INCOME TAX REVIEWER

I. Definition Of Income Tax  income tax law of the Phils. today

 enacted to simplify & restructure certain

Income tax is referred to as - provisions of the NIRC
 A tax on all yearly profits arising fr. property,
professions, trades or offices, or
 VAT Law (E.O. 39, 1987) : first attempt to
 A tax on a person’s income, emoluments, restructure tax system, tax administration
profits & the like. (FAILED)
 It may be succinctly defined as a tax on  SNITS (1992) : another attempt at restructuring
income, whether gross or net, realized in one
taxable year.
D. Sources of Income Tax Law: NIRC as amended
A. Nature of Income Tax
Income tax is generally regarded as an excise tax. II. Meaning Of Income/ Sources/
It is not levied upon persons, property, funds or Kinds
profits but upon the RIGHT of a person to receive
income or profits.
A. Definition of income/ differentiate fr. capital

B. Purpose of Income tax: Fiscal/Non-fiscal Sec. 36, Rev. Reg. 2

1. to provide large amounts of revenue;
1. to offset regressive sales & consumption
taxes; Income in the broad sense - all wealth w/c flows
into the taxpayer other than as a mere return of
2. To mitigate the evils arising fr. the capital; includes the forms of income
inequalities in the distribution of income & specifically described as gains & profits, including
wealth w/c are considered deterrents to gains derived fr. the sale or other disposition of
social progress, by a progressive scheme of capital assets.
taxation.
Gross Income - income ( in the broad sense) less
 Income tax is regarded as the best measure of income w/c is by statutory provision or otherwise
a person’s ability to pay. exempt fr. the tax imposed by law.
Net Income - gross income less statutory
C. Brief Historical Background of Phil. deductions
Income Tax Income means -
 accession to wealth
1. United States Revenue Act of 1913  gain
 Extended to the Phils. w/c was then a territorial  flow of wealth
possession of the US
 administered & enforced by internal revenue Conwi vs. CTA 213 SCRA 83
officers of the Phil. Government
Facts: Pets., Filipino citizens &
employees of P&G, were assigned to work
2. Revenue Act of 1916, War Revenue Act of
1917 abroad in 1970 & 1971, during w/c they were
paid US $ as compensation. When they filed
 amended Revenue Act of 1913
their ITR in 1970 & 1971, they computed the
tax due by applying the $-P conversion based
3. Act No. 2833
on the floating rate ordained under BIR Ruling
 enacted by the Phil. legislature under authority No. 70-027. In 1973 however, they filed
conferred by 1917 Act amended ITRs for ‘70 & ‘71 using the par value
of the peso as prescribed in RA # 265. They
4. CA No. 466 ( National Internal Revenue thus claim tax refunds or tax credits, w/c was
Code of 1939) denied by CTA. It is to be noted that Pets. did
 revised, amended & codified into a single tax not remit any portion of their income into the
code all the internal revenue laws embodied in Phils. during their stints abroad.
the 1939 NIRC & amendatory laws &
decrees Issue: WON income of Pets. were still
 was amended several times taxable in the absence of remittances or
acceptance of their salaries into the country
5. PD 1158 ( NIRC of 1977) Held: Yes the foreign earnings are taxable.
Income may be defined as an amount of
 consolidated & codified into a single tax
money coming to a person or corporation w/in
code all the internal revenue laws embodied in
the NIRC & amendatory laws & decrees
a specified time, whether as payment for
services, interest or profit fr. investment. The
$ earnings of Pets. are the fruit of their labors
6. PD 1994 (NIRC of 1986) in the foreign subsidiaries of P&G. It was a
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INCOME TAX REVIEWER
definite amount of money w/c came to them Held: NO. A wife may make a separate return
w/in a specified period of time of 2 years as of her own income only when she has a
payment for their services. Sec. 21 of the NIRC separate estate managed by herself as her
states that a tax shall be imposed upon own separate property & receives an income of
taxable net income received during each more than P 3T. The essential difference
taxable year fr. all sources by every individual, between capital & income is that capital is a
whether a citizen of the Phils. residing therein fund of property existing at an instant time;
or abroad. income is a flow of services rendered by that
capital by the payment of money fr. it or any
other benefit rendered by a fund of capital in
CIR vs. BOAC 149 SCRA 395 relation to such fund through a period of time.
Capital is wealth, income is service of wealth.
Facts: British Overseas Airways Corp. is
a 100% British-owned corp. organized &
existing under the laws of the UK. It had no Fisher vs. Trinidad 43 Phil 973
landing rights in the Phil. & had no CPCN . Facts: The Philippine American Drug Co.
Although it did not carry passengers &/or cargo was a duly organized corp. existing under Phil.
to or fr. the Phil., it maintained a general sales laws. Fisher was a stockholder of said
agent , Warner Barnes & Co. Ltd. & later corporation w/ a share of stock dividends
Qantas Airways w/c was responsible for selling worth P 24,800 in 1919. He was made to pay
BOAC tickets covering passengers & cargoes. under protest w/ the CIR.
CIR assessed deficiency taxes w/c was Issue: WON the stock dividends are
protested by BOAC. income & thus taxable
Issue: WON the revenue derived by Held: NO. Stock dividends are not income. An
BOAC fr. sales of tickets in the Phil. for air income is the return in money fr. one’s
transportation, while having no landing rights business, labor or capital invested. Only when
here, constitute income fr. Phil. sources & a cash dividend is given or such that dividend
accordingly taxable normally payable in money, & when so paid,
Held: Income means “ cash received or its then only does the stockholder realize a profit
equivalent”. It is the amount of money coming or gain; w/c becomes his separate property, &
to a person w/in a specific time. It is distinct fr. thus derive an income fr. the capital that he
capital, for while the latter is a fund, income is invested. Until that is done, the increased
a flow. As used in our laws, income is a flow of assets belong to the corporation & not to the
wealth. The source of an income is the individual stockholders. The stockholder who
property, activity or service that produced the receives a stock dividend has received nothing
income. For the source of income to be but a representation of his increased interest in
considered as coming fr. the Phil., it is the capital of the corporation.
sufficient that income is derived fr. activity
w/in the Phils. In BOAC’s case, the sale of B. Sources of Income
tickets in the Phils. is the activity that produces
the income. The tickets exchanged hands here 1. Capital/labor/exchange of capital
& payments were made in Phil currency. Thus,
the flow of wealth should share the burden of Query: What produces income?
supporting the government. Answer:

Madrigal vs. Rafferty 38 Phil 414 Commissioner vs. BOAC, supra

Facts: In Madrigal’s ITR, he declared his Held: The source of income is the property,
total net income to be P 296T. Subsequently, activity or service that produced the income.
he submitted a claim that said amount was the For the source of income to be considered as
income of the conjugal partnership existing coming fr. the Phil., it is sufficient that the
between himself & his wife, & that in income is derived fr. activity w/in the Phil. In
computing & assessing the additional income the case of BOAC, the sale of tickets in the Phil.
tax provided by act of Congress, the income is the activity that produces the income. The
declared should be divided into two equal tickets exchanged hands here & payments for
parts. fares were also made in Phil. currency. The
Issue: WON additional income tax site of the source of income is the Phil. & the
should be assessed by dividing income into flow of wealth proceeded fr., & occurred w/in
two equal parts, bec. of the conjugal Phil. territory, enjoying the protection accorded
partnership existing between the Madrigal by the Phil. government. Thus, said flow of
spouses wealth should share the burden of supporting
the government.

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INCOME TAX REVIEWER
ORDINARY GAIN is gain derived fr. the sale or
exchange of an asset w/c is not capital. (see S20(z)
2. Income derived fr. whatever source
supra)

SEC. 32. Gross Income. - SEC. 39. Capital Gains and Losses. -
(A) General Definition. - Except when otherwise provided (A) Definitions. - As used in this Title -
in this Title, gross income means all income derived
from whatever source, x x x (1) Capital Assets. - the term 'capital assets' means
property held by the taxpayer (whether or not
connected with his trade or business), but does not
 The words used in the law disclose a legislative include stock in trade of the taxpayer or other property
of a kind which would properly be included in the
policy to include all income not expressly inventory of the taxpayer if on hand at the close of the
exempted w/in the class of taxable income taxable year, or property held by the taxpayer
under our laws, irrespective of the voluntary or primarily for sale to customers in the ordinary course
involuntary action of the taxpayer in producing of his trade or business, or property used in the trade
the gains, & whether derived fr. legal or illegal or business, of a character which is subject to the
sources. allowance for depreciation provided in Subsection (F)
of Section 34; or real property used in trade or
 Income tax is source blind. business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means
Queries: Why is income tax source blind? Are the the excess of the gains from sales or exchanges of
ff. items income? capital assets over the losses from such sales or
exchanges.
1. found treasure
(3) Net Capital Loss. - The term 'net capital loss' means
2. punitive damages/damages for breach of the excess of the losses from sales or exchanges of
promise or alienation of affection capital assets over the gains from such sales or
3. worthless bad debts subsequently collected exchanges.
4. tax refund (B) Percentage Taken into Account. - In the case of a
taxpayer, other than a corporation, only the following
5. non-cash benefits percentages of the gain or loss recognized upon the
6. income fr. illegal sources sale or exchange of a capital asset shall be taken into
account in computing net capital gain, net capital loss,
7. psychological benefits of work and net income:
8. give-away prizes/scholarships/fellowships (1)One hundred percent (100%) if the capital asset has
been held for not more than twelve (12) months; and
C. Kinds/ Classification of Income or Gain  (2)Fifty percent (50%) if the capital asset has been held
(not in Ma’am’s SPIT outline but I think she just for more than twelve (12) months;
omitted it bec. she proceeded to letter D. Ella) (C) Limitation on Capital Losses. - Losses from sales or
exchanges of capital assets shall be allowed only to the
extent of the gains from such sales or exchanges. If a
1. Passive Income bank or trust company incorporated under the laws of
 refers to those items of gross income earned by the Philippines, a substantial part of whose business is
the receipt of deposits, sells any bond, debenture,
the taxpayer w/o his active/direct participation
note, or certificate or other evidence of indebtedness
in the earning process. issued by any corporation (including one issued by a
Ex. dividends, royalties, prizes & winnings government or political subdivision thereof), with
interest coupons or in registered form, any loss
Sec. 22(z), RA 8424 The term 'ordinary income' resulting from such sale shall not be subject to the
includes any gain from the sale or exchange of foregoing limitation and shall not be included in
property which is not a capital asset or property determining the applicability of such limitation to other
described in Section 39(A)(1). Any gain from the sale losses.
or exchange of property which is treated or considered, (D) Net Capital Loss Carry-over. - If any taxpayer, other
under other provisions of this Title, as 'ordinary than a corporation, sustains in any taxable year a net
income' shall be treated as gain from the sale or capital loss, such loss (in an amount not in excess of
exchange of property which is not a capital asset as the net income for such year) shall be treated in the
defined in Section 39(A)(1). succeeding taxable year as a loss from the sale or
The term 'ordinary loss' includes any loss from the sale exchange of a capital asset held for not more than
or exchange of property which is not a capital asset. twelve (12) months.
Any loss from the sale or exchange of property which is (E) Retirement of Bonds, Etc. - For purposes of this Title,
treated or considered, under other provisions of this amounts received by the holder upon the retirement of
Title, as 'ordinary loss' shall be treated as loss from the bonds, debentures, notes or certificates or other
sale or exchange of property which is not a capital evidences of indebtedness issued by any corporation
asset. (including those issued by a government or political
subdivision thereof) with interest coupons or in
registered form, shall be considered as amounts
2. Capital Gain/Ordinary Gain received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes
GAIN - transaction resulting in increases of wealth
of this Title -
capable of pecuniary estimation
(1) Gains or losses from short sales of property shall be
CAPITAL GAIN is the gain derived fr. the sale or considered as gains or losses from sales or exchanges
exchange of capital assets. of capital assets; and
(2) Gains or losses attributable to the failure to

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INCOME TAX REVIEWER
exercise privileges or options to buy or sell property  it has no application to gains or losses arising fr. the
shall be considered as capital gains or losses. sale of real property used in the trade or business to the
extent that such gain or loss is allocable to the land, as
distinguished fr. depreciable improvements upon the
Sec. 6 (e), NIRC Authority of the Commissioner to land.
prescribe real property values.
To such gain or loss allocable to the land, the limitations
The Commissioner is hereby authorized to divide the of 34(b) & (c) apply ( such limitation may be
Philippines into different zones or areas & shall, upon inapplicable to a dealer in real estate, but, if so, it is
consultation w/ competent appraisers both fr. private & bec. he holds the land primarily for sale to customers
public sectors, determine the fair market value of real in the ordinary course of his trade or business, not bec.
properties located in each zone or area. For purposes the land is subject to the allowance for depreciation
of computing any internal revenue tax, the value of the provided in 30 (f) NIRC), will not be subject to the
property shall be w/cever is higher of: percentage provisions of 34(b) & losses fr. such
1. The fair market value as determined by the transactions will not be subject to the limitations on
Commissioner, or losses provided in 30 (c).
2. The fair market value as shown in the schedule of
values of the Prov’l. or City Assessors.
Tuazon vs. Lingad 58 SCRA 170
Sec. 122, Rev. Reg. 2 Losses fr. sales or Facts: In 1948, pet. inherited 2 parcels
exchanges of property. No deduction is allowed in of land, w/c he subdivided into 29 lots &
respect of losses fr. sales of exchanges of property, leased 28. In 1950, he sold the lots on an
directly or indirectly,-
installment basis to their occupants. Lot 29
1. Between members of a family (whole or half siblings,
was subsequently subdivided & paved, & were
spouse, ancestors & lineal descendants);
also sold on a 10 yr. annual amortization basis.
2. Between an individual & a corporation more than 50%
in value of the outstanding stock of w/c is owned, He reported his income fr. the sale of the lots
directly or indirectly by or for such individual except as long-term capital gain. In 1957, he treated
in the case of distributions in liquidation; his income fr. the sale of the small lots as
3. Between two corporations more than 50% in value of capital gains & included only 1/2 as taxable
the outstanding stock of each of w/c is owned, income. He deducted the real estate dealer’s
directly or indirectly, by or for the same individual, if
either one of the corps. w/ respect to the taxable year
tax he paid in 1957 due to the rentals fr. his 28
of the corp. preceding the date of the sale or lots & other properties. BIR charged him w/
exchange was, under the law applicable to such deficiency income, considering the sale as
taxable year, a personal holding company or a foreign ordinary gains & not capital.
personal holding company, except in the cases of
distributions in liquidation; Issue: WON properties inherited by
4. Between a grantor & a fiduciary of any trust; petitioner should be regarded as capital assets
5. Between the fiduciary of a trust & the fiduciary of Held: NO. When pet. inherited the properties,
another trust, if the same person is a grantor w/
he got not only the duty to respect any
respect to each trust; or
contract thereon but also the correlative right
6. Between a fiduciary of a trust & a beneficiary of such
trust. to receive & enjoy the fruits of the business &
the property w/c the decedent had established.
Sec. 131, Rev. Reg. 2 Losses fr. wash sales of
Also, pet. owned other properties w/c he
stock or securities rented out, fr. w/c he periodically derived a
a) A taxpayer cannot deduct any loss claimed to have substantial income, & for w/c he had to pay
been sustained fr. the sale of stock or securities, if, the real estate dealer’s tax, w/c he used to
w/in a period beginning thirty days before the date of deduct fr. his gross income. Under the
such sale or disposition & ending thirty days after such circumstances, pet’s sale of the lots forming
date he has acquired, or has entered into a contract to
acquire, substantially identical stock or securities. part of his rental business cannot be
However, this prohibition does not apply in the case of characterized as other than sales of non-
a dealer in stock or securities if the sale or other capital, or ordinary assets. (remember
disposition of stock or securities is made in the exceptions in S33).
ordinary course of business of such dealer XXX

Sec. 132, Rev. Reg. 2 Definition of capital assets. Calasanz vs. Com. 144 SCRA 644
The law provides that the term capital assets shall be
held to mean property held by the taxpayer (WON
Facts: Petitioner inherited fr. her father
connected w/ his trade or business) . . . Same as Sec. an agricultural land in Rizal. In order to
33, NIRC. liquidate her inheritance, she had the land
The term capital asset includes all classes of property surveyed, introduced improvements thereon &
not specifically excluded by S30 (a). sold the lots at a profit. In their joint ITR, they
The exclusion fr. the term “capital assets” by property disclosed a profit of P 31,060 fr. the sale of the
used in the trade or business of the taxpayer of a subdivided lots, & reported 50% thereof as
character w/c is subject to the allowance for
depreciation in S30 (f) NIRC - taxable capital gains. Revenue examiner
adjudged pets. as engaged in business as real
 is limited to property used by the taxpayer in the
trade or business at the time of the sale or exchange (&) estate dealers, required them to pay real
estate dealer’s tax & assessed a deficiency
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INCOME TAX REVIEWER
income tax on profits derived fr. the sale based 1. Requisites for taxability
on the rates for ordinary income.
Issue: WON pets. are real estate dealers 1. There must be gain.
liable for real estate dealer’s tax  There must be in fact income. A txn whereby
WON gains realized fr. the sale of the nothing of exchangeable value comes to or is
received by the taxpayer does not give rise to
lots are taxable as ordinary income
taxable income.
Held: YES in both . The activities of pet. are 2. The gain must be realized or received.
no different fr. those invariably employed by  The increase in value, i.e., the gain, can be
one engaged in the business of selling real taxed only when a disposition of the property
estate. There was extensive development has occurred, w/c is of such nature as to
such that pets. did not sell the land in the constitute a realization of such gain fr. the
condition in w/c they acquired it. A original capital invested in the property.
considerable amount was expended to cover  The realization of income may take the form of
the cost of the improvements. It has been actual receipt of cash or property or
constructive receipt of the income.
held that a property ceases to be a capital
3. The gain must not be excluded by law fr.
asset if the amount expended to improve it is
taxation.
double its original cost, as in the CAB, for the
extensive improvements indicates that the  Incomes that are exempt fr. the tax by law are
not considered in determining gross income.
seller held the property primarily for sale to its
 Deductions, in contrast, are subtracted fr. gross
customers in the ordinary course of business.
income to arrive at taxable net income.
And since they are engaged in the business of
real estate, it follows that the property sold
2. Recognition/ Realization of income for
falls w/in the exception in the definition of
tax purposes
capital assets in S33, NIRC.

 Queries: When is income realized?

Gonzales vs. CTA 14 SCRA 79
Facts: Expropriation proceedings were SEC. 43. General Rule. - The taxable income shall be
computed upon the basis of the taxpayer's annual
conducted on property owned by petitioners, accounting period (fiscal year or calendar year, as the
w/c they inherited fr. their mother. Upon the case may be) in accordance with the method of
amounts received fr. the government, the pets. accounting regularly employed in keeping the books of
were ascertained to have made a capital gain such taxpayer, but if no such method of accounting
has been so employed, or if the method employed
of P 213,328.82 & each of them to have does not clearly reflect the income, the computation
received the amount of P 89T as share in the shall be made in accordance with such method as in
interest. Petitioners were each credited the the opinion of the Commissioner clearly reflects the
amount of P 86T as payment of their income income. If the taxpayer's annual accounting period is
tax. Subsequently, pets. asked for a refund of other than a fiscal year, as defined in Section 22(Q), or
if the taxpayer has no annual accounting period, or
the amount of P 24T saying that the P 89T they does not keep books, or if the taxpayer is an individual,
received as share in the interest would have the taxable income shall be computed on the basis of
been computed as capital gain & not ordinary the calendar year.
gain.
SEC. 44. Period in which Items of Gross Income
Issue: WON P 89T received as interest
Included. - The amount of all items of gross income
on the value of the land expropriated is shall be included in the gross income for the taxable
taxable as ordinary income year in which received by the taxpayer, unless, under
methods of accounting permitted under Section 43,
Held: YES. The acquisition by the gov’t. of any such amounts are to be properly accounted for as
private prop. through the exercise of eminent of a different period. In the case of the death of a
domain is embraced w/in the meaning of the taxpayer, there shall be included in computing taxable
term “sale” or “disposition of property” & the income for the taxable period in which falls the date of
his death, amounts accrued up to the date of his death
definition of gross income in S 29. The if not otherwise properly includible in respect of such
transfer of property through condemnation period or a prior period.
proceedings is a sale or exchange & the profit
fr. the txn constitutes capital gain. However, Sec. 51, Rev. Reg. No. 2 When income is to be
for income tax purposes, interest does not reported.
form part of the price paid by the gov’t. & thus Gains, profits, & income are to be included in the gross
not part of capital gain. Interest is the income for the taxable year in w/c they are received by
compensation for the delay in the return of the taxpayer, UNLESS they are included when they
accrue to him in accordance w/ the approved method
such capital. of accounting followed by him.
If a person sues in one year on a pecuniary claim or for
D. Taxable Income property, & money or property is received on a
judgment therefor in a later year, income is realized in

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INCOME TAX REVIEWER
THAT YEAR, assuming that the money or property Limpan vs. Com. 17 SCRA 703
would have been income in the earliest year if then
received. This is true of a recovery for patent Facts: Limpan Investment Co., a corp.
infringement. engaged in leasing real properties, filed its
Bad debts or accounts charged off subsequent to March ITRs for 1956 & 1957. After an investigation,
1, 1913, bec. of the fact that they were determined to the BIR found that pet. had underdeclared its
be worthless, w/c are subsequently recovered, whether
or not by suit, constitute income for THAT YEAR IN
rental incomes & had claimed excessive
WHICH RECOVERED, regardless of the date when depreciation of its buildings. Thus deficiency
amounts were charged off. income taxes & surcharges were demanded
against them. Pet. argues that the rents in
Sec. 52, Rev. Reg. No. 2 Income constructively question were not received in 1957, but were
received. turned over by the president to the company
Income w/c is only in 1959 & that the rates of depreciation
 credited to the account of, or applied by the BIR were unfair & inaccurate.
 set apart for Issue: WON the assessment of
a taxpayer & w/c is drawn upon him at any time is deficiency taxes were accurate
subject to tax for the YEAR DURING WHICH SO
CREDITED OR SET APART, although not actually Held: The assessment was valid. Pet.’s denial
reduced to possession. & explanation of the non-receipt of the
 To constitute receipt in such a case, the income must remaining unreported income for 1957 was not
be credited to the taxpayer w/o any substantial substantiated by the president nor by his 1957
limitation or restriction as to the -
personal income tax return in order to
 time or manner of payment or
establish that the rental income w/c he
 condition upon w/c payment is to be made.
allegedly collected & received in 1957 were
A BOOK ENTRY, if made, should indicate an absolute
reported therein. The w/drawal in 1958 of the
transfer fr. one account to another. If the income is
credited but is set apart, such income must be deposits in court pertaining to the 1957 rental
unqualifiedly subject to the demand of the taxpayer. income is no sufficient justification for the non-
When a corporation contingently credits Ees w/ bonus declaration of said income in 1957, since the
stock, BUT the stock is not available to such Ees until deposit was resorted to due to the refusal of
some future date, the mere crediting on the books of pet, to accept the same, & was not the fault of
the corporation does NOT constitute receipt.
its tenants. Pet. is thus deemed to have
constructively received such rentals in 1957.
Sec. 53, Rev. Reg. No. 2 Examples of constructive
receipt
(1) Interest Coupons. When interest coupons - Republic vs. de la Rama 18 SCRA 861
 have matured &
Facts: In 1951, the estate of the late
 are payable,
Esteban de la Rama filed its ITR for the year
 but have not been cashed,
1950. Later, BIR claims that the estate had
such interest payment, though not collected when due &
payable, - received in 1950 cash dividends fr. the De La
 is nevertheless available for the taxpayer &
Rama Steamship Co. Inc. w/c was not declared
in the ITR. BIR claims that the cash dividends
 should therefore be included in his gross income for
the YEAR DURING WHICH SUCH COUPONS MATURED. were applied in the deceased’s account w/ the
This is true if the coupons are exchanged for other former & this constituted constructive receipt
property instead of eventually being cashed. by the estate or heirs.
Defaulted coupons are income for the year in w/c paid.
Issue: WON there was constructive
(2) Share of profits. The distributive share of the profits
of a partner in a gen. partnership duly registered is
payment & thus constructive receipt by the
regarded as received by him, although not distributed. estate
(3) Interest on bank deposits. Interest credited on Held: There was no constructive receipt of the
savings bank deposits, even though the bank dividends. Income tax is assessed on income
nominally has a rule, seldom or never enforced, that it
may require so many days’ notice in advance of that has been received. In this case, income
cashing depositors’ checks, is INCOME TO THE was not received due to failure to deliver,
DEPOSITOR WHEN CREDITED. either actually or constructively. The debts to
(4) Credit to shareholders of building & loan. An amount w/c they were applied were not proven to have
credited to shareholders of a bldg. & loan assoc., when existed. The first debt was not proven to exist
such credit passes w/o restriction to the shareholder,
& the second debt was due fr. Hijos de I. de la
has a taxable status as INCOME FOR THE YEAR OF THE
CREDIT. Where the amount of such accumulations has Rama, an entity separate & distinct fr. the
not become available to the shareholder until the principal owner thereof. Constructive delivery
maturity of a share, the amount of any share in excess occurs only when it is shown that the debts to
of the aggregate amount paid in by the shareholder is w/c the dividends were applied actually
INCOME FOR THE YEAR OF THE MATURITY OF THE
SHARE. existed, were legally demandable &
chargeable to the deceased.
a. When is income realized?
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INCOME TAX REVIEWER
Realization of income for tax purposes the present global treatment on taxable
corporations. This classification is neither
b. Tests to determine realization of arbitrary nor inappropriate. Further, the due
income (Lukban, pp. 44-46) process clause may be correctly invoked only
when there is a clear contravention of inherent
or constitutional limitations in the exercise of
 Severance test the tax power. No such transgression is
 Substantial alteration of interest test evident in the CAB.
 Flow of wealth test
b. Bases of income tax
c. Kinds/Classification of taxable
income or gain i. Gross income/ receipts/
meaning in taxation/ in
1. Capital gain (sale of capital asset) financial accounting
2. Ordinary gain ii. Net income/ net taxable
3. Business income: Service concern/ income/ in taxation/ in
Manufacturing/Merchandising accounting
4. Income fr. trade or practice of profession iii. Presumed gain/ income
5. Passive income
6. Other forms of gain: ex. found treasure Sec. 24 (D) Capital Gains from Sale of Real
Property.
(1) In General. - The provisions of Section 39(B)
3. Income Tax Base/ Meaning/ Kinds notwithstanding, a final tax of six percent (6%)
a. Approaches in income recognition: based on the gross selling price or current fair
market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, is
Schedular vs. global approach hereby imposed upon capital gains presumed to
have been realized from the sale, exchange, or other
disposition of real property located in the Philippines,
Tan vs. del Rosario classified as capital assets, including pacto de retro
sales and other forms of conditional sales, by
Facts: These are two consolidated special individuals, including estates and trusts: Provided,
civil actions for prohibition challenging: 1) the That the tax liability, if any, on gains from sales or
constitutionality of RA 7496, also known as the other dispositions of real property to the government
or any of its political subdivisions or agencies or to
Simplified Net Income Taxation Scheme government-owned or controlled corporations shall
(SNITS), amending certain provisions of the be determined either under Section 24 (A) or under
NIRC; 2) the validity of Sec.6, Rev. Reg. No. 2- this Subsection, at the option of the taxpayer.
93 promulgated by the BIR pursuant to the (2) Exception. - The provisions of paragraph (1) of this
said law. Petitioners are taxpayers claiming to Subsection to the contrary notwithstanding, capital
gains presumed to have been realized from the sale
be adversely affected by the implementation
or disposition of their principal residence by natural
of the law. In the 1st case, the petitioners persons, the proceeds of which is fully utilized in
assert that the RA violates: 1) Art. VI, Sec. acquiring or constructing a new principal residence
26(1) w/c states, “Every bill passed by the within eighteen (18) calendar months from the date
Congress shall embrace only one subject w/c of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection:
shall be expressed in the title thereof.”; 2) Art. Provided, That the historical cost or adjusted basis of
VI, Sec. 28(1) w/c states, “The rule of taxation the real property sold or disposed shall be carried
shall be uniform & equitable. The Congress over to the new principal residence built or acquired:
shall evolve a progressive system of Provided, further, That the Commissioner shall have
been duly notified by the taxpayer within thirty (30)
taxation.”; & 3) Art. III, Sec.1, w/c states, “No days from the date of sale or disposition through a
person shall be deprived of … property w/o prescribed return of his intention to avail of the tax
due process of law, nor shall any person be exemption herein mentioned: Provided, still further,
denied the equal protection of the laws.” In That the said tax exemption can only be availed of
the 2nd case, the petitioners contend that the once every ten (10) years: Provided, finally, that if
there is no full utilization of the proceeds of sale or
BIR exceeded its rule-making authority in disposition, the portion of the gain presumed to have
implementing the Rev. Reg. been realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the
Held: RA is constitutional; Rev. Reg. is valid. gross selling price or fair market value at the time of
Its title is sufficiently descriptive of the subject sale, whichever is higher, shall be multiplied by a
of the law. What may be apparent fr. the fraction which the unutilized amount bears to the
amendatory law is the legislative intent to gross selling price in order to determine the taxable
portion and the tax prescribed under paragraph (1)
increasingly shift the income tax system
of this Subsection shall be imposed thereon.
towards the schedular approach in the income
taxation of individual taxpayers & to maintain
APP 7
INCOME TAX REVIEWER
c. Income tax rates the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and
SEC. 24. Income Tax Rates. one-half percent (7 1/2%) of such interest income:
(A) Rates of Income Tax on Individual Citizen and Provided, further, That interest income from long-term
Individual Resident Alien of the Philippines. deposit or investment in the form of savings, common
(1) An income tax is hereby imposed: or individual trust funds, deposit substitutes,
investment management accounts and other
(a) On the taxable income defined in Section 31 of this
investments evidenced by certificates in such form
Code, other than income subject to tax under
prescribed by the Bangko Sentral ng Pilipinas (BSP)
Subsections (B), (C) and (D) of this Section, derived for
shall be exempt from the tax imposed under this
each taxable year from all sources within and without
Subsection: Provided, finally, That should the holder of
the Philippines be every individual citizen of the
the certificate pre-terminate the deposit or investment
Philippines residing therein;
before the fifth (5th) year, a final tax shall be imposed
(b) On the taxable income defined in Section 31 of this on the entire income and shall be deducted and
Code, other than income subject to tax under withheld by the depository bank from the proceeds of
Subsections (B), (C) and (D) of this Section, derived for the long-term deposit or investment certificate based
each taxable year from all sources within the on the remaining maturity thereof:
Philippines by an individual citizen of the Philippines
Four (4) years to less than five (5) years - 5%;
who is residing outside of the Philippines including
overseas contract workers referred to in Subsection(C) Three (3) years to less than (4) years - 12%; and
of Section 23 hereof; and Less than three (3) years - 20%
(c) On the taxable income defined in Section 31 of this (2) Cash and/or Property Dividends - A final tax at the
Code, other than income subject to tax under following rates shall be imposed upon the cash and/or
Subsections (b), (C) and (D) of this Section, derived for property dividends actually or constructively received
each taxable year from all sources within the by an individual from a domestic corporation or from a
Philippines by an individual alien who is a resident of joint stock company, insurance or mutual fund
the Philippines. companies and regional operating headquarters of
The tax shall be computed in accordance with and at the multinational companies, or on the share of an
rates established in the following schedule: individual in the distributable net income after tax of a
partnership (except a general professional partnership)
Not over P10,000………………………………… 5%
of which he is a partner, or on the share of an
Over P10,000 but not over P30,000…………P500+10% of individual in the net income after tax of an association,
the excess over P10,000 a joint account, or a joint venture or consortium
Over P30,000 but not over P70,000………P2,500+15% of taxable as a corporation of which he is a member or
the excess over P30,000 co-venturer:
Over P70,000 but not over P140,000…… P8,500+20% of
the excess over P70,000  Six percent (6%) beginning January 1, 1998;
Over P140,000 but not over P250,000… P22,500+25% of  Eight percent (8%) beginning January 1, 1999;
the excess over P140,000
 Ten percent (10% beginning January 1, 2000.
Over P250,000 but not over P500,000… P50,000+30% of
the excess over P250,000
Provided, however, That the tax on dividends shall apply
Over P500,000 …………….……………… P125,000+34% of
only on income earned on or after January 1, 1998.
the excess over P500,000 in 1998.
Income forming part of retained earnings as of
Provided, That effective January 1, 1999, the top December 31, 1997 shall not, even if declared or
marginal rate shall be thirty-three percent (33%) and distributed on or after January 1, 1998, be subject to
effective January 1, 2000, the said rate shall be thirty- this tax.
two percent (32%).
(C) Capital Gains from Sale of Shares of Stock not Traded
For married individuals, the husband and wife, subject to in the Stock Exchange. - The provisions of Section
the provision of Section 51 (D) hereof, shall compute 39(B) notwithstanding, a final tax at the rates
separately their individual income tax based on their prescribed below is hereby imposed upon the net
respective total taxable income: Provided, That if any capital gains realized during the taxable year from the
income cannot be definitely attributed to or identified sale, barter, exchange or other disposition of shares of
as income exclusively earned or realized by either of stock in a domestic corporation, except shares sold, or
the spouses, the same shall be divided equally disposed of through the stock exchange.
between the spouses for the purpose of determining
Not over P100,000…………………………….. 5%
their respective taxable income.
On any amount in excess of P100,000………… 10%
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A
final tax at the rate of twenty percent (20%) is hereby (D) Capital Gains from Sale of Real Property. -
imposed upon the amount of interest from any (1) In General. - The provisions of Section 39(B)
currency bank deposit and yield or any other monetary notwithstanding, a final tax of six percent (6%) based
benefit from deposit substitutes and from trust funds on the gross selling price or current fair market value
and similar arrangements; royalties, except on books, as determined in accordance with Section 6(E) of this
as well as other literary works and musical Code, whichever is higher, is hereby imposed upon
compositions, which shall be imposed a final tax of ten capital gains presumed to have been realized from the
percent (10%); prizes (except prizes amounting to Ten sale, exchange, or other disposition of real property
thousand pesos (P10,000) or less which shall be located in the Philippines, classified as capital assets,
subject to tax under Subsection (A) of Section 24; and including pacto de retro sales and other forms of
other winnings (except Philippine Charity Sweepstakes conditional sales, by individuals, including estates and
and Lotto winnings), derived from sources within the trusts: Provided, That the tax liability, if any, on gains
Philippines: Provided, however, That interest income from sales or other dispositions of real property to the
received by an individual taxpayer (except a government or any of its political subdivisions or
nonresident individual) from a depository bank under agencies or to government-owned or controlled

APP 8
INCOME TAX REVIEWER
corporations shall be determined either under Section musical compositions shall be subject to a final tax of
24 (A) or under this Subsection, at the option of the ten percent (10%) on the total amount thereof:
taxpayer. Provided, further, That cinematographic films and
(3) Exception. - The provisions of paragraph (1) of this similar works shall be subject to the tax provided
Subsection to the contrary notwithstanding, capital under Section 28 of this Code: Provided, furthermore,
gains presumed to have been realized from the sale That interest income from long-term deposit or
or disposition of their principal residence by natural investment in the form of savings, common or
persons, the proceeds of which is fully utilized in individual trust funds, deposit substitutes, investment
acquiring or constructing a new principal residence management accounts and other investments
within eighteen (18) calendar months from the date evidenced by certificates in such form prescribed by
of sale or disposition, shall be exempt from the the Bangko Sentral ng Pilipinas (BSP) shall be exempt
capital gains tax imposed under this Subsection: from the tax imposed under this Subsection: Provided,
Provided, That the historical cost or adjusted basis of finally, that should the holder of the certificate pre-
the real property sold or disposed shall be carried terminate the deposit or investment before the fifth
over to the new principal residence built or acquired: (5th) year, a final tax shall be imposed on the entire
Provided, further, That the Commissioner shall have income and shall be deducted and withheld by the
been duly notified by the taxpayer within thirty (30) depository bank from the proceeds of the long-term
days from the date of sale or disposition through a deposit or investment certificate based on the
prescribed return of his intention to avail of the tax remaining maturity thereof:
exemption herein mentioned: Provided, still further,
That the said tax exemption can only be availed of Four (4) years to less than five (5) years - 5%;
once every ten (10) years: Provided, finally, that if Three (3) years to less than four (4) years - 12%; and
there is no full utilization of the proceeds of sale or
Less than three (3) years - 20%.
disposition, the portion of the gain presumed to have
been realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the (3) Capital Gains. - Capital gains realized from sale,
gross selling price or fair market value at the time of barter or exchange of shares of stock in domestic
sale, whichever is higher, shall be multiplied by a corporations not traded through the local stock
fraction which the unutilized amount bears to the exchange, and real properties shall be subject to the
gross selling price in order to determine the taxable tax prescribed under Subsections (C) and (D) of
portion and the tax prescribed under paragraph (1) Section 24.
of this Subsection shall be imposed thereon. (B) Nonresident Alien Individual Not Engaged in Trade or
Business Within the Philippines. - There shall be levied,
SEC. 25. Tax on Nonresident Alien Individual. - collected and paid for each taxable year upon the
entire income received from all sources within the
(A) Nonresident Alien Engaged in trade or Business
Philippines by every nonresident alien individual not
Within the Philippines. -
engaged in trade or business within the Philippines as
(1) In General. - A nonresident alien individual engaged interest, cash and/or property dividends, rents,
in trade or business in the Philippines shall be subject salaries, wages, premiums, annuities, compensation,
to an income tax in the same manner as an individual remuneration, emoluments, or other fixed or
citizen and a resident alien individual, on taxable determinable annual or periodic or casual gains,
income received from all sources within the profits, and income, and capital gains, a tax equal to
Philippines. A nonresident alien individual who shall twenty-five percent (25%) of such income. Capital
come to the Philippines and stay therein for an gains realized by a nonresident alien individual not
aggregate period of more than one hundred eighty engaged in trade or business in the Philippines from
(180) days during any calendar year shall be deemed a the sale of shares of stock in any domestic corporation
'nonresident alien doing business in the Philippines'. and real property shall be subject to the income tax
Section 22 (G) of this Code notwithstanding. prescribed under Subsections (C) and (D) of Section
(2) Cash and/or Property Dividends from a Domestic 24.
Corporation or Joint Stock Company, or Insurance or (C) Alien Individual Employed by Regional or Area
Mutual Fund Company or Regional Operating Headquarters and Regional Operating Headquarters of
Headquarter or Multinational Company, or Share in the Multinational Companies. - There shall be levied,
Distributable Net Income of a Partnership (Except a collected and paid for each taxable year upon the
General Professional Partnership), Joint Account, Joint gross income received by every alien individual
Venture Taxable as a Corporation or Association., employed by regional or area headquarters and
Interests, Royalties, Prizes, and Other Winnings. - Cash regional operating headquarters established in the
and/or property dividends from a domestic corporation, Philippines by multinational companies as salaries,
or from a joint stock company, or from an insurance or wages, annuities, compensation, remuneration and
mutual fund company or from a regional operating other emoluments, such as honoraria and allowances,
headquarter of multinational company, or the share of from such regional or area headquarters and regional
a nonresident alien individual in the distributable net operating headquarters, a tax equal to fifteen percent
income after tax of a partnership (except a general (15%) of such gross income: Provided, however, That
professional partnership) of which he is a partner, or the same tax treatment shall apply to Filipinos
the share of a nonresident alien individual in the net employed and occupying the same position as those of
income after tax of an association, a joint account, or a aliens employed by these multinational companies. For
joint venture taxable as a corporation of which he is a purposes of this Chapter, the term 'multinational
member or a co-venturer; interests; royalties (in any company' means a foreign firm or entity engaged in
form); and prizes (except prizes amounting to Ten international trade with affiliates or subsidiaries or
thousand pesos (P10,000) or less which shall be branch offices in the Asia-Pacific Region and other
subject to tax under Subsection (B)(1) of Section 24) foreign markets.
and other winnings (except Philippine Charity
(D) Alien Individual Employed by Offshore Banking Units.
Sweepstakes and Lotto winnings); shall be subject to
- There shall be levied, collected and paid for each
an income tax of twenty percent (20%) on the total
taxable year upon the gross income received by every
amount thereof: Provided, however, that royalties on
alien individual employed by offshore banking units
books as well as other literary works, and royalties on
established in the Philippines as salaries, wages,

APP 9
INCOME TAX REVIEWER
annuities, compensation, remuneration and other Provided, further, That the President, upon the
emoluments, such as honoraria and allowances, from recommendation of the Secretary of Finance, may
such off-shore banking units, a tax equal to fifteen effective January 1, 2000, allow corporations the option
percent (15%) of such gross income: Provided, to be taxed at fifteen percent (15%) of gross income as
however, That the same tax treatment shall apply to defined herein, after the following conditions have
Filipinos employed and occupying the same positions been satisfied:
as those of aliens employed by these offshore banking (1) A tax effort ratio of twenty percent (20%) of Gross
units. National Product (GNP);
(E) Alien Individual Employed by Petroleum Service (2) A ratio of forty percent (40%) of income tax collection
Contractor and Subcontractor. - An Alien individual who to total tax revenues;
is a permanent resident of a foreign country but who is
(3) A VAT tax effort of four percent (4%) of GNP; and
employed and assigned in the Philippines by a foreign
service contractor or by a foreign service (4) A 0.9 percent (0.9%) ratio of the Consolidated Public
subcontractor engaged in petroleum operations in the Sector Financial Position (CPSFP) to GNP.
Philippines shall be liable to a tax of fifteen percent The option to be taxed based on gross income shall be
(15%) of the salaries, wages, annuities, compensation, available only to firms whose ratio of cost of sales to
remuneration and other emoluments, such as gross sales or receipts from all sources does not
honoraria and allowances, received from such exceed fifty-five percent (55%).
contractor or subcontractor: Provided, however, That The election of the gross income tax option by the
the same tax treatment shall apply to a Filipino corporation shall be irrevocable for three (3)
employed and occupying the same position as an alien consecutive taxable years during which the
employed by petroleum service contractor and corporation is qualified under the scheme.
subcontractor.
For purposes of this Section, the term 'gross income'
Any income earned from all other sources within the derived from business shall be equivalent to gross
Philippines by the alien employees referred to under sales less sales returns, discounts and allowances and
Subsections (C), (D) and (E) hereof shall be subject to cost of goods sold. "Cost of goods sold' shall include all
the pertinent income tax, as the case may be, imposed business expenses directly incurred to produce the
under this Code. merchandise to bring them to their present location
and use.
SEC. 26. Tax Liability of Members of General For a trading or merchandising concern, 'cost of goods'
Professional Partnerships. - A general professional sold shall include the invoice cost of the goods sold,
partnership as such shall not be subject to the income plus import duties, freight in transporting the goods to
tax imposed under this Chapter. Persons engaging in the place where the goods are actually sold, including
business as partners in a general professional insurance while the goods are in transit.
partnership shall be liable for income tax only in their For a manufacturing concern, 'cost of goods
separate and individual capacities. manufactured and sold' shall include all costs of
For purposes of computing the distributive share of the production of finished goods, such as raw materials
partners, the net income of the partnership shall be used, direct labor and manufacturing overhead, freight
computed in the same manner as a corporation. cost, insurance premiums and other costs incurred to
Each partner shall report as gross income his distributive bring the raw materials to the factory or warehouse.
share, actually or constructively received, in the net In the case of taxpayers engaged in the sale of service,
income of the partnership. 'gross income' means gross receipts less sales returns,
allowances and discounts.
CHAPTER IV - TAX ON CORPORATIONS
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals
SEC. 27. Rates of Income tax on Domestic
which are nonprofit shall pay a tax of ten percent
Corporations. -
(10%) on their taxable income except those covered by
(A) In General. - Except as otherwise provided in this Subsection (D) hereof: Provided, that if the gross
Code, an income tax of thirty-five percent (35%) is income from unrelated trade, business or other activity
hereby imposed upon the taxable income derived exceeds fifty percent (50%) of the total gross income
during each taxable year from all sources within and derived by such educational institutions or hospitals
without the Philippines by every corporation, as from all sources, the tax prescribed in Subsection (A)
defined in Section 22(B) of this Code and taxable under hereof shall be imposed on the entire taxable income.
this Title as a corporation, organized in, or existing For purposes of this Subsection, the term 'unrelated
under the laws of the Philippines: Provided, That trade, business or other activity' means any trade,
effective January 1, 1998, the rate of income tax shall business or other activity, the conduct of which is not
be thirty-four percent (34%); effective January 1, 1999, substantially related to the exercise or performance by
the rate shall be thirty-three percent (33%); and such educational institution or hospital of its primary
effective January 1, 2000 and thereafter, the rate shall purpose or function. A 'Proprietary educational
be thirty-two percent (32%). institution' is any private school maintained and
In the case of corporations adopting the fiscal-year administered by private individuals or groups with an
accounting period, the taxable income shall be issued permit to operate from the Department of
computed without regard to the specific date when Education, Culture and Sports (DECS), or the
specific sales, purchases and other transactions occur. Commission on Higher Education (CHED), or the
Their income and expenses for the fiscal year shall be Technical Education and Skills Development Authority
deemed to have been earned and spent equally for (TESDA), as the case may be, in accordance with
each month of the period. existing laws and regulations.
The reduced corporate income tax rates shall be applied
on the amount computed by multiplying the number of (C) Government-owned or Controlled-Corporations,
months covered by the new rates within the fiscal year Agencies or Instrumentalities. - The provisions of
by the taxable income of the corporation for the existing special or general laws to the contrary
period, divided by twelve. notwithstanding, all corporations, agencies, or

