XIII-XVI Reviewer

XIII.
Income Taxation – Income of Estate and Trust (Section 60-64, NIRC, as amended)
Estate Status Entitlement Liability for Income Taxes

to Special
Deduction
Under Judicial Status of Individual Yes Estate itself
Settlement prior to his/her
death
NOT under Judicial 1. Without infusion No 1. As Co-Ownership – Heirs are
Settlement of capital, labor, or liable for income in proportion to
both on property their respective shares.
inherited – Co-
Ownership (Article
484, CC);
2. With infusion of 2. As Unregistered partnership –

capital, labor, or the Partnership itself is treated as
both on property a corporation, hence liable for
inherited with intent corporate income tax; and
to derive profit distribution of income after tax
unregistered to the partners thereof
partnership (Section constitutes a taxable dividend
22(B), NIRC) subject to final tax
Trust
Irrevocable Trust Status of Trustor Yes Trust itself
Revocable Trust No Trustor
1. Deductions available only to Estate under Judicial Settlement and Irrevocable

Trust in addition to those specified under Section 34, NIRC, as amended
(Sections 61-62, NIRC, as amended);
2. Tax Treatment of income of Employee’s Trust exempted by law from income

tax (Section 60(B), NIRC, as amended); requisites; rationale
* CIR v. CA, GCL Retirement Plan, G.R. No. 95022, March 23, 1992;
FACTS: This case is said to be precedent setting. While the amount involved is
insignificant, the Solicitor General avers that there are about 85 claims of the same nature
pending in the Court of Appeals and Bureau of Internal Revenue totalling approximately
P120M. Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the Decision of
respondent Court of Appeals, dated August 27, 1990, in CA-G.R. SP No. 20426, entitled
“Commissioner of Internal Revenue vs. GCL Retirement Plan, represented by its Trustee-
Director and the Court of Tax Appeals,” which affirmed the Decision of the latter Court, dated
15 December 1986, in Case no. 3888, ordering a refund, in the sum of P11,302.19, to the GCL
Retirement Plan representing the withholding tax on income from money market placements
and purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959. There is no
dispute with respect to the facts. Private Respondent, GCL Retirement Plan (GCL, for brevity) is
an employees’ trust maintained by the employer, GCL Inc., to provide retirement, pension,
disability and death benefits to its employees. The Plan as submitted was approved and
qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917. 1
In 1984, Respondent GCL made investments and earned therefrom interest income from
which was withheld the fifteen per centum (15%) final withholding tax imposed by Pres. Decree
No. 1959, 2 which took effect on 15 October 1984, to wit:
Date Kind of Investment Principal Income Earned 15% Tax
ACIC
12/05/84 Market Placement P 236,515.32 P 8,751.96 P 1,312.66
10/22/84 — 234,632.75 9,815.89 1,472.38
11/19/84 — 225,886.51 10,629.22 1,594.38
1/23/84 — 344,448.64 17,313.33 2,597.00
12/05/84 — 324,633.81 15,077.44 2,261.52
COMBANK Treasury Bills 2,064.15
————
P11,302.19
On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the
amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by
Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the
amount of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the
collection of the 15% final withholding tax from the interest income as it is an entity fully
exempt from income tax as provided under Rep. Act No 4917 in relation to Section 56 (b) 3 of
the Tax Code.
The refund requested having been denied, Respondent GCL elevated the matter to
respondent Court of Tax Appeals (CTA). The latter ruled in favor of GCL, holding that
employees’ trusts are exempt from the 15% final withholding tax on interest income and
ordering a refund of the tax withheld. Upon appeal, originally to this Court, but referred to
respondent Court of Appeals, the latter upheld the CTA Decision. Before us now, Petitioner
assails that disposition.
ISSUE: WON THE INTEREST INCOME IS SUBJECT TO WITHHOLDING TAX.

HELD: NO. 1. TAXATION; INCOME TAX; GOVERNING LAWS EXEMPTING
EMPLOYEES’ TRUST THEREFROM. — It appears that under Rep. Act No. 1983, which took
effect on 22 June 1957, amending Sec. 56(b) of the National Internal Revenue Code (Tax Code,
for brevity), employees’ trusts were exempt from income tax. It is significant to note that the
GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917 approved on 17 June 1967. In so far as employees’ trusts are
concerned, the foregoing provision should be taken in relation to then Section 56(b) (now 53[b])
of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957.
This provision specifically exempted employees’ trust from income tax.
2. ID.; ID.; ID.; REASONS THEREFOR. — And rightly so, by virtue of the raison d’etre
behind the creation of employees’ trusts. Employees’ trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain contingencies, particularly,
old age retirement, death, sickness, or disability. It provides security against certain hazards to
which members of the Plan may be exposed. It is an independent and additional source of
protection for the working group. What is more, it is established for their exclusive benefit and
for no other purpose.
3. ID.; ID.; ID.; PURPOSE THEREFOR. — The tax advantage in Rep. Act No. 1983,
Section 56(b), was conceived in order to encourage the formation and establishment of such
private Plans for the benefit of laborers and employees outside of the Social Security Act.
Enlightening is a portion of the explanatory note to H.B. No. 6503, now R.A. 1983.
4. ID.; ID.; ID.; R.A. NO. 1983, SEC. 56(b) IN RELATION TO R.A. NO. 4917; NOT
REPEALED BY P.D. NO. 1959. — The deletion in Pres. Decree No. 1959 of the provisos
regarding tax exemption and preferential tax rates under the old law, therefore, can not be
deemed to extend to employees’ trusts. Said Decree, being a general law, can not repeal by
implication a specific provision, Section 56(b) (now 53 [b]) in relation to Rep. Act No. 4917
granting exemption from income tax to employees’ trusts. Rep. Act 1983, which excepted
employees’ trusts in its Section 56(b) was effective on 22 June 1957 while Rep. Act No. 4917 was
enacted on 17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 1984.
A subsequent statute, general in character as to its terms and application, is not to be construed
as repealing a special or specific enactment, unless the legislative purpose to do so is
manifested. This is so even if the provisions of the latter are sufficiently comprehensive to
include what was set forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30 September
1971, 41 SCRA 190).
5. ID.; ID; EMPLOYEE’S TRUST; EXEMPTED FROM WITHHOLDING TAX ON
INTEREST EARNED ON BANK DEPOSITS. — Notably, too, all the tax provisions herein
treated of come under Title II of the Tax Code on “Income Tax.” Section 21(d), as amended by
Rep. Act No. 1959, refers to the final tax on individuals and falls under Chapter II; Section 24(cc)
to the final tax on corporations under Chapter III; Section 53 on withholding of final tax to
Returns and Payment of Tax under Chapter VI; and Section 56(b) to tax on Estates and Trusts
covered by Chapter VII. Section 56(b), taken in conjunction with Section 56(a), supra, explicitly
excepts employees’ trusts from “the taxes imposed by this Title.” Since the final tax and the
withholding thereof are embraced within the title on “Income Tax,” it follows that said trust
must be deemed exempt therefrom. Otherwise, the exception becomes meaningless. There can
be no denying either that the final withholding tax is collected from income in respect of which
employees’ trusts are declared exempt (Sec. 56[b], now 53[b], Tax Code). The application of the
withholdings system to interest on bank deposits or yield from deposit substitutes is essentially
to maximize and expedite the collection of income taxes by requiring its payment at the source.
If an employees’ trust like the GCL enjoys a tax-exempt status from income, we see no logic in
withholding a certain percentage of that income which it is not supposed to pay in the first
place.
* Tax Treatment on the amounts received by the employee-beneficiary

disbursed by Employee’s Trust;
General Rule: Section 32(A)(8) and (10), and 32(A), first sentence, in
relation Section 31, NIRC, as amended;
Section 8. Section 31 of the NIRC, as amended, is hereby further amended to read as follows:
"Sec. 31. Taxable Income Defined. - The term ‘taxable income’ means the pertinent items of
gross income specified in this Code, less deductions, if any, authorized for such types of income
by this Code or other special laws."
Section 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income
means all income derived from whatever source, including (but not limited to) the
following items:
(1) Compensation for services in whatever form paid, including, but not limited
to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of
a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and

(11) Partner's distributive share from the net income of the general professional
partnership.
Exception: If qualified for Section 32(B)(6)(a), NIRC, as amended
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this title:
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual
or corporate, in accordance with a reasonable private benefit plan
maintained by the employer: Provided, That the retiring official or
employee has been in the service of the same employer for at least ten (10)
years and is not less than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or employee only once. For
purposes of this Subsection, the term 'reasonable private benefit plan'
means a pension, gratuity, stock bonus or profit-sharing plan maintained
by an employer for the benefit of some or all of his officials or employees,
wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and
wherein its is provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
XIV. Corporations in General
1. Corporation; definition (Section 2, Revised Corporation Code);

