INCOME TAX a.

Calendar Year – An accounting period of 12 months ending on the last

Prof. Nadaine Tongco day of December.
Class Notes b. Fiscal Year – An accounting period of 12 months ending on the last day
Nov. 8, 2023 I Wed of any month other than December [Sec. 22(Q), NIRC].
c. Short Period – An accounting period which starts after the first month of
Income Tax is defined as a tax on all yearly profits arising from property, the tax year or ends before the last month of the tax year (less than 12
professions, trades, or offices, or as a tax on the person’s income, months). Instances whereby short accounting period arises:
emoluments, profits and the like. It may be succinctly defined as a tax on i. When a corporation is newly organized.
income, whether gross or net, realized in one taxable year. ii. When a corporation is dissolved. [Sec. 52(c), NIRC]
iii. When a corporation changes its accounting period. [Sec 46, NIRC]
NATURE: Income tax is generally classified as an excise tax. It is not levied iv. When the taxpayer dies.
upon persons, property, funds or profits but upon the right of a person General rule: Taxable income shall be computed based on the taxpayer’s
to receive income or profits. annual accounting period, which may be fiscal year or
calendar year
A. Classification of Taxpayers Exception: Taxable income shall be computed based on the basis of
Sec. 22 & 23 NIRC calendar year only:
a. If the taxpayer's annual accounting period is other than a fiscal year;
Definition of a Taxpayer (Sec. 22(N), NIRC) b. If the taxpayer has no annual accounting period;
c. If the taxpayer does not keep books of accounts; or
N) The term 'taxpayer’ means any person subject to tax imposed d. If the taxpayer is an individual [Sec. 43, NIRC].
by this Title.

Definition of a Person (Sec. 22(A), NIRC)

Source Kinds of Income/IT
(A) The term 'person’ means an individual, a trust, estate or of Income
corporation. Taxpayer Within Without 24(A) 24(B) 24(C) 24(D)
PH PH
Who is a “Person liable to tax” RC / / NIT FWT FWT FWT
NRC / X NIT FWT FWT FWT
Individuals, corporations, estates, trusts RA / X NIT FWT FWT FWT
NRAETB / X NIT FWT FWT FWT
f. Taxable Period NRANETB / X GIT GIT FWT FWT
"Taxable year" means the calendar year, or the fiscal year ending during DC / / NIT FWT FWT FWT
such calendar year, upon the basis of which the net income is computed. RFC / X NIT FWT FWT X
Taxable year includes, in the case of return made for a fractional part of a
NRFC / X GIT GIT FWT X
year under the provisions of Title II (Tax on Income), the period for which
such return is made [Sec.
22 (P), NIRC].
 SECTION 2. Natural-born citizens are those who are citizens of the
Individuals (Citizens/Aliens) Philippines from birth without having to perform any act to acquire or
perfect their Philippine citizenship. Those who elect Philippine citizenship
Citizens (Resident/Non-resident/OFW) in accordance with paragraph (3), Section 1 hereof shall be deemed
Sec. 23(A-D), NIRC natural-born citizens.

SEC. 23. General Principles of Income Taxation in the Philippines. -

Except when otherwise provided in this Code: Aliens (Resident/Non-resident)
o Resident Alien
(A) A citizen of the Philippines residing therein is taxable on all - Secs. 22(F), 24(B), NIRC
income derived from sources within and without the Philippines;
(F) The term 'resident alien' means an individual whose residence is within
the Philippines and who is not a citizen thereof.
(B) A nonresident citizen is taxable only on income derived from
sources within the Philippines;
- Sec. 5, Revenue Regulations No. 2
RR 2-1940 or the Income Tax Regulations
(C) An individual citizen of the Philippines who is working and deriving
revenueregulations: REVENUE REGULATIONS NO. 02-40 INCOME
income from abroad as an overseas contract worker is taxable only on
income derived from sources within the Philippines: Provided, That a
TAX REGULATIONS (PART 1) (taxbir.blogspot.com)
seaman who is a citizen of the Philippines and who receives compensation
for services rendered abroad as a member of the complement of a vessel o Non-Resident Alien (engaged in trade or business/not engaged)
engaged exclusively in international trade shall be treated as an overseas
contract worker; Non-Resident Alien Engaged in Trade or Business
(D) An alien individual, whether a resident or not of the Philippines, is - Secs. 22(G), 25(A), NIRC
taxable only on income derived from sources within the Philippines;
SEC. 25. Tax on Nonresident Alien Individual. – (A) Nonresident Alien
Secs. 1 and 2, Art. IV, 1987 Constitution Engaged in trade or Business Within the Philippines. –

Under Sec. 1, Article IV of the Philippine, Constitution, the following are (1) In General. - A nonresident alien individual engaged in trade or business
citizens of the Philippines: in the Philippines shall be subject to an income tax in the same manner as
- an individual citizen and a resident alien individual, on taxable income
1. Those who are citizens of the Philippines at the time of the adoption of received from all sources within the Philippines. A nonresident alien
the 1987 Philippine Constitution; individual who shall come to the Philippines and stay therein for an
2. Those whose fathers or mothers are citizens of the Philippines; aggregate period of more than one hundred eighty (180) days during any
3. Those born before January 17, 1973, of Filipino mothers, who elect calendar year shall be deemed a 'nonresident alien doing business in the
Philippine citizenship upon reaching the age of majority; Philippines'. Section 22 (G) of this Code notwithstanding.
4. Those who are naturalized in accordance with law.
- Revenue Regulations 2-2021
Non-Resident Alien Not Engaged in Trade or Business
- Secs. 25(B), NIRC
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within
the Philippines.- There shall be levied, collected and paid for each taxable
year upon the entire income received from all sources within the
Philippines by every nonresident alien individual not engaged in trade or
business within the Philippines as interest, cash and/or property dividends,
rents, salaries, wages, premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual or periodic or casual
gains, profits, and income, and capital gains, a tax equal to twenty-five
percent (25%) of such income. Capital gains realized by a nonresident alien
individual not engaged in trade or business in the Philippines from the sale
of shares of stock in any domestic corporation and real property shall be
subject to the income tax prescribed under Subsections (C) and (D) of
Section 24.
CORPORATIONS (DC, RFC, NRFC) them, supplemented by the provisions of this Code, insofar as they are
RCC: "an artificial being created by operation of law applicable.
having the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence". RR NO. 5 - 2021.pdf (bir.gov.ph)

Sec. 22 (B),(H),(I) NIRC Section 3(d) R.A. No. 7042, Foreign Investments Act (FIA)

