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INCOME TAXATION
During the Pre-Week, from October 6 - 11, 2014, you do not have the luxury of
time to do a leisurely reading of your books and notes. Thus, you should be very
selective in the use of review materials. “Domondon’s CUT AND PASTE” was specially
prepared to help you focus on the areas that are probable sources of questions to be
given during the 2014 Bar Examination in Taxation. The areas were identified by the
author through statistical analysis using data from Bar Examination questions in Taxation
given during the period 1964 up to 2013.
You should note that Domondon’s CUT AND PASTE was prepared using the
2014 coverage of the Bar Exams as the basis. For your guidance doctrines contained in
selected Supreme Court decisions up to March 31, 2014 (if available and applicable),
are also included. For areas without any entries, just try to recall the concepts. If you
could not recall the concepts refer to the books on Taxation authored by Prof.
Domondon.
1. You should first read and master the areas marked BAR because of the
high statistical probability that 80% to 90% of the 2014 Bar Examination in Taxation may
be sourced from these areas. You could “CUT” the concepts and “PASTE” them as your
answers to the Bar Questions. Of course, there may be a need to adjust the concept
that is “PASTED” to meet the requirements and factual circumstances of the actual Bar
Examination Questions.
To facilitate your understanding of the areas marked BAR, it is suggested that
you should write the notes you take during the “Pre-Week Reviews” directly opposite the
concept that you find difficulty understanding. If you intend to do a self-review during the
Pre-Week then you could annotate the “CUT AND PASTE” by writing your own
comments. Sometimes it is easier to understand the concept if it is in your own
handwriting. There may be no need to highlight the areas marked BAR because all the
areas so marked are equally dangerous.
2. After you have mastered the areas marked BAR you should next do a
selective reading of the areas that are not marked. It is statistically probable that 10% to
20% of the Bar Examination Questions for the 2014 Bar Examination in Taxation may be
sourced from the areas covered by this section. There is likewise a high probability that
“crazy questions” may be sourced from this section.
You could, if you so desire, highlight certain areas that are not marked BAR
which in your own estimation may be probable sources of questions. It is not advisable
to spend a lot of time on the unmarked areas unless you have first mastered the areas
marked BAR.
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Finally, the purpose of “Domondon”s CUT AND PASTE” is not to teach you
Taxation but to provide a guide on the areas you should focus in order to enable you to
pass the Bar Examination and be among the “TOP TEN” Bar passers. Advance
congratulations and see you soon in court as a fellow lawyer.
ABELARDO T. DOMONDON
Magnificus No. _____
July 5, 2014
Leon’s Den, Bigain Ist
San Jose, Batangas
A resident citizen is given protection by the Philippines no matter where he is found or no matter where he
earns his income. He is therefore obligated to support the Philippines, in exchange for the protection he receives.
It would appear from this concept that the tangible properties of non-resident alien decedents that are
physically located in the Philippines do not form part of their gross estate located in the Philippines. This is so because
the tangible personal property follows the residence of the decedent which is located outside of the Philippines. Thus,
they do not have tangible personal properties located in the Philippines for purposes of estate taxation.
c. Source principle
BAR: b. Fiscal period. The taxable period comprising any twelve (12) consecutive months,
starting on any day or month and ending twelve (12) months later. It may availed of only by corporations. Individuals,
estates or trusts may not use this tax period.
c. Short period. A taxable period which is less than twelve (12) consecutive months.
Instances when a taxpayer may have a short taxable period.
1) When a corporation is newly organized and commenced operations on any day within the year;
2) when a corporation changes its accounting period;
3) when a corporation is dissolved;
4) when a commissioner of Internal Revenue, by authority, terminates the taxable period of a
taxpayer pursuant to Section 6 (D) of the Tax Code; and
5) in case of final return of the decedent and such period ends at the time of his death. (BIR
Handbook on Audit Procedures and Techniques – Volume I (Revision 2000), Chapter V.B, p. 13, renumbered]
Example of an instance when a corporation may file an income tax return for a short
period.
1) If a taxpayer, other than an individual, changes its accounting period
a) from fiscal year to calendar year,
b) from calendar year to fiscal year, or
c) from one fiscal year to another,
2) the net income shall,
a) with the approval of the Commissioner of Internal Revenue,
b) be computed on the basis of such new accounting period
c) subject to the provisions” for filing of returns for short period resulting from change of
accounting period. (NIRC of 1997, Sec. 46, arrangement, numbering, words in italics and paraphrasing supplied]
NOTES AND COMMENTS: Only a corporation may change its accounting periods but always subject to the
approval of the Commissioner of Internal Revenue and compliance with the requirements for filing returns for short period
resulting from change of accounting period.
An individual taxpayer cannot change his accounting period because he is allowed only one, the calendar year.
Instances when the Commissioner shall declare the tax period of a taxpayer terminated at
any time. When it shall come to the knowledge of the Commissioner that a taxpayer
1) is retiring from business subject to tax, or
2) is intending to leave the Philippines or
3) to remove his property therefrom or to hide or conceal his property, or
4) is performing any act tending to
a) obstruct the proceedings for the collection of the tax for the past or current quarter or
year or
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b) to render the same totally or partly ineffective unless such proceedings are begun
immediately, (NIRC of 1997, Sec. 6 (D), arrangement and numbering supplied]
6. Kinds of taxpayers
a. Individual taxpayers
i. Citizens
a) Resident citizens
b) Non-resident citizens
ii. Aliens
a) Resident aliens
b) Non-resident aliens
1) Engaged in trade or business
BAR: The 180-day rule.
