CONSOLIDATED SYLLABUS

IN TAXATION

TAX 1

A. General Principles of Taxation

a. Concept1Underlying Basis2 and Purpose

1. Taxation, Taxes Defined

Taxation is the inherent power of the Sovereign, exercised through the legislature to
impose burdens upon subjects and objects within its jurisdiction for the purpose of
raising revenues to carry out the legitimate objects of the government.

Taxes are the forced proportional contributions from persons and property levied by the
State by virtue of its sovereignty for the support of the government and for public needs.

2. Attributes or Characteristics of Taxes

a) It is imposed by the State
b) Levied by the law-making body
c) It is an enforced contribution
d) Generally payable in money
e) Proportionate in character
f) Levied on persons, property and excise (privilege)
g) Levied for public purposes
h) Paid at regular periods or intervals
i) Personal to the taxpayer

1) Cebu Portland Cement v. CTA, L-29059, 15 Dec 1987, 156 SCRA 535 (Lifeblood of the
Government)
2) Mun. of Makati v. CA, et al, L-89898, 01 Oct 1990, 190 SCRA 206 (Exempt from execution)

1
What is the concept of taxation? It can be viewed in two ways, namelya) as a power to tax and (b) as the
act or process by which taxing power is exercised.

2
What is the theory or underlying basis of taxation? It is a necessity without which no government could
exist; revenues collected are intended to finance government and its activities. It can reach what
traditionally are within police power measures to attain:
i. Social justice
ii. Equitable distribution of wealth
iii. Economic progress
iv. Protection of local industries, public welfare and the like
 3) CIR v. Algue, Inc. et al, L-28896, 17 Feb 1988, 158 SCRA 9 (Lifeblood Theory; Rationale is
Symbiotic Relationship; timeliness of assessment / collection; effect of warrant of
distraint & levy; deductibility of promotional expense)3
4) BPI Family Savings Bank v. CA et al, 330 SCRA 507, G.R. No. 122480 April 12, 2000 (Mutual
Observance of fairness & honesty; claim for refund due to losses, how to prove
entitlement)4
b. Principles of a Sound Tax System
1. Fiscal Adequacy
2. Theoretical Justice
3. Administrative Feasibility
4. Will the non-observance of these principles invalidate the tax law? No, unless
other inherent and constitutional limitations are infringed.

c. Characteristics of Taxation
1. No attribute of sovereignty is more pervading, unlimited, plenary,
comprehensive and supreme
2. Wide spectrum of the power to tax reaches every trade or occupation, every
object of industry, use or enjoyment, every species of possession
3. Imposes burden, if not followed could result to seizure and penalty
4. Pervasive affecting constantly and consistently all relations of life
5. It also involves the power to destroy per Justice Marshall [but Justice Holmes
said no while the US SC sits]

5) CIR v Tokyo Shipping Co, 244 SCRA 332, G.R. No. L-68252 May 26, 1995 [Claim for Refund of
tax on GPB from charter of vessel; claim for refund construed strictississimi juris finding of fact
by CTA that vessel left without sugar laden; 15 years lapsed without refund though at one point
lawyer of BIR said it was approved; kill the goose that lay the golden eggs]

d. Limitation of Taxation
1. Inherent Limitations
a. Situs or Territoriality
b. Public Purpose
c. International Comity
d. Non-delegability - essentially Legislative in Nature

3
The substantive issue here is the deductibility of P75,000 promotional fees paid by Algue to certain
individuals who were also its stockholders and who rendered services so that Algue would earn
commission fees. The procedural issue whether or not Allgue seasonably filed its appeal to the CTA from
receipt of Warrant of Distraint and Levy. Due to a special circumstance, this case presents an excepted to
the rule that a Warrant of Distraint and Levy is “proof of the finality of the assessment” and “renders
hopeless a request for reconsideration,” being “tantamount to an outright denial thereof and makes the
said request deemed rejected.”

4
This is a claim for tax refund due to losses, which was denied by the CTA allegedly for failure to present
the Annual Income Tax Return of the following year, which would show whether the overpaid taxes had
not been credited in that year’s tax liability.
6) CIR v Mitsubishi Metal Corp, 181 SCRA 214, 22 Jan 1990 [Exemption of Japanese govt owned
bank does not extend to Jap corp, who in turn lent the loan to a local company; exemption
construed strictississimi]

e. Exemption of Government from tax

2. Constitutional Limitations
Directly affecting taxation
a. Non-imprisonment for non-payment of poll tax
b. Rule of taxation should be uniform and equitable; progressive system
of taxation to evolve; authorized President to fix limits by Congress
c. Exempt charitable and religious institution from property tax
d. Exempting law must be passed by majority of all members of
Congress
e. Special purpose tax should be used for said purpose and excess to
revert to general fund
f. Veto power of the President
g. Review power of the SC
h. Grant of power to local government
i. Exemption of non-stock, non-profit educational institution, etc from
taxes

Indirectly affecting taxation

a. Due Process and Equal Protection Clauses
b. Police Power and Eminent Domain higher, can override constitutional
rights, subject to limitations

Distinguish Taxation from Police Power and Eminent Domain

Taxation is subordinate to:

1) Due Process
1) Separation of Church and State
1) Non-impairment clause of contracts
1) Free exercise and enjoyment of religious profession

7) Phil Bank of Communications v. CIR, et al, 302 SCRA 241, G.R. No. 112024 January 28, 1999
[Summary collection does not infringe due process
8) Sison v. Ancheta, GR 59431, 25 Jul 1984 [Uniformity, Equal Protection and Due Process
Clauses not violated when BP 135 adopted gross income taxation) [when the tax “operates
with the same force and effect in every place where the subject may be found”. It was held to
comply with uniformity requirement; “Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate.]
9) Reyes v. Almanzor, 196 SCRA 322 G.R. Nos. L-49839-46 April 26, 1991 (Arbitrary
valuation violated Due Process
 10) Nitafan et al v. CIR, GR 78780, 23 Jul 1987 (Salaries of justices & Judges are not exempt from
income tax)
11) PAL v. Sec of Finance, GR 115852, 25 Aug 1994 (Withdrawal of PAL’s exemption from VAT
without being mentioned in title not violative of bill embracing one subject)
12) Tolentino v Sec of Finance & CIR, GR 11545, 64 SCAD 352, 235 SCRA 630 (Does VAT law
violate the “progressivity rule of taxation” given that VAT is regressive?; equality &
uniformity rule?)
13) ABAKADA Guro v. Exec Secretary, 469 SCRA 1, etc 1 Sep 2005 & 18 Oct 2005 G.R. No.
168056 September 1, 2005

e. Aspects of Taxation
Levy - pertains to the determination by Congress of the subject and object of
taxation as well as the rate. It refers to the enactment of tax laws or statutes

14) CIR v. Botelho Shipping Corp, 20 SCRA 487 R. Nos. L-21633-34 June 29, 1967
(tax exemptions granted to particular class persons)
15) Tan v. Del Rosario, Jr.5 237 SCRA 324(1994) G.R. No. 109289 October 3, 1994
(Legislative discretion to determine nature (kind), subject (purpose), extent (rate),
coverage (subject), land situs (place), SNITS is valid;

Assessment & Collection - refers to the act of administration and implementation

of the tax law by the executive department through its
administrative agencies

Payment - The act of compliance by the taxpayer, including such options, schemes or
remedies as may be legally open or available to him.

f. Classification of Taxes
According to subject matter (Capitation Tax, Property Tax, Excise Tax)
According to burden or incidence (Direct or indirect)

16) Maceda v. Macaraeg 223 SCRA 217 G.R. No. 88291 May 31, 1991
17) ABAKADA Guro v. Exec Secretary, GR 168056 1 Sep 2005 & 18 Oct 2005

According to determination of amount (Ad Valorem, Specific or mixed)

18) Tan v Mun of Pagbilao GR 14264, 30 Apr 1963 7 SCRA 887

According to purpose (General, Special)

19) PAL v. Romeo Edu, GR 41383, 15 Aug 1998 164 SCRA 320 (exempt from taxes)
20) ESSO Std Eastern v CIR GR 28508-9, 7 Jul 1989 175 SCRA 149 (Margin Fee a license – police
power, not taxing)
21) Lozano v. Energy Regulatory Board, GR 95119-21, 18 Dec 1990 192 SCRA 363 (OPSF not a
tax)

5
Tan v. Del Rosario, 237 SCRA 324 (1994) – This is a challenge to the validity of Simplified Net Income
Taxation applied to general professional partnerships; uniformity of taxation merely requires that all
subjects or objects of taxation similarly are to be treated alike both in privileges and liabilities.
 According to authority imposing the tax (National, Local)

22) Meralco Securities v. Central Board of Assessments Appeals, GR L-47245, 31 May 1982 114
SCRA 260 (Real Property under Real Property Tax Code, a national tax; This is no longer
true under the Local Government Code)

According to graduation (tax base / tax rate) – (Progressive, regressive,

proportionate)

g. Distinguished from other exactions

License

23)Procter & Gamble v. Mun of Jagna, 94 SCRA 894, (nature and amount of license) G.R. No.
L-24265 December 28, 1979
24)Golden Ribbon Lumber v City of Butuan, 12 SCRA 611 (non payment is illegal) G.R. No. L-
18534 December 24, 1964

Toll

25)City of Ozamis v Lumapas, 65 SCRA 33 G.R. No. L-30727 July 15, 1975

Special Assessments (Now, Special Levy under the Local Government Coe)

26)Apostolic Prefect v Treasurer of Baguio, 71 PHIL 547 GR No. L-47252 April 18, 1941

Debt or an ordinary obligation

27)Victoria Millling v Phil Ports Authority, GR 73705 27 Aug 1987, 153 SCRA 317 (share of
govt from earnings of arrastre and stevedoring from contractual compensation not tax)
28)CIR v Prieto 109 PHIL 592 G.R. No. L-13912 September 30, 1960

h. Sources of Tax Laws

1. Constitution
2. Statutes passed by Congress
 National Internal Revenue Code (NIRC)
 Local Government Code (LGC)
 Customs Modernization and Tariff Act (CMTA)
 Special Laws – ex. PEZA
3. Ordinances passed by Local Government Units
4. Administrative Rulings and Regulations
 Administrative rulings refer to less general interpretation of tax laws
issued on a timely basis by the Commissioner of the Internal Revenue
(CIR).
 Administrative Regulations are intended to clarify or explain the law and
carry into effect its general provisions by providing details of administration
and procedure. Such are issued by the Secretary of Finance upon
recommendation of the CIR.