APP 10
INCOME TAX REVIEWER
instrumentalities owned or controlled by the of the taxable year, as defined herein, is hereby
Government, except the Government Service Insurance imposed on a corporation taxable under this Title,
System (GSIS), the Social Security System (SSS), the beginning on the fourth taxable year immediately
Philippine Health Insurance Corporation (PHIC), the following the year in which such corporation
Philippine Charity Sweepstakes Office (PCSO) and the commenced its business operations, when the
Philippine Amusement and Gaming Corporation minimum income tax is greater than the tax computed
(PAGCOR), shall pay such rate of tax upon their taxable under Subsection (A) of this Section for the taxable
income as are imposed by this Section upon year.
corporations or associations engaged in s similar (2) Carry Froward of Excess Minimum Tax. - Any excess of
business, industry, or activity. the minimum corporate income tax over the normal
income tax as computed under Subsection (A) of this
(D) Rates of Tax on Certain Passive Incomes. - Section shall be carried forward and credited against
the normal income tax for the three (3) immediately
(1) Interest from Deposits and Yield or any other
succeeding taxable years.
Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. - (3) Relief from the Minimum Corporate Income Tax Under
A final tax at the rate of twenty percent (20%) is Certain Conditions. - The Secretary of Finance is
hereby imposed upon the amount of interest on hereby authorized to suspend the imposition of the
currency bank deposit and yield or any other monetary minimum corporate income tax on any corporation
benefit from deposit substitutes and from trust funds which suffers losses on account of prolonged labor
and similar arrangements received by domestic dispute, or because of force majeure, or because of
corporations, and royalties, derived from sources legitimate business reverses.
within the Philippines: Provided, however, That interest The Secretary of Finance is hereby authorized to
income derived by a domestic corporation from a promulgate, upon recommendation of the
depository bank under the expanded foreign currency Commissioner, the necessary rules and regulation that
deposit system shall be subject to a final income tax at shall define the terms and conditions under which he
the rate of seven and one-half percent (7 1/2%) of such may suspend the imposition of the minimum corporate
interest income. income tax in a meritorious case.
(2) Capital Gains from the Sale of Shares of Stock (4) Gross Income Defined. - For purposes of applying the
Not Traded in the Stock Exchange. - A final tax at minimum corporate income tax provided under
the rates prescribed below shall be imposed on net Subsection (E) hereof, the term 'gross income' shall
capital gains realized during the taxable year from the mean gross sales less sales returns, discounts and
sale, exchange or other disposition of shares of stock allowances and cost of goods sold. "Cost of goods sold'
in a domestic corporation except shares sold or shall include all business expenses directly incurred to
disposed of through the stock exchange: produce the merchandise to bring them to their
Not over P100,000…………………………. 5% present location and use.
Amount in excess of P100,000…………….. 10% For a trading or merchandising concern, 'cost of goods
sold' shall include the invoice cost of the goods sold,
(3) Tax on Income Derived under the Expanded
plus import duties, freight in transporting the goods to
Foreign Currency Deposit System. - Income the place where the goods are actually sold including
derived by a depository bank under the expanded
insurance while the goods are in transit.
foreign currency deposit system from foreign currency
transactions with local commercial banks, including For a manufacturing concern, cost of 'goods
branches of foreign banks that may be authorized by manufactured and sold' shall include all costs of
the Bangko Sentral ng Pilipinas (BSP) to transact production of finished goods, such as raw materials
business with foreign currency depository system units used, direct labor and manufacturing overhead, freight
and other depository banks under the expanded cost, insurance premiums and other costs incurred to
foreign currency deposit system, including interest bring the raw materials to the factory or warehouse.
income from foreign currency loans granted by such In the case of taxpayers engaged in the sale of service,
depository banks under said expanded foreign 'gross income' means gross receipts less sales returns,
currency deposit system to residents, shall be subject allowances, discounts and cost of services. 'Cost of
to a final income tax at the rate of ten percent (10%) of services' shall mean all direct costs and expenses
such income. necessarily incurred to provide the services required
Any income of nonresidents, whether individuals or by the customers and clients including (A) salaries and
corporations, from transactions with depository banks employee benefits of personnel, consultants and
under the expanded system shall be exempt from specialists directly rendering the service and (B) cost
income tax. of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and
(4) Intercorporate Dividends. - Dividends received by a cost of supplies: Provided, however, That in the case of
domestic corporation from another domestic
banks, 'cost of services' shall include interest expense.
corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or
SEC. 28. Rates of Income Tax on Foreign
Disposition of Lands and/or Buildings. - A final tax of Corporations.
six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale, exchange (A) Tax on Resident Foreign Corporations. –
or disposition of lands and/or buildings which are not (1) In General. - Except as otherwise provided in this
actually used in the business of a corporation and are Code, a corporation organized, authorized, or existing
treated as capital assets, based on the gross selling under the laws of any foreign country, engaged in trade
price of fair market value as determined in accordance or business within the Philippines, shall be subject to an
with Section 6(E) of this Code, whichever is higher, of income tax equivalent to thirty-five percent (35%) of the
such lands and/or buildings. taxable income derived in the preceding taxable year
from all sources within the Philippines: provided, That
(E) Minimum Corporate Income Tax on Domestic effective January 1, 1998, the rate of income tax shall be
Corporations. - thirty-four percent (34%); effective January 1, 1999, the
rate shall be thirty-three percent (33%), and effective
(1) Imposition of Tax. - A minimum corporate income tax
of two percent (2%0 of the gross income as of the end

APP 11
INCOME TAX REVIEWER
January 1, 2000 and thereafter, the rate shall be thirty- premiums, annuities, emoluments or other fixed or
two percent (32%). determinable annual, periodic or casual gains, profits,
In the case of corporations adopting the fiscal-year income and capital gains received by a foreign
accounting period, the taxable income shall be corporation during each taxable year from all sources
computed without regard to the specific date when within the Philippines shall not be treated as branch
sales, purchases and other transactions occur. Their profits unless the same are effectively connected with
income and expenses for the fiscal year shall be the conduct of its trade or business in the Philippines.
deemed to have been earned and spent equally for (6) Regional or Area Headquarters and Regional
each month of the period. Operating Headquarters of Multinational Companies.
The reduced corporate income tax rates shall be applied (a) Regional or area headquarters as defined in Section
on the amount computed by multiplying the number of 22(DD) shall not be subject to income tax.
months covered by the new rates within the fiscal year (b) Regional operating headquarters as defined in
by the taxable income of the corporation for the Section 22(EE) shall pay a tax of ten percent (10%) of
period, divided by twelve. their taxable income.
Provided, however, That a resident foreign corporation (7) Tax on Certain Incomes Received by a Resident
shall be granted the option to be taxed at fifteen Foreign Corporation. -
percent (15%) on gross income under the same (a) Interest from Deposits and Yield or any other
conditions, as provided in Section 27 (A). Monetary Benefit from Deposit Substitutes, Trust Funds
(2) Minimum Corporate Income Tax on Resident Foreign and Similar Arrangements and Royalties. - Interest
Corporations. - A minimum corporate income tax of from any currency bank deposit and yield or any other
two percent (2%) of gross income, as prescribed under monetary benefit from deposit substitutes and from
Section 27 (E) of this Code, shall be imposed, under trust funds and similar arrangements and royalties
the same conditions, on a resident foreign corporation derived from sources within the Philippines shall be
taxable under paragraph (1) of this Subsection. subject to a final income tax at the rate of twenty
(3) International Carrier. - An international carrier doing percent (20%) of such interest: Provided, however,
business in the Philippines shall pay a tax of two and That interest income derived by a resident foreign
one-half percent (2 1/2%) on its 'Gross Philippine corporation from a depository bank under the
Billings' as defined hereunder: expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and
(a) International Air Carrier. - 'Gross Philippine Billings'
one-half percent (7 1/2%) of such interest income.
refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail (b) Income Derived under the Expanded Foreign
originating from the Philippines in a continuous and Currency Deposit System. - Income derived by a
uninterrupted flight, irrespective of the place of sale or depository bank under the expanded foreign currency
issue and the place of payment of the ticket or passage deposit system from foreign currency transactions with
document: Provided, That tickets revalidated, local commercial banks including branches of foreign
exchanged and/or indorsed to another international banks that may be authorized by the Bangko Sentral
airline form part of the Gross Philippine Billings if the ng Pilipinas (BSP) to transact business with foreign
passenger boards a plane in a port or point in the currency deposit system units, including interest
Philippines: Provided, further, That for a flight which income from foreign currency loans granted by such
originates from the Philippines, but transshipment of depository banks under said expanded foreign
passenger takes place at any port outside the currency deposit system to residents, shall be subject
Philippines on another airline, only the aliquot portion to a final income tax at the rate of ten percent (10%) of
of the cost of the ticket corresponding to the leg flown such income.
from the Philippines to the point of transshipment shall Any income of nonresidents, whether individuals or
form part of Gross Philippine Billings. corporations, from transactions with depository banks
(b) International Shipping. - 'Gross Philippine Billings' under the expanded system shall be exempt from
means gross revenue whether for passenger, cargo or income tax.
mail originating from the Philippines up to final (c) Capital Gains from Sale of Shares of Stock Not Traded
destination, regardless of the place of sale or in the Stock Exchange. - A final tax at the rates
payments of the passage or freight documents. prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of
(4) Offshore Banking Units. - The provisions of any law to stock in a domestic corporation except shares sold or
the contrary notwithstanding, income derived by
disposed of through the stock exchange:
offshore banking units authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with Not over P100,000………………………… 5%
offshore banking units, including any interest income On any amount in excess of P100,000……. 10%
derived from foreign currency loans granted to (d) Intercorporate Dividends. - Dividends received by a
residents, shall be subject to a final income tax at the resident foreign corporation from a domestic
rate of ten percent (10%) of such income. corporation liable to tax under this Code shall not be
Any income of nonresidents, whether individuals or subject to tax under this Title.
corporations, from transactions with said offshore
banking units shall be exempt from income tax.
(B) Tax on Nonresident Foreign Corporation. -
(5) Tax on Branch Profits Remittances. - Any profit
(1) In General. - Except as otherwise provided in this
remitted by a branch to its head office shall be subject
Code, a foreign corporation not engaged in trade or
to a tax of fifteen (15%) which shall be based on the
business in the Philippines shall pay a tax equal to
total profits applied or earmarked for remittance
thirty-five percent (35%) of the gross income received
without any deduction for the tax component thereof
during each taxable year from all sources within the
(except those activities which are registered with the
Philippines, such as interests, dividends, rents,
Philippine Economic Zone Authority). The tax shall be
royalties, salaries, premiums (except reinsurance
collected and paid in the same manner as provided in
premiums), annuities, emoluments or other fixed or
Sections 57 and 58 of this Code: provided, that
determinable annual, periodic or casual gains, profits
interests, dividends, rents, royalties, including
and income, and capital gains, except capital gains
remuneration for technical services, salaries, wages

APP 12
INCOME TAX REVIEWER
subject to tax under subparagraphs (C) and (d): (1) In General. - The improperly accumulated earnings
Provided, That effective 1, 1998, the rate of income tax tax imposed in the preceding Section shall apply to
shall be thirty-four percent (34%); effective January 1, every corporation formed or availed for the purpose
1999, the rate shall be thirty-three percent (33%); and, of avoiding the income tax with respect to its
effective January 1, 2000 and thereafter, the rate shall shareholders or the shareholders of any other
be thirty-two percent (32%). corporation, by permitting earnings and profits to
(2) Nonresident Cinematographic Film Owner, Lessor or accumulate instead of being divided or distributed.
Distributor. - A cinematographic film owner, lessor, or (2) Exceptions. - The improperly accumulated earnings
distributor shall pay a tax of twenty-five percent (25%) tax as provided for under this Section shall not apply
of its gross income from all sources within the to:
Philippines. (a) Publicly-held corporations;
(3) Nonresident Owner or Lessor of Vessels Chartered by (b) Banks and other nonbank financial intermediaries;
Philippine Nationals. - A nonresident owner or lessor of and
vessels shall be subject to a tax of four and one-half
(c) Insurance companies.
percent (4 1/2%) of gross rentals, lease or charter fees
from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry (C) Evidence of Purpose to Avoid Income Tax. -
Authority. (1) Prima Facie Evidence. - the fact that any corporation
(4) Nonresident Owner or Lessor of Aircraft, Machineries is a mere holding company or investment company
and Other Equipment. - Rentals, charters and other shall be prima facie evidence of a purpose to avoid the
fees derived by a nonresident lessor of aircraft, tax upon its shareholders or members.
machineries and other equipment shall be subject to a (2) Evidence Determinative of Purpose. - The fact that
tax of seven and one-half percent (7 1/2%) of gross the earnings or profits of a corporation are permitted
rentals or fees. to accumulate beyond the reasonable needs of the
(5) Tax on Certain Incomes Received by a Nonresident business shall be determinative of the purpose to avoid
Foreign Corporation. – the tax upon its shareholders or members unless the
corporation, by the clear preponderance of evidence,
shall prove to the contrary.
(a) Interest on Foreign Loans. - A final withholding tax at
the rate of twenty percent (20%) is hereby imposed on (D) Improperly Accumulated Taxable Income. - For
the amount of interest on foreign loans contracted on purposes of this Section, the term 'improperly
or after August 1, 1986; accumulated taxable income' means taxable income'
adjusted by:
(b) Intercorporate Dividends. - A final withholding tax at
the rate of fifteen percent (15%) is hereby imposed on (1) Income exempt from tax;
the amount of cash and/or property dividends received (2) Income excluded from gross income;
from a domestic corporation, which shall be collected (3) Income subject to final tax; and
and paid as provided in Section 57 (A) of this Code,
subject to the condition that the country in which the (4) The amount of net operating loss carry-over
nonresident foreign corporation is domiciled, shall deducted;
allow a credit against the tax due from the nonresident
foreign corporation taxes deemed to have been paid in And reduced by the sum of:
the Philippines equivalent to twenty percent (20%) for
(1) Dividends actually or constructively paid; and
1997, nineteen percent (19%) for 1998, eighteen
percent (18%) for 1999, and seventeen percent (17%) (2) Income tax paid for the taxable year.
thereafter, which represents the difference between Provided, however, That for corporations using the
the regular income tax of thirty-five percent (35%) in calendar year basis, the accumulated earnings under
1997, thirty-four percent (34%) in 1998, and thirty- tax shall not apply on improperly accumulated income
three percent (33%) in 1999, and thirty-two percent as of December 31, 1997. In the case of corporations
(32%) thereafter on corporations and the fifteen adopting the fiscal year accounting period, the
percent (15%) tax on dividends as provided in this improperly accumulated income not subject to this tax,
subparagraph; shall be reckoned, as of the end of the month
(c) Capital Gains from Sale of Shares of Stock not Traded comprising the twelve (12)-month period of fiscal year
in the Stock Exchange. - A final tax at the rates 1997-1998.
prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of Classification of tax payers: INDIVIDUAL/
stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange:
CORPORATION/ ESTATE and TRUST
Not over P100,000…………..………………… 5%
On any amount in excess of P100,000………… 10%

SEC. 31. Taxable Income Defined. - The term taxable

SEC. 29. Imposition of Improperly Accumulated income means the pertinent items of gross income
Earnings Tax. - specified in this Code, less the deductions and/or
(A) In General. - In addition to other taxes imposed by personal and additional exemptions, if any, authorized
this Title, there is hereby imposed for each taxable for such types of income by this Code or other special
year on the improperly accumulated taxable income of laws.
each corporation described in Subsection B hereof, an
improperly accumulated earnings tax equal to ten
percent (10%) of the improperly accumulated taxable INDIVIDUAL: citizens: resident (NET/WORLDWIDE)
income.
non resident (NET/ WITHIN)
(B) Tax on Corporations Subject to Improperly
Accumulated Earnings Tax. - OCW (NET/WITHIN)
alien: resident (NET/WITHIN)

APP 13
INCOME TAX REVIEWER
non-resident engaged in trade or income. If the taxpayer's annual accounting period is
business (NET/WITHIN) other than a fiscal year, as defined in Section 22(Q), or
if the taxpayer has no annual accounting period, or
non-resident not engaged in trade/ does not keep books, or if the taxpayer is an individual,
business (GROSS/ WITHIN) the taxable income shall be computed on the basis of
the calendar year.
CORPORATIONS: domestic (NET/WORLDWIDE)
foreign resident doing business SEC. 44. Period in which Items of Gross Income
(NET /WITHIN) Included. - The amount of all items of gross income
shall be included in the gross income for the taxable
non-resident (not doing business) year in which received by the taxpayer, unless, under
GROSS/ WITHIN methods of accounting permitted under Section 43,
any such amounts are to be properly accounted for as
of a different period. In the case of the death of a
ESTATES and TRUSTS – treated as ind. TP taxpayer, there shall be included in computing taxable
 tax rate on ordinary income/ tax rate for capital income for the taxable period in which falls the date of
gain his death, amounts accrued up to the date of his death
if not otherwise properly includible in respect of such
 regular tax rate/ special tax rates period or a prior period.
 final tax – creditable tax
 withholding tax SEC. 45. Period for which Deductions and Credits
Taken. - The deductions provided for in this Title shall
 flat rate/ graduation of tax rates be taken for the taxable year in which 'paid or accrued'
 min marginal rate / max marginal rate or 'paid or incurred', dependent upon the method of
accounting the basis of which the net income is
 automatic increase of tax rates by 1999 and computed, unless in order to clearly reflect the income,
2000 the deductions should be taken as of a different period.
In the case of the death of a taxpayer, there shall be
allowed as deductions for the taxable period in which
4. Accounting periods & methods of falls the date of his death, amounts accrued up to the
accounting for taxable income & date of his death if not otherwise properly allowable in
deductible expenses respect of such period or a prior period.

SEC. 46. Change of Accounting Period. If a taxpayer,

a. Calendar year/ fiscal year other than an individual, changes his accounting
Accounting period: The accounting period is the period from fiscal year to calendar year, from calendar
year to fiscal year, or from one fiscal year to another,
taxable year. It is a fixed period of time, consisting
the net income shall, with the approval of the
of 12 months, upon the basis of w/c the taxable Commissioner, be computed on the basis of such new
income is computed & the income tax imposed. accounting period, subject to the provisions of Section
47.
Sec. 22. Definitions. –
(P) The term 'taxable year' means the calendar year, or SEC. 47. Final or Adjustment Returns for a Period
the fiscal year ending during such calendar year, upon of Less than Twelve (12) Months.
the basis of which the net income is computed under
this Title. 'Taxable year' includes, in the case of a
(A) Returns for Short Period Resulting from Change of
return made for a fractional part of a year under the Accounting Period. - If a taxpayer, other than an
provisions of this Title or under rules and regulations
individual, with the approval of the Commissioner,
prescribed by the Secretary of Finance, upon changes the basis of computing net income from
recommendation of the commissioner, the period for
fiscal year to calendar year, a separate final or
which such return is made. adjustment return shall be made for the period
(Q) The term 'fiscal year' means an accounting period between the close of the last fiscal year for which
of twelve (12) months ending on the last day of any return was made and the following December 31. If
month other than December. the change is from calendar year to fiscal year, a
(R) The terms 'paid or incurred' and 'paid or accrued' separate final or adjustment return shall be made for
shall be construed according to the method of the period between the close of the last calendar
accounting upon the basis of which the net income is year for which return was made and the date
computed under this Title. designated as the close of the fiscal year. If the
change is from one fiscal year to another fiscal year,
a separate final or adjustment return shall be made
CHAPTER VIII - ACCOUNTING PERIODS AND for the period between the close of the former fiscal
METHODS OF ACCOUNTING year and the date designated as the close of the new
fiscal year.
SEC. 43. General Rule. - The taxable income shall be (B) Income Computed on Basis of Short Period. -
computed upon the basis of the taxpayer's annual Where a separate final or adjustment return is made
accounting period (fiscal year or calendar year, as the under Subsection (A) on account of a change in the
case may be) in accordance with the method of accounting period, and in all other cases where a
accounting regularly employed in keeping the books of separate final or adjustment return is required or
such taxpayer, but if no such method of accounting permitted by rules and regulations prescribed by the
has been so employed, or if the method employed Secretary of Finance, upon recommendation of the
does not clearly reflect the income, the computation Commissioner, to be made for a fractional part of a
shall be made in accordance with such method as in year, then the income shall be computed on the
the opinion of the Commissioner clearly reflects the

APP 14
INCOME TAX REVIEWER
basis of the period for which separate final or (3) Interest on bank deposits. Interest credited on
adjustment return is made. savings bank deposits, even though the bank
nominally has a rule, seldom or never enforced, that it
may require so many days’ notice in advance of
When is income to be reported? cashing depositors’ checks, is INCOME TO THE
Income constructively received DEPOSITOR WHEN CREDITED.
(4) Credit to shareholders of building & loan. An amount
Sec. 51, Rev. Reg. No. 2 When income is to be credited to shareholders of a bldg. & loan assoc., when
reported. such credit passes w/o restriction to the shareholder,
Gains, profits, & income are to be included in the gross has a taxable status as INCOME FOR THE YEAR OF THE
CREDIT. Where the amount of such accumulations has
income for the taxable year in w/c they are received by
the taxpayer, UNLESS they are included when they not become available to the shareholder until the
maturity of a share, the amount of any share in excess
accrue to him in accordance w/ the approved method
of accounting followed by him. of the aggregate amount paid in by the shareholder is
INCOME FOR THE YEAR OF THE MATURITY OF THE
If a person sues in one year on a pecuniary claim or for SHARE.
property, & money or property is received on a
judgment therefor in a later year, income is realized in
THAT YEAR, assuming that the money or property Revenue Regulation #2 Provisions
would have been income in the earliest year if then Sec. 166. General Rule. – The method of accounting
received. This is true of a recovery for patent regularly employed by the taxpayer in keeping his
infringement. books, if such method clearly reflects his income is to
Bad debts or accounts charged off subsequent to March be followed w/ respect to the time as of w/c items of
1, 1913, bec. of the fact that they were determined to gross income & deductions are to be accounted for. If
be worthless, w/c are subsequently recovered, whether the taxpayer does not regularly employ a method of
or not by suit, constitute income for THAT YEAR IN accounting w/c clearly reflects his income, the
WHICH RECOVERED, regardless of the date when computation shall be made in such manner as in the
amounts were charged off. opinion of the Commissioner of Internal Revenue
clearly reflects it.

Sec. 52, Rev. Reg. No. 2 Income constructively

received. Sec. 167. Methods of accounting. – It is recognized
that no uniform method of accounting can be
Income w/c is
prescribed for all taxpayers, & the law contemplates
 credited to the account of, or that each taxpayer shall adopt such forms & systems
 set apart for of accounting as are in his judgment best suited to his
a taxpayer & w/c is drawn upon him at any time is purpose. Each taxpayer is required by law to make a
subject to tax for the YEAR DURING WHICH SO return of his true income. He must, therefore,
CREDITED OR SET APART, although not actually maintain such accounting records as will enable him to
reduced to possession. do so. Any approved standard method of accounting
w/c reflects taxpayer’s income may be adopted.
 To constitute receipt in such a case, the income must
Among the essentials are the following:
be credited to the taxpayer w/o any substantial
limitation or restriction as to the - In all cases in w/c the production, purchase, or sale of
merchandise of any kind is an income-producing
 time or manner of payment or
factor, inventories of the merchandise on hand
 condition upon w/c payment is to be made. (including finished goods, work in process, raw
A BOOK ENTRY, if made, should indicate an absolute materials, & supplies) should be taken at the beginning
transfer fr. one account to another. If the income is & end of the year & used in computing the net income
credited but is set apart, such income must be of the year in accordance w/ sections 144 to 151 of
unqualifiedly subject to the demand of the taxpayer. these regulations.
When a corporation contingently credits Ees w/ bonus Expenditures made during the year should be properly
stock, BUT the stock is not available to such Ees until classified as between capital & income; that is to say,
some future date, the mere crediting on the books of expenditures for items of plant, equipment, etc., w/c
the corporation does NOT constitute receipt. have a useful life extending substantially beyond the
year should be charged to a capital account & not to
an expense account; &
Sec. 53, Rev. Reg. No. 2 Examples of constructive
receipt In any case in w/c the cost of capital assets is being
recovered through deductions for wear & tear,
(1) Interest Coupons. When interest coupons - depletion, or obsolescence, any expenditure (other
 have matured & than ordinary repairs) made to restore the property or
 are payable, prolong its useful life should be added to the property
account or charged against the appropriate reserve &
 but have not been cashed,
not to current expenses.
such interest payment, though not collected when due &
payable, -
Sec. 168. Changes in accounting methods. – The
 is nevertheless available for the taxpayer &
true income, computed under the law, shall in all cases
 should therefore be included in his gross income for be entered in the return. If for any reason the basis of
the YEAR DURING WHICH SUCH COUPONS MATURED. reporting income subject to tax is changed, the
This is true if the coupons are exchanged for other taxpayer shall attach to his return a separate
property instead of eventually being cashed. statement setting forth for the taxable year & for the
Defaulted coupons are income for the year in w/c paid. preceding year the classes of items differently treated
(2) Share of profits. The distributive share of the profits under the two systems, specifying in particular all
of a partner in a gen. partnership duly registered is amounts duplicated or entirely omitted as the result of
regarded as received by him, although not distributed. such change

APP 15
INCOME TAX REVIEWER
A taxpayer who changes the method of accounting complete statement of the facts upon w/c he relies.
employed in keeping his book shall, before computing However, in his income tax return he shall take the
his income upon such new method for purposes of deduction or credit only for the taxable period in w/c it
taxation, secure the consent of the Commissioner of was actually “paid or incurred”, or “paid or accrued”,
Internal Revenue. For the purposes of this section, a as the case may be. Upon the audit of the return, the
change in the method of accounting employed in Commissioner of Internal revenue will decide whether
keeping books means any change in the accounting the case is w/in the exception provided by the law, &
treatment of items of income or deductions, such as a the taxpayer will be advised as to the period for w/c
change fr. cash receipts & disbursements method to the deduction or credit is properly allowable.
the accrual method, or vice versa; a change involving The provisions of paragraph (a) of this section in general
the basis of valuation employed in the computation of are not applicable w/ respect to the taxable period
inventories; a change fr. the cash or accrual method to during w/c the taxpayer dies. In such case, there shall
the long-term contract method, or vice versa; a change also be allowed as deductions & credits for such
in the long-term contract method fr. the percentage of taxable period amounts accrued & credits for such
completion basis to the complete contract basis, or taxable period amounts accrued up to the date of his
vice versa; or a change involving the adoption of, or a death if not otherwise allowable w/ respect to such
change in the use of, any other specialized basis of period or a prior period, regardless of the fact that the
computing net income such as the crop basis. decedent was required to keep his books & make his
Application for permission to change the method of returns on the basis of cash receipts & disbursements.
accounting employed & the basis upon w/c the return
is made shall be filed w/in 90 days after the beginning
of the taxable year to be covered by the return. The Sec. 172. Change of accounting period. – If a
application shall be accompanied by a statement corporation, including a duly registered general co-
specifying all amounts w/c would be duplicated or partnership, desires to change its accounting period fr.
entirely omitted as a result of the proposed change. fiscal year to calendar year or fr. calendar year to fiscal
Permission to change the method of accounting will year, or fr. one fiscal year to another, it shall at any
not be granted unless the taxpayer & the time not less than thirty days prior to the date fixed in
Commissioner of Internal Revenue agree to the terms section 46(b) of the Code for the filing of its return on
& conditions under w/c the change will be effected. the basis of its original accounting period submit a
written application to the Commissioner of Internal
Revenue designating the proposed date for the closing
Sec. 169. Accounting period. – Income tax returns, of its new taxable year, together w/ a statement of the
whether for individuals or for corporations, date on w/c the books of account were opened &
associations, or partnerships, are required to be made closed each year for the past three year, the date on
& their income computed for each calendar year w/c the taxable year began & ended as shown on the
ending on December 31 st of every year. However, returns filed for the past three years, & the reasons
corporations, associations, or partnerships may w/ the why the change in accounting period is desired.
approval of the Commissioner of Internal Revenue first
secured, file their returns & compute their income on
the basis of a fiscal year w/c means an accounting
period of twelve months ending on the last day of any
month other than December. But in no instance shall b. How is income recognized under
individual taxpayers be authorized to establish a fiscal the ff. situations:
year as basis for filing their returns & computing their
income.
i. Long-term contracts
Sec. 170. When included in gross income. – Except
as otherwise provided in section 39 in the case of the
death of a taxpayer, gains, profits, & income are to be SEC. 48. Accounting for Long-term Contracts. -
included in the gross income for the taxable year in Income from long-term contracts shall be reported for
w/c they are received by the taxpayer, unless they are tax purposes in the manner as provided in this Section.
included as of a different period in accordance w/ the As used herein, the term 'long-term contracts' means
approved method of accounting followed by him. If a building, installation or construction contracts covering
taxpayer has died, there shall also be included in a period in excess of one (1) year. Persons whose gross
computing net income for the taxable period in w/c he income is derived in whole or in part from such
died amounts accrued up to the date of his death if not contracts shall report such income upon the basis of
otherwise properly includible [allowable] in respect of percentage of completion. The return should be
such period or a prior period, regardless of the fact accompanied by a return certificate of architects or
that the decedent may have kept his books & made his engineers showing the percentage of completion
returns on the basis of cash receipts & disbursements. during the taxable year of the entire work performed
under contract. There should be deducted from such
gross income all expenditures made during the taxable
Sec. 171. “Paid or incurred” & “paid or accrued”. year on account of the contract, account being taken of
– The terms “paid or incurred” & “paid or accrued” the material and supplies on hand at the beginning
will be construed according to the method of and end of the taxable period for use in connection
accounting upon the basis of w/c the net income is with the work under the contract but not yet so
computed by the taxpayer. The deductions & credits applied. If upon completion of a contract, it is found
must be taken for the taxable year in w/c “paid or that the taxable net income arising thereunder has not
accrued” or “paid or incurred”, unless in order clearly been clearly reflected for any year or years, the
to reflect the income such deductions or credits should Commissioner may permit or require an amended
be taken as of a different period. If a taxpayer desires return.
to claim a deduction or a credit as of a period other
than the period in w/c it was “paid or accrued” or “paid
or incurred”, he shall attach to his return a statement
setting forth his request for consideration of the case ii. Installment sales
by the Commissioner of Internal Revenue together w/ a

APP 16
INCOME TAX REVIEWER
SEC. 49. Installment Basis. – market value of such buildings or improvements
(A) Sales of Dealers in Personal Property. - Under rules subject to the lease. (completion basis)
and regulations prescribed by the Secretary of Finance, (b) The lessor may spread over the life of the lease the
upon recommendation of the Commissioner, a person estimated depreciated value of such buildings or
who regularly sells or otherwise disposes of personal improvements at the termination of the lease & report
property on the installment plan may return as income as income for each of the lease an adequate part
therefrom in any taxable year that proportion of the thereof. (Pro-rated basis)
installment payments actually received in that year, If for any other reason than a bona fide purchase fr. the
which the gross profit realized or to be realized when lessee by the lessor, the lease is terminated so that
payment is completed, bears to the total contract the lessor comes into possession or control of the prop.
price. prior to the time originally fixed for the termination of
(B) Sales of Realty and Casual Sales of Personality. - In the lease, the lessor receives additional income for the
the case (1) of a casual sale or other casual disposition year in w/c the lease is so terminated to the extent
of personal property (other than property of a kind that the value of such buildings or improvements when
which would properly be included in the inventory of he became entitled to such possession exceeds the
the taxpayer if on hand at the close of the taxable amount already reported as income on account of the
year), for a price exceeding One thousand pesos erection of such buildings or improvements. No
(P1,000), or (2) of a sale or other disposition of real appreciation in value due to causes other than the
property, if in either case the initial payments do not premature termination of the lease shall be included.
exceed twenty-five percent (25%) of the selling price, Conversely, if the bldg. or improvements are destroyed
the income may, under the rules and regulations prior to the expiration of the lease, the lessor is
prescribed by the Secretary of Finance, upon entitled to deduct as loss for the year when such
recommendation of the Commissioner, be returned on destruction takes place the amount previously reported
the basis and in the manner above prescribed in this as income bec. of the erection of such buildings or
Section. As used in this Section, the term 'initial improvements, less any salvage value subject to the
payments' means the payments received in cash or lease to the extent that such loss was not
property other than evidences of indebtedness of the compensated for by insurance. If the bldgs. or
purchaser during the taxable period in which the sale improvements destroyed were acquired prior to March
or other disposition is made. 1, 1013, the deduction shall be based on the cost or
(C) Sales of Real Property Considered as Capital Asset by the value subject to the lease to the extent that such
Individuals. - An individual who sells or disposes of real loss was not compensated for by insurance.
property, considered as capital asset, and is otherwise
qualified to report the gain therefrom under Subsection
(B) may pay the capital gains tax in installments under c. Recording income & expense/
rules and regulations to be promulgated by the Keeping of books
Secretary of Finance, upon recommendation of the
Commissioner.
(D) Change from Accrual to Installment Basis. - If a
taxpayer entitled to the benefits of Subsection (A)
i. Computing gross/ net
elects for any taxable year to report his taxable income income
on the installment basis, then in computing his income
ii. Allocating income &
for the year of change or any subsequent year,
amounts actually received during any such year on expense
account of sales or other dispositions of property made iii. Matching principle/ cash
in any prior year shall not be excluded.
method/ accrual/ mixed
SEC. 50. Allocation of Income and Deductions. - In
the case of two or more organizations, trades or iv. Acctg. method w/c clearly
businesses (whether or not incorporated and whether reflects income
or not organized in the Philippines) owned or controlled
directly or indirectly by the same interests, the
Commissioner is authorized to distribute, apportion or
Sec. 22 (R), NIRC. The terms 'paid or incurred' and
allocate gross income or deductions between or among
'paid or accrued' shall be construed according to the
such organization, trade or business, if he determined
method of accounting upon the basis of which the net
that such distribution, apportionment or allocation is
income is computed under this Title.
necessary in order to prevent evasion of taxes or
clearly to reflect the income of any such organization,
trade or business.
v. Differences bet. tax acctg./
financial acctg.
iii. Termination of
leasehold
III. ITEMS OF GROSS INCOME AND
RR # 2. Sec. 49. Improvements by lessees---When EXCLUSIONS
buildings are erected or improvements made by a
lessee in pursuance of an agreement w/ the lessor &
Sec. 31. Taxable income Defined. – The term
such buildings or improvements are not subject to
“taxable income” means the pertinent items of gross
removal by the lessee, the lessor may at his option
income specified in this Code, less the deductions,
report the income therefr. upon either of the following
and/ or personal and additional exemptions if any,
bases:
authorized by such types of income by this Code or
(a) The lessor may report as income at the time when other special laws.
such buildings or improvements are completed the fair

APP 17
INCOME TAX REVIEWER
Sec. 32. Gross Income. – earnings and principal of the fund thus accumulated,
(a) General definition. – Gross income means all and wherein its is provided in said plan that at no time
income fr. whatever source derived, including (but not shall any part of the corpus or income of the fund be
limited to) the following items: used for, or be diverted to, any purpose other than for
the exclusive benefit of the said officials and
[Link] for services in whatever form paid, employees.
including fees, salaries, wages, commissions, & (b) Any amount received by an official or employee or
similar items; by his heirs from the employer as a consequence of
[Link] income derived fr. the conduct of trade or separation of such official or employee from the
business or the exercise of profession; service of the employer because of death sickness or
[Link] derived fr. dealings in property; other physical disability or for any cause beyond the
control of the said official or employee.
[Link];
(c) The provisions of any existing law to the contrary
[Link];
notwithstanding, social security benefits, retirement
[Link]; gratuities, pensions and other similar benefits received
[Link]; by resident or nonresident citizens of the Philippines or
[Link]; aliens who come to reside permanently in the
Philippines from foreign government agencies and
[Link] & winnings; other institutions, private or public.
10. Pensions; & (d) Payments of benefits due or to become due to any
11. Partner’s distributive share of the gross income person residing in the Philippines under the laws of the
of general professional partnership. United States administered by the United States
Veterans Administration.
(b) Exclusions fr. gross income. – The following items
shall not be included in gross income & shall be (e) Benefits received from or enjoyed under the Social
exempt fr. taxation under this Title: Security System in accordance with the provisions of
Republic Act No. 8282.
1. Life insurance. – The proceeds of life insurance
policies paid to the heirs or beneficiaries upon the (f) Benefits received from the GSIS under Republic Act
death of the insured, whether in a single sum or No. 8291, including retirement gratuity received by
otherwise, but if such amounts are held by the insurer government officials and employees.
under an agreement to pay interest thereon, the
interest payments shall be included in gross income. (7) Miscellaneous Items. –
(2) Amount Received by Insured as Return of Premium. - (a) Income Derived by Foreign Government. - Income
The amount received by the insured, as a return of derived from investments in the Philippines in loans,
premiums paid by him under life insurance, stocks, bonds or other domestic securities, or from
endowment, or annuity contracts, either during the interest on deposits in banks in the Philippines by (i)
term or at the maturity of the term mentioned in the foreign governments, (ii) financing institutions owned,
contract or upon surrender of the contract. controlled, or enjoying refinancing from foreign
(3) Gifts, Bequests, and Devises. _ The value of property governments, and (iii) international or regional
acquired by gift, bequest, devise, or descent: Provided, financial institutions established by foreign
however, That income from such property, as well as governments.
gift, bequest, devise or descent of income from any (b) Income Derived by the Government or its Political
property, in cases of transfers of divided interest, shall Subdivisions. - Income derived from any public utility
be included in gross income. or from the exercise of any essential governmental
(4) Compensation for Injuries or Sickness. - amounts function accruing to the Government of the Philippines
received, through Accident or Health Insurance or or to any political subdivision thereof.
under Workmen's Compensation Acts, as (c) Prizes and Awards. - Prizes and awards made
compensation for personal injuries or sickness, plus primarily in recognition of religious, charitable,
the amounts of any damages received, whether by suit scientific, educational, artistic, literary, or civic
or agreement, on account of such injuries or sickness. achievement but only if:
(5) Income Exempt under Treaty. - Income of any kind, to
(i) The recipient was selected without any action
the extent required by any treaty obligation binding
upon the Government of the Philippines. on his part to enter the contest or proceeding;
and
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(ii) The recipient is not required to render substantial
future services as a condition to receiving the prize or
(a) Retirement benefits received under Republic Act No. award.
7641 and those received by officials and employees of
private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan (d) Prizes and Awards in sports Competition. - All prizes
maintained by the employer: Provided, That the and awards granted to athletes in local and
retiring official or employee has been in the service of international sports competitions and tournaments
the same employer for at least ten (10) years and is whether held in the Philippines or abroad and
not less than fifty (50) years of age at the time of his sanctioned by their national sports associations.
retirement: Provided, further, That the benefits granted (e) 13th Month Pay and Other Benefits. - Gross benefits
under this subparagraph shall be availed of by an received by officials and employees of public and
official or employee only once. For purposes of this private entities: Provided, however, That the total
Subsection, the term 'reasonable private benefit plan' exclusion under this subparagraph shall not exceed
means a pension, gratuity, stock bonus or profit- Thirty thousand pesos (P30,000) which shall cover:
sharing plan maintained by an employer for the benefit (i) Benefits received by officials and employees of the
of some or all of his officials or employees, wherein national and local government pursuant to Republic
contributions are made by such employer for the Act No. 6686;
officials or employees, or both, for the purpose of
distributing to such officials and employees the

APP 18
INCOME TAX REVIEWER
(ii) Benefits received by employees pursuant to  If payment is made in cash, the full amount
Presidential Decree No. 851, as amended by received is subject to tax.
Memorandum Order No. 28, dated August 13, 1986;  If services are paid for w/ something other than
(iii) Benefits received by officials and employees not money, the FMV of the thing taken in payment
covered by Presidential decree No. 851, as amended by is the amount to be included as income.
Memorandum Order No. 28, dated August 13, 1986;
and
 If the services were rendered at a stipulated
price, in the absence of evidence to the
(iv) Other benefits such as productivity incentives and
contrary, such price shall be presumed to be
Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased the FMV of the compensation received.
through rules and regulations issued by the Secretary  Examples of compensation in kind:
of Finance, upon recommendation of the 1. Compensation paid in company stocks is to
Commissioner, after considering among others, the be treated as if the company had sold the
effect on the same of the inflation rate at the end of stock for its FMV & paid the EE in cash.
the taxable year.
2. Where living quarters are furnished in
addition to a cash salary, the rental value
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, should be reported as income.
SSS, Medicare and Pag-ibig contributions, and union
dues of individuals. 3. When meals are given an EE, the value
(g) Gains from the Sale of Bonds, Debentures or other
thereof constitutes income subject to tax.
Certificate of Indebtedness. - Gains realized from the 4. Promissory notes &/or other evidences of
same or exchange or retirement of bonds, debentures indebtedness constitute income according to
or other certificate of indebtedness with a maturity of the amount of their FMV.
more than five (5) years.
(h) Gains from Redemption of Shares in Mutual
a. Factors to consider in income
Fund. - Gains realized by the investor upon
redemption of shares of stock in a mutual fund recognition:
company as defined in Section 22 (BB) of this i. Convenience of the employer
Code. rule

A. Income fr. whatever source derived Sec. 2.78 1(A-2, 6a) , RR 2-98

ii. Factor of restricted preference

1. Income tax is source blind.
iii. Forced savings / forced
2. Treatment of special items: consumption
a. Recovery of accounts
previously written off b. Treatment of the following
b. Forgiveness of indebtedness compensation income:
(Sec. 50 RR 2) i. Fringe benefits to managerial &
c. Tax refunds supervisory Ee’s  EXCLUDED
FR. COMPENSATION INCOME/
d. Found treasure taxed separately.