1) A non-resident alien individual
2) who shall come to the Philippines
3) and stays therein for an aggregate period of more than 180 days during
any calendar year. [NIRC of 1997, Sec. 25 (A) (1) in relation to Sec. 22 (G)]
4) notwithstanding the definition of a non-resident alien under Sec. 22 (G).
(Ibid.)
5) shall be deemed a nonresident alien doing business in the Philippines.
(Ibid.)
b) Statutory minimum wage, defined. The term ‘statutory minimum wage’ earner
shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the
Bureau of Labor Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).
[NIRC of 1997, Sec. 22 (GG), as added by Rep. Act No. 9504]
4) or engaging in
a) petroleum,
b) coal,
c) geothermal, and
d) other energy operations, pursuant to
(1) an operation or consortium agreement
(2) under a service contract with the Government. [ NIRC of 1997, Sec. 22 (B), 1st
sentence, arrangement and numbering supplied]
i. Domestic corporations
ii. Foreign corporations
a) Resident foreign corporations
b) Non-resident foreign corporations
iii. Joint venture and consortium
Joint venture, defined. Generally understood to mean an organization formed for some
temporary purpose. (Philex Mining Corporation v. Commissioner of Internal Revenue, G. R. No. 148187, April
16, 2008)
For example: ABC, Inc., and XYZ Corporation, without forming a corporation, a partnership or
other recognizable business organization, agreed to join together to construct a 50 storey building.
After completion of the building then they go their separate ways again. They are said to have entered
into a joint venture agreement (JVA).
2) should involve joining or pooling of resources by licensed local contractors; that is,
licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI);
3) these local contractors are engaged in construction business; and
4) the Joint Venture itself must likewise be duly licensed as such by the Philippine
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI).
Joint ventures involving foreign contractors may also be treated as a non-taxable corporation
only if the member foreign contractor is covered by a special license as contractor by the Philippine
Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI); and the
construction project is certified by the appropriate Tendering Agency (government office) that the
project is a foreign financed/international-funded project and that international bidding is allowed under
the Bilateral Agreement entered into by and between the Philippine Government and the
foreign/international financing institution pursuant to the implementing rules and regulations of Republic
Act No. 4566 otherwise known as Contractor’s License Law.
Absent any one of the aforesaid requirements, the joint venture or consortium formed for the
purpose of undertaking construction projects shall be considered as taxable corporations.
In addition, the tax-exempt joint venture or consortium herein defined shall not include
those who are mere suppliers of goods, services or capital to a construction project.
The members to a Joint Venture not taxable as corporation shall each be responsible in
reporting and paying appropriate income taxes on their respective share to the joint venture’s profit.”
(RR No. 10-2012, Section 3)
BAR: c. Partnerships. Taxable partnerships. These are partnerships which are by law
assimilated to be within the context of, and so legally contemplated as, corporations. (Tan v. Del Rosario, Jr., et al., and
companion case, 237 SCRA 324,335)
These are business partnerships or partnerships which are organized for the purpose of engaging in trade or
business. They are subject to income tax as if they are corporations, whether or not registered with the Securities and
Exchange Commission as a partnership. Registration of a business partnership with the SEC is an indication of its
taxable character.
additional capital to increase or expand the inherited properties, merely continuing the dedication of the
property to the use to which it had been put by their forebears. (Obillos, Jr., v. Commissioner of Internal
Revenue, 139 SCRA 436)
3) Persons who contribute property or funds to a common enterprise and agree to share
the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no common stock capital,
and no community of interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Floyd R. Mechem, 2 nd Ed., section 83, p. 74 cited in Pascual v.
Commissioner of Internal Revenue,166SCRA 560)
4) The common ownership of property does not itself create a partnership between the
owners, though they may use it for purpose of making gains. They may, without becoming partners, are
among themselves co-owners as to the management and use of such property and the application of
the proceeds therefrom. (Spurlock v. Wilson, 142 S.W. 363, 160 No. App. 14. Ibid)
5) A joint purchase of land, by two, does not constitute a co-partnership in respect
thereto, nor does an agreement to share the profits and losses on the sale of land create a partnership;
the parties are only tenants in common. (Clark v. Sideway, 142 U.S. 682, 12 S. Ct. 327, 35 L. Ed., 1157 cited
in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560 )
6) Where plaintiff, his brother, and another agreed to become owners of a single tract of
realty holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiff’s commissions, no partnership existed as between the three
parties, whatever their relation may have been as to third parties. (Magee v. Magee, 123 N.E. 673, 233
Mass. 341, Ibid.)
7. Income taxation
a. Definition
b. Nature
BAR: c. General principles
Summary of source rule of income taxation as provided in the NRC of 1997. This is also
known as the general principles of income taxation which governs income taxation starting
January 1, 1998.
1) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
2) A nonresident citizen is taxable only on income derived from sources within the Philippines;
3) An individual citizen of the Philippines who is working and deriving income abroad as an
overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a
seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a
member of the complement of a vessel engaged exclusively in international trade shall be treated as an
overseas contract worker;
4) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
5) A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and
6) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines. (NIRC of 1997, Sec. 23, emphasis,
arrangement and numbering supplied)
8. Income
a. Definition . Earnings, in the form of money coming to a person or corporation, whether as
payment for services, interest or profit from investment. lawfully or unlawfully acquired, without consensual
recognition, express or implied, of an obligation to repay and without restriction as to their disposition.
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b. Nature
c. When income is taxable
i. Existence of income
ii. Realization of income
a) Tests of realization
b) Actual vis-à-vis constructive receipt
BAR: When income considered received for Philippine income tax
purposes.
1) If actually or physically received by taxpayer; or
2) If constructively received by taxpayer. (RR No. 2, Sec. 52)
BAR: v. All events test. For a taxpayer using the accrual method, the determinative
question is, when do the facts present themselves in such a manner that the taxpayer must recognize income
of expenses ?
The accrual of income and expenses is permitted when the all events test has been met. This test
requires:
1) fixing of a right to income or liability to pay; and
2) the availability of the reasonable accurate determination of such income or liability.
However, the test does not demand that the amount of income or liability be known absolutely, only that
a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is
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satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year.
The amount of liability does not have to be determined exactly; it must be determined with ‘reasonable
accuracy.’ Accordingly, the term ‘reasonable accuracy’ implies something less than an exact or completely
accurate amount.’ (Commissioner of Internal Revenue v. Isabela Cultural Commission, G. R. No. 172231, February 12
2007)
9. Gross income
a. Definition
b. Concept of income from whatever source derived. Gross income means all income
derived from whatever source. [NIRC of 1997, Sec. 32 (A), paraphrasing supplied]
BAR: b) Definition. For purposes of applying fringe benefit taxation, fringe benefit
means “any good, service or other benefit furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees), such as but not limited to:
1) Housing.
2) Expense account.
3) Vehicle of any kind.
4) Household personnel, such as maid, driver and others.
5) Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted.
6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations.
7) Expenses for foreign travel.
8) Holiday and vacation expenses.
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by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe
benefit.” [RR No. 3-98, Sec. 2.33 (D) (5) (a)]
7) Membership fees, dues and others are
taxable fringe benefits. Membership fees, dues, and other expenses borne by the employer
for his employee, in social and athletic clubs or other similar organizations shall be treated as
taxable fringe benefits of the employee in
full. [RR. No. 3-98, Sec. 2.33 (D) (6]
8) Expenses for foreign travel treated as taxable fringe benefits. “In the
absence of documentary evidence showing that the employee’s travel abroad was in
connection with business meetings or conventions, the
entire cost of the ticket, including cost of hotel accommodations and other expenses incident
thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business
meetings shall be evidenced by official communications from business associates abroad
indicating the purpose of the meetings. Business conventions shall be evidenced by official
invitations/ communications from the host organization or entity abroad. Otherwise, the entire
cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the
employee.” [RR No. 3-98, Sec. 2.33 (D) (7) (b),]
9) Travelling expenses of family members treated as taxable fringe
benefits. “Travelling expenses which are paid by the employer for the travel of the family
members of the employee shall be treated as taxable fringe benefits of the employee.” [RR No.
3-98; Sec. 2.33 (D) (7) (c)]
10) Holiday and vacation expenses treated as taxable fringe benefits.
“Holiday and vacation expenses of the employee borne by his employer shall be treated as
taxable fringe benefits.” [RR No. 3-98, Sec. 2.33 (D) (8),]
11) Educational assistance to the employee or dependents treated as
taxable fringe benefits. “The cost of the educational assistance to the employee which are
borne by the employer shall, in general, be treated as taxable fringe benefit.” [RR No. 3-98, Sec.
2.33, (D) (9) (a), 1st sentence]
“The cost of educational assistance extended by an employer to the dependents of an
employee shall be treated as taxable fringe benefits of the employee xxx .” [Ibid., Sec. 2.33 (D)
(9) (b), paraphrasing supplied]
12) Life or health insurance treated as taxable fringe benefits. The cost of
life or health insurance and other non-life insurance premiums borne by the employer for his
employee shall be treated as taxable fringe benefit, except the following:
a) Contributions of the employer for the benefit of the employee, pursuant
to the provisions of existing law, such as under the Social Security (SSS) (Rep. Act No.
8282, as amended) or under the Government Service Insurance System (GSIS) (Rep.
Act No. 8291), or similar contributions arising from the provisions of any other existing
law; and
b) The cost of premiums borne by the employer for the group insurance of
his employees. [RR No. 3-98, Sec. 2.33 (D) (10), arrangement supplied]
NOTES AND COMMENTS: If the recipient of the fringe benefit, that is not exempt, is a non-rank and file
employee (managerial or supervisory) it may be subject to the fringe benefit tax to be paid by the employer. If the
recipient is a rank and file employee, the monetary value shall be considered as part of the compensation income
of the employee for which he has to pay the corresponding tax.
maximum of fifty (50) meters from the perimeter of the business premises.” [RR No. 3-
98, Sec. 2.33 (D) (1) (g)]
2) Use of aircraft not subject to fringe benefits tax. “The use of aircraft
(including helicopters) owned and maintained by the employer shall be treated as business use
and not be subject to the fringe benefits tax.” [RR No. 3-98, Sec. 2.33 (D) (3) (g)]
3) Expenses for foreign travel NOT treated as taxable fringe benefits.
