TAX 2 FINALS EXAM REVIEWER
Acosta-
Cajustin)
DEDUCTIONS
Three Types of Deductions from Gross
Income:
a. Itemized deductions in Section 34(A)
to (J) and (M) available to all kinds of
taxpayers engaged in trade or business
or practice of profession in the
Philippines;
b. The optional standard deduction in
Section 34(L) available to individual
and corporate taxpayers deriving
business, professional, capital gains,
passive income, or other income not
subject to final tax; and
c. The special deductions in Sections 37
and 38 both of the Tax Code, and in
special laws like the BOI Law (E.O. 226)
Bar Question (2013)
Atty. Gambino is a partner in a general
professional partnership. The partnership
computes its gross revenues, claims deductions
allowed under Tax Code, and distributes net
income to the partners, including Atty. Gambino,
in accordance with its articles of partnership. In
filing his own income tax return, Atty. Gambino
claimed deductions that the partnership did not
claim, such as purchase of law books,
entertainment expenses, car insurance, and car
depreciation. The BIR disallowed the
deductions. Was the BIR correct?
No, the BIR is wrong in disallowing the
deductions claimed by Atty. Gambino. It appears
that the GPP claimed itemized deductions from
its gross revenues in arriving at his distributable
net income. The share of a partner in the net
income of the partnership must be reported by
him as part of his gross income from practice of
profession and he is allowed to claim further
deductions which are reasonable, ordinary, and
necessary in the practice of profession and were
not claimed by the partnership in computing its
net income (Sec. 26, NIRC; Rev. Regs. No. 16-
2008, 2010).
[NOTE: The examinee may want to qualify his
answer further by citing the rules on (a)
purchases of law books, which can be a capital
expenditure; (b) entertainment expenses, which
must conform to the ceiling for sellers of
services; (c) car insurance and depreciation,
(Atty. Deborah S.
which are deductible only to the extent that it
was used for business or practice of law]
[NOTE: The share in the net income of the
general professional partnership (GPP), actually
or constructively received, shall be reported as
taxable income of each partner. The partners
comprising the GPP can no longer claim further
deduction from their distributive share in the
net income of the GPP and are not allowed to
avail of the 8% income tax rate option since
their distributive share from the GPP is already
net of cost and expenses (Sec. 8, Rev. Regs. No. 8-
2018, implementing R.A. 10963 [TRAIN]).]
1 - ORDINARY AND NECESSARY TRADE,
BUSINESS OR PROFESSIONAL EXPENSES
A. IN GENERAL
- 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,
operation and/or conduct of
the trade, business or exercise
of a profession (Sec. 34(A)(1)
(a), NIRC)
(i) A reasonable allowance for
salaries, wages, and other
forms of compensation for
personal services actually
rendered, including the
grossed-up monetary value of
fringe benefit furnished or
granted by the employer to the
employee: Provided, That the
final tax imposed under Section
33 hereof has been paid;
(ii) A reasonable allowance for
travel expenses, here and
abroad, while away from home
in pursuit of trade, business or
profession;
(iii) A reasonable allowance for
rentals and/or other
payments which are required
as a condition for the continued
use or possession, for purposes
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of trade, business or
profession, of property to
which they taxpayer has not
taken or is not taking title or in
which he has no equity other
than that of a lessee, user or
possessor.
(iv) A reasonable allowance for
entertainment, amusement
and recreation expenses that
are directly connected to the
development, management and
operation of the trade, business
or profession of the taxpayer,
or that are directly related to or
in furtherance of the conduct of
his or its trade, business or
exercise of a profession not to
exceed such ceilings as the
Secretary of Finance may
prescribe.
Provided, That 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.
Rev. Reg. No. 10-2002
- Imposes a ceiling on the amount of
entertainment, amusement and
recreational expenses claimed by
appropriate taxpayers
- Allowable deduction shall not exceed
0.50% of net sales for taxpayers
engaged in sale of goods or properties;
or 1% of net revenue for taxpayers
engaged in sale of services, including
exercise of profession and use or lease
of properties.
- If a taxpayer derives income from both
sale of goods/properties and services,
the allowable expense shall in all cases
be determined based on an
apportionment formula, taking into
consideration the percentage of the net
sales/net revenue to the total net
sales/net revenue, but which in no case
shall exceed the maximum percentage
ceiling provided in the Regulations.
(Atty. Deborah S. Acosta-
- The ceiling provided shall apply only on
expenses paid or incurred beginning
September 1, 2002, regardless of the
taxpayer’s accounting period.
B. “ORDINARY” AND “NECESSARY”
EXPENSES
- Precise definition
“Necessary” - an expense is considered
necessary when the expenditure is appropriate
and helpful in the development of the taxpayer’s
business or that the same is proper for the
purpose of realizing a profit or minimizing a
loss.
“Ordinary” - an expense is considered ordinary
when it connotes a payment which is normal in
relation to the business of the taxpayer and the
surrounding circumstances.
- Does not require that the payments be
habitual or normal; the payment may be
unique or non-recurring
Offsetting of Expenses
Income payments subject to creditable or
final withholding taxes pursuant to the
provisions of Rev. Regs. No. 2-98, as amended,
shall be recorded at gross, regardless of
whether the transactions are actually offset or
the same provide for net settlement of cash
flows. Any amount offset against the income
payments by the payor not subjected to
creditable or final withholding tax shall not be
allowed as deductible expense of the payor
(RMC No. 61-2016).
Bar Question
Peter is the Vice-President for Sales of Golden
Dragon Realty Conglomerate, Inc. (Golden
Dragon). A group of five foreign investors visited
the country for possible investment in the
condominium units and subdivision lots of
Golden Dragon. After a tour of the properties for
sale, the investors were wined and dined by
Peter at the posh Conrad’s Hotel at the cost of
P150,000. Afterward, the investors were
brought to a party in a videoke club which cost
the company P200,000 for food and drinks, and
the amount of P80,000 as tips for business
promotion offers. Expenses at Conrad Hotel and
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the videoke club were receipted and submitted
to support the deduction for representation and
entertainment expenses. Decide if all the
representation and entertainment expenses
claimed by Golden Dragon are deductible.
Explain.
The expenses incurred were to entertain the
investors of Golden Dragon; thus, the amount
deductible for entertainment, amusement, and
recreation expenses is limited to the actual
amount paid or incurred but in no case shall the
deduction exceed 0.50% of net sales for
taxpayers engaged in the sale of goods or
properties (Sec. 34[A][1][a][iv], NIRC as
implemented by R.R. No. 10-2002).
[NOTE: Reasonableness and liberality are
recommended in considering an examinee’s
answer to this question.]
Bar Question (2014)
A, B, and C, all lawyers, formed a partnership
called ABC Law Firm so that they can practice
their profession as lawyers. For the year 2012,
ABC Law Firm received earnings and paid
expenses, among which are as follows:
Earnings:
(1) Professional/legal fees from various
clients
(2) Cash prize received from a religious
society in recognition of the exemplary
service of ABC Law Firm
(3) Gains derived from sale of excess
computers and laptops
Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in
meetings with clients
(B) What are the items in the above-
mentioned payments which may be
considered as deductions from the gross
income of ABC Law Firm? Explain.
The law firm being formed as a general
professional partnership is entitled to the same
deductions as allowed to corporations (Sec. 26,
NIRC). Hence, the three items of deductions
mentioned in the problem are all deductible,
they being in the nature of ordinary and
necessary expenses incurred in the practice of
profession (Sec. 34[A], NIRC).
(Atty. Deborah S. Acosta-
Bar Question (2009)
Masarap Food Corporation (MFC) incurred
substantial advertising expenses in order to
protect its brand franchise for one of its line
products. In its income tax return, MFC included
the advertising expense as deduction from gross
income, claiming it as an ordinary business
expense. Is MFC correct?
In 1995, respondent paid P9.4 million for
advertising a product. This was disallowed by
the BIR as ordinary and necessary expense and
considered the same as capital expenditure,
since the amount was staggering, which was
incurred to create or maintain some form of
goodwill for the taxpayer’s trade or business for
the industry or profession of which the taxpayer
is a member. The court held that “goodwill”
generally denotes the benefit arising from
connection and reputation, and efforts to
establish reputation are akin to acquisition of
capital assets. Therefore, expenses related
thereto are not (ordinary and necessary)
business expenses but are capital expenditures
(that are not deductible pursuant to the
provisions of Section 36 of the Tax Code) (CIR v.
General Foods (Phils.), Inc., 2003)
Bar Question (2014)
Which of the following should not be claimed
as deductions from gross income?
(A) Discounts given to senior citizens on
certain goods and services
(B) Advertising expenses to maintain
some form of goodwill for the
taxpayer’s business.
(C) Salaries and bonuses paid to employees
(D) Interest payment on loans for the
purchase of machinery and equipment
used in business
Legal Basis: General Foods Corp v. CIR, 2003
Professional expenses are deductible in the
year the professional services are rendered,
not in the year they are billed.
In 1984 and 1985, legal services were rendered
by the lawyers, but they were billed by the
lawyer and paid by the respondent in 1986. In
the audit of the books for 1986, the BIR
disallowed the expenses for 1986 pursuant to
the “all events test.” The CTA and CA ruled in
favor of the respondent. However, the Supreme
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Court reversed their decisions since taxpayer
uses the accrual method of accounting.
The Court ruled that accrual of income
and expense is permitted when the “all events
test” has been met. This test requires:
(1) Fixing a right to income or liability to
pay;
(2) The availability of reasonably accurate
determination of such income or
liability
It added that it does not, however,
demand that the amount of income or liability
be known absolutely; it only requires that a
taxpayer has at its disposal the information
necessary to compute the amount with
reasonable accuracy, which implies something
less than an exact or completely accurate
amount. Moreover, deduction parkates the
nature of tax exemption; it must be construed
strictly against the taxpayer (CIR v. Isabela
Cultural Corporation, 2007).
C. TEST OF DEDUCTIBILITY
(1) The expense must be ordinary and
necessary
(2) It must be paid or incurred within the
taxable year
(3) It must be paid or incurred in carrying
on a trade or business (ESSO v. CIR,
1989)
In addition, not only must the taxpayer
meet the business test, he must substantially
prove by evidence or records the deductions
claimed under the law, otherwise, the same will
be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and
necessary does not justify its deduction. (ESSO v.
CIR, 1989)
Conditions for deductibility of business
expenses:
1. It must be ordinary and necessary;
2. It must be paid or incurred during the
taxable year;
3. It must be paid or incurred in carrying
on or which are directly attributable to
the development, management,
operation and/or conduct of the trade,
business, or exercise of profession;
(Atty. Deborah S. Acosta-
4. It must be supported by adequate
invoices or receipts;
5. It is not contrary to law, public policy,
or morals; and
6. The tax required to be withheld on the
expense paid or payable is shown to
have been remitted to the BIR (Sec.
2.58.5, Rev. Regs. No. 2-98, 1998)
ESSO v. CIR, G.R. Nos. L-28508-9
*Test of deductibility enumerated above*
The margin fees were paid for the
remittance by ESSO as part of the profits to the
head office in the United States. Such remittance
was an expenditure necessary and proper for
the conduct of its corporate affairs. As stated in
the Lopez case, the margin fees are not expenses
in connection with the production or earning of
petitioner's incomes in the Philippines. They
were expenses incurred in the disposition of
said incomes; expenses for the remittance of
funds after they have already been earned by
petitioner's branch in the Philippines for the
disposal of its Head Office in New York which is
already another distinct and separate income
taxpayer.
Zamora v. Collector, G.R. No. L-15290, L-
15280, L-15289, L-15281
Promotion expenses constitute one of the
deductions in conducting a business, and should
satisfy the requirements of Section 30 of the Tax
Code, which provides that in computing net
income, there shall be allowed as deductions all
the ordinary and necessary expenses paid or
incurred during the taxable year, in carrying on
any trade or business.
Representation expenses fall under the
category of business expenses which are
allowable deductions from gross income, if they
meet the conditions prescribed by law,
particularly section 30 (a) (1), of the Tax Code.
To be deductible, they must be ordinary and
necessary expenses paid or incurred in carrying
on any trade or business, and should meet the
further test of reasonableness in amount. They
should, moreover, be covered by supporting
paper; in the absence thereof the amount
properly deductible as representation expenses
should be determined from all available data.
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D. TEST OF REASONABLENESS
- No fixed test for determination
- Factors in determining reasonableness:
(a) The amount and quality of the services
performed with relation to the business
(b) payment must be 'made in good faith
(c) the character of the taxpayer's business
(d) the volume and amount of its net
earnings
(e) its locality
(f) the type and extent of the services
rendered
(g) the salary policy of the corporation
(h) the size of the particular business
(i) the employees' qualifications and
contributions to the business venture
(j) general economic conditions
CM Hoskins & Co., Inc. v. Commissioner, G.R.
No. L-24059
It is a general rule that bonuses to employees
made in good faith and as additional
compensation for the services actually rendered
by the employees are deductible, provided such
payments, when added to the stipulated
salaries, do not exceed a reasonable
compensation for the services rendered.
The condition precedents to the
deduction of bonuses to employees are: (1) the
payment of the bonuses is in fact compensation;
(2) it must be for personal services actually
rendered; and (3) the bonuses, when added to
the salaries, are reasonable . . . when measured
by the amount and quality of the services
performed with relation to the business of the
particular taxpayer.
E. SUBSTANTIATION REQUIREMENT
- The taxpayer shall substantiate
with sufficient evidence, such
as official receipts or other
adequate records:
(i) The amount of the
expense being
deducted;
(ii) The direct connection
or relation of the
expense being
deducted to the
development,
(Atty. Deborah S. Acosta-
management,
operation and/or
conduct of the trade,
business or profession
of the taxpayer (Sec.
34[A][1][b], NIRC)
Additional requirements for deductibility of
certain payments
- Any amount paid or payable which is
otherwise deductible from, or taken
into account in computing gross income
or for which depreciation or
amortization may be allowed shall be
allowed as a deduction ONLY if it is
shown that the tax required to be
deducted and withheld therefrom has
been paid to BIR in accordance with this
Section, Sections 57 and 58 of this Code
(Sec. 34[K], NIRC).
Bar Question (1994)
In December 1993, the Sangguniang Bayan
authored a Christmas bonus of P3,000, a cash
gift of P5,000, and transportation and
representation allowance of P6,000 for each of
the municipal employees.
(1) Is the Christmas bonus subject to any
tax?
The Christmas bonus given by the Sangguniang
Bayan to the municipal employees is taxable as
additional compensation (Sec. 21[a], NIRC).
(2) How about the cash gift?
The cash gift per employee of P5,000 being
substantial may be considered taxable also. It is
in the nature of additional compensation income
as it is highly doubtful if municipal governments
are authorized to make gifts in substantial sums
such as this. It is not furthermore gift of “small
value” which employers might give to their
employees on special occasions like Christmas -
items which could be exempt under BIR
Revenue Audit Memorandum Order No. 1-87.
[NOTE: It is considered as de minimis benefits
under Rev. Regs. 3-98, as amended; hence
exempt from income tax and fringe benefits tax.]
(3) How about the transportation and
representation allowances?
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The transportation and representation
allowances are actually reimbursements for
expenses incurred by the employee for the
employer. Said allowances spent by the
employee for the employer are designed to
enhance the quality of the service that the
employer is supposed to perform for its clientele
like the people of the municipality.
[NOTE: The 13th month pay and other gross
benefits received by officials and employees of
public and private entities, are exempt to the
extent of P90,000 (formerly P82,000) pursuant
to Section 32(B)(7)(e), NIRC, as amended by
R.A. 10963 (TRAIN).]
Bar Question (2006)
Gold and Silver Corporation gave extra 14th
month bonus to all its officials and employees in
the total amount of P75 million. When it filed its
corporate income tax return the following year,
the corporation declared a net operating loss.
When the income tax return of the corporation
was reviewed by the BIR the following year, it
disallowed as item of deduction the P75 million
bonus the corporation gave its officials and
employees on the ground of unreasonableness.
The corporation claimed that the bonus is an
ordinary and necessary expense that should be
allowed. Decide the case.
I will rule against the deductibility of the bonus.
The extra bonus is both not normal to the
business and unreasonable. Admittedly, there is
no fixed test for determining the reasonableness
of a bonus as an additional compensation. This
depends upon many factors, such as the
payment must be made in good faith; the
character of the taxpayer’s business; the volume
and amount of its net earnings; the locality; the
type and extent of the services rendered; the
salary policy of the corporation; the size of the
particular business; the employees’ qualification
and contributions to the business venture; and
general economic conditions (CM Hoskins &
Co., Inc. v. CIR, 1969). Giving an extra bonus at a
time that the company suffers operating losses
is not a payment in good faith and is not normal
to the business; hence, unreasonable and would
not qualify as ordinary and necessary expense.
Bar Question (2016)
Henry, a U.S. naturalized citizen, went home to
the Philippines to reacquire Philippine
(Atty. Deborah S. Acosta-
citizenship under R.A. 9225. His mother left him
a lot and building in Makati City and he wants to
make use of it in his trading business.
Considering that he needs money for the
business, he wants to sell his lot and building
and make use of the consideration. However, the
lot has sentimental value and he wants to
reacquire it in the future. A friend of Henry told
him of the “sale-leaseback transaction”
commonly used in the U.S., which is also used
for tax reduction. Under said transaction, the lot
owner sells his property to a buyer on the
condition that he leases it back from the buyer.
At the same time, the property owner is granted
an option to repurchase the lot on or before an
agreed date. Henry approaches you as a tax
lawyer for advice.
Explain what tax benefits, if any, can be
obtained by Henry and the buyer from the
sale-leaseback transaction?
Henry will be entitled to claim rental expense as
a deduction from his gross income in the trading
business. His lease payments plus interest
would be substantially higher than the
depreciation expense he may claim in
computing his taxable income; hence, the lease
would result in the additional benefit of
increasing his additional tax deductions. The
buyer will be deriving rental income from the
property and be able to claim business
deductions such as real property taxes, repairs
and maintenance, depreciation, and other
expenses necessary for the renting out of the
property.
Bar Question (1993)
X is the Advertising Manager of Mang Douglas
Ham, Inc. X had dinner with Y, owner of a chain
or burger restaurants, to convince the latter to
carry Mang Doublas’ hamburger. After Y agreed,
both X and Y went their separate ways. X
celebrated by going to a single’s bar. He picked
up a partner and consumed a bottle of beer. He
drove home at 3:00 a.m. On his way, he
sideswiped a pedestrian who died as a result of
the accident. X settled the case extrajudicially by
paying the heirs of the pedestrian P50,000. The
money, however, came from Mang Douglas
Hamburger, Inc. Discuss whether the P50,000
can be claimed by Mang Douglas Hamburger,
Inc. as an ordinary and necessary expense.
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No. As the expenditure had not been incurred in
carrying on his trade or business, the same
cannot be considered an ordinary and necessary
expense for which deduction may be claimed.
Such expense is a personal expense which is not
deductible from the gross income pursuant to
Section 36 of the 1997 Tax Code.
Bar Question (2017)
Calvin Dela Pisa was a Permits and Licensing
Officer (rank-and-file) of Sta. Portia Realty
Corporation (SPRC). He invited the Regional
Director of the Housing and Land Use
Regulatory Board (HLURB) to lunch at the Sulo
Hotel in Quezon City to discuss the approval of
SPRC’s application for a development permit in
connection with its subdivision development
project in Pasig City. At breakfast the following
day, Calvin met a prospective client interested to
enter into a joint venture with SPRC for the
construction of a residential condominium unit
in Cainta, Rizal.
Calvin incurred expenses for the lunch
and breakfast meetings he had with the Regional
Director of HLURB and the prospective client,
respectively. The expenses were duly supported
by official receipts issued in his name. At
month’s end, he requested reimbursement of his
expenses, and SPRC granted his request.
(a) Can SPRC claim an allowable
deduction for the expenses incurred
by Calvin? Explain your answer.
SPRC cannot claim as a deduction, the amount
spent for lunch in the meeting with the Regional
Director of HLURB. While the expense is
business connected, the same is not allowed as
deduction because it was incurred as an indirect
payment to a government official which, not
only amounts to a violation of the Anti-Graft and
Corrupt Practices Act, but also constitutes
bribes, kickbacks, and similar payments (See
Sec. 34[a][c], NIRC).
With respect, however, to the amount
spent for breakfast with a prospective client, the
same is deductible from gross income of SPRC.
the expense complies with the requirements for
deductibility, namely: (a) the expense must be
ordinary and necessary; (b) it must have been
paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) it
(Atty. Deborah S. Acosta-
must be supported by receipts, records, or other
pertinent papers (CIR v. General Foods (Phils.)
Inc., 2003). Section 34(A)(1)(b) of the 1997
NIRC, as amended, does not require that the
substantiation be in the form of official receipts
or invoices issued in the name of the taxpayer
claiming the expense. It must only be proven
that there is a “direct connection or relation of
the expense being deducted to the development,
management, operation and/or conduct of the
trade, business, or profession of the taxpayer.”
(b) Is the reimbursement received by
Calvin from SPRC subject to tax?
Explain your answer.
No. Any amount paid as reimbursements for
representation incurred by the employee in the
performance of his duties is not compensation
subject to withholding, if the following
conditions are satisfied: (i) it is for ordinary and
necessary representation expense paid or
incurred by the employee in the pursuit of the
trade, business, or profession, and (ii) the
employee is required to account/liquidate for
such expense in accordance with the specific
requirements of substantiation pursuant to
Section 34 of the 1997 NIRC, as amended. The
amounts are actually spent by the employee for
the benefit of his employer, so no income is
considered to have flowed to the employee.
Bar Question (2014)
Freezy Corporation, a domestic corporation
engaged in the manufacture and sale of ice
cream, made payments to an officer of Frosty
Corporation, a competitor in the ice cream
business, in exchange for said officer’s
revelation of Frosty Corporation’s trade secrets.
May Freezy Corporation claim the payment
to the officer as deduction from its gross
income? Explain.
No. The payments made in exchange for the
revelation of a competitor’s trade secrets is
considered as an expense which is against the
law, morals, good customs or public policy,
which is not deductible (3M Philippines, Inc. v.
CIR, 1988). Also, the law will not allow the
deduction of bribes, kickbacks, and other similar
payments. Applying the principle of ejusdem
generis, payments made by Freezy Corporation
would fall under “other similar payments” which
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are not allowed as deduction from gross income
(Section 34[A][1][c], NIRC).
Bar Question (1998)
MC Garcia, a contractor who won the bid for the
construction of a public highway, claims as
expenses, facilitation fees which according to
him are standard operating procedure in
transactions with the government. Are these
expenses allowable as deduction from gross
income?
No. The alleged facilitation fees which he claims
as standard operating procedure in transactions
with the government comes in the form of
bribes or “kickback” which are not allowed as
deductions from gross income (Sec. 34[A][l][c],
NIRC).
Bar Question (2001)
In order to facilitate the processing of its
application for a license from a government
office, Corporation A found it necessary to pay
the amount of P100,000 deductible from the
gross income of Corporation A. On the other
hand, is the P100,000 taxable income of the
approving official? Explain your answers.
Since the amount of P100,000 constitutes a
bribe, it is not allowed as a deduction from gross
income of Corporation “A” (Sec. 34[A][1][c],
NIRC). However, to the recipient government
official, the same constitutes as a taxable
income. All income from legal or illegal sources
is taxable absent any clear provision of law
exempting the same. This is the reason why
gross income had been defined to include
income derived from whatever source (Sec.
32[A], NIRC). Illegally acquired income
constitutes realized income under the claim of
right doctrine (Rutkin v. U.S., 343 U.S. 130).
Bar Question (1993)
X is the proprietor of Vanguard, which is a
security and detective agency. X was able to get
the contract to provide the security services of a
government agency. He signed the Security
Agreement with the director of the government
agency calling for the deployment of 100
security guards on a 24-hour basis. The contract
was revocable at the will of the director. To
please the director, X gives him at the end of the
(Atty. Deborah S. Acosta-
month P100,000 per guard hired. May X deduct
from his income the money he paid to the
director? Reasons.
The money paid to please the director is not
deductible. This is a form of bribery. Deductions
shall not be allowed if the expense is contrary to
law, public policy or for immoral purposes
(Zamora v. Collector, 1963; Roxas v. CTA and CIR,
1968).
Bar Question (1998)
a) Are contributions to a candidate in
an election subject to donor’s tax?
No, provided the recipient candidate had
complied with the requirement for filing of
returns of contributions with the COMELEC as
required under the Omnibus Election Code.
b) On the part of the contributor, is it
allowable as a deduction from gross
income?
The contributor is not allowed to deduct the
contributions because the said expense is not
directly attributable to the development,
management, operation, and/or conduct of a
trade, business, or profession (Sec. 34[A][l][a],
NIRC).
F. OTHER CASES
CIR v. CTA & Smith Kline & French Overseas Co
(Phil Branch), L-54108
From the provisions, Section 37(b) of the old
National Internal Revenue Code, Commonwealth
Act No. 466, which is reproduced in Presidential
Decree No. 1158, the National Internal Revenue
Code of 1977, and Sec. 160 of Revenue
Regulations No. 2 it is manifest that where an
expense is clearly related to the production of
Philippine-derived income or to Philippine
operations (e.g. salaries of Philippine personnel,
rental of office building in the Philippines), that
expense can be deducted from the gross income
acquired in the Philippines without resorting to
apportionment. Under the same provisions also,
where there are items included in the overhead
expenses incurred by the parent company, all of
which directly benefit its branches, including the
Philippines, which cannot be definitely allocated
or identified with the operations of the
Philippine branch, the company may claim as its
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deductible share a ratable part of such expenses
based upon the ratio of the local branch's gross
income to the total gross income, worldwide, of
the multinational corporation.
Gancayco v. The Collector, L-13325
The petitioner cannot claim for deduction.
As to the farming expenses:
Section 30(a)(1) of the Tax Code partly reads:
“All the ordinary and necessary expenses paid
or incurred during the taxable year in carrying
on any trade or business, including … rentals or
other payments required to be made as a
condition to the continued use or possession, for
the purpose of trade or business, of property to
which the taxpayer has not taken or is not
taking title or in which he has no equity.”
In this case the Supreme Court
concurred in the decision of the CTA that, "No
evidence has been presented as to the nature of
the said 'farming expenses' other than the bare
statement of petitioner that they were spent for
the 'development and cultivation of (his)
property'. No specification has been made as to
the actual amount spent for purchase of tools,
equipment or materials, or the amount spent for
improvement. Respondent claims that the entire
amount was spent exclusively for clearing and
developing the farm which were necessary to
place it in a productive state. It is not,
therefore, an ordinary expense but a capital
expenditure. Accordingly, it is not deductible
but it may be amortized, in accordance with
Section 75 of Revenue Regulations No. 2, cited
above. See also, Section 31 of the Revenue Code
which provides that in computing net income,
no deduction shall in any case be allowed in
respect of any amount paid out for new
buildings or for permanent improvements or
betterments made to increase the value of any
property or estate."
As to the representation expenses:
Gancayco’s claim was partly allowed and partly
disallowed. The disallowance is justified by the
record, for, apart from the absence of receipts,
invoices or vouchers of the expenditures in
question, petitioner could not specify the items
constituting the same, or when or on whom or
on what they were incurred.
(Atty. Deborah S. Acosta-
2 - INTEREST
“Interest” - the amount paid by a debtor to his
creditor for the use or forbearance of money
(Art. 1956, NCC)
“Indebtedness” - an unconditional and legally
enforceable obligation for the payment of
money
“Debt” - not merely money due by contract but
whatever one is bound to render to another,
either for contract, or the requirement of the
law
A. SEC. 34(B), NIRC
General rule: the amount of interest paid or
incurred within a taxable year on
indebtedness in connection with the taxpayer’s
profession, trade or business shall be allowed as
deduction from gross income: Provided,
however, That the taxpayer’s otherwise
allowable deduction for interest expense shall
be reduced by forty-two percent (42%) of the
interest income subjected to final tax: Provided,
That effective January 1, 2008, the percentage
shall be thirty-three percent (33%). (As
amended by R.A. No. 9337) (Sec. 34[B][1], NIRC)
Exceptions: No deduction shall be allowed in
respect of interest:
(a) If within the taxable year an individual
taxpayer reporting income on the cash
basis incurs an indebtedness on
which an interest is paid in advance
through discount or otherwise;
provided, That such interest shall be
allowed as a deduction in the year the
indebtedness is paid: Provided, further,
That if the indebtedness is payable in
periodic amortizations, the amount of
interest which corresponds to the
amount of the principal amortized or
paid during the year shall be allowed as
deduction in such taxable year;
(b) If both the taxpayer and the person
to whom the payment has been made
or is to be made are persons
specified under Section 36(B)*; or
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(c) If the indebtedness is incurred to
finance petroleum exploration. (Sec.
34[B][2], NIRC)
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred
to acquire property used in trade, business or
exercise of a profession may be (a) allowed as a
deduction or (b) treated as a capital
expenditure. (Sec. 34[B][3], NIRC)
B. SEC. 34(B), NIRC*
In computing net income, no deduction 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
(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
a corporation more than fifty percent
(50%) in value of the outstanding stock
of which is owned, directly or indirectly,
by or for such individual; or
(3) Except in the case of distributions in
liquidation, between two corporation
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, if either
one of such corporations, with respect
to the taxable year of the corporation
preceding the date of the sale or
exchange was, under the law applicable
to such taxable year, a personal holding
company or a foreign personal holding
company; or
(4) Between the grantor and a fiduciary
of any trust; or
(5) Between the fiduciary of a trust and
the fiduciary of another trust if the
same person is a grantor with respect to
each trust; or
(6) Between a fiduciary of a trust and a
beneficiary of such trust.
C. REV. REG. NO. 13-2000
(Atty. Deborah S. Acosta-
In general, subject to certain limitations, the
following are the requisites for the
deductibility of interest expense from gross
income:
1) there must be a valid and existing
indebtedness;
2) The indebtedness must be that of the
taxpayer;
3) The interest must be legally due and
stipulated in writing;
4) The interest expense must be paid or
incurred during the taxable year;
5) The indebtedness must be connected
with the taxpayer’s trade, business, or
exercise of profession;
6) The interest payment arrangement
must not be between related taxpayers
mandated in Section 34(B)(2)(b), in
relation to Section 36(B), both of the
Tax Code of 1997;
7) The interest is not expressly disallowed
by law to be deducted from the
taxpayer’s gross income (e.g., interest
on indebtedness to finance petroleum
operations); and
8) The amount of interest deducted from
gross income does not exceed the limit
set forth in the law. In other words, the
taxpayer’s otherwise allowable
deduction for interest expense shall be
reduced by 33% (Sec. 34[B][1], NIRC).
PROVISIONS OF THE ABOVE TO THE
CONTRARY NOTWITHSTANDING, interest
incurred or paid by the taxpayer on all unpaid
business-related taxes shall be fully deductible
from gross income and shall not be subject to
the limitation on deduction heretofore
mentioned. Thus, such interest expenses
incurred or paid shall not be diminished by the
percentage of interest income earned which had
been subjected to final withholding tax.
D. RMC NO. 31-2009
- Disallowance of Bangko Sentral ng
Pilipinas’ claimed interest expense for
taxable year 2005
It was represented that BSP claimed
that it is not liable for the deficiency Income Tax
assessment for the year 2005 amounting to
P1,224,675,111.92 due to the disallowance of
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BSP’s claimed interest expense equivalent to
38%/42% of its interest income subjected to
final withholding tax; that BSP submits that it is
not engaged in an interest arbitrage scheme
because its investment in government
securities, treasury bonds and notes and other
securities, as well as other transactions from
which it earns interest income and which was
subjected to the final tax, are being undertaken
in accordance with its legally mandated
responsibilities to achieve its primary objective
of maintaining price stability; that BSP does not
borrow money from different financial
institutions for reinvestment purposes but as a
monetary tool in its open market operations to
mop up or siphon off excess liquidity in the
banking system; that BSP should be entitled to
claim the full amount of interest expense
incurred in the course of its operations; and that
such interest should not be reduced by a portion
of the interest income subjected to final tax.
HOWEVER, based on the provisions of the New
Central Bank Act, if a taxpayer incurred
indebtedness plus interest expense connected
with his trade during the taxable year and also
earned interest income which had been
subjected to final withholding tax, the amount of
interest shall be subject to the limitations as
provided for by law. Also, the law did not
provide that there is a need for a tax arbitrage in
order that the limitation on the deduction of the
interest expense can be applied. Besides, the
implementing rules itself says that the
limitation shall apply regardless of whether or
not a tax arbitrage scheme was entered into by
the taxpayer or regardless of the date when the
interest bearing loan and the date when the
investment was made for as long as, during the
taxable year, there is an interest expense
incurred on one side and an interest income
earned on the other side, which interest income
had been subjected to final withholding tax and
that the rule shall be observed irrespective of
the currency of the loan contracted and/or in
whatever currency the investments or deposits
were made.
E. CASES
CIR v. Palanca, G.R. No. L-16626
(Atty. Deborah S. Acosta-
While taxes and debts are distinguishable legal
concepts, in certain cases as in the suit at bar, on
account of their nature, the distinction becomes
inconsequential. This qualification is recognized
even in the United States. In our jurisdiction, the
rule is settled that although taxes already due
have not, strictly speaking, the same concept as
debts, they are however, obligations that may be
considered as such (Sambrano vs. CTA, 1957). In
a more recent case, CIR vs. Prieto, 1960, we
explicitly announced that while the distinction
between "taxes" and "debts" was recognized in
this jurisdiction, the variance in their legal
conception does not extend to the interests paid
on them, at least insofar as section 30(b) (1) of
the NIRC is concerned.
Paper Industries Corp. v. CA, G.R. Nos. 106949-
50
At the option of the taxpayer, interest incurred
to acquire property used in trade, business or
exercise of a profession may be (a) allowed as a
deduction or (b) treated as a capital
expenditure. (Sec. 34[B][3], NIRC). However,
should the taxpayer elect to deduct the interest
payments against its gross income, the taxpayer
cannot at the same time capitalize the interest
payments because that would constitute double
tax benefits which is not authorized by law.
Collector v. Prieto, G.R. No. L-13912
"Although taxes already due have not, strictly
speaking, the same concept as debts, they are,
however, obligations that may be considered as
such. "'The term "debt" is properly used in a
comprehensive sense as embracing not merely
money due by contract but whatever one is
bound to render to another, either for contract,
or the requirement of the law. (Camben vs. Fink
Coule & Coke Co. 61 LRA 584). "Where statute
imposes a personal liability for a tax, the tax
becomes, at least in a broad sense, a debt.
(Idem). "'A tax is a debt for which a creditor's
bill may be brought in a proper case.' (State vs.
Georgia Co., 19 LEA 485)." It follows that the
interest paid by herein respondent for the late
payment of her donor's tax is deductible from
her gross income under section 30 (b) of the Tax
Code above quoted.
Bar Question (1992)
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Sometime in December 1980, a taxpayer
donated to his son 3,000 shares of stock of San
Miguel Corporation. For failure to file a donor’s
return on the donation within the statutory
period, the taxpayer was assessed the sum of
P102,000, as donor’s tax plus 25% surcharge or
P25,500 and 20% interest or P20,400 which he
paid on June 24, 1985.
On April 10, 1986, he filed his income
tax return for 1985 claiming among others, a
deduction for interest amounting to P9,500.00
and reported a taxable income of P96,000.
On November 10, 1986, the taxpayer
filed an amended income tax return for the same
calendar year 1985, claiming therein an
additional deduction in the amount of P20,400
representing interest paid on the donor’s gift
tax.
A claim for refund of alleged overpaid
income tax for 1985 was filed with the
Commissioner which was subsequently denied.
Upon appeal with the CTA, the
Commissioner took issue with the CTA’s
determination that the amount paid by the
taxpayer for interest on his delinquent taxes is
deductible from the gross income for the same
year pursuant to Section 29(b)(1) of the NIRC.
The CIR pointed out that a tax is not
indebtedness. He argued that there is a
fundamental distinction between a “tax” and a
“debt.” According to the Commissioner, the
deductibility of interest on indebtedness from a
person’s income tax cannot extend to interest on
taxes.
1) What is your opinion on the
argument of the Commissioner that a
tax is not an indebtedness so that
deductibility on the interest on taxes
should not be allowed?
The Commissioner’s argument is misplaced
because the interest on the donor’s tax is not
one that can be considered as having been
incurred in connection with the taxpayer’s
trade, business or exercise of profession. Tax
obligations constitute indebtedness for
purposes of deduction from gross income of the
amount of interest paid on indebtedness (CIR v.
Palanca, 1966). Although interest payment for
delinquent taxes is not deductible as tax, the
taxpayer is not precluded from claiming said
(Atty. Deborah S. Acosta-
interest payment as a deduction (CIR v. Prieto,
1960).
Bar Question (1999)
Explain if the following items are deductible
from gross income for income tax purposes.
Disregard who is the person claiming the
expense.
1) Interest on loans used to acquire
capital equipment or machinery;
This is a deductible item from gross income. The
law gives the taxpayer the option to claim as a
deduction or treat as capital expenditure
interest incurred to acquire property used in
trade, business, or exercise of a profession (Sec.
34[B][3], NIRC).
2) Depreciation of goodwill.
This is not allowed as a deduction from gross
income. While intangibles may be allowed to be
depreciated or amortized, it is only allowed to
those intangibles whose use in the business or
trade is definitely limited in duration (Basilan
Estates, Inc. v. CIR, 1967). Such is not the case
with goodwill.
Bar Question (1999)
A Co., a Philippine corporation, issued preferred
shares of stock with the following features:
1. Non-voting;
2. Preferred and cumulative dividends at
the rate of 10% per annum, whether or
not in any period the amount is covered
by earnings or projects;
3. In the event of dissolution of the issuer,
holders of preferred stock shall be paid
in full or ratably as the assets of the
issuer may permit before any
distribution shall be made to common
stockholders; and
4. The issuer has the option to redeem the
preferred stock.
A Co. declared dividends on the
preferred stock and claimed the dividends as
interest deductible from its gross income for
income tax purposes. The BIR disallowed the
deduction. A Co. maintains that the preferred
shares with their features are really debt and
therefore the dividends are really interests.
Decide.
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The dividends are not deductible from gross
income. Preferred shares shall be considered
capital, regardless of the conditions under which
such shares are issued and, therefore, dividends
paid thereon are not considered “interest”
which are allowed to be deducted from the gross
income of the corporation (RMC No. 17-71,
1971).
3 - TAXES
A. SEC. 34(C), NIRC
General rule: all taxes paid or accrued within the
taxable year in connection with the taxpayer’s
profession, trade or business, shall be allowed as
deduction from gross income
Exceptions:
1. Philippine income tax (Sec. 81, Rev.
Regs. No. 2);
2. Foreign income tax (Sec. 82, Rev. Regs.
No. 2) Provided, this deduction shall be
allowed in the case of a taxpayer who
does not signify in his return his desire
to have to any extent the benefits of
paragraph (3) of this Subsection
(relating to credits for taxes of foreign
countries);
3. Estate and donor’s taxes (Sec. 83, Rev.
Regs. No. 2);
4. Special assessments on real property
(Sec. 84, Rev. Regs. No. 2); [taxes
assessed against local benefits of a kind
tending to increase the value of the
property assessed]
5. Electric energy consumption tax under
B.P. 36
Provided, That taxes allowed, when
refunded or credited, shall be included as part
of gross income in the year of receipt to the
extent of the income tax benefit of said
deduction.
B. ALLOWABLE DEDUCTION
Conditions for deductibility of taxes:
1. Payments must be for taxes;
2. Taxes are imposed by law upon the
taxpayer;
(Atty. Deborah S. Acosta-
3. Taxes must be paid or accrued during
the taxable year in connection with the
taxpayer’s trade, business, or
profession; and
4. Taxes are not specifically excluded by
law from being deducted from the
taxpayer’s gross income.
In case of an nonresident alien individual
engaged in trade or business in the
Philippines and a resident foreign
corporation: the deductions for taxes shall be
allowed ONLY IF and TO THE EXTENT that they
are connected with income from sources within
the Philippines
C. ALLOWABLE TAX CREDIT
If the taxpayer signifies in his return his desire
to have the benefits of deduction for taxes, the
tax imposed by this Title shall be credited with:
(a) In the case of a citizen of the Philippines
and of a domestic corporation, the
amount of income taxes paid or
incurred during the taxable year to any
foreign country; and
(b) In the case of any such individual who is
a member of a general professional
partnership or a beneficiary of an
estate or trust, his proportionate share
of such taxes of the general professional
partnership or the estate or trust paid
or incurred during the taxable year to a
foreign country, if his distributive share
of the income of such partnership or
trust is reported for taxation under this
Title.
An alien individual and a foreign corporation
shall NOT BE ALLOWED the credits against the
tax for the taxes of foreign countries allowed
under this paragraph.
Limitations on Credit
The amount of the credit taken shall be subject
to the following limitations:
(a) The amount of the credit in respect to
the tax paid or incurred to any country
shall not exceed the same proportion
of the tax against which such credit is
taken, which the taxpayer’s taxable
income from sources within such
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country under this Title bears to his
entire taxable income for the same
taxable year; and
(b) The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken,
which the taxpayer’s taxable income
from sources without the Philippines
taxable under this Title bears to his
entire taxable income for the same
taxable year.
Year in which Credit Taken: at the option of
the taxpayer and irrespective of his method of
accounting, credit is taken in the year in which
the taxes of the foreign country were incurred,
subject to conditions prescribed in Subsection
(C)(5).
If the taxpayer elects to take such credits in the
year in which the taxes of the foreign country
accrued, the credits for all subsequent years
shall be taken upon the same basis, and no
portion of any such taxes shall be allowed as a
deduction in the same or any succeeding year.
Proof of Credits Required
1. The total amount of income derived
from sources within the Philippines;
2. The amount of income derived from
each country, the tax paid or incurred to
which is claimed as a credit;
3. All other information necessary for the
verification and computation of such
credits.
CIR v. Lednicky, G.R. No. L-18169
An alien resident who derives income wholly
from sources within the Philippines may not
deduct from gross income the income taxes he
paid to his home country for the taxable year.
An alien resident's right to deduct from
gross income the income taxes he paid to a
foreign government is given only as an
alternative to his right to claim a tax credit for
such foreign income taxes; so that unless he has
a right to claim such tax credit if he chooses, he
is precluded from said deduction.
Petitioners admit that the purpose of
the law is to prevent the taxpayer from claiming
twice the benefits of his payment of foreign
(Atty. Deborah S. Acosta-
taxes, by deduction from gross income and by
tax credit. This danger of double credit certainly
can not exist if the taxpayer can not claim
benefit under either of these headings at his
option, so that he must be entitled to a tax credit
(respondent taxpayers admittedly are not so
entitled because all their income is derived from
Philippine sources), or the option to deduct
from gross income disappears altogether. In the