3. Items of gross income SEC. 33. Special Treatment of Fringe Benefit.-

(A) Imposition of Tax.- A final tax of thirty-four
percent (34%) effective January 1, 1998; thirty-three
A. Compensation for services, percent (33%) effective January 1, 1999; and thirty-two
percent (32%) effective January 1, 2000 and thereafter,
including fees, commission & similar is hereby imposed on the grossed-up monetary value
items of fringe benefit furnished or granted to the employee
(except rank and file employees as defined herein) by
the employer, whether an individual or a corporation
1. Taxable compensation income (unless the fringe benefit is required by the nature of,
or necessary to the trade, business or profession of the
 Pursuant to an Er-Ee relationship employer, or when the fringe benefit is for the
convenience or advantage of the employer). The tax
herein imposed is payable by the employer which tax
Sec.32 (A), NIRC. See above. shall be paid in the same manner as provided for under
Section 57 (A) of this Code. The grossed-up monetary
Sec. 2.78 1 (A) RR 2-98 value of the fringe benefit shall be determined by
dividing the actual monetary value of the fringe benefit
by sixty-six percent (66%) effective January 1, 1998;
De Leon: sixty-seven percent (67%) effective January 1, 1999;
and sixty-eight percent (68%) effective January 1, 2000
 Compensation for personal services is usually and thereafter: Provided, however, That fringe benefit
made in money but it may also be paid for in furnished to employees and taxable under Subsections
kind, or both in money & kind (B), (C), (D) and (E) of Section 25 shall be taxed at the

APP 19
INCOME TAX REVIEWER
applicable rates imposed thereat: Provided, further, 4. transportation / representation & living
That the grossed -Up value of the fringe benefit shall allowance
be determined by dividing the actual monetary value
of the fringe benefit by the difference between one 5. other fringe benefits
hundred percent (100%) and the applicable rates of
income tax under Subsections (B), (C), (D), and (E) of
Section 25.
Meaning of rank & file:

Sec. 22 (AA), NIRC. The term 'rank and file

(B) Fringe Benefit defined.- For purposes of this
employees' shall mean all employees who are holding
Section, the term 'fringe benefit' means any good,
neither managerial nor supervisory position as defined
service or other benefit furnished or granted in cash or
under existing provisions of the Labor Code of the
in kind by an employer to an individual employee
Philippines, as amended.
(except rank and file employees as defined herein)
such as, but not limited to, the following: Sec. 2.78-1 RR 2-98
(1) Housing;
(2) Expense account; Exempt fr. Tax
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and
others; Collector vs. Henderson
(5) Interest on loan at less than market rate to the Facts: Arthur Henderson is the president of
extent of the difference between the market rate and the American International Underwriters for
actual rate granted;
the Philippines w/c represents a group of
6) Membership fees, dues and other expenses borne by American insurance companies engaged in the
the employer for the employee in social and athletic
clubs or other similar organizations; business of general insurance (except life
(7) Expenses for foreign travel; insurance). He receives a basic annual salary
(8) Holiday and vacation expenses;
of P30,000 & allowance for house rental &
utilities (light, water, telephone, etc.).
(9) Educational assistance to the employee or his
dependents; and Although he & his wife are childless & are only
(10) Life or health insurance and other non-life insurance two in the family, they lived in a large
premiums or similar amounts in excess of what the law apartment provided for by his employer. As
allows. company president, he & his wife had to
entertain & put up houseguests for the
(C) Fringe Benefits Not Taxable. - The following company. The BIR now seeks to collect taxes
fringe benefits are not taxable under this Section: on the allowances for rental & utilities
(1) fringe benefits which are authorized and exempted expenses.
from tax under special laws;
(2) Contributions of the employer for the benefit of the Held: The exigencies of Henderson’s high
employee to retirement, insurance and hospitalization executive position, not to mention social
benefit plans; standing, demanded & compelled them to live
(3) Benefits given to the rank and file employees, in a more spacious & pretentious quarters like
whether granted under a collective bargaining the ones they had occupied. Although
agreement or not; and entertaining & putting up houseguests &
(4) De minimis benefits as defined in the rules and guests of the ER were not Henderson’s
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner. predominant occupation as president, he & his
The Secretary of Finance is hereby authorized to
wife had to do so. That is why his ER
promulgate, upon recommendation of the (corporation) had to grant him allowances for
Commissioner, such rules and regulations as are rental & utilities in addition to his annual basic
necessary to carry out efficiently and fairly the salary in order to take care of those extra
provisions of this Section, taking into account the
expenses for rental & utilities in excess of their
peculiar nature and special need of the trade, business
or profession of the employer. personal needs. Hence, the fact that the
taxpayers had to live or did not have to live in
the apartments chosen by the ER is of no
Revenue Regulation 3-98 moment, for no part of the allowances in
question redounded to their personal benefit or
ii. Fringe benefits not taxable: was retained by them. Their bills for rental &
See Sec. 33 C above. utilities were paid directly by the ER to the
creditors. Henderson is entitle to a ratable
iii. Treatment of the ff. items for
value of the allowances, & only a reasonable
rank & file Ee’s:
amount they would have spent for house
rentals & utilities should be the amount subject
1. Non-cash benefits: free use of facilities to tax, & the excess considered as expenses of
2. Meals & lodging/ living quarters the corporation.
3. Imputed rent/ use of household durable
Pirovano vs. Commissioner

APP 20
INCOME TAX REVIEWER
Facts: Pirovano was president & general each taxable year from all sources within the
manager of the De la Rama Steamship Philippines by an individual alien who is a resident of
the Philippines.
Company until the time of his death. The
The tax shall be computed in accordance with and at the
company had insured his life w/ various rates established in the following schedule:
insurance companies for a total sum of
P1,000,000, w/ itself as the beneficiary. After Not over P10,000………………………………… 5%
Pirovano’s death, the company renounced its Over P10,000 but not over P30,000…………P500+10% of
rights over the proceeds of the insurance the excess over P10,000
policies in favor of Pirovano’s children. The Over P30,000 but not over P70,000……… P2,500+15% of
CIR collected a donee’s gift tax fr. the children. the excess over P30,000
The latter contest the imposition on the ground Over P70,000 but not over P140,000……..8,500+20% of
that the act of the company was not motivated the excess over P70,000
solely by its sense of gratitude but was made Over P140,000 but not over P250,000… P22,500+25% of
the excess over P140,000
for compensation for Pirovano’s services to the
company. Over P250,000 but not over P500,000… P50,000+30% of
the excess over P250,000
Held: A donation made out of gratitude for Over P500,000 ……………………………… P125,000+34%
past services is subject to the donee’s gift tax. of the excess over P500,000 in 1998.
Art. 726, NCC provides that “when a person
gives to another a thing on account of the Provided, That effective January 1, 1999, the top
latter’s merit or of the services rendered by marginal rate shall be thirty-three percent (33%) and
him provided they do not constitute a effective January 1, 2000, the said rate shall be thirty-
two percent (32%).
demandable debt, the conveyances remain a
For married individuals, the husband and wife, subject to
gift or donation.” In the CAB, it was the provision of Section 51 (D) hereof, shall compute
emphasized in the Director’s resolution that separately their individual income tax based on their
the company decided to give the heirs the respective total taxable income: Provided, That if any
proceeds “out of gratitude”. income cannot be definitely attributed to or identified
as income exclusively earned or realized by either of
the spouses, the same shall be divided equally
between the spouses for the purpose of determining
c. Income earner & the applicable their respective taxable income.
tax rates (B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A
final tax at the rate of twenty percent (20%) is hereby
i. Regular compensation imposed upon the amount of interest from any
income modified gross currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds
and similar arrangements; royalties, except on books,
 Only ind. taxpayers earn comp. income as well as other literary works and musical
compositions, which shall be imposed a final tax of ten
 Applicable rates: percent (10%); prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be
Citizens, Res Alien & Non-Res. Alien subject to tax under Subsection (A) of Section 24; and
engaged in trade or business: other winnings (except Philippine Charity Sweepstakes
and Lotto winnings), derived from sources within the
Philippines: Provided, however, That interest income
SEC. 24. Income Tax Rates. received by an individual taxpayer (except a
nonresident individual) from a depository bank under
(A) Rates of Income Tax on Individual Citizen and
the expanded foreign currency deposit system shall be
Individual Resident Alien of the Philippines.
subject to a final income tax at the rate of seven and
(1) An income tax is hereby imposed: one-half percent (7 1/2%) of such interest income:
Provided, further, That interest income from long-term
(a) On the taxable income defined in Section 31 of this deposit or investment in the form of savings, common
Code, other than income subject to tax under or individual trust funds, deposit substitutes,
Subsections (B), (C) and (D) of this Section, derived for investment management accounts and other
each taxable year from all sources within and without investments evidenced by certificates in such form
the Philippines be every individual citizen of the prescribed by the Bangko Sentral ng Pilipinas (BSP)
Philippines residing therein; shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of
(b) On the taxable income defined in Section 31 of this the certificate pre-terminate the deposit or investment
Code, other than income subject to tax under before the fifth (5th) year, a final tax shall be imposed
Subsections (B), (C) and (D) of this Section, derived for on the entire income and shall be deducted and
each taxable year from all sources within the withheld by the depository bank from the proceeds of
Philippines by an individual citizen of the Philippines the long-term deposit or investment certificate based
who is residing outside of the Philippines including on the remaining maturity thereof:
overseas contract workers referred to in Subsection(C)
of Section 23 hereof; and
Four (4) years to less than five (5) years - 5%;
(c) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under Three (3) years to less than (4) years - 12%; and
Subsections (b), (C) and (D) of this Section, derived for Less than three (3) years - 20%

APP 21
INCOME TAX REVIEWER
herein mentioned: Provided, still further, That the said
(2) Cash and/or Property Dividends - A final tax at the tax exemption can only be availed of once every ten
following rates shall be imposed upon the cash and/or (10) years: Provided, finally, that if there is no full
property dividends actually or constructively received utilization of the proceeds of sale or disposition, the
by an individual from a domestic corporation or from a portion of the gain presumed to have been realized
joint stock company, insurance or mutual fund from the sale or disposition shall be subject to capital
companies and regional operating headquarters of gains tax. For this purpose, the gross selling price or
multinational companies, or on the share of an fair market value at the time of sale, whichever is
individual in the distributable net income after tax of a higher, shall be multiplied by a fraction which the
partnership (except a general professional partnership) unutilized amount bears to the gross selling price in
of which he is a partner, or on the share of an order to determine the taxable portion and the tax
individual in the net income after tax of an association, prescribed under paragraph (1) of this Subsection shall
a joint account, or a joint venture or consortium be imposed thereon.
taxable as a corporation of which he is a member or
co-venturer:
 5% - 34% (1998) 33% (1999) 32% (2000)/
Six percent (6%) beginning January 1, 1998; modified gross
Eight percent (8%) beginning January 1, 1999;  Non-resident Alien NETB  25% gross
Ten percent (10% beginning January 1, 2000. compensation income (no deductions/
exemption allowed)
Provided, however, That the tax on dividends shall apply
only on income earned on or after January 1, 1998. Note: special cases: alien employed by regional
Income forming part of retained earnings as of HQ of multination, offshore banking units/
December 31, 1997 shall not, even if declared or petroleum service contractor  15% final tax
distributed on or after January 1, 1998, be subject to
this tax.
i. Final tax on fringe benefit
(C) Capital Gains from Sale of Shares of Stock not Traded (NON-RANK and FILE) at the ff.
in the Stock Exchange. - The provisions of Section rates:
39(B) notwithstanding, a final tax at the rates
prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the
 34% 1998, 33% 1999, 32% 2000 based on the
sale, barter, exchange or other disposition of shares of
stock in a domestic corporation, except shares sold, or
grossed up monetary value of fringe benefit.
disposed of through the stock exchange. The FINAL TAX w/held & pd. by Ee’s at ff. rates:
Not over P100,000…………………………….. 5%
On any amount in excess of P100,000………… 10% 1. Res. Cit & Res. Aliens – 34% 1998; 33%
1999; 32% 2000.
(D) Capital Gains from Sale of Real Property. - 2. Aliens employed by regional HQ of a
(1) In General. - The provisions of Section 39(B) multinational corp. 15%
notwithstanding, a final tax of six percent (6%) based 3. Non-res. alien NOT engaged in trade or
on the gross selling price or current fair market value business: 25%
as determined in accordance with Section 6(E) of this
Code, whichever is higher, is hereby imposed upon
capital gains presumed to have been realized from the TAX BASE: grossed up monetary value of fringe
sale, exchange, or other disposition of real property
benefits
located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and Note: The grossed up monetary value of the fringe
trusts: Provided, That the tax liability, if any, on gains benefit shall be determined by dividing the actual
from sales or other dispositions of real property to the
government or any of its political subdivisions or
monetary value of the fringe benefit by the tax
agencies or to government-owned or controlled rate.
corporations shall be determined either under Section
24 (A) or under this Subsection, at the option of the
taxpayer. Please read: Rev. Reg. 3-98
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital
gains presumed to have been realized from the sale or 2. Exclusions fr. gross income
disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence a. Compensation for injuries or
within eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the capital sickness
gains tax imposed under this Subsection: Provided,
That the historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the
new principal residence built or acquired: Provided,
further, That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from
the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption

APP 22
INCOME TAX REVIEWER
Sec. 32 (b,4), NIRC. Compensation for injuries or 042-91 (March 13, 1991)
sickness. – Amounts received, through Accident or
Health Insurance or under Workmen’s Compensation Facts: The Consuelo Zobel Alger Foundation
Acts, as compensation for personal injuries or sickness, (CZAF), a U.S. corporation not engaged in
plus the amounts of any damages received whether by business in the Philippines, requested for
suit or agreement on account of such injuries or
sickness.
confirmation of its opinion to the effect that
the gross amount of interest derived by it fr. its
Philippine currency bank deposits in the
Philippines is subject to a 15% w/holding tax.
b. Income exempt under treaty
Held: Pursuant to Sec. 25(b)(1), NIRC, foreign
corporations not engaged in trade or business
Sec. 32 (b,5), NIRC. Income exempt under treaty. – in the Philippines shall pay a tax equal to 35%
Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the
of gross income received during each taxable
Philippines. year fr. all sources w/in the Philippines such as
interest, dividends, rents, royalties, etc.
However, Art. 12(2) of the RP-US Tax Treaty
Garrison vs. CA provides that “interest derived by a resident of
one of the contracting States fr. sources w/in
Held: The exemption granted to the
the other contracting State shall not be taxed
petitioners by the Military Bases Agreement fr.
by the other contracting State at a rate in
payment of income tax is not absolute. By the
excess of 15% of the gross amount of such
explicit terms of the MBA, it exists only as
interest.” Such being the case, the CZAF’s
regards income derived fr. their employment
interest income derived fr. its Philippine
“in the Philippines in connection w/ the
currency bank deposits is subject to a 15% tax
construction, maintenance, operation or
rate pursuant to Art. 12(2) of the RP-US Tax
defense of the bases”; it does not exist in
Treaty.
respect of other income, i.e. obtained or
proceeding fr. Philippine sources or sources
other than U.S. sources. Obviously, w/ respect Read at least one tax treaty.
to the latter form of income, the petitioners &
all other American nationals who are residents
of the Philippines are legally bound to pay the c. 13th month pay & other benefits
tax thereon.

BIR Rulings:

031-91 (Feb. 25, 1991) Sec. 32 (B, 7, e). 13th Month Pay and Other
Benefits. - Gross benefits received by officials and
Facts: The Refugee Services Philippines, Inc. employees of public and private entities: Provided,
(RSP), through Josefina Mendoza, requested for however, That the total exclusion under this
subparagraph shall not exceed Thirty thousand pesos
tax exemption fr. the BIR on the ground that it (P30,000) which shall cover:
is a non-stock, non-profit organization
(i) Benefits received by officials and employees of the
implementing projects for the United Nations national and local government pursuant to Republic
High Commissioner for Refugees (UNHCR). Act No. 6686;
Held: Tax exemption denied. Art. 18 of the (ii) Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
Convention on the Privileges & Immunities of Memorandum Order No. 28, dated August 13, 1986;
the United Nations is specific as to who are the (iii) Benefits received by officials and employees not
employees or officials entitled to tax covered by Presidential decree No. 851, as amended by
exemption. Only officials of the United Nations Memorandum Order No. 28, dated August 13, 1986;
& of the specialized agencies of the UN whose and
names are included in the list of officials w/c (iv) Other benefits such as productivity incentives and
shall fr. time to time be communicated & made Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased
known to the governments of the member- through rules and regulations issued by the Secretary
nations are exempt fr. the payment of income of Finance, upon recommendation of the
tax. In this case, there is no showing that the Commissioner, after considering among others, the
RSP & its employees had been included in such effect on the same of the inflation rate at the end of
the taxable year.
list. The amounts that RSP receives fr. the UN
represent the consideration for the services it
renders under a contract w/ it. Such being the i. Items to be included/ Limitation
case, RSP’s relationship w/ UNHCR is by virtue
of a contract, & not as conferred under the ii. Requirements for exclusion
provisions of the UN Charters.

APP 23
INCOME TAX REVIEWER
B. Pensions/ Retirement benefits/ b. Separation pay/ cause beyond
Separation pay Ee’s control (question of fact/
must be determined on the
basis of prevailing facts &
1. Taxable items : Pensions circumstances)
2. Exclusions
 must not be asked for or INITIATED by the
Sec. 32 (B,6, 1-f). Retirement Benefits, Pensions, Ee
Gratuities, etc.-
 was not of his own making
(a) Retirement benefits received under Republic Act No. c. Similar benefits received fr.
7641 and those received by officials and employees of foreign govt.
private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan d. Benefits recvd fr. US Veterans
maintained by the employer: Provided, That the Admin
retiring official or employee has been in the service of
the same employer for at least ten (10) years and is e. Benefits fr. SSS/GSIS
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 Commissioner vs. CA
official or employee only once. For purposes of this Facts: GCL Retirement Plan is an EE
Subsection, the term 'reasonable private benefit plan'
means a pension, gratuity, stock bonus or profit- trust maintained by the ER. Purpose of the
sharing plan maintained by an employer for the benefit plan is to provide for retirement pensions,
of some or all of his officials or employees, wherein disability & death benefits to the EE. GCL
contributions are made by such employer for the made investments but 15% of that was w/held
officials or employees, or both, for the purpose of
distributing to such officials and employees the
as final w/holding tax. Is GCL entitled to
earnings and principal of the fund thus accumulated, refund.
and wherein its is provided in said plan that at no time
Held: RA 4917 specifically provides that
shall any part of the corpus or income of the fund be
used for, or be diverted to, any purpose other than for retirement benefits received by officials & Ees
the exclusive benefit of the said officials and of private firms are exempt from all taxes. In
employees. so far as Ees trusts are concerned, RA 4917
(b) Any amount received by an official or employee or should be read together w/ Sec 53(b) w/c
by his heirs from the employer as a consequence of provides that the tax imposed by this Title
separation of such official or employee from the
service of the employer because of death sickness or
shall not apply to ee’s trusts w/c forms part of
other physical disability or for any cause beyond the a pension, stock bonus, or income-sharing plan
control of the said official or employee. of an ER. for the benefit of the some or all of
(c) The provisions of any existing law to the contrary his EE’s. EE’s trust & benefit plans provide
notwithstanding, social security benefits, retirement eco. assistance to EE’s upon occurrence of
gratuities, pensions and other similar benefits received some contingency. The tax advantage was
by resident or nonresident citizens of the Philippines or
aliens who come to reside permanently in the conceived in order to encourage the formation
Philippines from foreign government agencies and & establishment of such private plans for the
other institutions, private or public. benefit of EE’s.
(d) Payments of benefits due or to become due to any
person residing in the Philippines under the laws of the
United States administered by the United States Employees Trusts
Veterans Administration. The tax imposed on estates & trusts does not apply
(e) Benefits received from or enjoyed under the Social to income of an EE’s trust provided the ff.
Security System in accordance with the provisions of conditions are satisfied:
Republic Act No. 8282.
1. The EE’s trust forms part of a
(f) Benefits received from the GSIS under Republic Act
No. 8291, including retirement gratuity received by  pension
government officials and employees.
 stock bonus or
Sec. 2.78.1 (B, 1-12) RR 2-98  profit-sharing plan
 of the ER (Corp. or business partnership) for
a. Retirement benefits under RA the benefit of some or all of its EE’s
2. Contributions made to the trust by such ER,
7641 and
EE or both for the purpose of distributing to such
Retirement benefits received EE’s the earnings & principal of the fund
by officials & Ee’s of pvt. firms fr. accumulated by the trust in accordance w/ such
a reasonable plan. plan;
3. Such contributions were made for the
purpose of distributing the earnings & principal of
the fund accumulated by the trust; &
APP 24
INCOME TAX REVIEWER
4. The trust instrument makes it impossible, at a. It is ordinary & necessary traveling & representation
any time prior to the satisfaction of all liabilities w/ or entertainment expenses paid or incurred by the Ee
respect to EE’s under the trust, for part of the in the pursuit of the trade or business of the ER
corpus or income to be (w/in the taxable year or b. The EE is required to & does, make an
thereafter) accounting/liquidation for such expense in accordance
w/ the specific req.’s of substantiation for each
 used for or category of expense.

 diverted to If the reimbursements or advances exceed the actual

expenses, the excess if not returned to the ER
 purposes other than for the exclusive constitutes taxable compensation.
benefit of the EE’s
Zialcita case
C. PASSIVE INCOME
Facts: On Aug. 23, 1990, a resolution of the ct.
en banc was issued regarding the amounts 1. Interest income (Sec. 32 A, 4)
claimed by Atty. Zialcita on the occasion of his a. Taxable interest income
retirement. “ The terminal leave pay of Atty. i. Sources of interest
Zialcita received by virtue of his compulsory income
retirement can never be considered a part of
his salary subject to the payment of income
tax but falls under the phrase “other similar 1. interest on bank deposit/deposit substitute/
benefits received by retiring Ees & workers... & fr. trust fund & similar arrangement
thus exempt fr. the payment of IT. “ 2. interest on lending/interest income fr. bonds
The dispositive portion of the Res. 3. interest on uncollected salary
provides that Atty. Z is to be refunded the amt. 4. Int. on foreign bonds/ gov’t. bonds
w/c was deducted fr. his terminal leave pay & 5. in on T-bills
the ct. declared that “henceforth, no w/holding 6. int. earned fr. deposit maintained under FCD
tax shall be deducted by any office of this system
Court fr. the terminal leave pay benefits of all
retirees similarly situated...” Rev. Reg. 10-98: interest income of pawnshop
CIR filed a motion for clarification &/or operators
reconsideration.
Held: Terminal leave pay is exempt fr. IT. W/in ii. Meaning of the ff.
the purview of the NIRC provisions, compulsory items:
retirement may be considered as a “cause
beyond the control of said official or Ee.” Sec. 22 (V) NIRC. The term 'bank' means every
Consequently, the amt. he received by way of banking institution, as defined in Section 2 of RA No.
commutation of his accumulated leave credits 337, as amended, otherwise known as the General
banking Act. A bank may either be a commercial bank,
fall w/in Sec. 28 (b, 7b) NIRC. Or it may a thrift bank, a development bank, a rural bank or
likewise be viewed as a “retirement gratuity specialized government bank.
received by gov’t officials & Ees” w/c is (Y) The term 'deposit substitutes' shall mean an
another exclusion fr. gross income under Sec. alternative from of obtaining funds from the public (the
28(b,7f). term 'public' means borrowing from twenty (20) or
more individual or corporate lenders at any one time)
other than deposits, through the issuance,
1. BIR Ruling # 014-91 & 029-91, 085-91, & 020-91 endorsement, or acceptance of debt instruments for
Under Sec. 28(b) (7) (B) of the NIRC, any amt. received the borrowers own account, for the purpose of
by an official or employee by his heirs fr. his employer relending or purchasing of receivables and other
as a consequence of separation of such official or EE fr. obligations, or financing their own needs or the needs
the ER’s service due to death, sickness, or other of their agent or dealer. These instruments may
physical disability or for any cause beyond the control include, but need not be limited to bankers'
of the said official or Ee is exempt fr. taxes regardless acceptances, promissory notes, repurchase
of age or length of service. The phrase “for any cause agreements, including reverse repurchase agreements
beyond the control of the said official or Ee” connotes entered into by and between the Bangko Sentral ng
involuntariness on the part of the official or EE. The Pilipinas (BSP) and any authorized agent bank,
separation fr. the service of the official or EE must not certificates of assignment or participation and similar
be asked for or initiated by him. instruments with recourse: Provided, however, That
debt instruments issued for interbank call loans with
2. BIR Ruling # 021-91
maturity of not more than five (5) days to cover
Amounts paid specifically either as advance or deficiency in reserves against deposit liabilities,
reimbursements for transportation, representation & including those between or among banks and quasi-
other bona fide ordinary & necessary expenses banks, shall not be considered as deposit substitute
incurred or reasonably expected to be incurred by the debt instruments.
employee in the performance of his duties are not
compensation subject to w/holding tax if the ff.,
conditions are satisfied:
 ex. promissory notes; repurchase
agreements
APP 25
INCOME TAX REVIEWER
 exception: Debt instruments issued for From trust fund & similar arrangement (PESO-
interbank call loans w/ maturity of not more deposit) – Within
than 5 days.  20% (FINAL TAX) w/held by payer-bank Citizen/
resident alien
 25% (FINAL) Nonresident alien NETB
iii. Treatment of bonds
issued at a  20% (FINAL) corp.
premium/ at a
discount ii. interest income fr. long term
 adjustment to int. income/ recognition of
deposit or investment in the
income upon retirement of bond. form of savings, common ind.
trust fund, deposit substitutes,
investment management
iv. Interest on
accounts & other investment
insurance proceeds
evidenced by certificates in
such form prescribed by the
b. Exclusions BSP shall be exempt fr. tax
imposed under this
Subsection.
Sec. 32 (b,7) NIRC. Miscellaneous Items. –
(a) Income Derived by Foreign Government. - Income
derived from investments in the Philippines in loans, * Denomination P10,000 issued
stocks, bonds or other domestic securities, or from by banks ONLY
interest on deposits in banks in the Philippines by
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying Sec. 22 (FF), NIRC. The term 'long-term deposit or
refinancing from foreign governments, and investment certificates' shall refer to certificate of
(iii) international or regional financial institutions time deposit or investment in the form of savings,
established by foreign governments. common or individual trust funds, deposit substitutes,
investment management accounts and other
investments with a maturity period of not less than five
(5) years, the form of which shall be prescribed by the
Com. vs. Mitsubishi Metal
Bangko Sentral ng Pilipinas (BSP) and issued by banks
Facts: Atlas Consolidated borrowed fr. only (not by nonbank financial intermediaries and
Mitsubishi Metal the amount of $20 M. Atlas, in finance companies) to individuals in denominations of
Ten thousand pesos (P10,000) and other
turn, undertook to sell Mitsubishi all the copper denominations as may be prescribed by the BSP.
concentrates produced fr. said machine for a
period of 15 years. Mitsubishi then borrowed fr. Sec. 24 (B,1). Rate of Tax on Certain Passive
the Export-Import Bank of Japan. Atlas paid Income.
interest to Mitsubishi totaling P13,966.79 for (1) Interests, Royalties, Prizes, and Other Winnings. - A
the years ‘74 to ‘75. CIR imposed a 15% tax final tax at the rate of twenty percent (20%) is hereby
thereon. Mitsubishi is now applying for a tax imposed upon the amount of interest from any
credit on the ground that it was merely a currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds
financing institution owned, controlled & and similar arrangements; royalties, except on books,
financed by the Japanese Gov’t. as well as other literary works and musical
compositions, which shall be imposed a final tax of ten
Held: The loan agreement is strictly between percent (10%); prizes (except prizes amounting to Ten
Mitsubishi as creditor & Atlas as seller of thousand pesos (P10,000) or less which shall be
copper concentrates. The terms & the subject to tax under Subsection (A) of Section 24; and
reciprocal nature of their obligations make it other winnings (except Philippine Charity Sweepstakes
implausible that Mitsubishi was a mere agent and Lotto winnings), derived from sources within the
Philippines: Provided, however, That interest income
of Eximbank. The loan & sales contract bet. received by an individual taxpayer (except a
Mitsu & Atlas does not contain any direct or nonresident individual) from a depository bank under
inferential reference to Eximbank whatsoever. the expanded foreign currency deposit system shall be
Therefore, the interest income fr. the loans subject to a final income tax at the rate of seven and
one-half percent (7 1/2%) of such interest income:
extended to Atlas by Mitsu is NOT excludable Provided, further, That interest income from long-term
fr. gross income taxation, is not exempt fr. deposit or investment in the form of savings, common
w/holding tax. or individual trust funds, deposit substitutes,
investment management accounts and other
investments evidenced by certificates in such form
cc. Applicable tax rate prescribed by the Bangko Sentral ng Pilipinas (BSP)
shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of
i. Interest on bank deposit/ the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed
deposit substitute on the entire income and shall be deducted and

APP 26
INCOME TAX REVIEWER
withheld by the depository bank from the proceeds of
the long-term deposit or investment certificate based Finance Dept. Order 137-87
on the remaining maturity thereof:
Educ. inst. means a non-stock, non-profit corporation
Four (4) years to less than five (5) years - 5%; association duly registered under Phil. law, & operated
Three (3) years to less than (4) years - 12%; and exclusively for educational purposes, maintained &
Less than three (3) years - 20%. administered by private individual or group offering
formal education issued permit to operate by the
DECS.
Sec. 25 (A,2) Cash and/or Property Dividends from Revenues derived fr. & assets used in the operation of
a Domestic Corporation or Joint Stock Company,
cafeterias/canteens, dormitories, bookstores are
or Insurance or Mutual Fund Company or exempt fr. taxation provided they are owned &
Regional Operating Headquarter or
operated by the educational institution as ancillary
Multinational Company, or Share in the activities & the same are located w/in the school
Distributable Net Income of a Partnership
premises.
(Except a General Professional Partnership),
Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Dept. of Finance Order 149-95 Re: Exemption of
Prizes, and Other Winnings. - Cash and/or property Non-stock Non-Profit Educational Entities
dividends from a domestic corporation, or from a joint Amending Finance department Order 137-87
stock company, or from an insurance or mutual fund
Non-stock, non-profit educational institutions are exempt
company or from a regional operating headquarter of
fr. taxes on all their revenues & assets used actually,
multinational company, or the share of a nonresident
directly & exclusively for educational purposes.
alien individual in the distributable net income after
However, they shall be subject to internal revenue tax
tax of a partnership (except a general professional
on such educational institution of its educational
partnership) of which he is a partner, or the share of a
purposes or function.
nonresident alien individual in the net income after tax
of an association, a joint account, or a joint venture Interest income shall be exempt fr. taxation only when
taxable as a corporation of which he is a member or a used directly, exclusively for educational purposes. To
co-venturer; interests; royalties (in any form); and substantiate this claim, the institution must submit an
prizes (except prizes amounting to Ten thousand pesos annual information return & duly audited financial
(P10,000) or less which shall be subject to tax under statement. A certification of actual utilization & the
Subsection (B)(1) of Section 24) and other winnings Board resolution on the proposed project to be funded
(except Philippine Charity Sweepstakes and Lotto out of the money deposited in banks.
winnings); shall be subject to an income tax of twenty
percent (20%) on the total amount thereof: Provided,
however, that royalties on books as well as other iv. Other interest income
literary works, and royalties on musical compositions
 interest fr. lending (business) – regular tax rate
shall be subject to a final tax of ten percent (10%) on
the total amount thereof: Provided, further, That  interest income fr. bonds – final tax rate
cinematographic films and similar works shall be  interest on uncollected salary – regular rate
subject to the tax provided under Section 28 of this  interest on foreign bonds – regular if taxable
Code: Provided, furthermore, That interest income  interest on government bonds – 20% final
from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit
 interest on T-bills – 20% final
substitutes, investment management accounts and  int. earned fr. deposit maintained under FCD
other investments evidenced by certificates in such (foreign currency) system – 7 ½ %
form prescribed by the Bangko Sentral ng Pilipinas  int. on foreign loan contracted by a nonresident
(BSP) shall be exempt from the tax imposed under this foreign corp. on or after Aug. 1, 1986 – 20%
Subsection: Provided, finally, that should the holder Final tax.(Sec. 28 B, 5-a) NIRC.
of the certificate pre-terminate the deposit or
investment before the fifth (5 th) year, a final tax shall
be imposed on the entire income and shall be
deducted and withheld by the depository bank from 2. Rentals/Leases
the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
a. Lease of tangible personal
 Four (4) years to less than five (5) years - 5%; property
 Three (3) years to less than four (4) years - 12%; and
 Less than three (3) years - 20%.
 Operating lease/finance lease
 Leasehold Improvements
Note:
Rev. Regulation No. 19-86
Sec. 2.01/1 Operating lease, defined.--- An
 Exemption applies only to ind. TP’s except “operating lease” is a contract under w/c the asset is
nonresident alien NETB. They are taxed at not wholly amortized during the primary period of the
35%. For corporate taxpayers, no exemption. lease, & where the lessor DOES NOT rely solely on the
 Pre-termination will subject the interest to tax/ rentals during the primary period for his profits, but
tax rate based on the remaining maturity. looks for the recovery of the balance of his costs & for
the rest of his profits fr. the sale or re-lease of the
returned assets at the end of the primary lease period.
iii. Interest earned by non-stock Sec. 2.01/2 Finance lease, defined--- “Finance lease”
non-profit educational or “full payout lease” is a contract involving payment
institutions
APP 27
INCOME TAX REVIEWER
over an obligatory period (also called primary or basic Sec. 74. Rentals---Where a leasehold is acquired for
period) of specified rental amounts for the use of a business purposes for a specified sum, the purchaser
lessor’s property, sufficient in total to amortize the may take as a deduction in his return an adequate part
capital outlay of the lessor & to provide for the lessor’s of such sum each year, based on the number of years
borrowing costs & profits. The obligatory period refers the lease has to run. Taxes paid by a tenant to or for a
to the primary or basic non-cancelable period of the landlord for business property are ADDITIONAL RENT &
lease w/c in no case shall be less than 730 days. The constitute a deductible item to the tenant & TAXABLE
lessee, not the lessor, exercises the choice of the asset INCOME to the landlord; the amount of the tax being
& is normally responsible for maintenance, insurance, deductible by the latter. The cost borne by the lessee
& such other expenses pertinent to the use, in erecting buildings or making permanent
preservation & operation of the asset. Finance leases improvements on ground of w/c he is a lessee is held
may be extended, after the expiration of the primary to be a capital investment & not deductible as a
period, by non-cancelable secondary or subsequent business expense. In order to return to such taxpayer
periods w/ the rentals significantly reduced. The his investment of capital, an annual deduction may be
residual value shall in no instance be less than five per made fr. gross income of an amount equal to the cost
centum (5%) of the lessor’s acquisition cost of the of such improvements divided by the number of years
leased asset. remaining of the term of the lease, & such deduction
shall be in lieu of a deduction for depreciation. If the
remainder of the term of lease is greater than the
Sec. 4.02/2 Compelling persuasive factors. A
probable life value of the buildings erected, or of the
contract or agreement purported to be a lease shall be improvements made, this deduction shall take the form
treated as conditional sales contract if one or more of
of an allowance for depreciation.
the following compelling persuasive factors are
present: Sec. 49. Improvements by lessees---When buildings
are erected or improvements made by a lessee in
(A) The lessee is given the option to purchase the asset pursuance of an agreement w/ the lessor & such
at any time during the obligatory period of the lease,
buildings or improvements are not subject to removal
notw/standing that the option price is equivalent to or by the lessee, the lessor may at his option report the
higher than the current fair market value of the asset;
income therefr. upon either of the following bases:
(B) The lessee acquires automatic ownership of the asset (a) The lessor may report as income at the time when
upon payment of the stated amount of “rentals” w/c
such buildings or improvements are completed the fair
under the contract he is required to make; market value of such buildings or improvements
(C) Portions of the periodic rental payments are credited subject to the lease. (completion basis)
to the purchase price of the asset; (b) The lessor may spread over the life of the lease the
(D) The receipts of payment indicate that the payments estimated depreciated value of such buildings or
made were partial or full payments of the asset. improvements at the termination of the lease & report
Sec. 4.03/3 Absence of compelling persuasive as income for each of the lease an adequate part
factors. In the absence of the above compelling thereof. (Pro-rated basis)
persuasive factors or contrary implication, an intent If for any other reason than a bona fide purchase fr. the
warranting treatment of a transaction for tax purposes as lessee by the lessor, the lease is terminated so that
a purchase & sale rather than as a lease or rental the lessor comes into possession or control of the prop.
agreement, may in general be said to exist if, for prior to the time originally fixed for the termination of
example, one or more of the following conditions are the lease, the lessor receives additional income for the
present: year in w/c the lease is so terminated to the extent
that the value of such buildings or improvements when
he became entitled to such possession exceeds the
(a) Portions of the periodic payments are made
specifically applicable to an equity to be acquired by amount already reported as income on account of the
erection of such buildings or improvements. No
the lessee.
appreciation in value due to causes other than the
(b) The prop. may be acquired under a purchase option, premature termination of the lease shall be included.
at a price w/c is nominal in relation to the value of the Conversely, if the bldg. or improvements are destroyed
prop. at the time when the option may be exercised, as prior to the expiration of the lease, the lessor is
determined at the time of entering into the original entitled to deduct as loss for the year when such
agreement, or w/c is a relatively small amount when destruction takes place the amount previously reported
compared w/ the total payments w/c are required to be as income bec. of the erection of such buildings or
made. improvements, less any salvage value subject to the
lease to the extent that such loss was not
compensated for by insurance. If the bldgs. or
b. Lease of real property improvements destroyed were acquired prior to March
1, 1013, the deduction shall be based on the cost or
c. Tax treatment of the value subject to the lease to the extent that such
loss was not compensated for by insurance.
i. Advance rental/ long-term
lease
ii. Taxes & other obligations iv. VAT added to the rental/
assumed by the lessee paid by the lessee

iii. Leasehold improvements by

the lessee Limpan vs. Commissioner
Facts: The BIR discovered that Limpan
When is rental income recognized? Investment Co. underdeclared its rental
incomes for taxable years 1956 & 1957.
Limpan, however, argued that it was not
Rev. Regulation No. 2 supposed to declare said rental income for ‘56
APP 28
INCOME TAX REVIEWER
bec. the previous owners of the leased bldg. the amount of cash and/or property dividends received
still have to collect part of the total rentals. It from a domestic corporation, which shall be collected
and paid as provided in Section 57 (A) of this Code,
also claimed that only a part of the amount of subject to the condition that the country in which the
P81,690.00 for ‘57 was turned over to the nonresident foreign corporation is domiciled, shall
company by their President, Isabelo Lim. Also, allow a credit against the tax due from the nonresident
one of its tenants deposited in court his rentals foreign corporation taxes deemed to have been paid in
the Philippines equivalent to twenty percent (20%) for
amounting to P10,800.00. 1997, nineteen percent (19%) for 1998, eighteen
Held: Limpan, having admitted through its percent (18%) for 1999, and seventeen percent (17%)
thereafter, which represents the difference between
own witness that it had NOT declared more
the regular income tax of thirty-five percent (35%) in
than 1/2 of the amt. found by the internal 1997, thirty-four percent (34%) in 1998, and thirty-
revenue examiners as unreported rental three percent (33%) in 1999, and thirty-two percent
income for ‘56 & more than 1/3 of the amount (32%) thereafter on corporations and the fifteen
ascertained by the examiners as unreported percent (15%) tax on dividends as provided in this
subparagraph;
rental income for ‘57 contrary to its original
(c) Capital Gains from Sale of Shares of Stock not Traded
claim to the revenue authorities. in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the
d. Applicable rate sale, barter, exchange or other disposition of shares of
i. Normal/ regular rate stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange:
ii. Except the ff. nonresident Not over P100,000…………..………………… 5%
foreign corps. On any amount in excess of P100,000………… 10%.

Sec. 28, (B), NIRC. Tax on Nonresident Foreign  Nonresident cinematographic film owner
Corporation. - LESSOR or distributor 25% of gross income
(1) In General. - Except as otherwise provided in this  Nonres owner or lessor of vessels chartered by
Code, a foreign corporation not engaged in trade or Phil. nationals 4 ½% of gross rentals
business in the Philippines shall pay a tax equal to
 Nonres owner/ lessor of aircraft, machinery &
thirty-five percent (35%) of the gross income received
during each taxable year from all sources within the other equipmt. 7 ½ % gross rentals or fees.
Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or 3. Royalties
determinable annual, periodic or casual gains, profits a. What are royalties?
and income, and capital gains, except capital gains
subject to tax under subparagraphs (C) and (d): b. How are royalties earned?
Provided, That effective 1, 1998, the rate of income tax
shall be thirty-four percent (34%); effective January 1, c. Applicable rates:
1999, the rate shall be thirty-three percent (33%); and,  Individual taxpayers
effective January 1, 2000 and thereafter, the rate shall
be thirty-two percent (32%).
(2) Nonresident Cinematographic Film Owner, Lessor or Sec. 24 (B,1) NIRC. (B) Rate of Tax on Certain Passive
Distributor. - A cinematographic film owner, lessor, or Income.
distributor shall pay a tax of twenty-five percent (25%)
of its gross income from all sources within the (1) Interests, Royalties, Prizes, and Other Winnings. - A
Philippines. final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest from any
(3) Nonresident Owner or Lessor of Vessels Chartered by currency bank deposit and yield or any other monetary
Philippine Nationals. - A nonresident owner or lessor of benefit from deposit substitutes and from trust funds
vessels shall be subject to a tax of four and one-half and similar arrangements; royalties, except on books,
percent (4 1/2%) of gross rentals, lease or charter fees as well as other literary works and musical
from leases or charters to Filipino citizens or compositions, which shall be imposed a final tax of ten
corporations, as approved by the Maritime Industry percent (10%); prizes (except prizes amounting to Ten
Authority. thousand pesos (P10,000) or less which shall be
(4) Nonresident Owner or Lessor of Aircraft, Machineries subject to tax under Subsection (A) of Section 24; and
and Other Equipment. - Rentals, charters and other other winnings (except Philippine Charity Sweepstakes
fees derived by a nonresident lessor of aircraft, and Lotto winnings), derived from sources within the
machineries and other equipment shall be subject to a Philippines: Provided, however, That interest income
tax of seven and one-half percent (7 1/2%) of gross received by an individual taxpayer (except a
rentals or fees. nonresident individual) from a depository bank under
(5) Tax on Certain Incomes Received by a Nonresident the expanded foreign currency deposit system shall be
Foreign Corporation. - subject to a final income tax at the rate of seven and
one-half percent (7 1/2%) of such interest income:
Provided, further, That interest income from long-term
(a) Interest on Foreign Loans. - A final withholding tax at
deposit or investment in the form of savings, common
the rate of twenty percent (20%) is hereby imposed on
or individual trust funds, deposit substitutes,
the amount of interest on foreign loans contracted on
investment management accounts and other
or after August 1, 1986;
investments evidenced by certificates in such form
(b) Intercorporate Dividends. - A final withholding tax at prescribed by the Bangko Sentral ng Pilipinas (BSP)
the rate of fifteen percent (15%) is hereby imposed on shall be exempt from the tax imposed under this

APP 29
INCOME TAX REVIEWER
Subsection: Provided, finally, That should the holder of iv. For domestic & resident foreign
the certificate pre-terminate the deposit or investment corp.
before the fifth (5th) year, a final tax shall be imposed
on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of Sec. 27 (D,1). Rates of Tax on Certain Passive
the long-term deposit or investment certificate based Incomes. -
on the remaining maturity thereof:
(1) Interest from Deposits and Yield or any other
Four (4) years to less than five (5) years - 5%; Monetary Benefit from Deposit Substitutes and from
Three (3) years to less than (4) years - 12%; and Trust Funds and Similar Arrangements, and Royalties. -
A final tax at the rate of twenty percent (20%) is
Less than three (3) years - 20%.
hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary
Sec. 25 (A,2), NIRC. Cash and/or Property benefit from deposit substitutes and from trust funds
Dividends from a Domestic Corporation or Joint and similar arrangements received by domestic
Stock Company, or Insurance or Mutual Fund corporations, and royalties, derived from sources
Company or Regional Operating Headquarter or within the Philippines: Provided, however, That interest
Multinational Company, or Share in the income derived by a domestic corporation from a
Distributable Net Income of a Partnership depository bank under the expanded foreign currency
(Except a General Professional Partnership), deposit system shall be subject to a final income tax at
Joint Account, Joint Venture Taxable as a the rate of seven and one-half percent (7 1/2%) of such
Corporation or Association., Interests, Royalties, interest income.
Prizes, and Other Winnings. - Cash and/or property
dividends from a domestic corporation, or from a joint
stock company, or from an insurance or mutual fund Sec. 28 (7,a) Tax on Certain Incomes Received by a
company or from a regional operating headquarter of Resident Foreign Corporation. –
multinational company, or the share of a nonresident (a) Interest from Deposits and Yield or any other
alien individual in the distributable net income after Monetary Benefit from Deposit Substitutes, Trust Funds
tax of a partnership (except a general professional and Similar Arrangements and Royalties. - Interest
partnership) of which he is a partner, or the share of a from any currency bank deposit and yield or any other
nonresident alien individual in the net income after tax monetary benefit from deposit substitutes and from
of an association, a joint account, or a joint venture trust funds and similar arrangements and royalties
taxable as a corporation of which he is a member or a derived from sources within the Philippines shall be
co-venturer; interests; royalties (in any form); and subject to a final income tax at the rate of twenty
prizes (except prizes amounting to Ten thousand pesos percent (20%) of such interest: Provided, however,
(P10,000) or less which shall be subject to tax under That interest income derived by a resident foreign
Subsection (B)(1) of Section 24) and other winnings corporation from a depository bank under the
(except Philippine Charity Sweepstakes and Lotto expanded foreign currency deposit system shall be
winnings); shall be subject to an income tax of twenty subject to a final income tax at the rate of seven and
percent (20%) on the total amount thereof: Provided, one-half percent (7 1/2%) of such interest income.
however, that royalties on books as well as other
literary works, and royalties on musical compositions
shall be subject to a final tax of ten percent (10%) on 20% FINAL tax
the total amount thereof: Provided, further, That
cinematographic films and similar works shall be
subject to the tax provided under Section 28 of this v. for nonres foreign corp.
Code: Provided, furthermore, That interest income
from long-term deposit or investment in the form of  34% - 1998
savings, common or individual trust funds, deposit  33% - 1999
substitutes, investment management accounts and  32% - 2000
other investments evidenced by certificates in such
form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, that should the holder 4. Dividends
of the certificate pre-terminate the deposit or
investment before the fifth (5 th) year, a final tax shall
a. What is dividend income?
be imposed on the entire income and shall be i. How is dividend income earned
deducted and withheld by the depository bank from
the proceeds of the long-term deposit or investment ii. Kinds of dividend income
certificate based on the remaining maturity thereof:
a. Cash dividend
Four (4) years to less than five (5) years - 5%; b. Stock dividend/
Three (3) years to less than four (4) years - 12%; & stock rights
Less than three (3) years - 20%. c. Property
dividends
i. all royalties 20% FINAL tax d. Liquidating
ii. except: royalties on books, as dividends
well as other literary works & b. Disguised dividend/ payments
musical composition – 10% equivalent to dividend distribution
FINAL tax
 excessive compensation/ rental in lieu of
iii. 25% - nonres alien NETB dividends

APP 30
INCOME TAX REVIEWER
Sec. 73 (C), NIRC. Dividends Distributed are thereof. On 3/13/56, the latter’s counsel
Deemed Made from Most Recently Accumulated contended that the assessment should be sent
Profits. - Any distribution made to the shareholders or
members of a corporation shall be deemed to have to Leonor de la Rama who was appointed as
been made form the most recently accumulated profits administratrix of the estate. CIR sent the
or surplus, and shall constitute a part of the annual assessment to Leonor asking for payment. The
income of the distributee for the year in which assessment not being paid, the Dep. Comm. of
received.
IR again sent a letter to Lourdes & again it said
(D) Net Income of a Partnership Deemed
Constructively Received by Partners. - The taxable
that they should assess Leonor. The DCIR
income declared by a partnership for a taxable year demanded Leonor to pay the tax but still was
which is subject to tax under Section 27 (A) of this not paid. hence, the Rep. filed w/ CFI a
Code, after deducting the corporate income tax complaint vs. the heirs of Esteban seeking to
imposed therein, shall be deemed to have been collect fr. each heir the proportionate share in
actually or constructively received by the partners in
the same taxable year and shall be taxed to them in the IT liability of the estate.
their individual capacity, whether actually distributed Held: Where the dividends were not received
or not.
by the estate or the heirs; neither of them is
liable for the payment of income tax therefor.
Rev. Reg. 2, Secs. 250-253
There would be constructive receipt of the
The distinction between a stock dividend w/c does not, & dividends if the debts to w/c they were applied
one w/c does , constitute income taxable to the
shareholder is the distinction between a stock dividend really exist. In CAB, no constructive receipt as
w/c works no change in the corporate entity, the same the first debt was contested, & the second
interest in the same corp. being represented after the debt was due fr. “Hijos de la Rama” an entity
distribution by more shares of precisely the same separate & distinct fr. Esteban.
character, & a stock dividend where there either has
been a change of corporate identity or a change in the
nature of the shares issued as dividends whereby the
proportional interest of the shareholders after the
distribution is essentially different fr. his former Commissioner vs. Manning
interest. A stock dividend constitutes income if it gives
the shareholder an interest different fr. that w/c his Facts: MANTRASCO has authorized capital
former stock holdings represented. A stock dividend stock dividend into 25,000 common shares,
does not constitute income if the new shares confer no
different rights or interest than did the old - the new
24,700 owned by Reese; & the rest at 100
certificates + the old representing the same shares owned by Manning, McDonald, &
proportionate interest in the net assets of the corp. as Simmons. Pursuant to a Trust Agreement, after
did the old. Reese died, the 24,700 shares were reacquired
A true stock dividend is not subject to tax on its receipt by Mantrasco. Consequently, the same shares
in the hands of the recipient. Nevertheless, if a were distributed equally to M, M & S while
corporation after the distribution of a stock dividend,
proceeds to cancel or redeem its stock at such time & payment to the estate of Reese fr. the
in such manner as to make the distribution & companies profit was gradually made fr. 1953-
cancellation or redemption essentially equivalent to 63.
the distribution of a taxable dividend, the amount
received in redemption or cancellation of the stock Held: Where corporate earnings are used to
shall be treated as a taxable dividend. purchase outstanding stock treated as treasury
stock as a technical but prohibited device to
avoid effects of income taxation, distribution of
Republic vs. Dela Rama
said corporate earnings in the form of stock
Facts: The estate of the late Esteban de la dividends will subject stockholders receiving
Rama was the subject of Special Proceedings them to income tax. When the company parted
of the CFI of Iloilo. The exec-administrator, w/ a portion of their earnings “to buy” the
Hervas, filed on March 12, 1951 income tax corporate holdings of Reese, they were in
returns of the estate corresponding to tax yr. ultimate effect & result making a distribution
1950 declaring a net income of P22, 796.59. of such earnings to M, M & S.
P3,919.00 was assessed & paid as income tax.
The BIR later claimed that it had found out that
Note: Distribution of partner’s share in the net
there had been received by the estate in 1950 income of a taxable partnership is equivalent to
fr. the Dela Rama Steamship Co. cash distribution of dividends in a corp.
dividends amounting to P86,800 & was not
declared in the ITR. The BIR then made an
assessment as deficiency IT vs. the estate c. Exclusions
P56,032.50 (37355.00 as deficiency & i. Income exempt under a tax
18,677.50 as 50% surcharge). treaty
The Collector of IR wrote a letter 2/29/56 ii. Passive income of foreign
to Mrs. Lourdes de la Rama -Osmena informing government
her of the assessment & asking payment

APP 31
INCOME TAX REVIEWER
Sec. 32 (B, 7, a), NIRC. Income Derived by Foreign
Government. - Income derived from investments in
iii. Compensation for injuries or
the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in sickness
banks in the Philippines by (i) foreign governments, (ii)
financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (iii) Sec. 32. B. (4) Compensation for Injuries or
international or regional financial institutions Sickness. - amounts received, through Accident or
established by foreign governments. Health Insurance or under Workmen's Compensation
Acts, as compensation for personal injuries or sickness,
plus the amounts of any damages received, whether
5. Annuities & proceeds fr. life insurance by suit or agreement, on account of such injuries or
sickness.

a. Taxable income/computation Sec. 63 RR 2.