Section 2. Corporation Defined. - A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incidental to its existence.
1.1 What are included/ excluded in the term corporation? (Section 22(B) NIRC,
as amended by RA No. 11534; and RR No. 5-2021)
Section 4. Section 22 of the National Internal Revenue Code of 1997, as amended,
is hereby further amended to read as follows:
"(B) The term 'corporation' shall include one person corporations, partnerships,
no matter how created or organized, joint-stock companies, joint accounts
(cuentas en participation), associations, or insurance companies, but does not
include general professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the Government.
'General professional partnerships' are partnerships formed by persons for the
sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
a. Evangelista v. CIR, G.R. No. L-9996, October 15, 1957;
2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the acquisition of
another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioners in February,
1943. In other words, one cannot but perceive a character of habitually peculiar to business
transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one person, namely
Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business and
enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even
try to offer an explanation therefor.
b. Obillos, Jr. v. CIR, G.R. No. L-68118, October 19, 1985;

c. Pascual v. CIR, G.R. No. 78133, October 18, 1988;
FACTS:
Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels
of land. Petitioners subsequently sold the said lots in 1968 and 1970, and realized net profits.
The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of
the tax amnesties granted in the said years. However, the Acting BIR Commissioner assessed
and required Petitioners to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970. Petitioners protested the said assessment asserting
that they had availed of tax amnesties way back in 1974. In a reply, respondent Commissioner
informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture taxable as a corporation under
Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the
National Internal Revenue Code that the unregistered partnership was subject to corporate
income tax as distinguished from profits derived from the partnership by them which is subject
to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended,
by petitioners relieved petitioners of their individual income tax liabilities but did not relieve
them from the tax liability of the unregistered partnership. Hence, the petitioners were required
to pay the deficiency income tax assessed.
ISSUE:
Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for
the purposes of income tax.
RULING:
The Petitioners are simply under the regime of co-ownership and not under unregistered
partnership.
By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves (Art. 1767, Civil Code of the Philippines). In the present case, there is no evidence
that petitioners entered into an agreement to contribute money, property or industry to a
common fund, and that they intended to divide the profits among themselves. The sharing of
returns does not in itself establish a partnership whether or not the persons sharing therein have
a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and
the freedom of each party to transfer or assign the whole property. Hence, there is no adequate
basis to support the proposition that they thereby formed an unregistered partnership. The two
isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners
and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby.
Under the circumstances, they cannot be considered to have formed an unregistered
partnership which is thereby liable for corporate income tax, as the respondent commissioner
proposes.
d. CIR v. Spouses Magaan, G.R. No. 232663, May 3, 2021;

1.2 Kinds of Corporation under the NIRC, as amended:
a. Domestic Corporation (DC) (Section 22(C), NIRC, as amended);
Section 22. Definitions - When used in this Title:
(C) The term 'domestic,' when applied to a corporation, means created or organized in
the Philippines or under its laws.
b. Resident Foreign Corporation (RFC) (Section 28(1), NIRC, as amended);

and
Section 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation

organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to an income
tax equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when sales,
purchases and other transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally for each month of
the period.
The reduced corporate income tax rates shall be applied on the amount
computed by multiplying the number of months covered by the new rates within
the fiscal year by the taxable income of the corporation for the period, divided by
twelve.
Provided, however, That a resident foreign corporation shall be granted the

option to be taxed at fifteen percent (15%) on gross income under the same
conditions, as provided in Section 27 (A).
c. Non-Resident Foreign Corporation (NRFC) (Section 28(B)(1), NIRC, as

amended);
(B) Tax on Nonresident Foreign Corporation. -
(1) In General. - Except as otherwise provided in this Code, a foreign corporation

not engaged in trade or business in the Philippines shall pay a tax equal to thirty-
five percent (35%) of the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends, rents, royalties,
salaries, premiums (except reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits and income,
and capital gains, except capital gains subject to tax under subparagraphs (C)
and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-
four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent
(33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%).
1.3 Exempt Corporations;

a. Section 22(B), NIRC, as amended;
(B) The term 'corporation' shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), association,
or insurance companies, but does not include general professional partnerships and a
joint venture or consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the Government. 'General
professional partnerships' are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.
b. Section 27(C), NIRC, as amended;

"(C) Government-owned or -Controlled Corporations, Agencies or Instrumentalities - The
provisions of existing special or general laws to the contrary notwithstanding, all corporations,
agencies, or instrumentalities owned or controlled by the Government, except the Government
Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC), and the local water districts shall pay such rate of tax upon their
taxable income as are imposed by this Section upon corporations or associations engaged in
similar business, industry, or activity.
c. Section 30, NIRC, as amended;
Section 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) 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;
(C) A beneficiary society, order or association, operating fort he exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid
association or a nonstock 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;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) 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 inures to the benefit of any member, organizer,
officer or any specific person;
(F) 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 stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) 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, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) 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;
Notwithstanding the provisions in the preceding paragraphs, the 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.
- CIR v. CA, YMCA, G.R. No. 124043, October 14, 1998;

FACTS:
In 1980, YMCA earned an income of 676,829.80 from leasing out a portion of its premises to
small shop owners, like restaurants and canteen operators and 44,259 from parking fees
collected from non-members. On July 2, 1984, the CIR issued an assessment to YMCA for
deficiency taxes which included the income from lease of YMCA’s real property. YMCA
formally protested the assessment but the CIR denied the claims of YMCA. On appeal, the CTA
ruled in favor of YMCA and excluded income from lease to small shop owners and parking
fees. However, the CA reversed the CTA but affirmed the CTA upon motion for
reconsideration.
The main question in this case is: “is the income derived from rentals of real property owned by
Young Men’s Christian Association of the Philippines (YMCA) – established as “a welfare,
educational and charitable non-profit corporation” – subject to income tax under the NIRC and
the Constitution? In 1980, YMCA earned an income of P676,829 from leasing out a portion of its
premises to small shop owners, like restaurants and canteen operators and P44k form parking
fees.
ISSUE:
Whether the rental income of YMCA is taxable
RULING:
Yes. The exemption claimed by YMCA is expressly disallowed by the very wording of then
Section 27 of the NIRC which mandates that the income of exempt organizations (such as the
YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same
Code. While the income received by the organizations enumerated in Section 26 of the NIRC is,
as a rule, exempted from the payment of tax in respect to income received by them as such, the
exemption does not apply to income derived 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.
- CIR v. De La Salle University, Inc., G.R. No. 196596, November 9,
2016;
FACTS:
In 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No.
2794 authorizing its revenue officers to examine the latter's books of accounts and other
accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years.
BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes: (1)
income tax on rental earnings from restaurants/canteens and bookstores operating within the
campus; (2) VAT business income; and (3) documentary stamp tax (DST) on loans and lease
contracts. The BIR demanded the payment of P17,303,001.12, inclusive of surcharge, interest
and penalty for taxable years 2001, 2002 and 2003.
DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed
on August 3, 2005 a petition for review with the CTA Division.
DLSU, a non-stock, non-profit educational institutions, principally anchored its petition

on Article XIV, Section 4 (3) of the Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes
and duties. Xxx
In 2010, the CTA Division partially granted DLSU's petition for review. The DST assessment on
the loan transactions of DLSU in the amount of P11,681,774.00 is hereby CANCELLED.
However, DLSU is ordered to pay the deficiency income tax, VAT and DST on its lease
contracts, plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of
P18,421,363.53.
Both the Commissioner and DLSU moved for the reconsideration. The CTA Division denied the
Commissioner's motion for reconsideration while it held in abeyance the resolution on DLSU's
motion for reconsideration.
The Commissioner appealed to the CTA En Banc arguing that DLSU's use of its revenues and
assets for non-educational or commercial purposes removed these items from the exemption
coverage under the Constitution.
DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to
prove that its rental income was used actually, directly and exclusively for educational
purposes.
The CTA Division, in view of the supplemental evidence submitted, reduced the amount of
DLSU's tax deficiencies.
The CTA En Banc dismissed the Commissioner's petition for review and sustained the
findings of the CTA Division. The CTA En Banc was satisfied with DLSU's supporting
evidence confirming that part of its rental income had indeed been used to pay the loan it
obtained to build the university's Physical Education – Sports Complex.
The CTA En Banc partially granted DLSU's petition for review and further reduced its tax
liabilities to P2,554,825.47 inclusive of surcharge.
CIR ARGUMENTS:
DLSU's rental income is taxable regardless of how such income is derived, used or disposed of.
DLSU's operations of canteens and bookstores within its campus even though exclusively
serving the university community do not negate income tax liability.
The Commissioner contends that Article XIV , Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the income of
whatever kind and character of [a non-stock and non-profit educational institution] from any of
[its] properties, real or personal, or from any of [its] activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax imposed by this Code.
The Commissioner posits that a tax-exempt organization like DLSU is exempt only from
property tax but not from income tax on the rentals earned from property. Thus, DLSU's income
from the leases of its real properties is not exempt from taxation even if the income would be
used for educational purposes.

DLSU ARGUMENTS:
DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all revenues and
assets of non-stock, non-profit educational institutions used actually, directly and exclusively
for educational purposes are exempt from taxes and duties.
On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit educational
institutions is novel to the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code
cannot amend the 1987 Constitution; (2) Section 30 of the 1997 Tax Code is almost an exact
replica of Section 26 of the 1977 Tax Code — with the addition of non-stock, non-profit
educational institutions to the list of tax-exempt entities; and (3) that the 1977 Tax Code was
promulgated when the 1973 Constitution was still in place.
DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent
law that is contrary to the Constitution void and without any force and effect. Section 30 (H) of
the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a
non-stock and non-profit educational institution from any of its properties, real or personal, or
from any of its activities conducted for profit regardless of the disposition made of such income,
should be declared without force and effect in view of the constitutionally granted tax
exemption on "all revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes."
DLSU further submits that it complies with the requirements enunciated in the YMCA case, that
for an exemption to be granted under Article XIV , Section 4 (3) of the Constitution, the taxpayer
must prove that: (1) it falls under the classification non-stock, non-profit educational institution;
and (2) the income it seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes.