(B) The term 'corporation' shall include one person corporations , d) the phrase “doing business” shall include soliciting orders, service
partnerships, no matter how created or organized, joint-stock companies, contracts, opening offices, whether called “liaison” offices or branches;
joint accounts (cuentas en participacion), associations, or insurance appointing representatives or distributors domiciled in the Philippines or
companies, but does not include general professional partnerships and a who in any calendar year stay in the country for a period or periods totaling
joint venture or consortium formed for the purpose of undertaking one hundred eighty (180) days or more; participating in the management,
construction projects or engaging in petroleum, coal, geothermal and other supervision or control of any domestic business, firm, entity or corporation
energy operations pursuant to an operating consortium agreement under a in the Philippines; and any other act or acts that imply a continuity of
service contract with the Government. 'General professional partnerships’ commercial dealings or arrangements, and contemplate to that extent the
are partnerships formed by persons for the sole purpose of exercising their performance of acts or works, or the exercise of some of the functions
common profession, no part of the income of which is derived from normally incident to, and in progressive prosecution of, commercial gain or
engaging in any trade or business. of the purpose and object of the business organization: Provided, however,
That the phrase “doing business” shall not be deemed to include mere
(H) The term 'resident foreign corporation' applies to a foreign corporation investment as a shareholder by a foreign entity in domestic corporations
engaged in trade or business within the Philippines. duly registered to do business, and/or the exercise of rights as such
investor; nor having a nominee director or officer to represent its interests
(I) The term 'nonresident foreign corporation' applies to a foreign in such corporation; nor appointing a representative or distributor
corporation not engaged in trade or business within the Philippines. domiciled in the Philippines which transacts business in its own name and
for its own account.
Sec 3 & 4 Revised Corpo Code
Partnerships (Arts. 1767-1769, New Civil Code)
SEC. 3. Classes of Corporations. – Corporations formed or organized under
this Code may be stock or nonstock corporations. Stock corporations are
those which have capital stock divided into shares and are authorized to Article 1767. By the contract of partnership two or more persons bind
distribute to the holders of such shares, dividends, or allotments of the themselves to contribute money, property, or industry to a common fund,
surplus profits on the basis of the shares held. All other corporations are with the intention of dividing the profits among themselves.
nonstock corporations.
Two or more persons may also form a partnership for the exercise of a
SEC. 4. Corporations Created by Special Laws or Charters. – Corporations profession. (1665a)
created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to
Article 1768. The partnership has a juridical personality separate and
distinct from that of each of the partners, even in case of failure to comply Lorenzo Ona v. CIR, G.R. No. L-19342, May 25, 1972
with the requirements of article 1772, first paragraph. (n)
Julia Bunales died in 1944, leaving her five children and her surviving
Article 1769. In determining whether a partnership exists, these rules shall spouse, Lorenzo, as her heirs. - Bunales died in 1944, and the project
apply: partition of her estate was approved in 1949.
The project of partition of the properties inherited were approved.
(1) Except as provided by article 1825, persons who are not HOWEVER, no attempt was made to divide the properties listed. Instead,
partners as to each other are not partners as to third persons; the properties remained under the management of Lorenzo, who used said
properties in business by leasing or selling them and investing the income
derived and the proceeds from the salesin real properties and securities. -
(2) Co-ownership or co-possession does not of itself establish a
As a result, petitioners' properties and investments gradually increased
partnership, whether such-co-owners or co-possessors do or do
from P105,450.00 in 1949 to P480,005.20 in 1956. - The income derived
not share any profits made by the use of the property;
from the investments and properties included profits from installment
sales of subdivided lots, profits from sales of stocks, dividends, rentals and
(3) The sharing of gross returns does not of itself establish a
interests. - Every year, petitioners returned for income tax purposes their
partnership, whether or not the persons sharing them have a joint
shares in the net income derived from the properties, securities, or
or common right or interest in any property from which the
transactions involving them. However, they did not actually receive their
returns are derived;
shares in the yearly income. - Lorenzo, their father, continued to be the one
to manage these and invested the income. - The Commissioner of Internal
(4) The receipt by a person of a share of the profits of a business is Revenue (CIR) then decided that petitioners formed an unregistered
prima facie evidence that he is a partner in the business, but no partnership and was therefore subject to corporate income tax in
such inference shall be drawn if such profits were received in accordance with the Tax Code for years 1956 and 1957.
payment:
SC HELD: Unregistered partnership
(a) As a debt by installments or otherwise;
Apparently, at the start, or in the years 1944 to 1954, the respondent CIR
(b) As wages of an employee or rent to a landlord; did treat petitioners as co-owners, not liable to corporate tax, and it was
only from 1955 that he considered them as having formed an unregistered
(c) As an annuity to a widow or representative of a partnership.
deceased partner;
The properties remained under the management of Lorenzo who used said
(d) As interest on a loan, though the amount of payment properties in business by leasing or selling them and investing the income
vary with the profits of the business; derived and the proceeds from the sales in real properties and securities,"
as a result of which said properties and investments steadily increased
yearly from P87,860.00 in "land account" and P17,590.00 in "building
(e) As the consideration for the sale of a goodwill of a
account" in 1949 to P175,028.68 in "investment account," P135.714.68 in
business or other property by installments or otherwise.
"land account" and P169,262.52 in "building account" in 1956. - This would
then mean that the petitioners never actually received any share of the Gesselschaft (Munich): (1) Quota Share Reinsurance Treaty; (2) Surplus
income from Lorenzo. Instead, they allowed him to use the shares as part Reinsurance Treaty. - The reinsurance treaties required Afisco et al. to form
of the common fund of their ventures. - This would then mean that a pool –– which they did. - The pool of machinery insurers submitted a
petitioners did not merely limit themselves to holding the properties financial statement and filed an "Information Return of Organization
inherited by them. - The Court held that the petitioners formed an Exempt from Income Tax" for the year ending in 1975. - Based on this, the
unregistered partnership within the purview of the provisions of the Tax CIR made the following assessments: (1) Deficiency corporate tax →
Code. - The moment petitioners allowed the incomes from their respective P1,843,273.60. (2) Withholding taxes for dividends paid to–– (a) Munich →
shares of the inheritance and the inherited properties themselves used by P1,768,799.39. (b) Afisco et al. → P89,438.68. - Afisco et al. protested the
Lorenzo as a common fund, with the intention of deriving profit to be assessments. → CIR denied. - [ASSAILED CA DECISION]: (1) The pool of
shared by them proportionally, this was already tantamount to actually machinery insurers was a partnership taxable as a corporation, and that
contributing such incomes to a common fund and forming an the latter's collection of premiums on behalf of its members, the ceding
unregistered partnership. companies, was taxable income. (2) Prescription did not bar the BIR from
collecting the taxes due, because the taxpayer cannot be located at the
For tax purposes, the co-ownership of inherited properties is automatically address given in the information return filed.
converted into an unregistered partnership the moment the said common
properties and/or the incomes derived are used as a common fund with SC HELD: The pool was a partnership or association subject to tax as a
intent to produce profits for the heirs in proportion to their heirs as corporation.
determined in a project partition.
REASON: From the moment of partition, the heirs are entitled already to PET ARGUED: The reinsurance policies were written by them "individually
their respective definite shares of the estate and the incomes, for them to and separately," and their liability was limited to the extent of their
manage and dispose of as exclusively his own, and, accordingly he becomes allocated share in the original risks thus reinsured.
liable individually for all taxes.
- If after the partition, he allows his share to be held in common under a (1) They, the reinsurers, did not share the same risk or solidary liability; (2)
single management to be used with the intent of making profit, there can There was no common fund; (3) The executive board of the pool did not
be no doubt that, even if no document or instrument were executed for exercise control and management of its funds, unlike the board of directors
the purpose, for tax purposes, at least, an unregistered partnership is of a corporation; and (4) The pool or clearing house "was not and could not
formed which is what happened ITCAB. possibly have engaged in the business of reinsurance from which it could
have derived income for itself."
The income derived from inherited properties may be considered as
individual income of the heirs as long as inheritance is not distributed, but Art. 1767, NCC Requisites:
the moment their shares are used to make profits, the income from such (1) Mutual contribution to a common stock; and
shares should be considered taxable income of an unregistered (2) A joint interest in the profits.
partnership. - In other words, a partnership is formed when persons contract "to devote
to a common purpose either money, property, or labor with the intention
Afisco Insurance Corp. v. CIR, G.R.No. 112675, Jan. 25, 1999 of dividing the profits between themselves."
- Meanwhile, an association implies associates who enter into a "joint
Petitioners (Afisco et al.) are 41 non-life insurance corporations. they enterprise . . . for the transaction of business."
entered into two reinsurance treaties with Munchener Ruckversicherungs-
ITCAB, the ceding companies entered into a Pool Agreement or an facilities. However, the president for both companies was Max Blouse.
association that would handle all the insurance businesses covered under During the war, the companies ceased operations. After liberation, Martin
their reinsurance treaties with Munich. Olson then resigned as manager of Laguna and Joseph Benedict was
appointed Manager of both companies. The head office of the Laguna Bus
The following indicates a partnership or an association covered by Sec. 24, was also made the main office of both corporations. The placing of the two
NIRC: companies under one sole management was made by Max Blouse, by
(1) The pool has a common fund, consisting of money and other valuables virtue of the authority granted him by resolution of the Board of Directors
that are deposited in the name and credit of the pool. of the Laguna Bus and ratified by the boards of the two companies in their
This common fund pays for the administration and operation expenses of own respective resolutions. According to Benedict, the purpose of the joint
the pool. management was to economize overhead expenses and save on expenses
(2) The pool functions through an executive board, which resembles the (I.e. salaries, offices, etc.) Pursuant to this joint management, at year-end,
board of directors of a corporation, composed of one representative for their gross receipts and expenses were tallied, and the resulting net profits
each of the ceding companies. were evenly split. Each company incorporated its 50% share into their
(3) While the pool itself is not a reinsurer and does not issue any insurance individual books of accounts, prepared separate income tax returns, and
policy, its work is indispensable, beneficial and economically useful to the paid their respective income taxes separately. However, the Collector wrote
business of the ceding companies and Munich. - Without the pool, they the bus companies that there was due from them the amount of
would not have received their premiums. - The ceding companies share "in P422,210.89 as deficiency income tax under the theory that the Joint
the business ceded to the pool" and in the "expenses" according to a Emergency Operation was a corporation distinct from the two respondent
"Rules of Distribution" annexed to the Pool Agreement. - Profit motive or companies, as defined in section 84 (b), and so liable to income tax under
business is, therefore, the primordial reason for the pool's formation. - The section 24, both of the National Internal Revenue Code. The CTA disagreed
fact that the pool does not retain any profit or income does not obliterate with the CIR and favored the respondents.
an antecedent fact, that of the pool being used in the transaction of
business for profit. - Their association or coaction was indispensable to the The Court reversed the decision of the CTA and found that the Joint
transaction of the business. Emergency Operation or sole management or joint venture in this case falls
under the provisions of section 84 (b) of the NIRC, and consequently, it is
There is no double taxation.6 - The pool is a taxable entity distinct from liable to income tax as a corporation.
the individual corporate entities of the ceding companies. - The tax on its
income is obviously different from the tax on the dividends received by the The Court cited the case of Evangelista v. CIR where it ruled that the Tax
said companies. The tax exemptions claimed by Afisco et al. cannot be Code defined the term "corporation" as including partnerships, no matter
granted, since their entitlement thereto remains unproven and how created or organized, thereby indicating that "a joint venture need
unsubstantiated. not be undertaken in any of the standard forms, or in conformity with the
usual requirements of the law on partnerships, in order that one could be
- CIR v. Batangas Tayabas Bus Co., 102 Phil 822 deemed constituted for purposes of the tax on corporations." ITCAB, the
Respondent companies are two distinct and separate corporations engaged 2 companies conducted businesses as though they are one entity. The two
in the business of land transportation. Respondent Batangas was managed companies contributed money to a common fund to pay the salaries of
by Joseph Benedict while Laguna Bus was managed by Martin Olson. Each their respective personnel and the maintenance and operation of their
company also kept and maintained separate books, fleets of buses, repair shop in common + also used to buy spare parts and equipment.
management, personnel, maintenance and repair shops, and other Then, at year end, they’d deduct their pooled gross expenses from their
merged gross income and divide the merged net profit equally. This Jr., supra]
practice, according to the Court, is arbitrary under the income tax law, 2 petitions were consolidated assailing the constitutionality of RA 7596
considering that the operations of both entities are different, and many (aka Simplified Net Income Taxation Scheme/SNIT) amending provisions of
factors enter into their individual operation. Hence, their respective gross the National Internal Revenue Regulations No. 2-93. The first petition
income/expenses cannot, at the end of each year, be equal or even asserted that the enactment of Republic Act No. 7496 violates provisions of
approach equality. CLEARLY, while the two companies formed a Joint the constitution while the second alleges that respondents have exceeded
Emergency Operation without establishing a formal legal entity, they their rule-making authority in applying SNIT to general professional
operated their business affairs as if they were a single entity or partnership, partnerships in implementing section 6 of Revenue Regulations No. 2-93.
resulting in substantial cost savings and profits. Pursuant to the foregoing,
the respondents were ordered to pay the amount of the reassessment "Sec. 6 General Professional Partnership — The general professional
made by the Collector of Internal Revenue before the Tax Court. partnership (GPP) and the partners comprising the GPP are covered by R.A.
No. 7496. Thus, in determining the net profit of the partnership, only the
General Professional Partnership direct costs mentioned in said law are to be deducted from partnership
- Secs. 22(B), 26, 73(D), NIRC income. Also, the expenses paid or incurred by partners in their individual
'General professional partnerships’ are partnerships formed by persons for capacities in the practice of their profession which are not reimbursed or
the sole purpose of exercising their common profession, no part of the paid by the partnership but are not considered as direct cost, are not
income of which is derived from engaging in any trade or business. deductible from his gross income."