“Reasonable business expenses which are paid for by the employer for the foreign travel of his
employee for the purpose of attending business meetings or conventions shall not be treated
as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food,
beverages and local transportation) except lodging cost in a hotel (or similar establishments)
amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit
tax. The expenses should be supported by documents proving the actual occurrences of the
meetings or conventions.
The cost of economy and business class airplane ticket shall not be subject to a fringe
benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a
fringe benefit tax.” [RR No. 3-98, Sec. 2.33 (D) (7) (a)]
4) Educational assistance to the employee when NOT treated as
taxable fringe benefits. A “scholarship grant to the employee by the employer shall not
be treated as taxable fringe benefit if the education or study involved is directly connected with
the employer’s trade, business or profession, and there is a written contract between them that
the employee is under obligation to remain in the employ of the employer for the period of time
that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred
for the convenience and furtherance of the employer’s trade or business .” [RR No. 3-98, Sec.
2.33 (D) (9) (a), 2nd and 3rd sentences]
5) Other fringe benefits that are NOT subject to the fringe benefits tax:
a) Fringe benefits which are authorized and exempted from tax under the
NIRC of 1997 or special laws;
b) Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
c) Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not; and
d) De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue. [ NIRC of 1997 Sec. 32 (C); RR No. 3-98, Sec. 2.33
(C)]
iii. Professional income. These are the gains, returns and revenue derived from the
practice of a profession. Professional income does not include “part of the income which is derived from
engaging in any trade or business.” [NIRC of 1997, Sec. 22 (B), last sentence, emphasis supplied
NOTES AND COMMENTS: There is need to segregate the professional income from income derived from
business in the case of a general professional partnership (GPP). This is so because the professional income earned by
the general professional partnership is not taxable hence the GPP does not file an income tax return but an information
return.
On the other hand, the income from business of a GPP is taxable because the GPP is going to be considered as a
partnership engaged in business taxable as a corporation.
iv. Income from business. These are the gains, returns and revenue derived from a ”trade
or commercial activity regularly engaged in as a means of livelihood or with a view to profit.” (Yamane , etc. v.
BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005)
provides to its members and tenants. The previous interpretation that the association dues are funds which
are merely held in trust by a condominium corporation lacks legal basis and is hereby abandoned.
Moreover, since a condominium corporation is subject to income tax, income payments made to it are
subject to applicable withholding taxes under existing regulations.” (RMC No. 65-2012, Part I)
BAR: 2) 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:
a) Stock in trade of the taxpayer, or
b) Other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or
c) Property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or
d) Property used in the trade or business, of a character which is
subject to the allowance for depreciation; or real property used in the trade or business
of the taxpayer. [NIRC of 1997, [Sec. 39 (A) (1), arrangement and numbering supplied]
NOTES AND COMMENTS: For analysis, if the property is used in traded or business, it is an ordinary asset.
If it is NOT used in trade of business it is a capital assert.
BAR: Capital gain, defined. Any gain from the sale or exchange of
property which IS a capital asset or property.
Actual capital gain. The amount that remains after taking the receipt from
the disposition of the capital asset and subtracting the acquisition cost or cost basis.
This gain is then the tax base upon which the capital gains tax is imposed.
BAR: Net capital loss, defined. The excess of the losses from sales
and exchanges of capital assets over the gains from sales or exchanges of such
assets. [NIRC of 1997, Sec. 39 (A) (3)]
Amount realized, defined . “The amount realized from the sale or other
disposition of property shall be the sum of money received plus the fair market value of
the property (other than money) received. [NIRC of 1997, Sec. 40 (A), 2nd sentence]
BAR: Related parties, defined . The following are included in the concept of
related parties for the purpose of the prohibition.
1) Members of the same family. For purposes of defining related parties,
the family of an individual includes only his brothers and sisters (whether by the whole
or half-blood), spouse, ancestors, and lineal descendants, or
2) An individual and a corporation more than fifty per-cent (50%) in value
of the outstanding stock of which is owned, directly or indirectly, by or for such
individual, or
3) Two corporations more than fifty percent (50%) in value of the
outstanding stock of each of which is owned, directly or indirectly, by or for the same
individual, or
4) The grantor and a fiduciary of any trust, or
5) The fiduciary of a trust and the fiduciary of another trust of the same
person is a grantor with respect to each trust, or
6) A fiduciary of a trust and a beneficiary of such trust. [NIRC of 1997, Sec.
