed based on the adjusted & audited could avail of the provisions of Sec. 86 of the
figures. Tax Code.
The filing of quarterly ITRs req. by Sec. 68 & Held: The choice of a corporate taxpayer for
payment of quarterly income tax should be an automatic tax credit does not ipso facto
considered mere installments of the annual tax confer on it the right to immediately avail of
due. these payments w/c are computed based the same. prior approval by the CIR of the tax
on the cumulative figures of gross receipts & credit is nec. An opportunity must be given to
deductions in order to arrive at net taxable the internal rev. branch of the govt to
income shld. be treated as advances on investigate & confirm the veracity of the
portions of annual income tax due, to be claims of the taxpayer.
adjusted at the end of the fiscal year.

C. Withholding of INCOME tax


ACCRA Investment v. CA
Facts: Petitioner ACCRA is a domestic Rev. Reg. 2-98.
Corporation engaged in bus. of real estate
invest. & management consultancy. On Apr.
SEC. 57. Withholding of Tax at Source. -
15, 1982, pet. filed w/ BIR annual corp. income
(A) Withholding of Final Tax on Certain Incomes. - Subject to
tax return for cal. year ending Dec. 31, 1981 rules and regulations the Secretary of Finance may
( The end of fiscal year of the corp. ). The promulgate, upon the recommendation of the Commissioner,
corp. declared a net loss of 2,957,142.00 & requiring the filing of income tax return by certain income
declared all taxes w/held at source by payees, the tax imposed or prescribed by Sections 24(B)(1),
w/holding agents in the total amount of 82, 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
751.01. The w/holding agents remitted the 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)
(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)
w/held taxes to the BIR fr. Feb. to Dec. 1981. (1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
The corp. is now claiming a refund as it had no 28(B)(5)(c); 33; and 282 of this Code on specified items of
tax liability against w/c to credit the amounts income shall be withheld by payor-corporation and/or person
w/held ( the corp. declared a loss), as and paid in the same manner and subject to the same
overpaid income taxes. The CTA dismissed the conditions as provided in Section 58 of this Code.
pet. on the ground that the claim for refund (B) Withholding of Creditable Tax at Source. - The Secretary of
had already prescribed . Finance may, upon the recommendation of the Commissioner,
require the withholding of a tax on the items of income
Held: Claims for tax refunds, accdg. to Sec. 8 payable to natural or juridical persons, residing in the
of Rev. Reg. 13-78 shall be given in due course Philippines, by payor-corporation/persons as provided for by
only when it is shown on the return that the law, at the rate of not less than one percent (1%) but not
more than thirty-two percent (32%) thereof, which shall be
income payment received was declared as part
credited against the income tax liability of the taxpayer for the
of the gross income & the fact of w/holding is taxable year.
established by a copy of the statement. (C) Tax-free Covenant Bonds. In any case where bonds,
Furthermore, the return contemplated under mortgages, deeds of trust or other similar obligations of
the REV. Reg. is not the quarterly ret. filed by domestic or resident foreign corporations, contain a contract
corp. but the final adjusted return filed after or provisions by which the obligor agrees to pay any portion
the close of the fiscal year. Obviously, the of the tax imposed in this Title upon the obligee or to
corp. cannot claim a tax refund UNLESS it files reimburse the obligee for any portion of the tax or to pay the
interest without deduction for any tax which the obligor may
its return first so that it can be det. WON it is be required or permitted to pay thereon or to retain therefrom
really entitled to the refund. Thus, the tow under any law of the Philippines, or any state or country, the
year period should commence, at the latest, fr. obligor shall deduct bonds, mortgages, deeds of trust or other
the time of filing the final adj., return, w/c in obligations, whether the interest or other payments are
CAB, on Apr. 15, 1981. payable annually or at shorter or longer periods, and whether
the bonds, securities or obligations had been or will be issued
or marketed, and the interest or other payment thereon paid,
within or without the Philippines, if the interest or other
San Carlos Milling Co. v. Com. payment is payable to a nonresident alien or to a citizen or
Facts: SCM is a domestic corp. & paid its resident of the Philippines.
taxes for 1982. It an overpayment reflected as
creditable income tax in its annual final adj. SEC. 58. Returns and Payment of Taxes Withheld at
return. In 1984, SCM informed the CIR of its Source. -
intent to apply the total creditable amount (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes
deducted and withheld under Section 57 by withholding
against the 1984 tax dues consistent w/ Sec.
agents shall be covered by a return and paid to, except in
86 coupled w/ a comforting alternative request cases where the Commissioner otherwise permits, an
for a refund or tax credit. The CIR disallowed authorized Treasurer of the city or municipality where the
the automatic credit scheme & held that prior withholding agent has his legal residence or principal place of
authority fr. the CIR is nec. before a taxpayer business, or where the withholding agent is a corporation,
where the principal office is located.

APP 99
INCOME TAX REVIEWER
The taxes deducted and withheld by the withholding agent shall consolidation or reorganization, and where the law allows
be held as a special fund in trust for the government until paid deferred recognition of income in accordance with Section 40,
to the collecting officers. the information as may be required by rules and regulations
The return for final withholding tax shall be filed and the to be prescribed by the Secretary of Finance, upon
payment made within twenty-five (25) days from the close of recommendation of the Commissioner, shall be annotated by
each calendar quarter, while the return for creditable the Register of Deeds at the back of the Transfer Certificate of
withholding taxes shall be filed and the payment made not Title or Condominium Certificate of Title of the real property
later than the last day of the month following the close of the involved: Provided, finally, That any violation of this provision
quarter during which withholding was made: Provided, That by the Register of Deeds shall be subject to the penalties
the Commissioner, with the approval of the Secretary of imposed under Section 269 of this Code.
Finance, may require these withholding agents to pay or
deposit the taxes deducted or withheld at more frequent SEC. 59. Tax on Profits Collectible from Owner or Other
intervals when necessary to protect the interest of the Persons. - The tax imposed under this Title upon gains,
government. profits, and income not falling under the foregoing and not
(B) Statement of Income Payments Made and Taxes Withheld. - returned and paid by virtue of the foregoing or as otherwise
Every withholding agent required to deduct and withhold provided by law shall be assessed by personal return under
taxes under Section 57 shall furnish each recipient, in respect rules and regulations to be prescribed by the Secretary of
to his or its receipts during the calendar quarter or year, a Finance, upon recommendation of the Commissioner. The
written statement showing the income or other payments intent and purpose of the Title is that all gains, profits and
made by the withholding agent during such quarter or year, income of a taxable class, as defined in this Title, shall be
and the amount of the tax deducted and withheld therefrom, charged and assessed with the corresponding tax prescribed
simultaneously upon payment at the request of the payee, but by this Title, and said tax shall be paid by the owners of such
not late than the twentieth (20th) day following the close of gains, profits and income, or the proper person having the
the quarter in the case of corporate payee, or not later than receipt, custody, control or disposal of the same. For
March 1 of the following year in the case of individual payee purposes of this Title, ownership of such gains, profits and
for creditable withholding taxes. For final withholding tax