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A WON respondents have exceeded their authority in promulgating section
general professional partnership as such shall not be subject to the income 6 of Revenue Regulations No. 2-93 to carry out RA 7496 - No.
tax imposed under this Chapter. Persons engaging in business as partners in
a general professional partnership shall be liable for income tax only in their A general professional partnership, unlike an ordinary business partnership
separate and individual capacities. (which is treated as a corporation for income tax purposes and so subject
For purposes of computing the distributive share of the partners, the net to the corporate income tax), is not itself an income taxpayer. There is no
income of the partnership shall be computed in the same manner as a distinction in income tax liability between a person who practices his
corporation. profession alone or individually and one who does it through partnership
Each partner shall report as gross income his distributive share, actually or (whether registered or not) with others in the exercise of a common
constructively received, in the net income of the partnership. profession. The phrase "income taxpayers" is an all embracing term used in
the Tax Code, and it practically covers all persons who derive taxable
Tan v. Del Rosario and CIR, G.R.No. L-109289, October 3, 1994 income. Partnerships, no matter how created or organized, are subject to
income tax (and thus alluded to as "taxable partnerships"). For purposes
A global tax system is one where the tax treatment views indifferently the of the above categorization, are by law assimilated to be within the
tax base and generally treats in common all categories of taxable income context of, and so legally contemplated as, corporations. SNIT is not
of the taxpayer. [Tan v. Del intended or envisioned to cover corporations and partnerships which are
Rosario, Jr., G.R. No. 109289 (1994)] independently subject to the payment of income tax. "Exempt
A schedular approach in taxation is one where the income tax treatment partnerships” are not similarly identified as corporations nor even
varies and is made to depend on the kind or category of taxable income of considered as independent taxable entities for income tax purposes.
the taxpayer. [Tan v. Del Rosario, Here, the partners themselves, not the partnership, are liable for the
payment of income tax in their individual, capacity computed their
respective and distributive shares of profits. Although the partnership is
still obligated to file an income tax return mainly for administration and
data. Section 6 of Revenue Regulations No. 2-93 did not alter, but merely
confirmed, the above standing rule as now so modified by Republic Act No.
7496 on basically the extent of allowable deductions applicable to all
individual income taxpayers on their non-compensation income.