Art. 2021 NCC. The aleatory contract of life annuity
binds the debtor to pay an annual pension or income
during the life of one or more determinate persons in 6. Prizes & winnings/ Awards/ Rewards
consideration of a capital consisting of money or other
property, whose ownership is transferred to him at
once w/ the burden of the income. a. Taxable items
Sec. 32 (a,8) NIRC. Gross income. (a) General
definition. - Gross income means all income fr. i. gambling
whatever source derived, including ( but not limited winnings/contests/raffle
to ) the following items: prizes
(8) Annuities
ii. small town lottery winnings
iii. rewards under Sec. 282
b. Exclusions NIRC/ informer’s reward
i. Proceeds of Life insurance 10% FINAL w/holding tax
 What is insurance? Is casualty insurance a
life insurance contract? Sec. 32 (a, 9) NIRC. Gross income. (a) General
definition. - Gross income means all income fr.
 Are proceeds of non-life or property whatever source derived, including ( but not limited
insurance taxable? Pre-need contracts? to ) the following items:
(9) Prizes & winnings
Sec. 32 (b,1) NIRC. Exclusions fr. gross income. -
The ff. items shall not be included in gross income &
shall be exempt fr. taxation under this Title:
(1) Life Insurance. - The proceeds of life insurance
b. Exclusions/ Exemptions
policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or i. Phil. Charity Sweepstakes and
otherwise, but if such amounts are held by the insurer lotto winnings
under an agreement to pay interest thereon, the
interest payments shall be included in gross income. Sec. 24. (B) Rate of Tax on Certain Passive
Sec. 62 Rev. Reg. 2. Proceeds of life insurance are Income.
excluded fr. gross income bec. they partake more of (1) Interests, Royalties, Prizes, and Other Winnings. - A
indemnity or compensation rather than gain to the final tax at the rate of twenty percent (20%) is hereby
recipient. In case of a transfer for a valuable imposed upon the amount of interest from any
consideration, by assignment or otherwise, of a life currency bank deposit and yield or any other monetary
insurance, endowment or annuity contract or any benefit from deposit substitutes and from trust funds
interest therein only the actual value of such and similar arrangements; royalties, except on books,
consideration & the amount of the premiums & other as well as other literary works and musical
sums subsequently paid by the transferee shall be tax- compositions, which shall be imposed a final tax of ten
exempt. percent (10%); prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be
subject to tax under Subsection (A) of Section 24; and
ii. Return of premium paid other winnings (except Philippine Charity Sweepstakes
and Lotto winnings), derived from sources within the
 What is cash surrender value? Philippines: Provided, however, That interest income
 Computing income in annuity contracts received by an individual taxpayer (except a
nonresident individual) from a depository bank under
Sec. 32 (b,2) NIRC. Exclusions fr. gross income. - the expanded foreign currency deposit system shall be
The ff. items shall not be included in gross income & subject to a final income tax at the rate of seven and
shall be exempt fr. taxation under this Title: one-half percent (7 1/2%) of such interest income:
Provided, further, That interest income from long-term
(2) Amount Received by Insured as Return of Premium. -
deposit or investment in the form of savings, common
The amount received by the insured, as a return of
or individual trust funds, deposit substitutes,
premiums paid by him under life insurance,
investment management accounts and other
endowment, or annuity contracts, either during the
investments evidenced by certificates in such form
term or at the maturity of the term mentioned in the
prescribed by the Bangko Sentral ng Pilipinas (BSP)
contract or upon surrender of the contract.
shall be exempt from the tax imposed under this

APP 32
INCOME TAX REVIEWER
Subsection: Provided, finally, That should the holder of
the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed a. Found treasure – regular rate
on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of b. Refund of tax or recovery of bad debt
the long-term deposit or investment certificate based previously deducted – regular tax
on the remaining maturity thereof: rate
c. Damages
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20% C. Gains derived from dealings in property

ii. Prizes and awards in sports SEC. 39. Capital Gains and Losses. -
competition (A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means
property held by the taxpayer (whether or not
connected with his trade or business), but does not
include stock in trade of the taxpayer or other property
of a kind which would properly be included in the
Sec. 32 (b, 7d) NIRC. Exclusions fr. gross income. inventory of the taxpayer if on hand at the close of the
- The ff. items shall not be included in gross income & taxable year, or property held by the taxpayer
shall be exempt fr. taxation under this Title: primarily for sale to customers in the ordinary course
of his trade or business, or property used in the trade
(7) Miscellaneous items:
or business, of a character which is subject to the
(d) Prizes and Awards in sports Competition. - All allowance for depreciation provided in Subsection (F)
prizes and awards granted to athletes in local and of Section 34; or real property used in trade or
international sports competitions and tournaments business of the taxpayer.
whether held in the Philippines or abroad and
(2) Net Capital Gain. - The term 'net capital gain' means
sanctioned by their national sports associations.
the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or
exchanges.
iii. Prizes & awards/ religious/
(3) Net Capital Loss. - The term 'net capital loss' means
charitable/ scientific/ artistic/ the excess of the losses from sales or exchanges of
literary capital assets over the gains from such sales or
exchanges.
(B) Percentage Taken into Account. - In the case of a
Requisites for exclusion taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the
sale or exchange of a capital asset shall be taken into
Sec. 32 (b, 7c) NIRC. Exclusions fr. gross income. -
account in computing net capital gain, net capital loss,
The ff. items shall not be included in gross income &
and net income:
shall be exempt fr. taxation under this Title:
(1)One hundred percent (100%) if the capital asset has
(7) Miscellaneous items:
been held for not more than twelve (12) months; and
(c) Prizes and Awards. - Prizes and awards made
(2)Fifty percent (50%) if the capital asset has been held
primarily in recognition of religious, charitable,
for more than twelve (12) months;
scientific, educational, artistic, literary, or civic
achievement but only if: (C) Limitation on Capital Losses. - Losses from sales or
exchanges of capital assets shall be allowed only to the
(i) The recipient was selected without any action on
extent of the gains from such sales or exchanges. If a
his part to enter the contest or proceeding; and
bank or trust company incorporated under the laws of
(ii) The recipient is not required to render the Philippines, a substantial part of whose business is
substantial future services as a condition to the receipt of deposits, sells any bond, debenture,
receiving the prize or award. note, or certificate or other evidence of indebtedness
issued by any corporation (including one issued by a
government or political subdivision thereof), with
interest coupons or in registered form, any loss
7. Gifts/Bequests/Devises resulting from such sale shall not be subject to the
foregoing limitation and shall not be included in
 Tax treatment of remunerative donation determining the applicability of such limitation to other
 Extended/ but income from such property losses.
taxable (D) Net Capital Loss Carry-over. - If any taxpayer, other
than a corporation, sustains in any taxable year a net
capital loss, such loss (in an amount not in excess of
Sec. 32 (B, 3) NIRC. the net income for such year) shall be treated in the
succeeding taxable year as a loss from the sale or
3. Gifts, Bequests, and Devises. _ The value of property exchange of a capital asset held for not more than
acquired by gift, bequest, devise, or descent: Provided, twelve (12) months.
however, That income from such property, as well as
gift, bequest, devise or descent of income from any (E) Retirement of Bonds, Etc. - For purposes of this Title,
property, in cases of transfers of divided interest, shall amounts received by the holder upon the retirement of
be included in gross income. bonds, debentures, notes or certificates or other
evidences of indebtedness issued by any corporation
8. Other types of passive income (including those issued by a government or political

APP 33
INCOME TAX REVIEWER
subdivision thereof) with interest coupons or in
registered form, shall be considered as amounts Sec. 132, Rev. Reg. 2 Definition of capital assets.
received in exchange therefor.
The law provides that the term capital assets shall be
(F) Gains or losses from Short Sales, Etc. - For purposes held to mean property held by the taxpayer (WON
of this Title - connected w/ his trade or business) . . . Same as Sec.
1. Gains or losses from short sales of property shall be 33, NIRC.
considered as gains or losses from sales or The term capital asset includes all classes of property
exchanges of capital assets; and not specifically excluded by S30 (a).
2. Gains or losses attributable to the failure to exercise The exclusion fr. the term “capital assets” by property
privileges or options to buy or sell used in the trade or business of the taxpayer of a
character w/c is subject to the allowance for
depreciation in S30 (f) NIRC -
1. Types of gain/kinds of property
 is limited to property used by the taxpayer in the
a. Kinds/Classification of taxable trade or business at the time of the sale or exchange (&)
income or gain  it has no application to gains or losses arising fr. the
sale of real property used in the trade or business to the
What is capital gain? What is ordinary extent that such gain or loss is allocable to the land, as
gain/ income? distinguished fr. depreciable improvements upon the
land.
To such gain or loss allocable to the land, the limitations
(Z) The term 'ordinary income' includes any gain from of 34(b) & (c) apply ( such limitation may be
the sale or exchange of property which is not a capital inapplicable to a dealer in real estate, but, if so, it is
asset or property described in Section 39(A)(1). Any bec. he holds the land primarily for sale to customers
gain from the sale or exchange of property which is in the ordinary course of his trade or business, not bec.
treated or considered, under other provisions of this the land is subject to the allowance for depreciation
Title, as 'ordinary income' shall be treated as gain from provided in 30 (f) NIRC), will not be subject to the
the sale or exchange of property which is not a capital percentage provisions of 34(b) & losses fr. such
asset as defined in Section 39(A)(1). The term 'ordinary transactions will not be subject to the limitations on
loss' includes any loss from the sale or exchange of losses provided in 30 (c).
property which is not a capital asset. Any loss from the
sale or exchange of property which is treated or
considered, under other provisions of this Title, as
'ordinary loss' shall be treated as loss from the sale or c. Short term asset/ long term
exchange of property which is not a capital asset. asset
(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means
b. What is NET capital gain? NET property held by the taxpayer (whether or not
capital loss? connected with his trade or business), but does not
include stock in trade of the taxpayer or other property
of a kind which would properly be included in the
(I can’t find Sec. 16 (e) in the CTRA  and Sec. 22 inventory of the taxpayer if on hand at the close of the
(Z) is repetition… its coming back to me… taxable year, or property held by the taxpayer
repetition… the only thing I can see… Obiter primarily for sale to customers in the ordinary course
Master™) of his trade or business, or property used in the trade
or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F)
Sec. 122, Rev. Reg. 2 Losses fr. sales or of Section 34; or real property used in trade or
exchanges of property. No deduction is allowed in business of the taxpayer.
respect of losses fr. sales of exchanges of property,
(2) Net Capital Gain. - The term 'net capital gain'
directly or indirectly,-
means the excess of the gains from sales or exchanges
7. Between members of a family (whole or half siblings, of capital assets over the losses from such sales or
spouse, ancestors & lineal descendants); exchanges.
8. Between an individual & a corporation more than 50% (3) Net Capital Loss. - The term 'net capital loss'
in value of the outstanding stock of w/c is owned, means the excess of the losses from sales or
directly or indirectly by or for such individual except exchanges of capital assets over the gains from such
in the case of distributions in liquidation; sales or exchanges.
9. Between two corporations more than 50% in value of
the outstanding stock of each of w/c is owned,
directly or indirectly, by or for the same individual, if
either one of the corps. w/ respect to the taxable year
of the corp. preceding the date of the sale or
exchange was, under the law applicable to such
taxable year, a personal holding company or a foreign
personal holding company, except in the cases of Tuazon vs. Lingad 58 SCRA 170
distributions in liquidation;
10. Between a grantor & a fiduciary of any trust; Facts: In 1948, pet. inherited 2 parcels
11. Between the fiduciary of a trust & the fiduciary of of land, w/c he subdivided into 29 lots &
another trust, if the same person is a grantor w/ leased 28. In 1950, he sold the lots on an
respect to each trust; or installment basis to their occupants. Lot 29
12. Between a fiduciary of a trust & a beneficiary of was subsequently subdivided & paved, & were
such trust. also sold on a 10 yr. annual amortization basis.
He reported his income fr. the sale of the lots
APP 34
INCOME TAX REVIEWER
as long-term capital gain. In 1957, he treated real estate, it follows that the property sold
his income fr. the sale of the small lots as falls w/in the exception in the definition of
capital gains & included only 1/2 as taxable capital assets in S33, NIRC.
income. He deducted the real estate dealer’s
tax he paid in 1957 due to the rentals fr. his 28
Rodriguez vs. Collector
lots & other properties. BIR charged him w/
deficiency income, considering the sale as Facts: The Gov’t. paid P1,238,204.00 to E.
ordinary gains & not capital. Rodriguez Inc. as payment for its land w/c was
expropriated by the gov’t. Of the said amount,
Issue: WON properties inherited by
P625,315.90 were in the form of tax-exempt
petitioner should be regarded as capital assets
gov’t. bonds. Nung bayaran na ng tax, E.
Held: NO. When pet. inherited the properties, Rodriguez Inc. did not include the sum of P625
he got not only the duty to respect any thou, believing it to be exempt fr. taxation.
contract thereon but also the correlative right Ergo, the CIR assessed E. Rodriguez w/ a
to receive & enjoy the fruits of the business & deficiency income tax.
the property w/c the decedent had established.
Held: There can be no question that E.
Also, pet. owned other properties w/c he
Rodriguez is taxable on its income derived fr.
rented out, fr. w/c he periodically derived a
the sale of its prop. to the Gov’t. The fact that
substantial income, & for w/c he had to pay
a portion of the purchase price of the prop.
the real estate dealer’s tax, w/c he used to
was paid by the Gov’t. in the form of tax
deduct fr. his gross income. Under the
exempt bonds does not operate to exempt said
circumstances, pet’s sale of the lots forming
income fr. tax. The income fr. the sale of the
part of his rental business cannot be
land in question & the bonds are 2 different &
characterized as other than sales of non-
distinct taxable items so that the exemption
capital, or ordinary assets. (remember
does not operate to exempt the other, unless
exceptions in S33).
the law expressly so provides. The tax here is
on the income derived fr. the sale of E.
Calasanz vs. Com. 144 SCRA 644 Rodriguez’s prop. to the Gov’t. not the income
derived fr. the sale or exchange of the bonds.
Facts: Petitioner inherited fr. her father
an agricultural land in Rizal. In order to
liquidate her inheritance, she had the land 2. Computation of gain/loss
surveyed, introduced improvements thereon &
sold the lots at a profit. In their joint ITR, they SEC. 40. Determination of Amount and
disclosed a profit of P 31,060 fr. the sale of the Recognition of Gain or Loss. -
subdivided lots, & reported 50% thereof as (A) Computation of Gain or Loss. - The gain from the
taxable capital gains. Revenue examiner sale or other disposition of property shall be the excess
of the amount realized therefrom over the basis or
adjudged pets. as engaged in business as real
adjusted basis for determining gain, and the loss shall
estate dealers, required them to pay real be the excess of the basis or adjusted basis for
estate dealer’s tax & assessed a deficiency determining loss over the amount realized. The
income tax on profits derived fr. the sale based amount realized from the sale or other disposition of
on the rates for ordinary income. property shall be the sum of money received plus the
fair market value of the property (other than money)
Issue: WON pets. are real estate dealers received;
liable for real estate dealer’s tax (B) Basis for Determining Gain or Loss from Sale
or Disposition of Property. - The basis of property
WON gains realized fr. the sale of the shall be -
lots are taxable as ordinary income (1) The cost thereof in the case of property acquired on
Held: YES in both . The activities of pet. are or after March 1, 1913, if such property was acquired
by purchase; or
no different fr. those invariably employed by
(2) The fair market price or value as of the date of
one engaged in the business of selling real acquisition, if the same was acquired by inheritance; or
estate. There was extensive development (3) If the property was acquired by gift, the basis shall be
such that pets. did not sell the land in the the same as if it would be in the hands of the donor or
condition in w/c they acquired it. A the last preceding owner by whom it was not acquired
considerable amount was expended to cover by gift, except that if such basis is greater than the fair
the cost of the improvements. It has been market value of the property at the time of the gift
then, for the purpose of determining loss, the basis
held that a property ceases to be a capital shall be such fair market value; or
asset if the amount expended to improve it is (4) If the property was acquired for less than an
double its original cost, as in the CAB, for the adequate consideration in money or money's worth,
extensive improvements indicates that the the basis of such property is the amount paid by the
seller held the property primarily for sale to its transferee for the property; or
customers in the ordinary course of business. (5) The basis as defined in paragraph (C)(5) of this
And since they are engaged in the business of Section, if the property was acquired in a transaction

APP 35
INCOME TAX REVIEWER
where gain or loss is not recognized under paragraph acquisition shall not be treated as money and/or other
(C)(2) of this Section. property, and shall not prevent the exchange from
(C) Exchange of Property. - being within the exceptions.
(1) General Rule. - Except as herein provided, upon the (b) If the amount of the liabilities assumed plus the
sale or exchange or property, the entire amount of the amount of the liabilities to which the property is
gain or loss, as the case may be, shall be recognized. subject exceed the total of the adjusted basis of the
property transferred pursuant to such exchange, then
(2) Exception. - No gain or loss shall be recognized if in
such excess shall be considered as a gain from the sale
pursuance of a plan of merger or consolidation - or exchange of a capital asset or of property which is
not a capital asset, as the case may be.
(a) A corporation, which is a party to a merger or (5) Basis -
consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or (a) The basis of the stock or securities received by the
consolidation; or transferor upon the exchange specified in the above
exception shall be the same as the basis of the
(b) A shareholder exchanges stock in a corporation, property, stock or securities exchanged, decreased by
which is a party to the merger or consolidation, solely
(1) the money received, and (2) the fair market value
for the stock of another corporation also a party to the of the other property received, and increased by (a)
merger or consolidation; or
the amount treated as dividend of the shareholder and
(c) A security holder of a corporation, which is a party to (b) the amount of any gain that was recognized on the
the merger or consolidation, exchanges his securities exchange: Provided, That the property received as
in such corporation, solely for stock or securities in 'boot' shall have as basis its fair market value:
such corporation, a party to the merger or Provided, further, That if as part of the consideration to
consolidation. the transferor, the transferee of property assumes a
No gain or loss shall also be recognized if property is liability of the transferor or acquires form the latter
transferred to a corporation by a person in exchange property subject to a liability, such assumption or
for stock or unit of participation in such a corporation acquisition (in the amount of the liability) shall, for
of which as a result of such exchange said person, purposes of this paragraph, be treated as money
alone or together with others, not exceeding four (4) received by the transferor on the exchange: Provided,
persons, gains control of said corporation: Provided, finally, That if the transferor receives several kinds of
That stocks issued for services shall not be considered stock or securities, the Commissioner is hereby
as issued in return for property. authorized to allocate the basis among the several
(3) Exchange Not Solely in Kind. - classes of stocks or securities.
(b) The basis of the property transferred in the hands of
(a) If, in connection with an exchange described in the
above exceptions, an individual, a shareholder, a the transferee shall be the same as it would be in the
hands of the transferor increased by the amount of the
security holder or a corporation receives not only stock
or securities permitted to be received without the gain recognized to the transferor on the transfer.
recognition of gain or loss, but also money and/or
property, the gain, if any, but not the loss, shall be (6) Definitions. -
recognized but in an amount not in excess of the sum (a) The term 'securities' means bonds and debentures
of the money and fair market value of such other but not 'notes" of whatever class or duration.
property received: Provided, That as to the (b) The term 'merger' or 'consolidation', when used in
shareholder, if the money and/or other property
this Section, shall be understood to mean: (i) the
received has the effect of a distribution of a taxable ordinary merger or consolidation, or (ii) the acquisition
dividend, there shall be taxed as dividend to the
by one corporation of all or substantially all the
shareholder an amount of the gain recognized not in properties of another corporation solely for stock:
excess of his proportionate share of the undistributed
Provided, That for a transaction to be regarded as a
earnings and profits of the corporation; the remainder, merger or consolidation within the purview of this
if any, of the gain recognized shall be treated as a
Section, it must be undertaken for a bona fide business
capital gain. purpose and not solely for the purpose of escaping the
(b) If, in connection with the exchange described in the burden of taxation: Provided, further, That in
above exceptions, the transferor corporation receives determining whether a bona fide business purpose
not only stock permitted to be received without the exists, each and every step of the transaction shall be
recognition of gain or loss but also money and/or other considered and the whole transaction or series of
property, then (i) if the corporation receiving such transaction shall be treated as a single unit: Provided,
money and/or other property distributes it in finally , That in determining whether the property
pursuance of the plan of merger or consolidation, no transferred constitutes a substantial portion of the
gain to the corporation shall be recognized from the property of the transferor, the term 'property' shall be
exchange, but (ii) if the corporation receiving such taken to include the cash assets of the transferor.
other property and/or money does not distribute it in (c) The3term 'control', when used in this Section, shall
pursuance of the plan of merger or consolidation, the
mean ownership of stocks in a corporation possessing
gain, if any, but not the loss to the corporation shall be at least fifty-one percent (51%) of the total voting
recognized but in an amount not in excess of the sum
power of all classes of stocks entitled to vote.
of such money and the fair market value of such other
property so received, which is not distributed. (d) The Secretary of Finance, upon recommendation of
the Commissioner, is hereby authorized to issue rules
and regulations for the purpose 'substantially all' and
(4) Assumption of Liability. -
for the proper implementation of this Section.
(a) If the taxpayer, in connection with the exchanges
described in the foregoing exceptions, receives stock
or securities which would be permitted to be received
without the recognition of the gain if it were the sole a. Cost of basis of the property
consideration, and as part of the consideration, sold
another party to the exchange assumes a liability of
the taxpayer, or acquires from the taxpayer property,
subject to a liability, then such assumption or

APP 36
INCOME TAX REVIEWER
SEC. 39. Capital Gains and Losses. - i. General rule
(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means
property held by the taxpayer (whether or not
connected with his trade or business), but does not
include stock in trade of the taxpayer or other property Sec. 39 (C). Limitation on Capital Losses. - Losses
of a kind which would properly be included in the from sales or exchanges of capital assets shall be
inventory of the taxpayer if on hand at the close of the allowed only to the extent of the gains from such sales
taxable year, or property held by the taxpayer or exchanges. If a bank or trust company incorporated
primarily for sale to customers in the ordinary course under the laws of the Philippines, a substantial part of
of his trade or business, or property used in the trade whose business is the receipt of deposits, sells any
or business, of a character which is subject to the bond, debenture, note, or certificate or other evidence
allowance for depreciation provided in Subsection (F) of indebtedness issued by any corporation (including
of Section 34; or real property used in trade or one issued by a government or political subdivision
business of the taxpayer. thereof), with interest coupons or in registered form,
(2) Net Capital Gain. - The term 'net capital gain' any loss resulting from such sale shall not be subject
means the excess of the gains from sales or exchanges to the foregoing limitation and shall not be included in
of capital assets over the losses from such sales or determining the applicability of such limitation to other
exchanges. losses.
(3) Net Capital Loss. - The term 'net capital loss'
means the excess of the losses from sales or Sec. 136 RR 2.
exchanges of capital assets over the gains from such
sales or exchanges.
(B) Percentage Taken into Account. - In the case of a ii. Exception: Where no gain
taxpayer, other than a corporation, only the following or loss shall be recognized
percentages of the gain or loss recognized upon the
sale or exchange of a capital asset shall be taken into Sec. 40(C, 2) Exception. - No gain or loss shall be
account in computing net capital gain, net capital loss, recognized if in pursuance of a plan of merger or
and net income: consolidation-
(1)One hundred percent (100%) if the capital asset has (a) A corporation, which is a party to a merger or
been held for not more than twelve (12) months; and consolidation, exchanges property solely for stock in a
(2)Fifty percent (50%) if the capital asset has been held corporation, which is a party to the merger or
for more than twelve (12) months; consolidation; or
(b) A shareholder exchanges stock in a corporation,
which is a party to the merger or consolidation, solely
for the stock of another corporation also a party to the
b. Cost or basis of prop. merger or consolidation; or
exchanged in corporate (c) A security holder of a corporation, which is a party to
readjustment the merger or consolidation, exchanges his securities
in such corporation, solely for stock or securities in
such corporation, a party to the merger or
Section 39 (C, 5) NIRC---Basis.-- consolidation.
(a) The basis of the stock or securities received by the No gain or loss shall also be recognized if property is
transferor upon the exchange specified in the above transferred to a corporation by a person in exchange
exception shall be the same as the basis of the for stock or unit of participation in such a corporation
property, stock or securities exchanged, decreased by of which as a result of such exchange said person,
(1) the money received, and (2) the fair market value alone or together with others, not exceeding four (4)
of the other property received, and increased by (a) persons, gains control of said corporation: Provided,
the amount treated as dividend of the shareholder and That stocks issued for services shall not be considered
(b) the amount of any gain that was recognized on the as issued in return for property.
exchange: Provided, That the property received as
'boot' shall have as basis its fair market value:
Provided, further, That if as part of the consideration to Meaning of merger/ consolidation/ control/
the transferor, the transferee of property assumes a
liability of the transferor or acquires form the latter
securities
property subject to a liability, such assumption or
acquisition (in the amount of the liability) shall, for
purposes of this paragraph, be treated as money
received by the transferor on the exchange: Provided, Sec. 40 (C, 6) Definitions. -
finally, That if the transferor receives several kinds of (a) The term 'securities' means bonds and debentures
stock or securities, the Commissioner is hereby but not 'notes" of whatever class or duration.
authorized to allocate the basis among the several
classes of stocks or securities. (b) The term 'merger' or 'consolidation', when used in
this Section, shall be understood to mean: (i) the
(b) The basis of the property transferred in the hands of ordinary merger or consolidation, or (ii) the acquisition
the transferee shall be the same as it would be in the by one corporation of all or substantially all the
hands of the transferor increased by the amount of the properties of another corporation solely for stock:
gain recognized to the transferor on the transfer. Provided, That for a transaction to be regarded as a
merger or consolidation within the purview of this
Section, it must be undertaken for a bona fide business
c. Recognition of gain/loss in purpose and not solely for the purpose of escaping the
exchange of prop. burden of taxation: Provided, further, That in
determining whether a bona fide business purpose
exists, each and every step of the transaction shall be

APP 37
INCOME TAX REVIEWER
considered and the whole transaction or series of such, the merger was realized w/ Binalbagan
transaction shall be treated as a single unit: Provided, being allocated 216,000 shares in exchange for
finally , That in determining whether the property
transferred constitutes a substantial portion of the its tangible assets & sugar quota. In 1948,
property of the transferor, the term 'property' shall be Binalbagan’s equity was reduced to 176,945
taken to include the cash assets of the transferor. when it gave away 29,055 shares to 3 small
(c) The3term 'control', when used in this Section, shall sugar centrals. In 1951, these shares were sold
mean ownership of stocks in a corporation possessing for P6.1 M payable in installments--- (P1.5 in
at least fifty-one percent (51%) of the total voting
power of all classes of stocks entitled to vote.
‘51; P350 Thous + interest in ‘52; A total of
P15 thou for ‘53). The income tax was paid. For
(d) The Secretary of Finance, upon recommendation of
the Commissioner, is hereby authorized to issue rules 1951, Binalbagan deducted the book value of
and regulations for the purpose 'substantially all' and its tangible assets at P824,559.91 fr. the initial
for the proper implementation of this Section. payment of P1.5 M. 50% of the remainder was
reported as income or gain fr. the sale of
Commissioner vs. Rufino capital assets. In ‘54, CIR assessed deficiency
Facts: There are two corporations in this income tax for ‘51, ‘52, & ‘53.
case---both are named Eastern Theatrical Co. Held: Where 2 corporations merged their
We will call them E1 for the old corporation & assets to form a new corporation, each
E2 for the new corpo. In a special meeting of receiving non par value shares corresponding
stockholders of E1, a resolution was passed to their assets contributed, it is held that the
authorizing E1 to MERGE w/ E2 by transferring basis in computing the taxable gain fr. the sale
its business, assets, goodwill, & liabilities to of its shares of stock in the new corporation is
the latter. In exchange, E2 would issue & the fair market value of its assets given in
distribute to the shareholders of E1 one share exchange for said shares at the time of said
for each share held by them in the said corpo. exchange.
The merger was necessary to continue the
exhibition of moving pictures at the Lyric &
Capitol Theaters even after the corporate Revenue Memo Order 26-92
existence of E1, in view of its pending booking On Dec. 26, ‘91 & Jan. 3, ‘92, Revenue
contracts & CBA w/ its Ees. The CIR declared Reg. No. 1-92 & Rev. Mem. Circ. No. 1-92 were
that the merger was not undertaken for a bona respectively issued by this Office clarifying that
fide business purpose but merely TO AVOID the increased basic personal & additional
LIABILITY for the capital gains tax on the exemptions under the amendatory provisions
exchange of the old for the new shares of of RA 7167 shall apply to earnings/income of
stock. CIR then imposed deficiency individual taxpayers starting taxable year ‘92
assessments on capital gains taxes on the (& NOT ‘91) w/c shall be declared for income
stocks received by the shareholders of E1. tax purposes in their tax returns to be filed on
Held: No taxable gain was derived by the or before April 15, ‘93. Likewise, Rev. Reg. No.
shareholders fr. the transaction. There was a 1-92 shall take effect on compensation income
valid merger although the actual transfer of earned or received fr. Jan. 1, ‘92.
the properties subject of the Deed of However, in a decision in the
Assignment was not made on the date of the consolidated cases of Reynaldo V. Umali vs.
merger. The merger in question involved a Hon. Jesus P. Estanislao, Sec. of Finance & Hon.
pooling of resources aimed at the continuation Jesus U. Ong, CIR & Rene B. Gorospe, et al, vs.
& expansion of business & so came under the CIR, promulgated May 29, ‘92, the Supreme
letter & intendment of the NIRC, as amended, Court held that---
EXEMPTING fr. the capital gains tax exchanges
“WHEREFORE, Secs. 1, 3 & 5 of Rev.
of property effected under lawful corporate
combinations. The fact is that the merger Reg. No. 1-92 w/c provide that the regulations
shall take effect on compensation income
merely deferred the claim for taxes w/c may be
asserted by the gov’t later, when gains are earned or received fr. 1 Jan. ‘92 are hereby SET
ASIDE. They should take effect on
REALIZED & benefits are distributed among
the stockholders as a result of the merger. compensation income earned or received fr. 1
Jan. ‘91.
Collector vs. Binalbagan Estate
“Since this decision is promulgated after
Facts: Binalbagan & Isabela Sugar Co. 15 April ‘92, the individual taxpayers entitled
proposed to MERGE their assets to form a NEW to the increased exemptions on compensation
CORP., BISCOM, w/ a capital stock of 400 Thous income earned during a calendar year ‘91 who
Non Par value shares. The assets of both may have filed their income tax returns on or
merging companies were assessed & the before 15 April ‘92 (later extended to 24 April
market value of Binalbagan’s tangible assets 1992) w/o the benefit of such increased
was fixed as P2,541,134.69, & the sugar quota exemptions, are entitled to the corresponding
at P5/picul or P1,482,629.28. On the basis of tax refunds &/or credits, & respondents are
APP 38
INCOME TAX REVIEWER
ordered to effect such refunds &/or credits. No such sale or disposition and ending thirty (30) days
costs.” after such date, the taxpayer has acquired (by
purchase or by exchange upon which the entire
The BIR is filing a motion for recon of amount of gain or loss was recognized by law), or has
the aforementioned decision. entered into a contact or option so to acquire,
substantially identical stock or securities, then no
Accordingly, pending resolution of our deduction for the loss shall be allowed under Section
Motion for Recon, the basic personal & 34 unless the claim is made by a dealer in stock or
securities and with respect to a transaction made in
additional exemptions allowable to individual the ordinary course of the business of such dealer.
taxpayers for income tax purposes under Sec.
(B) If the amount of stock or securities acquired (or
29 (L) of the NIRC before its amendment by RA covered by the contract or option to acquire) is less
No. 7167 shall still apply for purposes of than the amount of stock or securities sold or
w/holding of income tax on wages as well as in otherwise disposed of, then the particular shares of
the computation of the second installment stock or securities, the loss form the sale or other
disposition of which is not deductible, shall be
payable on or before July 15, ‘92 of individual determined under rules and regulations prescribed by
income tax for taxable year ‘91. the Secretary of Finance, upon recommendation of the
Commissioner.
(C) If the amount of stock or securities acquired (or
covered by the contract or option to acquire which)
iii. Exception: Where gain is resulted in the non-deductibility of the loss, shall be
recognized but not the loss determined under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the
aa. Exchange not solely in kind Commissioner.
Sec. 39 (C, 3) NIRC Exchange Not Solely in Kind.
(a) If, in connection with an exchange described in the
 Transactions bet. related taxpayers
above exceptions, an individual, a shareholder, a
security holder or a corporation receives not only stock Who are related taxpayers?
or securities permitted to be received without the
recognition of gain or loss, but also money and/or
property, the gain, if any, but not the loss, shall be Sec. 36 NIRC. (B) Losses from Sales or Exchanges
recognized but in an amount not in excess of the sum of Property. - In computing net income, no
of the money and fair market value of such other deductions shall in any case be allowed in respect of
property received: Provided, That as to the losses from sales or exchanges of property directly or
shareholder, if the money and/or other property indirectly –
received has the effect of a distribution of a taxable (1) Between members of a family. For purposes of this
dividend, there shall be taxed as dividend to the paragraph, the family of an individual shall include
shareholder an amount of the gain recognized not in only his brothers and sisters (whether by the whole
excess of his proportionate share of the undistributed or half-blood), spouse, ancestors, and lineal
earnings and profits of the corporation; the remainder, descendants; or
if any, of the gain recognized shall be treated as a (2) Except in the case of distributions in liquidation,
capital gain. between an individual and corporation more than
(b) If, in connection with the exchange described in the fifty percent (50%) in value of the outstanding stock
above exceptions, the transferor corporation receives of which is owned, directly or indirectly, by or for
not only stock permitted to be received without the such individual; or
recognition of gain or loss but also money and/or other (3) Except in the case of distributions in liquidation,
property, then (i) if the corporation receiving such between two corporations more than fifty percent
money and/or other property distributes it in (50%) in value of the outstanding stock of which is
pursuance of the plan of merger or consolidation, no owned, directly or indirectly, by or for the same
gain to the corporation shall be recognized from the individual if either one of such corporations, with
exchange, but (ii) if the corporation receiving such respect to the taxable year of the corporation
other property and/or money does not distribute it in preceding the date of the sale of exchange was
pursuance of the plan of merger or consolidation, the under the law applicable to such taxable year, a
gain, if any, but not the loss to the corporation shall be personal holding company or a foreign personal
recognized but in an amount not in excess of the sum holding company;
of such money and the fair market value of such other
property so received, which is not distributed. (4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust
and the fiduciary of another trust if the same person
bb. Other transactions where is a grantor with respect to each trust; or
gain is recognized but not the (6) Between a fiduciary of a trust and beneficiary of
loss such trust.

 Wash sales/ compared w/ short selling  Illegal transactions

SEC. 38. Losses from Wash Sales of Stock or iv. Gains & losses attributable
Securities. - (to) taxpayer’s failure to
(A) In the case of any loss claimed to have been exercise privileges or
sustained from any sale or other disposition of shares options to buy/sell prop.
of stock or securities where it appears that within a
period beginning thirty (30) days before the date of

APP 39
INCOME TAX REVIEWER
d. Exclusions: is based on stock ownership, the following rules shall
be applied:
 Gains derived fr. buying & selling
shares of stock listed & traded (1) Stock Now Owned by Individuals –
through the local exchange Stock owned
 excluded/ exempt from income tax but subject  directly or indirectly
to percentage tax  by or for a corporation, partnership, estate or trust
 shall be considered as being owned proportionately
SEC. 127. Tax on Sale, Barter or Exchange of by its shareholders, partners or beneficiaries.
Shares of Stock Listed & Traded through the
Local Stock Exchange or through initial Public
Offering- (2) Family & Partnership Ownership –
(A) Tax of Sale, Barter or Exchange of Shares of Stock An individual shall be considered as owning the stock
Listed & Traded Through the Local Stock Exchange owned,
There shall be levied, assessed & collected on every  directly or indirectly,
 sale, barter, exchange  by or for his family,
 or other disposition of  or by or for his partner.

 shares of stock
For purposes of this par.,
 listed & traded through the local stock exchange
 the ‘family of an individual’
 other than the sale by a dealer in securities,
 includes only his brothers & sisters (whether by
a tax at the rate of whole or half-blood),
 1/2 of 1% of the gross selling price or  spouse, ancestors & lineal descendants.
 gross value in money of the shares of stock
 sold, bartered, exchanged or otherwise disposed (3) Options - If any person has an option to acquire
stock, such stock shall be considered as owned by
w/c shall be paid by the seller or transferor.
such person. For purposes of this paragraph, an option
to acquire such an option & each one of a series of
(B) Tax on Shares of Stock Sold or Exchanged through options shall be considered as an option to acquire
Initial Public Offering - such stock.
There shall be levied, assessed & collected on every (4) Constructive Ownership as Actual Ownership -
 sale, barter, exchange or other disposition Stock constructively owned by reason of the application
of paragraph (1) or (3) hereof shall,
 through initial public offering of shares of stock
 for purposes of applying paragraph (1) or (2),
 in closely held corporations, as defined herein,
 be treated as actually owned by such person;
 a tax at the rates provided hereunder
 but stock constructively owned by the individual
 based on the gross selling price or
 by reason of the application of paragraph (2) hereof
 gross value in money of  shall not be treated as owned by him
 the shares of stock  for purposes of again applying such paragraph
 sold bartered, exchanged or otherwise disposed in  in order to make another
accordance w/ the proportion of shares of stock sold,  the constructive owner of such stock.
bartered, exchanged or otherwise disposed
 to the total outstanding shares of stock after the
(C) Return on Capital Gains Realized fr. Sale of Shares of
listing in the local stock exchange:
Stocks -
Up to 25% : 4%
Over 25% but not over 33 1/3% : 2%
(1) Return on Capital Gains Realized fr. Sale of Shares of
Over 33 1/3% : 1% Stock Listed & Traded in the Local Stock Exchange –
It shall be the duty
The tax herein imposed shall be  of every stock broker who effected the sale
 paid by the issuing corporation in primary offering  subject to the tax imposed herein
 or by the seller in secondary offering.  to collect the tax & remit the same
 to the Bureau of Internal Revenue
For purpose of this Section,  w/in five (5) banking days fr. the date of collection
 the term ‘closely held corporation’ means thereof &
 any corporation at least 50% in value of the  to submit on Mondays of each week
outstanding capital stock or  to the secretary of the stock exchange,
 at least 50% of the total combined voting power of  of w/c he is a member,
 all classes of stock entitled to vote  a true & complete return
 is owned directly or indirectly by or for not more than  w/c shall contain a declaration of all his transactions
20 individuals.  effected through him during the preceding week &
 taxes collected by him & turned over
For purposes of determining whether the corporation is a  to the Bureau of Internal Revenue.
closely held corporation insofar as such determination

APP 40
INCOME TAX REVIEWER
(2) Return of Public Offering of Shares of Stock – Over P500,000 ………………………………P125,000+34% of
In case of primary offering, the excess over P500,000 in 1998.
 the corporate issuer shall Provided, That effective January 1, 1999, the top
marginal rate shall be thirty-three percent (33%) and
 file the return & pay the corresponding tax effective January 1, 2000, the said rate shall be thirty-
 w/in thirty (30) days fr. the date of listing of the two percent (32%).
shares of stock in the local stock exchange. For married individuals, the husband and wife, subject to
In the case of secondary offering, the provision of Section 51 (D) hereof, shall compute
 the provision of Subsection (C)(1) of this Section separately their individual income tax based on their
 shall apply as to the time & manner of the payment respective total taxable income: Provided, That if any
income cannot be definitely attributed to or identified
of the tax.
as income exclusively earned or realized by either of
the spouses, the same shall be divided equally
(D) Common Provisions – between the spouses for the purpose of determining
Any gain derived their respective taxable income.
 fr. the sale, barter, exchange or other disposition (B) Rate of Tax on Certain Passive Income.
 of shares of stock (1) Interests, Royalties, Prizes, and Other Winnings. - A
final tax at the rate of twenty percent (20%) is hereby
 under this Section
imposed upon the amount of interest from any
 shall be exempt fr. the tax imposed currency bank deposit and yield or any other monetary
 in Sections 24(C), 27(D)(2), 28(A)(8)(c), & 28(B)(5)(c) benefit from deposit substitutes and from trust funds
of this Code & and similar arrangements; royalties, except on books,
 fr. the regular individual or corporate income tax. as well as other literary works and musical
compositions, which shall be imposed a final tax of ten
percent (10%); prizes (except prizes amounting to Ten
Tax paid under this Section shall not be deductible for thousand pesos (P10,000) or less which shall be
income tax purposes . subject to tax under Subsection (A) of Section 24; and
other winnings (except Philippine Charity Sweepstakes
and Lotto winnings), derived from sources within the
e. Applicable tax rate Philippines: Provided, however, That interest income
received by an individual taxpayer (except a
nonresident individual) from a depository bank under
SEC. 24. Income Tax Rates. the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and
(A) Rates of Income Tax on Individual Citizen and one-half percent (7 1/2%) of such interest income:
Individual Resident Alien of the Philippines. Provided, further, That interest income from long-term
(1) An income tax is hereby imposed: deposit or investment in the form of savings, common
(a) On the taxable income defined in Section 31 of this or individual trust funds, deposit substitutes,
Code, other than income subject to tax under investment management accounts and other
Subsections (B), (C) and (D) of this Section, derived for investments evidenced by certificates in such form
each taxable year from all sources within and without prescribed by the Bangko Sentral ng Pilipinas (BSP)
the Philippines be every individual citizen of the shall be exempt from the tax imposed under this
Philippines residing therein; Subsection: Provided, finally, That should the holder of
the certificate pre-terminate the deposit or investment
(b) On the taxable income defined in Section 31 of this
before the fifth (5th) year, a final tax shall be imposed
Code, other than income subject to tax under
on the entire income and shall be deducted and
Subsections (B), (C) and (D) of this Section, derived for
withheld by the depository bank from the proceeds of
each taxable year from all sources within the
the long-term deposit or investment certificate based
Philippines by an individual citizen of the Philippines
on the remaining maturity thereof:
who is residing outside of the Philippines including
overseas contract workers referred to in Subsection(C)
of Section 23 hereof; and Four (4) years to less than five (5) years - 5%;
(c) On the taxable income defined in Section 31 of this Three (3) years to less than (4) years - 12%; and
Code, other than income subject to tax under Less than three (3) years - 20%
Subsections (b), (C) and (D) of this Section, derived for (2) Cash and/or Property Dividends - A final tax at the
each taxable year from all sources within the following rates shall be imposed upon the cash and/or
Philippines by an individual alien who is a resident of property dividends actually or constructively received
the Philippines. by an individual from a domestic corporation or from a
The tax shall be computed in accordance with and at the joint stock company, insurance or mutual fund
rates established in the following schedule: companies and regional operating headquarters of
multinational companies, or on the share of an
Not over P10,000………………………………… 5% individual in the distributable net income after tax of a
partnership (except a general professional partnership)
Over P10,000 but not over P30,000…………P500+10% of
of which he is a partner, or on the share of an
the excess over P10,000
individual in the net income after tax of an association,
Over P30,000 but not over P70,000………P2,500+15% of a joint account, or a joint venture or consortium
the excess over P30,000 taxable as a corporation of which he is a member or
Over P70,000 but not over P140,000…….P8,500+20% of co-venturer:
the excess over P70,000
Over P140,000 but not over P250,000…P22,500+25% of Six percent (6%) beginning January 1, 1998;
the excess over P140,000 Eight percent (8%) beginning January 1, 1999;
Over P250,000 but not over P500,000…P50,000+30% of Ten percent (10% beginning January 1, 2000.
the excess over P250,000

APP 41
INCOME TAX REVIEWER
Provided, however, That the tax on dividends shall apply come to the Philippines and stay therein for an
only on income earned on or after January 1, 1998. aggregate period of more than one hundred eighty
Income forming part of retained earnings as of (180) days during any calendar year shall be deemed a
December 31, 1997 shall not, even if declared or 'nonresident alien doing business in the Philippines'.
distributed on or after January 1, 1998, be subject to Section 22 (G) of this Code notwithstanding.
this tax. (2) Cash and/or Property Dividends from a Domestic
(C) Capital Gains from Sale of Shares of Stock not Traded Corporation or Joint Stock Company, or Insurance or
in the Stock Exchange. - The provisions of Section Mutual Fund Company or Regional Operating
39(B) notwithstanding, a final tax at the rates Headquarter or Multinational Company, or Share in the
prescribed below is hereby imposed upon the net Distributable Net Income of a Partnership (Except a
capital gains realized during the taxable year from the General Professional Partnership), Joint Account, Joint
sale, barter, exchange or other disposition of shares of Venture Taxable as a Corporation or Association.,
stock in a domestic corporation, except shares sold, or Interests, Royalties, Prizes, and Other Winnings. - Cash
disposed of through the stock exchange. and/or property dividends from a domestic corporation,
Not over P100,000…………………………….. 5% or from a joint stock company, or from an insurance or
mutual fund company or from a regional operating
On any amount in excess of P100,000………… 10% headquarter of multinational company, or the share of
(D) Capital Gains from Sale of Real Property. - a nonresident alien individual in the distributable net
(1) In General. - The provisions of Section 39(B) income after tax of a partnership (except a general
notwithstanding, a final tax of six percent (6%) based professional partnership) of which he is a partner, or
on the gross selling price or current fair market value the share of a nonresident alien individual in the net
as determined in accordance with Section 6(E) of this income after tax of an association, a joint account, or a
Code, whichever is higher, is hereby imposed upon joint venture taxable as a corporation of which he is a
capital gains presumed to have been realized from the member or a co-venturer; interests; royalties (in any
sale, exchange, or other disposition of real property form); and prizes (except prizes amounting to Ten
located in the Philippines, classified as capital assets, thousand pesos (P10,000) or less which shall be
including pacto de retro sales and other forms of subject to tax under Subsection (B)(1) of Section 24)
conditional sales, by individuals, including estates and and other winnings (except Philippine Charity
trusts: Provided, That the tax liability, if any, on gains Sweepstakes and Lotto winnings); shall be subject to
from sales or other dispositions of real property to the an income tax of twenty percent (20%) on the total
government or any of its political subdivisions or amount thereof: Provided, however, that royalties on
agencies or to government-owned or controlled books as well as other literary works, and royalties on
corporations shall be determined either under Section musical compositions shall be subject to a final tax of
24 (A) or under this Subsection, at the option of the ten percent (10%) on the total amount thereof:
taxpayer. Provided, further, That cinematographic films and
(2) Exception. - The provisions of paragraph (1) of this similar works shall be subject to the tax provided
under Section 28 of this Code: Provided, furthermore,
Subsection to the contrary notwithstanding, capital
gains presumed to have been realized from the sale or That interest income from long-term deposit or
investment in the form of savings, common or
disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in individual trust funds, deposit substitutes, investment
management accounts and other investments
acquiring or constructing a new principal residence
within eighteen (18) calendar months from the date of evidenced by certificates in such form prescribed by
the Bangko Sentral ng Pilipinas (BSP) shall be exempt
sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, from the tax imposed under this Subsection: Provided,
finally, that should the holder of the certificate pre-
That the historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire
new principal residence built or acquired: Provided,
further, That the Commissioner shall have been duly income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term
notified by the taxpayer within thirty (30) days from
the date of sale or disposition through a prescribed deposit or investment certificate based on the
remaining maturity thereof:
return of his intention to avail of the tax exemption
herein mentioned: Provided, still further, That the said
tax exemption can only be availed of once every ten Four (4) years to less than five (5) years - 5%;
(10) years: Provided, finally, that if there is no full Three (3) years to less than four (4) years - 12%; and
utilization of the proceeds of sale or disposition, the Less than three (3) years - 20%.
portion of the gain presumed to have been realized
from the sale or disposition shall be subject to capital
gains tax. For this purpose, the gross selling price or (3) Capital Gains. - Capital gains realized from sale,
fair market value at the time of sale, whichever is barter or exchange of shares of stock in domestic
higher, shall be multiplied by a fraction which the corporations not traded through the local stock
unutilized amount bears to the gross selling price in exchange, and real properties shall be subject to the
order to determine the taxable portion and the tax tax prescribed under Subsections (C) and (D) of
prescribed under paragraph (1) of this Subsection shall Section 24.
be imposed thereon. (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
SEC. 25. Tax on Nonresident Alien Individual. -
entire income received from all sources within the
(A) Nonresident Alien Engaged in trade or Business Philippines by every nonresident alien individual not
Within the Philippines. - engaged in trade or business within the Philippines as
(1) In General. - A nonresident alien individual engaged interest, cash and/or property dividends, rents,
in trade or business in the Philippines shall be subject salaries, wages, premiums, annuities, compensation,
to an income tax in the same manner as an individual remuneration, emoluments, or other fixed or
citizen and a resident alien individual, on taxable determinable annual or periodic or casual gains,
income received from all sources within the profits, and income, and capital gains, a tax equal to
Philippines. A nonresident alien individual who shall twenty-five percent (25%) of such income. Capital

APP 42
INCOME TAX REVIEWER
gains realized by a nonresident alien individual not
engaged in trade or business in the Philippines from CHAPTER IV - TAX ON CORPORATIONS
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 SEC. 27. Rates of Income tax on Domestic
24. Corporations. -
(C) Alien Individual Employed by Regional or Area (A) In General. - Except as otherwise provided in this
Headquarters and Regional Operating Headquarters of Code, an income tax of thirty-five percent (35%) is
Multinational Companies. - There shall be levied, hereby imposed upon the taxable income derived
collected and paid for each taxable year upon the during each taxable year from all sources within and
gross income received by every alien individual without the Philippines by every corporation, as
employed by regional or area headquarters and defined in Section 22(B) of this Code and taxable under
regional operating headquarters established in the this Title as a corporation, organized in, or existing
Philippines by multinational companies as salaries, under the laws of the Philippines: Provided, That
wages, annuities, compensation, remuneration and effective January 1, 1998, the rate of income tax shall
other emoluments, such as honoraria and allowances, be thirty-four percent (34%); effective January 1, 1999,
from such regional or area headquarters and regional the rate shall be thirty-three percent (33%); and
operating headquarters, a tax equal to fifteen percent effective January 1, 2000 and thereafter, the rate shall
(15%) of such gross income: Provided, however, That be thirty-two percent (32%).
the same tax treatment shall apply to Filipinos In the case of corporations adopting the fiscal-year
employed and occupying the same position as those of accounting period, the taxable income shall be
aliens employed by these multinational companies. For computed without regard to the specific date when
purposes of this Chapter, the term 'multinational specific sales, purchases and other transactions occur.
company' means a foreign firm or entity engaged in Their income and expenses for the fiscal year shall be
international trade with affiliates or subsidiaries or deemed to have been earned and spent equally for
branch offices in the Asia-Pacific Region and other each month of the period.
foreign markets. The reduced corporate income tax rates shall be applied
(D) Alien Individual Employed by Offshore Banking Units. on the amount computed by multiplying the number of
- There shall be levied, collected and paid for each months covered by the new rates within the fiscal year
taxable year upon the gross income received by every by the taxable income of the corporation for the
alien individual employed by offshore banking units period, divided by twelve.
established in the Philippines as salaries, wages, Provided, further, That the President, upon the
annuities, compensation, remuneration and other recommendation of the Secretary of Finance, may
emoluments, such as honoraria and allowances, from effective January 1, 2000, allow corporations the option
such off-shore banking units, a tax equal to fifteen to be taxed at fifteen percent (15%) of gross income as
percent (15%) of such gross income: Provided, defined herein, after the following conditions have
however, That the same tax treatment shall apply to been satisfied:
Filipinos employed and occupying the same positions
as those of aliens employed by these offshore banking (1) A tax effort ratio of twenty percent (20%) of Gross
units. National Product (GNP);
(E) Alien Individual Employed by Petroleum Service (2) A ratio of forty percent (40%) of income tax
Contractor and Subcontractor. - An Alien individual who collection to total tax revenues;
is a permanent resident of a foreign country but who is (3) A VAT tax effort of four percent (4%) of GNP; and
employed and assigned in the Philippines by a foreign (4) A 0.9 percent (0.9%) ratio of the Consolidated
service contractor or by a foreign service Public Sector Financial Position (CPSFP) to GNP.
subcontractor engaged in petroleum operations in the The option to be taxed based on gross income shall be
Philippines shall be liable to a tax of fifteen percent available only to firms whose ratio of cost of sales to
(15%) of the salaries, wages, annuities, compensation, gross sales or receipts from all sources does not
remuneration and other emoluments, such as exceed fifty-five percent (55%).
honoraria and allowances, received from such
The election of the gross income tax option by the
contractor or subcontractor: Provided, however, That
corporation shall be irrevocable for three (3)
the same tax treatment shall apply to a Filipino
consecutive taxable years during which the
employed and occupying the same position as an alien
corporation is qualified under the scheme.
employed by petroleum service contractor and
subcontractor. For purposes of this Section, the term 'gross income'
derived from business shall be equivalent to gross
Any income earned from all other sources within the
sales less sales returns, discounts and allowances and
Philippines by the alien employees referred to under
cost of goods sold. "Cost of goods sold' shall include all
Subsections (C), (D) and (E) hereof shall be subject to
business expenses directly incurred to produce the
the pertinent income tax, as the case may be, imposed
merchandise to bring them to their present location
under this Code.
and use.
For a trading or merchandising concern, 'cost of goods'
SEC. 26. Tax Liability of Members of General sold shall include the invoice cost of the goods sold,
Professional Partnerships. - A general professional plus import duties, freight in transporting the goods to
partnership as such shall not be subject to the income the place where the goods are actually sold, including
tax imposed under this Chapter. Persons engaging in insurance while the goods are in transit.
business as partners in a general professional
For a manufacturing concern, 'cost of goods
partnership shall be liable for income tax only in their
manufactured and sold' shall include all costs of
separate and individual capacities.
production of finished goods, such as raw materials
For purposes of computing the distributive share of the used, direct labor and manufacturing overhead, freight
partners, the net income of the partnership shall be cost, insurance premiums and other costs incurred to
computed in the same manner as a corporation. bring the raw materials to the factory or warehouse.
Each partner shall report as gross income his distributive
share, actually or constructively received, in the net
income of the partnership.