present case, while the taxpayers would have to
pay two taxes on the same income, the
Philippine government only receives the
proceeds of one tax. No double taxation from the
same governmental entity.
Gutierrez v. Collector, G.R. No. L-19537
CAPITAL EXPENDITURES NOT DEDUCTIBLE. —
The following are not deductible business
expenses but should be integrated into the cost
of the capital assets for which they were
incurred and depreciated yearly:
(1) Expenses in watching over laborers in
construction work. Watching over
laborers is an activity more akin to the
construction work than to running the
taxpayer's business.
(2) Real estate tax which remained unpaid
by the former owner of the taxpayer's
rental property but which the latter
paid, is an additional cost to acquire
such property and ought therefore to be
treated as part of the property's
purchase price.
(3) The iron bars, venetian blind and water
pump augmented the value of the
apartments where they were installed.
Their cost is not a maintenance charge,
hence, not deductible.
(4) Expenses for the relocation, survey and
registration of property tend to
strengthen title over the property,
hence, they should be considered as
addition to the cost of such property.
(5) The set of "Comments on the Rules of
Court" having a life span of more than
one year should be depreciated ratably
during its whole life span instead of its
total cost being deducted in one year.
4 - LOSSES
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A. ORDINARY LOSSES
General Classification of Losses
(a) Those incurred in a trade or business
for profit;
(b) Those incurred in any transaction
entered into for profit, although not
connected with the trade or business;
and
(c) Casualty losses that arise from fire,
storm shipwreck, or other casualty, or
from theft or robbery, even though not
connected with the trade or business of
the taxpayer.
i. Sec. 34(D), NIRC)
General rule: losses actually sustained during
the taxable year and not compensated for by
insurance or other forms of indemnity shall be
allowed as deductions:
(a) If incurred in trade, profession or
business;
(b) Of property connected with the trade,
business or profession, if the loss arises
from fires, storms, shipwreck, or other
casualties, or from robbery, theft or
embezzlement.
*Sec. of Finance will prescribe
the time and manner of
submitting declaration of loss
sustained from casualty or
from robbery, theft or
embezzlement; provided not
less than 30 days nor more
than 90 days from the date of
discovery
(c) No loss shall be allowed as a deduction
under this Subsection if at the time of
the filing of the return, such loss has
been claimed as a deduction for estate
tax purposes in the estate tax return.
In case of a nonresident alien individual or
foreign corporation: losses deductible shall be
those actually sustained during the year
incurred in business, trade or exercise of a
profession conducted within the Philippines,
when such losses are not compensated
ii. Rev. Reg. 12-77
(Atty. Deborah S. Acosta-
Conditions for Deductibility of Losses [Bar
1998]
1. The loss must be that of the taxpayer;
2. The loss is actually sustained and
charged off within the taxable year;
3. The loss is evidenced by a closed and
completed transaction;
4. The loss is not claimed as a deduction
for estate tax purposes;
5. The loss is not compensated for by
insurance or otherwise;
6. In the case of an individual , the loss
must be connected with his trade,
business, or profession, or incurred in
any transaction entered into for profit
though not connected with his trade
trade, business, or profession; and
7. In the case of casualty loss, it has been
reported to the BIR within 45 days from
date of occurrence of the loss.
Bad Debt Theory
Loss from theft or embezzlement occurring in
the year and discovered in another year is
ordinarily deductible for the year in which
sustained
In case the taxpayer had no means of
determining the actual date of the
embezzlement, a loss was sustained in the year
of discovery.
*the rule is now modified by the bad debt theory
which holds that since the embezzlement of
funds creates a debtor-creditor relationship, the
loss is deductible as bad debt in the year when
the right of recovery becomes worthless
(Talisay-Silay Milling Co. v. CIR, CTA, 1965).
iii. RMO 31-2009
Requirements for the Filing of Claims of
Casualty Loss
a. Sworn Declaration of Loss to be filed
within 45 days after the date of the
event, stating:
i. Nature of the event and time of
occurrence;
ii. Description and location of the
damaged property
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iii. Items needed to compute the
losses (e.g., cost or other basis
of properties; depreciation
allowed; value of properties
before and after the event; cost
of repair)
iv. Amount of insurance or other
compensation received or
receivable
b. Proof of elements of the losses claimed,
such as, but not limited to:
i. Photographs of properties
taken before and after the
event
ii. Documentary evidence for
determining the cost and
valuation of the damaged
properties (e.g., cancelled
checks, vouchers, receipts)
iii. Police report
*Failure to report can
be held against the
taxpayer
If the insurance proceeds exceed the net book
value of the damaged assets, such excess shall
be subject to the regular Income Tax, but not to
the Value-Added Tax, since the indemnification
is not an actual sale of goods by the insured
company of the insurance company
In the event of a total loss/destruction of
properties used in the business enterprise, the
net book value (costs less accumulated
depreciation) immediately preceding the
natural disaster should be used as the basis in
claiming casualty losses, and shall be reduced by
the amount of insurance proceeds received.
*No loss is sustained by the transfer of property
by gift or death
*Losses sustained in illegal transaction are not
deductible
B. NET OPERATING LOSS CARRY OVER
(NOLCO)
“Net operating loss” - the excess of allowable
deduction over gross income of the business in a
taxable year
(Atty. Deborah S. Acosta-
i. Sec. 34(D)(3), NIRC
General rule: the net operating loss of the
business or enterprise for any taxable year
immediately preceding the current taxable year,
not previously offset as deduction, shall be
carried over as a deduction from gross income
for the next three (3) consecutive taxable
years immediately following the year of such
loss
Exceptions:
1. Any net loss incurred in a taxable year
during which the taxpayer was exempt
from income tax shall not be allowed
as a deduction under this Subsection
2. A net operating loss carry-over shall be
allowed only if there has been no
substantial change in the ownership of
the business or enterprise in that---
i. Not less than seventy-five
percent (75%) in nominal
value of outstanding issued
shares, if the business is in the
name of a corporation, is held
by or on behalf of the same
persons; or
ii. Not less than seventy-five
percent (75%) of the paid up
capital of the corporation, is
held by or on behalf of the
same persons.
iii. For mines other than oil and
gas wells, a net operating loss
without the benefit of
incentives provided for under
E.O. No. 226 (Omnibus
Investments Code of 1987), as
amended, incurred in any of
the first ten (10) years of
operation may be carried
over as a deduction from
taxable income for the next
five (5) years immediately
following the year of such loss.
*The entire amount of the loss
shall be carried over to the first
of the five (5) years following
the loss, and any portion of
such loss which exceeds the
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taxable income of such first
year shall be deducted in like
manner from the taxable
income of the next remaining
four (4) years
ii. Rev. Reg. 14-2001
Entities not Entitled to Claim Deduction of
NOLCO:
1) Offshore Banking Unit of a foreign
banking corporation, and Foreign
Currency Deposit Unit of a domestic or
feoreign banking corporation, duly
authorized as such by BSP;
2) Enterprises registered with the BOI,
with respect to BOI-registered activity
enjoying the Income Tax Holiday
incentive;
3) Enterprises registered with the PEZA,
with respect to PEZA-registered
business activity;
4) Enterprises registered under the Bases
Conversion and Development Act of
1992;
5) Foreign corporations engaged in
international shipping or air carriage
business in the Philippines; and
6) Any person, natural or juridical,
enjoying exemption from income tax,
pursuant to the provisions of the Code
or any special law, with respect to its
operation during the period for which
the aforesaid exemption is applicable.
An individual who claims the 10% optional
standard deduction shall not simultaneously
claim deduction of the NOLCO, provided that
the three-year reglementary period shall
continue to run notwithstanding the fact that
the said individual availed of the 10% optional
standard deduction during the said period.
In the case of corporations, the three-year
reglementary period on the carry-over of
NOLCO shall also continue to run
notwithstanding the fact that it has paid its
income tax under the “Minimum Corporate
Income Tax” computation. NOLCO shall be
availed of on a “first-in, first-out basis.
(Atty. Deborah S. Acosta-
C. OTHER TYPES OF LOSSES
i. Capital Losses (Sec. 34(D)(4),
NIRC)
“Capital assets” - property held by the taxpayer
(whether or not connected with his trade or
business), but does not include stock in trade of
the taxpayer or other property of a kind which
would properly be included in the inventory of
the taxpayer if on hand at the close of the
inventory of the taxable year, or property held
by the taxpayer primarry for sale to customers
in the ordinary course of his trade or business,
or property used in the trade or business, of a
character which is subject to the allowance for
depreciation provided in Subsection (F) of
Section 34; or real property used in trade or
business of the taxpayer
“Net Capital Gain” - the excess of the gains
from sales or exchanges of capital assets over
the losses from such sales or exchanges
“Net Capital Loss” - excess of the losses from
sales or exchanges of capital assets over the
gains from such sales or exchanges
- Losses resulting from securities
becoming worthless during the taxable
year and are capital assets
Percentage Taken into Account
In case of a taxpayer, other than a corporation,
only the following percentages of the gain or
loss recognized upon the sale or exchange of a
capital asset shall be taken into account in
computing net capital gain, net capital loss, and
net income:
(1) One hundred percent (100%) if the
capital asset has been held for not more
than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset
has been held for more than twelve (12)
months
Limitation on Capital Losses
Losses from sales or exchanges of capital assets
shall be allowed only to the extent of the gains
from such sales or exchanges.
If a bank or trust, a substantial part of whose
business is the receipt of deposits, sells any
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bond, debenture, note or certificate or other
evidence of indebtedness issued by any
corporation, 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.
Net Capital Loss Carry-Over
If any taxpayer, other than a corporation,
sustains any taxable year a capital loss, such loss
(in an amount not in excess of the net income for
such year) shall be treated in the succeeding
taxable year as a loss from the sale or
exchange of a capital asset held for not more
than twelve (12) months.
*Amounts received upon retirement bonds,
debentures, notes or certificates or other
evidences of indebtedness, with interest
coupons or in registered form, shall be
considered as amounts received in exchange
therefor
Gains and Losses from Short Sales, Etc.
- Considered as gains or losses from sales
or exchanges of capital assets;
- If such gains or losses are attributable
to the failure to exercise privileges or
options to buy or sell property, it is
considered as capital gains or losses.
ii. Losses from Wash Sales (Sec.
34(D)(5), 38, NIRC)
“Wash sales” - sale of a security (stocks, bonds,
options) at a loss and repurchase of the same or
substantially identical security shortly before or
after
“Losses from Wash Sales” - any loss claimed to
have been sustained from any sale or other
disposition of shares of stock or securities
General Rule: Where it appears that within a
period beginning thirty (30) days before the
date of such sale or disposition and ending
thirty (30) days after such date, the taxpayer has
acquired, or has entered into a contract or
option so to acquire, substantially identical
(Atty. Deborah S. Acosta-
stock or securities, then NO DEDUCTION for
the loss shall be allowed
Exception: Claim is made by a dealer in stock or
securities and with respect to a transaction
made in the ordinary course of business of such
dealer
If the amount of stock or securities acquired (or
covered by the contract or option to acquire) is
less than the amount of stock or securities sold
or otherwise disposed of, then the particular
shares of stock or securities, the loss from the
sale or other disposition of which is not
deductible, shall be determined under rules and
regulations prescribed by the Sec. of Finance
If the amount of stock or securities acquired (or
covered by the contract or option to acquire) is
not less than the amount of stock or securities
sold or otherwise disposed of, then the
particular shares of stock or securities, the
acquisition of which is resulted in the non-
deductibility of the loss, shall be determined
under the rules and regulations prescribed by
the Secretary of Fiance.
iii. Wagering Losses (Sec. 34(D)
(6), 38, NIRC)
- Losses from wagering transactions
- Allowed only to the extent of the gains
from such transactions
iv. Abandonment Losses (Sec.
34(D)(7), NIRC)
In case a contract area where petroleum
operations are undertaken is partially or
wholly abandoned: all accumulated
exploration and development expenditures
pertaining thereto shall be allowed as deduction
If incurred prior to January 1, 1979; allowed
as deduction only from any income derived from
the same contract area.
In case a producing well is subsequently
abandoned: the unamortized costs thereof, as
well as the undepreciated costs of equipment
directly used therein, shall be allowed as a
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deduction in the year such well, equipment or
facility is abandoned by the contractor.
If such 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 resumption or restoration and shall
be amortized or depreciated
D. CASES
Plaridel Surety & Insurance Co. v. CIR, G.R. No.
L-21520
The rule is that the loss deduction will be denied
if there is a measurable right to compensation
for the oss, with ultimate collection reasonably
clear. So where there is reasonable ground for
reimbursement, the taxpayer must seek his
redress and may not secure a loss deduction
until he establishes that no recovery may be
had. In other words, the taxpayer must first
exhaust his remedies to recover or reduce his
loss.
Fernandez Hermanos, Inc. v. CIR, G.R. No. L-
21551, L-21557, L-21557, L-24978,
The Court sustains the Tax Court's disallowance
of the sums of P8,989.76 and P27,732.66 spent
by the taxpayer for the operation of its
Balamban coal mine in Cebu in 1950 and 1951,
respectively, and claimed as losses in the
taxpayer's returns for said years. The Tax Court
correctly held that the losses "are deductible in
1952, when the mines were abandoned, and not
in 1950 and 1951, when they were still in
operation." The taxpayer's claim that these
expenditures should be allowed as losses for the
corresponding years that they were incurred,
because it made no sales of coal during said
years, since the promised road or outlet through
which the coal could be transported from the
mines to the provincial road was not
constructed, cannot be sustained. Some definite
event must fix the time when the loss is
sustained, and there it was the event of actual
abandonment of the mines in 1952.
China Bank Corp. v. CA, G.R. No. 125508
The Court ruled that shares of stock held by way
of an investment are considered as capital assets
under the law and when said shares held by
(Atty. Deborah S. Acosta-
such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of
capital assets under Section 29(d)(4)(B) of the
National Internal Revenue Code. In the case at
bar, First CBC Capital (Asia), Ltd., the investee
corporation, is a subsidiary corporation of
petitioner bank whose shares in said investee
corporation are not intended for purchase or
sale but as an investment. Unquestionably then,
any loss therefrom would be a capital loss, not
an ordinary loss to the investor. The Court also
ruled that equity holdings cannot come close to
being, within the purview of "evidence of
indebtedness" under Section 33 of the NIRC. The
loss of petitioner bank in its equity investment
in the Hongkong subsidiary cannot also be
deductible as a bad debt. The shares of stock in
question did not constitute a loan extended by it
to its subsidiary (First CBC Capital) or a debt
subject to obligatory repayment by the latter,
essential elements to constitute a bad debt, but a
long term investment made by CBC.
Bar Question (2016)
Rakham operates the lending company that
made a loan to Alfonso in the amount of
P120,000 subject to a promissory note which is
due within one year from the note’s issuance.
Three years after the loan became due and upon
information that Alfonso is nowhere to be found,
Rakham asks you for advice on how to treat the
obligation as “bad debt.” Discuss the requisites
for deductibility of a “bad debt.”
I will advise Rakham that the obligation of
Alfonso may now be considered as bad debts for
having met the yardstick of a debt which had
become worthless. In order to be considered
worthless, the taxpayer should establish that
during the year from which a deduction is
sought, a situation developed as a result of
which it became evident in the exercise of
sound, objective business judgment that there
remained no practical, but only vaguely
theoretical, prospect that the debt would ever be
paid (Collector v. Goodrich International
Rubber Co., G.R. No. L-22265). A bad debt is
deductible if it complies with the following
requisites:
a. There must be a valid and subsisting
debt.
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b. The obligation is connected with the
taxpayer’s trade or business and is not
between related parties.
c. There is an actual ascertainment that
the debt is worthless.
d. The debt is charged-off during the
taxable year. A partial write-off is not
allowed (PRC v. CA, 1996)
Bar Question (2010)
“A” is a travelling salesman working full time for
Nu Skin Products. He receives a monthly salary
plus 3% commission on his sales in a Southern
province where he is based. He regularly uses
his own car to maximize his visits even to far-
flung areas. One fine day, a group of militants
seized his car. He was notified the following day
by the police that the marines and the militants
had a bloody encounter and his car was
completely destroyed after a grenade hit it. “A”
wants to file a claim for casualty loss. Explain
the legal basis of your tax advice.
I would advise “A” not to file a claim for casualty
loss deduction from gross income, because he
derives purely compensation income, which
includes the 3% commission on his sales, from
his employer. An individual who receives
compensation income under an employer-
employee relationship is not entitled to any kind
of deduction (whether itemized or the standard
deduction) from gross income (Sec. 34, NIRC).
Indeed, he is allowed to deduct from his gross
compensation income only the personal and
additional exemptions authorized in Section 35
of the Tax Code [NOTE: The allowance for
personal and additional exemptions as an
allowable deduction of individuals was repealed
by R.A. 10963 (TRAIN)]. Besides, to be
deductible from gross income, casualty loss
must relate to a property connected with the
trade, business or profession of the taxpayer
(Sec. 34[D][2], NIRC).
Bar Question (1993)
X is a traveling salesman in Joso, Sulu. In the
course of his travel, a band of MNLF seized his
car by force and used it to kidnap a foreign
missionary. The next day, X learned that the
military and the MNLF band had a chance
encounter. Using heavy weapons, the military
fired at the MNLF band that tried to escape with
(Atty. Deborah S. Acosta-
the use of X’s car. All the members of the band
died and X’s car was a total wreck. Can X deduct
the value of his car from his income as
casualty loss? Reasons.
Section 29(1)(c) of the NIRC provides that in
cases of individual taxpayers, losses to be
deductible must:
a) Actually be sustained and charged off
within the taxable year;
b) Have been incurred in trade, profession
or business or in any transaction
entered into for profit, though not
connected with trade, profession or
business;
c) Be evidenced by a closed and completed
transaction.
Moreover, Section 1 of Rev. Regs. No.
12-77 defined “casualty loss” as a complete or
partial destruction of property resulting from an
identifiable event of sudden, unexpected, or
unusual nature. It denotes accidents, some
sudden invasion by hostile agency and excludes
progressive deterioration.
Based on the abovementioned laws and
the circumstances of the case at bar, the value of
the wrecked car is deductible as casualty loss,
provided the regulations governing
substantiation requirements for losses are
complied with.
5 - BAD DEBTS
“Bad debts” - debt resulting from the
worthlessness or uncollectibility, in whole or in
part, of amount due the taxpayer by others,
arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered.
- Arises when a loan or debt for services
or sale or rental of property becomes
worthless or uncollectible
- Debt must have had a value when
acquired or created
If a worthless debt arises from unpaid wages,
rents, etc.: there is no deduction, UNLESS the
unpaid amount has been included in income.
A. SEC. 34(E), NIRC
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Bad Debts in General: debts due to the taxpayer
actually ascertained to be worthless and
charged off within the taxable year except those
not connected with profession, trade or
business and those sustained in a transaction
entered into between parties mentioned under
Recovery of bad debts previously allowed as
deduction in the preceding years: included as
part of the gross income in the year of
recovery to the extent of the income tax benefit
of said deduction.
Securities of taxpayers other than a bank or
trust company, a substantial part of whose
business is the receipt of deposits
If ascertained to be worthless and charged off
within the taxable year and are capital assets,
the loss resulting therefrom shall be
considered as a loss from the sale or exchange
on the last day of such taxable year, of capital
assets.
B. REV. REG. 5-99
Requisites for Valid Deduction of Bad Debts
from Gross Income of a Corporation or an
Individual engaged in Trade or business or a
Professional engaged in the practice of his
Profession
a) There must be an existing indebtedness
due to the taxpayer which must be valid
and legally demandable;
b) The same must be connected with the
taxpayer’s trade, business or practice of
profession;
c) The same must not be sustained in a
transaction entered into between
related parties enumerated under
Section 36(B) of the Tax Code of 1997
d) The same must be actually charged off
the books of accounts of the taxpayer as
of the end of the taxable year; and
e) The same must be actually ascertained
to be worthless and uncollectible as of
the end of the taxable year.
Recovery of bad debts previously allowed as
deduction in the preceding year or years will be
included as part of the taxpayer’s gross
income in the year of such recovery to the
(Atty. Deborah S. Acosta-
extent of the income tax benefit of said
deduction.
C. REV. REG. 25-2002
- Amends RR No. 5-99 relative to the
requirements for deductibility of bad
debts from the gross income of a
corporation, including banks, insurance
companies, or an individual, estate and
trust that is engaged in trade or
business or a professional engaged in
the practice of his profession.
Requisites
1) There must be an existing indebtedness
due to the taxpayer which must be valid
and legally demandable;
2) Indebtedness must be connected with
the taxpayer’s trade, business or
practice of profession;
3) Indebtedness must not be sustained in a
transaction entered into between
related parties enumerated under Sec.
36(B) of the Tax Code of 1997;
4) Indebtedness must be actually charged
off the books of accounts of the
taxpayer as of the end of the taxable
year; and
5) Indebtedness must be actually
ascertained to be worthless and
uncollectible as of the end of the taxable
year.
*taxpayer must ascertain and be able to
demonstrate with reasonable degree of
certainty the uncollectibility of the debt.
In the case of banks: taxpayer shall submit a
BSP/MB written approval of the writing off of
the indebtedness from the banks’ book of
accounts at the end of the taxable year.
In case of an insurance or surety company: a
receivable shall not be written-off from the
taxpayer’s books and claimed as bad debts
deduction UNLESS such company has been
declared closed due to insolvency or for any
such similar reason by the Insurance
Commissioner.
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Collector v. Goodrich International Rubber
Co., G.R. No. L-22265
Our statute permits the deduction of debts
"actually ascertained to be worthless within the
taxable year," obviously to prevent arbitrary
action by the taxpayer, to unduly avoid tax
liability.
The requirement of ascertainment of
worthlessness requires proof of two facts: (1)
that the taxpayer did in fact ascertain the debt to
be worthless, in the year for which the
deduction is sought; and (2) that, in so doing, he
acted in good faith.
Good faith on the part of the taxpayer is
not enough. He must show, also, that he had
reasonably investigated the relevant facts and
had drawn a reasonable inference from the
information thus obtained by him.
Fernandez Hermanos, Inc. v. CIR, G.R. No. L-
21551
The Tax Court's disallowance of the writing-off
in 1951 as a loss or bad debt the sum of
P353,134.25, which it had advanced or loaned to
Palawan Manganese Mines, Inc., was proper.
The Solicitor General has rightly pointed out
that the taxpayer has taken an "ambiguous
position" and "has not definitely taken a stand
on whether the amount involved is claimed as
losses or as bad debts but insists that it is either
a loss or a bad debt. "We sustain the
government's position that the advances made
by the taxpayer to its 100% subsidiary, Palawan
Manganese Mines, Inc. amounting to
P587,308.07 as of 1951 were investments and
not loans. The evidence on record shows that
the board of directors of the two companies
since August, 1945 were identical and that the
only capital of Palawan Manganese Mines, Inc. is
the amount of P100,000.00 entered in the
taxpayer's balance sheet as its investment in its
subsidiary company. This fact explains the
liberality with which the taxpayer made such
large advances to the subsidiary, despite the
latter's admittedly poor financial condition.
Bar Question (1999)
Explain if the following items are deductible
from gross income for income tax purposes.
Disregard who is the person claiming the
deduction.
(Atty. Deborah S. Acosta-
1) Reserves for bad debts;
Reserves for bad debts are not allowed as
deduction from gross income. Bad debts must be
charged off during the taxable year to be
allowed as deduction from gross income. The
mere setting up of reserves will not give rise to
any deduction (Sec. 34[E], NIRC).
2) Worthless securities
Worthless securities, which are ordinary assets,
are not allowed as deduction from gross income
because the loss is not realized. However, if
these worthless securities are capital assets, the
owner is considered to have incurred a capital
loss as of the last day of the taxable year and,
therefore, deductible to the extent of capital
gains (Sec. 34[D][4], NIRC). This deduction,
however, is not allowed to a bank or trust
company (Sec. 34[E][2], NIRC).
Bar Question (2004)
PQR Corporation claimed as a deduction in its
tax return the amount of P1,000,000 as bad
debts. The corporation was assessed by the CIR
for deficiency taxes on the ground that the debts
cannot be considered as “worthless”, hence, they
do not qualify as bad debts. The company asks
for your advice on “What factors will hold in
determining whether or not the debts are
bad debts?” Answer and explain briefly.
In order that debts shall be considered as bad
debts because they have become worthless, the
taxpayer should establish that during the year
for which the deduction is sought, a situation
developed as a result of which it became evident
in the exercise of sound, objective business
judgment that there remained no practical, but
only vaguely theoretical, prospect that the debt
would ever be paid (Collector v. Goodrich
International Rubber Co., L-22265)
“Worthless” is not determined by an inflexible
formula or slide rule calculation, but upon the
exercise of sound business judgment. The
factors considered include, but are not limited
to, the following: (a) the debtor has no property
nor visible income; (b) the debtor has been
adjudged bankrupt or insolvent; (c) collateral
shares have become worthless; and (d) there
are numerous debtors with small amounts of
debts and further action on the accounts would
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entail expenses exceeding the amounts sought
to be collected.
Tax Benefit Rule
The recovery of bad debts previously allowed as
deduction in the preceding year or years shall be
included as part of the taxpayer’s gross income
in the year of such recovery to the extent of the
income tax benefit of said deduction.
Example: if in the year the taxpayer claimed
deduction of bad debts written-off, he realized a
reduction of the income tax due from him on
account of the said deduction, his subsequent
recovery thereof from his debtor shall be
treated as a receipt of realized taxable income.
Conversely, if the said taxpayer did not benefit
from the deduction of the said bad debt written-
off because it did not result to any reduction of
his income tax in the year of such deduction (i.e.,
where the result of his business operation was a
net loss even without deduction of the bad debts
written-off), then his subsequent recovery
thereof shall be treated as a mere recovery or a
return of capital, hence, not treated as receipt of
realized taxable income.
Under this rule, the recovery of amounts
deducted in previous years from gross
income become taxable income UNLESS to the
extent thereof, the deduction did not result in
any tax benefit to the taxpayer.
Rev. Regs. No. 2
Any amount subsequently received on account
of a bad debt previously charged off and allowed
as deduction for prior years must be included in
the gross income for the taxable year in which it
was received.
Vis-a-vis Federal Income Tax Regulations
Recoveries of bad debts previously deducted do
not constitute taxable income, UNLESS the
deductions of bad debts in prior years resulted
in a reduction of income tax liability. This
doctrine can only be availed of by a creditor but
never a debtor (Phil. Fiber Processing Co. v. CIR,
1966)
Bar Question (2003)
(Atty. Deborah S. Acosta-
A. What is meant by the “tax benefit
rule”?
Tax Benefit Rule states that the taxpayer is
obliged to declare as taxable income subsequent
recovery of bad debts in the year they were
collected to the extent of the tax benefit enjoyed
by the taxpayer when the bad debts were
written-off and claimed as deduction from gross
income. It also applies to taxes previously
deducted from gross income but which were
subsequently refunded or credited. The
taxpayer is also required to report as taxable
income the subsequent tax refund or tax credit
granted to the extent of the tax benefit of the
taxpayer enjoyed when such taxes were
previously claimed as deduction from income
B. Give an illustration of the application
of the tax benefit rule.
X Company has a business connected receivable
amounting to P100,000 from Y who was
declared bankrupt by a competent court.
Despite earnest efforts to collect the same, Y was
not able to pay, prompting X Company to write-
off the entire liability. During the year of write-
off, the entire amount was claimed as a
deduction for income tax purposes reducing the
taxable net income of X Company to only
P1,000,000. Three years later, Y voluntarily paid
his obligation previously written-off to X
Company. In the year of recovery, the entire
amount constitutes part of gross income of X
Company because it was able to get full tax
benefit three years earlier.
Bar Question (2014)
Doñ a Evelina, a rich widow engaged in the
business of currency exchange, was assessed a
considerable amount of local business taxes by
the City Govt of Bagnet by virtue of Tax
Ordinance No. 24. Despite her objections
thereto, Doñ a Evelina paid the taxes.
Nevertheless, unsatisfied with said Tax
Ordinance, Doñ a Evelina, through her counsel
Atty. ELP, filed a written claim for recovery of
said local business taxes and contested the
assessment. Her claim was denied, and so Atty.
ELP elevated her case to the RTC.
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The RTC declared Tax Ordinance No 24
null and void without legal effect for having
been enacted in violation of the publication
requirement of tax ordinances and revenue
measures under the LGC and on the ground of
double taxation. On appeal, the CTA affirmed the
decision of the RTC. No motion for
reconsideration was filed and the decision
became final and executory.
(B) If Doña Evelina eventually recovers the
local business taxes, must the same be
considered as income taxable by the national
government?
Yes, subject to the tax benefit rule. The local
business tax paid is a business connected tax
hence, deductible from gross income. If at the
time of its deduction it resulted to a tax benefit
to Doñ a Evelina, then the recovery will form
part of gross income to the extent of the tax
benefit on the previous deduction (Sec. 34[C][1],
NIRC).
6 - DEPRECIATION
“Depreciation” - the gradual diminution in the
useful value of tangible property resulting from
wear and tear and normal obsolescence.
- Also applied to amortization of the
value of intangible assets, the use of
which in the trade or business is
definitely limited in duration
- As used in this section, it excludes any
idea of a mere reduction in market
value not resulting from exhaustion,
wear and tear, or obsolescence.
General rule: depreciation deduction or a
reasonable allowance for the exhaustion, wear
and tear, and obsolescence of property used in
the trade or business may be deducted from
gross income (Sec. 34(F), NIRC)
Who may take Depreciation
Those who sustain an economic loss from the
decrease in property value due to depreciation.
Ordinarily, this is the person who owns and has
a capital investment in the property
Conditions for Deductibility of Depreciation
(Atty. Deborah S. Acosta-
1. The allowance for depreciation must be
reasonable;
2. It must be for property arising out of its
use in the trade or business, or out of its
not being used temporarily during the
year; and
3. It must be charged off during the
taxable year from the taxpayer’s books
of accounts.
Bar Question (1998)
1. What is the proper allowance for
depreciation of any property used in
trade or business?
The proper allowance of depreciation of any
property used in trade or business refers to the
reasonable allowance for the exhaustion, wear
and tear (including reasonable allowance for
obsolescence) of said property. The reasonable
allowance shall include, but not limited to, an
allowance computed under any of the following
methods: (a) straight-line method; (b) declining-
balance methods; (c) sum-of-years-digit
method; and (d) any other method which may
be prescribed by the Sec. of Finance upon
recommendation of the CIR (Sec. 34[F], NIRC).
2. What is the annual depreciation of a
depreciable fixed asset with a cost of
P100,000 and an estimated useful
life of 20 years and salvage value of
P10,000 after its useful life?
The annual depreciation of the depreciable fixed
asset may be computed on the straight-line
method which will allow the taxpayer to deduct
an annual depreciation of P4,500, arrived at by
dividing the depreciable value of P100,000 by
the estimated useful life of 20 years.
A. METHODS OF DEPRECIATION
i. Straight Line Method
- calculated by dividing
the difference between
an asset's cost and its
expected salvage value
by the number of years
it is expected to be
used.
ii. Declining Balance Method
- Uses a rate not
exceeding twice the
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TAX 2 FINALS EXAM REVIEWER
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rate which would have
been used had the
annual allowance been
computed under the
method described in
Subsection (F)(1)
iii. Sum of the Years Digit
Method
- a form of accelerated
depreciation that is
based on the
assumption that the
productivity of the
asset decreases with
the passage of time.
Under this method, a
fraction is computed
by dividing the
remaining useful life of
the asset on a facilities, or
particular date by the
sum of the year's digits
Agreement as to Useful Life on which
Depreciation Rate is Based
If the taxpayer and the Commissioner have
entered into an agreement in writing specifically
dealing with the useful life and rate of
depreciation of any property, the rate so
agreed upon shall be binding on both the
taxpayer and the National Government
In case of presence of facts and circumstances
not taken into consideration during the
adoption of such agreement, the party
initiating the modification shall have the
responsibility of establishing the existence of
such facts and circumstances
Any change in the agreed rate and useful life
of the depreciable property as specified in the
agreement shall not be effective for taxable
years prior to the taxable year in which notice
(in writing by certified mail or registered mail)
is served by the party initiating such change to
the other party
Where the taxpayer has adopted such useful life
and depreciation rate for any depreciable asset
and claimed the depreciation expenses as
(Atty. Deborah S. Acosta-
deduction from his gross income, without any
written objection on the part of the
Commissioner or his duly authorized
representative, the aforesaid useful life and
depreciation rate so adopted shall be
considered binding
B. SPECIAL RULES ON DEPRECIATION
i. Private Educational
Institutions (Sec. 34(A)(2),
NIRC)
In addition to other allowable deductions, a
private educational institution may, at its option,
elect either:
a) To deduct expenditures otherwise
considered as capital outlays of
depreciable assets incurred during the
taxable year for the expansion of school
b) To deduct allowance for depreciation
thereof
ii. Petroleum Operations (Sec.
34(F)(4))
Depreciation in respect of all properties
directed related to production of petroleum
initially placed in service in a taxable year shall
be allowed under the straight-line or declining-
balance method at the option of the service
contractor
If the declining-balance method is initially
elected, the service contractor may at any
subsequent date, shift to the straight-line
method.
Useful life of properties used in or related to
production of petroleum: 10 years or such
shorter life as may be permitted by the
Commissioner
Useful life of properties not directly used in
the production of petroleum: estimated at five
years; depreciated under the straight-line
method
iii. Mining Operations (Sec.
34(F)(5))
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TAX 2 FINALS EXAM REVIEWER
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Depreciation in respect of all properties used
in mining operations other than petroleum
operations shall be computed as follows:
(a) At the normal rate of depreciation if
the expected life is ten (10) years or
less; or
(b) Depreciated over any number of years
between five (5) years and the
expected life if the latter is more than
ten (10) years, and the depreciation
thereon allowed as deduction from
taxable income
*contractor must notify the Commissioner
which of the depreciation rates it will use
iv. For Nonresident Aliens
Engaged in Trade or Business
or Resident Foreign
Corporation (Sec. 34(F)(6))
- A reasonable allowance for the
deterioration of property arising out of
its use or employment or its non-use
in the business, trade or profession
shall be permitted only when such
property is located in the Philippines
Basilan Estate, Inc. v. Commissioner, G.R. No.
L-22492
The income tax law does not authorize the
depreciation of an asset beyond its acquisition
cost. Reason:: deductions from gross income
are privileges, not matters of right. They are not
created by implication but upon clear
expression in the law. Moreover, the recovery,
free of income tax, of an amount more than the
invested capital in an asset will transgress the
underlying purpose of a depreciation allowance.
For then what the taxpayer would recover will
be, not only the acquisition cost, but also some
profit. Recovery in due time through
depreciation of investment made is the
philosophy behind depreciation allowance; the
idea of profit has never been the underlying
reason for the allowance. Hence, depreciation on
appraisal value is not allowed.
Zamora v. Collector, No. L-15290
As the lower court based its findings on Bulletin
F, petitioner Zamora, argues that the same
(Atty. Deborah S. Acosta-
should have been first proved as a law, to be
subject to judicial notice. Bulletin F, is a
publication of the US Federal Internal Revenue
Service, which was made after a study of the
lives of the properties. In the words of the lower
court: "It contains the list of depreciable assets,
the estimated average useful lives thereof and
the rates of depreciation allowable for each kind
of property. (See 1955 PH Federal Taxes, Par.
14, 160 to Par. 14, 163-0). It is true that Bulletin
F has no binding force, but it has a strong
persuasive effect considering that the same has
been the result of scientific studies and
observation for a long period in the United State
after whose Income Tax Law ours is patterned."
Verily, courts are permitted to look into and
investigate the antecedents or the legislative
history of the statutes involved (Director of
Lands v. Abaya, et al., 63 Phil. 559). Zamora also
contends that his basis for applying the 3-1/2%
rate is the testimony of its witness Mariano
Katipunan, who cited a book entitled "Hotel
Management — Principles and Practice" by
Lucius Boomer, President, Hotel Waldorf Astoria
Corporation. As well commented by the Solicitor
General, "while the petitioner would deny us the
right to use Bulletin F, he would insist on using
as authority, a book in Hotel management
written by a man who knew more about hotels
than about taxation. All that the witness did
(Katipunan) . . . is to read excerpts from the said
book (t.s.n. pp. 99-101), which admittedly were
based on the decision of the U.S. Tax Courts,
made in 1928 (t.s.n. p. 106)". In view hereof, We
hold that the 2-1/2% rate of depreciation of
the Bay View Hotel building, is approximately
correct.
Fernandez Hermanos Inc. v. CIR, CIR, G.R. No.
L-21551
During the year 1950 to 1954, the taxpayer
claimed a depreciation allowance for its
buildings at the annual rate of 10%. The
Commissioner claimed that the reasonable
depreciation rate is only 3% annually. We
sustain the Tax Court's finding that the taxpayer
did not submit adequate proof of the
correctness of the taxpayer's claim that the
depreciable assets or buildings in question had a
useful life only of 10 years so as to justify its
10% depreciation per annum claim, such finding
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TAX 2 FINALS EXAM REVIEWER
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being supported by the record. The taxpayer's
contention that it has many zero or one-peso
assets, support the Commissioner's position that
a 10% annual depreciation rate was excessive.
7 - DEPLETION (SEC. 34(G), NIRC)
In case of oil and gas wells or mines, a
reasonable allowance for depletion or
amortization computed in accordance with the
cost-depletion method shall be granted
When the allowance for depletion shall equal
the capital invested: no further allowance shall
be granted
After production in commercial 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 wells
and/or mines; or
(b) Shall be deductible in full in the year
paid or incurred or, at the election of
the taxpayer, may be capitalized and
amortized if such expenditures
incurred are for producing wells and/or
mines in the same contract area
“Intangible costs in petroleum operations” -
any cost incurred in petroleum operations in
which in itself has no salvage value and which is
incidental to and necessary for the drilling of
wells and preparation of wells for the
production of petroleum
- Shall not pertain to the acquisition or
improvement of property of a character
subject to the allowance for
depreciation except that the allowance
for depreciation on such property shall
be deductible
*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 the adjusted cost basis for the
purpose of computing allowable cost depletion.
(Atty. Deborah S. Acosta-
Election to Deduct Exploration and
Development Expenditures in Mining
Operations
Taxpayer may, at his option, deduct exploration
and development expenditures accumulated as
cost or adjusted basis for cost depletion as of
date of prospecting, as well as exploration and
development expenditures paid or incurred
during the taxable year.
Total amount deductible for exploration and
development expenditures: shall not exceed
twenty-five percent (25%) of the net income
from mining operations computed without the
benefit of any tax incentives under existing laws.
Actual exploration and development
expenditures MINUS 25% of the net income
from mining: shall be carried forward to the
succeeding years until fully deducted.
*election of the taxpayers shall be irrevocable
and shall be binding in succeeding taxable
years
“Net income from mining operations” - gross
income from operations LESS “allowable
deductions” necessary or related to mining
operations
“Allowable deductions” - mining, milling and
marketing expenses, and depreciation of
properties directly used in the mining
operations.
“Exploration expenditures” - expenditures
paid or incurred during the development stage
of the mine or other natural deposits.
“Development stage of the mine or other
natural deposits” - at the time when deposits of
ore or other minerals are shown to exist in
sufficient commercial quantity and quality
“End stage” - upon commencement of actual
commercial extraction
Depletion of Oil and Gas Wells and Mines
Deductible by a Nonresident Alien Individual
engaged in trade or business in PH or
Foreign Corporation
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Allowance for depletion of oil and gas wells or
mines in this Subsection shall be authorized
ONLY in respect to oil and gas wells or mines
located within the Philippines
8 - CHARITABLE AND OTHER
CONTRIBUTIONS
“Accredited Domestic Corporations or
Associations” - refer to a corporation or
association/organization created or organized
for exclusively for one or more of the following
purposes:
i. religious;
ii. charitable;
iii. scientific;
iv. Youth and sports development;
v. Cultural;
vi. educational;
vii. rehabilitation of veterans; and
viii. social welfare
A. SUBJECT TO LIMITATION (SEC. 34(H)
(1), NIRC)
Conditions for Deductibility
1. The charitable contribution must
actually be paid or made to the
Philippine government or any political
subdivision thereof exclusively for
public purposes, or any of the
accredited domestic corporation or
association specified in the Tax Code;
2. It must be made within the taxable
year;
3. It must not exceed 10% (individual) or
5% (corporation) of the taxpayer’s
taxable income before charitable
contributions (whether deductible in
full or subject to limitation);
4. It must be evidenced by adequate
receipts or records; and
5. The amount of charitable contribution
of property other than money shall be
based on the acquisition cost of said
property (Sec. 34[H], NIRC). The
limitation is imposed to prevent abuse
of donating paintings and other
valuable properties and claiming
excessive deductions therefrom.
(Atty. Deborah S. Acosta-
*Irrespective of the accounting method used by
the donor, donation is recognized as a deduction
from his gross income in the year such donation
was actually paid or made, not in the year the
deed of donation was perfected. The
deductibility of donation is not governed by the
ordinary rules on deductibility of the expense.
Donation must be both perfected and
consummated before it can be allowed as a
deduction (Phil. Stock Exchange v. CIR, CTA,
2002).
Bar Question (1993)
The Filipinas Hospital for Crippled Children is a
charitable organization. X visited the hospital,
on his birthday, as was his custom. He gave
P1,000,000 to the hospital and P5,000 to a
crippled girl whom he particularly pitied. A
crippled son of X is in the hospital as one of its
patients. X wants to exclude both the P100,000
and the P5,000 from his gross income. Discuss.
Under Section 29(h)(1) of the NIRC, charitable
contributions to be deductible must be:
a. Actually paid or made to domestic
corporations or associations organized
and operated exclusively for religious,
charitable, scientific, youth and sports
development, cultural or educational
purposes or for rehabilitation of
veterans or to social welfare
institutions no part of which inures to
the benefit of any private individual;
b. Made within the taxable year;
c. Not more than six percent (now 10%)
(for individuals) or three percent (now
5%) (for corporations) of the
taxpayer’s taxable income to be
computed without including the
contribution.
Applying the above-provisions of law to
the case at bar, it is clear therefore that only the
P100,000 contribution of X to Filipinas Hospital
for Crippled Children qualified as a deductible
contribution.
Section 29(h)(1) of the NIRC expressly
provides that the same must be actually paid to
a charitable organization to be deductible. Note
that the law accorded no privilege to similar
contributions extended to private individuals.
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