ISSUE:
W/N it is required that the revenues and income of a non-stock, non-profit educational
institution must have also been sourced from educational activities or activities related to the
purposes of an educational institution for it to be tax-exempt.
RULING:
No, it is notrequired that the revenues and income of a non-stock, non-profit educational
institution must have also been sourced from educational activities or activities related to the
purposes of an educational institution for it to be tax-exempt
Before fully discussing the merits of the case, we observe that:

1. The constitutional provision refers to two kinds of educational institutions: (1) non-
stock, non-prot educational institutions and (2) proprietary educational institutions.
2. DLSU falls under the frst category. Even the Commissioner admits the status of DLSU
as a nonstock, non-profit educational institution.
3. While DLSU's claim for tax exemption arises from and is based on the Constitution,
the Constitution, in the same provision, also imposes certain conditions to avail of the
exemption. We discuss below the import of the constitutional text vis - à- vis the
Commissioner's counterarguments.
4. There is a marked distinction between the treatment of non-stock, non-profit
educational institutions and proprietary educational institutions. The tax exemption
granted to non-stock, non-prot educational institutions is conditioned only on the actual,
direct and exclusive use of their revenues and assets for educational purposes. While tax
exemptions may also be granted to proprietary educational institutions, these
exemptions may be subject to limitations imposed by Congress.
The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the
Tax Code. The relevant text reads: The following organizations shall not be taxed under this
Title [Tax Income] in respect to income received by them as such:
(H) A non-stock and non-profit educational institution xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the 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.

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-
stock, nonprofit educational institutions such that the revenues and income they derived from
their assets, or from any of their activities conducted for profit, are taxable even if these
revenues and income are used for educational purposes.
We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with
respect to nonstock, non-profit educational institutions, provided, that the non-stock,
non-profit educational institutions prove that its assets and revenues are used actually,
directly and exclusively for educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational
institutions, is not subject to limitations imposed by law.
The tax exemption granted by the Constitution to non-stock, non-profit educational

institutions is conditioned only on the actual, direct and exclusive use of their assets,
revenues and income for educational purposes.
A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational
activities or activities related to the purposes of an educational institution. The phrase all
revenues is unqualified by any reference to the source of revenues. Thus, so long as the
revenues and income are used actually, directly and exclusively for educational purposes, then
said revenues and income shall be exempt from taxes and duties.
We find it helpful to discuss at this point the taxation of revenues versus the taxation of
assets.
REVENUES consist of the amounts earned by a person or entity from the conduct of business
operations. It may refer to the sale of goods, rendition of services, or the return of an
investment. Revenue is a component of the tax base in income tax, VAT, and local business tax
(LBT).
ASSETS, on the other hand, are the tangible and intangible properties owned by a person or
entity. It may refer to real estate, cash deposit in a bank, investment in the stocks of a
corporation, inventory of goods, or any property from which the person or entity may derive
income or use to generate the same. In Philippine taxation, the fair market value of real
property is a component of the tax base in real property tax. Also, the landed cost of imported
goods is a component of the tax base in VAT on importation 88 88 and tariff duties.
Thus, when a non-stock, non-profit educational institution proves that it uses its revenues
actually, directly, and exclusively for educational purposes, it shall be exempted from income
tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form
of real property for educational purposes, it shall be exempted from RPT.
WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal

Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the
total amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.
- CIR v. St. Luke’s Medical Center, Inc., G.R. No. 195909, September
26, 2012;
FACTS: St. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit
corporation. The BIR assessed St. Luke’s deficiency taxes for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded withholding tax.
St. Luke’s filed an administrative protest with the BIR against the deficiency tax assessments.
The BIR did not act on the protest within the 180-day period under Section 228 of the NIRC.
Thus, St. Luke’s appealed to the CTA.
BIR’s contentions: The BIR argued before the CTA that Section 27(B) of the NIRC, which
imposes a 10% preferential tax rate on the income of proprietary nonprofit hospitals, should be
applicable to St. Luke’s. According to the BIR, Section 27(B), introduced in 1997, “is a new
provision intended to amend the exemption on non-profit hospitals that were previously
categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x.”
It is a specific provision which prevails over the general exemption on income tax granted
under Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic
organizations promoting social welfare. The BIR claimed that St. Luke’s was actually operating
for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover,
the hospital’s board of trustees, officers and employees directly benefit from its profits and
assets.
St. Luke’s contention: St. Luke’s contended that the BIR should not consider its total revenues,
because its free services to patients was P218,187,498 or 65.20% of its 1998 operating income. St.
Luke’s also claimed that its income does not inure to the benefit of any individual. St. Luke’s
maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se
does not destroy its income tax exemption.
ISSUE/S: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.
RULING: There is no dispute that St. Luke’s is organized as a non-stock and non-profit

charitable institution. However, this does not automatically exempt St. Luke’s from paying
taxes. This only refers to the organization of St. Luke’s. Even if St. Luke’s meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property
taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the
property “actually, directly and exclusively” for charitable purposes. To be exempt from income
taxes, Section 30(E) of the NIRC requires that a charitable institution must be “organized and
operated exclusively” for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be “operated exclusively” for social
welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and
operated exclusively.”
Notwithstanding the provisions in the preceding paragraphs, the 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
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts “any” activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the
“[n]on-stock corporation or association [must be] organized and operated exclusively for x x x
charitable x x x purposes x x x.” It likewise qualifies the requirement in Section 30(G) that the
civic organization must be “operated exclusively” for the promotion of social welfare.
Thus, even if the charitable institution must be “organized and operated exclusively” for
charitable purposes, it is nevertheless allowed to engage in “activities conducted for profit”
without losing its tax exempt status for its not-for-profit activities. The only consequence is that
the “income of whatever kind and character” of a charitable institution “from any of its
activities conducted for profit, regardless of the disposition made of such income, shall be
subject to tax.”
In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying patients. It
cannot be disputed that a hospital which receives approximately P1.73 billion from paying
patients is not an institution “operated exclusively” for charitable purposes. Clearly, revenues
from paying patients are income received from “activities conducted for profit.” Services to
paying patients are activities conducted for profit. They cannot be considered any other way.
There is a “purpose to make profit over and above the cost” of services.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable
or social welfare purposes insofar as its revenues from paying patients are concerned. This
ruling is based not only on a strict interpretation of a provision granting tax exemption, but also
on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires
that an institution be “operated exclusively” for charitable or social welfare purposes to be
completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its
tax exemption if it earns income from its for-profit activities. Such income from for-profit
activities, under the last paragraph of Section 30, is merely subject to income tax, previously at
the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
XV. Corporate Income Taxation – DC (Section 27, NIRC, as amended)
1. GENERAL RULE (Section 27(A) and (E), NIRC, as amended by RA No.

11534):
Section 6. Section 27 of the National Internal Revenue Code of 1997, as amended, is hereby
further amended to read as follows:
"SEC. 27. Rates of Income Tax on Domestic Corporations. -
"(A) In General, — Except as otherwise provided in this Code, an income tax rate of twenty-five
percent (25%) effective July 1, 2020, is hereby imposed upon the taxable income derived during
each taxable year from all sources within and without the Philippines by every corporation, as
defined in Section 22(B) of this Code and taxable under this title as a corporation, organized in,
or under the laws of the Philippines.
"Provided, That corporations with net taxable income not exceeding Five million pesos and with
total assets not exceeding One hundred million pesos (P 100,000,000.00), excluding land on
which the particular business entity's ofice, plant, and equipment are situated during the
taxable year for which the tax is imposed, shall be taxed at twenty percent (20%).
"In the case of corporations adopting the fiscal-year accounting period, the taxable income shall
be computed without regard to the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period.
"The corporate income tax rate shall be applied on the amount computed by multiplying the
number of months covered by the new rate within the fiscal year by the taxable income of the
corporations for the period, divided by twelve.
"(E) Minimum Corporate Income Tax on Domestic Corporations.
"(1) Imposition of Tax. — A minimum corporate income tax of two percent (2%) of the
gross income as of the end of the taxable yea.r, as defined herein, is hereby i.mposed on
a corporation taxable under this title, 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: Provided, That effective July 1, 2020 until June 30, 2023, the
rate shall be one percent (1%).
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate
income tax over the normal income tax as computed under Subsection (A) of this Section
shall be carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The
Secretary of Finance is hereby authorized to suspend the imposition of the minimum
corporate income tax on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of

the Commissioner, the necessary rules and regulation that shall define the terms and
conditions under which he may suspend the imposition of the minimum corporate
income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income
tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales
less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold'
shall include all business expenses directly incurred to produce the merchandise to
bring them to their present location and use.
Whichever is higher of the Regular Corporate Income Tax (RCIT), or

Minimum Corporate Income Tax (MCIT), if applicable;
a. Tax Rate and Tax Base of RCIT starting July 1, 2020
General Rule: 25%
Exception: 20%; conditions for entitlement
b. Tax Rate and Tax Base of MCIT (Section 27(E)(1), NIRC, as amended)
- 1% (July 1, 2020 – June 30, 2023);
- 2% (July 1, 2023 onwards);
- When may the taxpayer be liable for MCIT (Section 27(E)(1),

NIRC, as amended)
"SEC. 27. Rates of Income Tax on Domestic Corporations. –
"(1) Imposition of Tax. — A minimum corporate income tax of two percent (2%) of the
gross income as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this title, beginning on the fourth taxable year immediately
Section for the taxable year: Provided, That effective July 1, 2020 until June 30, 2023, the
rate shall be one percent (1%).
- Treatment of Excess of MCIT over the RCIT (Section 27(E)(2),