APP 43
INCOME TAX REVIEWER
In the case of taxpayers engaged in the sale of service, (3) Tax on Income Derived under the Expanded Foreign
'gross income' means gross receipts less sales returns, Currency Deposit System. - Income derived by a
allowances and discounts. depository bank under the expanded foreign currency
deposit system from foreign currency transactions with
local commercial banks, including branches of foreign
(B) Proprietary Educational Institutions and Hospitals. -
banks that may be authorized by the Bangko Sentral
Proprietary educational institutions and hospitals ng Pilipinas (BSP) to transact business with foreign
which are nonprofit shall pay a tax of ten percent
currency depository system units and other depository
(10%) on their taxable income except those covered by banks under the expanded foreign currency deposit
Subsection (D) hereof: Provided, that if the gross
system, including interest income from foreign
income from unrelated trade, business or other activity currency loans granted by such depository banks
exceeds fifty percent (50%) of the total gross income
under said expanded foreign currency deposit system
derived by such educational institutions or hospitals to residents, shall be subject to a final income tax at
from all sources, the tax prescribed in Subsection (A)
the rate of ten percent (10%) of such income.
hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated Any income of nonresidents, whether individuals or
trade, business or other activity' means any trade, corporations, from transactions with depository banks
business or other activity, the conduct of which is not under the expanded system shall be exempt from
substantially related to the exercise or performance by income tax.
such educational institution or hospital of its primary (4) Intercorporate Dividends. - Dividends received by a
purpose or function. A 'Proprietary educational domestic corporation from another domestic
institution' is any private school maintained and corporation shall not be subject to tax.
administered by private individuals or groups with an (5) Capital Gains Realized from the Sale, Exchange or
issued permit to operate from the Department of Disposition of Lands and/or Buildings. - A final tax of
Education, Culture and Sports (DECS), or the six percent (6%) is hereby imposed on the gain
Commission on Higher Education (CHED), or the presumed to have been realized on the sale, exchange
Technical Education and Skills Development Authority or disposition of lands and/or buildings which are not
(TESDA), as the case may be, in accordance with actually used in the business of a corporation and are
existing laws and regulations. treated as capital assets, based on the gross selling
price of fair market value as determined in accordance
(C) Government-owned or Controlled-Corporations, with Section 6(E) of this Code, whichever is higher, of
Agencies or Instrumentalities. - The provisions of such lands and/or buildings.
existing special or general laws to the contrary
notwithstanding, all corporations, agencies, or (E) Minimum Corporate Income Tax on Domestic
instrumentalities owned or controlled by the Corporations. -
Government, except the Government Service Insurance
(1) Imposition of Tax. - A minimum corporate income tax
System (GSIS), the Social Security System (SSS), the
of two percent (2%0 of the gross income as of the end
Philippine Health Insurance Corporation (PHIC), the
of the taxable year, as defined herein, is hereby
Philippine Charity Sweepstakes Office (PCSO) and the
imposed on a corporation taxable under this Title,
Philippine Amusement and Gaming Corporation
beginning on the fourth taxable year immediately
(PAGCOR), shall pay such rate of tax upon their taxable
following the year in which such corporation
income as are imposed by this Section upon
commenced its business operations, when the
corporations or associations engaged in s similar
minimum income tax is greater than the tax computed
business, industry, or activity.
under Subsection (A) of this Section for the taxable
year.
(D) Rates of Tax on Certain Passive Incomes. - (2) Carry Froward of Excess Minimum Tax. - Any excess of
(1) Interest from Deposits and Yield or any other the minimum corporate income tax over the normal
Monetary Benefit from Deposit Substitutes and from income tax as computed under Subsection (A) of this
Trust Funds and Similar Arrangements, and Royalties. - Section shall be carried forward and credited against
A final tax at the rate of twenty percent (20%) is the normal income tax for the three (3) immediately
hereby imposed upon the amount of interest on succeeding taxable years.
currency bank deposit and yield or any other monetary (3) Relief from the Minimum Corporate Income Tax Under
benefit from deposit substitutes and from trust funds Certain Conditions. - The Secretary of Finance is
and similar arrangements received by domestic hereby authorized to suspend the imposition of the
corporations, and royalties, derived from sources minimum corporate income tax on any corporation
within the Philippines: Provided, however, That interest which suffers losses on account of prolonged labor
income derived by a domestic corporation from a dispute, or because of force majeure, or because of
depository bank under the expanded foreign currency legitimate business reverses.
deposit system shall be subject to a final income tax at
The Secretary of Finance is hereby authorized to
the rate of seven and one-half percent (7 1/2%) of such
promulgate, upon recommendation of the
interest income.
Commissioner, the necessary rules and regulation that
shall define the terms and conditions under which he
(2) Capital Gains from the Sale of Shares of Stock Not may suspend the imposition of the minimum corporate
Traded in the Stock Exchange. - A final tax at the rates income tax in a meritorious case.
prescribed below shall be imposed on net capital gains (4) Gross Income Defined. - For purposes of applying the
realized during the taxable year from the sale, minimum corporate income tax provided under
exchange or other disposition of shares of stock in a Subsection (E) hereof, the term 'gross income' shall
domestic corporation except shares sold or disposed of mean gross sales less sales returns, discounts and
through the stock exchange: allowances and cost of goods sold. "Cost of goods sold'
shall include all business expenses directly incurred to
Not over P100,000…………………………. 5% produce the merchandise to bring them to their
present location and use.
Amount in excess of P100,000…………….. 10%
For a trading or merchandising concern, 'cost of goods
sold' shall include the invoice cost of the goods sold,

APP 44
INCOME TAX REVIEWER
plus import duties, freight in transporting the goods to Philippines: Provided, further, That for a flight which
the place where the goods are actually sold including originates from the Philippines, but transshipment of
insurance while the goods are in transit. passenger takes place at any port outside the
For a manufacturing concern, cost of 'goods Philippines on another airline, only the aliquot portion
manufactured and sold' shall include all costs of of the cost of the ticket corresponding to the leg flown
production of finished goods, such as raw materials from the Philippines to the point of transshipment shall
used, direct labor and manufacturing overhead, freight form part of Gross Philippine Billings.
cost, insurance premiums and other costs incurred to (b) International Shipping. - 'Gross Philippine Billings'
bring the raw materials to the factory or warehouse. means gross revenue whether for passenger, cargo or
In the case of taxpayers engaged in the sale of service, mail originating from the Philippines up to final
'gross income' means gross receipts less sales returns, destination, regardless of the place of sale or
allowances, discounts and cost of services. 'Cost of payments of the passage or freight documents.
services' shall mean all direct costs and expenses
necessarily incurred to provide the services required (4) Offshore Banking Units. - The provisions of any law to
by the customers and clients including (A) salaries and the contrary notwithstanding, income derived by
employee benefits of personnel, consultants and offshore banking units authorized by the Bangko
specialists directly rendering the service and (B) cost Sentral ng Pilipinas (BSP) to transact business with
of facilities directly utilized in providing the service offshore banking units, including any interest income
such as depreciation or rental of equipment used and derived from foreign currency loans granted to
cost of supplies: Provided, however, That in the case of residents, shall be subject to a final income tax at the
banks, 'cost of services' shall include interest expense. rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or
SEC. 28. Rates of Income Tax on Foreign Corporations. - corporations, from transactions with said offshore
(A) Tax on Resident Foreign Corporations. - banking units shall be exempt from income tax.
(1) In General. - Except as otherwise provided in this (5) Tax on Branch Profits Remittances. - Any profit
Code, a corporation organized, authorized, or existing remitted by a branch to its head office shall be subject
under the laws of any foreign country, engaged in to a tax of fifteen (15%) which shall be based on the
trade or business within the Philippines, shall be total profits applied or earmarked for remittance
subject to an income tax equivalent to thirty-five without any deduction for the tax component thereof
percent (35%) of the taxable income derived in the (except those activities which are registered with the
preceding taxable year from all sources within the Philippine Economic Zone Authority). The tax shall be
Philippines: provided, That effective January 1, 1998, collected and paid in the same manner as provided in
the rate of income tax shall be thirty-four percent Sections 57 and 58 of this Code: provided, that
(34%); effective January 1, 1999, the rate shall be interests, dividends, rents, royalties, including
thirty-three percent (33%), and effective January 1, remuneration for technical services, salaries, wages
2000 and thereafter, the rate shall be thirty-two premiums, annuities, emoluments or other fixed or
percent (32%). determinable annual, periodic or casual gains, profits,
income and capital gains received by a foreign
In the case of corporations adopting the fiscal-year corporation during each taxable year from all sources
accounting period, the taxable income shall be
within the Philippines shall not be treated as branch
computed without regard to the specific date when profits unless the same are effectively connected with
sales, purchases and other transactions occur. Their
the conduct of its trade or business in the Philippines.
income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for (6) Regional or Area Headquarters and Regional
each month of the period. Operating Headquarters of Multinational Companies.
The reduced corporate income tax rates shall be applied
on the amount computed by multiplying the number of (a) Regional or area headquarters as defined in Section
months covered by the new rates within the fiscal year 22(DD) shall not be subject to income tax.
by the taxable income of the corporation for the (b) Regional operating headquarters as defined in
period, divided by twelve. Section 22(EE) shall pay a tax of ten percent (10%) of
their taxable income.
Provided, however, That a resident foreign corporation
shall be granted the option to be taxed at fifteen 7. Tax on Certain Incomes Received by a Resident
percent (15%) on gross income under the same Foreign Corporation. –
conditions, as provided in Section 27 (A). (a) Interest from Deposits and Yield or any other
(2) Minimum Corporate Income Tax on Resident Foreign Monetary Benefit from Deposit Substitutes, Trust Funds
Corporations. - A minimum corporate income tax of and Similar Arrangements and Royalties. - Interest
two percent (2%) of gross income, as prescribed under from any currency bank deposit and yield or any other
Section 27 (E) of this Code, shall be imposed, under monetary benefit from deposit substitutes and from
the same conditions, on a resident foreign corporation trust funds and similar arrangements and royalties
taxable under paragraph (1) of this Subsection. derived from sources within the Philippines shall be
subject to a final income tax at the rate of twenty
(3) International Carrier. - An international carrier doing percent (20%) of such interest: Provided, however,
business in the Philippines shall pay a tax of two and
That interest income derived by a resident foreign
one-half percent (2 1/2%) on its 'Gross Philippine corporation from a depository bank under the
Billings' as defined hereunder:
expanded foreign currency deposit system shall be
(a) International Air Carrier. - 'Gross Philippine Billings' subject to a final income tax at the rate of seven and
refers to the amount of gross revenue derived from one-half percent (7 1/2%) of such interest income.
carriage of persons, excess baggage, cargo and mail (b) Income Derived under the Expanded Foreign
originating from the Philippines in a continuous and
Currency Deposit System. - Income derived by a
uninterrupted flight, irrespective of the place of sale or depository bank under the expanded foreign currency
issue and the place of payment of the ticket or passage
deposit system from foreign currency transactions with
document: Provided, That tickets revalidated, local commercial banks including branches of foreign
exchanged and/or indorsed to another international
banks that may be authorized by the Bangko Sentral
airline form part of the Gross Philippine Billings if the ng Pilipinas (BSP) to transact business with foreign
passenger boards a plane in a port or point in the

APP 45
INCOME TAX REVIEWER
currency deposit system units, including interest foreign corporation taxes deemed to have been paid in
income from foreign currency loans granted by such the Philippines equivalent to twenty percent (20%) for
depository banks under said expanded foreign 1997, nineteen percent (19%) for 1998, eighteen
currency deposit system to residents, shall be subject percent (18%) for 1999, and seventeen percent (17%)
to a final income tax at the rate of ten percent (10%) of thereafter, which represents the difference between
such income. the regular income tax of thirty-five percent (35%) in
Any income of nonresidents, whether individuals or 1997, thirty-four percent (34%) in 1998, and thirty-
corporations, from transactions with depository banks three percent (33%) in 1999, and thirty-two percent
under the expanded system shall be exempt from (32%) thereafter on corporations and the fifteen
income tax. percent (15%) tax on dividends as provided in this
subparagraph;
(c) Capital Gains from Sale of Shares of Stock Not Traded
in the Stock Exchange. - A final tax at the rates (c) Capital Gains from Sale of Shares of Stock not Traded
prescribed below is hereby imposed upon the net in the Stock Exchange. - A final tax at the rates
capital gains realized during the taxable year from the prescribed below is hereby imposed upon the net
sale, barter, exchange or other disposition of shares of capital gains realized during the taxable year from the
stock in a domestic corporation except shares sold or sale, barter, exchange or other disposition of shares of
disposed of through the stock exchange: stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange:
Not over P100,000………………………… 5%
Not over P100,000…………..………………… 5%
On any amount in excess of P100,000……. 10%
On any amount in excess of P100,000………… 10%
(d) Intercorporate Dividends. - Dividends received by a
resident foreign corporation from a domestic
corporation liable to tax under this Code shall not be
subject to tax under this Title. i. Special rates:
(B) Tax on Nonresident Foreign Corporation. -
 Stock transactions – sale of domestic shares
(1) In General. - Except as otherwise provided in this classified as capital assets but not traded and
Code, a foreign corporation not engaged in trade or listed in the Phil. Stock Exch. 5% - 10%
business in the Philippines shall pay a tax equal to
thirty-five percent (35%) of the gross income received  Sale of real prop classified as capital asset – 6%
during each taxable year from all sources within the FINAL TAX based on gross selling price or zonal
Philippines, such as interests, dividends, rents, value whichever is higher
royalties, salaries, premiums (except reinsurance  Sale of land and building by a corp. 6% FINAL
premiums), annuities, emoluments or other fixed or TAX based on gross selling price or zonal value
determinable annual, periodic or casual gains, profits whichever is higher
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 ii. Regular tax on NET CAPITAL
shall be thirty-four percent (34%); effective January 1, GAIN
1999, the rate shall be thirty-three percent (33%); and,
effective January 1, 2000 and thereafter, the rate shall
be thirty-two percent (32%). D. Gross income derived from the Conduct of
(2) Nonresident Cinematographic Film Owner, Lessor or Trade or Business or the Exercise of a
Distributor. - A cinematographic film owner, lessor, or
distributor shall pay a tax of twenty-five percent (25%)
Profession;
of its gross income from all sources within the
Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by 1. Computation of taxable income fr.
Philippine Nationals. - A nonresident owner or lessor of business/ conduct of trade or
vessels shall be subject to a tax of four and one-half profession.
percent (4 1/2%) of gross rentals, lease or charter fees
from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry
Authority.
Sec. 43, Rev. Reg. 2. Gross income fr. business. –
(4) Nonresident Owner or Lessor of Aircraft, Machineries In the case of a
and Other Equipment. - Rentals, charters and other
a) manufacturing,
fees derived by a nonresident lessor of aircraft,
machineries and other equipment shall be subject to a b) merchandising, or
tax of seven and one-half percent (7 1/2%) of gross c) mining business,
rentals or fees. “gross income” means the total sales, less the cost of
(5) Tax on Certain Incomes Received by a Nonresident goods sold, plus any income fr. investments & fr.
Foreign Corporation. - incidental or outside operations or sources. In
(a) Interest on Foreign Loans. - A final withholding tax at determining the gross income, subtractions should not
the rate of twenty percent (20%) is hereby imposed on be made for depreciation, depletion, selling expenses
the amount of interest on foreign loans contracted on or losses, or for items not ordinarily used in computing
or after August 1, 1986; the cost of goods sold.
(b) Intercorporate Dividends. - A final withholding tax at
the rate of fifteen percent (15%) is hereby imposed on Sec. 45, Rev. Reg. 2. Gross income of farmers. - A
the amount of cash and/or property dividends received farmer reporting on the basis of receipts &
from a domestic corporation, which shall be collected disbursements (in w/c no inventory to determine
and paid as provided in Section 57 (A) of this Code, profits is used) shall include in his gross income for the
subject to the condition that the country in which the taxable year
nonresident foreign corporation is domiciled, shall 1. the amount of cash or the value of merchandise or
allow a credit against the tax due from the nonresident other property received fr. the sale of livestock &

APP 46
INCOME TAX REVIEWER
produce w/c were raised during the taxable year or Gross Sales less returns and discounts less Cost of
prior years, Sales less Expenses = NET INCOME
2. the profits fr. the sale of any livestock or other items
w/c were purchased, &
3. gross income fr. all other sources. xxx xxx xxx
b. Manufacturing
Gross sales less returns and discounts less cost of
Sec. 27 (E) Minimum Corporate Income Tax on goods manufactured and sold less expenses = NET
Domestic Corporations. - INCOME
(1) Imposition of Tax. - A minimum corporate income tax c. Service concern/ Conduct of trade
of two percent (2%0 of the gross income as of the
end of the taxable year, as defined herein, is hereby Gross receipts less cost of service less expenses =
imposed on a corporation taxable under this Title, NET INCOME
beginning on the fourth taxable year immediately d. Practice of Profession
following the year in which such corporation
commenced its business operations, when the Gross professional fees less expenses = NET
minimum income tax is greater than the tax INCOME
computed under Subsection (A) of this Section for
the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess
e. Farming/Agribusiness
of the minimum corporate income tax over the
normal income tax as computed under Subsection
(A) of this Section shall be carried forward and f. Performance of the functions of a
credited against the normal income tax for the three public office
(3) immediately succeeding taxable years.
(Sec.22 (s) , NIRC – supra.)
(3) Relief from the Minimum Corporate Income Tax
Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of the g. other types of business
minimum corporate income tax on any corporation
which suffers losses on account of prolonged labor
dispute, or because of force majeure, or because of 2. Exclusions
legitimate business reverses.
The Secretary of Finance is hereby authorized to
a. Income exempt under a treaty
promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that
shall define the terms and conditions under which he Sec. 32 (B 5)— Income Exempt under Treaty. -
may suspend the imposition of the minimum corporate Income of any kind, to the extent required by any
income tax in a meritorious case. treaty obligation binding upon the Government of the
Philippines.
(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
b. Income derived by the gov’t. or its
allowances and cost of goods sold. "Cost of goods sold' political subd. fr. the exercise of
shall include all business expenses directly incurred to any essential gov’t. function.
produce the merchandise to bring them to their
present location and use.
For a trading or merchandising concern, 'cost of goods Sec. 32 (B 7) NIRC
sold' shall include the invoice cost of the goods sold, (7) Miscellaneous Items. -
plus import duties, freight in transporting the goods to
(a) Income Derived by Foreign Government. -
the place where the goods are actually sold including
Income derived from investments in the Philippines in
insurance while the goods are in transit.
loans, stocks, bonds or other domestic securities, or
For a manufacturing concern, cost of 'goods from interest on deposits in banks in the Philippines by
manufactured and sold' shall include all costs of (i) foreign governments, (ii) financing institutions
production of finished goods, such as raw materials owned, controlled, or enjoying refinancing from foreign
used, direct labor and manufacturing overhead, freight governments, and (iii) international or regional
cost, insurance premiums and other costs incurred to financial institutions established by foreign
bring the raw materials to the factory or warehouse. governments.
In the case of taxpayers engaged in the sale of service, (b) Income Derived by the Government or its Political
'gross income' means gross receipts less sales returns, Subdivisions. - Income derived from any public utility
allowances, discounts and cost of services. 'Cost of or from the exercise of any essential governmental
services' shall mean all direct costs and expenses function accruing to the Government of the Philippines
necessarily incurred to provide the services required or to any political subdivision thereof.
by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost P.D. 1931
of facilities directly utilized in providing the service SECTION 1. The provisions of special or general law to
such as depreciation or rental of equipment used and the contrary notw/standing, all exemptions fr. the
cost of supplies: Provided, however, That in the case of payment of duties, taxes, fees, imposts & other
banks, 'cost of services' shall include interest expense. charges heretofore granted in favor of government-
owned or controlled corporations including their
subsidiaries, are hereby w/drawn.
a. Merchandising SEC. 2. The President of the Philippines &/or the Minister
of Finance, upon the recommendation of the Fiscal

APP 47
INCOME TAX REVIEWER
Incentives Review Board created under Presidential f) those approved by the President upon the
Decree No. 776, is hereby empowered to restore, recommendation of the Fiscal Incentives Review Board.
partially or totally, the exemptions w/drawn by Sec. 1
above or otherwise revise the scope & coverage of any
SEC. 2. The Fiscal Incentives Review Board, created
applicable tax & duty, taking into account, among
under PD No. 776, as amended, is hereby authorized
others, any or all of the following:
to:
1) The effect on the relative price levels;
a) restore tax &/or duty exemptions w/drawn hereunder
2) The relative contribution of the corporation to the in whole or in part;
revenue generation effort; b) revise the scope & coverage of tax &/or duty
3) The nature of the activity in w/c the corporation is exemption;
engaged in; or c) impose conditions for the restoration of tax &/or duty
4) In general, the greater national interest to be served. exemption;
SEC. 3. The Ministry of Finance shall promulgate the d) prescribe the date or period of effectivity of the
necessary rules & regulations to effectively implement restoration of tax &/or duty exemption;
the provisions of this Decree. e) formulate & submit to the President for approval, a
complete system for the grant of subsidies to
deserving beneficiaries, in lieu of or in combination w/
PD 1955
the restoration of tax & duty exemptions or preferential
SECTION 1. The provisions of special or general law to treatment in taxation, indicating the source of funding
the contrary notw/standing, all exemptions fr. or any therefor, eligible beneficiaries & the terms & conditions
preferential treatment in the payment of duties, taxes, for the grant thereof taking into consideration the
fees, imposts & other charges heretofore granted to international commitments of the Philippines & the
private business enterprise &/or persons engaged in necessary precautions such that the grant of subsidies
any economic activity are hereby w/drawn, except does not become the basis for countervailing action.
those enjoyed by the following:

Sec. 4 (3), Art XIV, Constitution--All revenues &

(a) Those registered by the Board of Investments under assets of non-stock, non-profit educational institutions
PD No. 1789, as amended by BP Blg. 391, & those used actually, directly & exclusive for educational
registered by the Export Processing Zone Authority purposes shall be exempt fr. taxes & duties. Upon the
under PD No. 66, as amended by PD Nos. 1449, 1776, dissolution or cessation of the corporate existence of
1776-A, & 1786; such institutions, their assets shall be disposed of in
(b) The copper mining industry in accordance w/ the the manner provided by law.
provisions of LOI 1416; Sec. 4 (4), Art. XIV, Constitution-- Subject to
(c) Those covered by international agreements to w/c the conditions prescribed by law, all grants, endowments,
Philippines is a signatory; donations or contributions used actually, directly, &
(d) Those covered by the non-impairment clause of the exclusively for educational purposes shall be exempt fr.
tax.
Constitution; &
(e) Those that will be approved by the President of the Sec. 28 (3), Art. VI, Constitution--Charitable
institutions, churches & parsonages or convents
Philippines upon the recommendation of the Minister of
Finance. appurtenant thereto, mosques, non-profit cemeteries,
& all lands, buildings, & improvements, actually,
directly & exclusively used for religious, charitable or
E.O. 93 educational purposes shall be exempt fr. taxation.
SECTION 1. The provisions of any general or special law
to the contrary notw/standing, all tax & duty incentives Finance Dept. Order 137-87
granted to the government & private entities are
hereby w/drawn, except: Educ. inst. means a non-stock, non-profit corporation
association duly registered under Phil. law, & operated
a) those covered by the non-impairment clause of the exclusively for educational purposes, maintained &
Constitution; administered by private individual or group offering
b) those conferred by effective international agreements formal education issued permit to operate by the
to w/c the Gov’t. of the Rep. of the Phil. is a signatory; DECS.
c) those enjoyed by enterprises registered w/: Revenues derived fr. & assets used in the operation of
cafeterias/canteens, dormitories, bookstores are
(i) the Board of Investments pursuant to PD No. exempt fr. taxation provided they are owned &
1789, as amended; operated by the educational institution as ancillary
(ii) the Export Processing Zone Authority pursuant activities & the same are located w/in the school
to PD No. 66, as amended; premises.
(iii) the Phil Veterans Investment Development
Corporation Industrial Authority pursuant Dept. of Finance Order 149-95 Re: Exemption of
to PD 358 as amended; Non-stock Non-Profit Educational Entities
d) those enjoyed by the copper mining industry pursuant Amending Finance department Order 137-87
to the provisions of LOI No. 1416; Non-stock, non-profit educational institutions are exempt
e) those conferred under the four basic codes namely: fr. taxes on all their revenues & assets used actually,
directly & exclusively for educational purposes.
(i) the Tariff & Customs Code, as amended;
However, they shall be subject to internal revenue tax
(ii) the National Internal Revenue Code, as on such educational institution of its educational
amended; purposes or function.
(iii) the Local Tax Code, as amended; Interest income shall be exempt fr. taxation only when
(iv) the Real Property Tax Code, as amended; used directly, exclusively for educational purposes. To
substantiate this claim, the institution must submit an

APP 48
INCOME TAX REVIEWER
annual information return & duly audited financial (4) Rentals and royalties. - Rentals and royalties from
statement. A certification of actual utilization & the property located in the Philippines or from any interest
Board resolution on the proposed project to be funded in such property, including rentals or royalties for -
out of the money deposited in banks. (a) The use of or the right or privilege to use in the
Philippines any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark,
10. Partner’s distributive share of the trade brand or other like property or right;
gross income of gen. professional (b) The use of, or the right to use in the Philippines any
partnership industrial, commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or
commercial knowledge or information;
What is a gen. prof. partnership? (d) The supply of any assistance that is ancillary and
 “… exercising their common profession, no part subsidiary to, and is furnished as a means of enabling
of the income is derived from engaging in any the application or enjoyment of, any such property or
right as is mentioned in paragraph (a), any such
trade or business.”
equipment as is mentioned in paragraph (b) or any
such knowledge or information as is mentioned in
Sec. 22. (B) The term 'corporation' shall include paragraph (c);
partnerships, no matter how created or organized, joint- (e) The supply of services by a nonresident person or his
stock companies, joint accounts (cuentas en employee in connection with the use of property or
participacion), association, or insurance companies, but rights belonging to, or the installation or operation of
does not include general professional partnerships and a any brand, machinery or other apparatus purchased
joint venture or consortium formed for the purpose of from such nonresident person;
undertaking construction projects or engaging in
(f) Technical advice, assistance or services rendered in
petroleum, coal, geothermal and other energy operations
connection with technical management or
pursuant to an operating consortium agreement under a
administration of any scientific, industrial or
service contract with the Government. 'General
commercial undertaking, venture, project or scheme;
professional partnerships' are partnerships formed
and
by persons for the sole purpose of exercising their
common profession, no part of the income of which is (g) The use of or the right to use:
derived from engaging in any trade or business. (i) Motion picture films;
(ii) Films or video tapes for use in connection with
television; and
IV. Situs of the sources of income (iii) Tapes for use in connection with radio
broadcasting.
A. Meaning of situs in income
taxation/determining factors in fixing (5) Sale of Real Property. - gains, profits and income
the situs of income under Phil. tax law from the sale of real property located in the
Philippines; and
(6) Sale of Personal Property. - gains; profits and
1. Classification of income as to source income from the sale of personal property, as
determined in Subsection (E) of this Section.

SEC. 42. Income from Sources Within the (B) Taxable Income From Sources Within the
Philippines.- Philippines. -
(A) Gross Income From Sources Within the (1) General Rule. - From the items of gross income
Philippines. - The following items of gross income specified in Subsection (A) of this Section, there shall
shall be treated as gross income from sources within be deducted the expenses, losses and other
the Philippines: deductions properly allocated thereto and a ratable
part of expenses, interests, losses and other
(1) Interests. - Interests derived from sources within
deductions effectively connected with the business or
the Philippines, and interests on bonds, notes or other
trade conducted exclusively within the Philippines
interest-bearing obligation of residents, corporate or
which cannot definitely be allocated to some items or
otherwise;
class of gross income: Provided, That such items of
(2) Dividends. - The amount received as dividends: deductions shall be allowed only if fully substantiated
by all the information necessary for its calculation. The
(a) from a domestic corporation; and remainder, if any, shall be treated in full as taxable
(b) from a foreign corporation, unless less than fifty income from sources within the Philippines.
percent (50%) of the gross income of such foreign (2) Exception. - No deductions for interest paid or
corporation for the three-year period ending with the incurred abroad shall be allowed from the item of gross
close of its taxable year preceding the declaration of income specified in subsection (A) unless indebtedness
such dividends or for such part of such period as the was actually incurred to provide funds for use in
corporation has been in existence) was derived from connection with the conduct or operation of trade or
sources within the Philippines as determined under the business in the Philippines.
provisions of this Section; but only in an amount which
bears the same ration to such dividends as the gross (C) Gross Income From Sources Without the
income of the corporation for such period derived from Philippines. - The following items of gross income
sources within the Philippines bears to its gross income shall be treated as income from sources without the
from all sources. Philippines:
(3) Services. - Compensation for labor or personal (1) Interests other than those derived from sources
services performed in the Philippines; within the Philippines as provided in paragraph (1) of
Subsection (A) of this Section;

APP 49
INCOME TAX REVIEWER
(2) Dividends other than those derived from sources has filed with the Commissioner a bond conditioned
within the Philippines as provided in paragraph (2) of upon the future payment by him of any income tax
Subsection (A) of this Section; that may be due on the gains derived from such
(3) Compensation for labor or personal services transfer, or (2) the Commissioner has certified that the
performed without the Philippines; taxes, if any, imposed in this Title and due on the gain
realized from such sale or transfer have been paid. It
(4) Rentals or royalties from property located without the shall be the duty of the transferor and the corporation
Philippines or from any interest in such property
the shares of which are sold or transferred, to advise
including rentals or royalties for the use of or for the the transferee of this requirement.
privilege of using without the Philippines, patents,
copyrights, secret processes and formulas, goodwill, (F) Definitions. - As used in this Section the words
trademarks, trade brands, franchises and other like 'sale' or 'sold' include 'exchange' or 'exchanged'; and
properties; and the word 'produced' includes 'created', 'fabricated,'
'manufactured', 'extracted,' 'processed', 'cured' or
(5) Gains, profits and income from the sale of real
'aged.'
property located without the Philippines.

(D) Taxable Income From Sources Without the a. Gross/ taxable Income fr. sources
Philippines. - From the items of gross income
specified in Subsection (C) of this Section there shall w/in the Phils.
be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto Sec. 42. (B) Taxable Income From Sources Within
and a ratable part of any expense, loss or other the Philippines. -
deduction which cannot definitely be allocated to some
items or classes of gross income. The remainder, if (1) General Rule. - From the items of gross income
any, shall be treated in full as taxable income from specified in Subsection (A) of this Section, there shall
sources without the Philippines. be deducted the expenses, losses and other
deductions properly allocated thereto and a ratable
part of expenses, interests, losses and other
(E) Income From Sources Partly Within and Partly deductions effectively connected with the business or
Without the Philippines.- Items of gross income, trade conducted exclusively within the Philippines
expenses, losses and deductions, other than those which cannot definitely be allocated to some items or
specified in Subsections (A) and (C) of this Section, class of gross income: Provided, That such items of
shall be allocated or apportioned to sources within or deductions shall be allowed only if fully substantiated
without the Philippines, under the rules and by all the information necessary for its calculation. The
regulations prescribed by the Secretary of Finance, remainder, if any, shall be treated in full as taxable
upon recommendation of the Commissioner. Where income from sources within the Philippines.
items of gross income are separately allocated to
sources within the Philippines, there shall be deducted (2) Exception. - No deductions for interest paid or
(for the purpose of computing the taxable income incurred abroad shall be allowed from the item of gross
therefrom) the expenses, losses and other deductions income specified in subsection (A) unless indebtedness
properly apportioned or allocated thereto and a ratable was actually incurred to provide funds for use in
part of other expenses, losses or other deductions connection with the conduct or operation of trade or
which cannot definitely be allocated to some items or business in the Philippines.
classes of gross income. The remainder, if any, shall be
included in full as taxable income from sources within
the Philippines. In the case of gross income derived Commissioner vs. JAL, supra
from sources partly within and partly without the
Philippines, the taxable income may first be computed Com. vs. BOAC , supra
by deducting the expenses, losses or other deductions
apportioned or allocated thereto and a ratable part of NDC vs. Com.
any expense, loss or other deduction which cannot Facts: NDC made 14 promissory notes for the
definitely be allocated to some items or classes of
gross income; and the portion of such taxable income
balance of the purchase price of 12 vessels it
attributable to sources within the Philippines may be had contracted a Tokyo firm to build. Said
determined by processes or formulas of general balance & interests were timely remitted in
apportionment prescribed by the Secretary of Finance. Tokyo. NDC w/held no tax. The CIR assessed it
Gains, profits and income from the sale of personal liable for interest tax. The CTA affirmed. NDC
property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in now contends no tax was due as all the related
whole or in part) by the taxpayer without and sold acts. in the transxn. were done in Tokyo.
within the Philippines, shall be treated as derived
partly from sources within and partly from sources Held: Income fr. sources w/in the Phils. include
without the Philippines. interest & other interest-bearing obligations of
Gains, profits and income derived from the purchase of residents, corporate or otherwise. The law
personal property within and its sale without the speaks of “source” w/c, in CAB, is the NDC, a
Philippines, or from the purchase of personal property resident domestic corporation. Nothing in the
without and its sale within the Philippines shall be
law speaks of the “act or activity” of non-
treated as derived entirely form sources within the
country in which sold: Provided, however, That gain resident corps. in the Phils. or the place where
from the sale of shares of stock in a domestic the contract is signed. The residence of the
corporation shall be treated as derived entirely form obligor who pays the interest & not the
sources within the Philippines regardless of where the physical location of the securities, bonds or
said shares are sold. The transfer by a nonresident
alien or a foreign corporation to anyone of any share of notes, or the place of payment, is the
stock issued by a domestic corporation shall not be determining factor of the source of interest
effected or made in its book unless: (1) the transferor income. Thus, if the obligor is a Phil. resident,

APP 50
INCOME TAX REVIEWER
the interest payment he made can have shall be treated as income from sources without the
sources other than w/in the Phils. The interest Philippines:
is paid not by the bond, note or other interest- (1) Interests other than those derived from sources
within the Philippines as provided in paragraph (1) of
bearing obligations but by the obligor. Subsection (A) of this Section;
(2) Dividends other than those derived from sources
within the Philippines as provided in paragraph (2) of
Howden vs. Collector Subsection (A) of this Section;
Facts: Commonwealth, a domestic (3) Compensation for labor or personal services
corporation, entered into reinsurance contracts performed without the Philippines;
w/ British reinsurance companies not engaged (4) Rentals or royalties from property located without the
Philippines or from any interest in such property
in trade or business in the Phils., whereby including rentals or royalties for the use of or for the
former agreed to cede to the latter a portion of privilege of using without the Philippines, patents,
the premiums on indemnity insurances it had copyrights, secret processes and formulas, goodwill,
underwritten in the Phils. Howden, another trademarks, trade brands, franchises and other like
properties; and
British corporation, not engaged in trade or
business in the Phils. represented said British (4) Gains, profits and income from the sale of real
property located without the Philippines.
companies. Contracts were prepared & signed
by the British in London, & sent to Manila for
Sec. 24. (D) Taxable Income From Sources
Commonwealth’s signing. Thus, Without the Philippines. - From the items of gross
Commonwealth remitted P798,297 w/ accrued income specified in Subsection (C) of this Section there
interest at P4,985 as Howden’s gross income. shall be deducted the expenses, losses, and other
Howden filed refund claim for P65,115. deductions properly apportioned or allocated thereto
Howden agreed to pay P977 as income tax on and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some
the P4,985 accrued interest. He invoked a CIR items or classes of gross income. The remainder, if
ruling exempting fr. w/holding tax reinsurance any, shall be treated in full as taxable income from
premiums received fr. a domestic insurance sources without the Philippines.
company by foreign insurance companies not
authorized to do business here. Its action to
2. General principles of income taxation
recover was denied by the CTA.
in the Philippines and situs of sources
Held: The income source is the property, of income
service or activity that produced it.
Reinsurance premiums remitted to Howden
had for their source the undertaking (an SEC. 23. General Principles of Income Taxation in
the Philippines. - Except when otherwise provided in
activity ) to indemnify Commonwealth. This this Code:
took place in the Phils. The risks originally (A) A citizen of the Philippines residing therein is taxable
underwritten by Commonwealth on w/c the on all income derived from sources within and without
reinsurance premiums & indemnity were based the Philippines;
were all situated in the Phils. The latter (B) A nonresident citizen is taxable only on income
contracts were perfected in the Phils. under derived from sources within the Philippines;
Art. 11 thereof, the parties intended Phil. law (C) An individual citizen of the Philippines who is working
to govern by providing for arbitration in Manila. and deriving income from abroad as an overseas
contract worker is taxable only on income derived from
Also, the contract provided for the use of Phil. sources within the Philippines: Provided, That a
currency as a medium of exchange & tax seaman who is a citizen of the Philippines and who
payment. receives compensation for services rendered abroad as
a member of the complement of a vessel engaged
Appellant should not confuse activity exclusively in international trade shall be treated as an
that creates income w/ business in the course overseas contract worker;
of w/c an income is realized, for activity may (D) An alien individual, whether a resident or not of the
consist of a single act while business implies Philippines, is taxable only on income derived from
continuity of transactions. An income may be sources within the Philippines;
earned by a corp. in the Phils. although such (E) A domestic corporation is taxable on all income
derived from sources within and without the
corp. conducts all its business abroad. The Tax Philippines; and
Code does not require a foreign corp. to be (F) A foreign corporation, whether engaged or not in
engaged in business in the Phils. for its income trade or business in the Philippines, is taxable only on
fr. sources w/in the Phils. to be taxable. income derived from sources within the Philippines.

b. Gross/ Taxable Income fr. sources CIR vs. BOAC AND THE CTA
w/o the Phils.
FELICIANO, J. dissenting:
 Whether the foreign corporate taxpayer is
Sec. 42. (C) Gross Income From Sources Without doing business in the Philippines &
the Philippines. - The following items of gross income
therefore a resident foreign corporation, or
APP 51
INCOME TAX REVIEWER
not doing business in the Philippines & the employee: Provided, That the final tax imposed
therefore a non resident foreign under Section 33 hereof has been paid;
corporation, IT IS LIABLE TO INCOME TAX (ii) A reasonable allowance for travel expenses, here and
abroad, while away from home in the pursuit of trade,
ONLY TO THE EXTENT THAT IT DERIVED business or profession;
INCOME FROM SOURCES WITHIN THE (iii) A reasonable allowance for rentals and/or other
PHILIPPINES. payments which are required as a condition for the
continued use or possession, for purposes of the trade,
 SOURCE OF INCOME RELATE TO THE
business or profession, of property to which the
PROPERTY, ACTIVITY OR SERVICE WHICH taxpayer has not taken or is not taking title or in which
PRODUCED THE INCOME, not to the flow of he has no equity other than that of a lessee, user or
money or site of payment possessor;
(iv) A reasonable allowance for entertainment,
 Where income taxation of services in amusement and recreation expenses during the
involved, the income is sources in the taxable year, that are directly connected to the
PLACE WHERE THE SERVICE IS RENDERED. development, management and operation of the trade,
business or profession of the taxpayer, or that are
 . Income fr. transportation or other services directly related to or in furtherance of the conduct of
done outside the Philippine must be treated his or its trade, business or exercise of a profession not
as derived entirely fr. sources outside the to exceed such ceilings as the Secretary of Finance
Philippines may, by rules and regulations prescribe, upon
recommendation of the Commissioner, taking into
 . Income of a foreign airline for carriage of account the needs as well as the special
passengers & cargo between points located circumstances, nature and character of the industry,
trade, business, or profession of the taxpayer:
outside the Philippines is not an income fr. Provided, That any expense incurred for entertainment,
sources w/in the Philippines although the amusement or recreation that is contrary to law,
tickets are sold here, such tickets being morals public policy or public order shall in no case be
merely evidence of the contract of carriage. allowed as a deduction.

 Under P.D. 1355, international carriers (b) Substantiation Requirements. - No deduction from
issuing passage documentation in the gross income shall be allowed under Subsection (A)
Philippines for uplifts between points hereof unless the taxpayer shall substantiate with
outside the Philippine are not charged any sufficient evidence, such as official receipts or other
adequate records: (i) the amount of the expense being
Philippine income tax on their Philippine deducted, and (ii) the direct connection or relation of
billings. In place thereof, a 2.5% excise tax the expense being deducted to the development,
on billings in respect of passengers & management, operation and/or conduct of the trade,
cargoes originating fr. the Philippine business or profession of the taxpayer.
regardless of embarkation or debarkation is (c) Bribes, Kickbacks and Other Similar Payments. - No
imposed. deduction from gross income shall be allowed under
Subsection (A) hereof for any payment made, directly
or indirectly, to an official or employee of the national
government, or to an official or employee of any local
V. Allowable deductions in government unit, or to an official or employee of a
determining taxable income government-owned or -controlled corporation, or to an
official or employee or representative of a foreign
A. General Principles Governing Tax government, or to a private corporation, general
Deductions professional partnership, or a similar entity, if the
payment constitutes a bribe or kickback.