It would be difficult to accept petitioner's view that the amendatory law

should be considered as having now adopted a gross income, instead of
as having still retained the net income, taxation scheme ● The allowance
for deductible items, it is true, may have significantly been reduced by the
questioned law in comparison with that which has prevailed prior to the
amendment ○ limiting, however, allowable deductions from gross income
is neither discordant with, nor opposed to, the net income tax concept

What may instead be perceived to be apparent from the amendatory law

is the legislative intent to increasingly shift the income tax system
towards the schedular approach in the income taxation of individual
taxpayers and to maintain, by and large, the present global treatment on
taxable corporations ○ We certainly do not view this classification to be
arbitrary and inappropriate.
Obillos v. CIR, L-68118, Oct. 29, 1985
Co-ownership Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on 2 lots located
Art. 484, Civil Code at Greenhills, San Juan. The next day he transferred his rights to his four
children, the petitioners, to enable them to build their residences.
Article 484. There is co-ownership whenever the ownership of an Presumably, the Torrens titles issued to them would show that they were
undivided thing or right belongs to different persons. In default of co-owners of the 2 lots. A year after, the petitioners resold them to the
contracts, or of special provisions, co-ownership shall be governed by the Walled City Securities Corporation and Olga Cruz Canda. They derived from
provisions of this Title. the sale a total profit of P134,341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half
thereof.