NIRC, as amended);
Section 27. Rates of Income tax on Domestic Corporations. -
(E) Minimum Corporate Income Tax on Domestic Corporations. -
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of
the gross income as of the end of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such 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.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum
corporate income tax over the normal income tax as computed under Subsection
(A) of this Section shall be carried forward and credited against the normal
income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. -
The Secretary of Finance is hereby authorized to suspend the imposition of the
minimum corporate income tax on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of
legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and regulation that
shall define the terms and conditions under which he may suspend the
imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate
income tax provided under Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and allowances and cost of goods
sold. "Cost of goods sold' shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.
- Suspension of Application of MCIT (Section 27(E)(3), NIRC, as

amended)
- CREBA v. Romulo, G.R. No. G.R. No. 160756, March 9, 2010;
FACTS:
CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative
of the due process clause as it levies income tax even if there is no realized gain. They also
question the creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets stating that (1) they ignore the different treatment of ordinary assets and capital assets; (2)
the use of gross selling price or fair market value as basis for the CWT and the collection of tax
on a per transaction basis (and not on the net income at the end of the year) are inconsistent
with the tax on ordinary real properties; (3) the government collects income tax even when the
net income has not yet been determined; and (4) the CWT is being levied upon real estate
enterprises but not on other enterprises, more particularly those in the manufacturing sector.
ISSUE:
Are the impositions of the MCIT on domestic corporations and CWT on income from sales of
real properties classified as ordinary assets unconstitutional?
HELD:
NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is
arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of
goods and other direct expenses from gross sales. Besides, there are sufficient safeguards that
exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the
carry forward of any excess MCIT paid over the normal income tax; and (3) the Secretary of
Finance can suspend the imposition of MCIT in justifiable instances.
The regulations on CWT did not shift the tax base of a real estate business’ income tax from net
income to GSP or FMV of the property sold since the taxes withheld are in the nature of
advance tax payments and they are thus just installments on the annual tax which may be due
at the end of the taxable year. As such the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income and the use of the GSP or FMV is because
these are the only factors reasonably known to the buyer in connection with the performance of
the duties as a withholding agent.
Neither is there violation of equal protection even if the CWT is levied only on the real industry
as the real estate industry is, by itself, a class on its own and can be validly treated different
from other businesses.
d. Applicable to Proprietary Non-Profit Education Institutions or

Proprietary Non-Profit Hospitals who failed to satisfy the predominance
test (Section 27(B), NIRC, as amended);
"(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions
and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income
except those covered by Subsection (D) hereof: Provided, That beginning July 1, 2020 until June
30, 2023, the tax rate herein imposed shall be one percent (1%): Provided, further, That if the
gross income from 'unrelated trade, business or other activity' exceeds fifty percent (50%) of the
total gross income derived by such educational or hospitals from all sources, the tax prescribed
in Subsection (A) hereof shall be imposed on the en&e taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other activity' means any trade, business or
other activity, the conduct of which is not substantially related to the exercise or performance
by such educational institution or hospital of its primary purpose or function. 'Proprietary'
means a private hospital, or any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of Education
(DepEd), or the Commission on Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in accordance with existing laws
and regulations.
d. Applicable to Government Owned and Control Corporations
(GOCCs), save for exceptions. (Section 27(C), NIRC, as amended);
"(C) Government-owned or -Controlled Corporations, Agencies or Instrumentalities. - The
provisions of existing special or general laws to the contrary notwithstanding, all corporations,
agencies, or owned or controlled by the Government, except the Government Service Insurance
System (GSIS), the Social Security System (SSS), the Home Development Mutual Fund (HDMF),
the Philippine Health Insurance Corporation (PHIC), and the local water districts shall pay such
rate of tax upon their taxable income as are imposed by this Section upon corporations or
associations engaged in a similar business, industry, or activity.
2. EXCEPTIONS (Section 27(B), (C), and (D), NIRC, as amended):

a. Proprietary Non-Profit Educational Institutions or Proprietary
Non-Profit Hospitals who satisfied the predominance test.
(Section 27(B), NIRC, as amended by RA No. 11534)
- Tax Base and Tax Rate:

1% of taxable income (July 1, 2020 to June 30, 2023);
10% of taxable income (July 1, 2023 onwards);
- CIR v. St. Luke’s Medical Center, Inc., G.R. No. 195909, September
26, 2012;
b. Certain GOCCs (Section 27(C), NIRC, as amended);

GOCCS
c. Certain Passive Income (Section 27(D), NIRC, as amended);
"(D) Rates of Tax on Certain Passive Incomes. - x x x
"x x x
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax
at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements received by domestic corporations, and
royalties, derived from sources within the Philippines: Provided, however, That interest
income derived by a domestic corporation from a depository bank under the expanded
foreign currency deposit system shall be subject to a final income tax at the rate of seven
and one-half percent (7 1/2%) of such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A
final tax at the rates prescribed below shall be imposed on net capital gains realized
during the taxable year from the sale, exchange or other disposition of shares of stock in
a domestic corporation except shares sold or disposed of through the stock exchange:
Not over P100,000………………… 5%

Amount in excess of P100,000…… 10%
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with local commercial banks, including
branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency depository system units and other
depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions

with depository banks under the expanded system shall be exempt from income tax.
"(4) Intercorporate Dividends. - Dividends received by a domestic corporation shall not

be subject to tax under this title: Provided, That for foreign-sourced dividends to be
exempt, the funds from such dividends actually received or remitted into the
Philippines are reinvested in the business operations of the domestic corporation in the
Philippines within the next taxable year from the time the foreign-sourced dividends
were received and shall be limited to funding the working capital requirements, capital
expenditures, dividend payments, investment in domestic subsidiaries, and
infrastructure project: Provided, further, That the domestic corporation holds directly at
least twenty percent (20%) of the outstanding shares of the foreign corporation and has
held the shareholdings for a minimum of two (2) years at the time of the dividends
distribution.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of lands and/or buildings which
are not actually used in the business of a corporation and are treated as capital assets,
based on the gross selling price of fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.
1.1. Interest Income /Monetary Benefit (Section 27(D)(1),

NIRC);
a. Scope: Philippine Peso Bank Deposits/Foreign Currency Bank

Deposits/ Deposit Substitutes (Section 22(Y), NIRC)/Trust
Funds
(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from the
public (the term 'public' means borrowing from twenty (20) or more individual or corporate
lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance
of debt instruments for the borrowers own account, for the purpose of relending or purchasing
of receivables and other obligations, or financing their own needs or the needs of their agent or
dealer. These instruments may include, but need not be limited to bankers' acceptances,
promissory notes, repurchase agreements, including reverse repurchase agreements entered
into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank,
certificates of assignment or participation and similar instruments with recourse: Provided,
however, That debt instruments issued for interbank call loans with maturity of not more than
five (5) days to cover deficiency in reserves against deposit liabilities, including those between
or among banks and quasi-banks, shall not be considered as deposit substitute debt
instruments.
b. Requirement
c. Tax Rate
d. Banco de Oro v. Republic of the Philippines, G.R. No. 198756,

August 16, 2016 (Resolution on Motion for Reconsideration)
FACTS: The case involves the proper tax treatment of the discount or interest income arising
from the ₱35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of
Treasury on October 18, 2001 (denominated as the Poverty Eradication and Alleviation
Certificates or the PEA Ce Bonds by the Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-2011
(2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the
20% final withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau
of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon their
payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus filed by petitioners under Rule 65
of the Rules of Court seeking to:
a. ANNUL Respondent BIR’s Ruling No. 370-2011 dated 7 October 2011 [and] other related
rulings issued by BIR of similar tenor and import, for being unconstitutional and for having
been issued without jurisdiction or with grave abuse of discretion amounting to lack or· excess
of jurisdiction … ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT
from the payment of the face value of the Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the
Government Bonds upon maturity … ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary

injunction, enjoining Respondents, particularly the BIR and the BTr, from withholding or
collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing the
assailed 2011 BIR Ruling, as well asother related rulings issued by the BIR of similar tenor and
import, pending the resolution by [the court] of the merits of [the] Petition.
PETITIONER’S ARGUMENT: In sum, petitioners and petitioners-intervenors, namely, RCBC,

RCBC Capital, and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue
Code when it declared that all government debt instruments are deposit substitutes regardless
of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds,
represented by the government as an inducement and important consideration for the purchase
of the Bonds;
b) It constitutes deprivation ofproperty without due process because there was no prior notice
to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-government

organizations and development of the capital market; and
e) The assessment had already prescribed.
RESPONDENT’S ARGUMENT:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in
issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner
of Internal Revenue’s power to interpret the provisions of the 1997 National Internal Revenue
Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained
in previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which have already
effectively abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings especially
when the latter’s rulings are not in harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give
rise to a vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate
remedy in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax
they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of

courts.
ISSUES:
A.) WON THE TERMS “20 OR MORE” REFERS ONLY TO THE NUMBER OF

LENDER/INVESTOR DURING INITIAL ISSUANCE OF THE BOND.
B.) WON THE RESPONDENT SHOULD RELEASE THE AMOUNT WITHHELD TO THE

PETITIONERS PENDING THE DETERMINATION OF THE NUMBER OF THE SECONDARY
LENDER/INVESTORS.
HELD:
A.) NO. Under the 1997 National Internal Revenue Code, Congress specifically defined “public”
to mean “twenty (20) or more individual or corporate lenders at any one time.” Hence, the
number of lenders is determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that “there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the
Government Bonds.”169 On the other hand, respondents theorize that the word “any” “indicates
that the period contemplated is the entire term of the bond and not merely the point of
origination or issuance[,]”170 such that if the debt instruments “were subsequently sold in
secondary markets and so on, insuch a way that twenty (20) or more buyers eventually own the
instruments, then it becomes indubitable that funds would be obtained from the “public” as
defined in Section 22(Y) of the NIRC.”171 Indeed, in the context of the financial market, the
words “at any one time” create an ambiguity.
The financial market, therefore, is an agglomeration of financial transactions in securities

performed by market participants that works to transfer the funds from the surplus units (or
investors/lenders) to those who need them (deficit units or borrowers).
Meaning of “at any one time”