SEC. 34. Deductions from Gross Income. - Except for (2) Expenses Allowable to Private Educational
taxpayers earning compensation income arising from Institutions. - In addition to the expenses allowable
personal services rendered under an employer- as deductions under this Chapter, a private
employee relationship where no deductions shall be educational institution, referred to under Section 27 (B)
allowed under this Section other than under subsection of this Code, may at its option elect either: (a) to
(M) hereof, in computing taxable income subject to deduct expenditures otherwise considered as capital
income tax under Sections 24 (A); 25 (A); 26; 27 (A), outlays of depreciable assets incurred during the
(B) and (C); and 28 (A) (1), there shall be allowed the taxable year for the expansion of school facilities or (b)
following deductions from gross income; to deduct allowance for depreciation thereof under
Subsection (F) hereof.
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or (B) Interest.-
Professional Expenses.-
(1) In General. - The amount of interest paid or incurred
(a) In General. - There shall be allowed as deduction from within a taxable year on indebtedness in connection
gross income all the ordinary and necessary expenses with the taxpayer's profession, trade or business shall
paid or incurred during the taxable year in carrying on be allowed as deduction from gross income: Provided,
or which are directly attributable to, the development, however, That the taxpayer's otherwise allowable
management, operation and/or conduct of the trade, deduction for interest expense shall be reduced by an
business or exercise of a profession, including: amount equal to the following percentages of the
(i) A reasonable allowance for salaries, wages, and other interest income subjected to final tax:
forms of compensation for personal services actually
rendered, including the grossed-up monetary value of Forty-one percent (41%) beginning January 1, 1998;
fringe benefit furnished or granted by the employer to

APP 52
INCOME TAX REVIEWER
Thirty-nine percent (39%) beginning January 1, 1999; professional partnership or the estate or trust paid or
and incurred during the taxable year to a foreign country, if
Thirty-eight percent (38%) beginning January 1, 2000; his distributive share of the income of such partnership
or trust is reported for taxation under this Title.
(2) Exceptions. - No deduction shall be allowed in An alien individual and a foreign corporation shall not be
respect of interest under the succeeding allowed the credits against the tax for the taxes of
subparagraphs: foreign countries allowed under this paragraph.

(a) If within the taxable year an individual taxpayer (4) Limitations on Credit. - The amount of the credit
reporting income on the cash basis incurs an taken under this Section shall be subject to each of the
indebtedness on which an interest is paid in advance following limitations:
through discount or otherwise: Provided, That such (a) The amount of the credit in respect to the tax paid or
interest shall be allowed a deduction in the year the incurred to any country shall not exceed the same
indebtedness is paid: Provided, further, That if the proportion of the tax against which such credit is
indebtedness is payable in periodic amortizations, the taken, which the taxpayer's taxable income from
amount of interest which corresponds to the amount of sources within such country under this Title bears to
the principal amortized or paid during the year shall be his entire taxable income for the same taxable year;
allowed as deduction in such taxable year; and
(b)If both the taxpayer and the person to whom the (b) The total amount of the credit shall not exceed the
payment has been made or is to be made are persons same proportion of the tax against which such credit is
specified under Section 36 (B); or taken, which the taxpayer's taxable income from
(c)If the indebtedness is incurred to finance petroleum sources without the Philippines taxable under this Title
exploration. bears to his entire taxable income for the same taxable
year.
(3) Optional Treatment of Interest Expense. - At the (5) Adjustments on Payment of Incurred Taxes. - If
option of the taxpayer, interest incurred to acquire accrued taxes when paid differ from the amounts
property used in trade business or exercise of a claimed as credits by the taxpayer, or if any tax paid is
profession may be allowed as a deduction or treated as refunded in whole or in part, the taxpayer shall notify
a capital expenditure. the Commissioner; who shall redetermine the amount
of the tax for the year or years affected, and the
amount of tax due upon such redetermination, if any,
(C) Taxes.- shall be paid by the taxpayer upon notice and demand
(1) In General. - Taxes paid or incurred within the by the Commissioner, or the amount of tax overpaid, if
taxable year in connection with the taxpayer's any, shall be credited or refunded to the taxpayer. In
profession, trade or business, shall be allowed as the case of such a tax incurred but not paid, the
deduction, except Commissioner as a condition precedent to the
allowance of this credit may require the taxpayer to
(a) The income tax provided for under this Title;
give a bond with sureties satisfactory to and to be
(b) Income taxes imposed by authority of any foreign approved by the Commissioner in such sum as he may
country; but this deduction shall be allowed in the case require, conditioned upon the payment by the taxpayer
of a taxpayer who does not signify in his return his of any amount of tax found due upon any such
desire to have to any extent the benefits of paragraph redetermination. The bond herein prescribed shall
(3) of this subsection (relating to credits for taxes of contain such further conditions as the Commissioner
foreign countries); may require.
(c) Estate and donor's taxes; and (6) Year in Which Credit Taken. - The credits provided
(d) Taxes assessed against local benefits of a kind for in Subsection (C)(3) of this Section may, at the
tending to increase the value of the property assessed. option of the taxpayer and irrespective of the method
Provided, That taxes allowed under this Subsection, of accounting employed in keeping his books, be taken
when refunded or credited, shall be included as part of in the year which the taxes of the foreign country were
gross income in the year of receipt to the extent of the incurred, subject, however, to the conditions
income tax benefit of said deduction. prescribed in Subsection (C)(5) of this Section. If the
taxpayer elects to take such credits in the year in
which the taxes of the foreign country accrued, the
(2) Limitations on Deductions. - In the case of a
credits for all subsequent years shall be taken upon the
nonresident alien individual engaged in trade or
same basis and no portion of any such taxes shall be
business in the Philippines and a resident foreign
allowed as a deduction in the same or any succeeding
corporation, the deductions for taxes provided in
year.
paragraph (1) of this Subsection (C) shall be allowed
only if and to the extent that they are connected with (7)Proof of Credits. - The credits provided in
income from sources within the Philippines. Subsection (C)(3) hereof shall be allowed only if the
taxpayer establishes to the satisfaction of the
(3) Credit Against Tax for Taxes of Foreign
Commissioner the following:
Countries. - If the taxpayer signifies in his return his
desire to have the benefits of this paragraph, the tax (a) The total amount of income derived from sources
imposed by this Title shall be credited with: without the Philippines;
(b) The amount of income derived from each country, the
(a) Citizen and Domestic Corporation. - In the case of a tax paid or incurred to which is claimed as a credit
citizen of the Philippines and of a domestic under said paragraph, such amount to be determined
corporation, the amount of income taxes paid or under rules and regulations prescribed by the
incurred during the taxable year to any foreign Secretary of Finance; and
country; and (c) All other information necessary for the verification
(b) Partnerships and Estates. - In the case of any such and computation of such credits.
individual who is a member of a general professional (D) Losses. -
partnership or a beneficiary of an estate or trust, his (1) In General.- Losses actually sustained during the
proportionate share of such taxes of the general taxable year and not compensated for by insurance or

APP 53
INCOME TAX REVIEWER
other forms of indemnity shall be allowed as deduction from taxable income for the next five (5)
deductions: years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the
(a) If incurred in trade, profession or business; first of the five (5) taxable years following the loss, and
any portion of such loss which exceeds, the taxable
(b) Of property connected with the trade, business or
income of such first year shall be deducted in like
profession, if the loss arises from fires, storms, manner form the taxable income of the next remaining
shipwreck, or other casualties, or from robbery, theft or
four (4) years.
embezzlement.
The Secretary of Finance, upon recommendation of the
(4) Capital Losses. -
Commissioner, is hereby authorized to promulgate
rules and regulations prescribing, among other things, (a) Limitation. - Loss from sales or Exchanges of capital
the time and manner by which the taxpayer shall assets shall be allowed only to the extent provided in
submit a declaration of loss sustained from casualty or Section 39.
from robbery, theft or embezzlement during the (b) Securities Becoming worthless. - If securities as
taxable year: Provided, however, That the time limit to defined in Section 22 (T) become worthless during the
be so prescribed in the rules and regulations shall not taxable year and are capital assets, the loss resulting
be less than thirty (30) days nor more than ninety (90) therefrom shall, for purposes of this Title, be
days from the date of discovery of the casualty or considered as a loss from the sale or exchange, on the
robbery, theft or embezzlement giving rise to the loss. last day of such taxable year, of capital assets.
(c) No loss shall be allowed as a deduction under this
Subsection if at the time of the filing of the return, (5) Losses From Wash Sales of Stock or Securities .
such loss has been claimed as a deduction for estate - Losses from 'wash sales' of stock or securities as
tax purposes in the estate tax return. provided in Section 38.
(6) Wagering Losses. - Losses from wagering
(2) Proof of Loss. - In the case of a nonresident alien transactions shall b allowed only to the extent of the
individual or foreign corporation, the losses deductible gains from such transactions.
shall be those actually sustained during the year
(7) Abandonment Losses. -
incurred in business, trade or exercise of a profession
conducted within the Philippines, when such losses are (a) In the event a contract area where petroleum
not compensated for by insurance or other forms of operations are undertaken is partially or wholly
indemnity. The secretary of Finance, upon abandoned, all accumulated exploration and
recommendation of the Commissioner, is hereby development expenditures pertaining thereto shall be
authorized to promulgate rules and regulations allowed as a deduction: Provided, That accumulated
prescribing, among other things, the time and manner expenditures incurred in that area prior to January 1,
by which the taxpayer shall submit a declaration of 1979 shall be allowed as a deduction only from any
loss sustained from casualty or from robbery, theft or income derived from the same contract area. In all
embezzlement during the taxable year: Provided, That cases, notices of abandonment shall be filed with the
the time to be so prescribed in the rules and Commissioner.
regulations shall not be less than thirty (30) days nor (b) In case a producing well is subsequently abandoned,
more than ninety (90) days from the date of discovery the unamortized costs thereof, as well as the
of the casualty or robbery, theft or embezzlement undepreciated costs of equipment directly used therein
giving rise to the loss; and , shall be allowed as a deduction in the year such well,
(3) Net Operating Loss Carry-Over. - The net equipment or facility is abandoned by the contractor:
operating loss of the business or enterprise for any Provided, That if such abandoned well is reentered and
taxable year immediately preceding the current production is resumed, or if such equipment or facility
taxable year, which had not been previously offset as is restored into service, the said costs shall be included
deduction from gross income shall be carried over as a as part of gross income in the year of resumption or
deduction from gross income for the next three (3) restoration and shall be amortized or depreciated, as
consecutive taxable years immediately following the the case may be.
year of such loss: Provided, however, That any net loss
incurred in a taxable year during which the taxpayer (E) Bad Debts. -
was exempt from income tax shall not be allowed as a (1) In General. - Debts due to the taxpayer actually
deduction under this Subsection: Provided, further, ascertained to be worthless and charged off within the
That a net operating loss carry-over shall be allowed taxable year except those not connected with
only if there has been no substantial change in the profession, trade or business and those sustained in a
ownership of the business or enterprise in that - transaction entered into between parties mentioned
(i) Not less than seventy-five percent (75%) in nominal under Section 36 (B) of this Code: Provided, That
value of outstanding issued shares., if the business is recovery of bad debts previously allowed as deduction
in the name of a corporation, is held by or on behalf of in the preceding years shall be included as part of the
the same persons; or gross income in the year of recovery to the extent of
(ii) Not less than seventy-five percent (75%) of the paid the income tax benefit of said deduction.
up capital of the corporation, if the business is in the (2) Securities Becoming Worthless. - If securities, as
name of a corporation, is held by or on behalf of the defined in Section 22 (T), are ascertained to be
same persons. worthless and charged off within the taxable year and
"For purposes of this subsection, the term 'not operating are capital assets, the loss resulting therefrom shall, in
loss' shall mean the excess of allowable deduction over the case of a taxpayer other than a bank or trust
gross income of the business in a taxable year. company incorporated under the laws of the
Provided, That for mines other than oil and gas wells, a Philippines a substantial part of whose business is the
net operating loss without the benefit of incentives receipt of deposits, for the purpose of this Title, be
provided for under Executive Order No. 226, as considered as a loss from the sale or exchange, on the
amended, otherwise known as the Omnibus last day of such taxable year, of capital assets.
Investments Code of 1987, incurred in any of the first
ten (10) years of operation may be carried over as a (F) Depreciation. -

APP 54
INCOME TAX REVIEWER
(1) General Rule. - There shall be allowed as a Properties not used directly in the production of
depreciation deduction a reasonable allowance for the petroleum shall be depreciated under the straight-line
exhaustion, wear and tear (including reasonable method on the basis of an estimated useful life of five
allowance for obsolescence) of property used in the (5) years.
trade or business. In the case of property held by one (5) Depreciation of Properties Used in Mining
person for life with remainder to another person, the Operations. - an allowance for depreciation in respect
deduction shall be computed as if the life tenant were of all properties used in mining operations other than
the absolute owner of the property and shall be petroleum operations, shall be computed as follows:
allowed to the life tenant. In the case of property held
(a) At the normal rate of depreciation if the expected life
in trust, the allowable deduction shall be apportioned
is ten (10) years or less; or
between the income beneficiaries and the trustees in
accordance with the pertinent provisions of the (b) Depreciated over any number of years between five
instrument creating the trust, or in the absence of such (5) years and the expected life if the latter is more
provisions, on the basis of the trust income allowable than ten (10) years, and the depreciation thereon
to each. allowed as deduction from taxable income: Provided,
That the contractor notifies the Commissioner at the
(2) Use of Certain Methods and Rates. - The term
beginning of the depreciation period which
'reasonable allowance' as used in the preceding
depreciation rate allowed by this Section will be used.
paragraph shall include, but not limited to, an
allowance computed in accordance with rules and (6) Depreciation Deductible by Nonresident Aliens
regulations prescribed by the Secretary of Finance, Engaged in Trade or Business or Resident
upon recommendation of the Commissioner, under any Foreign Corporations. - In the case of a nonresident
of the following methods: alien individual engaged in trade or business or
resident foreign corporation, a reasonable allowance
(a) The straight-line method;
for the deterioration of Property arising out of its use or
(b) Declining-balance method, using a rate not employment or its non-use in the business trade or
exceeding twice the rate which would have been profession shall be permitted only when such property
used had the annual allowance been computed is located in the Philippines.
under the method described in Subsection (F) (1);
(G) Depletion of Oil and Gas Wells and Mines. -
(c) The sum-of-the-years-digit method; and
(1) In General. - In the case of oil and gas wells or
(d) any other method which may be prescribed by the mines, a reasonable allowance for depletion or
Secretary of Finance upon recommendation of the amortization computed in accordance with the cost-
Commissioner. depletion method shall be granted under rules and
(3) Agreement as to Useful Life on Which regulations to be prescribed by the Secretary of
Depreciation Rate is Based. - Where under rules finance, upon recommendation of the Commissioner.
and regulations prescribed by the Secretary of Finance Provided, That when the allowance for depletion shall
upon recommendation of the Commissioner, the equal the capital invested no further allowance shall be
taxpayer and the Commissioner have entered into an granted: Provided, further, That after production in
agreement in writing specifically dealing with the commercial quantities has commenced, certain
useful life and rate of depreciation of any property, the intangible exploration and development drilling costs:
rate so agreed upon shall be binding on both the (a) shall be deductible in the year incurred if such
taxpayer and the national Government in the absence expenditures are incurred for non-producing wells
of facts and circumstances not taken into consideration and/or mines, or (b) shall be deductible in full in the
during the adoption of such agreement. The year paid or incurred or at the election of the taxpayer,
responsibility of establishing the existence of such may be capitalized and amortized if such expenditures
facts and circumstances shall rest with the party incurred are for producing wells and/or mines in the
initiating the modification. Any change in the agreed same contract area.
rate and useful life of the depreciable property as 'Intangible costs in petroleum operations' refers to any
specified in the agreement shall not be effective for cost incurred in petroleum operations which in itself
taxable years prior to the taxable year in which notice has no salvage value and which is incidental to and
in writing by certified mail or registered mail is served necessary for the drilling of wells and preparation of
by the party initiating such change to the other party wells for the production of petroleum: Provided, That
to the agreement: said costs shall not pertain to the acquisition or
Provided, however, that where the taxpayer has adopted improvement of property of a character subject to the
such useful life and depreciation rate for any allowance for depreciation except that the allowances
depreciable and claimed the depreciation expenses as for depreciation on such property shall be deductible
deduction from his gross income, without any written under this Subsection.
objection on the part of the Commissioner or his duly Any intangible exploration, drilling and development
authorized representatives, the aforesaid useful life expenses allowed as a deduction in computing taxable
and depreciation rate so adopted by the taxpayer for income during the year shall not be taken into
the aforesaid depreciable asset shall be considered consideration in computing the adjusted cost basis for
binding for purposes of this Subsection. the purpose of computing allowable cost depletion.
(4) Depreciation of Properties Used in Petroleum (2) Election to Deduct Exploration and
Operations. - An allowance for depreciation in respect Development Expenditures. - In computing taxable
of all properties directly related to production of income from mining operations, the taxpayer may at
petroleum initially placed in service in a taxable year his option, deduct exploration and development
shall be allowed under the straight-line or declining- expenditures accumulated as cost or adjusted basis for
balance method of depreciation at the option of the cost depletion as of date of prospecting, as well as
service contractor. exploration and development expenditures paid or
However, if the service contractor initially elects the incurred during the taxable year: Provided, That the
declining-balance method, it may at any subsequent amount deductible for exploration and development
date, shift to the straight-line method. expenditures shall not exceed twenty-five percent
The useful life of properties used in or related to (25%) of the net income from mining operations
production of petroleum shall be ten (10) years of such computed without the benefit of any tax incentives
shorter life as may be permitted by the Commissioner. under existing laws. The actual exploration and

APP 55
INCOME TAX REVIEWER
development expenditures minus twenty-five percent activities in education, health, youth and sports
(25%) of the net income from mining shall be carried development, human settlements, science and culture,
forward to the succeeding years until fully deducted. and in economic development according to a National
The election by the taxpayer to deduct the exploration Priority Plan determined by the National Economic and
and development expenditures is irrevocable and shall Development Authority (NEDA), In consultation with
be binding in succeeding taxable years. appropriate government agencies, including its
regional development councils and private
'Net income from mining operations', as used in this
philantrophic persons and institutions: Provided, That
Subsection, shall mean gross income from operations any donation which is made to the Government or to
less 'allowable deductions' which are necessary or
any of its agencies or political subdivisions not in
related to mining operations. 'Allowable deductions' accordance with the said annual priority plan shall be
shall include mining, milling and marketing expenses,
subject to the limitations prescribed in paragraph (1)
and depreciation of properties directly used in the of this Subsection;
mining operations. This paragraph shall not apply to
expenditures for the acquisition or improvement of (b) Donations to Certain Foreign Institutions or
property of a character which is subject to the International Organizations. - donations to foreign
allowance for depreciation. institutions or international organizations which are
fully deductible in pursuance of or in compliance with
In no case shall this paragraph apply with respect to
agreements, treaties, or commitments entered into by
amounts paid or incurred for the exploration and the Government of the Philippines and the foreign
development of oil and gas.
institutions or international organizations or in
The term 'exploration expenditures' means expenditures pursuance of special laws;
paid or incurred for the purpose of ascertaining the
(c) Donations to Accredited Nongovernment
existence, location, extent or quality of any deposit of Organizations. - the term 'nongovernment
ore or other mineral, and paid or incurred before the
organization' means a non profit domestic corporation:
beginning of the development stage of the mine or
deposit.
(1) Organized and operated exclusively for scientific,
The term 'development expenditures' means research, educational, character-building and youth
expenditures paid or incurred during the development
and sports development, health, social welfare,
stage of the mine or other natural deposits. The cultural or charitable purposes, or a combination
development stage of a mine or other natural deposit
thereof, no part of the net income of which inures to
shall begin at the time when deposits of ore or other the benefit of any private individual;
minerals are shown to exist in sufficient commercial
quantity and quality and shall end upon (2) Which, not later than the 15 th day of the third month
commencement of actual commercial extraction. after the close of the accredited nongovernment
organizations taxable year in which contributions are
(3) Depletion of Oil and Gas Wells and Mines received, makes utilization directly for the active
Deductible by a Nonresident Alien individual or
conduct of the activities constituting the purpose or
Foreign Corporation. - In the case of a nonresident function for which it is organized and operated, unless
alien individual engaged in trade or business in the
an extended period is granted by the Secretary of
Philippines or a resident foreign corporation, allowance Finance in accordance with the rules and regulations to
for depletion of oil and gas wells or mines under
be promulgated, upon recommendation of the
paragraph (1) of this Subsection shall be authorized Commissioner;
only in respect to oil and gas wells or mines located
within the Philippines. (3) The level of administrative expense of which shall, on
an annual basis, conform with the rules and
regulations to be prescribed by the Secretary of
(H) Charitable and Other Contributions. - Finance, upon recommendation of the Commissioner,
(1) In General. - Contributions or gifts actually paid or but in no case to exceed thirty percent (30%) of the
made within the taxable year to, or for the use of the total expenses; and
Government of the Philippines or any of its agencies or
(4) The assets of which, in the even of dissolution, would
any political subdivision thereof exclusively for public be distributed to another nonprofit domestic
purposes, or to accredited domestic corporation or
corporation organized for similar purpose or purposes,
associations organized and operated exclusively for or to the state for public purpose, or would be
religious, charitable, scientific, youth and sports
distributed by a court to another organization to be
development, cultural or educational purposes or for used in such manner as in the judgment of said court
the rehabilitation of veterans, or to social welfare
shall best accomplish the general purpose for which
institutions, or to non-government organizations, in the dissolved organization was organized.
accordance with rules and regulations promulgated by
the Secretary of finance, upon recommendation of the Subject to such terms and conditions as may be
Commissioner, no part of the net income of which prescribed by the Secretary of Finance, the term
inures to the benefit of any private stockholder or 'utilization' means:
individual in an amount not in excess of ten percent (i) Any amount in cash or in kind (including
(10%) in the case of an individual, and five percent (%) administrative expenses) paid or utilized to
in the case of a corporation, of the taxpayer's taxable accomplish one or more purposes for which the
income derived from trade, business or profession as accredited nongovernment organization was
computed without the benefit of this and the following created or organized.
subparagraphs. (ii) Any amount paid to acquire an asset used (or
(2) Contributions Deductible in Full. - held for use) directly in carrying out one or more
Notwithstanding the provisions of the preceding purposes for which the accredited
subparagraph, donations to the following institutions nongovernment organization was created or
or entities shall be deductible in full; organized.
(a) Donations to the Government. - Donations to the
Government of the Philippines or to any of its agencies An amount set aside for a specific project which comes
or political subdivisions, including fully-owned within one or more purposes of the accredited
government corporations, exclusively to finance, to nongovernment organization may be treated as a
provide for, or to be used in undertaking priority utilization, but only if at the time such amount is set

APP 56
INCOME TAX REVIEWER
aside, the accredited nongovernment organization has (J) Pension Trusts. - An employer establishing or
established to the satisfaction of the Commissioner maintaining a pension trust to provide for the payment
that the amount will be paid for the specific project of reasonable pensions to his employees shall be
within a period to be prescribed in rules and allowed as a deduction (in addition to the contributions
regulations to be promulgated by the Secretary of to such trust during the taxable year to cover the
Finance, upon recommendation of the Commissioner, pension liability accruing during the year, allowed as a
but not to exceed five (5) years, and the project is one deduction under Subsection (A) (1) of this Section ) a
which can be better accomplished by setting aside reasonable amount transferred or paid into such trust
such amount than by immediate payment of funds. during the taxable year in excess of such contributions,
(3) Valuation. - The amount of any charitable but only if such amount (1)has not theretofore been
contribution of property other than money shall be allowed as a deduction, and (2) is apportioned in equal
based on the acquisition cost of said property. parts over a period of ten (10) consecutive years
beginning with the year in which the transfer or
(4) Proof of Deductions. - Contributions or gifts shall
payment is made.
be allowable as deductions only if verified under the
rules and regulations prescribed by the Secretary of (K) Additional Requirements for Deductibility of
Finance, upon recommendation of the Commissioner. Certain Payments. - Any amount paid or payable
which is otherwise deductible from, or taken into
account in computing gross income or for which
(I) Research and Development.- depreciation or amortization may be allowed under this
(1) In General. - a taxpayer may treat research or Section, shall be allowed as a deduction only if it is
development expenditures which are paid or incurred shown that the tax required to be deducted and
by him during the taxable year in connection with his withheld therefrom has been paid to the Bureau of
trade, business or profession as ordinary and Internal Revenue in accordance with this Section 58
necessary expenses which are not chargeable to and 81 of this Code.
capital account. The expenditures so treated shall be (L) Optional Standard Deduction. - In lieu of the
allowed as deduction during the taxable year when
deductions allowed under the preceding Subsections,
paid or incurred. an individual subject to tax under Section 24, other
(2) Amortization of Certain Research and than a nonresident alien, may elect a standard
Development Expenditures. - At the election of the deduction in an amount not exceeding ten percent
taxpayer and in accordance with the rules and (10%) of his gross income. Unless the taxpayer
regulations to be prescribed by the Secretary of signifies in his return his intention to elect the optional
Finance, upon recommendation of the Commissioner, standard deduction, he shall be considered as having
the following research and development expenditures availed himself of the deductions allowed in the
may be treated as deferred expenses: preceding Subsections. Such election when made in
(a) Paid or incurred by the taxpayer in connection with the return shall be irrevocable for the taxable year for
his trade, business or profession; which the return is made: Provided, That an individual
who is entitled to and claimed for the optional
(b) Not treated as expenses under paragraph 91) hereof;
and standard deduction shall not be required to submit
with his tax return such financial statements otherwise
(c) Chargeable to capital account but not chargeable to required under this Code: Provided, further, That
property of a character which is subject to except when the Commissioner otherwise permits, the
depreciation or depletion. said individual shall keep such records pertaining to his
In computing taxable income, such deferred expenses gross income during the taxable year, as may be
shall be allowed as deduction ratably distributed over required by the rules and regulations promulgated by
a period of not less than sixty (60) months as may be the Secretary of Finance, upon recommendation of the
elected by the taxpayer (beginning with the month in Commissioner.
which the taxpayer first realizes benefits from such (M) Premium Payments on Health and/or
expenditures). Hospitalization Insurance of an Individual
The election provided by paragraph (2) hereof may be Taxpayer. - the amount of premiums not to exceed
made for any taxable year beginning after the Two thousand four hundred pesos (P2,400) per family
effectivity of this Code, but only if made not later than or Two hundred pesos (P200) a month paid during the
the time prescribed by law for filing the return for such taxable year for health and/or hospitalization insurance
taxable year. The method so elected, and the period taken by the taxpayer for himself, including his family,
selected by the taxpayer, shall be adhered to in shall be allowed as a deduction from his gross income:
computing taxable income for the taxable year for Provided, That said family has a gross income of not
which the election is made and for all subsequent more than Two hundred fifty thousand pesos
taxable years unless with the approval of the (P250,000) for the taxable year: Provided, finally, That
Commissioner, a change to a different method is in the case of married taxpayers, only the spouse
authorized with respect to a part or all of such claiming the additional exemption for dependents shall
expenditures. The election shall not apply to any be entitled to this deduction.
expenditure paid or incurred during any taxable year Notwithstanding the provision of the preceding
for which the taxpayer makes the election. Subsections, The Secretary of Finance, upon
recommendation of the Commissioner, after a public
(3) Limitations on deduction. - This Subsection shall hearing shall have been held for this purpose, may
not apply to: prescribe by rules and regulations, limitations or
(a) Any expenditure for the acquisition or improvement ceilings for any of the itemized deductions under
of land, or for the improvement of property to be used Subsections (A) to (J) of this Section: Provided, That for
in connection with research and development of a purposes of determining such ceilings or limitations,
character which is subject to depreciation and the Secretary of Finance shall consider the following
depletion; and factors: (1) adequacy of the prescribed limits on the
actual expenditure requirements of each particular
(b) Any expenditure paid or incurred for the purpose of
industry; and (2)effects of inflation on expenditure
ascertaining the existence, location, extent, or quality
levels: Provided, further, That no ceilings shall further
of any deposit of ore or other mineral, including oil or
be imposed on items of expense already subject to
gas.
ceilings under present law.

APP 57
INCOME TAX REVIEWER
nec. expenses paid or incurred during the
1. Meaning Of Deductions/ taxable year in carrying on any trade or
Differentiated From Other Terms business/c must be substantiated by records.
Mrs. Z went abroad on a combined business &
DEFINITION. Deductions are items or amounts
medical trip. Not all of her expenses came
w/c the law allows to be deducted fr. gross income under the ord. & nec. expenses. (Only half of it
in order to arrive at taxable income. are deductible). The SC upheld the CTA when
it based its decision on the US 1955 PH Federal
Taxes Par.14 160-K w/c is based on scientific
2. Basic Principles In Governing
studies & observations for a long period
Deductions/ Requisites
regarding the useful life of a hotel bldg. The
sale of the properties in JPN notes partly
The taxpayer seeking a deduction must point to realized a capital gain when converted to PHP
some specific provisions of the statute authorizing Peso.
the deduction.
deductions are allowed only when there is a clear
provision in the statute for the deduction claimed. 3. Kinds Of Deductions
He must be able to prove that he is entitled to the i. Itemized – individual/ corps.
deduction authorized or allowed.
ii. Optional Standard – ind.
As a rule, if the taxpayer does not w/in any year taxpayer only
deduct certain of his expenses, losses, interest,
taxes or other charges, he cannot deduct them iii. Special deductions
form the income o the next or any succeeding year.
4. Limitations Imposed By Law
BUSINESS EXPENSE VS. CAPITAL EXPENSE
Example:
Business expenses deductible fr. gross income are
the ordinary & necessary expenses paid or incurred
during the taxable year in carrying on the Sec. 34 (H) Charitable and Other Contributions.
taxpayer’s trade, profession or business. (1) In General. - Contributions or gifts actually paid or
Capital expenses are expenses that result in made within the taxable year to, or for the use of the
Government of the Philippines or any of its agencies or
obtaining benefits of a permanent nature such as
any political subdivision thereof exclusively for public
lands, buildings, & machinery. purposes, or to accredited domestic corporation or
associations organized and operated exclusively for
DIFFERENTIATED FROM EXEMPTION / religious, charitable, scientific, youth and sports
development, cultural or educational purposes or for
EXCLUSION : basically the taxpayer does not the rehabilitation of veterans, or to social welfare
have to pay at all for items excluded/exempt fr. tax institutions, or to non-government organizations, in
FROM TAX CREDIT: it is the taxpayer’s rt. to deduct accordance with rules and regulations promulgated by
fr. income tax due the amt. of tax he has paid to a the Secretary of finance, upon recommendation of the
foreign country subject to limitations. Commissioner, no part of the net income of which
inures to the benefit of any private stockholder or
individual in an amount not in excess of ten percent
Zamora Vs. Collector (10%) in the case of an individual, and five percent (%)
in the case of a corporation, of the taxpayer's taxable
Facts: Zamora, owner of Bay View Hotel &
income derived from trade, business or profession as
Farmacia Zamora filed his ITR for ‘51 & ‘52. computed without the benefit of this and the following
The Collector found that he failed to file his subparagraphs.
return of the capital gains derived fr. the sale
of certain real properties & claimed ded’ns w/c
were not allowed. Z appealed to the SC 5. Substantiation Requirements
arguing the CTA erred when it (1) disallowed
P10,478.50 as promotion expenses incurred by
wife for promoting hotel & pharmacy (1/2 of
alleged P20,957 bus. expense);(2) disallowed
3.5% per annum rate of depreciation ;(3) Sec. 34 (1,b) Substantiation Requirements. - No
disregarded the price in deed of sale, as costs deduction from gross income shall be allowed under
of Mla. prop. for det. alleged cap. gains, & (4) Subsection (A) hereof unless the taxpayer shall
applied the Ballantyne Scale of Values in det. substantiate with sufficient evidence, such as official
receipts or other adequate records: (i) the amount of
the cost of said prop. the expense being deducted, and (ii) the direct
Held: PROMOTION EXPENSES constitute one of connection or relation of the expense being deducted
to the development, management, operation and/or
the deductions in conducting a business & conduct of the trade, business or profession of the
shld. satisfy the requirements of the Tax Code taxpayer.
Sec.30 w/c provides the in computing net inc.
there shall be allowed as ded’ns all the ord. &

APP 58
INCOME TAX REVIEWER
6. Allocation of expenses and Among the ordinary & necessary expenses paid for
deductions incurred in carrying on any trade or business maybe
included a reasonable allowance for salaries or other
SEC. 50. Allocation of Income and Deductions. - In compensation for personal services actually rendered.
the case of two or more organizations, trades or The test of deductibility in the area of compensation
businesses (whether or not incorporated and whether payments is whether they –
or not organized in the Philippines) owned or controlled  Are reasonable &
directly or indirectly by the same interests, the
Commissioner is authorized to distribute, apportion or  Are, in fact, purely for service.
allocate gross income or deductions between or among  This test & its practical application may be further
such organization, trade or business, if he determined stated & illustrated as follows:
that such distribution, apportionment or allocation is  Any amount paid in the form of compensation, but
necessary in order to prevent evasion of taxes or not in fact as the purchase price services, is not
clearly to reflect the income of any such organization, deductible.
trade or business.
 An ostensible salary paid by a corporation may be
distribution of dividend on stock. This is likely to
occur in the case of a corporation having few
B. Allowable deduction from business shareholders, practically all of whom draw salaries.
income/ trade or practice of profession If in such a case the salaries are in excess of those
ordinarily paid for similar services, & the excessive
payments corresponds or bear a close holding to the
1. Ordinary/ Necessary Business relationship to the stockholdings of the officers or
Expenses employees, it would seem likely that the salaries are
not paid wholly for services rendered, but that
SEC. 34. Deductions from Gross Income. - Except for excessive payments are a distribution of earnings
taxpayers earning compensation income arising from upon the stock.
personal services rendered under an employer-  An ostensible salary may be in part payment for
employee relationship where no deductions shall be property. This may occur, for example, where a
allowed under this Section other than under subsection partnership sells our a corporation, the farmer
(M) hereof, in computing taxable income subject to partners agreeing to continue in the service of the
income tax under Sections 24 (A); 25 (A); 26; 27 (A), corporation. In such a case it may be found that the
(B) and (C); and 28 (A) (1), there shall be allowed the salaries of the farmer partners are not merely for
following deductions from gross income; services, but in part constitute payment of the
(A) Expenses. - transfer of the business.
(1) Ordinary and Necessary Trade, Business or  The form of method of fixing compensation is not
Professional Expenses.- decisive as to deductibility. While any form of
(a) In General. - There shall be allowed as deduction from contingent compensation invites scrutiny as a
gross income all the ordinary and necessary expenses possible distribution of earnings of the enterprise, it
paid or incurred during the taxable year in carrying on does not follow that payments on a contingent basis
or which are directly attributable to, the development, are to be treated fundamentally on any basis
management, operation and/or conduct of the trade, different fr. that applying to compensation at a flat
business or exercise of a profession, including: rate. Generally speaking, if contingent
compensation is paid pursuant to a free bargain
between the employer & the individual made before
the services are rendered, not influenced by any
A. Salaries, wages, and other forms consideration on the part of the employer other than
of compensation for personal that a securing on fair & advantageous terms the
services services of the individual, it should be allowed as a
deduction even though in the actual working out of
 services actually rendered the contract it may prove to be greater than the
 factors to consider to determine amount w/c would ordinarily be paid.
reasonableness of amount. In any event the allowance for compensation paid may
not exceed what is reasonable under the
Sec. 34 (A, 1, a, i). A reasonable allowance for salaries, circumstances. It is in general just to assume the
wages, and other forms of compensation for personal reasonable & true compensation is only such amount
services actually rendered, including the grossed-up as would ordinarily be paid for like services by are
monetary value of fringe benefit furnished or granted those existing at the date when the contract for
by the employer to the employee: Provided, That the services was made, not those existing at the date
final tax imposed under Section 33 hereof has been when the contract is questioned.
paid;
Section 71. Treatment of excessive compensation
Rev. Reg. 6-82 as amended by Rev. Reg. 12-87 –
This covers the collection at the source of the Y tax on The income tax liability of the recipient in respect
compensation Y of employed individual taxpayers. The of an amount of ostensible paid to him as
only impt. sections in this RR cover the defn. of compensation, but not allowed to be deducted as such
Compensation (AS INCOME FOR THE EE AND AS by the payer, will depend upon the circumstances of
DEDUCTIBLE EXPENSE FOR THE ER) & its other forms each case. Thus, in the case of payments by
(traveling, representation, etc.) corporations, if such payments –
 Corresponds or bear a close relationship to
Secs. 70-73 Rev. Reg. 2 stockholdings, &

Section 70. Compensation for personal  Are found to be distribution of earnings or profits, the
services. excessive payments will be treated as dividend

APP 59
INCOME TAX REVIEWER
If such payments constitute payment for property, they Facts: H was the chairman of the Bd. of Dirs.
should be treated by the payer as capital expenditure of the corp. w/c bears his name. He owns
& by the recipient as part of the purchase price.
99.6% of the capital stock. He was also a
salesman-broker for his co. receiving 50%
Section 72. Bonuses to employees. Bonuses to
employees will constitute allowable deductions fr.
share on the sales commission earned by the
gross income when such payments are made – co. besides his monthly salary for a total
in good faith & annual compensation of P45,000 plus annual
as additional compensation for the services actually salary bonus of P40,000 & free use of the co.
rendered by the employees, provided such payments, car & receipt of other allowances & benefits.
when added to the stipulated salaries do not exceed a He also received the add’l Y of P99,977.91 as
reasonable compensation for the service rendered. his 50% share of the supervisor’s fee received
It is immaterial whether such bonuses are paid – by the co. as managing agent of a real estate
 in cash or project.
 in kind or
Held: As a general rule bonuses to Ees are
 partly cash & partly in kind.
deductible as such as add’l compensation for
the services actually rendered by the Ees when
 Donations made to employees & others , w/c –
such payments when added to the stipulated
 do no have in them the element of compensation or salaries do not exceed a reasonable
 are in excess of reasonable compensation for compensation for the services rendered. In
services, are not deductible fr. gross income.
CAB, the petitioner fails the tests of
reasonableness.
Section 73. Pensions, compensations for injuries.
– Amounts paid –
 for pensions to retired employees or to their families KUENZLE VS. COMMISSIONER
or others dependent upon them or
 on account of injuries received by employees & Facts: Comm. assessed K deficiency Y tax on
lump-sum amounts paid or accrued as the grd. that the bonuses paid to the Ees were
compensations for injuries, not reasonable.
are proper deductions as ordinary & necessary expenses
Held: Not reasonable. In arriving at the
Such deductions are limited to the amount not
compensated for by insurance or otherwise. When the conclusion, the CT. gave due consideration to
amount of the salary of an officer or employee is paid all the material factors (SEE ENUMERATION
for a limited period after his death to his widow or ABOVE)that to decide accordingly. Policy of
heirs in recognition of the services rendered by the giving bonuses in not unreasonable but net
individual, such payments may be deducted. Salaries
paid by ER to employees –
loss resulting fr. it is.
 who are absent in the military, naval, or other
service of the government
AGUINALDO IND. VS. COMMISSIONER
 but who intent to return at the conclusion of such
service, are allowable deductions. (relative to Facts: Pet. was engaged in 2 businesses:
pension trust.) fishnet mfg. & furniture mfg. It bought a pc. of
land in Munti. for the fishnet industry & then
sold it to move to another location in Mka.
Additional deduction under the Productivity They cited bonuses given to officers of Pet. as
Incentive Act. their share of the profit realized fr. the sale was
a deductible expense.
Sec.7 . Benefits & tax incentives - Held: Not deductible> Sale was effected
(a) Subject to the provs. of Sec.6 hereof (defined what a through a broker who was paid a commission.
productivity incentive program [PIP]is), a bus.
enterprise w/c adopts a PIP , duly & mutually agreed
There is no evid. of any service incurred by
upon by the parties to the labor-mgt committee, shall pet’s officers w/c cld. be the basis of the grant
be granted a special deduction fr. gross Y equivalent to to them of a bonus out of the gain realized fr.
50% of the total productivity bonuses given to Ees the sale. Doctrine: The taxpayer must show
under the program over & above the total allowable
that its claimed deductions must clearly come
ord. & nec. bus. ded’n for said bonuses under the
NIRC... w/in the language of the law, since allowances,
(b) Grants for manpower training & special studies given like exemptions, are matters of legislative.
to rank-&-file Ees pursuant to a program prepared by
the labor-mgt. committee for the devt. of skills
identified as nec. by the appropriate govt. agency shall COMMISSIONER VS. ALGUE, supra.
also entitle the bus. enterprise to a special ded’n fr.
gross Y equiv. to 50 % of the total grants over & above
the allowable ... b. TRAVEL EXPENSES
 here and abroad
C.M. HOSKINS VS. COMMISSIONER  while away from home
 in the pursuit of trade, business or profession

APP 60
INCOME TAX REVIEWER
Repairs in the nature of replacement, to the extent that
they
Sec. 34. (A, 1, a). (ii) A reasonable allowance for travel  arrest deterioration, &
expenses, here and abroad, while away from home in  appreciably prolong the life of the property
the pursuit of trade, business or profession;
should be charged against the depreciation reserves if
such an account is kept.
Sec. 66. Rev. No. 2 Traveling expenses.
Traveling expenses as ordinarily understood, include
Commissioner Vs. Soriano
 transportation expenses &
 meals & Held: Expenditures for replacements,
 lodging. alterations & improvs./additions w/c either
prolong the life of the property or increase its
If the trip is undertaken for other than business
value are capital in nature & are not
purposes, -
deductible.
 the transportation expenses are personal expense, &
 the meals & lodgings are living expenses,
 & therefore, not deductible.
GUTIERREZ VS. COLLECTOR
If the trip solely on business, the reasonable & necessary
traveling expenses, including transportation expenses, Facts: G was primarily engaged in the
meals & lodging, becomes business instead of business of leasing property for w/c he paid
personal expenses.
real estate brokers privilege tax. He claimed
If then, an individual whose business requires him to ded’ns for electrical supplies, paint, labor,
travel, -
cement, tiles, gravel, masonry & labor used to
 receives a salary as full compensation for his
services w/o reimbursement for traveling expenses, repair the taxpayer’s rental apartments did not
or increase the value nor prolong its life, but
 is employed on a commission basis w/ no expenses merely kept the apartments in an ordinary
allowance, operating condition, hence necessary
his traveling expenses, including the entire amount expenditures for the maintenance of his
expended for meals & lodging are deductible fr. gross business.
income.
Held: Expenses for watching over laborers in
If an individual
construction work are not deductible. The
activity is more akin to construction work than
 receives a salary &
running a business. Construction costs are
 is also repaid his actual traveling expenses,
capital expenditure.
he shall include in gross income, the amount so repaid &
may deduct such expenses.
d. RENTALS/LEASE and/or other
If an individual – payments which are required as a
 receives a salary & condition for the continued use or
 also an allowance for meals & lodging, possession
 xxx the amount of the allowance should be included
in gross income & the cost of such meals & lodging
may be deducted therefr.. Xxx  for purposes of the trade, business or
profession,
 of property to which the taxpayer has not taken
c. Repairs or is not taking title or
 in which he has no equity other than that of a
 to maintain efficient working condition lessee, user or possessor
 does not prolong life or add value
 repair and maintenance expense v. capital Sec. 34. A, 1, a. (iii) A reasonable allowance for
rentals and/or other payments which are required as a
expense
condition for the continued use or possession, for
purposes of the trade, business or profession, of
property to which the taxpayer has not taken or is not
Sec. 34., see above na lang please. taking title or in which he has no equity other than that
of a lessee, user or possessor;
Sec. 68. Rev. Reg. No. 2. Repairs.
The cost of incidental repairs w/c neither – Advanced rental/ deposit:
 materially add to the value of the property nor
 appreciably prolong its life Sec. 74, RR No. 2. Rentals.
 but keep it in an ordinary/efficient operating Where a leasehold is acquired for business purposes for
condition a specified sum, the purchaser may take as deduction
in his return & adequate part of such sum each year
may be deducted as an expense, provided the plans or based on the number of years the lease has to run.
property account is not increased by the amount of
such expenditure.

APP 61
INCOME TAX REVIEWER
Taxes paid by a tenant to or for a landlord for business law, morals, public policy or public order shall in
property – no case be allowed as a deduction.
 are additional rent &
 constitute a deductible item to the tenant & taxable
income to the landlord;
ROXAS vs. CTA
the amount of the tax being deductible by the latter. Facts: Roxas Y Cia. a partnership formed to
The cost borne by the lessee in – manage the prop. left by Do Pedro Roxas
 erecting buildings or deducted fr. its gross Y P40 for tickets to a
 making permanent improvements banquet in honor of Don Sergio Osmena & P28
on ground of w/c he is lessee is held to be capital for beer given as gifts to various persons,
investment & not deductible as a business expense. claimed as representation expenses.
In order to return such taxpayer to his investment of Held: Representation expenses are deductible
capital, an annual deduction may be made fr. gross
income of an amount equal to the cost of such fr. gross Y as expenditures incurred in carrying
improvements divided by the number of years on a business or trade under the Tax Code ,
remaining of the terms of the lease, & such deduction provided the taxpayer proves that they are
shall be in lieu of deduction for depreciation. If the reasonable in amt., nec., incurred in
remainder of the term of the lease is greater that the
probable life of the buildings erected or of the
connection w/ the bus. Not proven in this
improvements made, his deduction shall take the form case.
of an allowance for depreciation.
Rev. Reg. 19-86… wala akong kopya eh. f. Expenses Of Farmers/ Those
Engaged In Agribusiness
Operating lease/ finance lease/ conditional
sale A farmer who operates a farm for profit is
entitled to deduct amounts actually expended in
carrying on the business. Deductible: Cost of (1)
e. Entertainment/ Presentation
tools of short life or small cost & (2)of feeding &
Expense raising livestock in so far as it represents actual
outlay but not including the value of the farm
Sec. 34. A. 1. a. (iv) A reasonable allowance for produce grown upon the farm & (3) of gasoline or
entertainment, amusement and recreation expenses fuel, repairs & upkeep of the transportation eqpt.
during the taxable year, that are directly connected to NOT deductible: (1) costs of farm machinery, eqpt
the development, management and operation of the & farm bldgs. & (2) amts. expended in the dev’t. of
trade, business or profession of the taxpayer, or that farm orchards & ranches, prior to the time when
are directly related to or in furtherance of the conduct
the productive state is reached. Such are regarded
of his or its trade, business or exercise of a profession
not to exceed such ceilings as the Secretary of Finance as investments of capital or capital expenditures &
may, by rules and regulations prescribe, upon may be depreciated.
recommendation of the Commissioner, taking into
account the needs as well as the special
circumstances, nature and character of the industry,
GANCAYCO VS. COLLECTOR
trade, business, or profession of the taxpayer: Facts: Deficiency Y taxes levied. Gancayco
Provided, That any expense incurred for entertainment, claims farming expenses are deductible (for
amusement or recreation that is contrary to law,
morals public policy or public order shall in no case be the devt. & cultivation of his prop).
allowed as a deduction. Held: No evid. presented as to the nature of
the farming expenses, other than G’s
statement. Collector claims that the expense
When deductible: REQUISITES:
was for clearing & devt., nec. to place it in a
productive state. It is not an ordinary expense
1. Incurred during the taxable year; but a capital expenditure.
2. Directly connected to the development,
management and operation of the trade,
business or profession of the taxpayer, or that g. Other business expenses.
are directly related to or in furtherance of the
conduct of his trade, business or exercise of a
profession; Treatment of the ff.:
3. Not to exceed such ceilings as the Sec of Fin 1. Advertising expense
may, by rules & regs prescribe, upon 2. Promotional expense
recommendation of the Commissioner, taking 3. Litigation expense
into acct the needs as well as the special
4. Capitalization/ reorganization expense
circumstances, nature & character of the
industry, trade, business or profession of the
taxpayer.
4. Any expense incurred for entertainment, h. Special Deductions For Educational
amusement or recreation that is contrary to Institutions : Sec. 29 (2) NIRC

APP 62
INCOME TAX REVIEWER
Interest paid on back-to-back loan shall be reduced
Sec. 34. A. (2). Expenses Allowable to Private by an amount = to the ff. percentages of the in.
Educational Institutions. - In addition to the income subj. to final tax:
expenses allowable as deductions under this Chapter,  Forty-one percent (41%) beginning January 1,
a private educational institution, referred to under
Section 27 (B) of this Code, may at its option elect
1998;
either: (a) to deduct expenditures otherwise  Thirty-nine percent (39%) beginning January 1,
considered as capital outlays of depreciable assets 1999; and
incurred during the taxable year for the expansion of  Thirty-eight percent (38%) beginning January 1,
school facilities or (b) to deduct allowance for 2000;
depreciation thereof under Subsection (F) hereof.