Kinds of Administrative Issuances

a. Legislative Rule. A legislative rule is in the nature of subordinate
legislation, designed to implement a primary legislation by providing the
details thereof. In the same way that laws must have the benefit of public
hearing, it is generally required that before a legislative rule is adopted,
there must be hearing. (CIR vs. CA, G.R. No. 119761, August 29, 1996)
b. Interpretative Rule. When an administrative rule is merely
interpretative in nature, its applicability needs nothing further than its
bare issuance for it gives no real consequence more than what the law
itself has already prescribed. When, upon the other hand, the
administrative rule goes beyond merely providing for the means that can
facilitate or render least cumbersome the implementation of the law but
substantially adds to or increases the burden of those governed, it
behooves the agency to accord at least to those directly affected a chance
to be heard, and thereafter to be duly informed, before that new issuance
is given the force and effect of law. (CIR vs. CA, G.R. No. 119761, August 29,
1996)

Kinds of Rulings

 Rulings of First Impression - These refer to the rulings, opinions and

interpretations of the CIR with respect to the provisions of the Tax
Code and other tax laws without established precedent, and which are
issued in response to the specific request for ruling filed by a taxpayer
with the BIR. Provided, however, that the term shall include reversal,
modification or revocation of any existing ruling.
 Rulings of Established Precedents - These are reiterations of
previous rulings, opinions or interpretations of the CIR. This power
may be delegated. (e.g. requests for rulings with the BIR, Tax Treaty
Relief Application with BIR International Tax Affairs Division)

BIR Issuances

 Revenue Regulations (RR) are issuances signed by the Secretary of

Finance, upon recommendation of the CIR, that specify, prescribe or
define rules and regulations for the effective enforcement of the
provisions of the National Internal Revenue Code (NIRC) and related
statutes.
 Revenue Memorandum Circular (RMCs) are issuances that publish
pertinent and applicable portions, as well as amplifications, of laws, rules,
regulations and precedents issued by the BIR and other agencies/offices.
  Revenue Memorandum Orders (RMOs) are issuances that provide
directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods and procedures necessary in
the implementation of stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations, except auditing.

 Revenue Audit Memorandum Orders (RAMOs) are orders issued

specifically stating the audit programs of the BIR for a particular taxable
year.

 Revenue Memorandum Rulings (RMRs) are rulings, opinions and

interpretations of the CIR with respect to the provisions of the Tax Code
and other tax laws, as applied to a specific set of facts, with or without
established precedents, and which the CIR may issue from time to time
for the purpose of providing taxpayers guidance on the tax consequences
in specific situations. BIR Rulings cannot contravene duly issued RMRs.

 Revenue Bulletins are periodic issuances, notices and official

announcements of the CIR that consolidate the BIR’s position on certain
specific issues of law or administration in relation to the provision of the
Tax Code, relevant tax laws and other issuances for the guidance of the
public. (Reviewer on Taxation, 2014 Edition, Atty. Victorino C. Mamalateo)

5. Jurisprudence / Judicial Decisions

i. Interpretation and Construction of Tax Statutes

How are tax laws interpreted or construed?
a. Rules of Statutory Construction are applied, legislative intent is
primordial
b. In case of doubt, construed in favor of taxpayer
c. But for exemptions, construed against taxpayer
ii. Except when it applies to government
iii. Special class of subjects under special conditions
iv. When the law says so

29)CIR v CA, Central Vegetable Mfg Co & CTA, GR 107135, 23 Feb 1999
30)Luzon Stevedoring v CTA, GR 30232, 29 Jul 1988, 163 SCRA 647
31)CIR v. Gotamco & Sons, GR 31092, 27 Feb 1987, 148 SCRA 36
32)CIR v. CA, CTA and Ateneo de Manila, GR 115349, 18 Apr 1997, 271 SCRA 605

How are the rules applied? Apply first the doctrine that imposition is a
burden thus construed strictly vs. govt, then if applicable, the burden shifts to
taxpayer to prove he is exempt.

j. Classifications of Exemptions
 Express

i. Section 30 of NIRC
ii. Section 105 of Tariffs and Customs Code
iii. Special Laws, like the Omnibus Investment Code

Implied or by Omission

i. Government is impliedly not subject to tax but it can tax itself

ii. Equity
iii. Contractual

33)Prov of Mizamis Oriental v. Cagayan Electric, GR 45355, 12 Jan 1990, 181 SCRA 38

k. Instances Exemptions construed liberally

The law says so
Special classes of persons under special circumstances

34)CIR v. CA, ROH Auto Products Phils & CTA, GR 108358, 20 Jan 1995, 240 SCRA 368 Commented [A1]: End tax rev wed

In favor of the government, etc

35)Maceda v. Macaraeg, 197 SCRA 77

Exemptions granted to traditional exemptees, such as religious / charitable

36)CIR v. DLSU - GR Nos 196596, November 9, 2016, G.R. No. 198841 and G.R. No. 198941

l. Certain Doctrines in Taxation

Prospectivity of tax laws

How may tax laws be applied? General rule, prospective, but the law can
provide that it has retro effect and it is still valid, except if too harsh and
oppressive as to violate due process clause of the constitution.

37)Hydro Resources v CA, GR L-80276 21 Dec 1990, 192 SCRA 604 [ad valorem tax imposed by
law passed after transfer of ownership not applicable; contract of sale subject to suspensive
condition; LC issued prior to law is not subject to ad valorem; no retro effect unless stated by
law]

38)Central Azucarera de Don Pedro v. CTA, 20 SCRA 344 G.R. Nos. L-23236 and L-23254
May 31, 1967 [interest on deficiency tax was imposed by a law passed after the deficiency was
incurred is not a retroactive application]

May tax laws be given retroactive effect?

39)Yes, Lorenzo v. Posadas 64 Phil 353 G.R. No. 43082. June 18, 1937;
40)Smietanka v First Trust Savings Bank, 257 US 602; Law on Federal Taxation, Vo;
1 p.154

Is the government bound by the errors of its agents? While the government
is not bound by the error of its agent in issuing a ruling, in the interest of
justice and fair play, reversal of ruling may not be given retro effect

41) CIR v. Benguet Corp, 463 SCRA 28 (2005) G.R. Nos. 134587 & 134588 July 8, 2005
42) CIR v. Burmeisters & Wain Scandinavian, GR 153205 Jan 2007
Non-retroactive
43) CIR v. Ayala Securities Corp, GR L-29485, 21 Nov 1989 – tax on undue accumulation of
income does not prescribe because the law imposing does not provide for the fixed period within
which to file a tax return; the SC reconsidered its earlier decision dated April 8, 1976; see Sec 29,
NIRC

May taxes prescribe? No, but the law can provide for its prescription, such as
NIRC, Customs and LGC

Double Taxation
means taxing the same person for the same tax period and the same activity
twice, by the same jurisdiction.

a) Direct Duplicate Taxation – same property is taxed twice when it should

be taxed only once; and that both taxes are imposed on the same property
or subject matter for the same purpose, by the same State, Government or
taxing authority within the same jurisdiction or taxing district during the
same taxing period and covering the same kind of character of tax. It
violates the equal protection clause of the constitution.

Requisites:

1. Both taxes are imposed on the same property or subject matter;

2. For the same purpose;
3. Imposed by the same taxing authority;
4. Within the same jurisdiction;
5. During the same taxing period;
6. Covering the same kind or character of tax.

b) Indirect Duplicate Taxation – is the opposite of direct double taxation and

is not legally objectionable. The absence of one or more of the foregoing
requisites of obnoxious direct tax makes it indirect.

c) Constitutionality of Double Taxation

General Rule: Our Constitution does not prohibit double taxation, in broad
sense. Hence, it may not be invoked as a defense against the validity of tax laws.
 Exception: Double taxation will not be allowed if it results in a violation of the
equal protection clause of the Constitution.