Thus, from the point of view of the financial market, the phrase “at any one time” for purposes
of determining the “20 or more lenders” would mean every transaction executed in the primary
or secondary market in connection with the purchase or sale of securities.
For example, where the financial assets involved are government securities like bonds, the
reckoning of “20 or more lenders/investors” is made at any transaction in connection with the
purchase or sale of the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary

market usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to

individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or
morelenders/investors, there is deemed to be a public borrowing and the bonds at that point
intime are deemed deposit substitutes. Consequently, the seller is required to withhold the 20%
final withholding tax on the imputed interest income from the bonds.
B.) YES. The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at 10.2
billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the
PEACe Bonds to undisclosed investors at ₱11.996 billion.
It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the
PEACe Bonds were issued at the time of origination. However, a reading of the underwriting
agreement and RCBC term sheet reveals that the settlement dates for the sale and distribution
by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed
investors at a purchase price of approximately ₱11.996 would fall on the same day, October 18,
2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality,
therefore, the entire ₱10.2 billion borrowing received by the Bureau of Treasury in exchange for
the ₱35 billion worth of PEACe Bonds was sourced directly from the undisclosed number of
investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time
of origination or issuance. At this point, however, we do not know as to how many investors
the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds
are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National
Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the
20% final withholding tax on the interest or discount from the PEACe Bonds. Further, the
obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds
would likewise be required of any lender/investor had the latter turned around and sold said
PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24 of the 1997 National Internal Revenue Code, interest
income received by individuals from longterm deposits or investments with a holding period of
not less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the
proper procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to
the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding
tax directly from RCBC Capital/CODE-NGO, orany lender or investor if such be the case, as the
withholding agents.
1.2 Interest Income – Others (Section 32(A)(4) in relation to

Sections 31 and 27(A) or (E), NIRC, as amended)
Section 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income
means all income derived from whatever source, including (but not limited to) the
following items:
(4) Interests;
"Sec. 31. Taxable Income Defined. - The term ‘taxable income’ means the pertinent items of
gross income specified in this Code, less deductions, if any, authorized for such types of income
by this Code or other special laws.
Section 27. Rates of Income tax on Domestic Corporations. -
(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable
year from all sources within and without the Philippines by every corporation, as
defined in Section 22(B) of this Code and taxable under this Title as a corporation,
organized in, or existing under the laws of the Philippines: Provided, That effective
January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000
and thereafter, the rate shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and expenses for the fiscal year
shall be deemed to have been earned and spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the fiscal year by the
taxable income of the corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of
Finance, may effective January 1, 2000, allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined herein, after the following conditions
have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position
(CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose
ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five
percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for
three (3) consecutive taxable years during which the corporation is qualified under the
scheme.
For purposes of this Section, the term 'gross income' derived from business shall be
equivalent to gross sales less sales returns, discounts and allowances and cost of goods
sold. "Cost of goods sold' shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods' sold shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold, including insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances and discounts.
(E) Minimum Corporate Income Tax on Domestic Corporations. -
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the
gross income as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year immediately
Section for the taxable year.
income tax over the normal income tax as computed under Subsection (A) of this Section
shall be carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
corporate income tax on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of

the Commissioner, the necessary rules and regulation that shall define the terms and
conditions under which he may suspend the imposition of the minimum corporate
income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income
tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales
less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold'
shall include all business expenses directly incurred to produce the merchandise to
bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods
are actually sold including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less
sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including (A) salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of supplies: Provided, however, That
in the case of banks, 'cost of services' shall include interest expense.
2.1. Passive Royalty income (Section 27(D)(1), NIRC, as
amended)
"(D) Rates of Tax on Certain Passive Incomes -
"(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements
received by domestic corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived by a domestic corporation from a
depository bank under the expanded foreign currency deposit system shall be subject to a final
income tax at the rate of fifteen percent (15%) of such interest income.
a. Requirement;
b. Tax Rates; Preferential Tax Rates
2.2. Royalty Income – Others (including Active Royalty

Income) (Section 32(A)(5;rent) in relation to Sections 31
and 27(A) and (E). NIRC, as amended)
 Section 32 A, 5- Gross income ; rent
 Section 31- definition of taxable income
 Section 27 (A), (E)- Rates of Income Tax on
Domestic Corporations
a. CREBA v. Romulo, G.R. No. 160756, March 9, 2010;

Ruling on rental income
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is not:
…if the income is generated in the active pursuit and performance of the corporation’s primary
purposes, the same is not passive income… 76
It is income generated by the taxpayer’s assets. These assets can be in the form of real properties
that return rental income, shares of stock in a corporation that earn dividends or interest income
received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income
payable to natural or juridical persons, residing in the Philippines." There is no requirement that this
income be passive income. If that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains
to CWT. The former covers the kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it
is wrong to regard 57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It
has been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its
functions.77 Similarly, considering that the law uses the general term "income," the Secretary and CIR
may specify the kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate them and their specific
expertise in their respective fields.
b. Iconic Beverages, Inc. v. CIR, CTA EB Nos. 1563 & 1564,

September 18, 2018;
Title: Iconic Beverages, Inc. vs CIR, CTA Case No. 8607 dated August 14, 2015
Ponente: CTA First Division
Doctrine to Remember
For royalties to be subject to final tax, they must be in the nature of passive income and not income
generated in the active pursuit and performance of the corporation’s primary purpose. Hence, when
royalties are derived from its primary activities, they are subject to Regular Corporate Income Tax
(RCIT) under Section 32 (A)(6) NIRC.
Facts
 IBI is primary engaged in the business of manufacturing, buying, selling and dealing in alcoholic
and non-alcoholic beverages and to own, purchase, license and/or acquire such trademarks and
other intellectual property rights necessary for the furtherance of its business. In exchange for a
100% ownership of IBI’s share of stocks, SMC transferred its trademark and other intellectual
property rights to IBI. IBI therefore has no other income but that royalty income from SMBI and
MPLI for the use of trademark and other intellectual property.
 CIR assessed Iconic Beverages, Inc. (IBI) for, among others, deficiency income tax on royalty fees
received for taxable year 2009. The CIR argued that IBI incorrectly treated the royalty fees as
passive income subject to 20% final tax. The CIR asserted that the royalty was earned in the active
pursuit of business hence, subject to the 30% regular corporate income tax (RCIT).
 Upon the CIR’s denial of its protest against the assessment, IBI filed a Petition for Review filed with
the Court of Tax Appeals.
Issues Articles/Law Involved
Are the royalty fees received by IBI considered  Sec. 24(B)(1) NIRC – 20% final tax on royalty
passive income subject to the 20% final income except on literary works, books and
withholding tax? musical compositions(LBM) which are subject
to 10%.
 Sec. 32(A)(6) NIRC - Royalties
Rulings
No. The CTA First Division ruled that the royalty fees received by IBI are not passive but active income
subject to the 30% RCIT.
The business transactions of IBI resulting in the payment of royalty income were in line, if not in accord,
with IBI’s primary purpose as stated in its Articles of Incorporation that includes owning, purchasing,
licensing and/or acquiring such trademarks and other intellectual property rights in furtherance of its
business.
The Court noted IBI’s Audited Financial Statements (AFS) for 2009 which belied its contention that the
act of licensing out of its trademarks and intellectual property rights were incidental and one-time
transactions. The 2009 AFS showed that licensing was the only business activity of IBI and its lone
source of income in 2009. IBI did not engage in any business activity beyond licensing, precisely
because such was its primary purpose.
3.1. Income by domestic bank under FCDU (Section 27(D)(3),

NIRC, as amended);
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with local commercial banks, including
branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency depository system units and other
depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a
final income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions

with depository banks under the expanded system shall be exempt from income tax.
4.1. Intercorporate dividends (Section 27(D)(4), NIRC, as amended

by RA No. 11534; RR No. 5-2021);
"(D) Rates of Tax on Certain Passive Incomes. - x x x
"x x x
"(4) Intercorporate Dividends. - Dividends received by a domestic corporation shall not be

subject to tax under this title: Provided, That for foreign-sourced dividends to be exempt, the
funds from such dividends actually received or remitted into the Philippines are reinvested in
the business operations of the domestic corporation in the Philippines within the next taxable
year from the time the foreign-sourced dividends were received and shall be limited to
funding the working capital requirements, capital expenditures, dividend payments,
investment in domestic subsidiaries, and infrastructure project: Provided, further, That the
domestic corporation holds directly at least twenty percent (20%) of the outstanding shares
of the foreign corporation and has held the shareholdings for a minimum of two (2) years at
the time of the dividends distribution.
a. Dividends received by DC from DC;