The CIR subsequently required the petitioners to pay corporate income tax,
in addition to individual income tax on their shares thereof. The
Commissioner acted on the theory that the four petitioners had formed an
unregistered partnership or joint venture.
However, the SC disagreed with the CIR. Article 1769(3) of the Civil Code Proprietary educational institutions and hospitals which are nonprofit shall
provides that "the sharing of gross returns does not of itself establish a pay a tax of ten percent (10%) on their taxable income except those covered
partnership, whether or not the persons sharing them have a joint or by Subsection (D) hereof: Provided, That beginning July 1, 2020 until June
common right or interest in any property from which the returns are 30, 2023, the tax rate herein imposed shall be one percent (1%): Provided,
derived". In this provision, there must be an unmistakable intention to further, That [24] if the gross income from 'unrelated trade, business or other
form a partnership or joint venture. This is not present ITCAB. Their original activity' exceeds fifty percent (50%) of the total gross income derived by
purpose was to divide the lots for residential purposes. If later on they such educational institutions or hospitals from all sources, the tax
found it not feasible to build their residences on the lots because of the prescribed in Subsection (A) hereof shall be imposed on the entire taxable
high cost of construction, then they had no choice but to resell the same to income. For purposes of this Subsection, the term 'unrelated trade, business
dissolve the co-ownership. The division of the profit was merely incidental or other activity' means any trade, business or other activity, the conduct of
to the dissolution of the co-ownership which was in the nature of things a which is not substantially related to the exercise or performance by such
temporary state. educational institution or hospital of its primary purpose or function.
'Proprietary' means a private hospital [21] or any private school maintained
Joint Venture; Exempt v. Taxable and administered by private individuals or groups with an issued permit to
- Revenue Regulation No. 10-2012, June 1, 2012 operate from the Department of Education (DepEd), [21] or the Commission
Regulations are hereby promulgated to properly implement exclusion to on Higher Education (CHED), or the Technical Education and Skills
the definition of what is considered as a corporation pursuant to Sec 22 (B) Development Authority (TESDA), as the case may be, in accordance with
of the NIRC of 1997, in particular, those concerning joint venture existing laws and regulations.
undertakings involving construction projects.
Section 3. JOINT VENTURES NOT TAXABLE AS CORPORATIONS. A joint - Revenue Regulations 3-2022 (1% from 2020 to 2023)
venture or consortium formed for the purpose of undertaking construction
projects not considered as corporation under Sec 22 of the NIRC of 1997 as CIR v. St. Luke’s Medical Center, Inc., G.R. Nos. 195909 and 195960,
amended, should be: (1) for the undertaking of a construction project; and September 26, 2012
(2) should involve joining or pooling of resources by licensed local St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a
contracts; that is, licensed as general contractor by the Philippine nonstock and non-profit corporation. BIR assessed St. Luke's deficiency
Contractors Accreditation Board (PCAB) of the Department of Trade and taxes amounting to P76,063,116.06 for 1998, comprised of deficiency
Industry (DTI); (3) these local contractors are engaged in construction income tax, value-added tax, withholding tax on compensation and
business; and (4) the Joint Venture itself must likewise be duly licensed as expanded withholding tax. The basis for this assessment was Section 27(B)
such by the Philippine Contractors Accreditation Board (PCAB) of the of the NIRC which partly states that “proprietary educational institutions
Department of Trade and Industry (DTI) and hospitals which are nonprofit shall pay a tax of ten percent (10%) on
their taxable income…”
• Special Corporations
o Private Educational Institutions and Non-profit Hospitals In response, St. Luke's filed an administrative protest with the BIR against
- Sec. 27(B), NIRC the deficiency tax assessments, to which BIR did not respond. Hence, the
appeal to the CTA. St Luke’s argues, among others, that it is a non-stock and
(B) Proprietary Educational Institutions and Hospitals.– non-profit institution for charitable and social welfare purposes under
Section 30 (E) and (G) of the NIRC, and therefore should be exempt from
tax. Furthermore, the legislative intent of introducing Section 27 (B) was it does not distribute any of its profits to its members and such profits are
only to remove the exemption for "proprietary non-profit" hospitals. reinvested pursuant to its corporate purposes. Hence, St. Luke’s income will
only be taxed at a preferential tax rate of 10%, pursuant to Section 27(B).
The CTA partially granted St. Luke’s petition. It canceled the deficiency
assessed by the BIR based on the 10% tax rate under Section 27 (B) of the o Government-owned and controlled corporations
NIRC because such was not applicable to St. Luke’s.1 However, it must pay - Sec. 27(C), NIRC
deficiency income tax arising from income that was not from charitable (C) Government-owned or –Controlled Corporations, Agencies or
activities. Instrumentalities. - The provisions of existing special or general laws to the
contrary notwithstanding, all corporations, agencies, or instrumentalities
The Court modified the CTA ruling and held that St. Luke’s is liable to pay owned or controlled by the Government, except the Government Service
deficiency income tax based on the 10% preferential income tax rate under Insurance System (GSIS), the Social Security System (SSS), the Home
Section 27(B) of the NIRC. There is no dispute that St. Luke's is organized as Development Mutual Fund (HDMF) [25], the Philippine Health Insurance
a non-stock and non-profit charitable institution. However, this does not Corporation (PHIC), and the local water districts [26] shall pay such rate of
automatically mean that St. Luke’s is exempt from paying taxes. This is tax upon their taxable income as are imposed by this Section upon
because it being a charitable institution only refers to its organization. corporations or associations engaged in a similar business, industry, or
Being a non-stock and non-profit corporation does not, by this reason activity.
alone, completely exempt an institution from tax.
Estates and Trusts.
An institution cannot use its corporate form to prevent its profitable Sec 60, NIRC
activities from being taxed. In order to be exempt from income tax, Section Income tax imposed on individuals shall apply to income of estates or of
30(E) requires that a charitable institution be: (1) a non-stock corporation any kind of property held in trust. [Sec. 60 (A), NIRC]
or association, (2) organized exclusively for charitable purposes, (3) Exceptions: (1) Employee’s trust [Sec. 60, NIRC];
operated exclusively for charitable purposes, and (4) No part of its net (2) Revocable trusts [Sec. 63, NIRC];
income or asset shall belong to or inure to the benefit of any member, (3) Income for Benefit of Grantor [Sec. 64, NIRC]
organizer, officer or any specific person. Section 30(G) further requires that Taxable income of the estate or trust is computed in the same manner as
the institution be "operated exclusively" for social welfare. an individual, subject to certain special rules [Sec 61, NIRC]
Estate
In the instant case, St. Luke's had total revenues of P1.73B from services to Refers to all the property, rights and obligations of a person which are not
paying patients. It cannot be disputed that a hospital which receives extinguished by his death and those which have accrued thereto since the
approximately P1.73 billion from paying patients is not an institution opening of the succession. [DE LEON citing Arts. 776 and 781 NCC]
"operated exclusively" for charitable purposes under Section 30(E). Clearly, Trust
revenues from paying patients are income received from "activities An arrangement created by will or an agreement under which legal title to
conducted for profit." Hence, the Court finds that St. Luke's is a corporation property is passed to another for conservation or
that is not "operated exclusively" for charitable or social welfare purposes investment with the income therefrom and ultimately the corpus