44)Pepsi Cola v. Tanauan, 69 SCRA 460 G.R. No. L-31156. February 27, 1976 [mun
ordinance impose .01 per gallon per RA is not undue delegation; no double
taxation; not specific tax]

45)CIR v. SC Johnson & Sons, 309 SCRA 87 (1999) G.R. No. 127105 June 25, 1999
[Most favored nation clause; double taxation; claim for refund in the nature of
exemption; construction of RP-US tax Treaty – tax rate on royalty US v Germany,
international juridical double taxation defined]

d) Modes of Eliminating Double Taxation

(i) Tax Deduction – a subtraction from gross income in arriving at the

taxable income:

 Section 4(a) of the Expanded Senior Citizens Act of 2003, which

provides that the 20% discount given to senior citizens shall be
considered a tax deduction, rather than a tax credit on the part of the
establishment granting the same, is not unconstitutional. While the
Constitution protects property rights, the State, in the exercise of the
police power, can intervene in the operations of a business which may
result in an impairment of property rights in the process (Carlos Super
Drug Corp. vs. DSWD, G.R. No. 166494, June 29, 2007).

(ii) Tax Credit - an amount subtracted from an individual’s or entity’s tax

liability (tax due) to arrive at the total tax liability.

 A deduction differs from a tax credit, in that a deduction reduces

taxable income while a credit reduces tax liability.

 Under the Expanded Seniors Citizens Act of 2003, the 20% discount
shall be considered as a tax deduction not as a tax credit.

(iii) Treaties with other states

 A tax treaty sets out the respective rights to tax of the state of
source (situs) and the state of residence with regard to certain
cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are
given the right to tax, although the amount of tax that may be
imposed by the state of source is limited.
  It applies whenever the state of source is given full or limited right
to tax. The treaty makes it incumbent upon the state of residence to
allow relief in order to avoid double taxation.

“Failure to comply with the requirements of RMO No. 1-2000,

as amended by RMO No. 72-2010, is not fatal to the availment
of tax treaty relief” (Deutsche Bank AG Manila Branch vs. CIR, GR
No. 188550, August 19, 2013)

(iv)Tax Exemption - grant of immunity to persons or entities from the

obligation to pay taxes.

Means of escaping taxation –

a) Shifting of Tax Burden

The transfer of the burden of tax by the original payer or the one on
whom the tax was assessed or imposed to another.
a. Forward shifting- transfer of the tax burden from a factor of
production through the factors of distribution until finally rests on
the consumer; ex. Excise taxes, sales tax
b. Backward shifting- transfer of the tax burden from the consumer
through the factors of distribution to the factor of production; ex.
Reverse computation for vat (gross receipts / 1.12)
c. Onward shifting- transfer of the tax burden two or more times
either forward or backward.

Tax Avoidance vs Tax Evasion

i. Tax avoidance
It is the use by the taxpayer of legally permissible alternative tax rates or
methods of assessing taxable property or income in order to avoid or
reduce tax liability (e.g. termination of deposits subject to 20% final tax
and re-investing it in tax-exempt government bonds).
ii. Tax evasion
It is the use of taxpayer of illegal or fraudulent means to evade or lessen
the payment of a tax (e.g. deliberate non-reporting or under-reporting of
an income).

Indicia of Fraud in Tax Evasion (Sec 248B, NIRC)

Revenue Memorandum Order No. 27-2010 re-invigorating the Run After Tax
Evaders (RATE) Program and amending certain portions of RMO No. 24-
2008
https://www.bir.gov.ph/images/bir_files/old_files/pdf/49948RMO%2027
-2010.pdf
 a) Substantial under-declaration of taxable sales, receipts or income, or
a substantial overstatement of deductions, as determined by the
Commissioner pursuant to the rules and regulations to be
promulgated by the Secretary of Finance, shall constitute prima facie
evidence of a false or fraudulent return; or

b) Failure to report sales, receipts or income in an amount exceeding

thirty percent (30%) of that declared per return, and a claim of
deductions in an amount exceeding (30%) of actual deductions, shall
render the taxpayer liable for substantial under-declaration of sales,
receipts or income or for overstatement of deductions.

46) CIR v. Rufino, GR L-33665-68, 27 Feb 1987, 148 SCRA 42, [tax exempt merger of two
corporations]
47) Delpher Trades Corp v IAC, 157 SCRA 349 G.R. No. L-69259 January 26, 1988 [tax
exempt transfer of property to a corporation resulting to control]
48) CIR v. Benigno Toda, 438 SCRA 290 (2004) G.R. No. 147188 September 14, 2004 –
meaning of fraud; tax avoidance / evasion

Is equitable recoupment allowed though prescription has set in?

49) Collector v. UST, 104 PHIL 1062 – (rejected this common law doctrine)

Set off of taxes (compensation)

50) Philex Mining v. CIR,L-125704, 28 Aug 1998 (General rule: no offsetting) [Refundable VAT
v. Excise tax);
51) CIR v ESSO Standard, 172 SCRA 369 18 Apr 1989, 172 SCRA 623 [ Offset of Percentage Tax
and amusement taxes v. matured back pay certificates];
52) Domingo v. Garlitos, 8 SCRA 443 [1963] (exception: allowed)[Estate and Inheritance Taxes v
specifically appropriated fund for the payment of obligation to the estate]

Taxpayer suit may be filed

When disbursement of public funds involved

BUT NOT to enjoin COMELEC to call election

Funds were not raised through taxation
Maceda v. Macaraeg, 197 SCRA 771 [Exemption of NPC from taxes]

Are compromises allowed? Yes by the BIR under NIRC and by Customs under the
CMTA. NO similar provisions under the LGC, thus Civil Code applies suppletorily

Are tax laws political in nature? No, it applies to territory and not by reason of
occupying forces.
m. DEFINITIONS OF DIFFERENT TAXES UNDER THE NIRC

Capital Gains Tax is a tax imposed on the gains presumed to have been realized
by the seller from the sale, exchange or other disposition of capital assets located
in the Philippines, including pacto de retro sales and other forms of conditional
sale.

Documentary Stamp Tax is a tax on documents, instruments, loan agreements

and papers evidencing the acceptance, assignment, sale or transfer of an
obligation, rights or property incident thereto.

Donor’s Tax is a tax on a donation or gift, and is imposed on the gratuitous

transfer of property between two or more persons who are living at the time of
the transfer.

Estate Tax is a tax on the right of the deceased person to transmit his / her
estate to his / her lawful heirs and beneficiaries at the time of death and on
certain transfers which are made by law as equivalent to testamentary
disposition.

Income Tax is a tax on all yearly profits arising from property, profession,
trades or offices or as a tax on a person’s income, emoluments, profits and the
like.

Percentage Tax is a business tax imposed on persons or entities who sell or

lease goods , properties or services in the ordinary course of trade or business
whose gross annual sales or receipts do not exceed P1.5million and are not VAT-
registered.

Value-Added Tax is a business tax imposed and collected from the seller in the
course of trade or business on every sale of properties (real or personal) lese of
goods or properties (real or personal) or vendors of services. It is an indirect
tax, thus it can be passed on to the buyer.

Withholding Tax on Compensation is the tax withheld from individuals

receiving purely compensation income.

Expanded Withholding Tax is a kind of withholding tax which is prescribed

only for certain payors and is creditable against the income tax due of the payee
for the taxable quarter / year.

Final Withholding Tax is a kind of withholding tax which is prescribed only for
certain payors and is not creditable against the income tax due of the payee for
the taxale year. Income tax withheld constitutes the full and final payment of the
Income Tax due from the payee on the said income.
 Withholding Tax on Government Money Payments is the tax withheld by
government offices and instrumentalities, including government owned or
controlled corporations and local government units, before making any
payments to private individuals, corporations, partnerships and / or
associations.

a) THE NATIONAL INTERNAL REVENUE CODE

a. Taxes imposed under the NIRC (Sec 21, NIRC)

b. Bureau of Internal Revenue (Sec 2 to 20, NIRC)

Powers and duties of the Bureau of Internal Revenue

Exclusive and original power of the CIR to interpret tax laws, subject to
review by the Secretary of Finance
Assess and Collect

53) CIR v. Pascor Realty & Dev Corp, 309 SCRA 402 (1999) G.R. No. 128315. June 29, 1999,
Meaning of Assessment; is assessment prejudicial to filing a tax evasion case?