Hence, the P5,000 contribution to the crippled deduction in the form of premium payments on
girl cannot be claimed as a deduction. health and/or hospitalization insurance in an
amount not exceeding P2,400 per annum (Sec.
Bar Question (1993) 34[M], NIRC). This deduction is allowed if the
X’s favorite charity organization is the aggregate family income does not exceed
Philippine National Red Cross (PNRC). To raise P250,000 and by the spouse, in case of married
money, PNRC sponsored a concert featuring the individual, who claims additional personal
Austria Boys Choir. X advanced P100,000 to the exemption for dependents. [NOTE: The
PNRC for which he was issued a promissory allowance for personal and additional
note. Before its maturity, X cancelled and exemptions and premium payments on health
returned the note to PNRC. an advertising man, and/or hospitalization insurance as an
X also undertook the promotions of the Austria allowable deduction of individuals were
Boys Choir. Part of the promotions campaign repealed by R.A. 10963 (TRAIN).]
was to ask prominent personalities to publicly
donate blood to the PNRC a day before the B. DEDUCTIBLE IN FULL (SEC. 34(H)(2))
concert. X himself donated 100 cc. Of blood. X
intends to claim as deductions the value of the 1. Donations to the Government
note, the cash value of the promotions campaign - Exclusively to finance, to
and the cash value of the blood he donated. Give provide for, or to be used in
your legal advice. undertaking priority activities
The value of the note can be claimed as in education, health, youth and
deduction as charitable contribution. While the sports development, human
amount was originally a loan, it can be settlements, science and
considered to have become a gift or contribution culture, and in economic
when X cancelled and returned the note to development, according to
PNRC, a charitable organization. National Priority Plan by NEDA
On the other hand, the cash value of the - Donation which is not in
promotions campaign cannot be claimed as a accordance with annual
deduction. Advertising expenses can only be priority plan subject to
deducted from revenues where the expenses limitations in paragraph (1) of
were incurred. In the case at hand, PNRC is the this Subsection
revenue-producing entity not X. X did not derive
any revenue. Thus, the cash value of his 2. Donations to Certain Foreign
promotions campaign cannot be claimed as Institutions or International
deduction. Organizations
Finally, the cash value of the blood - In pursuance of or in
donated by X cannot be claimed as deduction. compliance with agreements,
Blood has no monetary value in this case as it is treaties, or commitments
not disbursed in the form of expense. entered into by the
Government of PH and the
Bar Question (2001) foreign institutions or
international organizations or
Taxpayers, whose only income consist of
in pursuance of special laws
salaries and wages from their employers, have
long been complaining that they are not allowed
3. Donations to Accredited
to deduct any item from their gross income for
Nongovernment Organizations
purposes of computing their net taxable income.
(nonprofit domestic corporations:
With the passage of the Comprehensive Tax
(1) Organized and operated
Reform Act of 1997, is this complaint still
exclusively for scientific,
valid? Explain your answer.
research, educational,
No more. Gross compensation income
character-building and youth
earners are now allowed at least an item of