insofar as its revenues from paying patients are concerned. St. Luke's fails (principal) to be distributed in accordance with the directions of
to meet the requirements under Section 30 (E) and (G) of the NIRC to be the creator as expressed in the governing
completely tax exempt from all its income. Nonetheless, it remains a instrument. [DE LEON]
proprietary non-profit hospital under Section 27 (B) of the NIRC as long as
B. RESIDENCE If he lives in the Philippines and has no
definite intention as to his stay, he is a
• How is residence defined? Meaning of “Engaged in Trade or Business” resident. A mere floating intention
indefinite as to time, to return to
The term ‘residence’ is to be understood not in its common acceptation as another country is not sufficient to
referring to ‘dwelling’ or ‘habitation,’ but rather to ‘domicile’ or legal constitute him a transient.
residence, that is, ‘the place where a party actually or constructively has b. Definite Intention = TRANSIENT:
his permanent home, where he, no matter where he may be found at any One who comes to the Philippines for a
given time, eventually intends to return and remain (animus manendi) definite purpose, which in its nature
may be promptly accomplished, is a
Resident citizen - is a citizen of the Philippines who has a transient.
permanent home or place of abode in the Philippines to which Exception: Definite Intention but such cannot
he/she intends to return whenever he/she is absent for business be promptly accomplished; If his purpose is of
or pleasure. such nature that an extended stay may be
Non-resident Citizens (NRC) [Sec. 22 (E), necessary for itsnot accomplishment, and thus
NIRC] the alien makes his home temporarily in the
1. PH citizen who establishes to the satisfaction of the CIR the fact of his Philippines, then he becomes a resident.
physical presence abroad with a definite intention to reside therein.
2. PH citizen who leaves the Philippines during the taxable year to reside 2. Non-resident Alien
abroad, either as an immigrant or for employment on a permanent basis. a. Engaged in trade or business within
3. PH citizen who works and derives income from abroad and whose the Philippines - If the aggregate
employment thereat requires him to be physically present abroad most of period of his stay in the Philippines is
the time during the taxable year. To be considered physically present more than 180 days during any
abroad most of the time during the taxable year, a contract worker must calendar year. [Sec. 25(A)(1), NIRC]
have been outside the PH for not less than 183 days during such taxable b. Not engaged in trade or business
year. within the Philippines - If the
[BIR R.R. 1-79, Sec. 2] aggregate period of his stay in the
4. PH citizen previously considered as a non-resident citizen and who Philippines does not exceed 180 days
arrives during the taxable year to reside permanently in the PH - Treated as
NRC with respect to his income derived DOING BUSINESS – implies a continuity of
from sources abroad until his arrival in the PH commercial dealings and arrangements, and
contemplates, to that extent, the performance
ALIENS of acts or works or the exercise of some of the
1. Resident Alien – An alien actually present functions normally incident to, and in
in the Philippines who is not a mere progressive prosecution of commercial gain or
transient or sojourner is a resident for for the purpose and object of the business
income tax purposes. organization. [CIR v. BOAC, G.R. No. L-65773
a. No/Indefinite Intention = RESIDENT: (1987)]
Includes: A corporation which is not domestic. [Sec. 22
1. soliciting orders, service contracts (D), NIRC]
2. opening offices, whether called "liaison" 1. Resident foreign corporations – Foreign corporation engaged in trade or
offices or branches business
3. appointing representatives or distributors within the Philippines. [Sec. 22 (H), NIRC]
domiciled in the Philippines or who in any 2. Non-resident foreign corporations –
calendar year stay in the country for a Foreign corporation not engaged in trade
period totaling 180 days or more or business within the Philippines. [Sec. 22
4. participating in the management, (I), NIRC]
supervision or control of any domestic
business, firm, entity or corporation in the Garrison vs. Court of Appeals, G.R. Nos. L-44501-05, 19 July 1990;
Philippines.
Excludes: ALL the petitioners are US citizens, who entered this country under Sec.
1. mere investment as a shareholder in 9(a) of the PH Immigration Act of 1940, as amended. • ALL of them are
domestic corporations, and/or the exercise presently employed in the US Naval Base, Olongapo City. • ALL of them
of rights as such investor received separate notices from Ladislao Firmacion, District Revenue
2. having a nominee director or officer to Officer, stationed at Olongapo City, informing them they had not filed their
represent its interests in such corporation respective income tax returns for 1969, as required by Sec. 45 of the NIRC.
3. appointing a representative or distributor
domiciled in the Philippines which ALL of them were directed to file the said returns within 10 days from
transacts business in its own name and for receipt of notice. • However, they refused to file their income tax returns,
its own account. [RA 7042, Foreign claiming that they are NOT resident aliens BUT only special temporary
Investments Act] visitors, having entered the country under Sec. 9(a) of the PH Immigration
Act of 1940, as amended. • They also claimed exemption from filing the
Law of Incorporation Test return in PH by virtue of the provisions of Art. XII, par 2 of the US-RP
To determine the residence of a corporation, Military Bases Agreement.
the Philippines adopted the Law of
Incorporation test under which a corporation is They argue that the CA was erred: 1. To consider the “physical or bodily
considered domestic if it is organized or presence” in the country as “sufficient by itself to qualify them as resident
created in accordance with or under the laws of aliens despite the fact that they were NOT ‘residents’ of the PH
the Philippines and foreign if it is organized or immediately before their employment by the US Government at Subic
created in accordance with or under the laws of Naval Base and their presence here during the period concerned was
a foreign country. [MAMALATEO] dictated by their respective work. 2. To refuse to recognize the “tax-
Domestic corporations exempt status under the pertinent provisions of the RP-US Military Bases
A corporation created and organized in the Agreement.”
Philippines or under its laws. [Sec. 22 (C),
NIRC] SC HELD: Exempt from paying but not from filing
Foreign corporations
Sec. 45 of the NIRC "SEC. 45. — Individual returns . (a) Requirements. — (1) Bases Agreement, it exists only as regards income derived from their
The following individuals are required to file an income tax return, if they employment "in the Philippines in connection with construction,
have a gross income of at least One Thousand Eight Hundred Pesos for the maintenance, operation or defense of the bases;" it does not exist in
taxable year; . . . (b) If alien residing in the Philippines, regardless of respect of other income.
whether the gross income was derived from sources within or outside the
Philippines." • In other words, so that American nationals residing in the country may
be relieved of the duty to pay income tax for any given year, it is
The petitioners argue that they are covered by the above provision since, incumbent on them to show the Bureau of Internal Revenue that in that
as is admitted on all sides, they are all US nationals, all employed in the year they had derived income exclusively from their employment in
American Naval Base at Subic Bay, and receive salary exclusively and from connection with the US bases, and none whatever "from Philippine
NO other source in the PH. They also claim to return to the US after sources or sources other than the US sources."
termination of employment. • This claim had been rejected by the CA with
the statement that the Bases Agreement “speaks of exemption from the o The duty rests on the U.S. nationals concerned to invoke and prima facie
payment of income tax, NOT from the filing of the income tax returns.” establish their tax-exempt status. o It cannot simply be presumed that they
earned no income from any other sources than their employment in the
American bases and are therefore totally exempt from income tax.