b. Dividends received by DC from RFC; and
c. Dividends received by DC from NRFC (foreign-sourced
dividends); Requirements for exemption
d. Rationale for Exemption
- Filipinas Life Assurance Co. v. CTA, G.R. No. L-21258, October 31,
1967;
Facts:
The issue posed in this appeal is whether domestic and resident foreign life insurance
companies are entitled to return only 25 per cent of their income from dividends under the
1957 amendment of section 24 of the National Internal Revenue Code, the... pertinent
provisions of which read as follows:
"SEC. 24. Rate of Tax on Corporation. (A) In general there shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year from all
sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized, but not including duly registered general
copartnership (compañias colectivas). domestic insurance companies and foreign life
insurance companies doing business in the Philippines, a tax upon such income equal to... the
sum of the following:
"Twenty per centum upon the amount by which such total net income does not exceed one
hundred thousand pesos; and
"Twenty-eight per centum upon the amount by which such total net income exceeds one
hundred thousand pesos; and a like tax shall be levied, assessed, collected and paid annually
upon the total net income received in the preceding taxable year from all... sources within
the Philippines by every corporation organized, authorized or existing under the laws of any
foreign country: . . . And Provided, further, That in the case of dividends received by a
domestic or resident foreign corporation from a domestic corporation... liable to tax under
this Chapter or from a domestic corporation engaged in a new and necessary industry, as
defined under Republic Act Numbered Nine hundred and one, only twenty-five per centum
thereof shall be returnable for purposes of the tax imposed by this... section.
"(B) Rate of Tax on Life Insurance Companies. There shall be levied, assessed, collected and
paid annually from every insurance company organized in or existing under the laws of the
Philippines, or foreign life insurance company authorized to carry on business in... the
Philippines, but not including purely cooperative companies or associations as defined in
section two hundred and fifty-five of this Code, on the total investment income received by
such company during the preceding taxable year from interest, dividends and rents from all...
sources whether from or within the Philippines, a tax of six and one-half per centum upon
such income: Provided, however, That foreign life insurance companies not doing business in
the Philippines shall, on any investment income received by... them from the Philippines, be
subject to tax as any other foreign corporation. . . ."
The Court of Tax Appeals ruled that life insurance companies should report in full their
income from dividends because, while they are treated in subsection (B), the proviso
regarding dividend exclusion is found in subsection (A) which treats of corporations in
general. The... petitioner appealed to this Court, contending, on the basis of the history of
the proviso, that the benefits of dividend exclusion are available to all domestic and resident
foreign corporations regardless of the business in which they may be engaged.
Issues:
The issue posed in this appeal is whether domestic and resident foreign life insurance
companies are entitled to return only 25 per cent of their income from dividends under the
1957 amendment of section 24 of the National Internal Revenue Code
Ruling:
The Court of Tax Appeals ruled that life insurance companies should report in full their
income from dividends because, while they are treated in subsection (B), the proviso
regarding dividend exclusion is found in subsection (A) which treats of corporations in
general. The... petitioner appealed to this Court, contending, on the basis of the history of
the proviso, that the benefits of dividend exclusion are available to all domestic and resident
foreign corporations regardless of the business in which they may be engaged.
We agree with the petitioner.
The petitioner is a domestic life insurance company.
In sum, as the then Congressman Ferdinand Marcos described the bill which became
Republic Act 1855, "It is a bill which places [life] insurance companies in the same class as
other companies. And the rate is lower than in ordinary companies because it is six and one
half per... cent."[19]
If the purpose of the 1957 amendment was to place life insurance companies at par with
other companies by taxing them on their true income, then the legislature could not have
intended to withdraw from them a privilege which they had then been enjoying in common
with non-life... insurance companies. Indeed, by no rule of logic can the decision to exclude
premium receipts from gross income be considered a decision to include all of dividend
income in gross income.
Nor could it have been the intention of the legislature to discriminate against domestic life
insurance companies in favor of resident foreign corporations engaged in other business.
Thus, the haphazard amendment of section 24 by several legislative acts - as a result of
which the proviso on dividend exclusion is now found in sub-section (a) makes reliance on its
grammatical construction highly unsafe and unsound in arriving at its meaning.[22] Since
nothing in the history of the 1957 amendment or in the rationale of dividend exclusion
indicates the contrary, we hold that domestic and resident foreign life insurance companies
are entitled to the benefits of dividend exclusion, the position of the... proviso allowing it
notwithstanding.
Accordingly, the decision appealed from is reversed, and the respondent Commissioner of
Internal Revenue is ordered to refund to the petitioner company the amount of P2,721 as
excess income tax for 1958. No pronouncement as to costs.
Principles:
"As a general rule of statutory construction a proviso is deemed to apply only to the
immediately preceding clause or provision.
But a purely syntactical approach is hardly a safe guide to the meaning of a statute. The
position of a proviso, for instance, although possessed of considerable influence, is not
necessarily controlling. The proviso may apply to sections or portions thereof which follow
it... or even to the entire statute.[3] Position, after all, cannot override intention, in the
ascertainment of which the legislative history of a statute is extremely more important.
A resort to legislative history should prove particularly helpful in the case of section 24 of
the Code as this section has gone through a miscellany of amendments, with the result that
its basic outlines are now only vaguely discernible, From a one-paragraph section it has...
grown into a multi-paragraph one, with lengthy sentences qualified at every turn by
exceptions and provisos
5.1. Tax Treatment of Certain Properties falling under Section

27(D)(2) and (D)(5), NIRC, as amended – Discussion will be on a
separate topic.
(D) Rates of Tax on Certain Passive Incomes. -
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below shall be imposed on net capital
gains realized during the taxable year from the sale, exchange or other disposition of
shares of stock in a domestic corporation except shares sold or disposed of through
the stock exchange:
Not over P100,000………………… 5%

Amount in excess of P100,000…… 10%
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of lands and/or buildings
which are not actually used in the business of a corporation and are treated as
capital assets, based on the gross selling price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or
buildings
XVI. Income Taxation – RFC (Section 28(A), NIRC, as amended);
1. GENERAL RULE (Section 28(A)(1) and (2) in relation to 27(E), NIRC, as

amended by RA No. 11534):
SEC. 28. Rates of Income Tax on Foreign Corporations. –
A.
"(1) In General. — Except as otherwise provided in this Code, a corporation organized, authorized,
or existing under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to twenty-five percent (25%) of the taxable
income derived in the preceding taxable year from all sources within the Philippines effective July 1,
2020.
"In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when sales, purchases and other transactions occur.
Their income and expenses for the fiscal year shall be deemed to have been earned and spent
equally for each month of the period.
"The corporate income tax rate shall be applied on the amount computed by multiplying the number
of months covered by the new rate within the fiscal year by the taxable income of the corporation for
the period, divided by twelve.
"(2) Minimum Corporate Income Tax of Resident Foreign Corporations. — A minimum corporate
income tax of two percent (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 taxable under
paragraph (1) of this Subsection: Provided, That effective July 1, 2020 until Ju.ne 303 2023, the rate
shall be one percent (1%).
"SEC. 27. Rates of Income Tax on Domestic Corporations. -
"(1) Imposition of Tax. — A minimum corporate income tax of two percent (2%) of the gross
income as of the end of the taxable yea.r, as defined herein, is hereby i.mposed on a
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: Provided, That effective July 1, 2020 until June 30, 2023, the rate shall
be one percent (1%).
Regular Corporate Income Tax (RCIT) or Minimum Corporate Income Tax

(MCIT), whichever is higher
a. Tax Rate and Tax Base of RCIT starting July 1, 2020: 25%
b. Tax Rate and Tax Base of MCIT (Section 27(E)(1), NIRC, as amended)
- 1% (July 1, 2020 – June 30, 2023);
- 2% (July 1, 2023 onwards);
- When may the taxpayer be liable for MCIT (Section 27(E)(1),
NIRC, as amended)
Section 27 (E)(1)
(E) Minimum Corporate Income Tax on Domestic Corporations.
"(1) Imposition of Tax. — A minimum corporate income tax of two percent (2%) of the gross
income as of the end of the taxable yea.r, as defined herein, is hereby i.mposed on a
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: Provided, That effective July 1, 2020 until June 30, 2023, the rate shall
be one percent (1%).
- Treatment of Excess of MCIT over the RCIT (Section 27(E)(2),
NIRC, as amended);
income tax over the normal income tax as computed under Subsection (A) of this
Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.
- Suspension of Application of MCIT (Section 27(E)(3), NIRC, as

amended)
corporate income tax on any corporation which suffers losses on account of
prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.
- CREBA v. Romulo, G.R. No. 160756, March 9, 2010;

Ruling:
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses
after operations of a corporation or consistent reports of minimal net income render its financial
statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by
corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a
tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated
into the law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major
capital expenditures, the imposition of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation commenced its operations. 25 This grace
period allows a new business to stabilize first and make its ventures viable before it is subjected to
the MCIT.
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income
tax which shall be credited against the normal income tax for the three immediately succeeding
years.
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate business reverses.
c. Offshore Banking Units (OBUs) are subject to RCIT/MCIT
from effectivity from RA No. 11534 (Preferential treatment of
OBUs was removed by RA No. 11534; See RR No. 5-2021);
d. ROHQs are subject to RCIT/MCIT from January 1, 2022;
2. EXCEPTIONS to Sections 28(A)(1) and (2), NIRC, as amended:

a. Gross Philippine Billings (GPB) (Section 28(A)(3)(a) and (b), NIRC, as
amended); Requisites
Section 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings'
as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the 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 the 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 boards 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 Gross Philippine Billings.
- Definition of GPB; Requisites
- For international air-carriers;