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TAX 2 FINALS EXAM REVIEWER
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and sports development,
health, social welfare, cultural
or charitable purposes, or a
combination thereof, no part
of the net income of which
inures to the benefit of any
private individual
(2) Which, not later than the 15th
day of the third month after the
close of the accredited
nongovernment organization’s
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 and operated,
unless an extended period is
granted
(3) The level of administrative
expense shall, on an annual
basis, conform with the rules
and regulations, but in no case
to exceed thirty percent
(30%) of the total expense;
and
(4) The assets of which, in the
event of dissolution, would be:
(a) Distributed to another
nonprofit domestic
corporation organized
for similar purpose,
or
(b) To the State for public
purpose, or
(c) Would be distributed
by a court to another
organization to be
used in such manner
as in the judgment of
said court shall best
accomplish the
general purpose for
which the dissolved
organization was
organized.
Valuation: based on the acquisition cost of
property
(Atty. Deborah S. Acosta-
C. REV. REG. NO. 13-98
- issued December 14, 1998 prescribes
the regulations to implement Republic
Act No. 8424 entitled "An Act Amending
the National Internal Revenue Code as
amended", specifically Section 34 (H)
relative to the deductibility of
contributions or gifts actually paid or
made to accredited donee institutions
in computing taxable income.
D. MC NO. 14-2008
- issued on January 29, 2008 clarifies the
validity of the Certificates of
Accreditation issued by the Philippine
Council for NGO Certification (PCNC) to
charitable institutions prior to the
effectivity date of Executive Order (EO)
No. 671.
Taxpayers and revenue officers are
advised that the Certificates of Accreditation
issued by the PCNC as of November 15, 2007 are
still valid until March 31, 2008. Accordingly,
holders of such certificates are directed to
renew their accreditation as donee-institutions
with the proper accrediting government entity
designated under EO No. 671 on or before
March 31, 2008.
Various government accrediting
agencies are advised to observe the applicable
guidelines for accreditation as set forth under
Revenue Regulations No. 13-98.
E. RMC 88-2007
- issued on December 17, 2007 publishes
the full text of Executive Order No. 671
dated October 22, 2007 entitled
“Designating Appropriate Government
Agencies to be the Accrediting Entities
that will Certify and Accredit Charitable
Organization as Donee-Institutions
Relative to the Deductibility of
Contributions or Gifts Received by
Them, in Relation to Section 34 of the
Tax Reform Act of 1997”
To determine the qualification of non-stock,
non-profit corporations, nongovernmental
organizations, associations, and foundations for
accreditation as qualified donee-institutions, the
following Departments are designated as
Accrediting Entities:
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TAX 2 FINALS EXAM REVIEWER
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a. Department of Social Welfare and
Development - for charitable and/or
social welfare organizations,
foundations and associations including
but not limited to those engaged in
youth, child, women, family, disabled
persons, older persons, welfare and
development;
b. Department of Science and Technology
– for organizations, associations and
foundations primarily engaged in
research and other scientific activities;
c. Philippine Sports Commission – for
organizations, foundations and
associations primarily engaged in
sports development;
d. National Council for Culture and Arts -
for organizations, foundations and
associations primarily engaged in
cultural activities; and
e. Commission on Higher Education – for
organizations, foundations and
associations primarily engaged in
educational activities.
The Accrediting Entities shall comply
with the standards and guidelines set by the
Department of Finance relative to accreditation
of non-stock, non-profit corporations/ non-
governmental organizations, as provided for in
Revenue Regulations No. 13-98.
Roxas v. CTA, No. L-25043
Contributions to the Christmas funds of the
Pasay City Police, Pasay City Firemen and
Baguio City Police are not deductible because
the Christmas funds were not spent for public
purposes but as Christmas gifts to the families of
members of said entities. Section 39 (h) of the
Tax Code provides that a contribution to a
government entity is deductible only when used
exclusively for public purposes. The
contribution to the chapel of the FEU located in
the premises of said school is not deductible
because said chapel was not shown to belong to
the Catholic church or any religious
organization; on the contrary it was found to
belong to the FEU contributions to which are not
deductible under sec. 30 (h) of the Tax Code
because the net income of said university inures
to the benefit of its stockholders.
(Atty. Deborah S. Acosta-
Contributions to the Philippines
Herald's fund for Manila's neediest families are
allowable deductions because such
contributions were not made to the Philippines
Herald but to a group of civic spirited citizens
organized by the Herald solely for charitable
purposes and said citizens do not receive
profits. Such group of citizens may, therefore, be
classified as an association exclusively
organized for charitable purpose mentioned in
sec. 30(h) of the Tax Code. Contributions to the
Manila y Police Trust Fund constitute allowable
deductions because the trust fund belongs to the
Manila Police, a government entity intended to
be used exclusively for its public functions.
9 - RESEARCH AND DEVELOPMENT (SEC. 34
(I), NIRC)
“Research or development expenditures”
- May be treated as ordinary and
necessary expenses which are not
chargeable to capital account, when
paid or incurred by the taxpayer during
the taxable year in connection with his
trade, business or profession
Amortization of Certain Research and
Development Expenditures
At the election of the taxpayer and in accordance
with rules and regulations, the following
research and development expenditures may be
treated as deferred expenses:
(a) Paid or incurred by the taxpayer in
connection with his trade, business or
profession;
(b) Not treated as expenses under
paragraph (1) hereof; and
(c) Chargeable to capital account but not
chargeable to property of a character
which is subject to depreciation or
depletion
Deferred expenses shall be allowed as
deduction ratably distributed over a period
of not less than sixty (60) months as may be
elected by the taxpayer (beginning with the
month in which the taxpayer first realized
benefits from such expenditures)
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TAX 2 FINALS EXAM REVIEWER
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When election may be made: any taxable year
beginning after the effectivity of this Code, but
only if made not later than the time prescribed
by law for filing the return for such taxable year.
Method and period selected shall be adhered
to for the taxable year for which the election is
made and for all subsequent taxable years
UNLESS, with approval of the Commissioner, a
change to a different method is authorized
Limitations on Deduction
This Subsection shall not apply to:
(a) Any expenditure for the acquisition or
improvement of land, or for the
improvement of property to be used
in connection with research and
development of a character which is
subject to depreciation and depletion;
and
(b) Any expenditure paid or incurred for
the purpose of ascertaining the
existence, location, extent, or quality
of any deposit of ore or other mineral,
including oil or gas.
10 - PENSION TRUST (SEC. 34(L), NIRC)
- Established and maintained to provide
for the payment of reasonable pensions
to an employer’s employees
- A reasonable amount transferred or
paid into such trust during the taxable
year shall be allowed as deduction (in
addition to the contributions to such
trust during the taxable year to cover
the pension liability accruing during the
year, allowed as deduction under
Subsection [A][1] of this Section)
- Such deduction is allowed ONLY IF such
amount:
(1) Has not theretofore been
allowed as a deduction, and
(2) Is apportioned in equal parts
over a period of ten (10)
consecutive years beginning
with the year in which the
transfer or payment is made
(Atty. Deborah S. Acosta-
11 - OPTIONAL STANDARD DEDUCTION (SEC.
34(L), NIRC) - See TRAIN
The optional standard deduction (OSD), which is
in lieu of the itemized deductions, is merely a
privilege that may be enjoyed by certain
individual taxpayers. The requisites for its
exercise are as follows:
a. OSD is available only to citizens or
resident aliens and to domestic
corporations and resident foreign
corporations; thus, non-resident aliens
and non-resident foreign corporations
are not entitled to claim the optional
standard deduction;
b. The standard deduction is optional; i.e.,
unless taxpayer signifies in his return
his intention to elect this deduction, he
is considered as having availed of the
itemized deductions;
c. Such election, when made by the
qualified taxpayer, is irrevocable for the
year in which made; however, he can
change to or select the itemized
deductions in succeeding year(s);
d. The amount of standard deductions is
limited to 40% of taxpayer’s gross sales
or gross receipts (in the case of
individuals selling goods or services, as
the case may be) and on gross income
(in the case of a corporation); and
e. Proof of actual deductions is not
required.
OSD for General Professional Partnerships
and Partners of GPPs
The distributable net income of the GPP may be
determined by claiming either the itemized
deductions allowed under Section 34 of the
NIRC or in lieu thereof, it can opt to avail of the
OSD allowed to corporations in claiming the
deductions in an amount not exceeding 40% of
its gross income.
Share in the net income of GPP, actually or
constructively received, shall be reported as
taxable income of each partner.
Partners comprising the GPP can no longer
further deduct from their distributive share in
the net income of the GPP and are not allowed
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