54) Marcos II v. CA, 270 SCRA 47(1997) G.R. No. 120880 June 5, 1997 Burden of Proof on
taxpayer to prove erroneous assessment; inapplicability of the statute on non-claims under the
Rules of Court to taxes

55) Meralco Securities Corp v. Savellano, 117 SCRA 804 G.R. No. L-36181 October 23, 1982 (BIR
cannot be compelled by Mandamus to issue assessment)

Enforce forfeitures, penalties & fines, execute decision of CTA & ordinary courts

56) Republic v CA 366 SCRA 489(2001);

57) Aznar v CIR 58 SCRA 519(1974);
58) CIR v. Benigno Toda 438 SCRA 290 (2004) (meaning of fraud)

Effect police powers

Obtain information, etc

59) Sy Po v CTA, GR No. 81446, 18 Aug 1988 (best evidence to support assessment);
60) CIR v. Hantex Trading GR L-136975, 31 Mar 2005;
61) Aurelio P. Reyes v. Coll of Internal Revenue, CTA No. 42, 26 Jul 1956 and
62) William Li Yao v. Coll, CTA No. 30, 30 Jul 1956 (use of net worth method)

63) Bache & Co. v. Ruiz, 37 SCRA 823 (requirement for a search warrant)

3. BIR Rules and Regulations

64) CIR v. CA, ROH Auto Products Phil Inc and CTA, GR No. 108358, 20 Jan 1995, 240 SCRA 368
(Nature of administrative rules and regulations)
 65) CIR v. CA, CTA and Fortune Tobacco Corp, GR No. 119761, 29 Aug 1996, 261 SCRA 236
(Extent of BIR Interpretative rule)

66) Soriano etal v CIR G.R. No. 184450, January 24, 2017 "plain meaning rule" (or verba legis in
statutory construction)

67) CIR v. Burroughs Ltd, GR No. 66653, 19 Jun 1986, 142 SCRA 324 (Effect of revocation of ruling)

68) PBC v. CIR, GR No. 112024, 29 Jan 1999 (wrong interpretation will not prejudice the
government)

69) ABS-CBN v. CTA & CIR, GR No. 52306, 12 Oct 1981 (circulars or rulings, prospective)

70) CIR v. Benguet Corporation, 463 SCRA 28 (2005) – Non-retroactivity of ruling; while
government is not bound by the error of its agents issuing ruling, in the interest of justice and fair
play, it may be not given retroactive effect (same holding in Sy Po v. CTA, GR No. 81446, 18 Aug
1988;

71) CIR v. Burmeisters & Wain Scandinavian, GR No. 153205, Jan 2007 – Non-retroactivity of BIR
ruling; 0% VAT on export of services

C. INCOME TAXATION (Secs 22 to 83, NIRC)

1. Definition of Terms (Sec 22, NIRC)

2. General Principles (Sec 23, NIRC and cross refer to Sec 42)
3. RR 8-2018 – implementing the Income Tax provisions of TRAIN law

72) CIR v. BOAC 149 SCRA 395 – Source of income of airlines – sale of airline tickets of an offline
carrier considered income derived from Phil by majority SC; source rule discussed; minority
considered airline tickets as contract of carriage or service, thus situs is where rendered;
characterization becomes moot given the new provision on 2 ½ % Phil Gross Billings regardless
of where sold or paid provided cargo or passenger originates from Phil. [Read RA 10378, 29 Mar
2013, amending Sec 28(A)(3)(b), NIRC]

73) NDC v CIR, 151 SCRA 472 (1987) – Source of interest income – Exemption strictly construed; Sec
37 (now Sec 42) – income from sources within the Philippines applied; also exclusions from gross
income.

4. Meaning of Income

74) Fisher v. Trinidad GR No. 17518, 30 Oct 1922, 43 Phil 973 – Income defined; stock dividends
construed

75) Madrigal v. Rafferty GR No. 12287, 07 Aug 1918, 38 Phil 14 – Functions of income tax – The
aim has been to mitigate the evils arising from the inequalities of wealth by a progressive scheme
of taxation, which places the burden on those best able to pay; income distinguished from capital.
Income as contrasted with capital or property is to be the test. The essential difference between
capital and income is that capital is a fund; income is a flow. Capital is wealth, while income is the
service of wealth. “The fact is that property is a tree, income is the fruit; labor is a tree, income the
fruit; capital is a tree, income is the fruit.” Madrigal spouses reported income from conjugal
partnership separately resulting to lower tax due. SC said under the law at the time they should
 report jointly. The partnership is not a business partnership; right of spouses inchoate. [Under
current income tax law, spouses report their income jointly but income tax liability is computed
separately.]

76) CONWI v. CTA, GR No. 48532, 31 Aug 1992, 213 SCRA 83 – Income may be defined as an amount
of money coming to a person or corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the fruits of one’s labor. The issue here is
which exchange rate to use on $-denominated salaries of P&G employees earned abroad. RR
issued by Sec of Finance required application of floating rate is applicable in this case but not the
CB Circular. Thus, refund claim is denied.

77) Javier v. CA 199 SCRA 824 – received by mistake in income

78) Limpan Investment Corp v. CIR, 17 SCRA 703 (1966) – constructive receipt of rent income
deposited in court in 1957 withdrawn in 1958

79) Fernandez v. CIR 29 SCRA 553 – Book error not income - liability to an insurance company
overstated, thus when corrected the net worth went up. This is not taxable.

80) Rutkin v. US, 343 US 130 – claim of right doctrine – illegally acquired (extortion) is income

81) Eisener v. Macomber, 252 US 189; CIR v. CA 301 SCRA 52 – Severance test theory – separation
from capital of something which is of exchangeable value, refers to taxability of stock dividends

82) Helvering v. Horst. 311 US 112, Control test – power to procure the payment of income and
enjoy the benefit thereof determines who is subject to tax on coupon bond donated to his son.

83) BIR Ruling 029 – 1998 – Economic benefit principle – exception to the rule that no income is
earned when there is merely an increase in the value of the property

84) CIR v. Lednicky, 11 SCRA 603 – Partnership Theory – the right to tax income emanates from
partnership in the production of income by providing protection, resources, incentives and climate
to produce income. [Was income tax paid to foreign government by resident alien deductible
though income exclusively came from the Philippines? No.]

85) CIR v. Isabela Cultural Corp GR No. 17223, 12 Feb 2007 – All Events Test applied in
recognizing income or liability under accrual method of accounting. Expenses incurred in prior
year cannot be claimed as expense in another. For a taxpayer using the accrual method, the
determinative question is, when do the facts present themselves in such a manner that the
taxpayer must recognize income or expense? The accrual of income and expense is permitted
when the all-events test has been met. This test requires: (1) fixing of a right to income or liability
to pay; and (2) the availability of the reasonable accurate determination of such income or
liability.

5. INCOME TAXPAYERS [KINDS]

Individuals (Sec 24 to 26, NIRC)

Citizens Aliens
Residents Residents
Non-residents Non-residents
Engaged in business
 Not engaged

Corporate Taxpayers (Sec 27 to 30, NIRC)

Kinds of Corporation
Domestic (Sec 27)
Foreign (Sec 28)
Resident – engaged in business
Non-resident

Others whose activities or ventures considered as corporation for

income tax purposes

Estate under judicial settlement – must be under judicial administration; entitled to

deduction for single individual; allowed to deduct distribution to heirs.

Trusts – irrevocable both as to corpus and as to income

6. TAX BASE AND TAX RATES FOR INDIVIDUALS

Resident citizens
All sources – compensation, business and other income, (except passive
income & capital gains – subject to final taxes)

Readings / Questions:
86) Tan v. Del Rosario 237 SCRA 324 (1994) Global Taxation

RR No. 2-98, as amended by RR 8-98, 12-98, 3-99, 8-2000, 10-2000, 6-2001, 12-2001, 3-
2002 and 14-2003 on withholding taxes

RR 3-98, as amended – Fringe Benefits Tax

87) Coll v. Henderson 1 SCRA 649 – Convenience of employer rule

Overtime / Transportation Allowance & Duty Allowance on night / graveyard shift / outstation or
out of town allowance for carrying on the business of employer are not subject to FBT being for
the convenience of employer. Moreover, when they are pre-computed on daily basis and paid
while on assignment, they likewise not subject to income tax and WT. [DA 013-2008, 16 Jan 2008]

What is compensation income?

What are fringe benefits? (See Sec 33, NIRC)
What is meant by ordinary income? (Sec 22, NIRC)
How is compensation of directors of corporation taxed? Effect if directors are not
employees of the corporations? If not employed, taxed like a business income.
[RMC 34-2008, 15 Apr 2008 – fees paid to directors of a corporation who are not
employees of said corporation is considered as seller of services, hence also
subject to VAT.
How is taxable income computed? (Sec 31, NIRC)
Gross compensation, less personal and additional exemptions and premiums on health
and hospitalization (subject to conditions)
Business and other income taxed at net taxable income (net income = GI less deductions
under Sec 34, NIRC)
Above items subject to graduated tax rates under Section 24(A) (20% to 35% if exceeding
250,000 annual income, effective Jan 1, 2018)
Passive Income
Royalties – 20% (except books, literary, musical at 10%)
Prizes exceeding 10K – 20%; 10K or less subject to ordinary rates (except from PCSO
and lotto which is exempt)
Other winnings – 20%
Interest (peso) – 20%
Interest (foreign) – 15% (except non-resident individuals)
Interest (5 years) – exempt
Interest Pre-termination of long term deposit, < 3 years – 20%; <4 years – 12%; <5
years – 5%
Dividends from domestic corp and taxable partnership, 10%
Stock dividend, CIR v CA, 301 SCRA 152
Recipient other than shareholder, Bachrach v. Siefert, 87 Phil 483
Treasury Stock, CIR v. Manning 65 SCRA 14
Dividends from foreign corp – subject to regular income tax
Dealings in properties classified as capital assets
Capital gains from sale of real property located in Phil – 6%
Exemption of residence from CGT – Sec 24(D)NIRC, RR 13-99 –
Other capital gains – 20% to 35% (if exceeding 250,000 annual income)
Sale of stocks of Domestic Corp
Listed and thru Stock Exchange – exempt from income tax but subject to 6/10 of
1% (non-deductible from gross income) See Sec 127
Not listed or if listed, not thru stock exchange – 15% of net gain
See Rev Reg No. 2-82, 29 Mar 1982 – taxation of sales of shares of stocks classified
as capital assets
See RR 7-2003 – capital assets vs ordinary assets
Cash reward to informers – 10%, max of 1M (see Sec 282, NIRC)