- For international shipping;
- CIR v. British Overseas Airways Corporation, G.R. No. L-65773, April
30, 1987;
The source of an income is the property, activity or service that produced the income. For such source to
be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines.
Facts:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review of the Court of Tax Appeals’ decision
setting aside petitioner's assessment of deficiency income taxes against respondent British Overseas
Airways Corporation (BOAC) for the fiscal years 1959 to 1971.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom, and is engaged in the international airline business. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the
Philippines. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although
during the period covered by the assessments, it maintained a general sales agent in the Philippines —
Wamer Barnes and Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC
tickets covering passengers and cargoes.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with
the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount
paid.
The CTA ruled in favor of BOAC citing that the proceeds of sales of BOAC tickets do not constitute BOAC
income from Philippine sources since no service of carriage of passengers or freight was performed by
BOAC within the Philippines and, therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that the place where services
are rendered determines the source.
Issue: Whether revenues derived by BOAC from sales of ticket for air transportation, while having no
landing rights here, constitute income of BOAC from Philippine sources, and accordingly, taxable
Ruling:
The source of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of
supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon
the terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling
public in general embraces within its terms all the elements to constitute it a valid contract, binding
upon the parties entering into the relationship.
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely
directs that the types of income listed therein be treated as income from sources within the Philippines.
A cursory reading of the section will show that it does not state that it is an allinclusive enumeration,
and that no other kind of income may be so considered.
The absence of flight operations to and from the Philippines is not determinative of the source of
income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time
pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ...
which produced the income. Unquestionably, the passage documentations in these cases were sold in
the Philippines and the revenue therefrom was derived from a activity regularly pursued within the
Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo
to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from
the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the
income herein is the Philippines.
- Air Canada v. CIR, G.R. No. 169507, January 11, 2016;

- Association of International Shipping Lines, et. al. v. Secretary of
Finance, G.R. No. 222239, January 15, 2020;
- Reciprocity Clause (RA No. 10378);
- CIR v. Gulf Air Company - Philippine Branch, CTA EB No. 2439,
April 12, 2022;
b. Branch Profit Remittance Tax (BPRT) (Section 28(A)(4), NIRC,
as amended;
(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding,
income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with offshore banking units, including any interest income derived
from foreign currency loans granted to residents, shall be subject to a final income tax at the
rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with said
offshore banking units shall be exempt from income tax.
- Applicability of BPRT
- Composition of BPRT
- Exceptions to BPRT
- Bank of America N.T. and SA v. CA, G.R. No. 103106, July 21, 1994;
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 (then in force) calls for nothing further. The taxpayer
is a single entity, and it should be understandable if, such as in this case, it is the local branch of the
corporation, using its own local funds, which remits the tax to the Philippine Government.
Facts:
Petitioner Bank of America NT & SA is a foreign corporation duly licensed to engage in business in the
Philippines with Philippine branch office at BA Lepanto Bldg., Paseo de Roxas, Makati, Metro Manila. On
July 20, 1982 it paid 15% branch profit remittance tax in the amount of P7,538,460.72 on profit from its
regular banking unit operations and P445,790.25 on profit from its foreign currency deposit unit
operations or a total of P7,984,250.97. The tax was based on net profits after income tax without
deducting the amount corresponding to the 15% tax
Petitioner filed a claim for refund with the Bureau of Internal Revenue of that portion of the payment
which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have
been computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the
amount before profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting
respondent's decision, petitioner filed a petition for review on June 14, 1984 with this Honorable Court
for the recovery of the amount of P1,041,424.03.
The Court of Tax Appeals upheld petitioner bank in its claim for refund. The Commissioner of Internal
Revenue filed a timely appeal to the Supreme Court which referred it to the Court of Appeals following
this Court's pronouncement in Development Bank of the Philippines vs. Court of Appeals, et al. (180
SCRA 609). On 19 September 1990, the Court of Appeals set aside the decision of the Court of Tax
Appeals. Explaining its reversal of the tax court's decision, the appellate court said:
The Court of Tax Appeals sought to deduce legislative intent vis-a-vis the aforesaid law through an
analysis of the wordings thereof, which to their minds reveal an intent to mitigate at least the harshness
of successive taxation. The use of the word remitted may well be understood as referring to that part of
the said total branch profits which would be sent to the head office as distinguished from the total
profits of the branch (not all of which need be sent or would be ordered remitted abroad). If the
legislature indeed had wanted to mitigate the harshness of successive taxation, it would have been
simpler to just lower the rates without in effect requiring the relatively novel and complicated way of
computing the tax, as envisioned by the herein private respondent. The same result would have been
achieved.
Issue: Whether or not petitioner’s argument should be sustained that the 15% branch profit remittance
tax on the basis Section 24(b) (2) (ii) of the National Internal Revenue Code should be assessed on the
amount actually remitted abroad. (NO)
Ruling:
There is absolutely nothing in Section 24(b) (2) (ii), supra, which indicates that the 15% tax on branch
profit remittance is on the total amount of profit to be remitted abroad which shall be collected and
paid in accordance with the tax withholding device provided in Sections 53 and 54 of the Tax Code.
The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax
of fifteen per cent (15%)" — without more. Nowhere is there said of "base on the total amount actually
applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad, which
shall be collected and paid as provided in Sections 53 and 54 of this Code." Where the law does not
qualify that the tax is imposed and collected at source based on profit to be remitted abroad, that
qualification should not be read into the law. It is a basic rule of statutory construction that there is no
safer nor better canon of interpretation than that when the language of the law is clear and
unambiguous, it should be applied as written. And to our mind, the term "any profit remitted abroad"
can only mean such profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is
commonly and popularly accepted and understood. To say therefore that the tax on branch profit
remittance is imposed and collected at source and necessarily the tax base should be the amount
actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the
unmistakable meaning of plain words
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 (then in force) calls for nothing further. The taxpayer
is a single entity, and it should be understandable if, such as in this case, it is the local branch of the
corporation, using its own local funds, which remits the tax to the Philippine Government.
The remittance tax was conceived in an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices and organizing, on the other hand,
subsidiary domestic corporations where at least a majority of all the latter's shares of stock are owned
by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local branches
were made to pay only the usual corporate income tax of 25%-35% on net income (now a uniform 35%)
applicable to resident foreign corporations (foreign corporations doing business in the Philippines).
While Philippine subsidiaries of foreign corporations were subject to the same rate of 25%-35% (now
also a uniform 35%) on their net income, dividend payments, however, were additionally subjected to a
15% (withholding) tax (reduced conditionally from 35%). In order to avert what would otherwise appear
to be an unequal tax treatment on such subsidiaries vis-a-vis local branch offices, a 20%, later reduced to
15%, profit remittance tax was imposed on local branches on their remittances of profits abroad. But
this is where the tax pari-passu ends between domestic branches and subsidiaries of foreign
corporations.
The Solicitor General suggests that the analogy should extend to the ordinary application of the
withholding tax system and so with the rule on constructive remittance concept as well. It is difficult to
accept the proposition. In the operation of the withholding tax system, the payee is the taxpayer, the
person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of
the government for the collection of the tax in order to ensure its payment. Obviously, the amount
thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base.
Since the payee, not the payor, is the real taxpayer, the rule on constructive remittance (or receipt) can
be easily rationalized, if not indeed, made clearly manifest. It is hardly the case, however, in the
imposition of the 15% remittance tax where there is but one taxpayer using its own domestic funds in
the payment of the tax. To say that there is constructive remittance even of such funds would be
stretching far too much that imaginary rule. Sound logic does not defy but must concede to facts.
The Court holds, accordingly, that the written claim for refund of the excess tax payment filed, within
the two-year prescriptive period, with the Court of Tax Appeals has been lawfully made.
- Marubeni Corporation v. CIR, G.R. No. 76753, September 14, 1989;

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 subject to
Branch Profit Remittance Tax.
Facts:
Marubeni Corporation is a Japanese corporation licensed to engage in business in the

Philippines. When the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co. of
Manila were declared, a 10% final dividend tax was withheld from it, and another 15% profit
remittance tax based on the remittable amount after the final 10% withholding tax were paid
to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit for
the amount which it has allegedly overpaid the BIR.
Issues and Ruling:

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 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.
c. Regional Area Headquarters (RAHQ) and Regional Operating

Headquarters (ROHQ) (Section 28(A)(5), NIRC, as amended
by RA No. 11534)
"(5) Regional or Area Headquarters and Regional Operating Headquarters of Multinational

Companies. -
"(a) Regional or area headquarters as defined in Section 22 (DD) shall not be subject to income tax.
"(b) Regional operating headquarters as defined in Section 22 (EE) shall pay a tax of ten percent
(10%) of their taxable income: Provided, That effective January 1, 2022, regional operating
headquarters shall be subject to the regular corporate income tax.
- RAHQ (Section 22(DD), NIRC, as amended);
(DD) The term 'regional or area headquarters' shall mean 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.
- ROHQ (Section 22(EE), NIRC, as amended): 10% of taxable

income; and starting January 1, 2022, RCIT or MCIT, whichever is
higher;
(EE) The term 'regional operating headquarters' shall mean a 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
communications; and business development.
- CIR v. Shinko Electric Industries Co., Ltd., G.R. No. 226287, July 6,
2021
d. Passive Income of RFCs – (Section 28(6), NIRC, as amended);
(6) Regional or Area Headquarters and Regional Operating Headquarters of