36 (B)]
NOTES AND COMMENTS: Interests paid to related parties are not allowed to be deducted from
gross income.
value), whichever is higher, is imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property located in the Philippines,
classified as capital assets, including pacto de retro sales and other forms of conditional sales,
by individuals, including estates and trusts. [NIRC of 1997, Sec. 24 (D), emphasis supplied)
A final tax of six percent (6%) is hereby imposed on the gain presumed to have been
realized from the sale, exchange or disposition of lands and/or buildings which are not
actually used in the business of a corporation and are treated as capital assets, based on the
gross selling price or fair market value (BIR zonal valuation or the assessor’s value), whichever
is higher, of such lands and/or buildings.” [NIRC of 1997, Sec. 27 (D) (5), emphasis supplied]
NOTES AND COMMENTS: The reader should take note of the differential treatment. For
individuals, estates and trusts the subject may be any “real property” but for corporations the subject is
limited only to “lands and/or buildings.”
Furthermore, the asset disposed of must be a capital asset and the capital asset should be
located in the Philippines. If located outside the Philippines treat it as if it is an ordinary asset.
Likewise, the buyer should not be the government.
Finally, the holding period should not be applied and the tax is applied whether there is a gain or
a loss arising from the transaction. This is so because the tax is imposed on the “presumed capital
gains.”
6) Tax exempt transfer of land and the common areas from a real estate
developer to the Condominium Corporation established pursuant to the provisions of
Republic Act No. 4726, otherwise known as the Condominium Act.
BAR: (a) Shares listed and traded in the stock exchange. There
shall be levied, assessed and collected on every sale, barter or exchange or other disposition
of Shares of Stock Listed and Traded through the Local Stock Exchange other than the sale by
a dealer of securities under the following rules:
1) Tax Rate. - A stock transaction tax at the rate of one-half of one percent
(1/2 of 1%) based on the amount determined in subsection (b) hereunder.
2) Tax Base - Gross selling price or gross value in money of the shares of
stock sold, bartered, exchanged or otherwise disposed of which shall be assumed and
paid by the seller or transferor through the remittance of the stock transaction tax by
the seller or transferor’s broker. [NIRC of 1997 , Sec. 127 (A); RR No. 6-2008, Sec. 5]
NOTES AND COMMENTS: The above tax is not an income tax categorized as a capital
gains tax but a percentage tax in the nature of a transaction tax. Thus, an exemption from
taxation does not include exemption from the payment of this percentage tax.
BAR: (b) Shares not listed and traded in the stock exchange .
Without applying the holding period, a final tax at the rates prescribed below is hereby imposed
upon the net capital gains realized during the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic corporation:
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f) the BIR Commissioner shall have been duly notified by the taxpayer within
thirty (30) days from the date of sale or disposition through a prescribed return of his intention
to avail of the tax exemption;
g) the said tax exemption can only be availed of once every ten (10) years. [NIRC
of 1997, Sec. 24 (D) (2) , numbering and arrangement supplied]
vi. Passive investment income. This is income from an activity in which the income
earner did not have any substantial material participation. For example interest income earned from bank
deposits and deposit substitutes.
BAR: Tax treatment of interest income. Determine the nature of the interest income.
Is it passive income, such as interest earned from bank deposits and deposit substitutes subject to the
final tax OR is it income derived from the business activities of the income earner arising from trade or
business such as interest earned from lending money which should be reported in the income tax
return as ordinary income subject to the global or schedular system of taxation.
BAR: Interest income from deposits under the Foreign Currency Deposit
(EFCD) System that are exempt from income tax. Interest earned from foreign currency
deposits of taxpayers that are not subject to tax on their incomes from without are exempt from the final
or other kinds of taxes. (RR No. 10-98) REASON: They are fruits of income from without hence also
incomes from without.
NOTES AND COMMENTS: If the foreign exchange earnings are converted to local currency the interest
income would then be taxable.
BAR: Deposit substitutes, defined. An alternative form of obtaining funds from the
public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at
any one time) other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrowers own account, for the purpose of relending or purchasing of receivables
and other obligations, or financing their own needs or the needs of their agent or dealer. [NIRC of 1997,
Sec. 22 (Y), 1st sentence]
NOTES AND COMMENTS: The income are from deposit substitutes are subject to final tax if he income
earner is passive income but if the income is derived from being in the business of lending or relending money
then it is treated as ordinary income subject to regular income taxation.
Examples of deposit substitutes. These instruments may include, but need not be
limited to bankers' acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation and similar instruments with recourse.
[NIRC of 1997, Sec. 22 (Y), 2nd sentence]
NOTES AND COMMENTS: debt instruments issued for interbank call loans with maturity of not more
than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among
banks and quasi-banks, shall not be considered as deposit substitute debt instruments. [NIRC of 1997, Sec. 22
(Y), 2nd sentence]]
The “19-Lender Rule.” In order for an instrument to qualify as a ‘deposit substitute’ the
borrowing must be made from twenty (20) or more individual or corporate lenders at any one time.
Corollarily, the mere flotation of a debt instrument is not considered to be a ‘public’ borrowing and is not
deemed a ‘deposit substitute’ if there are only nineteen (19) or less individual or corporate lenders at
any one time.