Non-resident Citizen
From within Phil – same rules as to resident citizen
Without Phil – exempt

Resident Alien
Same rules as to resident citizen, but only on income earned from within Phil

Non-resident Alien
Engaged in business (more than 180 days cumulative stay in the Phils)
– same as resident alien on taxable income received from sources within the
Philippines [Sec 25(A)(1 to 3)]
-

Not engaged – 25% on gross income (but entitled to preferred rates for sale of shares
of stocks and real property)
Dividends from domestic corp – 25%
Royalties, prizes & winnings – 25%

Estates and Trusts (Sec 60 to 66, NIRC)

CATEGORIES OF INCOME OF INDIVIDUAL TAXPAYERS
Compensation
Fringe Benefits
Income from Trade / Business
Exercise of Profession
Passive Income
Other Dealings in Property

COMPUTATION OF INCOME TAX DUE OF INDIVIDUAL WHO EARNS BUSINESS, COMPENSATION

AND OTHER INCOME
Gross Sales / Receipts
Less: Sales Returns & Discounts
Net Sales
Less: Cost of Sales / Service
Gross Income from business or exercise of profession
Compensation income (purely compensation income is not entitled to business deductions)
Other Income (other than those subject to final tax)
Total Gross Income
Less: Itemized Deductions or optional standard deduction
Personal and additional exemptions
Taxable Income
Tax Due (Tax table 20% to 35%, if exceeding annual income of 250,000)
Creditable W/Tax
Tax still due / refund

TYPE OF GROSS INCOME OF INDIVIDUALS SUBJECT TO 20% TO 35% TAX )if exceeding annual
income of 250,000)
Compensation
Trade / Business
Exercise of Profession
Prizes / Winnings – P 10K or less (except from PCSO and lotto, which is exempt)
Capital gains on real property sold to government – 6%
Other capital gains from dealings in property [except those subject to 6% final tax on land
and 15% final tax on shares of stocks not traded in the Stock Exchange and 6/10 of 1%
transaction tax on shares of stocks traded and sold through the stock exchanges; see below
Capital gains other than from real property and shares of stocks are still subject to the rules
on long term and short term investments, i.e. 1 year or less and over 1 year holding period;
loss carry over and deduction rules of capital loss v. capital gains and ordinary income only.

INCOME OF INDIVIDUALS SUBJECT TO FINAL TAX

Passive Income
Prizes / winnings >P10K, except from PCSO and lotto
Dividends
Royalties
Interest
Capital Gains from sale or exchange of shares of stock (outside of stock exchanges);
Capital gains from sale of real property (held as capital asset)
Informer’s reward
GENERAL PROFESSIONAL PARTNERSHIP (Sec 26)
Exempt from income tax as a corporation but its partners are taxable on their share whether
distributed or not
88) Its exclusion is a classification clause not an exemption thus construed in favour of
taxpayer, CIR v. Ledesma, 31 SCRA 95, 30 Jan 1970
89) Sison v. Ancheta and Tan v. Del Rosario, supra

TAX BASE AND TAX RATES APPLICABLE TO CORP (Sec 27 -30, NIRC)
Meaning of Corp or partnership
90) Sharing not taxable – Pascual v. CIR, 166 SCRA 560 (1988)
91) Co-ownership is not taxable, Ona v. CIR, 45 SCRA 74;
92) Obillos v. CIR, 139 SCRA 436 (1985); cited Ona, Evangelista cases
93) Afisco Insurance v. CIR, GR No. L-112675, 25 Jan 1999; taxed as a corporation the pool
of insurance companies.
94) Joint Emergency Operations – Coll v. Batangas, 54 OG 6724
95) Power of Attorney for operation of mining claims deemed partnership – Philex Mining
v. CIR, GR No. 148187, 16 Apr 2008

Kinds of Corporation
Domestic (Sec 27)
Profit-oriented (32%); effective July 1, 2005 – 35%; effective January 1, 2009 – 30%
per RA 9337
Proprietary educational and non-profit hospital – 10% of taxable income, except
passive income; contrast with a tax exempt non-stock and non-profit educational
institution; See Art. XIV, Sec 3(3) of the Constitution;
96) Central Mindanao State Universtiy v. Dept of Agrarian Reform 215 SCRA 86 (1992);
and
97) Abra Valley College, Inc. v. Aquino, 162 SCRA 106 (1988)
Government Corps – SSS, GSIS, PHIC, local water districts

Foreign (Sec 28)

Resident – engaged in business
Non-resident
Others whose activities or ventures considered as corporation for income tax
purposes

TAXATION OF DIFFERENT TYPES OF INCOME OF DOMESTIC CORP – SUBJECT TO TAX ON

INCOME EARNED FROM ALL SOURCES (WITHIN & WITHOUT THE PHILS); see
98) NV Reederif Amsterdam v. CIR GR No. 46029, 23 June 1988
On taxable income (other than passive income) – 34%, 33% or 32% starting 2000,
35%; effective January 1, 2009 – 30% per RA 9337

On Passive Income
Royalty – 20%
Interest / Yield from bank deposits, deposit substitutes, Trust Fund and similar
arrangement – 20%
99) [CIR v. Solidbank, GR No. 148191, 25 Nov 2003 – GRT v. FWT – no double taxation;
accrued v. constructive]
Interest Income (expanded foreign currency) – 15% (TRAIN)
 Interest Income of depositary banks from deposits in foreign currency & loans to
residents – 10%
Interest income from non-residents, whether individual or corp – exempt
Interest (5 years or more maturity) – exempt; if pre terminated <3- 20%, <4 –
12%, <5 – 5%
Interest passed on by parent company to its subsidiaries on reimbursement basis
is not taxable to parent company. The real lender is the banks. [CTA Case No.
7086, 10 Jan 2008]
Dividends from domestic corp and taxable partnership – exempt from regular
income tax [See Sec 73, NIRC]
Dividends from foreign corp subject to regular income tax

Capital gains from sale of real property located in the Phil – 6%

Where sale of land was made between PEZA-registered enterprises subject to 5%
preferential tax “ in lieu of all other taxes”, the same is not subject to 6% CGT,
VAT or DST [DA 025-2008, 22 Jan 2008]
Sale of real property held for investment by a holding company and not engaged
in real estate business is subject to 6% CGT & DST but exempt from VAT [DA
011-2008, 15 Jan 2008]
Buyers of real property who are not engaged in trade or business are required to
withhold the creditable tax from the purchase price. If seller already remitted
the tax, there is no more obligation to pay the tax or the penalty, [DA 02-2008,
08 Jan 2008]
Sale of stocks of domestic corp
Listed and thru stock exchange – exempt from income tax, but subject to
business tax at 6/10 of 1% of gross (Sec 127)
IPO of a taxpayer granted with legislative air transport franchise is not
subject to IPO tax because of ipso facto provision in its franchise that
levels the playing field with competition. The competition franchise
provides that it shall pay 2% franchise tax or basic corp income tax
whichever is lower, ‘in lieu of other taxes’. The issuance of shares of
stocks is likewise not subject to DST. [DA 05-2008, 9 Jan 2008]
Not listed or if listed, not trade thru stock exchange – 15% on net gain (TRAIN)
See RR 7-2003 Capital assets v. Ordinary Assets

2% MCIT BASED ON GROSS INCOME (see Rev Reg 9-98, 25 Aug 1998)
Beginning immediately on the 4th taxable year from start of operations; compare tax based
on 30% and 2% of Gross income whichever is higher. Carry Forward of Excess MCIT vs
regular tax for 3 immediately succeeding years
Relief due to prolonged labor disputes, force majeure, and other legit buss reverses
Gross Income means Gross Sales less sale returns, discounts & allowances & Cost of Goods
Sold (CGS). CGS include all expenses to produce the goods to bring them to their present
location & use. For trading or merchandising, CIF & duties; for manufacturing, cost of
goods manufactured and sold, cost of producing finished goods; for seller of services,
Gross Receipts less sales returns, discounts, allowances & cost of services, facilities,
salaries, benefits, equipment, rent, supplies; for banks, include interest expense.
100) CREBA Inc v. Exec Secretary, et al – GR NO. 160756, 09 March 2010 (Validity of
imposition of MCIT and other related issues)

15% OF GROSS INCOME IS AN OPTION TO CORPORATION

 Tax effort ratio = 20% of GNP
Income tax collected = 40% total revenues
VAT = 4% of GNP
Consolidated Public Sector Financial Position = 0.9% of GNP