to avail of the eight percent income tax rate

option since their distributive share from the
GPP is already net of cost and expenses (Section
8, Rev. Regs. 8-2018, implementing R.A. 10963
[TRAIN]).
Bar Question (2009)
Ernesto, a Filipino citizen and a practicing
lawyer, filed his income tax return for 2007,
claiming optional standard deductions. Realizing
that he has enough documents to substantiate
his profession-connected expenses, he now
plans to file an amended income tax return for
2007, in order to claim itemized deductions,
since no audit has been commenced by the BIR
on the return he previously filed. Will Ernesto
be allowed to amend his return? Why or why
not?
Ernesto will not be allowed to file an
amended return for 2007, not because of Section
6(A) of the 1997 Tax Code which allowed the
filing of amended tax return provided that no
audit notice has been served upon him by the
BIR in the meantime, but because of Section
34(L) of the Tax Code, which provides that
“Such election (of the itemized or standard
deduction) when made in the return shall be
irrevocable for the taxable year for which the
return is made.”
A. REP. ACT. NO. 9504
- AN ACT AMENDING SECTIONS 22, 24,
34, 35, 51, AND 79 OF REPUBLIC ACT
NO. 8424, AS AMENDED, OTHERWISE
KNOWN AS THE NATIONAL INTERNAL
REVENUE CODE OF 1997
- Amends Section 34(L) to increase to
40% of gross sales or receipts the
Operational Standard Deduction (OSD)
allowed to individuals (except
nonresident aliens) engaged in business
or earning income in the exercise of
their profession
- Now allow corporations (except
nonresident foreign corporations) to
claim OSD, instead of itemized
deductions, in an amount not exceeding
40% of their gross income.
B. RR 16-2008
- Issued on December 18, 2008
implements the provisions of Section
34(L) of the Tax Code of 1997, as
amended by Section 3 of R.A. 9504,
dealing on the Optional Standard
Deductions (OSD) allowed to
individuals and corporations in
computing their taxable income.

Bar Question (2015) Who may claim OSD

a. Individuals:
In 2012, Dr. K decided to return to his
i. Resident Citizen
hometown to start his own practice. At the end
ii. Non-resident citizen
of 2012, Dr. K found that he earned gross
iii. Resident Alien
professional income in the amount of
iv. Taxable estates and
P1,000,000. While he incurred expenses
trusts
amounting to P560,000 constituting mostly of
b. Corporations:
his office space rent, utilities, and miscellaneous
i. Domestic corporation
expenses related to his medical practice.
ii. Resident foreign
However, to Dr. K’s dismay, only P320,000 of his
corporation
expenses were duly covered by receipts. What
are the options available to Dr. K so he could
OSD allowed: maximum 40% of gross
maximize the deductions from his gross
sale (if accrual basis of accounting) or
income?
gross receipts (if cash basis of
In order to maximize his deductions, Dr.
accounting) during the taxable year
K may avail of the optional standard deduction
(OSD) which is an amount not exceeding 40% of
What is no allowed to be deducted
his gross sales or gross receipts. The OSD can be
for purposes of determining the
claimed without being required to present proof
basis of OSD
or evidence of expenses paid or incurred by him
(Sec. 34[L], NIRC; Rev. Regs. 16-08, as amended.)

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TAX 2 FINALS EXAM REVIEWER
Cajustin)
a. “Cost of sales” of individual
seller of goods
b. “Cost of services” of individual
seller of services
Passive incomes subjected to a final
tax at source shall not form part of the
gross income for purposes of computing
the 40% OSD.
GPP
- May claim either itemized
deductions or avail OSD
- Shall not exceed 40% of its
gross income
- The net income to be
determined is the distributable
net income from which the
share of each partner is to be
determined
- Each partner shall report as
gross income his distributive
share, actually or
constructively received, in the
net income of the partnership
- If the GPP availed of itemized
deduction, the partners may
still either claim itemized
deduction or OSD from said
share, PROVIDED, that, in
claiming itemized deductions,
the partner is precluded from
claiming expenses already
claimed by the GPP
- If the GPP claimed itemized
deductions and a partner also
claimed such, the deductions
allowed to the partner must
be ordinary and necessary
expenses for the practice of
profession not yet claimed by
GPP
GPP and each of the partners are
entitled to their own election of
deductions, thereby resulting to
FOUR POSSIBILITIES:
a. GPP may claim itemized
deductions in computing net
income and a partner may also
claim itemized deductions in
(Atty. Deborah S. Acosta-
computing his taxable income;
or
b. GPP may claim OSD in
computing net income while a
partner may claim itemized
deductions in computing his
taxable income; or
c. GPP may claim itemized
deductions in computing net
income while a partner may
claim OSD in computing his
taxable income; or
d. GPP may claim OSD in
computing net income and a
partner may also claim OSD in
computing his taxable income.
A taxpayer who elected to avail of the
OSD shall signify in his/its return
such intention, OTHERWISE he/it shall
be considered as having availed himself
of the itemized deductions.
12 - PREMIUM PAYMENTS ON HEALTH/
HOSPITALIZATION INSURANCE (SEC. 34(M),
NIRC) - See TRAIN
- the amount of premiums not to exceed
Two thousand four hundred pesos
(P2,400) per family or Two hundred
pesos (P200) a month paid during the
taxable year for health and/or
hospitalization insurance taken by the
taxpayer for himself, including his
family, shall be allowed as a deduction
from his gross income: Provided, That
said family has a gross income of not
more than Two hundred fifty
thousand pesos (P250,000) for the
taxable year: Provided, finally, That in
the case of married taxpayers, only the
spouse claiming the additional
exemption for dependents shall be
entitled to this deduction.
- REPEALED by TRAIN
13 - ALLOWANCE FOR PERSONAL AND
ADDITIONAL EXEMPTION - See TRAIN
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TAX 2 FINALS EXAM REVIEWER
Cajustin)
- Repealed by TRAIN
- Such exemptions enjoyed previously
were replaced with the first P250,000
of taxable income which is not subject
to zero percent rate of income tax,
practically exempting such income from
income tax (RMC No. 50-2018, May 11,
2018).
- Formerly, for each individual taxpayer
taxed under Section 24(A) (i.e., citizens
and resident aliens), the personal
exemption shall be P50,000 (R.A. 9504,
July 1, 2008)
A. RR 10-2008
- Issued on September 24, 2008
implements certain provisions
of R.A. No. 9504 entitled “An
Act Amending Sections 22, 24,
34, 35, 51 and 79 of R.A. No.
8424, as Amended, relative to
withholding of Income Tax on
compensation, increase of
personal and additional
exemptions, compensation
received by Minimum Wage
Earners (MWEs) and other
concerns.
(a) Basic personal exemptions. -
individual taxpayers regardless
of status are entitled to
P50,000 personal exemption
(b) Additional exemptions for
taxpayers with dependents. -
an individual, whether single or
married, shall be allowed an
additional exemption of
P25,000 for each qualified
dependent child, provided that
the total number of
dependents for which
additional exemptions may be
claimed shall not exceed four
(4) dependents. The
additional exemptions for QDC
shall be claimed by ONLY ONE
of the spouses in case of
married individuals.
“Dependent” - legitimate,
illegitimate or legally adopted
(Atty. Deborah S. Acosta-
child chiefly dependent upon
and living with the taxpayer;
not more than 21 years of age,
unmarried and not gainfully
employed or if such depended,
regardless of age, is incapable
of self-support because of
mental or physical defect.
B. PERSONAL EXEMPTION (SEC. 35(A),
NIRC)
- REPEALED by TRAIN
1. For single individual or
married individual judicially
decreed as legally separated
with no qualified dependents
- P20,000
2. For Head of Family
P25,000
3. For each married individual
- P32,000
In the case of married individuals where only
one of the spouses is deriving gross income,
ONLY SUCH SPOUSE shall be allowed the
personal exemption.
R.A. 9504 (2008), increased personal
exemptions to P50,000, as irrespective of
whether the individual is single, head of the
family, or married.
C. ADDITIONAL EXEMPTION
i. Sec. 35(B), NIRC)
- Eight thousand pesos
(P8,000) for each
dependent not
exceeding four (4)
- claimed by only one of
the spouses in the case
of married individuals.
- In the case of legally
separated spouses,
additional exemptions
may be claimed only
by the spouse who
has custody of the
child or children:
Provided, That the total
amount of additional
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TAX 2 FINALS EXAM REVIEWER
Cajustin)
exemptions that may
be claimed by both
shall not exceed the
maximum additional
exemptions herein
allowed.
ii. Definition of Dependent
legitimate, illegitimate or
legally adopted child chiefly
dependent upon and living
with the taxpayer if such
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
mental or physical defect.
R.A. 9504 (2008), increased additional
exemptions for children to P25,000 for each
child not exceeding four.
R.A. 10165 (Foster Care Act of 2012) authorizes
a foster parent to claim an additional
exemption of P25,000 for a foster child, if the
period of foster care is at least a continuous
period of one taxable year.
- Only one foster parent, who must be of
legal age, at least 16 years older than
the foster child, UNLESS the applicant is
a relative of the foster child, among
others, can treat the foster child as
dependent for a particular year.
- An agency may also enjoy exemption
from income tax, as implemented by RR
No. 13-98 and it can apply for
qualification as a donee institution
entitled to deduction from gross income
and exemption from donor’s tax
(RMC No. 41-2013, April 17, 2013).
D. CHANGE OF STATUS (SEC. 35(C),
NIRC)
If the taxpayer marries or should
have additional dependent(s) as
defined above during the taxable year,
the taxpayer may claim the
(Atty. Deborah S. Acosta-
corresponding additional exemption, as
the case may be, in full for such year.
If the taxpayer dies during the taxable
year, his estate may still claim the
personal and additional exemptions for
himself and his dependent(s) as if he
died at the close of such year.
If the spouse or any of the
dependents dies or if any of such
dependents marries, becomes
twenty-one (21) years old or
becomes gainfully employed during
the taxable year, the taxpayer may still
claim the same exemptions as if the
spouse or any of the dependents died,
or as if such dependents married,
became twenty-one (21) years old or
became gainfully employed at the close
of such year.
E. PERSONAL EXEMPTION ALLOWABLE
TO NONRESIDENT ALIEN
INDIVIDUAL (SEC. 35(D), NIRC)
A nonresident alien individual engaged
in trade, business or in the exercise of a
profession in the Philippines shall be
entitled to a personal exemption in the
amount equal to the exemptions
allowed in the income tax law in the
country of which he is a subject - or
citizen, to citizens of the Philippines
not residing in such country, not to
exceed the amount fixed in this
Section as exemption for citizens or
resident of the Philippines: Provided,
That said nonresident alien should file a
true and accurate return of the total
income received by him from all
sources in the Philippines, as required
by this Title.
F. ESTATES AND TRUSTS (SEC. 62,
NIRC)
- allowed an exemption of
Twenty thousand pesos
(P20,000) from the income of
the estate or trust
- REPEALED by TRAIN
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TAX 2 FINALS EXAM REVIEWER
Cajustin)
Madrigal v. Rafferty, G.R. No. 12287
Exemptions are fixed at arbitrary amounts
intended to substitute for personal and living
expenses. They are roughly the equivalent of the
taxpayer’s minimum subsistence and those of
his dependents.
Bar Question (2001)
Distinguish allowable deductions from
personal exemptions. Give an example of an
allowable deduction and another example
for personal exemption.
The distinction are as follows:
1. As to amount - allowable deductions
generally refer to actual expenses
incurred in the pursuit of trade,
business, or practice of profession while
personal exemptions are arbitrary
amounts allowed by law
2. As to nature - allowable deductions
constitute business expenses while
personal exemptions pertain to
personal expenses
3. As to purpose - deductions are allowed
to enable the taxpayer to recoup his
cost of doing business while personal
exemptions are allowed to cover
personal, family, and living expenses.
4. As to claimants - allowable deductions
can be claimed by all taxpayers,
corporate, or otherwise, while personal
exemptions can be claimed only by
individual taxpayers.
Bar Question (1997)
Mar and Joy got married in 1990. A week before
their marriage, Joy received, by way of donation,
a condominium unit worth P750,000 from her
parents. After marriage, some renovations were
made at a cost of P150,000. The spouses were
both employed in 1991 by the same company.
On December 30, 1992, their first child was
born,a dn a second child was born on November
7, 1993. In 1994, they sold the condominium
unit and bought a new unit.
Under the foregoing facts, what were the
events in the life of the spouses that had
income tax incidence?
a. Their marriage in 1990 qualifies them
to claim personal exemption for
married individuals;
(Atty. Deborah S. Acosta-
b. Their employment in 1991 by the same
company will make them liable to the
income imposed on gross compensation
income;
c. Birth of the first child in December
1992 would give rise to an additional
exemption of P5,000 (now P25,000) for
the taxable year 1992;
d. Birth of their second child in November
1993 would likewise entitle them to
claim additional exemption of P5,000
(now P25,000) raising their additional
personal exemptions to P10,000 for
taxable year 1993.
e. Sale of their condominium unit in 1994
shall make the spouses liable to the five
percent (now 6%) capital gains tax on
the gain presumed to have been
realized from the sale.
“Status-at-the-end-of-the-year Rule” -
whatever is the status of the taxpayer at the end
of the calendar year shall be used for purposes
of determining his personal and additional
exemptions generally applies
Under TRAIN: regardless of the status of the
taxpayer, the first P250,000 income of an
individual shall enjoy tax exemption
Bar Question (2004)
Ram got married to Lisa last January 2003. On
November 30, 2003, Lisa gave birth to twins.
Unfortunately, however, Lisa died in the course
of her delivery. Due to complications, one of the
twins also died on December 15, 2003.
In preparing his income tax return
for the year 2003, what should Ram indicate
in the return as his civil status: (a) single; (b)
married; (c) head of the family; (d) widower;
(e) none of the above? Why? Reason.
Ram should indicate “(b) married” as
his civil status in preparing his income tax
return for the year 2003. The death of his wife
during the year will not change his status
because should the spouse die during the
taxable year, the taxpayer may still claim the
same exemptions (that of being married) as if
the spouse died at the close of such year (Sec.
35[c], NIRC).
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TAX 2 FINALS EXAM REVIEWER
Cajustin)
ITEMS NOT DEDUCTIBLE
A. BRIBES, KICKBACK (SEC. 34(A)(1)(c),
NIRC)
No deduction from gross income shall
be allowed under Subsection (A) here
for any payment made, directly or
indirectly,
a. to an official or employee of the
national government, or
b. to an official or employee of
any LGU, or
c. to an official or employee of a
government-owned or
-controlled corporation, or
d. to an official or employee or
representative of a foreign
government, or
e. to a private corporation,
general professional
partnership, or a similar entity,
if the payment constitutes a bribe or
kickback.
B. SEC. 36. NIRC
In general, in computing net income, no
deduction shall in any case be allowed in respect
to --
1. Personal, living, or family expenses;
2. Any amount paid out for new buildings
or for permanent improvements, or
betterments made to increase the value
of any property or estate (shall not
apply to intangible drilling and
development costs incurred in
petroleum operations, which are
deductible under subsection (G)(1) of
Section 34;
3. Any amount expended in restoring
property or in making good the
exhaustion thereof for which an
allowance is or has been made; or
4. Premiums paid on any life insurance
policy covering the life of any officer or
employee, or of any person financially
interested in any trade or business
(Atty. Deborah S. Acosta-
carried on by the taxpayer, individual,
or corporate, when the taxpayer is
directly or indirectly a beneficiary
under such policy (Sec. 121, Rev. Regs.
No. 2);
5. Losses from sales or exchange of
property between related parties
a. Between members of a family
(brothers and sisters [whether
by the whole or half-blood],
spouse, ancestors, and lineal
descendants); or
b. Except in the case of
distributions in liquidation,
between an individual and a
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
c. Except in the case of
distributions in liquidation,
between two corporation
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, if
either one of such corporations,
with respect to the taxable year
of the corporation preceding
the date of the sale or exchange
was, under the law applicable
to such taxable year, a personal
holding company or a foreign
personal holding company; or
d. Between the grantor and a
fiduciary of any trust; or
e. Between the fiduciary of a
trust and the fiduciary of
another trust if the same
person is a grantor with
respect to each trust; or
f. Between a fiduciary of a trust
and a beneficiary of such
trust.
Gancayco v. Collector, L-13325
The petitioner cannot claim for deduction.
As to the farming expenses:
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

Section 30(a)(1) of the Tax Code partly reads:
“All the ordinary and necessary expenses paid
or incurred during the taxable year in carrying
on any trade or business, including … rentals or
other payments required to be made as a
condition to the continued use or possession, for
the purpose of trade or business, of property to
which the taxpayer has not taken or is not
taking title or in which he has no equity.”
In this case the Supreme Court
concurred in the decision of the CTA that, "No
evidence has been presented as to the nature of
the said 'farming expenses' other than the bare
statement of petitioner that they were spent for
the 'development and cultivation of (his)
property'. No specification has been made as to
the actual amount spent for purchase of tools,
equipment or materials, or the amount spent for
improvement. Respondent claims that the entire
amount was spent exclusively for clearing and
developing the farm which were necessary to
place it in a productive state. It is not,
therefore, an ordinary expense but a capital
expenditure. Accordingly, it is not deductible
but it may be amortized, in accordance with
Section 75 of Revenue Regulations No. 2, cited
above. See also, Section 31 of the Revenue Code
which provides that in computing net income,
no deduction shall in any case be allowed in
respect of any amount paid out for new
buildings or for permanent improvements or
betterments made to increase the value of any
property or estate."
As to the representation expenses:
Gancayco’s claim was partly allowed and partly
disallowed. The disallowance is justified by the
record, for, apart from the absence of receipts,
invoices or vouchers of the expenditures in
question, petitioner could not specify the items
constituting the same, or when or on whom or
on what they were incurred.
grounds, OXY objected to the insurance
purchase but ADD purchased the policy anyway.
Its annual premium amounted to P100,000. Is
said premium deductible by ADD
Computers? Reason.
NO. The premium is not deductible
because it is not an ordinary business expense.
The term “ordinary” is used in the income tax
law in its common significance and it has the
connotation of being normal, usual or customary
(Deputy v. Du Pont, 1940). Paying the premium
for the insurance of a person not connected to
the company is not normal, usual or customary.
Another reason for its non-deductibility
is the fact that it can be considered as an illegal
compensation made to a government employee.
This is so because if the insured, his estate, or
his heirs were made as the beneficiary (because
of the requirement of insurable interest), the
payment of premium will constitute bribes
which are not allowed as deduction from gross
income (Sec. 34[A][1][c], NIRC).
On the other hand, if the company was
made the beneficiary, whether directly or
indirectly, the premium is not allowed as a
deduction from gross income (Sec. 36[A][4],
NIRC).