NOTES AND COMMENTS: However, any person holding any interest, whether legal or beneficial, on
a debt instrument or holding thereof either by assignment or participation, with or without recourse, shall be
considered as lender and thus, be counted in applying the 19-lender rule. (RR No. 14-2-12, Section 8)
b) Dividend income
1) Cash dividend
2) Stock dividend
BAR: Tax treatment of stock dividends. Stock dividends are unrealized gain
and cannot be subject to income tax until the gains have been realized. Stock dividends
represent capital and do not constitute income to its recipient. The mere issuance thereof is
not subject to income tax as they are nothing but an “enrichment through increase in value of
capital investment.”
As capital, stock dividends postpone the realization of profits because the “fund
represented by the new stock has been transferred from surplus to capital and no longer
available for actual distribution.”
Before realization, stock dividends are nothing but a representation of an interest in the
corporate properties. As capital, it is not yet subject to income tax. (Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
3) Property dividend
23
4) Liquidating dividend
c) Royalty income. The compensation for the use of a patented invention [Universal
Food Corporation v. Court of Appeals, 33 SCRA 11 (1970)]
BAR: Tax treatment of royalty income for inviduals. A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of royalties, except on books, as well as other
literary works and musical compositions, which shall be imposed a final tax of ten percent (10%).
[NIRC of 1997, Sec. 24 (B) (1), paraphrasing supplied]
NOTES AND COMMENTS: For corporations, the tax rate is also 20% without any distinction as to
royalties. [NIRC of 1997, Sec. 27 ((D) (1); Sec. 28 (7) (a)] Thus, even books and other literary works and musical
compositions shall be subject to the 20% tax.
Likewise, prizes, and other winnings (except Philippine Charity Sweepstakes and Lotto winnings) of
corporations are not subject to the final tax but included as part of their ordinary income.
d) Rental income. The amount paid for use of property in which the payor does not
intend to take ownership.
3) Tax treatment of
(a) Leasehold improvements by lessee
BAR: Methods for income recognition where ownership of
improvements constructed by the lessees is transferred to the lessor
after the lease period. If improvements are in lieu of rent, the value is income to
the landlord upon completion of the improvements.
If the improvements are not in lieu of rents, the value thereof is income to the
landlord only in the year of termination of the lease. (Bkatt v. U.S., 305 U.S. 267, and
Helvering v. Brunn, 309 U.S. 461)
vii. Annuities, proceeds from life insurance or other types of insurance . Not
subject to final tax considered as ordinary income unless excluded from gross income.
viii. Prizes and awards. Generally considered as income subject to final tax unless it is
among those excluded from gross income or does not exceed P10,000.00 in which case it is included in the
income tax return subject to ordinary income taxation.
ix. Pensions, retirement benefit, or separation pay. If not excluded from gross
income reported in the income tax return subject to ordinary income taxation.
x. Income from any source whatever. All income not expressly excluded or
exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in
producing the income. (Gutierrez v. Collector of Internal Revenue, CTA Case No. 65, August 31, 1965)
The source of the income may be legal or illegal. It may likewise include amounts of indebtedness that
are forgiven, recovered accounts previously written-off or taxes previously deducted from gross income but
subsequently refunded.
4) An insolvent debtor does not realize taxable income from the cancellation or
forgiveness. (Commissioner v. Simmons Gin Co., 43 F2d 327 CCA 10th)
5) The insolvent debtor realizes income resulting from the cancellation or
forgiveness of indebtedness when he becomes solvent. [Lakeland Grocery Co. v. Commissioner,
36 BTA (F) 289]
e) bears to its gross income from all sources. [NIRC of 1997, Sec. 42 (A) (2)
(a), (b), numbering and arrangement supplied]
NOTES AND COMMENTS: All dividends other than the above are dividends derived
from sources without the Philippines.
Dividends received by a domestic corporation from another domestic corporation are
not subject to tax.
4) Rentals
5) Royalties
6) Sale of real property. Gains, profits and income from the sale of real
property located in the Philippines [NIRC of 1997, Sec. 42 (A) (5) ] are considered from within the
Philippines.
If the real property is located outside of the Philippines, then the proceeds are
considered as derived from sources without the Philippines.
g) Exclusions from gross income . Exclusions from gross income under the
National Internal Revenue Code of 1997.
1) Life Insurance proceeds.
2) Amount received by insured as return of premium.
3) Gifts, bequest and devises.
4) Compensation for injuries or sickness.
5) Income exempt under treaty.
6) Retirement benefits, pensions; gratuities, etc.
27
7) Miscellaneous Items:
a) Income derived by foreign government.
b) Income derived by the government or its political subdivisions.
c) Prizes and awards.
d) Prizes and awards in sports competitions.
e) 13th month pay and other benefits.
f) GSIS, SSS, Medicare and other contributions.
g) Gains from the sale of bonds, debentures or other certificate of
indebtedness.
h) Gains from redemption of shares in mutual fund. [NIRC of 1997, Sec. 32
(B)]
1) Rationale for the exclusions. Some receipts are excluded from gross
income because they are not income.
Even if they are by definition income, the exclusions are not subject to tax because of
policy considerations such as to avoid the effects of double taxation, or to provide incentives for
certain socially desirable activities.
Reason for the exclusion . The amount returned are not income but return
of capital. They represent earnings which were previously taxed.
NOTES AND COMMENTS: The premiums are excluded but the amounts received
exceeding the premiums paid are subject to tax being a return from the use of money (the
premiums paid).