RESIDENT FOREIGN CORPORATION

30% effective January 1, 2009 – same as domestic corp, except that taxable income should
come from Phil sources
International Carrier – 2 ½ of Gross Phil Billings (GPB)
Air Carrier – continuous and uninterrupted flight originating from Phil regardless of place
of issue and payment, exchange with other airlines; but in transhipment,
only the leg from Phil
Shipping – originating from Phil up to final destination; regardless of sale or payment of
document
101) CIR v. Tokyo Shipping Co. GR No. L-68252, 25 May 1995 [Claim for refund of tax on GPB
from charter or vessel; claim fro refund construed stricticissimi juris finding of fact by CTA that
vessel left without sugar laden; 15 years lapsed without refund though at one point lawyer of BIR
said it was approved; kill the goose that lay the golden eggs]
10% - Offshore banking units – income from foreign transactions with local and resident
banks, including from foreign loans with residents
15% - Branch profits remittances based on total profits applied or earmarked for remittance
without deduction of tax component paid via withholding system
Except activities registered with PEZA
102) Items of income = rent, dividends, salaries, remuneration, capital gains, royalty, etc if not
effectively connected with the conduct of its trade or business in the Phils [see CIR v. Marubeni,
177 SCRA 500]
10% - RHQ, AHQ, ROHQ – Sec 22 DD & EE, NIRC, for definitions
20% - on interests & royalties
7.5% - on interest income from expanded foreign currency denominated units in a depositary
bank
10% - on interest from depositary bank
5% / 10% (100K / >100K)- capital gains on sale of shares of stocks
Inter-corporate dividends from domestic corp - exempt

NON-RESIDENT FOREIGN CORPORATION

30% effective January 1, 2009 based on gross income
25% on cinema film owner, lessor or distributor
4 ½ % on rentals to owners or lessor of chartered vessels to Phil residents
7 ½ % rentals of aircraft, machineries & other equipment
20% on foreign loans contracted on or after Aug 1, 1988
capital gains on sale of shares of stocks -5% to 10% or 6/10 of 1% if sold through stock
exchange
Royalty – subject to tax treaty
103) Most favored nation clause CIR v. SC Johnson & Sons 309 SCRA 87 (1999)
15% on dividends from domestic corp provided a tax credit = to 33% if granted to non-
resident corp for tax deemed paid
104) CIR v. Procter & Gamble, 204 SCRA 378, GR No. 66838, 02 Dec 1991, Persons liable to tax
v. persons subject to tax; rate of tax at 15% v. 35%
10% IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) See Rev Reg No. 2-2001, 12 Feb
2001 implementing Sec 29 of NIRC)
Applies to domestic corporations; Exemptions
Publicly held corp
Banks & Non-bank Financial Institution
Insurance Companies
General Professional Partnerships
Non-taxable Joint Venture
PEZA, CDA entities
Prima facie evidence of purpose to avoid payment of tax, if personal holding or investment
company
Evidence determinative if permitted to accumulate beyond the reasonable needs of the
purpose to avoid tax upon shareholders unless contrary is proved
Dividend must be declared and paid within 1 year from close of tax year, otherwise tax shall
be paid within 15 days thereafter
How computed: Taxable Income during the year + Exempt, exclusions, final tax, NOLCO less
dividends & income tax paid, and reasonable needs x 10%
Reasonable needs include anticipated needs:
100% of paid up capital
Definite expansion with board resolution
Loan Agreements
LWC requirements, meet competition, anticipated losses or reverses, hazards and
emergencies
Legal Prohibition
Subsidiaries of foreign corp earmarked for investments
Investments if unrelated business, bonds and long term securities are not deemed
reasonable
105) Bardahl Formula and Immediacy Test (Cyanamid Phils Inc v. CA 332 SCRA 639, 2000)
IAET is only imposed once on specific earnings but still subject to dividends tax to individuals

EXEMPT CORPORATIONS (Sec 30, NIRC)

Labor, agricultural & horticultural not principally for profit
Non-stock, non-profit mutual and coop banks for mutual purpose & without profit
Beneficiary society, order, association, frat benefits of members
Exclusive cemetery for members
Non-stock religious, charitable, scientific, cultural no income inures to its members or any
specific person. (Art VI, Sec 28(3), Constitution) grants exemption to religious, non-
profit cemeteries, charitable, educational covers property tax)
NGOs engaged in micro financing are subject to income tax regardless of disposition
because these are not the registered activities that are exempt [RR 14-2007, 11 Dec
2007]
Business league, chamber or trade association, (ANPC v. CIR, G.R. No. 228539 June 26,
2019)
Civic league, org
Non-stock, non-profit educational institutions [Art XIV, Sec 4(3) of Constitution) are
exempt from duties and taxes, all revenues and assets; substantial evidence to prove that
it fails under classification and that income is used actually, directly and exclusively for
educational purposes. (See Rev Memorandum Circular No. 76-2003, 14 Nov 2003),
DLSU v. CIR, G.R. No. 196596/G.R. No. 198841/G.R. No. 198941, November 9, 2016,)
Government Educational Institutions
 Farmers or other mutual typhoon or fire insurance co., mutual ditch, irrigation or coop
telegraph, only fees, assessments are for meeting expenses
Farmers fruit growers association for marketing products
Notwithstanding the foregoing, income of whatever kind or nature from properties or
activities conducted for profit regardless of disposition shall be subject to tax
106) Interest Income of religious org subject to tax regardless of disposition; bank deposits
are personal property (BIR Ruling 512, 21 Oct 1998, Ruling No 58, 05 Apr 1991);
Rental income is taxable regardless of disposition
(CIR v. CA 298 SCRA 83, 14 Oct 1998)
107) Gain from sale of land & bldg of religious org used for same purpose is an isolated
transaction, thus exempt from income tax; its rents, dividends, interest, profits from
businesses are taxable.
(Manila Polo Club, CTA No. 293, 31 August 1959; BIR Rulings No. 569, 29 Nov 1988;
No. 115, 2 Apr 1992)
108) Application of Sec 30 (H) – YMCA, CIR v. CA 298 SCRA 83 – YMCA’s income is not
exempt from income tax. It is not an educational institution referred to in the constitution.

MEANING OF TAXABLE INCOME (Sec 31) – ITEMS OF GROSS INCOME LESS DEDUCTIONS AND
PERSONAL EXEMPTIONS, IF ANY, AUTHORIZED BY NIRC OR SPECIAL LAWS

Sec 32 (A) Definitions of Gross Income, includes compensation for services, conduct of
trade or business or profit, gains from dealings in property, interest, rents, royalties,
dividends, annuities, prizes, winnings, pensions, partners’ distributive share in general
professional partnership

Sec 32 (B) EXCLUSIONS FROM GROSS INCOME – Excluded and exempts from taxation
Life insurance proceeds payable to heirs or beneficiaries, but if held by insurer to pay
interest, the interest is taxable; Question: If beneficiary is the taxpayer itself, are the
proceeds taxable or not? Justice dimaampao says yes.
Return of premiums or cash surrender value under diff types of life insurance
Gifts, bequests, devices of property, but income from such property & gifts, etc or income
from any property, in case of transfer of divided interests, are taxable
Compensation for injuries or sickness, plus damages whether by suit or agreement
Exempt by treaty
Retirement, pensions, gratuities, etc. under RA 7641 and from reasonable private benefit
plan (50 / 10 / once; non-diversion of corpus & profits)
Amount received as consequence of separation due to sickness / death, other physical
disability, or causes beyond control
109) PLDT v CIR GR No. 157264, 31 Jan 2008 – separation pay due to redundancy. Proof of
receipt by employees of the pay and the remittance of the withholding tax to the BIR are material
to the claim for refund of erroneously paid withholding tax on separation pay. Also, it must be
shown that employees declared the income and the tax paid to the BIR through withholding.
“Section 10. Claims for tax credit or refund. – Claims for tax credit or refund of income tax deducted
and withheld on income payments shall be given due course only when it is shown on the return
that the income payment received was declared as part of the gross income and the fact of
withholding is established by a copy of the statement duly issued by the payer to the payee (BIR
Form NO. 1743.1) showing the amount paid and the amount of tax withheld thereon.”