Bar Question (2004)

OXY is the president and CEO of ADD
Computers, Inc. When OXY was asked to join the
government service as director of a bureau
under the DTI, he took a leave of absence from
ADD. Believing that its business outlook,
goodwill, and opportunities improved with OXY
in the government, ADD proposed to obtain a
policy of insurance on his life. On ethical

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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

TAX BASE AND TAX RATES to be deducted from the gross

Income Tax System in the Philippines: semi-
schedular or semi-global
- Each type or group of income is subject
to one set of graduated income tax
rates, r normal or minimum corporate
income tax rates, or preferential tax
rates.
- These tax rates are applied to different
tax bases depending on the type or
group of income
“Tax base” - the amount of taxable income upon
which the applicable tax rate is applied to arrive
at the income tax rate
compensation income of an individual
- Capital gains and passive investment
incomes not subject to capital gains
tax/final withholding income tax shall
be subject to the regular income tax or
global tax system
1 - INDIVIDUALS
A - RESIDENT CITIZENS AND RESIDENT
ALIENS (SEC. 24, NIRC), RR 23-2018
i. Taxable Income (Sec. 24(A)(1)(a), (b)
& (c), NIRC)

General Categories of Tax Base - the annual taxable income not over
1. Compensation income, business and 250,000 of individual citizens,
professional income, capital gains, individual resident aliens, and non-
passive income, and other income not resident alien individuals engaged in
subject to final tax; trade or business in the Philippines is
2. Capital gains subject to final now exempt from income tax
withholding income tax at preferential - Allowance for personal and additional
tax rates; and exemptions for individual taxpayers
3. Passive investment income subject to were repealed
final withholding income tax at
preferential tax rates. Tax Schedule effective January 1, 2018 until
December 31, 2022
“Global Tax System”
We follow the global tax system insofar as Not over P250,000 0%
compensation income, business and Over P250,000 but 20% of the excess
professional income, capital gains, passive not over P400,000 over P250,000
incomes, and other income not subject to final
tax. Over P400,000 but P30,000 + 25% of the
- The allowable deductions under not over P800,000 excess over P400,000
Sections 34, 37, and 38 of the Tax Code
Over P800,000 but P130,000 + 30% of
as well as personal and additional
not over P2,000,000 the excess over
exemptions under Section 35 of the Tax P800,000
Code, with respect to individuals, are
deducted from the taxable gross Over P2,000,000 but P490,000 + 32% of
income (except capital gains from sale not over P8,000,000 the excess over
or exchange of shares of stock of a P2,000,000
domestic corporation and real property,
Over P8,000,000 P2,410,000 + 35% of
and passive incomes that are subject to the excess over
final withholding taxes). P8,000,000
- Gross income less allowable deductions
= Net “taxable income”
Tax Schedule effective January 1, 2023
- No deductions (whether itemized or
onwards
optional standard) are allowed by law
Not over P250,000 0%

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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

b. A VAT-registered taxpayers, regardless

Over P250,000 but 15% of the excess
over P250,000 of the amount of gross sales/receipts
not over P400,000
and other non-operating income;
Over P400,000 but P22,500 + 20% of the c. Non-VAT taxpayers whose gross
not over P800,000 excess over P400,000 sales/receipts and other non-operating
income exceeded the 3,000,000 VAT
Over P800,000 but P102,500 + 25% of threshold;
not over P2,000,000 the excess over
d. Taxpayers who are subject to Other
P800,000
Percentage Taxes under Title V of the
Over P2,000,000 but P402,500 + 30% of Tax Code, as amended, except those
not over P8,000,000 the excess over subject under Section 116 of the same
P2,000,000 title;
e. Partners of a General Professional
Over P8,000,000 P2,202,500 + 35% of
Partnership (GPP) since their
the excess over
P8,000,000 distributive share from the GPP is
already net of costs and expenses; and
f. Individuals enjoying income tax
OPTIONAL 8% FLAT RATE
exemption such as those registered
The following individuals have the option to
under the Barangay Micro Business
avail of an eight percent tax on their annual
Enterprises (BMBEs), etc., since
gross income from business or practice of
taxpayers are not allowed to avail of
profession:
double or multiple tax exemptions
a. Purely self-employed individuals
under different laws, unless specifically
and/or professionals whose gross
provided by law.
sales or gross receipts and other non-
operating income do not exceed the
CERTAIN INDIVIDUALS ARE SUBJECT TO 15%
value-added tax (VAT) threshold as
PREFERENTIAL TAX
provided in Section 109(BB) of NIRC
a. Alien individuals employed by the
(now P3,000,000 under TRAIN) on
following whose taxable base is their
their annual taxable income in excess of
gross compensation income without
P250,000 in lieu of the graduated
any deduction of their personal and
income tax rates above-prescribed and
additional exemptions
percentage tax under Section 116 of
i. Regional or area headquarters
NIRC
(RHQ),
b. Mixed income earners earning both
ii. Regional operating
compensation income and income from
headquarters (ROHQ),
business or profession on their annual
iii. Offshore banking units,
gross income from business or practice
iv. Foreign petroleum service
of profession if such total income does
contractors and sub-
not exceed the VAT threshold in lieu of
contractors
the graduated income tax rates above-
b. Filipinos employed and occupying the
prescribed and the percentage tax
same positions as the above aliens
under Section 116 of NIRC. All
employed by RQHs and ROHQs (Sec.
compensation income in excess of
25[C], [D] and [E], NIRC).
P250,000 shall still be subject to the
graduated rates above-prescribed.
*UNDER TRAIN: all Filipinos employed by
RHQs, ROHQs, OBUs, and Petroleum Service
The following individuals are not qualified to
Contractors and Subcontractors formerly
avail of the Optional 8% flat income tax rate:
enjoying preferential tax treatment prior to
a. Purely compensation income earners;
2018 are now subject to regular income tax
rates under Section 24(A)(2)(a) of NIRC.

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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

individual trust funds, deposit substitutes,

ii. Passive Income investment management accounts and other
1. Interests, Royalties, Prizes investments with a maturity period of not less
and Other Winnings than five (5) years (Sec. 22(FF), NIRC)

1. For interests from any currency bank Rev. Reg. 10-98

deposit and yield or any other issued September 2, 1998 prescribes the
monetary benefit from deposit regulations to implement RA No. 8424 relative
substitutes and from trust funds and to the imposition of income taxes on income
similar arrangements: final tax of derived under the Foreign Currency Deposit and
20%; Offshore Banking Systems.
2. For royalties other than those on books, - Interest income which is actually or
literary works and musical constructively received by a resident
compositions: final tax of 20% citizen of the Philippines or by a
3. For royalties on books, as well as other resident alien individual from a foreign
literary works and musical currency bank deposit: subject to a
compositions: final tax of 10%; final withholding tax of 7.5%
4. For prizes more than P10,000: final tax - The depository bank will withhold and
of 20%; remit the tax.
[For prizes amounting to P10,000 or - If a bank account is jointly in the name
less: subject to tax under Subsection of a non-resident citizen, 50% of the
(A) of Section 24] interest income from such bank
5. For other winnings: final tax of 20%; deposit will be treated as exempt
[For winnings amounting to P10,000 or while the other 50% will be subject to
less from PCS and lotto: exempt from a final withholding tax of 7.5%
tax] - The Regulations will apply on taxable
6. For interest income received (except a income derived beginning January 1,
non-resident individual) from a 1998 pursuant to the provisions of
depository bank under the expanded Section 8 of RA 8424.
foreign currency deposit system: final - In case of deposits which were made in
income tax of 15%; 1997, only that portion of interest
7. For interest income from long-term which was actually or constructively
deposit or investment in the form of received by a depositor starting
savings, common or individual trust January 1, 1998 is taxable.
funds, deposit substitutes, investment
management accounts and other iii. Dividends (Sec. 24(B)(2), NIRC)
investments: exempt from tax
imposed under this Subsection; Final tax of 10% (beginning January 1, 2000)
[HOWEVER, if the holder pre-terminate shall be imposed upon the cash and/or property
such deposit or investment before the dividends actually or constructively received by
fifth (5th) year, a final tax shall be an individual from:
imposed on the entire income based a. Domestic corporation
on the following: b. Joint stock company
4 years to less than 5 years: 5%; c. Insurance or mutual fund companies
3 years to less than 4 years: 12%; d. Regional operating headquarters of
Less than 3 years: 20% (Sec. 24(B)(1), multinational companies
NIRC) e. Share of an individual in the
distributable net income after tax of a
“Long-term deposit or investment partnership (except a GPP)
certificate” - certificate of tie deposit or f. Share of an individual in the net income
investment in the form of savings, common or after tax of an association

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g. Joint account
h. Joint venture or consortium taxable as a
corporation
[beginning January 1, 1998: 6%;
Beginning January 1, 1999: 8%]
*Tax on dividends apply only on income earned
on or after January 1, 1998
iv. Capital gains on shares of stock
Final tax of 15% shall be imposed upon the net
capital gains realized from the sale, barter,
exchange or other disposition of shares of stock
in a domestic corporation (except those made
through stock exchange):
Not over P100,000: 5%
On any amount in excess of P100,000:
10% (Sec. 24(C), NIRC)
Rev. Reg. 6-2008
Stock transaction tax at the rate of ½ of 1%
- Shall be levied, assessed and collected
on every sale, barter, exchange or other
disposition of shares of stock listed and
traded through the LSE
- Shall be based on the gross selling price
or gross value in money of the shares of
stock sold, bartered, exchanged or
otherwise disposed
- 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
Stock transaction tax for sale, barter,
exchange or other disposition through IPO:
Proportion of Disposed Shares Tax Rate
to Outstanding Shares
Up to 25% 4%
Over 25% but not over 33 ⅓% 2%
Over 33 ⅓% 1%
Final tax imposed on the sale, barter or
exchange of shares of stock not traded
through the LSE:
(Atty. Deborah S. Acosta-
Amount of Capital Gain Tax Rate
Not over P100,000 5%
On any amount in excess of 10%
P100,000
v. Capital gains on real property
Final tax of 6% (based on the gross selling
price or current fair market value, whichever is
higher (Sec. 24(D)(1))
Exception: capital gains presumed to have been
realized from the sale or disposition of their
principal residence utilized in acquiring or
constructing a new principal residence (within
18 months) shall be exempt from CGT
*Real property defined in Art. 415 of CC
Rev. Reg. 8-98
- Capital Gains Tax (CGT) Return will
be filed by the seller within 30 days
following each sale or disposition of
real property
- Payment of the CGT will be made to an
Authorized Agent Bank (AAB) located
within the Revenue District Office
(RDO) having jurisdiction
- Creditable withholding taxes
deducted and withheld by the
withholding agent/buyer on the sale,
transfer or exchange or real property
classified as ordinary asset will be paid
by the withholding agent/buyer upon
filing of the return with the AAB located
within the RDO having jurisdiction
- Payment of CWT will have to be done
within 10 days following the end of the
month in which the transaction
occurred, provided, however, that
taxes withheld in December will be filed
on or before January 25 of the following
year.
Rev. Reg. 13-99
Capital gains presumed to have been realized
from the sale, exchange or disposition by a
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Cajustin)

natural person of his principal residence shall principal residence sold, exchanged or
not be imposed with income tax, including disposed by the aforesaid taxpayer
the six percent (6%) capital gains tax, subject
to the following conditions: B - NON-RESIDENT ALIENS (SEC. 25, NIRC)
1) Sworn Declaration Requirement; i. Engaged in trade or business
2) Post Reporting Requirement; 1. Taxable Income (Sec. 25(A)
3) The tax exemption herein granted may (1), NIRC)
be availed of only once every ten (10) - Subject to an income
years; tax in the same
4) The historical cost or adjusted basis of manner as an
his old principal residence sold, individual citizen and a
exchanged or disposed shall be carried resident alien
over to the cost basis of his new individual, on taxable
principal residence; and income received from
5) If there is no full utilization of the all sources within the
proceeds of sale, exchange or Philippines
disposition of his old principal - Those who come to the
residence for the acquisition or PH and stay therein for
construction of his new principal an aggregate period of
residence, he shall be liable for more than 180 days:
deficiency capital gains tax which deemed nonresident
shall be computed in accordance with alien doing business
Sec. (4) hereof. Accordingly, only a in the PH
fractional part (which the utilized
amount bears to the gross selling price) 2. Passive Income (Sec. 25(A)
of the historical cost of the old principal (2), NIRC)
residence sold shall be carried over to
the cost basis of the new principal Income tax of 20% shall be imposed on:
residence 1. Cash and/or property dividends from
a. Domestic corporation
Rev. Reg. 14-2000 b. Joint stock company
- amends Sections 3(2), 3 and 6 of RR No. c. Insurance or mutual fund
13-99 relative to the sale, exchange or company
disposition by a natural person of his d. Regional operating
"principal residence" headquarters of multinational
- Residential address shown in the company
latest income tax return filed by the e. Share of a nonresident alien
vendor/transferor immediately individual in the distributable
preceding the date of sale of said real net income after tax of a
property shall be treated, for purposes partnership (except GPP)
of these Regulations, as a conclusive f. Share of a nonresident alien
presumption about his true individual in the net income
residential address after tax of an association
- Seller/transferor's compliance with the g. Joint account
preliminary conditions for exemption h. Joint venture
from the 6% capital gains tax under 2. Interests
Sec. 3(1) and (2) of the Regulations 3. Royalties (in any form) [except royalties
will be sufficient basis for the RDO to on books, literary works and musical
approve and issue the Certificate compositions which shall be subject to a
Authorizing Registration (CAR) or Tax final tax of 10%; and cinematographic
Clearance Certificate (TCC) of the films and similar works which shall be

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subject to tax provided under Section
28 of this Code]
4. Prizes [except prizes amounting to
P10,000 or less which shall be subject
to ta tax under Subsection (B)(1) of
Section 24]
5. Other winnings [except PCS and Lotto
winnings]
6. For 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: exempt from tax
imposed under this Subsection;
[HOWEVER, if the holder pre-terminate
such deposit or investment before the
fifth (5th) year, a final tax shall be
imposed on the entire income based
on the following:
4 years to less than 5 years: 5%;
3 years to less than 4 years: 12%;
Less than 3 years: 20%
3. Capital Gains (Sec. 25(A)(3),
NIRC)
- Shall be subject to the
tax prescribed under
Subsections (C) and
(D) of Section 24
ii. Not engaged in trade or business
(Sec. 25(B), NIRC)
- Tax equal to 25% shall be
imposed upon the income
derived from all sources within
the Philippines
- Capital gains shall be subject
to income tax prescribed under
Subsections (C) and (D) of
Section 24
iii. Special Aliens (Sec. 25(C), (D) & (E),
NIRC)
Tax equal to 15% shall be imposed upon the
gross income from compensation of alien
individuals employed in:
a) Regional or Area Headquarters and
Regional Operating Headquarters of
Multinational Companies
(Atty. Deborah S. Acosta-
b) Offshore Banking Units
c) Petroleum Service Contractor and
Subcontractor
*same tax treatment shall apply to a Filipino
employed and occupying the same position as
the above
*income earned from all other sources
within the PH by such alien shall be subject to
the pertinent income tax as the case may be
RMC 41-2009
- Clarifies the meaning of the term
“Managerial and Technical Positions”
under Section 25(C) of the Tax Code of
1997, as amended
To be a managerial employee, the following
elements must concur:
a. His primary duty consists of
performance of work directly related to
management policies;
b. He customarily and regularly exercises
discretion and independent judgment in
the performance of his functions;
c. He regularly and directly assists in the
management of the establishment; and
d. He does not devote 20% of his time to
work other than those above prescribed
“Technical position” is limited only to
positions which are highly technical in nature or
where there are no Filipinos who are competent,
able and willing to perform the services for
which the aliens are desired
In view thereof, only Filipinos employed and
occupying managerial and highly technical
positions as defined above, similar to the
positions of the aliens employed by regional or
area headquarters and regional operating
headquarters of multinational companies, shall
be entitled to the option to be taxed at either
15% of gross income or at the regular Income
Tax rate on their taxable income in accordance
with Section 25(C) of the Tax Code of 1997, as
amended
C - MEMBERS OF GENERAL PROFESSIONAL
PARTNERSHIPS (SEC. 26, NIRC)
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TAX 2 FINALS EXAM REVIEWER
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- GPP shall not be subject to the income
tax imposed under this Chapter
- Partners in GPP shall be liable for
income tax only in their separate and
individual capacities
Soriano, et al. v. Secretary of Finance, et al.,
GR Nos. 184450, 184508, 184538, 185234,
January 24, 2017
In sum, R.A. 9504, like R.A. 7167 in Umali, was a
piece of social legislation clearly intended to
afford immediate tax relief to individual
taxpayers, particularly low-income
compensation earners. Indeed, if R.A. 9504 was
to take effect beginning taxable year 2009 or
half of the year 2008 only, then the intent of
Congress to address the increase in the cost of
living in 2008 would have been negated.
Therefore, following Umali, the test is whether
the new set of personal and additional
exemptions was available at the time of the
filing of the income tax return. In other words,
while the status of the individual taxpayers is
determined at the close of the taxable year, their
personal and additional exemptions - and
consequently the computation of their taxable
income - are reckoned when the tax becomes
due, and not while the income is being earned or
received. The NIRC is clear on these matters.
The taxable income of an individual taxpayer
shall be computed on the basis of the calendar
year. The taxpayer is required to file an income
tax return on the 15th of April of each year
covering income of the preceding taxable year.
The tax due thereon shall be paid at the time the
return is filed. It stands to reason that the new
set of personal and additional exemptions,
adjusted as a form of social legislation to
address the prevailing poverty threshold, should
be given effect at the most opportune time as
the Court ruled in Umali
2 - CORPORATIONS
A - DOMESTIC CORPORATIONS (SEC. 27,
NIRC)
i. In General (Sec. 27(A), NIRC)
- Subject to Philippine income tax at 30%
(effective January 1, 2009) of its net
(Atty. Deborah S. Acosta-
taxable income from sources within and
without the Philippines
- Subject to the corporate income tax for
the year, equal to the higher amount
between the regular corporate income
tax (RCIT), computed at 30%on its net
taxable income, and the minimum
corporate income tax (MCIT) computed
at two percent of its gross income
during the year.
- Therefore, there will be two yearly
computations of corporate income
taxes for every corporation subject to
either the RCIT or MCIT, whichever is
higher
EXCEPT: in case of a proprietary educational
institution and hospital which is non-profit,
which shall be subject to income tax at 10% of
its taxable income, UNLESS its gross income
from unrelated trade, business, or other activity
exceeds 50% of the total gross income derived
from all sources (Sec. 27[B], NIRC)
John Hay Peoples Alternative Coalition v. Lim
A domestic corporation that is registered with
the Camp John Hay Development Authority is
not entitled to the five percent preferential
income tax rate on its gross income earned and
thus subject to the normal corporate income tax
rate on its net taxable income from worldwide
sources.
Proclamation No. 420, which was issued
by the President and which extended the same
privileges enjoyed by enterprises registered
with the Subic Bay Metropolitan Authority
(SBMA) under R.A. 7227 (a.k.a. Bases
Development and Conversion Law) to
enterprises registered with the other Freeport
zones like the Camp John Hay, violated the 1987
Constitution, which provides that now law
granting tax exemption shall be passed without
the concurrence of a majority of all the members
of Congress.
ii. Special Corporations (Sec. 27(B), (C),
NIRC)
1. Proprietary Educational
Institutions and Hospitals
which are non-profit
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Cajustin)

- Shall pay a tax of ten

percent (10%) on their Exempt from all taxes
taxable income except Income derived by a depository bank under the
those covered by expanded foreign currency deposit system from
Section (D) thereof; foreign currency transactions with
Provided, That if the nonresidents, offshore banking units in the PH,
gross income from local commercial banks, including branches of
unrelated trade, foreign banks
business or other Final Tax of 10% shall be imposed
activity exceeds fifty upon the interest income from foreign currency
percent (50%) of the loans granted by such abovementioned
total gross income depository banks under said expanded foreign
derived from all system to residents other than offshore banking
sources, the tax units in the PH or other depository banks
prescribed in
Subsection (A) hereof (2) Dividends (Sec. 27(4), NIRC)
shall be imposed on
the entire taxable Dividends received by a domestic corporation
income (Sec. 27[B], from another domestic corporation shall not be
NIRC). subject to tax
2. Government-owned or
-Controlled Corporations, (3) Capital Gains (Sec. 27(D)(2) & (5),
Agencies or NIRC)
Instrumentalities
- Except GSIS, SSS, PHIC Final tax of 15% shall be imposed on net
and the local water capital gains from the sale, exchange or other
districts shall pay such disposition of shares of stock in a domestic
rate on tax upon their corporation (except shares sold or disposed
taxable income as are through the stock exchange)
imposed by this
Section upon Final tax of 6% shall be imposed on gain
corporations or presumed to be realized on the sale, exchange or
associations engaged disposition of lands and/or buildings which are
in a similar business, not actually used in the business of a
industry, or activity corporation and are treated as capital assets
iii. Passive Income
(1) Interest, Royalties (Sec. 27(D)(1) &
(3), NIRC) B - RESIDENT FOREIGN CORPORATIONS (SEC.
28, NIRC)
Final tax of 20% shall be imposed on the - Organized or existing under the laws of
following received by domestic corporations:: any foreign country but is engaged in
a. Interest on currency bank deposit and trade or business in the Philippines (i.e.,
yield through a branch).
b. Any other monetary benefit from
deposit substitutes i. In General (Sec. 28(A), NIRC)
c. Trust funds and similar arrangements - Taxed similarly as a domestic
corporation at the rate of 30%
Final Income Tax of 15% shall be imposed on its net income derived from
upon interest income derived from a depository sources within the Philippines.
bank under the expanded foreign currency
deposit system