Pensions, and gratuities from foreign sources that are excluded from
gross income.
1) The provisions of any existing law to the contrary notwithstanding,
social security benefits, retirement gratuities, pensions and other similar benefits
a) received by resident or non-resident citizens of the
Philippines or aliens
b) who come to reside permanently in the Philippines
c) from foreign government agencies and other institutions,
private or public. [NIRC of 1997, Sec. 32 (B) (6) (c), arrangement and numbering
supplied]
2) Payments of benefits due or to become due to
a) any person residing in the Philippines
b) under the laws of the United States administered by the United
States Veterans Administration. [Ibid., Sec. 32 (B) (6) (c))
NOTES AND COMMENTS: It would appear from the above that there is no need to
comply with the ten (10) year length of service, the age requirement of not less than fifty (50)
years at the time of retirement and not having previously enjoyed the exclusion of retirement
benefits.
Requisites for the exclusion from gross income of prizes and awards in
sports competition: All prizes and awards
1) granted to athletes
2) in local and international sports tournaments and competitions
3) whether held in the Philippines or abroad, and
4) sanctioned by their national sports associations. [NIRC of 1997, Sec.
32 (B) (7) (d), arrangement and numbering supplied]
1) General rules
BAR: Requisites before deductions are allowed.
32
3) Itemized deductions
(a) Expenses. There shall be allowed as deduction from gross
income
(1) all the ordinary and necessary expenses
2) paid or incurred during the taxable year
3) in carrying on or which are directly attributable to, the
a) development,
b) management,
c) operation and/or
d) conduct
(1) of the trade, business or exercise of a
profession. [NIRC of 1997, Sec. 34 (A) (1) (a)]
(d) Losses
(1) Requisites for deductibility
BAR: General requisites for deductibility of losses. There
must be compliance with the general requisites for deductibility as applied to
losses:
1) There must be a specific provision of law allowing the
deductions, since deductions do not exist by implication . (Atlas
Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue, L-26911, January 27, 1981 and Commissioner of Internal
Revenue v. Atlas Consolidated Mining and Development Corporation, et al.,
102 SCRA 246).
2) There must be proof of entitlement to the deduction s.
(Atlas Consolidated, supra; Paper Industries Corporation of the Philippines v.
Court of Appeals, et al., 250 SCRA 434)
3) The deductions must not have been waived. (RR No. 2,
Sec. 76)
4) The withholding and payment of the tax required must
be shown. [NIRC of 1997, Secs. 34 (K), 58 and 81]
(f) Depreciation
BAR: (1) Requisites for deductibility
a. The property subject to depreciation must be property
with life of more than one taxable year.
b. The property depreciated must be used in trade,
business or exercise of a profession.
c. The depreciation method used must be reasonable and
consistent.
d. The depreciation must have been charged during the
taxable year. (RR No. 2, Sec. 113)
e. A depreciation schedule should be attached to the
income tax return. (Ibid., Sec. 115)
foreign corporations) the OSD allowed shall be in an amount not exceeding forty
percent (40%) of their gross income. (RR No. 16-2008, Sec. 4, 1st par.)
of single, married and head of the family for purpose of availing of the basic personal
exemption.
a) in full for such year. [RR 2-98, Sec. 2.79 (I) (1) (b), 4th par.,
2nd sentence, as amended by RR No. 10-2008, arrangement and numbering
supplied]
(c) Others
a. General rule that resident citizens are taxable on income from all sources
within and without the Philippines
i. Non-resident citizens
i. Inclusions
a) Monetary compensation
(3) Bonuses, 13th month pay, and other benefits not exempt
iii. Deductions
a) Personal exemptions and additional exemptions
53
ii. Income from the sale of real property situated in the Philippines
iii. Income from the sale, exchange, or other disposition of other capital
assets
a. Senior citizens
a. Tax payable
i. Regular tax
ii. Minimum Corporate Income Tax (MCIT)
a) Imposition of MCIT
b) Carry forward of excess minimum tax
c) Relief from the MCIT under certain conditions
d) Corporations exempt from the MCIT
e) Applicability of the MCIT where a corporation is governed both
under the regular tax system and a special income tax system
b. Allowable deductions
i. Itemized deductions
ii. Optional standard deduction
c. Taxation of passive income
i. Passive income subject to tax
a) Interest from deposits and yield, or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements and
royalties
b) Capital gains from the sale of shares of stock not traded in the
stock exchange
c) Income derived under the expanded foreign currency deposit
system
55
d) Inter-corporate dividends
e) Capital gains realized from the sale, exchange, or disposition of
lands and/or buildings
ii. Passive income not subject to tax
d. Taxation of capital gains
iii. Income from the sale, exchange, or other disposition of other capital
assets
General rule. The entire amount of gain or loss upon the sale or exchange of property shall be recognized.
[NIRC of 1997, Sec. 40 (c) (1)]
NOTES AND COMMENTS: If gains are recognized, the gains shall be taxable. If gains are not recognized they are not
going to be taxed.
If losses are recognized they shall be allowed as deductions from gross income. If the losses are not recognized, they are
not allowed to be deducted from gross income.