CTA Circular 1-95 states in part:

 1. The party who desires to introduce as evidence such voluminous documents
must, after motion and approval by the Court, present (a) a Summary containing,
among others, a chronological listing of the numbers, dates and amounts covered
by the invoices or receipts and the amounts of tax paid; and (b) a Certification of
an independent Certified Public Accountant attesting to the correctness of the
contents of the summary after making an examination, evaluation and audit of the
voluminous receipts and invoices xxx

2. The method of individual presentation of each and every receipt, invoice or

account for making, identification and comparison with the originals thereof need
not be done before the Court or Clerk of Court anymore after the introduction of
the summary and CPA certification. It is enough that the receipts, invoices,
vouchers or other documents covering the said accounts or payment to be
introduced in evidence must be pre-marked by the party concerned and
submitted to the Court in order to be made accessible to the adverse party who
desires to check and verify the correctness of the summary and CPA certification.
Likewise, the originals of the voluminous receipts, invoices and accounts must be
ready for verification and comparison in case of doubt on the authenticity thereof
is raised during the hearing or resolution of the formal offer of evidence.
(Emphasis and underscoring supplied)

Motion for New Trial & Liberal application of the CTA rules of court discussed.
Petition denied. [See new Rules of Court for CTA issued in 2005]

Social security, retirement, gratuities, pensions received by Filipinos or aliens who reside
permanently in the Philippines from foreign government, other institution, public or
private
Received by any person residing in Phil from US Veterans Admin
SSS, GSIS benefits and gratuities
Income by foreign government, their financing institutions & international finance
institution
Income from public utility and essential functions of Phil government and political
subdivisions
Prizes & awards as recognitions for religious, charitable, scientific, educational, art,
literary, civic if selection is without action on his part to enter the contest or
proceedings and does not require substantial future service
Prizes and awards to athletes from local and international competition recognized by
local sports association [cross reference to Other Percentage Tax, Title V, NIRC]
13th Month pay & other benefits under this paragraph, not more P30K such as
government employees under RA 6686, benefits not covered by PD 851 as amended
by MO No. 28, 13 Aug 1986, productivity incentives and Christmas bonus. Ceiling
increased to P82K under RA 9504
SSS, GSIS, Medicare, Pag-ibig, Union Dues by individuals
Gains from sale of bonds, debentures, certificate of indebtedness with maturity of >5
years
Gains from redemption of mutual funds company shares defined in Sec 22 (BB)

ALLOWABLE DEDUCTIONS

Itemized Deductions (Sec 34, NIRC)

 10% Optional Standard Deductions (OSD) (Sec 34 (L), Amended pursuant to RA
9504, 07 Jul 2008, now 40%, includes corporation
Allowed only to citizens and resident aliens engaged in business or profession
No need to support expenses
Election irrevocable for the year
Unless indicated, itemized is deemed elected
Premiums on medical & hospitalization (Sec 34 M)
Personal Exemptions (Sec 35)
Personal and additional exemptions

Not allowed to claim deductions

Individuals receiving compensation income (except premiums on medical /
hospitalization subject to limitations and personal and additional
exemptions)
Non-resident aliens not engaged in trade or business
Aliens (also Filipinos similarly situated) employed in ROHQ, AHQ, OBU,
Petroleum contractors
Non-resident Foreign Corporations
Income subject to Final Tax

Itemized Deductions (Sec 34)

110) There must be a law allowing them (Atlas Consolidated Mining v. CIR 102 SCRA
246)
Requisites: Ordinary, necessary, reasonable, not against law, etc
Ordinary and necessary means reasonable
111) It appeared sale of property was effected by a broker hence bonus to company officer
disallowed (Aguinaldo v. CIR, 112 SCRA 136, 1982)
Fees paid to broker to induce investors are reasonable and deductible (On the
substantive issue, SC allowed the deduction as reasonable citing Rev Reg
No. 2. It is worth noting at this point that most of the payees were not in
the regular employ of Algue, nor were they its controlling stockholders.
The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of claimed deduction. In the present case,
however, we find that the onus has been discharged satisfactorily. The
private respondent has proved that the payment of the fees was necessary
and reasonable in the light of the efforts exerted by the payees in inducing
investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of
pesos. This was no mean feat and should be, as it was, sufficiently
recompensed [see Algue case, supra]
Must be connected with business, except:
Contributions / donations
Premium on health / hospitalization
These are allowed to corporations, individuals, partnerships
112) Must be incurred during the year, [CIR v. Isabela Cultural Corp, GR No. 172231, 12
Feb 2007] – All events test applied in determining whether expenses booked on
accrual basis should be claimed as deductible expense]
113) Must be substantiated (ESSO v. CIR 175 SCRA 149 (1989)], see Cohan Rule – there
is showing that expenses were incurred but cannot be ascertained due to absence of
documentary evidence (RMC 23-2000)
 RR No. 6-2018 - requirements for deductibility of certain expenses,
RR No. 11-2018 and 14-2018- relative to withholding of Income Tax

Subject to withholding tax, where applicable

114) FEBTC V. CA, CTA & BIR, 477 SCRA 49 (Dec 2005) – To sufficiently support claims
for tax refund of excess creditable withholding tax, BIR Form 1743 must be
submitted, Confirmation Receipts and ITRs are not sufficient. Having failed to do so,
the claims were correctly denied. Under withholding tax system, it is the payor who
withholds the tax and not the payee. The OR/CR did not indicate the nature and
amount of the payment. “The findings of fact of the CTA, a special court exercising
particular expertise on the subject of tax, are generally regarded as final, binding and
conclusive upon this Court, especially if these are substantially similar to the findings
of the CA which is normally the arbiter of questions of fact. The findings shall not be
reviewed nor disturbed on appeal, unless a party can show that these are not
supported by evidence or when the judgment is premised on a misapprehension of
facts, or when the lower courts failed to notice certain relevant facts which if
considered would only justify a different conclusion.

Income payments to registered enterprises availing of the Income Tax

Holiday are not subject to Creditable Withholding Tax [DA 030-2008
23 Jan 2008]

115) Barcelon, Roxas Securities v. CIR, GR No. 157064 07 Aug 2006 – Assessed for deficiency
income tax for failure to withhold tax, assessment barred by prescription.

Specific Deductions
Salaries, bonuses, emoluments, allowances, incentives, Fringe Benefits
Rental (without equity, operating lease)
116) Advertising expenses are period costs deductible in the year incurred or paid.
However, they may be considered capital expenditures if so substantial in promoting
a single brand (CIR v. General Foods, 401 SCRA 545)
Entertainment, amusement, recreation, subject to ceiling
Travel Expense
Excess over 1st class not deductible, subject to FBT
Excess over fixed allowance $150 / 100 not deductible, taxable to employee
or to FBT
Home leave not taxable to employee
Family expenses taxable to employee to be deductible to employer
Meals & Housing
Generally taxable to employee, except when for the convenience of the
employer or form part of Fringe Benefits of the employee
Cash Advance / Reimbursement system
Entertainment, amusement or recreation (EAR) facilities
Directly related to business
Directly in furtherance of business
Not contrary to law, etc
Ceiling, ½ % or1% of Net sales or net revenues
Substantiation in the name of taxpayer & subject to w/tax, where applicable
 Only one athletic club per officer
Guests other than company officers, etc
Exclusions from EAR
Treated as compensation or Fringe Benefit
Charitable or fund raising events
Bona fide business meetings of directors, etc
Business league or professional organization meet
Promotion, Ad and marketing
Shifting to other accounts to hide –prohibited
Separate item in ITR or note to FS

Interest – Use, forbearance or detention of money [see Rev Reg 13-2000, 20 Nov
2000 – Requisites]
There is debt, and interest is agreed in writing
Paid or incurred in connection with business during the year
Legally due
Not between related parties
Not incurred for petroleum operations
Not capitalized
Limitations on interest – interest is reduced by 41% (42% effective 01 Jul
2005);
39% and 38% of interest income subject to final w/tax
Interest of business taxes not subject to limit
Although cash basis, interest paid in advance deductible only in the year debt
is paid in full or correspondingly to amortized principal

Taxes
Connected with trade or business, except
117) Income Tax – Local [ Not an item of operating expenses because it does not help
generate revenue, nor does it redound to benefit of customers, thus not to be
considered in fixing rates of public utility (Republic v. Meralco, GR No. 141369, 14
Nov 2002)
118) Income tax paid to foreign government (tax credit / deduction)
CIR v. Lednicky 11 SCRA 604 – Partnership Theory – the right to tax income
emanates from partnership in the production of income by providing protection,
resources, incentives and climate to produce income. [Was income tax paid to foreign
government by resident alien deductible though income exclusively came from the
Phils? No.]
Gift & Estate Tax
Special Assessment or special levy under the Local Govt Code [Real
Property Taxation]
If allowed, as deductible and subsequently refunded, Tax Benefit rule
applies
Limitations on tax credit
119) CIR v. Central Luzon Drug Corp (Mercury) 456 SCRA 414 (2005) – 20% Senior
Citizens discount is a tax credit deductible from tax liability

Losses
Fires, shipwreck, theft other casualties
Connected with trade or business
 Not compensated by insurance or otherwise
Not claimed in the estate tax return
Declared within 30 to 90 days with BIR
NOLCO – Sec 34(D)(3) (see Rev Reg 14-2001, 27 Aug 2001)
Losses from wash sales of stock & securities (Sec 38)
What are wash sales and how are they treated for income tax purposes?
Capital losses (Sec 39)

Bad Debts (See Rev Reg No. 5-99, 10 Mar 1999, as amended by Rev Reg No. 25-
2002, 19 Nov 2002 amending Sec. 3 of RR No. 5-99)
120) Charged off during the year (see PRC v. CIR 256 SCRA 667)
Connected with business
Not related parties
Effort to collect failed
Legal debt
121) Power of attorney for operation of mining claims deemed partnership; write off of
bad debts not warranted; it was investment, thus not debt; alleged debtor has not
filed for bankruptcy; assumed guaranteed obligations were not yet due – Philex
Mining v. CIR GR No. 148187, 16 Apr 2008
Tax Benefit Rule applies

Depreciation
122) Definition – Gradual diminution in the useful service value of tangible property used
in business (Basilan Estates Inc v. CIR, 21 SCRA 17, 1967
Methods of depreciation [straight line, sum of years digits, etc]

Depletion
Definition – Exhaustion of natural resources like mines, oil and gas wells as a
result of production or severance from such mines or wells.