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TAX 2 FINALS EXAM REVIEWER
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- Its income from foreign sources
shall be exempt from
Philippines income tax
N.V. Reederit Amsterdam v. Commissioner,
G.R. No. 46029, June 23, 1988
A foreign corporation engaged in trade or
business within the Philippines, or which has an
office or place of business therein, is taxed on its
total net income received from all sources
within the Philippines at the rate of 25% upon
the amount but which taxable net income does
not exceed P100,000.00, and 35% upon the
amount but which taxable net income exceeds
P100,000.00. On the other hand, a foreign
corporation not engaged in trade or business
within the Philippines and which does not have
any office or place of business therein is taxed
on income received from all sources within the
Philippines at the rate of 35% of the gross
income.
ii. Special Foreign Corporations
(1) International Carriers
- Shall pay a tax of two and one-
half percent (2-½%) on its
“Gross Philippine Billings” (Sec.
28(3), NIRC)
- Such tax is an income tax levied
on the presumed gain of the
international airline companies
(and not a percentage tax).
- May be entitled to preferential
income tax rate of 1.5% on GPB
under the tax treaty, or even
exempt from Philippine income
tax, subject to rules on
reciprocity, on revenues from
the transport of passengers
from the Philippines to a
foreign port (R.A. 10378, July
23, 2013)
“International Air Carrier” - a foreign
airline corporation doing business in
the Philippines having been granted
landing rights in any Philippine port to
perform international air
transportation services/activities or
flight operations anywhere in the
world.
(Atty. Deborah S. Acosta-
“Offline carrier” - an international air
carrier having no flight operations to
and from the Philippines (Sec. 2, Rev.
Regs. No. 15-2012, May 30, 2002).
- Not considered engaged in
business as an international air
carrier in the Philippines, and
is, therefore, not subject to GPB
tax nor to the three percent
common carrier’s tax.
“Gross Philippine Billings in
International Air Carrier” - amount of
gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a
continuous and uninterrupted flight,
irrespective of the place of sale or issue
and that place of payment of the ticket
or passage document
- Provided, That tickets
revalidated, exchanged and/or
indorsed to another
international airline form part
of the Gross Philippine Billings
if the passenger board a plane
in a port or point in the
Philippines
- Provided, further, That for a
flight which originates from the
Philippines, but transshipment
of passenger takes place at any
port outside the Philippines on
another airline, only the aliquot
portion of the cost of the ticket
corresponding to the leg flown
from the Philippines to the
point of transshipment shall
form part of the GPB
“Gross Philippine Billings in International
Shipping” - gross revenue whether for
passenger, cargo or mail originating from the
Philippines up to final destination, regardless of
the place of sale or payments of the passage or
freight documents
Rev. Reg. 15-2002
- In the case of the passenger’s passage
documents or flights from any port or
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TAX 2 FINALS EXAM REVIEWER
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point in the Philippines and back, that
portion of revenue pertaining to the
return trip to the Philippines shall not
be included as part of GPB
- Refunded tickets shall likewise not be
included in computation of GPB
- In the case of a flight that originates
from the Philippines but
transshipment of passenger, excess
baggage, cargo and/or mail takes places
elsewhere in another aircraft belonging
to a different airline company, the GPB
shall be that portion of the revenue
corresponding to the leg flown from any
point in the Philippines to the point of
transshipment
(2) Offshore Banking Units
- Income derived by offshore
banking units authorized by
the BSP from foreign currency
transactions with local
commercial banks, including
branches of foreign banks that
may be authorized by the BSP
to transact business with
offshore banking units,
including any interest derived
from foreign currency loans
granted to residents, shall be
subject to a final income tax at
the rate of 10% of such income
(Sec. 28(4), as amended, NIRC)
Rev. Reg. 10-98
- Income derived by an FCDU or an OBU
from foreign currency transactions with
residents of the Philippines, including
local commercial banks, local branches
of foreign banks, and other depository
banks under the foreign currency
deposit system, shall be subject to a
final withholding tax of 10%.
- These income include: interest from
lending operations, including bank
charges, commissions, service fees, and
net foreign exchange transactions gains
- Income from foreign currency
transactions with non-residents of the
Philippines shall not be subject to
(Atty. Deborah S. Acosta-
income tax by express provision of the
law.
- The person making the income payment
shall withhold and remit the tax
Rev. Reg. 10-76
- Enumerates the taxes that are covered
by the in-lieu-of nature of the 5%
income tax which include but are not
limited to:
1. Privilege tax
2. Gross receipts tax
3. Documentary and science
stamp tax
4. Profit remittance tax
- Re-enforced the exemption of FCDUs
from gross receipts tax
Rev. Reg. 14-77
- Amended Rev. Reg. 10-76
- “Gross onshore income” - gross
interest income arising from foreign
currency loans and advances to and/or
investments with residents made by
offshore banking units or expanded
foreign currency deposit units
- In case of foreign currency loan
transactions: such gross
interest income shall refer only
to the stipulated interest and
shall not include any and all
fees, commissions and other
charges which are integral
parts of the income form the
above transactions
- Such gross onshore income shall be
taxed with ten percent (10%) thereof
and be a final tax. Any and all fees,
commissions and other charges which
are integral parts of the charges
imposed on foreign currency loan
transactions are exempt from the tax
herein imposed
- In the case of onshore income realized
by an OBU or by an expanded FCDU: the
income need not be included in the
quarterly income tax return to be filed
- The payor-borrower under Section 53,
in relation to Section 54, of NIRC, is
constituted as the withholding agent
charged with the obligation of
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TAX 2 FINALS EXAM REVIEWER
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deducting, withholding and remitting to
the CIR the income tax due thereon
(3) Regional or Area Headquarters and
Regional Operating Headquarters
“Regional or Area Headquarters
(RHQ) - a branch established in the
Philippines by multinational companies
and which headquarters do not earn or
derive income from the Philippines and
which act as supervisory,
communications, and coordinating
center for their affiliates, subsidiaries,
or branches in the Asia-Pacific Region
and other foreign markets (Sec. 22(DD),
NIRC)
- Exempt from income tax since
they are not engaged in
business in the Philippines nor
derive any active business
income from sources within the
Philippines
- However, income from passive
investments like interest
income on bank deposits or
deposit substitutes in the
Philippine is subject to the final
withholding tax
“Regional Operating Headquarters” -
branch established in the Philippines by
multinational companies which are
engaged in any of the following
services: general administration and
planning; business planning and
coordination; sourcing and
procurement of raw materials and
components; corporate finance
advisory services; marketing control
and sales promotion; training and
personnel management; logistic
services; research and development
services and product development;
technical support and maintenance;
data processing and communication;
and business development (Sec. 22(EE),
NIRC)
- Shall pay a tax of ten percent
(10%) of their taxable income
(Atty. Deborah S. Acosta-
“Representative office” - a branch in
the Philippines of a foreign
multinational corporation whose
activities are limited to information
dissemination, product promotion, and
the performance of quality control of
goods for export to its head office or
affiliates
- Exempt from income tax since
they are not engaged in
business in the Philippines nor
derive any active business
income from sources within the
Philippines
- However, income from passive
investments like interest
income on bank deposits or
deposit substitutes in the
Philippine is subject to the final
withholding tax
Bar Question (2015)
KKK Corp. secured its Certificate of
Incorporation from the SEC on June 3, 2013. It
commenced business operations on August 12,
2013. In April 2014, Ms. J, an employee of KKK
Corp. in charge of preparing the annual income
tax return of the corporation for 2013, got
confused on whether she should prepare
payment for the regular corporate income tax or
the minimum corporate income tax
a) As Ms. J’s supervisor, what will be
your advice?
As Ms. J’s supervisor, I will advise that
KKK Corp. should prepare payment for
the regular corporate income tax and
not the minimum corporate income tax.
Under the Tax Code, minimum
corporate income tax is only applicable
beginning on the fourth taxable year
following the commencement of
business corporation (Sec. 27[e][1],
NIRC)
b) What are the distinctions between
regular corporate income tax and
minimum corporate income tax?
The distinctions between regular
corporate income tax and the minimum
corporate income tax are the following:
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TAX 2 FINALS EXAM REVIEWER
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1. As to Taxpayer: Regular
corporate income tax applies
to all corporate taxpayers;
while MCIT applies to domestic
corporation and resident
foreign corporations
2. As to Tax Rate: RCIT is 30%;
while MCIT is 2%
3. As to Tax Base: RCIT is based
on the net taxable income;
while MCIT is based on gross
income
4. As to Period of Applicability:
RCIT is applicable once the
corporation commenced its
business operation; while
MCIT is applicable beginning
on the fourth taxable year
following the commencement
of business operation
5. As to Imposition: MCIT is
imposed whenever it is greater
than the RCIT of the
corporation (Sec. 27[A] and [E],
NIRC; RR No. 9-98)
Bar Question (2001)
What is the rationale of the law in imposing
what is known as the MCIT on Domestic
Corporations?
The imposition of the MCIT is designed to
forestall the prevailing practice of corporations
of over claiming deductions in order to reduce
their income tax payments. The filing of income
tax returns showing a tax loss every year goes
against the business motive which impelled the
stockholders to form the corporation. This is the
reason why domestic corporations (and
resident foreign corporations), after the
recovery period of four years from the time they
commence business operations, become liable
to the MCIT whenever this tax imposed at two
percent of gross income exceeds the normal
corporate income tax imposed on net income
(Sponsorship Speech, Chairman of Senate Ways
and Means Committee).
Is a corporation which is exempted from the
MCIT automatically exempted from the
RCIT? Explain your answer.
No. The MCIT is a proxy for the normal
corporate income tax, not the regular income tax
(Atty. Deborah S. Acosta-
paid by a corporation. For instance, a
proprietary educational institution may be
subject to a regular corporate income tax of 10%
(depending on its dominant income), but it is
exempt from the imposition of MCIT because the
latter is not intended to substitute special tax
rates. So is with PEZA enterprises, CDA
enterprises, etc.
[NOTE: If what is meant by regular income tax is
the 32% tax rate imposed on net taxable income
of corporations, the answer would be in the
affirmative, because domestic corporations and
resident foreign corporations are either liable
for the two percent of gross income (MCIT) or
32% of net income (the normal corporate
income tax), whichever is higher.] (Beginning
January 1, 2009, the applicable regular
corporate income tax is 30%)
(4) Branch Profit Remittance Tax (Sec.
28(A)(5), NIRC)
- Any profit remitted by a branch
to its head office shall be
subject to a tax of fifteen
percent (15%) which shall be
based on the total profits
applied or earmarked for
remittance without any
deduction for the tax
component thereof
Marubeni Corp. v. Commissioner, 177 SCRA
500
NO. Pursuant to Section 24(b)(2) of the Tax
Code, as amended, only profits remitted abroad
by a branch office to its head office which are
effectively connected with its trade or business
in the Philippines are subject to the 15% profit
remittance tax. The dividends received by
Marubeni Corporation from Atlantic Gulf and
Pacific Co. are not income arising from the
business activity in which Marubeni Corporation
is engaged. Accordingly, said dividends if
remitted abroad are not considered branch
profits for purposes of the 15% profit
remittance tax imposed by Section 24(b)(2) of
the Tax Code, as amended.
Bank of America NT & SA v. CA & CIR, 234
SCRA 302
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Cajustin)

In the 15% remittance tax, the law specifies its
own tax base to be on the “profit remitted
abroad.” There is absolutely nothing equivocal
or uncertain about the language of the
provision. The tax is imposed on the amount
sent abroad, and the law calls for nothing
further.
The branch profit remittance tax should
be based on the amount actually remitted, NOT
what was applied for. There is nothing in
Section 24 which indicates that the 15%
tax/branch profit remittance is on the total
amount of profit; where the law does NOT
qualify that the tax is imposed and collected at
source, the qualification should not be read into
law. Rationale of 15%: To equalize/ share the
burden of income taxation with foreign
corporations
RMC 55-80
- Any profit remitted by a branch office to
its mother company authorized to
engage in petroleum operations in
the Philippines shall be subject to a tax
t seven and one-half percent (7.5%)
Final tax of 10% shall be imposed on
interest income from foreign currency loans
granted by the abovementioned depository
banks to residents other than depository banks
under the expanded system
2. Dividends (Sec. 28(A)(7)(d),
NIRC)
Dividends received by a resident foreign
corporation from a domestic corporation liable
to tax shall not be subject to tax under this
Title
3. Capital gains (Sec. 28(A)(7)
(c), NIRC)
Final tax prescribed below is imposed upon
the net capital gains from the sale, barter,
exchange or other disposition of shares of stock
in a domestic corporation (except those through
stock exchange):
Not over P100,000 5%
On any amount in excess of P100,000 10%

iii. Passive Income

iv. Subsidiary v. Branch of a Foreign
1. Interest (Sec. 28(A)(7)(a) &
Corporation
(b), NIRC)
“Subsidiary” - is a company controlled by
Final income tax of 20% shall be imposed on:
another, usually large (and many times,
(1) Interest from any currency bank
multinational) corporation. It is a distinct legal
deposit and yield
entity for purposes of taxation and regulation
(2) Any other monetary benefit from
deposit substitutes
“Branch office” - is an extension of a foreign
(3) Monetary benefit from trust funds and
enterprise and has no separate and independent
similar arrangements
legal personality. It can carry out the business
(4) Royalties
activities of its parent company and may derive
income from the host country.
Final income tax of 7 ½% shall be imposed on
interest income derived by a resident foreign
corporation from a depository bank under the
C - NON-RESIDENT FOREIGN CORPORATION
expanded foreign currency deposit system
- Organized or existing under the laws of
any foreign country and not engaged in
Exempt from all taxes are those income
trade or business in the Philippines but
derived by a depository bank under the
derives income from sources within the
expanded foreign currency deposit system from
Philippines
foreign currency transactions with
nonresidents, offshore banking units in PH, local
i. In General (Sec. 28(B)(1), NIRC)
commercial banks including branches of foreign
banks