Multinational Companies. -
(a) Regional or area headquarters as defined in Section 22(DD) shall not be

subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE) shall pay a

tax of ten percent (10%) of their taxable income.
1.1. Interest Income /Monetary Benefit (Section 28(6)(a), Ibid.);

a. Scope: Philippine Peso Bank Deposits/Foreign Currency Bank
Deposits/ Deposit Substitutes (Section 22(Y), NIRC)/Trust Funds
(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from the
public (the term 'public' means borrowing from twenty (20) or more individual or corporate
lenders at any one time) other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrowers own account, for the purpose of relending
or purchasing of receivables and other obligations, or financing their own needs or the needs
of their agent or dealer. These instruments may include, but need not be limited to bankers'
acceptances, promissory notes, repurchase agreements, including reverse repurchase
agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation and similar instruments
with recourse: Provided, however, That debt instruments issued for interbank call loans with
maturity of not more than five (5) days to cover deficiency in reserves against deposit
liabilities, including those between or among banks and quasi-banks, shall not be considered
as deposit substitute debt instruments.
b. Requirement
c. Tax Rate
d. Banco de Oro v. Republic of the Philippines, G.R. No. 198756,
August 16, 2016 (Resolution on Motion for Reconsideration)
Facts:
The instant case involves the proper tax treatment of the discount or interest income arising
from the PhP 35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury
in October 2001, denominated as the Poverty Eradication and Alleviation Certificates or the PEACe
Bonds. These PhP 35 billion worth PEACe Bonds, upon maturity on October 18, 2011 were bought by
RCBC Capital from the Government at the discounted price of PhP 10.17 billion, which later sold the
same in the secondary markets at its desired price.
Prior to the said date of maturity, the CIR issued BIR Ruling No. 370-2011 (2011 BIR Ruling), declaring
that the PEACe Bonds being deposit substitutes are subject to the 20% FWT. Pursuant to this ruling, the
Secretary of Finance directed the Bureau of Treasury (BTr) to withhold a 20% final tax from the face
value of the PEACe Bonds upon their payment at maturity. The 2011 BIR Ruling reversed the two (2)
previous rulings declaring that the PEACe Bonds are not covered by the provision on deposit substitutes.
Resultantly, fearing smaller returns on the bonds they bought, once drawn against the BTr, herein
petitioner-banks filed these petitions for certiorari, prohibition and/or mandamus seeking, among
others, to: 1. annul Respondent BIR’s Ruling No. 370-2011 and other related rulings of similar tenor and
import, for being unconstitutional and for having been issued without jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdic-tion; 2. prohibit all parties particularly the BTr from
withholding or collecting the 20% FWT from the payment of the face value of the PEACe Bonds; and, 3.
command respondents particularly the BTr to pay the full amount of the face value of the PEACe Bonds.
Issues:
1. Whether the PEACe Bonds are “deposit substitutes” and thus subject to 20% FWT under the
1997 NIRC, following the phraseology of Sec. 22(Y) of the NIRC.
Ruling:
There is a need to determine whether the PEACe Bonds were sold to more than 20 individuals at any
given time. Although the assailed BIR rulings are hereby annulled, the Government is not precluded
from collecting 20% FWT on the sale of PEACe Bonds as provided under the law.
Under Secs. 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 [NIRC], a [FWT] at the rate of 20% is imposed
on interest on any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements. This tax treatment of interest from bank
deposits and yield from deposit substitutes was first introduced in the 1977 [NIRC] through [PD] No.
1739 issued in 1980. Later, [PD] No. 1959, effective... formally added the definition of deposit
substitutes, viz:
“(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own
account, for the purpose of relending or purcha-sing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer. These promissory notes, repurchase agreements,
certificates of assignment or participation and similar instrument with recourse as may be authori-zed
by the [BSP], for banks and non-bank financial intermediaries or by the [SEC] of the Philippines for
commercial, industrial, finance companies and either nonfinancial companies: Provided, however, that
only debt instruments issued for inter-bank call loans to cover deficiency in reserves against deposit
liabilities including those between or among banks and quasi-banks shall not be considered as deposit
substitute debt instruments.” Revenue Regulations No. 17-84, issued to implement [PD] No. 1959,
adopted verbatim the same definition and specifically identified the following borrowings as “deposit
substitutes”:
Under the 1997 [NIRC], Congress specifically defined “public” to mean “twenty (20) or more individual
or corporate lenders at any one time.” Hence, the number of lenders is determi-native of whether a
debt instrument should be considered a deposit substitute and conse-quently subject to the 20% [FWT].
Petitioners contend that “there [is] only one (1) lender (i.e. RCBC) to whom the BTr issued the
Government Bonds.” On the other hand, respondents theorize that the word “any” “indicates that the
period contemplated is the entire term of the bond and not merely the point of origination or
issuance[,]” such that if the debt instruments “were subsequently sold in secondary markets and so on,
in such a way that twenty (20) or more buyers eventually own the instruments, then it becomes
indubitable that funds would be obtained from the ‘public’ as defined in Sec. 22(Y) of the NIRC.” Indeed,
in the context of the financial market, the words “at any one time” create an ambiguity.
The financial market, therefore, is an agglomeration of financial transactions in securities performed by

market participants that works to transfer the funds from the surplus units (or investors/lenders) to
those who need them (deficit units or borrowers).
Thus, from the point of view of the financial market, the phrase “at any one time” for purposes of
determining the “20 or more lenders” would mean every transaction executed in the primary or
secondary market in connection with the purchase or sale of securities.
For debt instruments that are not deposit substitutes, regular income tax applies.
It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under
the 1997 [NIRC] are subject to the regular income tax. The phrase “all income derived from whatever
source” in Chap. VI, Computation of Gross Income, Sec. 32(A) of the 1997 [NIRC] discloses a legislative
policy to include all income not expressly exempted as within the class of taxable income under our
laws. Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the
seller is required to withhold the 20% final income tax on the imputed interest income from the bonds.
1.2 Interest Income – Others (Section 32(A)(4) in relation to

Sections 31 and 28(1) or (2), NIRC, as amended)
2.1. Passive Royalty income (Section 28(6)(a), id.)

a. Requirement;
b. Tax Rates; Preferential Tax Rates
2.2. Royalty Income – Others (including Active Royalty Income)

(Section 32(A)(5) in relation to Sections 31 and 28(1) and (2), id.)
a. CREBA v. Romulo, G.R. No. 160756, March 9, 2010;
b. Iconic Beverages, Inc. v. CIR, CTA EB Nos. 1563 & 1564,
September 18, 2018;
3.1. Income by Depositary Bank under the FCDU (Section 28(6)(b),

id.)
3.1. Intercorporate dividends (par. d., ibid.);
4.1. Sale, exchange or disposition of certain assets (par. c, ibid.) (to

be discussed in a separate topic);

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XIII.

Estate Status Entitlement Liability for Income Taxes

2. With infusion of 2. As Unregistered partnership –

1. Deductions available only to Estate under Judicial Settlement and Irrevocable

2. Tax Treatment of income of Employee’s Trust exempted by law from income

12/05/84 Market Placement P 236,515.32 P 8,751.96 P 1,312.66

10/22/84 — 234,632.75 9,815.89 1,472.38

11/19/84 — 225,886.51 10,629.22 1,594.38

1/23/84 — 344,448.64 17,313.33 2,597.00

12/05/84 — 324,633.81 15,077.44 2,261.52

COMBANK Treasury Bills 2,064.15

ISSUE: WON THE INTEREST INCOME IS SUBJECT TO WITHHOLDING TAX.

* Tax Treatment on the amounts received by the employee-beneficiary

Section 32. Gross Income. -

(3) Gains derived from dealings in property;

(9) Prizes and winnings;

(10) Pensions; and

Exception: If qualified for Section 32(B)(6)(a), NIRC, as amended

(6) Retirement Benefits, Pensions, Gratuities, etc.-

XIV. Corporations in General

1. Corporation; definition (Section 2, Revised Corporation Code);

a. Evangelista v. CIR, G.R. No. L-9996, October 15, 1957;

b. Obillos, Jr. v. CIR, G.R. No. L-68118, October 19, 1985;

d. CIR v. Spouses Magaan, G.R. No. 232663, May 3, 2021;

Section 22. Definitions - When used in this Title:

b. Resident Foreign Corporation (RFC) (Section 28(1), NIRC, as amended);

Section 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation

Provided, however, That a resident foreign corporation shall be granted the

c. Non-Resident Foreign Corporation (NRFC) (Section 28(B)(1), NIRC, as

(B) Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation

1.3 Exempt Corporations;

Section 22. Definitions - When used in this Title:

b. Section 27(C), NIRC, as amended;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

- CIR v. CA, YMCA, G.R. No. 124043, October 14, 1998;

DLSU, a non-stock, non-profit educational institutions, principally anchored its petition

Before fully discussing the merits of the case, we observe that:

We now adopt YMCA as precedent and hold that:

The tax exemption granted by the Constitution to non-stock, non-profit educational

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal

RULING: There is no dispute that St. Luke’s is organized as a non-stock and non-profit

XV. Corporate Income Taxation – DC (Section 27, NIRC, as amended)

1. GENERAL RULE (Section 27(A) and (E), NIRC, as amended by RA No.

"SEC. 27. Rates of Income Tax on Domestic Corporations. -

"(E) Minimum Corporate Income Tax on Domestic Corporations.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of

Whichever is higher of the Regular Corporate Income Tax (RCIT), or

- When may the taxpayer be liable for MCIT (Section 27(E)(1),

"SEC. 27. Rates of Income Tax on Domestic Corporations. –

"(E) Minimum Corporate Income Tax on Domestic Corporations.

- Treatment of Excess of MCIT over the RCIT (Section 27(E)(2),

Section 27. Rates of Income tax on Domestic Corporations. -

(E) Minimum Corporate Income Tax on Domestic Corporations. -

- Suspension of Application of MCIT (Section 27(E)(3), NIRC, as

- CREBA v. Romulo, G.R. No. G.R. No. 160756, March 9, 2010;