o The situation is no different from that of Filipino and other resident

income-earners in the Philippines who, by reason of the personal
exemptions and permissible deductions under the Tax Code, may not be
liable to pay income tax year for any particular year; that they are not
liable to pay income tax, no matter how plain or irrefutable such a
proposition might be, does not exempt them from the duty to file an
income tax return.

NV Reederit v. CIR, G.R. No. 46029, June 23, 1988, 162 SCRA 487
CA Decision: But even if exempt from paying income tax, said petitioners,
were NOT excused from filing income tax returns. The Revenue Code
Petitioner N.B. Reederij "AMSTERDAM" had 2 vessels, MV "Amstelmeer"
requires filing of an income tax return also by any “alien residing in the PH,
and MV "Amstelkroon," called on Philippine ports to load cargoes for
regardless of whether the gross income was derived from sources within
foreign destination. - freight fees were paid abroad in the amount of US
or outside the PH.” • Since the petitioners, although aliens residing within
$98,175.00 in 1963 and US $137,193.00 in 1964.
PH, had failed to do so, they had been properly prosecuted and convicted
for having violated the Code. • What the law requires is merely physical or
- Petitioner Royal Interocean Lines acted as husbanding agent for a fee or
bodily presence in a given place for a period of time, not the intention to
commission on said vessels - No income tax appears to have been paid by
make it a permanent place of abode.
petitioner N.V. Reederij "AMSTERDAM" on the freight receipts.
SC: The exemption granted to the petitioners by the Bases Agreement
from payment of income tax is NOT absolute. • By the explicit terms of the
Respondent Commissioner of Internal Revenue, through his examiners, Petitioner is a foreign corporation not authorized or licensed to do
filed the corresponding income tax returns under Section 15 of the business in the Philippines.
National Internal Revenue Code.
- It does not have a branch office in the Philippines and it made only two
Applied the prevailing market conversion rate before of P3.90 to the US calls in Philippine ports, one in 1963 and the other in 1964.
$1.00 - Gross receipts of petitioner for 1963 and 1964 amounted to
P382,882.50 and P535,052.00 - In order that a foreign corporation may be considered engaged in trade
or business, its business transactions must be continuous.
- assessed said petitioner in the amounts of P193,973.20 and P262,904.94
as deficiency income tax for 1963 and 1964, as a non-resident foreign - A casual business activity in the Philippines by a foreign corporation, as
corporation not engaged in trade or business in the Philippines under in the present case, does not amount to engaging in trade or business in
Section 24 (b) (1) of the Tax Code the Philippines for income tax purposes.

- On the assumption that the said petitioner is a foreign corporation - Petitioner N.V. Reederij 'Amsterdam' is a non-resident foreign
engaged in trade or business in the Philippines, petitioner Royal corporation, organized and existing under the laws of The Netherlands
Interocean Lines filed an income tax return at the exchange rate of P2.00 with principal office in Amsterdam and not licensed to do business in the
to US$1.00 - Also made a written protest against the assessment made by Philippines
the respondent Commissioner which protest was denied by said
respondent. - It is therefore taxable on income from all sources within the Philippines,
as interest, dividends, rents, salaries, wages, premiums, annuities,
SC HELD: Should be taxed as a FOREIGN CORPORATION NOT ENGAGED IN compensations, remunerations,emoluments, or other fixed or
TRADE OR BUSINESS IN THE PH (NON-RESIDENT FOREIGN CORP.) determinable annual or periodical or casual gains, profits and income and
capital gains, and the tax is equal to thirty per centum of such amount,
RULES: - a foreign corporation doing business in the Philippines is taxable under Section 24(b) (1) of the Tax Code.
on income solely from sources within the Philippines, it is permitted to
claim deductions from gross income but only to the extent connected with - petitioner N. V. Reederij 'Amsterdam' being a non-resident foreign
income earned in the Philippines (Secs. 24(b) (2) and 37, Tax Code.) corporation, its taxable income consists of its gross income from all
sources within the Philippines.
- foreign corporations not doing business in the Philippines are taxable on
income 'from all sources within the Philippines, as interest, dividends, - NOTE: - If foreign corporation engaged in trade or business within the
rents, salaries, wages, premiums, annuities, compensations, Philippines, or which has an office or place of business, then: - taxed on
remunerations, emoluments, or other fixed or determinable annual or its total net income received from all sources within the Philippines at the -
periodical or casual gains, profits and income and capital gains.' The tax is rate of 25% upon the amount but which taxable net income does not
30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax Code.) exceed - P100,000.00 - 35% upon the amount but which taxable net
income exceeds P100,000.00.

If foreign corporation not engaged in trade or business within the

Philippines and which does not have any office or place of business: (THIS
IS PETITIONER) - taxed on income received from all sources within the to the 32% taxable income. The SC held that petitioner is undoubtedly
Philippines at the rate of 35% of the gross income. doing business or engaged in trade or business in the Philippines by
appointing Aerotol as a general sales agent and they MAY be subject to the
Air Canada v CIR, G.R. No. 169507, January 11, 2016 32% tax on its taxable income.

Air Canada, a foreign corporation organized and existing under the laws of Under Section 28(A)(1) - Tax on resident foreign corporations applies to
Canada, was granted to operate as an offline carrier. Being an offline corporations organized, authorized, or existing under the laws of any
carrier would mean that they do NOT have flights originating from or foreign country, engaged in trade or business within the Philippines and
coming to the Philippines, nor do they operate any airplane in the they are subject to the 32% taxable income.
Philippines. Air Canada also engaged in the services of Aerotel as its
general sales agent in the Philippines. Considering that they were an offline Definition of “resident foreign corporation” - a foreign corporation
carrier, Air Canada filed a written claim for refund of alleged erroneously engaged in trade or business within the Philippines." “Doing” or “engaging
paid income tax on Gross Philippine Billings amounting to P5.1M as they in” or “transacting” business implies continuity of commercial dealings and
argued to no longer fall under the definition of Gross Philippine Billings arrangements, and contemplates, to that extent, the performance of acts
pursuant to its revised definition. The CTA First Division denied the petition or works or the exercise of some of the functions normally incident to, and
for Review stating that while Air Canada was NOT liable for tax on its Gross in progressive prosecution of commercial gain or for the purpose and
Philippine Billings, it was still liable to pay the 32% corporate income tax on object of the business organization. The IRR of R.A. 7042 clarifies that that
income derived from the sale of airline tickets pursuant to Section 28(A)(1) "doing business" includes "appointing representatives or distributors,
if the National Internal Revenue Code (NIRC). The CTA En Banc affirmed operating under full control of the foreign corporation, domiciled in the
the findings of the First Division. Philippines or who in any calendar year stay in the country for a period or
periods totaling one hundred eighty (180) days or more[.]”
The main issue is whether or not Air Canada is entitled to a refund of
alleged erroneously paid income tax of Gross Philippine Billings amounting Aerotol performs acts or works or exercises functions that are incidental
to P5.1M. and beneficial to the purpose of petitioner’s business as they bring direct
receipts or profits to the latter. - Nothing on record shows that Aerotol
The SC held that they are not entitled to a refund. However, the Supreme solicited orders alone and for its own account without interference or
Court ruled on the classification of Air Canada and as to what can be taxed. direction of the petitioner. - Aerotol cannot "enter into any contract on
The Supreme Court first held that Air Canada is NOT liable for the Gross behalf of the petitioner without the express written consent of the latter,"
Philippine Billings since they are an offline carrier with no landing rights in and they must perform its functions according to the standards of the
the Philippines. Thus, they do not fall under Gross Philippine Billings since petitioner. - Petitioner was also issued by the Civil Aeronautics Board an
the tax only attaches to those originating in the Philippines in a continuous authority to operate as an offline carrier in the Philippine for a period of
and uninterrupted flight as defined by the NIRC. five years.