Charitable & Other Contributions

Requisites [ See RR 13-98 and Sec 13 (C) of RR 2-2003]; What are the
requirements for the deductibility of donations for income tax purposes?
123) (Mariposa Properties Inc v. CIR, CTA Case No. 6402, 13 Feb 2007) In deciding on
the BIR’s disallowance of deduction for donations made to a private foundation, the
CTA required the donor to prove compliance of both the donor and the donee with
the requirements for deductibility of donations. Hence, for failure of the donor to
present proof that the foundation’s income tax return and audited financial
statements, as well as the annual information report of the foundation were
submitted to BIR as required in the regulations, the deduction for donations was
disallowed. Deductible in full and subject to limitations
Donations by PEZA registered entity to Province of Batangas for national
priority project of NEDA is exempt from donor’s tax, deductible in full and
not subject to DST [DA 026-2008, 22 Jan 2008]

Research and Development

Requisites for deductibility
Limitations on deductions

Pension Trust Contributions

 Nature and requisites
Limitation on deduction
Excess retirement plan assets reverted back to the employer company is
subject to income tax [DA 020-2008, 17 Jan 2008]

Items not deductible (Sec 36)

Personal and living expenses
Capital Expenditures
Premium on insurance where beneficiary is the payor –taxpayer
Losses between related parties

Special provisions re: income and deductions of insurance companies (Sec 37)
Losses from Wash Sales of Stock or securities (Sec 38)
Capital gains and losses (Sec 39) [See Rev Reg No. 7-2003, 27 Dec 2003]

INCOME TAX TREATMENT ON THE SALE OR EXCHANGE OF PROPERTY (SEC 40)

General rule on recognition of gain or loss in a sale or exchange of property

Exceptions
Factors relevant to determination of gain or loss
How is gain or loss computed?
What is the basis to be used?
When are gains recognized, but not losses?
What are the two types of merger or consolidation under Sec 40?
What are the tax implications of merger, consolidation & acquisition of 80% of the assets?
What are the requisites for taxable and tax free transfer of property resulting to majority
ownership of the corporation?
When stocks or securities are subsequently sold, how are gains or losses computed?
Guidelines on Monitoring of Tax – Free exchange of property for shares [Rev Reg No. 18-
2001]
Implementing guidelines of Sec 40 [RMO 32-2001 & RMO 17-2002]
Tax consequences of tax-free exchange of property for shares of stock of controlled
corporation per Sec 40 (C)(2) [See Rev Memorandum Ruling No. 1-2001, 29 Nov
2001]
Tax consequences of De Pacto Merger re Sec 40 (C)(2) and (6)(B) [See Rev Memo Ruling
No. 1-2002]
Determination of substituted basis of property transferred and shares received [See Rev
Memo Ruling No. 2-2002];
124) CIR v. Rufino, GR No. L-33665-68, 27 Feb 1987, 148 SCRA 42 – [ tax exempt merger
of two corporations]
125) Delpher Trades Corp v. IAC, 157 SCRA 349,- [tax exempt transfer of property to a
corporation resulting to control]
126) CIR v. Benigno Toda, 438 SCRA 290 (2004) – meaning of fraud; tax avoidance /
evasion
See De Leon’s NIRC Annotated Vol 1, 2003 ed discussions of Sec 40.
How are inventories treated? (Sec 41)
Income from sources within the Philippines (Sec 42)
 127) CIR v. BOAC 149 SCRA 395 – Source of income of airlines – [ sale of airline tickets of
an offline carrier considered income from Phil by majority of SC; source rule
discussed; minority considered airline tickets as contract of carriage or service, thus
situs is where rendered; characterization becomes moot given the new tax provision
on 2 ½ % Phil Gross Billings regardless of where sold or paid provided cargo or
passenger originates from Phil]
128) NDC v. CIR, 151 SCRA 472 (1987) – Source of interest income – [Exemption strictly
construed; Sec 37 (now Sec 42) – Income from sources within the Philippines applied;
also exclusions from gross income.

Accounting periods and accounting methods (Sec 43 to 50)

How are installment and deferred payment sales treated for income tax purposes?
Accounting Methods (Sec 43)
What accounting methods are acceptable to BIR
What are accounting periods and their relevance
How are leases treated for income tax, VAT and withholding purposes?
Two types of leases: (1) Full payout lease – it’s treated as capital lease – subject to VAT
the full amount of lease and to 2% WT if payor is top 10,000 taxpayer; also subject to
depreciation on the part of the lessee-buyer and (2) FMV or residual lease – treated
as operating lease, the monthly rentals are subject to VAT and WT. See BIR Ruling
No. 9-2007 and Rev Reg 19-86
129) Ericsson v. Pasig City 538 SCRA 99, 22 Nov 2007- Accrual accounting of income;
financial reporting system; gross receipts v. gross income; double taxation explained;
question of law v. of facts; Rules 41, 45 and 56; local taxation.

Returns and Payments for individuals and corporations [Sec 51 to 59]

What returns should be filed
Who are required to file the returns
When, where and how are returns filed and the tax paid
Effects if returns are not file don time or not at all
What happens in case of excess creditable withholding for corporation?
130) Philam Asset Management Inc v. CIR 477 SCRA 761, 14 Dec 2005 – Under Sec 76
of the NIRC, a taxable corporation with excess quarterly income tax payments may
apply for either a tax refund or a tax credit, but not both. The choice of one precludes
the other. Failure to indicate a choice, however, will not bar a valid request for a
refund, should this option be chosen later on. [ 1997 and 1998 ITR]. Issues are:
“Whether or not the failure of the petitioner to indicate in its annual income tax return
the option to refund its creditable withholding tax is fatal to its claim for refund”; [NO]
and “Whether or not the presentation in evidence of the petitioner’s annual income
tax return for the succeeding calendar year is a legal requisite in a claim for refund of
unapplied creditable withholding tax” [NO] But if it is clear that an option was made
although the box is not filled up, that choice shall prevail. [Narrated history of recent
NIRC amendments]
131) CIR v. Meralco, 535 SCRA 399, 10 Oct 2007 – Filing of ITR with excess payment
applied for credit and refund; proof required. Note the amendments to the law
applied in this case under 1986 NIRC v. 1997 NIRC provisions

Estates and Trusts (Secs 60 to 66, NIRC)

 The taxes imposed on individuals apply to income of estates and of any property held in trust,
including:

Income accumulated in trust for unborn or unascertained persons with contingent

interest or for future distribution according to the terms of the will or trust
Income to be distributed currently by fiduciary to beneficiaries, and income collected by
guardian to be held or distributed per court order
Income received by estates of deceased person during period of admin or settlement
proceedings
Trust holding employee retirement plan is not taxable subject to conditions under Sec
60(B). Any amount received by said employee or distribute in excess of his
contribution is taxable to him. But under Sec 32 (B)(6)(a) if the conditions for its
exclusion are present, the excess may also be exempt from income tax.

Estate – refers to the mass of property [assets and liabilities] left by a decedent
Taxable as a separate taxpayer like an individual if under judicial testate or intestate
proceedings, otherwise, income from said property is taxable to the heirs; it follows
the status of the decedent
Trust – property held by one person for the benefit of another
Taxable -
Trust – if income is to be accumulated or if the trustee has discretion to
accumulate or distribute to beneficiaries
Beneficiary – if he / she received income from the trust during the taxable year
pursuant to the trust agreement
Grantor – if revocable or held for grantor’s benefit or to his designate
Control test – power to procure the payment of income and enjoy the benefit
thereof determines who is subject to tax on coupon bond donated to his
son. Helvering v. Horst. 31 US 112
Deductions – same as Estate
Estates and Trusts entitled to deductions
Distribution to heir during the year; If no distribution, subsequent distribution of
said income no longer taxable to heirs
Distribution to guardian for the benefit of infant
Administered in foreign country is taxable in the Philippines in the hands of the
trust but no longer taxable in the hands of the beneficiary when distributed
to him. These distributions are not allowed as deductions from the taxable
return of the trust.
Read BIR Ruling 003-05 – taxation of trusts under common trust funds.

Other Income Tax Requirements (Secs 67 to 73)

How are dividends taxed? (Sec 73)

Quarterly corporate income tax, Annual declaration and quarterly payments of income tax
(Secs 74 to 77)
132) State Land Investment Corp v. CIR, GR No. 171956, 18 Jan 2008 – Excess
creditable tax may be refunded or credited at the option of the taxpayer under former
Sec 69, now Sec 76. Under then Sec 69, excess taxes may be credited in the following
year only, after then need to be claimed for refund within two (2) years from payment
which SIC did. MR filed with CTA included 1999 & 2000 ITRs showing losses, thus
1997 excess tax credit could not have been applied in 1999, Doctrines: SC is not trier
 of facts but if lower court mis-appreciated facts or failed to notice facts that could
change conclusion, then it can review facts. Solutio indebiti applied against
government. Refund granted. Note: counting of 2 years starts from the filing of final
return.

Irrevocability of option to claim credits for excess withholding taxes vs refund (Sec 76)

133) Rhombus Energy Inc v. CIR Gr 206362, Aug 01, 2018

Withholding on Wages (Secs 78 to 83)