2. INTEREST EXPENSE b. NON-DEDUCTIBLE INTEREST

c. INTEREST PAID IN ADVANCE/
INTEREST PERIODICALLY
Sec. 34. (B) Interest.-
AMORTIZED.
(1) In General. - The amount of interest paid or incurred
within a taxable year on indebtedness in connection Sec. 34. (2) Exceptions. - No deduction shall be
with the taxpayer's profession, trade or business shall allowed in respect of interest under the succeeding
be allowed as deduction from gross income: Provided, subparagraphs:
however, That the taxpayer's otherwise allowable (a) If within the taxable year an individual taxpayer
deduction for interest expense shall be reduced by an reporting income on the cash basis incurs an
amount equal to the following percentages of the indebtedness on which an interest is paid in advance
interest income subjected to final tax: through discount or otherwise: Provided, That such
Forty-one percent (41%) beginning January 1, 1998; interest shall be allowed a deduction in the year the
indebtedness is paid: Provided, further, That if the
Thirty-nine percent (39%) beginning January 1, 1999;
indebtedness is payable in periodic amortizations, the
and
amount of interest which corresponds to the amount of
Thirty-eight percent (38%) beginning January 1, 2000; the principal amortized or paid during the year shall be
(2) Exceptions. - No deduction shall be allowed in allowed as deduction in such taxable year;
respect of interest under the succeeding (b)If both the taxpayer and the person to whom the
subparagraphs: payment has been made or is to be made are persons
specified under Section 36 (B); or
(a) If within the taxable year an individual taxpayer (c)If the indebtedness is incurred to finance petroleum
reporting income on the cash basis incurs an exploration.
indebtedness on which an interest is paid in advance
through discount or otherwise: Provided, That such
interest shall be allowed a deduction in the year the d. Optional treatment of interest
indebtedness is paid: Provided, further, That if the
expense.
indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of
the principal amortized or paid during the year shall be Sec. 34. B. (3) Optional Treatment of Interest
allowed as deduction in such taxable year; Expense. - At the option of the taxpayer, interest
incurred to acquire property used in trade business or
(b)If both the taxpayer and the person to whom the exercise of a profession may be allowed as a deduction
payment has been made or is to be made are persons or treated as a capital expenditure.
specified under Section 36 (B); or

3. TAXES
(c)If the indebtedness is incurred to finance petroleum
exploration.
Sec. 34 C. Taxes.
(5) Optional Treatment of Interest Expense. At the (1) In General. - Taxes paid or incurred within the taxable
option of the taxpayer, interest incurred to acquire year in connection with the taxpayer's profession,
property used in trade business or exercise of a trade or business, shall be allowed as deduction,
profession may be allowed as a deduction or treated except
as a capital expenditure. (a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign
country; but this deduction shall be allowed in the case
of a taxpayer who does not signify in his return his
a. REQUISITES FOR DEDUCTION. desire to have to any extent the benefits of paragraph
(3) of this subsection (relating to credits for taxes of
foreign countries);
i. paid or incurred during the (c) Estate and donor's taxes; and
taxable year; (d) Taxes assessed against local benefits of a kind
ii. On indebtedness in connection tending to increase the value of the property assessed.
w/ the taxpayer’s Provided, That taxes allowed under this Subsection,
when refunded or credited, shall be included as part of
profession, trade or
gross income in the year of receipt to the extent of the
business however income tax benefit of said deduction.
iii. Subject to limitation:

APP 63
INCOME TAX REVIEWER
(2) Limitations on Deductions. - In the case of a same basis and no portion of any such taxes shall be
nonresident alien individual engaged in trade or allowed as a deduction in the same or any succeeding
business in the Philippines and a resident foreign year.
corporation, the deductions for taxes provided in (7)Proof of Credits. - The credits provided in Subsection
paragraph (1) of this Subsection (C) shall be allowed (C)(3) hereof shall be allowed only if the taxpayer
only if and to the extent that they are connected with establishes to the satisfaction of the Commissioner the
income from sources within the Philippines. following:
(3) Credit Against Tax for Taxes of Foreign Countries. - If (a) The total amount of income derived from sources
the taxpayer signifies in his return his desire to have without the Philippines;
the benefits of this paragraph, the tax imposed by this
(b) The amount of income derived from each country, the
Title shall be credited with:
tax paid or incurred to which is claimed as a credit
(a) Citizen and Domestic Corporation. - In the case of a under said paragraph, such amount to be determined
citizen of the Philippines and of a domestic under rules and regulations prescribed by the
corporation, the amount of income taxes paid or Secretary of Finance; and
incurred during the taxable year to any foreign
(c) All other information necessary for the verification
country; and
and computation of such credits.
(b) Partnerships and Estates. - In the case of any such
individual who is a member of a general professional
partnership or a beneficiary of an estate or trust, his
proportionate share of such taxes of the general COMMISSIONER VS. PALANCA
professional partnership or the estate or trust paid or
Facts: Palanca donated shares of stock to his
incurred during the taxable year to a foreign country, if
his distributive share of the income of such partnership son. He was assessed a gift tax, surcharge &
or trust is reported for taxation under this Title. interest for failure to file a return. He claimed a
An alien individual and a foreign corporation shall not be ded’n for interest paid on the donee’s gift tax.
allowed the credits against the tax for the taxes of The BIR then considered the transfer as made
foreign countries allowed under this paragraph. in contemplation of death & was assessed
(4) Limitations on Credit. - The amount of the credit inheritance & estate taxes.
taken under this Section shall be subject to each of the
following limitations: Held: Although taxes already due have not
(a) The amount of the credit in respect to the tax paid or the same concept as debts strictly speaking,
incurred to any country shall not exceed the same they are obligations w/c may be considered as
proportion of the tax against which such credit is such. In CIR vs. Prieto, it was held that the
taken, which the taxpayer's taxable income from
sources within such country under this Title bears to distinction bet. taxes & debts is recognized in
his entire taxable income for the same taxable year; this jurisdiction, the variance in their legal
and conception does not extend to the interest paid
(b) The total amount of the credit shall not exceed the on them. Requisites are (1) to (4) given above.
same proportion of the tax against which such credit is Indebtedness, as used in the Tax Code, is the
taken, which the taxpayer's taxable income from
unconditional & legally enforceable oblign. for
sources without the Philippines taxable under this Title
bears to his entire taxable income for the same taxable the payment of money. As Such, a tax may be
year. deemed as an indebtedness.
(5) Adjustments on Payment of Incurred Taxes. - If
accrued taxes when paid differ from the amounts
claimed as credits by the taxpayer, or if any tax paid is
refunded in whole or in part, the taxpayer shall notify
the Commissioner; who shall redetermine the amount
of the tax for the year or years affected, and the COMMISSIONER VS. PRIETO
amount of tax due upon such redetermination, if any,
shall be paid by the taxpayer upon notice and demand Facts: Prieto gave gifts of real prop. to her 4
by the Commissioner, or the amount of tax overpaid, if kids. CIR assessed gift taxes, interests &
any, shall be credited or refunded to the taxpayer. In
the case of such a tax incurred but not paid, the
compromises thereon. P now claims the
Commissioner as a condition precedent to the interest as ded’n.
allowance of this credit may require the taxpayer to
give a bond with sureties satisfactory to and to be
Held: For interest to be allowed as ded’n fr.
approved by the Commissioner in such sum as he may gross Y, it must be shown that there be
require, conditioned upon the payment by the taxpayer indebtedness, interest upon such & that what
of any amount of tax found due upon any such is claimed as int. ded’n should have been paid
redetermination. The bond herein prescribed shall or incurred w/in the yr. RR No. 2,
contain such further conditions as the Commissioner
may require. implementing 30(a) providing that no ded’n
(6) Year in Which Credit Taken. - The credits provided for shld. be allowed for amts. representing
in Subsection (C)(3) of this Section may, at the option interest, surcharge & penalties incident to DQ
of the taxpayer and irrespective of the method of is inapplicable to cases where the taxpayer
accounting employed in keeping his books, be taken in seeks to come under 30(b) w/c provides for
the year which the taxes of the foreign country were
incurred, subject, however, to the conditions
ded’n of interest on indebtedness.
prescribed in Subsection (C)(5) of this Section. If the
taxpayer elects to take such credits in the year in
which the taxes of the foreign country accrued, the KUENZLE VS. COLLECTOR
credits for all subsequent years shall be taken upon the

APP 64
INCOME TAX REVIEWER
Facts: Kuenzle is a domestic corp. engaged in proportionate share of such taxes of the general
the importation of textiles, hardware, etc. It professional partnership or the estate or trust paid or
incurred during the taxable year to a foreign country, if
deducted fr. its gross Y certain items such as his distributive share of the income of such partnership
interest on earned but unpaid salaries & or trust is reported for taxation under this Title.
bonuses of its Ees. An alien individual and a foreign corporation shall not be
allowed the credits against the tax for the taxes of
Held: Under the law, in order that interest foreign countries allowed under this paragraph.
may be deductible , it must be paid on
“indebtedness”. It is imperative that there is (4) Limitations on Credit. - The amount of the credit
an existing indebtedness w/c may be subject taken under this Section shall be subject to each of the
to the payment of interest. The unclaimed following limitations:
salaries & bonuses do not constitute (a) The amount of the credit in respect to the tax paid or
indebtedness w/in the meaning of the law. incurred to any country shall not exceed the same
proportion of the tax against which such credit is
taken, which the taxpayer's taxable income from
sources within such country under this Title bears to
a. IN GENERAL. his entire taxable income for the same taxable year;
and
(b) The total amount of the credit shall not exceed the
Taxes paid or incurred within the taxable year in same proportion of the tax against which such credit is
connection w/ the taxpayer’s profession, trade or taken, which the taxpayer's taxable income from
business, shall be allowed as deduction. sources without the Philippines taxable under this Title
bears to his entire taxable income for the same taxable
year.
b. NOT DEDUCTIBLE:
i. Phil. income tax (5) Adjustments on Payment of Incurred Taxes. - If
accrued taxes when paid differ from the amounts
ii. Income taxes imposed by claimed as credits by the taxpayer, or if any tax paid is
authority of any foreign refunded in whole or in part, the taxpayer shall notify
country; but this deduction the Commissioner; who shall redetermine the amount
shall be allowed in the case of the tax for the year or years affected, and the
amount of tax due upon such redetermination, if any,
of a taxpayer who does not shall be paid by the taxpayer upon notice and demand
signify in his return his by the Commissioner, or the amount of tax overpaid, if
desire to have to any extent any, shall be credited or refunded to the taxpayer. In
the benefits of tax credit. the case of such a tax incurred but not paid, the
Commissioner as a condition precedent to the
iii. Estate and donor’s taxes, and allowance of this credit may require the taxpayer to
give a bond with sureties satisfactory to and to be
iv. Taxes assessed vs. local approved by the Commissioner in such sum as he may
benefits of a kind tending to require, conditioned upon the payment by the taxpayer
increase the value of the of any amount of tax found due upon any such
property assessed. redetermination. The bond herein prescribed shall
contain such further conditions as the Commissioner
may require.
(6) Year in Which Credit Taken. - The credits provided
c. Treatment of tax deducted and for in Subsection (C)(3) of this Section may, at the
subsequently credited or refunded  option of the taxpayer and irrespective of the method
shall be included as part of gross of accounting employed in keeping his books, be taken
income in the year of receipt. in the year which the taxes of the foreign country were
incurred, subject, however, to the conditions
d. Limitations on Deductions prescribed in Subsection (C)(5) of this Section. If the
taxpayer elects to take such credits in the year in
 Nonresident alien/ resident foreign corp.
which the taxes of the foreign country accrued, the
 connected w/ income fr. sources w/in the Phils. credits for all subsequent years shall be taken upon the
same basis and no portion of any such taxes shall be
allowed as a deduction in the same or any succeeding
e. Tax CREDIT. year.
(7)Proof of Credits. - The credits provided in
Subsection (C)(3) hereof shall be allowed only if the
Sec. 34. C. (3) Credit Against Tax for Taxes of taxpayer establishes to the satisfaction of the
Foreign Countries. - If the taxpayer signifies in his Commissioner the following:
return his desire to have the benefits of this paragraph,
the tax imposed by this Title shall be credited with: (a) The total amount of income derived from sources
without the Philippines;
(a) Citizen and Domestic Corporation. - In the case of a
citizen of the Philippines and of a domestic (b) The amount of income derived from each country, the
corporation, the amount of income taxes paid or tax paid or incurred to which is claimed as a credit
incurred during the taxable year to any foreign under said paragraph, such amount to be determined
country; and under rules and regulations prescribed by the
Secretary of Finance; and
(b) Partnerships and Estates. - In the case of any such
individual who is a member of a general professional (d) All other information necessary for the verification
partnership or a beneficiary of an estate or trust, his and computation of such credits.

APP 65
INCOME TAX REVIEWER
Import duties paid to the proper customs officers, &
business occupation, license privilege, excise & stamp
i. Tax credit v. tax deduction taxes & any other taxes of every name & nature paid
directly to the Government of the RP or to any political
ii. Taxpayers entitled to tax credit sub. thereof, are deductible. The word “taxes” means
iii. Taxes allowed as credit. taxes. Proper & no deduction should be allowed for
amounts representing interest, surcharge or penalties
iv. Limitations on credit. incident to delinquency.. Postage is not a tax.
Automobile registration fees are considered taxes.
Tax Credit- refers to the tax payers right to deduct “taxes are deductible as such only by the person upon
fr. the income tax due the amount of the tax he has whom they are imposed.” Thus the merchant’s sales
paid in a foreign country subject to limitation. It is tax imposed by law upon sales is not deductible by the
allowed to lessen the rigor of Int’l double or individual purchaser even though the tax may be billed
multiple taxation to him as a separate item.
In computing the net income of an individual, no
deduction is allowed for the tax is imposed upon his
Distinct fr. Tax Deduction interest as a shareholder of a bank or other
corporation. w/c are paid by the corporation w/o
reimbursements fr. the taxpayer. The amount s paid
TAX CREDIT TAX DEDUCTION
should not be included in the income of the
Tax deducted fr. tax deducted fr. shareholder.
income tax itself computing the In the case of corporate bonds or other obligations
taxable income containing a tax-free covenant clause, the corporation
all taxes, as a only three kinds of paying the tax or any part of it, for someone else,
pursuant to its agreement is not entitled to deduct
general rule are foreign taxes may
such payment fr. gross income on any ground.
allowed as be claimed as
deduction w/ the credits against
exception of the 7 Phil. income tax Sec. 81. RR. No. 2. Income tax imposed by the
kinds of taxes i.e. foreign government.- The law does not permit the deduction
of the income tax paid or accrued in favor of the
expressly income, war-
government & in no case may the taxpayer avail of
excluded profits & excess- such deduction.
profits tax.

Sec. 82. RR No. 2 Income, war-profits & excess

Sec. 34. C. (4) Limitations on Credit. - The amount profits taxes imposed by the authority of a
of the credit taken under this Section shall be subject foreign country. – Income, war-profits & excess-
to each of the following limitations: profits taxes imposed by the authority of a foreign
country are allowed as deductions only if the taxpayer
(a) The amount of the credit in respect to the tax paid or
does not signify in his return his desire to have to any
incurred to any country shall not exceed the same
extent the benefits of the provisions of law allowing
proportion of the tax against which such credit is
credits against the tax for taxes of foreign countries.
taken, which the taxpayer's taxable income from
sources within such country under this Title bears to
his entire taxable income for the same taxable year; Sec. 83. RR No. 2 Estate inheritance & gift taxes;
and taxes assessed against local benefits.-Estate,
(b) The total amount of the credit shall not exceed the inheritance & gift taxes are not deductible.
same proportion of the tax against which such credit is So-called taxes, property assessments paid for local
taken, which the taxpayer's taxable income from benefits such as street, sidewalk & other
sources without the Philippines taxable under this Title improvements imposed bec. of & measured by some
bears to his entire taxable income for the same taxable benefit inuring directly to the property against w/c the
year. assessment is to be levied, do not constitute an
allowable deduction fr. gross income tax. A tax is
considered assessed against local benefits when the
v. Other requirements. property subject to the tax is limited to the property
benefited.
 When there are adjustments on payment of
incurred taxes.
COMMISSIONER VS. LEDNICKY
vi. When crediting allowed. Facts: The Lednicky spouses are American
vii. Substantiation requirements/ citizens living in the Phils. & have derived all
Proof of credit. their Y fr. Phil. sources for the taxable year in
question. In their amended ITR for ‘56 they
claimed a deduction of P205,939 as paid in
Secs. 80-83 Rev. Reg. 2 1956 to the US Gov’t. as federal Y tax for said
Sec. 80. RR No. 2. Taxes in General.- As a general year. Requested for refund of P112,437.
rule, taxes are deductible w/ the exception of those w/
respect to w/c the law does not permit deduction. Held: No deduction nor tax credit allowed.
However, in the case of a nonresident alien individual Alien residents who derive their income fr.
& a foreign corporation, deduction is allowed only if & sources w/in the Phils. solely may not deduct
to the extent that the taxes for w/c deduction is
claimed are connected w/ the income fr. sources w/in
fr. gross Y the Y tax paid to his home country
RP. for the taxable year. Such rt. is given only as
an alternative to his rt. to claim a tax credit for
APP 66
INCOME TAX REVIEWER
such foreign Y taxes, such that unless he has a (i) Not less than seventy-five percent (75%) in
right to claim such a credit if he chooses, he is nominal value of outstanding issued shares., if
the business is in the name of a corporation, is
precluded fr. such deduction. To allow a held by or on behalf of the same persons; or
resident alien to deduct fr. his taxes whatever (ii) Not less than seventy-five percent (75%) of the
he pays to his gov’t amounts to conferring paid up capital of the corporation, if the business
upon him the power to reduce the tax due to is in the name of a corporation, is held by or on
the Phil gov’t simply by increasing the tax behalf of the same persons.
rates on the alien resident. "For purposes of this subsection, the term 'not operating
loss' shall mean the excess of allowable deduction over
gross income of the business in a taxable year.
5. LOSSES. Provided, That for mines other than oil and gas wells, a
net operating loss without the benefit of incentives
provided for under Executive Order No. 226, as
Sec. 34. (D) Losses. – amended, otherwise known as the Omnibus
(1) In General.- Losses actually sustained during the Investments Code of 1987, incurred in any of the first
taxable year and not compensated for by insurance or ten (10) years of operation may be carried over as a
other forms of indemnity shall be allowed as deduction from taxable income for the next five (5)
deductions: years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the
(a) If incurred in trade, profession or business; first of the five (5) taxable years following the loss, and
any portion of such loss which exceeds, the taxable
(b) Of property connected with the trade, business or
income of such first year shall be deducted in like
profession, if the loss arises from fires, storms,
manner form the taxable income of the next remaining
shipwreck, or other casualties, or from robbery, theft or
four (4) years.
embezzlement.
(4) Capital Losses. -
The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate (a) Limitation. - Loss from sales or Exchanges of capital
rules and regulations prescribing, among other things, assets shall be allowed only to the extent provided in
the time and manner by which the taxpayer shall Section 39.
submit a declaration of loss sustained from casualty or (b) Securities Becoming worthless. - If securities as
from robbery, theft or embezzlement during the defined in Section 22 (T) become worthless during the
taxable year: Provided, however, That the time limit to taxable year and are capital assets, the loss resulting
be so prescribed in the rules and regulations shall not therefrom shall, for purposes of this Title, be
be less than thirty (30) days nor more than ninety (90) considered as a loss from the sale or exchange, on the
days from the date of discovery of the casualty or last day of such taxable year, of capital assets.
robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this (5) Losses From Wash Sales of Stock or Securities. -
Subsection if at the time of the filing of the return, Losses from 'wash sales' of stock or securities as
such loss has been claimed as a deduction for estate provided in Section 38.
tax purposes in the estate tax return.
(6) Wagering Losses. - Losses from wagering
transactions shall b allowed only to the extent of the
(2) Proof of Loss. - In the case of a nonresident alien gains from such transactions.
individual or foreign corporation, the losses deductible
(7) Abandonment Losses. -
shall be those actually sustained during the year
incurred in business, trade or exercise of a profession
conducted within the Philippines, when such losses are (a) In the event a contract area where petroleum
not compensated for by insurance or other forms of operations are undertaken is partially or wholly
indemnity. The secretary of Finance, upon abandoned, all accumulated exploration and
recommendation of the Commissioner, is hereby development expenditures pertaining thereto shall be
authorized to promulgate rules and regulations allowed as a deduction: Provided, That accumulated
prescribing, among other things, the time and manner expenditures incurred in that area prior to January 1,
by which the taxpayer shall submit a declaration of 1979 shall be allowed as a deduction only from any
loss sustained from casualty or from robbery, theft or income derived from the same contract area. In all
embezzlement during the taxable year: Provided, That cases, notices of abandonment shall be filed with the
the time to be so prescribed in the rules and Commissioner.
regulations shall not be less than thirty (30) days nor (b) In case a producing well is subsequently abandoned,
more than ninety (90) days from the date of discovery the unamortized costs thereof, as well as the
of the casualty or robbery, theft or embezzlement undepreciated costs of equipment directly used therein
giving rise to the loss; and , shall be allowed as a deduction in the year such well,
(3) Net Operating Loss Carry-Over. - The net operating equipment or facility is abandoned by the contractor:
loss of the business or enterprise for any taxable year Provided, That if such abandoned well is reentered and
immediately preceding the current taxable year, which production is resumed, or if such equipment or facility
had not been previously offset as deduction from gross is restored into service, the said costs shall be included
income shall be carried over as a deduction from gross as part of gross income in the year of resumption or
income for the next three (3) consecutive taxable restoration and shall be amortized or depreciated, as
years immediately following the year of such loss: the case may be.
Provided, however, That any net loss incurred in a
taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction a. Definition
under this Subsection: Provided, further, That a net
operating loss carry-over shall be allowed only if there
has been no substantial change in the ownership of the Sec. 34. D. (1) In General.- Losses actually sustained
business or enterprise in that - during the taxable year and not compensated for by

APP 67
INCOME TAX REVIEWER
insurance or other forms of indemnity shall be allowed insurance proceedings are finally settled & the loss
as deductions: not recoverable therein is finally ascertained.
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or
profession, if the loss arises from fires, storms, i. CASUALTY LOSS
shipwreck, or other casualties, or from robbery, theft or
embezzlement.
ii. NIRC provision:

Sec. 34. D. 1. b. x x x
b. Types/ Classification of Losses The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate
rules and regulations prescribing, among other things,
the time and manner by which the taxpayer shall
1. Ordinary Losses:/ Business Loss submit a declaration of loss sustained from casualty or
2. Casualty Loss from robbery, theft or embezzlement during the
3. Capital Loss taxable year: Provided, however, That the time limit to
be so prescribed in the rules and regulations shall not
be less than thirty (30) days nor more than ninety (90)
Special kinds of losses: days from the date of discovery of the casualty or
1. Losses fr. wash sales of stock or securities; robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this
2. Losses due to involuntary removal of
Subsection if at the time of the filing of the return,
buildings, machinery, etc. incident to such loss has been claimed as a deduction for estate
renewal or replacement; tax purposes in the estate tax return.
3. Losses of the useful value of capital assets
due to some change in business conditions; (2) Proof of Loss. - In the case of a nonresident alien
& individual or foreign corporation, the losses deductible
shall be those actually sustained during the year
4. Abandonment losses in petroleum
incurred in business, trade or exercise of a profession
operations. conducted within the Philippines, when such losses are
not compensated for by insurance or other forms of
Secs. 94 – 100 / 104 of rev. Reg. No. 2 are indemnity. The secretary of Finance, upon
incorporated in the following topics: recommendation of the Commissioner, is hereby
authorized to promulgate rules and regulations
prescribing, among other things, the time and manner
by which the taxpayer shall submit a declaration of
loss sustained from casualty or from robbery, theft or
c. Requisites for deductibility embezzlement during the taxable year: Provided, That
1. Must be that of the taxpayer the time to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor
2. Must be actually sustained & charged off more than ninety (90) days from the date of discovery
w/in the taxable year of the casualty or robbery, theft or embezzlement
3. Must be evidenced by a closed & completed giving rise to the loss; and
transaction
4. Must not be compensated for by insurance
or other form of indemnity iii. Net operating loss carry-over.
5. A sworn declaration must be filed w/in 45
days after the date of the occurrence of
(3) Net Operating Loss Carry-Over. - The net
casualty or robbery, theft or embezzlement operating loss of the business or enterprise for any
6. The taxpayer must prove the elements of the taxable year immediately preceding the current
loss claimed, such as the actual nature & taxable year, which had not been previously offset as
occurrence of the event & amount of the deduction from gross income shall be carried over as a
loss; & deduction from gross income for the next three (3)
consecutive taxable years immediately following the
7. The loss must be connected w/ the trade or year of such loss: Provided, however, That any net loss
business of the taxpayer. incurred in a taxable year during which the taxpayer
was exempt from income tax shall not be allowed as a
deduction under this Subsection: Provided, further,
A casualty loss is not deductible even though the That a net operating loss carry-over shall be allowed
above requisites are present, if it has been claimed only if there has been no substantial change in the
as a deduction for estate tax purposes in the estate ownership of the business or enterprise in that -
tax return. (Sec. 93 RR2) (i) Not less than seventy-five percent (75%) in nominal
value of outstanding issued shares., if the business is
Closed & completed transaction (Sec. 96 RR in the name of a corporation, is held by or on behalf of
the same persons; or
2)
(ii) Not less than seventy-five percent (75%) of the paid
The law requires that the loss should be sustained up capital of the corporation, if the business is in the
during the taxable year. A loss is actually sustained name of a corporation, is held by or on behalf of the
when it is evidenced by a closed & completed same persons.
transaction. There should be an identifiable event
w/c justifies the loss, such as when there is a
complete destruction of property or when
APP 68
INCOME TAX REVIEWER
"For purposes of this subsection, the term 'not operating development expenditures pertaining thereto shall be
loss' shall mean the excess of allowable deduction over allowed as a deduction: Provided, That accumulated
gross income of the business in a taxable year. expenditures incurred in that area prior to January 1,
Provided, That for mines other than oil and gas wells, a 1979 shall be allowed as a deduction only from any
net operating loss without the benefit of incentives income derived from the same contract area. In all
provided for under Executive Order No. 226, as cases, notices of abandonment shall be filed with the
amended, otherwise known as the Omnibus Commissioner.
Investments Code of 1987, incurred in any of the first (b) In case a producing well is subsequently abandoned,
ten (10) years of operation may be carried over as a the unamortized costs thereof, as well as the
deduction from taxable income for the next five (5) undepreciated costs of equipment directly used therein
years immediately following the year of such loss. The , shall be allowed as a deduction in the year such well,
entire amount of the loss shall be carried over to the equipment or facility is abandoned by the contractor:
first of the five (5) taxable years following the loss, and Provided, That if such abandoned well is reentered and
any portion of such loss which exceeds, the taxable production is resumed, or if such equipment or facility
income of such first year shall be deducted in like is restored into service, the said costs shall be included
manner form the taxable income of the next remaining as part of gross income in the year of resumption or
four (4) years. restoration and shall be amortized or depreciated, as
the case may be.

iv. CAPITAL LOSS.

 Losses fr. wash sales of stock or securities
 wagering losses
Sec. 34. D. (4) Capital Losses. -  abandonment losses (petroleum operations.)
(a) Limitation. - Loss from sales or Exchanges of capital
assets shall be allowed only to the extent provided in Plaridel Surety V. Collector of IR
Section 39.
(b) Securities Becoming worthless. - If securities as Facts: The Collector of Internal Revenue
defined in Section 22 (T) become worthless during the disallowed a LOSS deduction by the petitioner,
taxable year and are capital assets, the loss resulting said deduction was for the payment of a
therefrom shall, for purposes of this Title, be performance bond w/c Plaridel previously
considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets. issued on behalf of certain debtor/principals
who defaulted on their obligation.

 Losses fr. sales or exchange of capital assets Held: The Court upheld the CIR in
 Securities becoming worthless. disallowing the deduction bec. the loss
sustained by Plaridel Surety was compensated
FERNANDEZ HERMANOS v. COMM. for (by insurance or) otherwise &, therefore, it
has not in fact & in law suffered any loss. The
In this case, the SC held that there was alleged deductible loss was covered by a
adequate basis for allowance of the writing off judicially enforceable right based on a contract
as worthless securities the stock of a lumber – an indemnity agreement signed by the
company, it appearing that it had closed debtor/principals in favor of the Surety Co., w/c
operations although it still had its sawmill & had not yet exhausted all its available
equipment of some value, for even assuming remedies under the indemnity agreement.
that the company would later somehow realize
some proceeds fr. its sawmill & equipment &
such proceeds would later be distributed to its CU UNJIENG v. Board of Tax Appeals
stockholders, the amount so received by the
Facts: Petitioner claimed war losses (actually
taxpayer would then be properly reportable as
incurred in the years 1945 to 1947) in its 1950
income of the taxpayer in the year it is
return, after it was advised by the War Damage
received. In the meantime, it may properly be
Commission that no other payments would be
claimed as loss in his tax return pursuant to
available other than those already effected.
Sec. 29 d,4,b or Sec. 29, e (Bad debts).
CIR disallowed the deduction & assessed
deficiency taxes.
v. Other kinds of losses:
Held: Petitioner could not deduct the said
losses beyond the years when they were
Sec. 34. D. actually sustained. [The word] “Otherwise”
(5) Losses From Wash Sales of Stock or Securities . should be construed to refer to compensation
- Losses from 'wash sales' of stock or securities as due under a title analogous or similar to
provided in Section 38. insurance. The loss sustained by the taxpayer
(6) Wagering Losses. - Losses from wagering must be covered by judicially enforceable right
transactions shall b allowed only to the extent of the arising fr. any of the sources of obligations,
gains from such transactions.
namely: law, contract, quasi-contract, tort or
(7) Abandonment Losses. -
crime, in order that it may be considered
(a) In the event a contract area where petroleum
“compensated for otherwise than by
operations are undertaken is partially or wholly
abandoned, all accumulated exploration and insurance.” The approval of the Phil.

APP 69
INCOME TAX REVIEWER
rehabilitation Act in 1946 did not authorize the (50%) in value of the outstanding stock of which is
petitioner to postpone for another year, its owned, directly or indirectly, by or for the same
individual if either one of such corporations, with
claim for deduction arising fr. the war losses in respect to the taxable year of the corporation
question. preceding the date of the sale of exchange was
under the law applicable to such taxable year, a
COMM. v. PRISCILLA ESTATE INC. personal holding company or a foreign personal
Facts: Priscilla Estate had a barong-barong in holding company;
one of its lots, w/c was being rented at P3,730 (4) Between the grantor and a fiduciary of any trust; or
per month. The City Engineer of Manila (5) Between the fiduciary of and the fiduciary of a trust
declared the property a fire hazard & forced and the fiduciary of another trust if the same person
is a grantor with respect to each trust; or
the company to demolish it. The value of the
property was consequently declared by the (6) Between a fiduciary of a trust and beneficiary of
such trust.
Co., as a loss. The Commish of IR disallowed
the deduction & claims that the amount should
form part of the cost of the new bldg., a. What are bad debts?
constructed in the place of the old structure.
b. Who are related taxpayers?
Held: The CIR’s contention is erroneous bec. c. Requisites for deduction.
the removal of the barong-barong was forced
upon the corporation, the fact that the latter 1. Debts due taxpayer
was earning fr. the said structure & that it had 2. Actually ascertained to be worthless
no funds to construct a new one belied any 3. Charged off w/in the taxable year
intention to demolish the old one. Since the 4. Connected w/ profession, trade or business
demolished bldg., was not compensated for by 5. Not those sustained in a transaction entered
insurance or otherwise, its loss should be into bet. related parties.
charged as a deduction fr. gross income.
d. Treatment recovered bad debts
6. BAD DEBT previously allowed as deduction.

Sec. 34. (E) Bad Debts. -  included as part of the gross income in the year
(1) In General. - Debts due to the taxpayer actually of recovery to the extent of the income tax
ascertained to be worthless and charged off within the benefit of said deduction.
taxable year except those not connected with
profession, trade or business and those sustained in a
transaction entered into between parties mentioned e. Securities becoming worthless.
under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as deduction 1. ascertained to be worthless and
in the preceding years shall be included as part of the 2. charged off w/in the taxable year
gross income in the year of recovery to the extent of
3. are capital assets
the income tax benefit of said deduction.
(2) Securities Becoming Worthless. - If securities, as 4. the loss resulting therefrom shall, in the case
defined in Section 22 (T), are ascertained to be of a taxpayer other than a bank or trust co.
worthless and charged off within the taxable year and incorporated under the laws of the Phils. a
are capital assets, the loss resulting therefrom shall, in substantial part of whose business is the
the case of a taxpayer other than a bank or trust receipt of deposits, for the purpose of this
company incorporated under the laws of the Title, be considered as a loss fr. the sale or
Philippines a substantial part of whose business is the exchange, on the last day of such taxable
receipt of deposits, for the purpose of this Title, be year, of capital assets.
considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets.
FERNANDEZ HERMANOS v. COMM
Sec. 36. (B) Losses from Sales or Exchanges of
Property. - In computing net income, no deductions Facts: FH Inc., gave advances to a subsidiary
shall in any case be allowed in respect of losses from mining company w/c the latter could not repay
sales or exchanges of property directly or indirectly – due to its difficulties. FH Inc., wrote off said
(1) Between members of a family. For purposes of this advances w/c were disallowed by the CIR &
paragraph, the family of an individual shall include sustained by the Court.
only his brothers and sisters (whether by the whole
or half-blood), spouse, ancestors, and lineal Held: Under the memorandum agreement, the
descendants; or mining company was to pay FH Inc., 15% of its
(2) Except in the case of distributions in liquidation, net income, the advances were not loans but
between an individual and corporation more than
investments of FH Inc., w/c gave the advances
fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for w/o actually expecting repayment as debts.
such individual; or The loss cannot be written off bec. there is no
(3) Except in the case of distributions in liquidation, valid & subsisting debt.
between two corporations more than fifty percent

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INCOME TAX REVIEWER
Ascertainment of worthlessness. any time in the future. So when the recovery is
Before a debt can be ascertained to be worthless, merely doubtful, the deduction is not allowed.
the creditor must take reasonable steps to collect Usually the ff. steps are required:
the debt w/in the period of prescription. The duty of
ascertainment requires proof of two facts: 1. Sending of statements of accounts;
 That the taxpayer did in fact ascertain the 2. Sending of collection letters;
debt to be worthless in the year for w/c 3. Giving the account to a lawyer for
deduction was sought; & collection; &
 That in doing so acted in good faith. 4. Filing a collection case in court.

COLLECTOR v. GOODRICH
Deduction of bad debt subsequently collected
Facts: Goodrich claimed deductions on several – A debt w/c was previously found to be worthless
bad debts. Most of the debtors were merely & written off in a prior year & subsequently
sent demand letters. Some debtors mad partial collected does not render the deduction
payments, others later paid the debt in full. unallowable or illegal. The amount of the debt
The CIR disallowed these as deductions. must be reported as income in the taxable year in
w/c it is received.
Held: The claimed deductions should be
rejected. The requirement of ascertainment 7. DEPRECIATION
needs proof of two facts (see above
discussion). Good faith on the part of the
taxpayer is not enough. He must show also Sec.34 (f) NIRC Depreciation. -
that he had reasonably investigated the (1) General Rule. - There shall be allowed as a
depreciation deduction a reasonable allowance for the
relevant facts & had drawn a reasonable exhaustion, wear and tear (including reasonable
inference fr. the information thus obtained by allowance for obsolescence) of property used in the
him. Respondent herein has not adequately trade or business. In the case of property held by one
made such showing. The payments made, person for life with remainder to another person, the
deduction shall be computed as if the life tenant were
some in full, after the accounts had been
the absolute owner of the property and shall be
characterized as bad debts, merely stresses allowed to the life tenant. In the case of property held
the undue haste w/ w/c the same had been in trust, the allowable deduction shall be apportioned
written off. between the income beneficiaries and the trustees in
accordance with the pertinent provisions of the
PRC v. CA instrument creating the trust, or in the absence of such
provisions, on the basis of the trust income allowable
Facts: Phil. Refining Company protested the to each.
disallowance by the CIR of bad debts & interest (2) Use of Certain Methods and Rates. - The term
expenses w/c the former listed as deductions 'reasonable allowance' as used in the preceding
in its return. paragraph shall include, but not limited to, an
allowance computed in accordance with rules and
Held: These particular bad debts were not regulations prescribed by the Secretary of Finance,
allowable deductions bec. they do not meet upon recommendation of the Commissioner, under any
the requirements stated in the Goodrich case. of the following methods:
There was lack of proof or evidence of good (a) The straight-line method;
faith & reasonable ascertainment of collection. (b) Declining-balance method, using a rate not
Among the accounts disallowed as deductions exceeding twice the rate which would have been
used had the annual allowance been computed
were the ff.:
under the method described in Subsection (F) (1);
1. Remoblas store & CM Variety store – not a (c) The sum-of-the-years-digit method; and
single document was offered to show that (d) any other method which may be prescribed by the
the stores were indeed burned, even just a Secretary of Finance upon recommendation of the
police report. PRC did not even send Commissioner.
demand letters. (3) Agreement as to Useful Life on Which Depreciation
Rate is Based. - Where under rules and regulations
2. Aboitiz Shipping Corp. – no proof was given prescribed by the Secretary of Finance upon
of PRC policy that gives rebates to clients in recommendation of the Commissioner, the taxpayer
case of loss arising fr. fortuitous events, w/c and the Commissioner have entered into an agreement
in writing specifically dealing with the useful life and
it now passes off as uncollectible debts; rate of depreciation of any property, the rate so agreed
3. AFPCES – the mere fact that AFPCES is a upon shall be binding on both the taxpayer and the
national Government in the absence of facts and
govt. agency does not preclude P fr. filing circumstances not taken into consideration during the
suit since the agency was discharging adoption of such agreement. The responsibility of
proprietary functions. establishing the existence of such facts and
circumstances shall rest with the party initiating the
The taxpayer must be able to modification. Any change in the agreed rate and useful
demonstrate that the debt is not only life of the depreciable property as specified in the
uncollectible as of the taxable year but also at agreement shall not be effective for taxable years prior

APP 71
INCOME TAX REVIEWER
to the taxable year in which notice in writing by The term is also applied to amortization of
certified mail or registered mail is served by the party the value of intangible assets the use of w/c in the
initiating such change to the other party to the trade or business is definitely limited in duration.
agreement:
The necessity for depreciation allowance arises fr.
Provided, however, that where the taxpayer has adopted
such useful life and depreciation rate for any
the fact that certain property used in the business
depreciable and claimed the depreciation expenses as gradually approaches a point where its usefulness
deduction from his gross income, without any written is exhausted. By using the property, a gradual sale
objection on the part of the Commissioner or his duly is made of it; & the depreciation charged is the
authorized representatives, the aforesaid useful life measure of the cost w/c has been sold. When then
and depreciation rate so adopted by the taxpayer for the property is disposed of after years of use, it is
the aforesaid depreciable asset shall be considered no longer the whole thing originally used.
binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum
Operations. - An allowance for depreciation in respect b. Requisites for deductibility:
of all properties directly related to production of 1. The allowance for depreciation must be
petroleum initially placed in service in a taxable year
reasonable.
shall be allowed under the straight-line or declining-
balance method of depreciation at the option of the 2. It must be for property arising out of its use
service contractor. or employment in the business or trade, or
However, if the service contractor initially elects the out of its not being used temporarily during
declining-balance method, it may at any subsequent the year.
date, shift to the straight-line method. 3. It must be charged off during the taxable
The useful life of properties used in or related to year.
production of petroleum shall be ten (10) years of such
4. A statement on the allowance must be
shorter life as may be permitted by the Commissioner.
attached to the return.
Properties not used directly in the production of
petroleum shall be depreciated under the straight-line
method on the basis of an estimated useful life of five “Reasonable allowance” as used in the Tax Code,
(5) years. includes (but is not limited to) an allowance
(5) Depreciation of Properties Used in Mining Operations. computed in accordance w/ the regulations
- an allowance for depreciation in respect of all prescribed by the Finance Secretary under any of
properties used in mining operations other than the ff. methods:
petroleum operations, shall be computed as follows:
1. Straight-line method;
(a) At the normal rate of depreciation if the expected life
is ten (10) years or less; or 2. Declining balance method;
(b) Depreciated over any number of years between five 3. Sum-of-the-years digits method; &
(5) years and the expected life if the latter is more 4. Any other method prescribed by the Sec. of
than ten (10) years, and the depreciation thereon Finance upon recommendation of the
allowed as deduction from taxable income: Provided,
Commissioner.
That the contractor notifies the Commissioner at the
beginning of the depreciation period which
depreciation rate allowed by this Section will be used. c. Who may deduct depreciation
(6) Depreciation Deductible by Nonresident Aliens expense?
Engaged in Trade or Business or Resident Foreign
Corporations. - In the case of a nonresident alien
individual engaged in trade or business or resident
 In the case of property held by one person for
foreign corporation, a reasonable allowance for the
deterioration of Property arising out of its use or life with remainder to another person
employment or its non-use in the business trade or  in the case of property held in trust
profession shall be permitted only when such property
is located in the Philippines. d. COMPUTATION / methods allowed.

LIMPAN INC., v. COMM.

a. What is depreciation? what is
Facts: Limpan is the owner of several
obsolescence?
apartment units. CIR assessed deficiency taxes
& reduced depreciation expense at the rate
 For the exhaustion, wear and tear (including stated in the petitioner’s return bec. these
reasonable allowance for obsolescence) of were excessive. Petitioner’s witness tried to
property establish that some of its buildings were old &
out of style, hence they were entitled to higher
Definition: rates of depreciation.
(Basilan Estates Inc., v. Comm & Secs. 110 – Held: Findings of the CIR & the CTA should be
115 RR 2) upheld, the deductions claimed by Limpan
Depreciation - the gradual diminution in the were excessive. Depreciation is a question of
useful value of tangible property used in the trade fact & is not measured by theoretical yardstick
or business resulting fr. exhaustion, wear & tear, & but should be determined by a consideration of
normal obsolescence actual facts.