Next, the SC held that the petitioner falls within the definition of a However, the SC held that the application of the 32% tax rate under Sec.
resident foreign corporation under the NIRC. Under Section 28(A)(1) 28(A)(1) must consider the existence of an effective tax treaty between the
states that tax on resident foreign corporations applies to corporations Philippines and Canada. While petitioner is taxable as a resident foreign
organized, authorized, or existing under the laws of any foreign country, corporation under Section 28(A)(1) of the 1996 NIRC on its taxable
engaged in trade or business within the Philippines and they are subject income, it could only be taxed at a maximum of 1 ½% of gross revenues
pursuant to Article VIII of the Republic of the Philippines-Canada Tax paid, but the CIR denied it. Thus, BOAC filed a case with the CTA praying it
Treaty that applies to petitioner as a “foreign corporation organized and be given a refund.
existing under the laws of Canada” The SC held that through the
appointment of Aerotol as their general sales agent, petitioner is As to the second case, BOAC was assessed deficiency income tax
considered to have carried on their business in the Philippines through a assessment for P534,132.08 for the years 1969-1971 + P1k as penalty
permanent establishment pursuant to Article VII of the Tax Treaty as the under Sec. 74, NIRC. BOAC then filed its second case with the CTA, praying
former is dependent on the latter. Thus, income attributable to Aerotel or it be absolved of liability for deficiency income tax for 1969-1971.
from business activities effected by petitioner through Aerotel may be
taxed in the Philippines. However, they should not exceed 1 ½% of the The CTA tried the two cases jointly, and found in favor of BOAC. It ruled
gross revenue pursuant to Articles VII in relation to Article VIII of the Tax that the proceeds of sales of BOAC passenger tickets in the PH by its agents
Treaty. during the period in question do NOT constitute BOAC income from PH
sources, since no service of carriage of passengers/freight was performed
To conclude, the SC held that the P5.1M Gross Philippine Billings tax paid by BOAC within the PH. Thus, BOAC’s income from this wasn’t subject to
by petitioner was computed at the rate of 1 1/2% of its gross revenues PH income tax. The CTA observed that income from transportation is
amounting to P345.7M. Thus, they paid the proper amount of Tax which in income from services, such that the place where the services are rendered
turn means no refund is forthcoming. determines the source. Thus, the CTA ordered CIR to credit BOAC with
what it paid under the first case, and cancel the assessment in the second
CIR v. British Overseas Airways Corp, G.R. No. L-65773-74, April 30, 1987, case. Thereafter, the CIR filed a petition for review on certiorari with the
149 SCRA 395 SC.

This case deals with two cases filed by the British Overseas Airways Corp. The SC disagreed with the CTA, ruling that BOAC’s revenue from the sale
(BOAC) with the CTA. of tickets in the PH for air transportation constituted income from PH
sources. Thus, they are taxable.
BOAC is a 100% British Gov’t-owned corp. organized and existing under the
laws of the UK. It operates air transportation service and sells (1) First, the SC established that BOAC is a resident foreign
transportation tickets over the routes of other airline members. For the corporation. Under Sec. 20, 1977 Tax Code, a resident foreign
fiscal years important to this case (1959-1967, 1968-1969, and 1970-1971), corporation is a foreign corp. engaged in trade or business within
BOAC had no landing rights here nor did it carry passengers and/or cargo the PH or having an office or place of business therein. In order
to and from the PH. However, during this period, it had a general sales that a foreign corp. may be regarded as doing business within a
agent in the PH (Warner Barnes and Company, Ltd. and later Qantas State, there must be (1) Continuity of conduct; and (2) Intention
Airways) which was responsible for selling BOAC tickets for passengers and to establish a continuous business (e.g. the appointment of a
cargoes. local agent), and not one of a temporary character. ITCAB, BOAC
maintained a general sales agent in the PH during the periods
As to the first case, CIR assessed BOAC P2,498,358.56 for deficiency covered by the subject assessments. It performed activities in
income taxes for the years 1959-1963. Subsequently, the assessment was exercise of the functions which are normally incident to, and in
changed to P858,307.79 for the years 1959-1967. BOAC paid this progressive prosecution of, the purpose and object of its
assessment under protest. BOAC then filed a claim for refund for what it organization as an int’l air carrier (i.e., selling and issuing tickets;
breaking down trips into series and assigning each series to a
 different airline company; receiving the fare from the whole trip; SITUS
and allocating it to the various airline companies).

Thus, since BOAC was engaged in business in the PH thru a local

agent during the period covered by the assessments, it is a
resident foreign corp. subject to tax upon its total net income
received in the preceding taxable year from all sources within the
PH (see: Sec. 24[b][2], Tax Code)

(2) Second, the SC established that BOAC’s income came from

sources within the PH. Income is defined as the “flow of wealth,”
or the cash received (or its equivalent). A source of income is the
property, activity, or service that produced the income –– and
for the source of income to be considered as coming from within
the PH, it is sufficient that the income is derived from activity
within the PH. ITCAB, BOAC’s sale of tickets in the PH is the
activity (source) that produces the income. The tickets exchanged
hands in the PH; and payments for fares were also made here in
PH currency. Thus, the situs of the source of payments is the PH.
The flow of wealth proceeded from and occurred within PH
territory, enjoying protection from the PH gov’t –– and in
consideration of this protection, the flow of wealth should share
the burden of supporting the gov’t.

Thus, BOAC’s PH gross income from fiscal years 1968-69 to 1970-

71 in the amount of P10,428,368.00 is taxable. But note that it is
only in these years that BOAC should be taxed, because PD 69
(Nov. 24 1972) states that int’l carriers shall pay a[n income] tax of In summary, in determining whether an income is taxable in the
2 ½% on their gross PH billings. Philippines, two factors must be considered:
TO CONCLUDE, the SC ordered BOAC to pay the deficiency income
(I) The citizenship and residence of the person obtaining the
tax assessed in the second case + surcharge + interest; and denied
gain and
BOAC’s claim for refund.
(II) the “source” of income.

To be taxable, the person deriving the profit must be either a

citizen or resident of the country, and the “source” of the income
must be in the Philippines.
 Sec. 42, NIRC

- Secs. 152-165, Revenue Regulations No. 2

Taxable income means the pertinent items of gross income specified in the
Tax Code as amended, less the deductions, if any, authorized for such types
of income, by the Tax Code or other special laws.

The classification of a taxpayer’s assets would depend on the nature of their

The term "gross receipts" means the total amount of money or its business. For example, in the case of real estate companies, ordinary
equivalent representing the contract price, compensation, service fee, business operations require the possession of properties instead of
rental or royalty, including the amount charged for materials supplied with inventory. Thus, real properties are considered ordinary properties as they
the services and deposits and advance payments actually or constructively are necessary to day-to-day (or ordinary) operations. On the other hand, for
received during the taxable year. any company not primarily engaged in the trade or selling of properties,
these properties are considered capital assets.