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- Taxed at the rate of 30% on its
gross income from Philippine
sources.
ii. Special Non-Resident Foreign
Corporations (Sec. 28(B)(2), (3) &
(4), NIRC)
1. Nonresident
Cinematographic Film
Owner, Lessor or Distributer
- shall pay tax of twenty-five
percent (25%) of its gross
income from all sources within
the Philippines
2. Nonresident Owner or Lessor
of Vessels Chartered by
Philippine Nationals - subject
to a tax of four and one-half
percent (4 ½%) of gross
rentals, lease or charter fees
from leases or charters to
Filipino citizens or
corporations
3. Nonresident Owner or Lessor
of Aircraft, Machineries and
other Equipment - rentals,
charters and other fees derived
by a nonresident lessor of
aircraft, machineries and other
equipment shall be subject to a
tax of seven and one-half
percent (7 ½%) or gross
rentals or fees
iii. Passive Income
1. Interest (Sec. 28(B)(5)(a)
- Interest income on
foreign loans
contracted on or after
August 1, 1986 shall be
subject to a final
withholding tax of
20%
2. Dividends (Sec. 28(B)(5)(b)
- Cash and/or property
dividends received
from a domestic
corporation shall be
subject to a final
withholding tax at the
(Atty. Deborah S. Acosta-
rate of 15%, subject to
the condition that the
country in which the
non-resident foreign
corporation is
domiciled shall allow a
credit against the tax
due from the non-
resident foreign
corporation taxes
deemed to have been
paid in the Philippines
equivalent to 15%,
which represents the
difference between the
regular income tax of
30% on corporations
and the 15% tax on
dividends as provided
in this subparagraph
RMO 8-2017
- Requires the non-resident recipient of
dividends, interest, and royalties to file
the Certificate of Residence for Tax
Treaty Relief Application (CORTT) with
the payor of income and withholding
agent in the Philipine in order to avail of
the automatic application of treaty rates
on dividends, interest, and royalties in
lieu of the mandatory Tax Treaty Relief
Application (TTRA)
- For other types of income payments, a
TTRA is still required to be with the
International Tax Affairs Division
(ITAD) of the BIR
Commissioner v. Procter & Gamble PMC, 160
SCRA 560, 204 SCRA 377
The applicability to the dividend remittances by
P&G-Phil. to P&G-USA of the fifteen percent
(15%) tax rate provided for in Section 24 (b) (1)
of the NIRC. The ordinary thirty-five (35%) tax
rate applicable to dividend remittances to non-
resident corporate stockholders of a Philippine
corporation, goes down to fifteen percent (15%)
if the country of domicile of the foreign
stockholder corporation "shall allow" such
foreign corporation tax a credit for "taxes
deemed paid in the Philippines," applicable
against the tax payable to the domiciliary
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country by the foreign stockholder corporation.
In other words, in the instant case, the reduced
fifteen percent (15%) dividend tax rate is
applicable if the USA "shall allow" to P&G-USA a
tax credit for "taxes deemed paid in the
Philippines" applicable against the US taxes of
P&G-USA. The NIRC specifies that such tax credit
for "taxes deemed paid in the Philippines" must,
as a minimum, reach an amount equivalent to
twenty (20) percentage points which represents
the difference between the regular thirty-five
percent (35%) dividend tax rate and the
preferred fifteen percent (15%) dividend tax
rate. It is important to note that Section 24 (b)
(1), NIRC, does not require that the US must give
a "deemed paid" tax credit for the dividend tax
(20 percentage points) waived by the
Philippines in making applicable the preferred
dividend tax rate of fifteen percent (15%). In
other words, our NIRC does not require that the
US tax law deem the parent-corporation to have
paid the twenty (20) percentage points of
dividend tax waived by the Philippines. The
NIRC only requires that the US "shall allow"
P&G-USA a "deemed paid" tax credit in an
amount equivalent to the twenty (20)
percentage points waived by the Philippines.
The parent-corporation P&G-USA is
"deemed to have paid" a portion of the
Philippine corporate income tax although that
tax was actually paid by its Philippine
subsidiary, P&G-Phil., not by P&G-USA. This
"deemed paid" concept merely reflects
economic reality, since the Philippine corporate
income tax was in fact paid and deducted from
revenues earned in the Philippines, thus
reducing the amount remittable as dividends to
P&G-USA. In other words, US tax law treats the
Philippine corporate income tax as if it came out
of the pocket, as it were, of P&G-USA as a part of
the economic cost of carrying on business
operations in the Philippines through the
medium of P&G-Phil. and here earning profits.
What is, under US law, deemed paid by P&G-USA
are not "phantom taxes" but instead Philippine
corporate income taxes actually paid here by
P&G-Phil., which are very real indeed. It is also
useful to note that both (i) tax credit for the
Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate
income tax actually paid by P&G-Phil. but
(Atty. Deborah S. Acosta-
"deemed paid" by P&G-USA, are tax credits
available or applicable against the US corporate
income tax of P&G-USA. These tax credits are
allowed because of the US congressional desire
to avoid or reduce double taxation of the same
income stream.
Commissioner v. Wander Phils. 160 SCRA 573
ISSUE: Whether or not private respondent
Wander is entitled to the preferential rate of
15% withholding tax on dividends declared
and remitted to its parent corporation,
Glaro.
Yes. Pursuant to Section 24 (b) (1) of the Tax
Code, as amended by P.D. 369 and 778, the
dividends received from a domestic corporation
liable to tax, the tax shall be 15% of the
dividends received, subject to the condition that
the country in which the non-resident foreign
corporation is domiciled shall allow a credit
against the tax due from the non-resident
foreign corporation taxes deemed to have been
paid in the Philippines equivalent to 20% which
represents the difference between the regular
tax (35%) on corporations and the tax (15%)
dividends.
While it may be true that claims for
refund are construed strictly against the
claimant, nevertheless, the fact that Switzerland
did not impose any tax or the dividends received
by Glaro from the Philippines should be
considered as a full satisfaction of the given
condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege
to withhold only 15% tax provided for under
Presidential Decree No. 369, amending Section
24 (b) (1) of the Tax Code, would run counter to
the very spirit and intent of said law and
definitely will adversely affect foreign
corporations' interest here and discourage them
from investing capital in our country.
Marubeni Corp. v. Commissioner, 177 SCRA
500
1. Whether or not the dividends Marubeni
Corporation received from Atlantic Gulf and
Pacific Co. are effectively connected with its
conduct or business in the Philippines as to
be considered branch profits subject to 15%
profit remittance tax imposed under Section
24(b)(2) of the National Internal Revenue
Code.
NO. Pursuant to Section 24(b)(2) of the Tax
Code, as amended, only profits remitted abroad
by a branch office to its head office which are
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effectively connected with its trade or business
in the Philippines are subject to the 15% profit
remittance tax. The dividends received by
Marubeni Corporation from Atlantic Gulf and
Pacific Co. are not income arising from the
business activity in which Marubeni Corporation
is engaged. Accordingly, said dividends if
remitted abroad are not considered branch
profits for purposes of the 15% profit
remittance tax imposed by Section 24(b)(2) of
the Tax Code, as amended.
2. Whether Marubeni Corporation is a
resident or non-resident foreign
corporation. Marubeni Corporation is a non-
resident foreign corporation, with respect to
the transaction.
Marubeni Corporation’s head office in Japan is a
separate and distinct income taxpayer from the
branch in the Philippines. The investment on
Atlantic Gulf and Pacific Co. was made for
purposes peculiarly germane to the conduct of
the corporate affairs of Marubeni Corporation in
Japan, but certainly not of the branch in the
Philippines.
3. At what rate should Marubeni be taxed?
15%. The applicable provision of the Tax Code is
Section 24(b)(1)(iii) in conjunction with the
Philippine-Japan Tax Treaty of 1980. As a
general rule, it is taxed 35% of its gross income
from all sources within the Philippines.
However, a discounted rate of 15% is given to
Marubeni Corporation on dividends received
from Atlantic Gulf and Pacific Co. on the
condition that Japan, its domicile state, extends
in favor of Marubeni Corporation a tax credit of
not less than 20% of the dividends received.
This 15% tax rate imposed on the dividends
received under Section 24(b)(1)(iii) is easily
within the maximum ceiling of 25% of the gross
amount of the dividends as decreed in Article
10(2)(b) of the Tax Treaty. Note: Each tax has a
different tax basis. Under the Philippine-Japan
Tax Convention, the 25% rate fixed is the
maximum rate, as reflected in the phrase “shall
not exceed.” This means that any tax imposable
by the contracting state concerned should not
exceed the 25% limitation and said rate would
apply only if the tax imposed by our laws
exceeds the same.
iv. Capital gains (Sec. 28(B)(5)(c), NIRC)
(Atty. Deborah S. Acosta-
- Subject to the final tax at the
following rates: (a) five
percent on net capital gains
not over P100,000; and (b)
10% on net capital gains in
excess of P100,000
D - MINIMUM CORPORATE INCOME TAX
(“MCIT”)
i. On Domestic Corporation (Sec. 27(E),
NIRC)
Tax of 2% of the gross income as of the end of
the taxable year is imposed on a corporation
taxable beginning on the fourth taxable year
immediately following the year in which such
corporation commenced its business operations,
when the minimum income tax is greater than
the tax computed under Subsection (A) of this
Section for the taxable year.
Primarily aims to forestall tax evasion
by corporations that declare losses despite their
business operations
Thus, even if a corporation incurs net
loss in its business operations, it is still subject
to an MCIT of 2% of its gross income
ii. On Resident Foreign Corporation
(Sec. 28(A)(2), NIRC)
Tax of 2% of gross income, as prescribed under
Section 27(E) of this Code, shall be imposed,
under the same conditions, on a resident foreign
corporation
iii. Rev. Reg. 9-98
issued September 2, 1998 prescribes the
regulations to implement RA No. 8424 relative
to the imposition of the Minimum Corporate
Income Tax (MCIT) on domestic corporations
and resident foreign corporations. Specifically,
an MCIT of 2% of the gross income as of the end
of the taxable year is imposed upon any
domestic corporations beginning the 4th taxable
year immediately following the taxable year in
which such corporation commenced its business
operations. The MCIT will be imposed whenever
such operation has zero or negative taxable
income or whenever the amount of MCIT is
greater than the normal income tax due from
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such operation. In the case of a domestic
corporation whose operations or activities are
partly covered by the regular income tax system
and partly covered under a special income tax
system, the MCIT will apply on operations
covered by the regular income tax system.
The Regulations will apply to domestic
and resident foreign corporations on their
aforementioned taxable income derived
beginning January 1, 1998 pursuant to the
pertinent provisions of RA 8424, provided,
however, that corporations using the fiscal year
accounting period and which are subject to
MCIT on income derived pertaining to any
month or months of the year 1998 will not be
imposed with penalties for late payment of the
tax.
iv. RMC 4-2003
Issued on January 15, 2003 clarifies the items
that would constitute gross receipts and cost of
services for purposes of computing the gross
income on sale of services, which shall be the
basis of the 2% Minimum Corporate Income Tax
(MCIT).
The determination of what items should
comprise gross receipts and the corresponding
cost of services is specified in the Circular for
the following industries:
1) Banks and non-bank financial
intermediaries performing quasi-
banking activities;
2) Insurance and pension funding
companies;
3) Finance companies and other financial
intermediaries not performing quasi-
banking activities;
4) Brokers of securities (excluding banks);
5) Customs, insurance, real estate,
immigration and commercial brokers;
6) General engineering and/or building
contractors;
7) Common carriers or transportation
contractors;
8) Hotel, motel, rest/pension/lodging
house and resort operators;
9) Food service establishments;
10) Lessors of property;
11) Telephone and telegraph, electric, gas
and water utilities; and
12) Radio and/or television broadcasting.
(Atty. Deborah S. Acosta-
v. Rev. Reg. 12-2007
issued on October 17, 2007 amends certain
provisions of Revenue Regulations (RR) No. 9-
98 relative to the due date within which to pay
the Minimum Corporate Income Tax (MCIT)
imposed on domestic corporations and resident
foreign corporations pursuant to Sections 27(E)
and 28(A)(2) of the Tax Code, as amended.
An MCIT of two percent (2%) of the
gross income as of the end of the taxable year
(whether calendar or fiscal year, depending on
the accounting period employed) is imposed
upon any domestic corporation beginning on the
4 th taxable year immediately following the
taxable year in which such corporation
commenced its business operations. The MCIT
shall be imposed whenever such corporation
has zero or negative taxable in come or
whenever the amount of MCIT is greater than
the normal Income Tax due from such
corporation.
Notwithstanding the above provision,
however, the computation and the payment of
MCIT, shall likewise apply at the time of filing
the quarterly corporate Income Tax as
prescribed under Sections 75 and 77 of the Tax
Code, as amended.
Thus, in the computation of the tax due
for the taxable quarter, if the computed
quarterly MCIT is higher than the quarterly
normal Income Tax, the tax due to be paid for
such taxable quarter at the time of filing the
quarterly corporate Income Tax Return (ITR)
shall be the MCIT, which is 2% of the gross
income as of the end of the taxable quarter. In
the payment of said quarterly MCIT, excess
MCIT from the previous taxable year/s shall not
be allowed to be credited. Expanded
withholding tax, quarterly corporate Income Tax
payments under the normal Income Tax and the
MCIT paid in the previous taxable quarter/s are
allowed to be applied against the quarterly
MCIT due.
The quarterly MCIT paid on the
quarterly ITR shall be credited against the
normal Income Tax at year end if in the
preparation and filing of the annual ITR and in
the final computation of the annual Income Tax
due, it appears that the normal Income Tax due
is higher than the computed annual MCIT.
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Moreover, in addition to the quarterly MCIT
paid and quarterly normal Income Tax
payments in the taxable quarters of the same
taxable year, excess MCIT in the prior year/s
(subject to the prescriptive period allowed for
its creditability), expanded withholding taxes in
the current year and excess expanded
withholding taxes in the prior year shall be
allowed to be credited against the annual
Income Tax computed under the normal Income
Tax rules.
However, if in the computation of the
annual Income Tax due, the computed annual
MCIT due appears to be higher than the annual
normal Income Tax due, what may be credited
against the annual MCIT due shall only be the
quarterly MCIT payments of the current taxable
quarters, the quarterly normal Income Tax
payments in the quarters of the current taxable
year, the expanded withholding taxes in the
current year and excess expanded withholding
taxes in the prior year. Excess MCIT from the
previous taxable year/s shall not be allowed to
be credited therefrom as the same can only be
applied against normal Income Tax.
For purposes of these Regulations, the
term, “normal Income Tax” means the income
tax rates prescribed under Sections 27(A) and
28(A)(1) of the Code at 34% on January 1, 1998;
33% effective January 1, 1999; at 32% effective
January 1, 2000 and 35% effective November 1,
2005 and thereafter. Provided, however, that
effective January 1, 2009 the rate of Income Tax
shall be 30% pursuant to RA No. 9337.
The taxpayer shall pay the MCIT
whenever it is greater than the regular or
normal corporate Income Tax which is imposed
under Sections 27(A) and 28(A)(1) of the Tax
Code. The final comparison between the normal
Income Tax payable by the corporation and the
MCIT shall be made at the end of the taxable
year and the payable or excess payment in the
annual ITR shall be computed taking into
consideration corporate Income Tax payment
made at the time of filing of quarterly corporate
ITR whether this be MCIT or normal Income Tax
The term “gross income” means gross
sales less sales returns, discounts and
allowances and cost of goods sold, in case of sale
of goods, or gross revenue less sales returns,
discounts, allowances and cost of
(Atty. Deborah S. Acosta-
services/direct cost, in case of sale of services.
This rule, notwithstanding, if apart from
deriving income from these core business
activities there are other 2 items of gross
income realized or earned by the taxpayer
during the taxable period which are subject to
the normal corporate Income Tax, the same
items must be included as part of the taxpayer’s
gross income for computing MCIT. This means
that the term “gross income” will also include all
items of gross income enumerated under
Section 32(A) of the Tax Code, as amended,
except income exempt from Income Tax and
income subject to final withholding tax
The MCIT shall be paid in the same
manner prescribed for the payment of the
normal corporate Income Tax which is on a
quarterly and on a yearly basis. It shall be
covered by a tax return designed for the
purpose, which will be submitted together with
the corporation's annual final adjustment ITR.
Domestic corporations shall be required to pay
the MCIT on a quarterly basis, pursuant to the
provisions of Sections 75 and 77 of the Tax Code
in relation to Section 245 of the same Code, as
amended
In the filing of the quarterly ITR for the
taxable quarter which is due for filing after the
effectivity of these Regulations, the computation
of the MCIT shall be done on cumulative basis
covering not only the current taxable quarter
but also the previous taxable quarters of the
same taxable year. Such computed MCIT shall be
compared with the cumulative normal Income
Tax, whereupon the higher amount between the
two shall be the basis of the quarterly Income
Tax payment to be made for said taxable
quarter.
Thus, for those using calendar year
basis accounting period, in the filing of the
quarterly ITR for the third quarter ended
September 2007, which is due for filing on or
before November 29, 2007, the gross income for
the 1st and 2nd quarters shall be added to the
gross income for the quarter ended September
2007, the total of which shall be the basis of the
2% MCIT which shall then be compared with the
computed cumulative normal Income Tax. The
cumulative MCIT for the three (3) said quarters
shall be paid in case the same appears to be
higher than the normal Income Tax computed
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for the same period. Excess normal Income Tax
carried over from previous taxable year and
payments made for the previous quarters of the
same taxable year, including withholding tax
credits claimed for said previous quarters of
same taxable year shall be credited against the
computed tax due in the cumulative quarterly
tax return.
E - IMPROPERLY ACCUMULATED EARNINGS
TAX
- An improperly accumulated earnings
tax equal to 10% is imposed on the
improperly accumulated taxable
income of every corporation formed or
availed of for the purpose of avoiding
the income tax with respect to its
shareholders or the shareholders of any
other corporation by permitting its
earnings and profits to accumulate
instead of being divided or distributed
(Sec. 29, NIRC)
The rationale is that if the earnings and
profits were distributed, the shareholders
would then be liable to income tax thereon,
whereas if the distribution were not made to
them, they would incur no tax in respect to the
undistributed earnings and profits of the
corporations.
THUS, a tax is being imposed in the
nature of a penalty to the corporation for
improper accumulation of its earnings, and
as a form of deterrent to the avoidance of tax
upon shareholders who are supposed to pay
dividends tax on the earnings distributed to
them by the corporation.
Rev. Reg. 2-2001
- Provides that the IAET shall be imposed
on improperly accumulated taxable
income earned starting January 1, 1998
by domestic corporations as defined
under the Tax Code and which are
classified as closely-held corporations
defines as those corporations at least
50% in value of the outstanding capital
stock or at least 50% of the total
combined voting power of all classes of
stock entitled to vote is owned directly
or indirectly by or for not more than 20
individuals.
(Atty. Deborah S. Acosta-
- Domestic corporations not falling under
the aforesaid definition are, therefore,
publicly-held corporations.
- The IAET shall not apply to:
(1) Publicly-held corporations;
(2) Banks and other non-bank
financial intermediaries; and
(3) Insurance companies (Sec.
29[B][2], NIRC)
- Rev. Regs. No. 2-2001 further added the
following entities as outside the
coverage of the IAET:
(1) Taxable partnerships;
(2) General professional
partnerships;
(3) Non-taxable joint ventures; and
(4) Enterprises duly registered
with PEZA
(5) Enterprises registered
pursuant to the Bases
Conversion and Development
Act of 1992
(6) Other enterprises duly
registered under special
economic zones declared by
law which enjoy payment of
special tax rate on their
registered operations or
activities in lieu of other taxes,
national or local
(7) Branch of a foreign corporation
Those covered by IAET are required to pay or
issue dividends not later than one year
following the close of the taxable year,
otherwise, the IAET, if any, should be paid
within 15 days thereafter.
HOWEVER, said corporations are allowed to
accumulate earnings up to 100% of their paid-
up capital as of Balance Sheet date, inclusive of
accumulations taken from other years. [“paid-
up capital” - capital refers to the value of the
property or assets of a corporations; the total
amount of the capital that persons have agreed
to take and pay for, which need not necessarily
be, adn can be more than, the par value of the
shares]
In excess thereof, the accumulation of surplus or
undistributed earnings or profits shall be
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subject to the IAET, unless used for the
reasonable needs of the business (used either
for the immediate needs of the business or
reasonably anticipated needs of the business)
In order to determine whether profits are
accumulated for the reasonable needs of the
business: the controlling intention of the
taxpayer is that which is manifested at the time
of accumulation, not subsequently declared
intentions; definiteness of plan/s coupled with
action/s taken towards its consummation is
essential
Bar Question (2010)
What is the “immediacy test”? Explain
briefly.
To determine the reasonable needs of the
business in order to justify an accumulation of
earnings (and not impose the 10% tax on
improperly accumulated earnings of
corporations), the “immediacy” test under
American jurisprudence has been adopted in the
Philippines. Thus, the term ”reasonable needs
of the business” is construed to mean the
immediate needs of the business to accumulate
earnings and profits (instead of declaring
dividends to shareholders), including
reasonably anticipated needs.
Manila Wine Merchants, Inc. v. CIR, 127 SCRA
483
To determine the "reasonable needs" of the
business in order to justify an accumulation of
earnings, the Courts of the United States have
invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the
business" to mean the immediate needs of the
business, and it was generally held that if the
corporation did not prove an immediate need
for the accumulation of the earnings and profits,
the accumulation was not for the reasonable
needs of the business, and the penalty tax would
apply. American cases likewise hold that
investment of the earnings and profits of the
corporation in stock or securities of an
unrelated business usually indicates an
accumulation beyond the reasonable needs of
the business.
Thus, if the failure to pay dividends is
due to some other cause, such as the use of
(Atty. Deborah S. Acosta-
undistributed earnings and profits for the
reasonable needs of the business, such purpose
does not fall within the interdiction of the
statute (Ibid., p. 45).
CIR v. Tuason 173 SCRA 397
The Court of Tax Appeals conceded that the
Revenue Commissioner's determination that
Antonio Tuason, Inc. was a mere holding or
investment company, was "presumptively
correct" (p. 7, Annex A), for the corporation did
not involve itself in the development of
subdivisions but merely subdivided its own lots
and sold them for bigger profits. It derived its
income mostly from interest, dividends and
rental realized from the sale of realty. Another
circumstance supporting that presumption is
that 99.99% in value of the outstanding stock of
Antonio Tuason, Inc., is owned by Antonio
Tuason himself. The Commissioner
"conclusively presumed" that when the
corporation accumulated (instead of
distributing to the shareholders) a surplus of
over P3 million from its earnings in 1975 to
1978, the purpose was to avoid the imposition
of the progressive income tax on its
shareholders. Since the company as of the time
of the assessment in 1981, had invested in its
business operations only P773,720 out of its
accumulated surplus profits of P3,263,305.88
for 1975-1978, its remaining accumulated
surplus profits of P2,489,585.88 are subject to
the 25% surtax.
It is plain to see that the company's
failure to distribute dividends to its
stockholders in 1975-1978 was for reasons
other than the reasonable needs of the business,
thereby falling within the interdiction of Section
25 of the Tax Code of 1977.
Cyanamid v. CA, 322 SCRA 639
A review of American taxation history on
accumulated earnings tax will show that the
application of the accumulated earnings tax to
publicly held corporations has been
problematic. Initially, the Tax Court and the
Court of Claims held that the accumulated
earnings tax applies to publicly held
corporations. Then, the Ninth Circuit Court of
Appeals ruled in Golconda that the accumulated
earnings tax could only apply to closely held
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corporations. Despite Golconda, the Internal
Revenue Service asserted that the tax could be
imposed on widely held corporations including
those not controlled by a few shareholders or
groups of shareholders. The Service indicated it
would not follow the Ninth Circuit regarding
publicly held corporations. In 1984, American
legislation nullified the Ninth Circuit's Golconda
ruling and made it clear that the accumulated
earnings tax is not limited to closely held
corporations. Clearly, Golconda is no longer a
reliable precedent.
F - EXEMPTION FROM TAX ON CORPORATION
i. Sec. 30, NIRC
The following organizations shall not be taxed
under this Title in respect to income received by
them as such:
1. Labor, agricultural or horticultural
organization (not organized principally
for profit);
2. Mutual savings bank (not having a
capital stock represented by shares),
and cooperative bank (without capital
stock organized and operated for
mutual purposes and without profit);
3. A beneficiary society, order or
association (operating for the exclusive
benefit of the members such as a
fraternal organization operating under
the lodge system), or a mutual aid
association or a non-stock corporation
organized by employees (providing for
the payment of life, sickness, accident,
or other benefits exclusively to the
members of such society, order, or
association, or nonstock corporation or
their dependents);
4. Cemetery company (owned and
operated exclusively for the benefit of
its members);
5. Nonstock corporation or association
(organized and operated exclusively)
for religious, charitable, scientific,
athletic, or cultural purposes, or for the
rehabilitation of veterans, (no part of its
net income or asset shall belong to or
inure to the benefit of any member,
organizer, officer or any specific
person);
(Atty. Deborah S. Acosta-
6.
Business league, chamber of commerce,
or board of trade, (not organized for
profit and no part of the net income of
which inures to the benefit of any
private stockholder or individual);
7. Civic league or organization (not
organized for profit but operated
exclusively for the promotion of social
welfare);
8. A non stock and nonprofit educational
institution;
9. Government educational institution;
10. Farmers’ or other mutual typhoon or
fire insurance company, mutual ditch or
irrigation company, mutual or
cooperative telephone company, or like
organization of a purely local character,
(the income of which consists solely of
assessments, dues, adn fees collected
from members for the sole purpose of
meeting its expenses); and
11. Farmers’, fruit growers’, or like
association (organized and operated) as
a sales agent for the purpose of
marketing the products of its members
and turning back to them the proceeds
of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by them;
*Income of whatever kind and character of the
foregoing 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 imposed under this Code.
ii. Sec. 24, Rev. Reg. No. 2
iii. Secs. 25-32, 35, Rev. Reg. No. 2
CIR v. St. Luke’s Medical Center, Inc., G.R. No.
203514
The Court reaffirmed its ruling in G.R. Nos.
195909 and 195960 (Commissioner Internal
Revenue v. St. Luke's Medical Center, Inc.). For
an institution to be completely exempt from
income tax, Section 30(E) and (G) of the 1997
NIRC requires said institution to operate
exclusively for charitable or social welfare
purposes. But in case an exempt institution
under Section 30(E) or (G) of the said Code
earns income from its “for-profit activities”, it
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

will not lose its tax exemption. However, its

income from “for-profit activities” will be
subject to income tax at the preferential 10%
rate pursuant to Section 27(B) thereof.
Following earlier cases, St. Luke's fails to meet
the requirements under Section 30(E) and (G) of
the NIRC to be completely tax exempt from all
its income. However, it remains a proprietary
non-profit hospital under Section 27(B) of the
NIRC as long as it does not distribute any of its
profits to its members and such profits are
reinvested pursuant to its corporate purposes.
St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its
net income from its for-profit activities.

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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

VALUE-ADDED TAX “Output tax” - the value-added tax due on the

sale or lease of taxable goods, properties or
Secs. 105-115, NIRC sercies by any person registered or required to
(as amended by RA 8424 & RA 9238, February 5, 2004 and register under Section 236 of Tax Code (Sec.
RA 9338, effective July 1, 2005, implemented by RR 16-2005 110[A], NIRC).
(November 1, 2005) and RR 4-2007 (February 7, 2007); RR
No. 13-2018, March 15, 2018)
“Input tax” - the value-added tax due from or
paid by a VAT-registered person in the course of
Characteristics of Value-Added Tax (Bar his trade or business on importation of goods or
Question 1996) local purchase of goods, properties, or services,
1. It is a tax on the value added of a including lease or use of property, from a VAT-
taxpayer registered person (Sec. 110[A], NIRC).
2. It is collected through the “tax credit The buyer becomes entitled to the input
method” or “invoice method.” tax upon consummation of sale and issuance of a
3. It is transparent form of sales tax VAT invoice, in the case of sale of goods or
4. It is a broad-based tax on consumption properties, and upon payment of service fee or
of goods, properties, or services in the compensation, in the case of sale of services.
Philippines as it applies to all stages of
manufacture, production, adn The value added of a taxpayer and his value-
distribution of goods and services. added tax due or excess input tax on his
5. It is an indirect tax. transactions during the quarter can be
6. The Philippines adopted the “separate computed by using the formula shown below:
indication of tax method.”
7. There is no cascading in the value- CASE “A” CASE “B”
added tax system.
Am VAT Amt VAT
“VAT” - is a tax on the value added of a taxpayer t
arising from taxable sales of goods, properties,
Sales 100 100
or services during the quarter at the rate of zero
percent or 10%. Output tax 12.0 12.0
(100x12%)
“Value Added” - is the difference between total
sales of a taxpayer for the taxable quarter Purchases 80 130
subject to value-added tax and his total Input tax 9.6 15.6
purchases for the same period subject also to (80 or 130 x 12%
value-added tax.
In this sense, the value added of a Value Added 20 (30)
businessman is the same as his gross profit,
VAT Payable 2.4
provided that he is not engaged in transactions
(20 x 12%)
exempt from value-added tax.
Excess input tax (3.6)
If there is no value added on taxable sales [(30) x 12%)]
(because the gross sales or receipts is equal to
the gross purchases) or where there is a loss
from sale (because the gross purchases is more Atlas Consolidated v. CIR, G.R. No. 146221,
than gross sales or receipts): there is still output September 25, 2007
tax due on the transaction
*there will be no value-added tax due or there
will be an excess input tax which may be carried RR 7-95
over to the next quarter(s), respectively

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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

CIR v. Sony Philippines, Inc., G.R. No. 178697,

RMO 39-95 November 17, 2010

KEPCO Philippines Corp. v. CIR, G.R. No.

RMC 1-96 up to 7-96 181858, November 24, 2010

AT&T Communications Services Phils., Inc. v.

CIR, G.R. No. 182364, August 3, 2010
Are reimbursements subject to VAT?

Silicon Philippines, Inc. v. CIR, G.R. No. 172378,

january 12, 2011
CIR v. Court of Appeals, et al, G.R. No. 125355,
March 30, 2000 Renato V. Diaz and Aurora Timbl v. Secretary
of Finance, G.R. No. 193007, July 19, 2011

RMC 9-2006, January 25, 2006
RMC No. 39-2007, January 22, 2007
RR 13-97
RR 7-99
RMC 74-99
American Express v. Commissioner, SC G.R.
152609, June 28, 2005
CIR v. Burmeister and Wain, G.R. No. 153205,
January 22, 2007
CIR v. Magsaysay Lines, G.R. No. 146984, July
28, 2006
RA No. 9361, December 31, 2006
(as implemented by RR No. 2-2007 (December 29, 2006))
PAGCOR v. BIR, G.R. No. 172087, March 15,
2011
CIR v. Aichi Forging Company of Asia, G.R. No.
184823, October 6, 2010
Fort Bonifacio Devt Corp. v. CIR, G.R. Nos.
158885 and 170680, April 2, 2009
CIR v. Benguet Corporation, G.R. Nos. 134587
and 134588, July 8, 2005
CIR v. SM Prime Holdings, Inc. et al, G.R. No.
183505, February 26, 2010
CIR v. The Philippine American Accident
Insurance Company, et al., G.R. No. 141658,
March 18, 2005
RR No. 18-2011
RR No. 16-2011
RR No. 13-2012

CIR v. Seagate Technology Phils., G.R. No.

153866, February 11, 2015 Mindanao II Geothermal Partnership v. CIR,
G.R. No. 204745, December 8, 2014
Medicard Philippines, Inc. v. CIR, G.R. No.
222743, April 5, 2017 Taganito Mining Corporation v. CIR, G.R. No.
201195, November 26, 2014
Microsoft Philippines, Inc. v. CIR, G.R. No.
180173, April 6, 2011

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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)

Fort Bonifacio Development Corporation v.

CIR, et al., G.R. Nos. 175707, 180035, 181092,
November 19, 2014

AT&T Communications Services Phils., Inc. v.

CIR, G.R. No. 185969, November 19, 2014

CIR v. Team Sual Corporation, G.R. No.

205055, July 18, 2014

San Roque Power Corp. v. CIR, G.R. No.

205543, June 30, 2014

Pilipinas Total Gas, Inc. v. CIR, G.R. No.

207112, December 8, 2015

Eastern Telecommunications Philippines, Inc.

v. CIR, G.R. No. 183531, March 25, 2015

Takenaka Corporation - Philippine Branch v.

CIR, G.R. No. 193321, October 19, 2016

Sitel Philippines Corporation v. CIR, G.R. No.

201326, February 8, 2017

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