Example of a tax-free exchange. A single proprietor transfers all his interest in the business including
its goodwill at their fair market value to a corporation which shall be organized in exchange for the shares of stock of
equivalent value of the latter. There would be a tax-free exchange if it will result to the proprietor owning entirely the
capital stock of the corporation, except perhaps the qualifying shares of the other incorporators. REASON: The
exchange will not give rise to any gain for purposes of income tax. (BIR Ruling February 29, 1960)
NOTES AND COMMENTS: A precondition for the tax-free exchange is that it should result to corporate control. The author
submits that If there was already corporate control prior to the exchange, then the tax-free exchange does not apply.
Technically there is no tax exemption even if the exchange is solely in kind . It is correct to
state that no taxable gain or loss is recognized under certain circumstances where there is an exchange solely in kind.
However, the exemption refers only to the initial exchange. Where the parties to the exchange dispose of the property
they received as a result of the exchange, then a gain or loss would be recognized.
Thus, there is merely a deferral of the income tax.
(iii) Capital gains from sale of shares of stock not traded in the stock
exchange
Exclude:
i. Non-resident cinematographic film-owner, lessor or distributor
ii) Non-resident owner or lessor of vessels chartered by Philippine nationals
(iii) Non-resident owner or lessor of aircraft machineries and other equipment
16. Improperly accumulated earnings of corporations
17. Exemption from tax on corporations
18. Taxation of partnerships
19. Taxation of general professional partnerships
20. Withholding tax
a. Concept. This practice which is also known as “taxation at source”, refers to the requirement that
taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor-corporations and/or persons
from payments made to payees-corporations and/or persons for the former to pay the same directly to the BIR. Thus,
the taxes are collected practically at the time the transaction is made or when the taxable act occurs.
Liabilities for failure of withholding agent to collect and remit taxes. Any person required
to withhold, account for, and remit any tax imposed by the NIRC of 1997, or who willfully fails to withhold such tax, or
account for and remit such tax, or aids or abets in any manner to evade any such tax, or the payment thereof,
1) shall in addition to the criminal penalties of fine and imprisonment provided for under Sec. 255
of the NIRC of 1997,
2) be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not
accounted for and remitted. (NIRC of 1997, Sec. 251)
Criminal penalties for failure to withhold, remit or refund . Any person required under this Code or
by rules and regulations promulgated thereunder to withhold or remit taxes withheld, or refund excess taxes withheld
on compensation, at the time or times required y law or rules and regulations shall, in addition to other penalties
provided by law, upon conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000.00) and
suffer imprisonment of not less than one (1) year but ore more than ten (10) years. (NIRC of 1997, Sec. 255, paraphrasing
supplied)
58
Liability of withholding agent is personal. The withholding agent is explicitly made personally liable
under the NIRC of 1997 for the payment of the tax required to be withheld.
REASON: The law sets no condition for the personal liability of the withholding agent to attach. This is in order
to compel the withholding agent to withhold the tax under any and all circumstances. In effect, the responsibility for the
collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has
jurisdiction.
Thus, the withholding agent is the constituted agent both of the government and the taxpayer. With respect to
the collection and/or withholding of the tax, he is the Government’s agent. In regard to the filing of the necessary
income tax return and the payment to the Government, he is the agent of the taxpayer. The withholding agent,
therefore, is no ordinary government agent especially because under the Tax Code he is personally liable for the tax he
is duty bound to withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable under
the law. (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 1999)
Liability if the withholding agent is the Government . If the withholding agent is the
Government or any of its agencies, political subdivisions or instrumentalities, or a government-owned or controlled
corporation, the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for
the deficiency taxes. [NIRC of 1997, Sec. 247 (b)]
Penal liability of corporations. Any corporation, association or general co-partnership liable for any of
the acts or omissions penalized under this Code, in addition to the penalties imposed herein upon the responsible
corporate officers, partners, or employees shall, upon conviction for each act or omission, be punished by a fine of not
less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000). (NIRC of 1997,
Sec. 256)
b. Kinds
i. Withholding of final tax on certain incomes. Under the final withholding tax
system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of
the income due from the payee on the said income. The liability for payment of the tax rests primarily on the
payor as the withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding,
the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an
income tax return for the particular income. [RR No. 2-98, Sec. 2.57 (A), 1st par.]
Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) and the required Alphabetical Lists of
Employees/Payees and Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income
Payments Exempt from Withholding Tax (BIR Form No. 1604-E) and the required Alphabetical List of Payees
are filed with their respective RDOs on or before January 31 and March 1 of the following year respectively.
(Note: No annual return for withholding tax on GVAT and GPT). (RMC No. 23-2012, B, paraphrasing and
note supplied
g. Timing of withholding. The obligation of the payor to deduct and withhold the tax arises at the
time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset,
whichever is applicable in the payor’s books, whichever comes first. The term ‘payable’ refers to the date the
obligation becomes due, demandable and legally enforceable.
Provided, however, that where income is not yet paid or payable but the same has been recorded as an
expense or asset, whichever is applicable, in the payor’s books, the obligation to withhold shall arise in the last month
of the return period in which the same is claimed as an expense or amortized for tax purposes. (RR No. 2-98, Sec.
2.57.4, as amended by RR No. 12-2001, paraphrasing supplied)
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