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INCOME TAX REVIEWER
may nevertheless, be subject of a depreciation
allowance.
BASILAN ENTERPRISES INC., v. COMM.
Facts: BEI claimed deductions for the e. Agreement as to useful life/
depreciation of its assets up to 1949 on the economic life conditions/
basis of their acquisition cost. As of Jan. 1950, restrictions
it changed the depreciable value of said assets
by increasing it to conform w/ the increase in f. Special types of depreciable
cost for their replacement. Accdgly, for its properties
1950 – 1953 returns, it deducted fr. gross
income, the value of depreciations computed
i. Properties used in petroleum
on the reappraised value.
operations
Held: The income tax law does not authorize
ii. Properties used in mining
the depreciation of an asset beyond its
operation
acquisition cost. Hence a deduction over &
above such cost cannot be claimed or allowed. iii. Depreciation of properties used
The reason is that deductions fr. gross income by nonresident aliens
are privileges, not matters of right. They are engaged in trade or
not created by implication but upon clear business or resident foreign
expression in the law. Moreover, the recovery, corps.
free of income tax , of an amount, more than
the invested capital in an asset, will transgress
8. DEPLETION
the underlying purpose of depreciation
allowance. For then, what the taxpayer would
recover would be, not only the acquisition cost, Depletion is the exhaustion of natural resources
but also some profit. Recovery in due time like mines & oil & gas wells as a result of
through depreciation of investment made is production or severance fr. such mines or wells.
the philosophy behind depreciation, the idea of
profit on the investment made has never been Sec. 34. (G) Depletion of Oil and Gas Wells and
the underlying reason for the allowance of a Mines. -
deduction for depreciation. (1) In General. - In the case of oil and gas wells or mines,
a reasonable allowance for depletion or amortization
computed in accordance with the cost-depletion
Illustration: method shall be granted under rules and regulations to
be prescribed by the Secretary of finance, upon
A machine w/ a cost of P50,500 w/c has an
recommendation of the Commissioner. Provided, That
estimated useful life of 10 years & salvage value of when the allowance for depletion shall equal the
P500 after its useful life should have an annual capital invested no further allowance shall be granted:
depreciation of P5,000 computed as follows: Provided, further, That after production in commercial
COST P50,500 quantities has commenced, certain intangible
exploration and development drilling costs: (a) shall be
Less – Salvage Value (500) deductible in the year incurred if such expenditures are
Amount subject to depreciation P50,000 incurred for non-producing wells and/or mines, or (b)
======= shall be deductible in full in the year paid or incurred
or at the election of the taxpayer, may be capitalized
Annual depreciation will be: and amortized if such expenditures incurred are for
P50,000 producing wells and/or mines in the same contract
area.
10 years = P5,000
'Intangible costs in petroleum operations' refers to any
cost incurred in petroleum operations which in itself
** No depreciation will be allowed in the case of has no salvage value and which is incidental to and
property w/c has been amortized to its scrap value necessary for the drilling of wells and preparation of
& is no longer in use. (Sec. 108, RR 2) wells for the production of petroleum: Provided, That
said costs shall not pertain to the acquisition or
improvement of property of a character subject to the
Property not subject to depreciation – allowance for depreciation except that the allowances
[Link] or stock in trade; for depreciation on such property shall be deductible
under this Subsection.
[Link], apart fr. the improvements or physical
development added to it; Any intangible exploration, drilling and development
expenses allowed as a deduction in computing taxable
[Link] of minerals w/c through the process of removal
income during the year shall not be taken into
suffer depletion already subj. to depletion allowance);
consideration in computing the adjusted cost basis for
[Link] solely for personal purposes; the purpose of computing allowable cost depletion.
[Link], the use of w/c in business or trade is not of (2) Election to Deduct Exploration and Development
limited duration; & Expenditures. - In computing taxable income from
[Link] repairs w/c neither materially add up to the mining operations, the taxpayer may at his option,
value or prolong the life, but keep it in an ordinary deduct exploration and development expenditures
efficient operating condition. Property kept in repair accumulated as cost or adjusted basis for cost

APP 73
INCOME TAX REVIEWER
depletion as of date of prospecting, as well as d. Amount deductible by a
exploration and development expenditures paid or nonresident alien individual or
incurred during the taxable year: Provided, That the
amount deductible for exploration and development foreign corporation
expenditures shall not exceed twenty-five percent
(25%) of the net income from mining operations
Persons entitled to claim depletion allowance
computed without the benefit of any tax incentives
(Sec. 3, Rev. Reg. 5-76)
under existing laws. The actual exploration and
development expenditures minus twenty-five percent Allowed only to mining entities w/c own an economic
(25%) of the net income from mining shall be carried interest in mineral deposits
forward to the succeeding years until fully deducted. Economic interest – the taxpayer has acquired by
The election by the taxpayer to deduct the exploration investment any interest in mineral & secures it, by any
and development expenditures is irrevocable and shall form of legal relationship, such as but not limited to,
be binding in succeeding taxable years. operating agreement & service contract agreement,
income derived fr. the extraction of mineral, to w/c it
'Net income from mining operations', as used in this
must look for the return of its capital
Subsection, shall mean gross income from operations
less 'allowable deductions' which are necessary or A corporation w/c has no capital investment in the
related to mining operations. 'Allowable deductions' mineral deposit does not possess an economic interest
shall include mining, milling and marketing expenses, merely bec. through a contractual relation it possesses
and depreciation of properties directly used in the a mere pecuniary advantage derived fr. production.
mining operations. This paragraph shall not apply to A resident foreign corporation is entitled only to deduct
expenditures for the acquisition or improvement of depreciation allowance for oil & gas wells located w/in
property of a character which is subject to the the Philippines.
allowance for depreciation.
In no case shall this paragraph apply with respect to
amounts paid or incurred for the exploration and Consolidated Mines V. CTA
development of oil and gas.
Facts: Consolidated is a domestic mining corp.
The term 'exploration expenditures' means expenditures w/c claimed deductions for depletion, the rates
paid or incurred for the purpose of ascertaining the
existence, location, extent or quality of any deposit of of w/c pet’r & the CIR disagreed on.
ore or other mineral, and paid or incurred before the Held: The Tax Code provides in case of mines
beginning of the development stage of the mine or
deposit. for a deduction on depletion - a reasonable
The term 'development expenditures' means
allowance not to exceed the market value of
expenditures paid or incurred during the development the product thereof w/c has been mined &
stage of the mine or other natural deposits. The sold during the year for w/c the return was
development stage of a mine or other natural deposit made.
shall begin at the time when deposits of ore or other
minerals are shown to exist in sufficient commercial The formula for computing the rate of
quantity and quality and shall end upon depletion is:
commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible
Cost of mine property
by a Nonresident Alien individual or Foreign Estimated ore deposit = Rate of
Corporation. - In the case of a nonresident alien
individual engaged in trade or business in the
depletion per unit of product mined & sold
Philippines or a resident foreign corporation, allowance Cost of mine property :
for depletion of oil and gas wells or mines under
paragraph (1) of this Subsection shall be authorized 1. Mine cost
only in respect to oil and gas wells or mines located
within the Philippines. 2. Expenses of development before production
As an income tax concept, depletion is wholly
a creation of the statute, “solely a matter of
a. Depletion of oil and gas wells legislative grace”, hence the pet’r has the
and mines burden of justifying the allowance of any
b. Method allowed: COST deduction claimed. The company must
DEPLETION provide the evidence for its assertion that CIR
erred.
I. When depletion shall equal
the capital invested/ no
more deduction 9. RESEARCH AND DEVELOPMENT EXPENSE
II. Treatment of intangible
costs in petroleum products Sec. 34. (I) Research and Development.-
(1) In General. - a taxpayer may treat research or
c. Option to deduct exploration and development expenditures which are paid or incurred
development expenditures by him during the taxable year in connection with his
trade, business or profession as ordinary and
necessary expenses which are not chargeable to
What are exploration expenditures? capital account. The expenditures so treated shall be
development expenditures? allowed as deduction during the taxable year when
paid or incurred.

APP 74
INCOME TAX REVIEWER
(2) Amortization of Certain Research and Development [Link] AND OTHER
Expenditures. - At the election of the taxpayer and in CONTRIBUTIONS
accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the following REV. REG. 13-98.
research and development expenditures may be
treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with Sec. 34. (H) Charitable and Other Contributions.
his trade, business or profession; (1) In General. - Contributions or gifts actually paid or
(b) Not treated as expenses under paragraph 91) hereof; made within the taxable year to, or for the use of the
and Government of the Philippines or any of its agencies or
any political subdivision thereof exclusively for public
(c) Chargeable to capital account but not chargeable to purposes, or to accredited domestic corporation or
property of a character which is subject to associations organized and operated exclusively for
depreciation or depletion. religious, charitable, scientific, youth and sports
In computing taxable income, such deferred expenses development, cultural or educational purposes or for
shall be allowed as deduction ratably distributed over the rehabilitation of veterans, or to social welfare
a period of not less than sixty (60) months as may be institutions, or to non-government organizations, in
elected by the taxpayer (beginning with the month in accordance with rules and regulations promulgated by
which the taxpayer first realizes benefits from such the Secretary of finance, upon recommendation of the
expenditures). Commissioner, no part of the net income of which
The election provided by paragraph (2) hereof may be inures to the benefit of any private stockholder or
made for any taxable year beginning after the individual in an amount not in excess of ten percent
effectivity of this Code, but only if made not later than (10%) in the case of an individual, and five percent (%)
the time prescribed by law for filing the return for such in the case of a corporation, of the taxpayer's taxable
taxable year. The method so elected, and the period income derived from trade, business or profession as
selected by the taxpayer, shall be adhered to in computed without the benefit of this and the following
computing taxable income for the taxable year for subparagraphs.
which the election is made and for all subsequent (2) Contributions Deductible in Full. - Notwithstanding
taxable years unless with the approval of the the provisions of the preceding subparagraph,
Commissioner, a change to a different method is donations to the following institutions or entities shall
authorized with respect to a part or all of such be deductible in full;
expenditures. The election shall not apply to any (a) Donations to the Government. - Donations to the
expenditure paid or incurred during any taxable year Government of the Philippines or to any of its agencies
for which the taxpayer makes the election. or political subdivisions, including fully-owned
government corporations, exclusively to finance, to
(3) Limitations on deduction. - This Subsection shall not provide for, or to be used in undertaking priority
apply to: activities in education, health, youth and sports
(a) Any expenditure for the acquisition or improvement development, human settlements, science and culture,
of land, or for the improvement of property to be used and in economic development according to a National
in connection with research and development of a Priority Plan determined by the National Economic and
character which is subject to depreciation and Development Authority (NEDA), In consultation with
depletion; and appropriate government agencies, including its
regional development councils and private
(b) Any expenditure paid or incurred for the purpose of
philantrophic persons and institutions: Provided, That
ascertaining the existence, location, extent, or quality
any donation which is made to the Government or to
of any deposit of ore or other mineral, including oil or
any of its agencies or political subdivisions not in
gas.
accordance with the said annual priority plan shall be
subject to the limitations prescribed in paragraph (1)
of this Subsection;
a. What items are treated as R& D (b) Donations to Certain Foreign Institutions or
expenses? International Organizations. - donations to foreign
institutions or international organizations which are
b. How deduction is computed fully deductible in pursuance of or in compliance with
c. Treated as deferred expenses agreements, treaties, or commitments entered into by
the Government of the Philippines and the foreign
(optional) of some R and D institutions or international organizations or in
expense pursuance of special laws;
 conditions and limitations (c) Donations to Accredited Nongovernment
Organizations. - the term 'nongovernment
d. Limitations on deduction/ R & D
organization' means a non profit domestic corporation:
provisions shall not apply to:
i. Any expenditure for the acquisition or
improvement of land, or for the (1) Organized and operated exclusively for scientific,
improvement of property to be used in research, educational, character-building and youth
connection with research and development and sports development, health, social welfare,
cultural or charitable purposes, or a combination
of a character which is subject to
thereof, no part of the net income of which inures to
depreciation and depletion; and the benefit of any private individual;
ii. Any expenditure paid or incurred for the (2) Which, not later than the 15 th day of the third month
purpose of ascertaining the existence, after the close of the accredited nongovernment
location, extent, or quality of any deposit of organizations taxable year in which contributions are
ore or other mineral, including oil or gas. received, makes utilization directly for the active
conduct of the activities constituting the purpose or

APP 75
INCOME TAX REVIEWER
function for which it is organized and operated, unless f. Proof of donation for tax deduction
an extended period is granted by the Secretary of purposes
Finance in accordance with the rules and regulations to
be promulgated, upon recommendation of the
Commissioner; Roxas V. CTA
(3) The level of administrative expense of which shall, on
an annual basis, conform with the rules and Facts: Supra
regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner,
Held: Contributions to the Christmas Fund of
but in no case to exceed thirty percent (30%) of the the Pasay City Police & Firemen & the Baguio
total expenses; and City Police are not deductible for the reason
(4) The assets of which, in the even of dissolution, would that Christmas Funds were not spent for public
be distributed to another nonprofit domestic purposes but as gifts to the families of the
corporation organized for similar purpose or purposes, members of said entities. Under the Tax Code,
or to the state for public purpose, or would be
distributed by a court to another organization to be a contribution to a govt. entity is deductible
used in such manner as in the judgment of said court when used exclusively for public purposes.
shall best accomplish the general purpose for which
the dissolved organization was organized.
Contributions to the Phil. Herald’s fund
for Manila’s neediest families were disallowed
Subject to such terms and conditions as may be
prescribed by the Secretary of Finance, the term on the ground that PH is not a corporation or
'utilization' means: assn. Contemplated in the Tax Code. It should
(i) Any amount in cash or in kind (including be noted however, that the contributions were
administrative expenses) paid or utilized to not made to the PH but to a group of civic-
accomplish one or more purposes for which the spirited citizens organized by the PH solely for
accredited nongovernment organization was
created or organized.
charitable purposes.
(ii) Any amount paid to acquire an asset used (or
held for use) directly in carrying out one or more [Link] TO A PENSION TRUST
purposes for which the accredited
nongovernment organization was created or
organized. Sec. 34. (J) Pension Trusts. - An employer
establishing or maintaining a pension trust to provide for
An amount set aside for a specific project which comes the payment of reasonable pensions to his employees
within one or more purposes of the accredited shall be allowed as a deduction (in addition to the
nongovernment organization may be treated as a contributions to such trust during the taxable year to
utilization, but only if at the time such amount is set cover the pension liability accruing during the year,
aside, the accredited nongovernment organization has allowed as a deduction under Subsection (A) (1) of this
established to the satisfaction of the Commissioner Section ) a reasonable amount transferred or paid into
that the amount will be paid for the specific project such trust during the taxable year in excess of such
within a period to be prescribed in rules and contributions, but only if such amount (1)has not
regulations to be promulgated by the Secretary of theretofore been allowed as a deduction, and (2) is
Finance, upon recommendation of the Commissioner, apportioned in equal parts over a period of ten (10)
but not to exceed five (5) years, and the project is one consecutive years beginning with the year in which the
which can be better accomplished by setting aside transfer or payment is made.
such amount than by immediate payment of funds.
(3) Valuation. - The amount of any charitable
 Deduction of lump-sum contribution
contribution of property other than money shall be
based on the acquisition cost of said property.  REQUISITES FOR DEDUCTIBILITY
(4) Proof of Deductions. - Contributions or gifts shall be
allowable as deductions only if verified under the rules C. ITEMS THAT CANNOT BE DEDUCTED
and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
SEC. 36. Items not Deductible.-
(A) General Rule. - In computing net income, no
a. What donations or gifts are deduction shall in any case be allowed in respect to
deductible? (1) Personal, living or family expenses;
b. Deduction with limitation (2) Any amount paid out for new buildings or for
permanent improvements, or betterments made to
c. Contributions deductible in full. increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and
d. Treatment of the ff. donations: development costs incurred in petroleum operations
i. Donations to the gov’t. which are deductible under Subsection (G) (1) of
Section 34 of this Code.
ii. Donations to certain foreign (3) Any amount expended in restoring property or in
institutions or int’l making good the exhaustion thereof for which an
organizations allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering
iii. Donations to accredited the life of any officer or employee, or of any person
non-gov’t. organizations financially interested in any trade or business carried
e. valuation of donation on by the taxpayer, individual or corporate, when the

APP 76
INCOME TAX REVIEWER
taxpayer is directly or indirectly a beneficiary under Held: It appears that the driver was used for
such policy. personal & business purposes. The SC is not
(B) Losses from Sales or Exchanges of Property. - In inclined to disturb the finding of the court the
computing net income, no deductions shall in any case
be allowed in respect of losses from sales or exchanges Jamir used the car “more for business than for
of property directly or indirectly - personal purposes”.
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole or
2. Capital Expenditure
half-blood), spouse, ancestors, and lineal descendants; i. Acquisition of asset
or
(2) Except in the case of distributions in liquidation, ii. Repairs that prolong life and
between an individual and corporation more than fifty add value
percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such
iii. Addition/ improvement on an
individual; or existing asset
(3) Except in the case of distributions in liquidation, iv. Compare/ differentiate with
between two corporations more than fifty percent ordinary expense
(50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same
individual if either one of such corporations, with
respect to the taxable year of the corporation Sec. 120 Rev. Reg. 2. Capital expenditure
preceding the date of the sale of exchange was under No deduction fr. gross income may be made –
the law applicable to such taxable year, a personal  For any amounts made for the new buildings or for
holding company or a foreign personal holding permanent improvements or betterments made to
company; increase the value of the taxpayer’s property, or
(4) Between the grantor and a fiduciary of any trust; or  For any amount expended in restoring property or in
(5) Between the fiduciary of and the fiduciary of a trust making good the exhaustion thereof for w/c an
and the fiduciary of another trust if the same person is allowance of depreciation expended for securing a
a grantor with respect to each trust; or copyright & plates, w/c remain the property of the
person making the payments, are investment of
(6) Between a fiduciary of a trust and beneficiary of
capital.
such trust.
The cost of defending of perfecting title of property,
constitutes a part of the cost on the property & is not a
1. Personal living and other family deductible expense.
expenses The amount expended for architect’s services is part of
the cost of the building.
Examples: tuition fees, groceries and other Commissions paid in purchasing securities are an offset
household expense against the selling price.
Expenses of the administration of an Estate, such as –
Sec. 119 Rev. Reg. 2 Personal, living, & family  court costs
expenses are not deductible.  attorney’s fee &
(1) Insurance paid on a dwelling owned &  executor’s commissions
occupied by a taxpayer is a personal expense & not  are chargeable against the “corpus” of the estate &
deductible. are not allowable deductions.
(2) Premiums paid for life for life insurance are not  Amounts –
deductible.  to be assessed & placed under an agreement
In the case of a professional man who – between bondholders or shareholders of a
 Rents a property for residential purposes corporation.
 But incidentally receives his clients, patients, or  to be used in a reorganizing of the corporation,
callers in connection w/ his professional work (his are investments of capital an not deductible for any
place of business being elsewhere), purpose in return of income.
no part of the rent is deductible as a business expense. In the case of a corporation, expenses for organizations,
If, however, he uses part of the house for his office, such such as -
portion of the rent as is properly attributed to such  incorporation fees
office is deductible.  attorney’s fees
Where the father is legally entitled to the services of his  accountants’ charges,
minor children, any allowances w/c he gives them  are ordinary capital expenditures,
whether said to be in consideration of services or but where such expenditures are limited to purely
otherwise, are not allowable salary deductions in his incidental expenses, a taxpayer may be charge such
returns of income. item against income in the year in w/c they are
Alimony & an allowance paid under a separation incurred.
agreement are not deductible fr. gross income. A holding company w/c guarantees dividend at a
specified rate on the stock of the subsidiary
corporation for the purpose of –
COLLECTOR VS. JAMIR  securing new capital for the subsidiary &
Facts: Jamir claimed as ded’n the salary of his  increasing the value of its stockholdings in the
driver. The CIR assessed the tax due. CTA subsidiary
allowed 3/4s of the salary to be deducted.

APP 77
INCOME TAX REVIEWER
may not deduct amounts paid in carrying out this
guarantee in computing its net income, but such
payments may be added to the cost of its stock in the
subsidiary.

SEC. 38. Losses from Wash Sales of Stock or

Commissioner Vs. Soriano Securities. -
Facts: The taxpayer had a piece of land in (A) In the case of any loss claimed to have been
sustained from any sale or other disposition of shares
Mla. To carry out a project, it hired an architect of stock or securities where it appears that within a
as a contractor for pile-driving lumber into the period beginning thirty (30) days before the date of
grd. The taxpayer sold the prop. & later such sale or disposition and ending thirty (30) days
claimed as deductible the amt. paid to the after such date, the taxpayer has acquired (by
purchase or by exchange upon which the entire
architect & service fee for pile-driving. amount of gain or loss was recognized by law), or has
Held: Expenses constitute capital expenditure entered into a contact or option so to acquire,
substantially identical stock or securities, then no
w/c the owner/taxpayer was entitled to
deduction for the loss shall be allowed under Section
consider as part of the total cost of its property 34 unless the claim is made by a dealer in stock or
in det. the amt. of profit it realized fr. the sale. securities and with respect to a transaction made in
Expenditures for replacements, alterations & the ordinary course of the business of such dealer.
improvements/additions w/c either prolong (B) If the amount of stock or securities acquired (or
the life of the prop. or increase its value are covered by the contract or option to acquire) is less
than the amount of stock or securities sold or
capital in nature & therefore are part of the otherwise disposed of, then the particular shares of
cost. Not deductible. stock or securities, the loss form the sale or other
disposition of which is not deductible, shall be
determined under rules and regulations prescribed by
3. Insurance premium payment the Secretary of Finance, upon recommendation of the
Commissioner.
(C) If the amount of stock or securities acquired (or
 When deductible covered by the contract or option to acquire which)
 When NOT deductible resulted in the non-deductibility of the loss, shall be
determined under rules and regulations prescribed by
 Insurance premium as fringe benefit the Secretary of Finance, upon recommendation of the
Commissioner.

4. Losses between related taxpayers Sec. 101 Rev. Reg. 2. Capital losses on wash sales
of stock or securities
Losses on sale or exchange of capital assets are allowed
Sec. 36. (B) Losses from Sales or Exchanges of to the extent provided in Sec 34 of the Code. If any
Property. - In computing net income, no deductions securities w/c are capital assets become worthless
shall in any case be allowed in respect of losses from during the taxable year, the loss resulting, therefr.
sales or exchanges of property directly or indirectly - shall be considered as a low fr. the sale or exchange on
(1) Between members of a family. For purposes of this the last day of such taxable year, of capital losses
paragraph, the family of an individual shall include assets. Losses on “wash sales” of stock or securities
only his brothers and sisters (whether by the whole or are treated in Sec. 33 of Code 1.
half-blood), spouse, ancestors, and lineal descendants;
or
(2) Except in the case of distributions in liquidation,
between an individual and corporation more than fifty
percent (50%) in value of the outstanding stock of 6. Illegal expense
which is owned, directly or indirectly, by or for such
individual; or
(3) Except in the case of distributions in liquidation,
between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same
Calanoc Vs. Collector
individual if either one of such corporations, with
respect to the taxable year of the corporation Facts: By authority of a solicitor’s permit,
preceding the date of the sale of exchange was under Calanoc financed & promoted a boxing match
the law applicable to such taxable year, a personal
holding company or a foreign personal holding to solicit contributions for orphans & destitute
company; children. Included in the expenditures was an
(4) Between the grantor and a fiduciary of any trust; or amt. for police protection.
(5) Between the fiduciary of and the fiduciary of a trust Held: The expenditure is disallowed as it is
and the fiduciary of another trust if the same person is illegal. It is a consideration given for the
a grantor with respect to each trust; or
performance of the police of functions
(6) Between a fiduciary of a trust and beneficiary of such
trust. required of them to be rendered under the law.

5. Losses on wash sales

APP 78
INCOME TAX REVIEWER
Sec. 34. 1. (c) Bribes, Kickbacks and Other Similar 4. Assessment insurance cos.
Payments. - No deduction from gross income shall be
allowed under Subsection (A) hereof for any payment
made, directly or indirectly, to an official or employee
of the national government, or to an official or E. DEDUCTIONS ALLOWED TO INDIVIDUAL
employee of any local government unit, or to an official TAXPAYERS.
or employee of a government-owned or -controlled
corporation, or to an official or employee or
representative of a foreign government, or to a private 1. Optional standard deduction.
corporation, general professional partnership, or a
similar entity, if the payment constitutes a bribe or Sec. 34. (L) Optional Standard Deduction. - In lieu of
kickback. the deductions allowed under the preceding
Subsections, an individual subject to tax under Section
24, other than a nonresident alien, may elect a
standard deduction in an amount not exceeding ten
OTHERS: percent (10%) of his gross income. Unless the taxpayer
i. Protection money signifies in his return his intention to elect the optional
standard deduction, he shall be considered as having
ii. Ransom paid to kidnappers for availed himself of the deductions allowed in the
the release of a corporate preceding Subsections. Such election when made in
the return shall be irrevocable for the taxable year for
officer which the return is made: Provided, That an individual
iii. Revolutionary tax paid to NPA who is entitled to and claimed for the optional
standard deduction shall not be required to submit
with his tax return such financial statements otherwise
D. DEDUCTIONS ALLOWED FOR SPECIAL required under this Code: Provided, further, That
except when the Commissioner otherwise permits, the
CORPORATIONS said individual shall keep such records pertaining to his
gross income during the taxable year, as may be
required by the rules and regulations promulgated by
SEC. 37. Special Provisions Regarding Income and the Secretary of Finance, upon recommendation of the
Deductions of Insurance Companies, Whether Commissioner.
Domestic or Foreign. -
(A) Special Deduction Allowed to Insurance
Companies. - In the case of insurance companies,  in lieu of itemized deductions
whether domestic or foreign doing business in the  not exceeding 10% of his gross income
Philippines, the net additions, if any, required by law to  What is gross income?
be made within the year to reserve funds and the sums
other than dividends paid within the year on policy and
annuity contracts may be deducted from their gross Sec. 27. E. (4) Gross Income Defined. - For
income: Provided, however, That the released reserve purposes of applying the minimum corporate income
be treated as income for the year of release. tax provided under Subsection (E) hereof, the term
'gross income' shall mean gross sales less sales
(B) Mutual Insurance Companies. - In the case of returns, discounts and allowances and cost of goods
mutual fire and mutual employers' liability and mutual sold. "Cost of goods sold' shall include all business
workmen's compensation and mutual casualty expenses directly incurred to produce the merchandise
insurance companies requiring their members to make to bring them to their present location and use.
premium deposits to provide for losses and expenses,
said companies shall not return as income any portion For a trading or merchandising concern, 'cost of goods
of the premium deposits returned to their sold' shall include the invoice cost of the goods sold,
policyholders, but shall return as taxable income all plus import duties, freight in transporting the goods to
income received by them from all other sources plus the place where the goods are actually sold including
such portion of the premium deposits as are retained insurance while the goods are in transit.
by the companies for purposes other than the payment For a manufacturing concern, cost of 'goods
of losses and expenses and reinsurance reserves. manufactured and sold' shall include all costs of
(C) Mutual Marine Insurance Companies. - Mutual production of finished goods, such as raw materials
marine insurance companies shall include in their used, direct labor and manufacturing overhead, freight
return of gross income, gross premiums collected and cost, insurance premiums and other costs incurred to
received by them less amounts paid to policyholders bring the raw materials to the factory or warehouse.
on account of premiums previously paid by them and In the case of taxpayers engaged in the sale of service,
interest paid upon those amounts between the 'gross income' means gross receipts less sales returns,
ascertainment and payment thereof. allowances, discounts and cost of services. 'Cost of
(D)Assessment Insurance Companies.- Assessment services' shall mean all direct costs and expenses
insurance companies, whether domestic or foreign, necessarily incurred to provide the services required
may deduct from their gross income the actual deposit by the customers and clients including (A) salaries and
of sums with the officers of the Government of the employee benefits of personnel, consultants and
Philippines pursuant to law, as additions to guarantee specialists directly rendering the service and (B) cost
or reserve funds. 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
1. Insurance companies banks, 'cost of services' shall include interest expense.

2. Mutual insurance companies

 How to avail of the optional deduction
3. Mutual marine insurance  Who is entitled?
companies

APP 79
INCOME TAX REVIEWER
2. Premium payments on health dependent upon and living with the taxpayer if such
and/or hospitalization insurance dependent is not more than twenty-one (21) years of
age, unmarried and not gainfully employed or if such
of an individual taxpayer. dependent, regardless of age, is incapable of self-
support because of mental or physical defect.

Sec. 34. (M) Premium Payments on Health and/or (C) Change of Status. - If the taxpayer marries or should
Hospitalization Insurance of an Individual have additional dependent(s) as defined above during
Taxpayer. - the amount of premiums not to exceed the taxable year, the taxpayer may claim the
Two thousand four hundred pesos (P2,400) per family corresponding additional exemption, as the case may
or Two hundred pesos (P200) a month paid during the be, in full for such year.
taxable year for health and/or hospitalization insurance
taken by the taxpayer for himself, including his family, If the taxpayer dies during the taxable year, his estate
shall be allowed as a deduction from his gross income: may still claim the personal and additional exemptions
Provided, That said family has a gross income of not for himself and his dependent(s) as if he died at the
more than Two hundred fifty thousand pesos close of such year.
(P250,000) for the taxable year: Provided, finally, That If the spouse or any of the dependents dies or if any of
in the case of married taxpayers, only the spouse such dependents marries, becomes twenty-one (21)
claiming the additional exemption for dependents shall years old or becomes gainfully employed during the
be entitled to this deduction. taxable year, the taxpayer may still claim the same
exemptions as if the spouse or any of the dependents
died, or as if such dependents married, became
twenty-one (21) years old or became gainfully
a. Limitation/ employed at the close of such year.
ceiling/ conditions for
deductions (D) Personal Exemption Allowable to Nonresident Alien
b. Who is entitled? Individual. - A nonresident alien individual engaged in
trade, business or in the exercise of a profession in the
Philippines shall be entitled to a personal exemption in
F. PERSONAL EXEMPTION FOR INDIVIDUAL the amount equal to the exemptions allowed in the
income tax law in the country of which he is a subject -
TAXPAYER. or citizen, to citizens of the Philippines not residing in
such country, not to exceed the amount fixed in this
Section as exemption for citizens or resident of the
SEC. 35. Allowance of Personal Exemption for Philippines: Provided, That said nonresident alien
Individual Taxpayer. - should file a true and accurate return of the total
(A) In General. - For purposes of determining the tax income received by him from all sources in the
provided in Section 24 (A) of this Title, there shall be Philippines, as required by this Title.
allowed a basic personal exemption as follows:
For single individual or married individual judicially
decreed as legally separated with no qualified 1. Basic personal exemption
dependents P20,000
For Head of Family P25,000
Sec. 2.79 (I) 1. a. Rev. Reg. 2-98.
For each married Individual P32,000
In the case of married individuals where only one of the
spouses is deriving gross income, only such spouse a. Single individual or
shall be allowed the personal exemption.
married individual judicially decreed as
For purposes of this paragraph, the term 'head of family'
means an unmarried or legally separated man or legally separated w/ no qualified dependents
woman with one or both parents, or with one or more P20,000
brothers or sisters, or with one or more legitimate,
recognized natural or legally adopted children living
with and dependent upon him for their chief support, b. Head of family P 25,000
where such brothers or sisters or children are not more Dependent Sec. 2.79 (B) (1) (d) Rev Reg. 2-
than twenty-one (21) years of age, unmarried and not 98
gainfully employed or where such children, brothers or
sisters, regardless of age are incapable of self-support Benefactors of senior citizens
because of mental or physical defect. Single unmarried parent?
(B) Additional Exemption for Dependents. - There shall be
allowed an additional exemption of Eight thousand
c. Each (legally) married individual
pesos (P8,000) for each dependent not exceeding four
(4). 32,000
The additional exemption for dependent shall be claimed
by only one of the spouses in the case of married 2. Additional exemption for dependents
individuals.
In the case of legally separated spouses, additional
exemptions may be claimed only by the spouse who Sec. 2.79 (I) (1) (b) Rev Reg. 2-98
has custody of the child or children: Provided, That the
total amount of additional exemptions that may be
claimed by both shall not exceed the maximum a. How many dependents are
additional exemptions herein allowed.
allowed?
For purposes of this Subsection, a 'dependent' means a
legitimate, illegitimate or legally adopted child chiefly

APP 80
INCOME TAX REVIEWER
b. Who are the qualified (E) A domestic corporation is taxable on all income
dependents? Are senior citizens derived from sources within and without the
Philippines; and
qualified dependents? Are
(F) A foreign corporation, whether engaged or not in
spurious children covered? trade or business in the Philippines, is taxable only on
income derived from sources within the Philippines.

Dependent means a legitimate, illegitimate or

legally adopted child chiefly dependent upon and
living with the taxpayer if such dependent is not B. CORPORATIONS
more than 21 years of age, unmarried & not 1. Definition of corp./ corporate
gainfully employed or if such dependent, taxpayer
regardless of age, is incapable of self-support
because of mental or physical defect.
Sec. 22. (B) The term 'corporation' shall include
partnerships, no matter how created or organized,
c. Amount allowed P8,000 each max joint-stock companies, joint accounts (cuentas en
of 4 dependents participacion), association, or insurance companies,
but does not include general professional partnerships
d. Who may claim the additional and a joint venture or consortium formed for the
exemption? Maya single parent purpose of undertaking construction projects or
claim the deduction? 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'
3. Change of status of the taxpayer are partnerships formed by persons for the sole
and the dependent purpose of exercising their common profession, no part
of the income of which is derived from engaging in any
trade or business.
 marriage
 death
 reaching the age of 21 PARTNERSHIP : includes gen. partnerships &
 gainfully employed limited partnerships, whether registered or not,
BUT not gen. professional partnerships
 having children

4. personal exemption allowable to JOINT STOCK COMPANIES: constituted when

nonresident alien individual one a group of individuals, acting jointly, establish
& operate a business enterprise under an artificial
 reciprocity name, w/ an invested capital divided into
 requirements transferable shares, an elected board of directors,
& other corporate characteristics, BUT w/out
VI. CLASSIFICATION OF INCOME formal governmental authority.
TAXPAYERS.
JOINT ACCOUNTS (CUENTAS EN
A. GENERAL PRINCIPLES OF INCOME PARTICIPACION): constituted when one interests
TAXATION IN THE PHILS. himself in the business of another by contributing
capital thereto, & sharing in the profits or losses in
the proportion agreed upon; not subject to any
SEC. 23. General Principles of Income Taxation in formality & may be privately contracted orally or in
the Philippines. - Except when otherwise provided in writing.
this Code:
(A) A citizen of the Philippines residing therein is taxable
on all income derived from sources within and without ASSOCIATIONS: include all orgs. w/c have
the Philippines; substantially the same features of a corporation
(B) A nonresident citizen is taxable only on income (substantial resemblance in purpose, gen. form &
derived from sources within the Philippines; mode of operations.
(C) An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas
JOINT VENTURE: commercial undertaking by two
contract worker is taxable only on income derived from
sources within the Philippines: Provided, That a or more persons, differing from a partnership in
seaman who is a citizen of the Philippines and who that it relates to the disposition of a single lot of
receives compensation for services rendered abroad as goods or the completion of a single project; its
a member of the complement of a vessel engaged duration is limited to the period in w/c the goods
exclusively in international trade shall be treated as an are soled or the project is carried on.
overseas contract worker;
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from Who are large taxpayers?
sources within the Philippines;
Revenue Reg. 1-98

APP 81
INCOME TAX REVIEWER
Exceptions – general professional partnership services, skill, knowledge, material or
money
Sec. 22 (B), supra.  profits must be shared amount the parties;
SEC. 26. Tax Liability of Members of General
Professional Partnerships. - A general professional  there must be a JOINT PROPRIETARY
partnership as such shall not be subject to the income INTEREST, & the right of mutual control
tax imposed under this Chapter. Persons engaging in over the subject matter of the enterprise;
business as partners in a general professional
partnership shall be liable for income tax only in their  usually there is a single business TXN
separate and individual capacities. rather than a general or continuous TXN
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be
Likewise, a JV was created when 2 corps.
computed in the same manner as a corporation. while registered & operating separately where
Each partner shall report as gross income his distributive placed under one sole management w/c
share, actually or constructively received, in the net operated the business affairs of said co.'s as
income of the partnership. though they constituted as single entity
thereby obtaining substantial economy &
SEC. 73. Distribution of dividends or Assets by profits in the operation. (Collector vs. BTC)
Corporations. –
Thus the Venture w/c has been
(D) Net Income of a Partnership Deemed
Constructively Received by Partners. - The taxable constituted as a single entity whereby Empire
income declared by a partnership for a taxable year & Uniphil agreed to pool their resources for the
which is subject to tax under Section 27 (A) of this dev't of a parcel of land, is a JV w/c is subject
Code, after deducting the corporate income tax to the 35% under Sec. 24 of the Tax Code.
imposed therein, shall be deemed to have been
actually or constructively received by the partners in However, the shares of Uniphil & Empire from
the same taxable year and shall be taxed to them in the profits of the JV are NOT SUBJECT to
their individual capacity, whether actually distributed income tax since said profits are in the nature
or not. of dividends w/c are not subject to tax under
Sec. 24(e).
BIR ruling 254-91, 26-11-1991
Empire Stateland & Resources, INC (Empire), a 2. Ordinary partnership as a corporate
domestic corp. entered into a business tie-up taxpayer
w/ Uniphil Marketing (Uniphil) another a. Test whether an entity is a taxable
domestic corp., whereby both firms agreed to partnership
pool their resources together for the purpose
 a partnership no matter how organized
of developing & constructing condominium
units & selling them to the public. Uniphil was Sec. 22 (B), supra.
to contribute the lot, materials & labor, while Sec. 73 (D), supra.
Empire was to supply labor & materials. The
development & construction of the units & the
eventual sale thereof was to be undertaken & Ona vs. Commissioner
managed by Uniphil Empire Venture (Venture), Facts: When Bonales died, she left her
an entity put up by the contracting parties husband & 5 children. The heirs partitioned
solely for that venture. Empire will receive the estate in such a way that they had a 1/2
30% of the profits of the Venture while Uniphil undivided interest in 10 lots, 6 houses & an
will receive 70%. Empire argues that the undetermined amount of damages fr. the
respective shares of Uniphil & Empire in the Water Damage Commission. Although the
net profits is not subject to income tax, the project of partition was approved by the court.
same having been taxes in the hands of the property remained undivided & the
Venture o.w. the same income would be husband managed the properties. He either
subjected to 35% tax each in the hands of sold the property or leased them, & then
Venture, Uniphil & Empire or a total tax of 70% invested the proceeds in real estate &
ISSUE: What is the tax status of Venture? Is it securities. From these investments, the Onas
considered a joint venture (JV) & therefore received income. They did not, however,
taxable as a domestic corp.? actually receive their shares in the yearly
What is the tax treatment of the income as it was left in the hands of their
distributive shares of Uniphil & Empire in the father who invested them in real properties &
respective amount of 70% & 30%? securities.

RULING: To constitute a JV, certain factors are Held: The heirs formed an unregistered
essential: partnership. From the moment they allowed
not only the incomes from their respective
 each party must make a contribution, not shares in the inheritance but even the
necessarily of capital, but by way of inherited properties themselves to be used by
APP 82
INCOME TAX REVIEWER
the husband as a common fund in undertaking property inherited by them pro-indiviso.
several TXN's or in business, w/ the intention They created it purposely. They borrowed a
of deriving profit to be shared by them substantial portion thereof in order to
proportionally, such act was tantamount to establish the common fund.
actually contributing such income to a  They invested the same, not merely in one
common fund &, in effect, they thereby formed TXN but in a series of TXN.
an unregistered partnership w/in the purview
of the NIRC.  The properties bought by them were not
devoted to residential purposes, or to other
personal uses. Instead, they were leased.
Gatchalian vs. Collector  For over a decade, these conditions existed.
Facts: This is case where the pets.
contributed to buy a sweepstakes ticket.
Pascual vs. Com.
Held: The pets. organized a partnership of a
civil nature bec. each of them put up money to Facts: Pascual & Dragon bought a total of
buy a ticket for the sole purpose of dividing five lots in 2 sales. They then sold these lots.
equally the prize w/c they may win, as they did From these sales they earned profits. They
in fact in the amount of Php 50,000. The paid capital gains tax but the Com. demanded
partnership was not only formed, but also, they pay corp. income tax for being an
upon winning the prize, one of the pets., in his unregistered partnership?
capacity as a co-partner, collected the prize. Held: In the present case, there is no evidence
These circumstances repel the idea that the that petitioners entered into an agreement to
one formed & organized among them was a contribute money, property or industry to a
community of property. common fund, & that they intended to divide
Having organized a partnership, the said the profits among themselves. Respondent
entity is one bound to pay the income tax. The commissioner &/ or his representative just
tax should not be pro-rated among them & assumed these conditions to be present on the
paid individually resulting in their exemption basis of the fact that petitioners purchased
from corporate taxes. certain parcels of land & became co-owners
thereof.
In Evangelista, there was a series of
Evangelista vs. Collector transactions where petitioners purchased
Facts: The pets. (siblings I suppose) twenty-four (24) lots showing that the purpose
borrowed money from their father w/c they was not limited to the conservation or
used together w/ their own money to buy real preservation of the common fund or even the
properties. Their father was appointed by properties acquired by them. The character of
them to manage their properties w/ full power habituality peculiar to business transactions
to lease; collect rents, etc. Then the CIR engaged in for the purpose of gain was
demanded payment of income tax on corps., present.
real estate dealer’s fixed tax & corporation In the instant case, petitioners bought
residence tax for a period of 9 years. two (2) parcels of land in 1965. They did not
Held: Yes, a partnership was formed. sell the same nor make any improvements
According to the Civil Code (A1767), the thereon. In 1966, they bought another three
essential elements of a partnership are: (3) parcels of land from one seller. It was only
 an agreement to contribute money, 1968 when they sold the two (2) parcels of
property or industry to a common fund; & land after w/c they did not make any additional
or new purchase. The remaining three (3)
 intent to divide the profits among the parcels were sold by them in 1970. The
contracting parties. transactions were isolated. The character of
The first element is present in this case. habituality peculiar to business transactions
The petitioners agreed to contribute to a for the purpose of gain was not present.
common fund. Hence, the issue narrows down
to their intent in acting as they did. Upon
consideration of all the facts & circumstances b. Unregistered partnership
surrounding the case, we are fully satisfied distinguished from Co-ownership
that their purpose was to engage in real estate for tax purposes.
for monetary gain & divide it among
themselves, because: Obillos. vs. Com.
 Said common fund was not something they Facts: Jose Obillos bought two parcels of
found already in existence. It was not land w/c he transferred to the names of his
APP 83
INCOME TAX REVIEWER
children. After a year, the children sold them c. Tax liability of partnership &
for a profit, for w/c they paid capital gains tax. partners
The CIR demanded payment of corp. income
tax & considered the share of each child as his
distributive dividend. This was based on the
Revenue Reg. 1 - 89.
theory that the children formed an
Except as herein otherwise provided, there shall be
unregistered partnership. w/held a creditable income tax at the rates herein
Held: They formed a co-ownership & not a specified for each class of payee from the ff. items of
income payments to persons residing in the Phils.
partnership. The Civil Code provides that the
sharing of gross returns does not of itself Any amount paid or payable periodically or at the end of
the taxable year by a gen. professional partnership to
establish a partnership, WON the persons the partners, such as-
sharing them have a joint or common right or  drawings
interest in any of the property from w/c the  advances
returns are derived. There must be an
 sharings
unmistakable intention to form a partnership
 allowances
or JV.
 stipends, etc.
All co-ownerships are not deemed 15%,
unreg. partnership. Co-owners who own EXCEPT the amount paid to a partner who is a non-
properties w/c produce income should not resident alien whether or not engaged in trade or
automatically be considered partners of an business in the Phils. w/c shall be subject to a final
unregistered partnership or a corp. w/in the w/holding tax of 30&.
purview of the income tax law.
SEC. 26. Tax Liability of Members of General
In the CAB, they had no such intention. Professional Partnerships. - A general professional
They were co-owners pure & simple. To partnership as such shall not be subject to the income
consider them as partners would obliterate the tax imposed under this Chapter. Persons engaging in
business as partners in a general professional
distinction between co-ownership &
partnership shall be liable for income tax only in their
partnership. The pets. were not engaged in a separate and individual capacities.
JV by reason of that isolated TXN. Their For purposes of computing the distributive share of the
original plan was to divide the lots for partners, the net income of the partnership shall be
residential purposes. If later they found it not computed in the same manner as a corporation.
feasible to build their residences on the lots Each partner shall report as gross income his distributive
bec. of the high cost of construction, then they share, actually or constructively received, in the net
income of the partnership.
had no choice but to resell the same to
dissolve the co-ownership. The division of the
profit was merely incidental to the dissolution Sec. 73 (D), supra.
of the co-ownership w/c was in the nature of
things a temporary state. d. Joint venture unincorporated/ inc.

Reyes vs. Com BIR Ruling 254-91 supra (Case of Empire Uniphil &
the Uniphil Empire JV)
Facts: Father & son tandem bought a lot
& a building. The building were occupied by
tenants. Father & son divided the income Queries: How is a JV created?
coming from the tenants. They even hired an What is the tax treatment of a JV for the
administrator to collect rents. The Com. purposes of income taxation?
assessed them corp. income tax, surcharge &
compromise for a period of 5 years.
Held: Partnership (Evangelista vs. Coll) 3. Classification of Corporate
applies. However, the difference w/ that case Taxpayers/ Income Tax Base
& the CAB is that in the latter a single TXN
occurred. But the SC ruled that such minor
differentiation does not relieve them from the a. Domestic (NET WORLDWIDE)
Evangelista ruling.
Moreover, the case satisfies one of the Sec. 22. (C) The term 'domestic,' when applied to a
corporation, means created or organized in the
req’t of partnerships -- an agreement to Philippines or under its laws.
contribute money, property or industry to a
common fund.
SEC. 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

APP 84
INCOME TAX REVIEWER
hereby imposed upon the taxable income derived income derived by such educational institutions or
during each taxable year from all sources within and hospitals from all sources, the tax prescribed in
without the Philippines by every corporation, as Subsection (A) hereof shall be imposed on the entire
defined in Section 22(B) of this Code and taxable under taxable income. For purposes of this Subsection, the
this Title as a corporation, organized in, or existing term 'unrelated trade, business or other activity'
under the laws of the Philippines: Provided, That means any trade, business or other activity, the
effective January 1, 1998, the rate of income tax shall conduct of which is not substantially related to the
be thirty-four percent (34%); effective January 1, 1999, exercise or performance by such educational
the rate shall be thirty-three percent (33%); and institution or hospital of its primary purpose or
effective January 1, 2000 and thereafter, the rate shall function. A 'Proprietary educational institution' is any
be thirty-two percent (32%). private school maintained and administered by private
In the case of corporations adopting the fiscal-year individuals or groups with an issued permit to operate
accounting period, the taxable income shall be from the Department of Education, Culture and Sports
computed without regard to the specific date when (DECS), or the Commission on Higher Education
specific sales, purchases and other transactions occur. (CHED), or the Technical Education and Skills
Their income and expenses for the fiscal year shall be Development Authority (TESDA), as the case may be,
deemed to have been earned and spent equally for in accordance with existing laws and regulations.
each month of the period. (C) Government-owned or Controlled-Corporations,
The reduced corporate income tax rates shall be applied Agencies or Instrumentalities. - The provisions of
on the amount computed by multiplying the number of existing special or general laws to the contrary
months covered by the new rates within the fiscal year notwithstanding, all corporations, agencies, or
by the taxable income of the corporation for the instrumentalities owned or controlled by the
period, divided by twelve. Government, except the Government Service Insurance
System (GSIS), the Social Security System (SSS), the
Provided, further, That the President, upon the Philippine Health Insurance Corporation (PHIC), the
recommendation of the Secretary of Finance, may
Philippine Charity Sweepstakes Office (PCSO) and the
effective January 1, 2000, allow corporations the option Philippine Amusement and Gaming Corporation
to be taxed at fifteen percent (15%) of gross income as
(PAGCOR), shall pay such rate of tax upon their taxable
defined herein, after the following conditions have income as are imposed by this Section upon
been satisfied:
corporations or associations engaged in s similar
1. A tax effort ratio of twenty percent (20%) of Gross business, industry, or activity.
National Product (GNP);
2. A ratio of forty percent (40%) of income tax (D) Rates of Tax on Certain Passive Incomes. -
collection to total tax revenues;
(1) Interest from Deposits and Yield or any other
3. A VAT tax effort of four percent (4%) of GNP; and Monetary Benefit from Deposit Substitutes and from
4. A 0.9 percent (0.9%) ratio of the Consolidated Public Trust Funds and Similar Arrangements, and Royalties. -
Sector Financial Position (CPSFP) to GNP. A final tax at the rate of twenty percent (20%) is
The option to be taxed based on gross income shall be hereby imposed upon the amount of interest on
available only to firms whose ratio of cost of sales to currency bank deposit and yield or any other monetary
gross sales or receipts from all sources does not benefit from deposit substitutes and from trust funds
exceed fifty-five percent (55%). and similar arrangements received by domestic
The election of the gross income tax option by the corporations, and royalties, derived from sources
within the Philippines: Provided, however, That interest
corporation shall be irrevocable for three (3)
consecutive taxable years during which the income derived by a domestic corporation from a
depository bank under the expanded foreign currency
corporation is qualified under the scheme.
deposit system shall be subject to a final income tax at
For purposes of this Section, the term 'gross income' the rate of seven and one-half percent (7 1/2%) of such
derived from business shall be equivalent to gross interest income.
sales less sales returns, discounts and allowances and
(2) Capital Gains from the Sale of Shares of Stock Not
cost of goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce the Traded in the Stock Exchange. - A final tax at the rates
prescribed below shall be imposed on net capital gains
merchandise to bring them to their present location
and use. realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a
For a trading or merchandising concern, 'cost of goods' domestic corporation except shares sold or disposed of
sold shall include the invoice cost of the goods sold, through the stock exchange:
plus import duties, freight in transporting the goods to
the place where the goods are actually sold, including Not over P100,000…………………………. 5%
insurance while the goods are in transit. Amount in excess of P100,000…………….. 10%
For a manufacturing concern, 'cost of goods (3) Tax on Income Derived under the Expanded Foreign
manufactured and sold' shall include all costs of Currency Deposit System. - Income derived by a
production of finished goods, such as raw materials depository bank under the expanded foreign currency
used, direct labor and manufacturing overhead, freight deposit system from foreign currency transactions with
cost, insurance premiums and other costs incurred to local commercial banks, including branches of foreign
bring the raw materials to the factory or warehouse. banks that may be authorized by the Bangko Sentral
In the case of taxpayers engaged in the sale of service, ng Pilipinas (BSP) to transact business with foreign
currency depository system units and other depository
'gross income' means gross receipts less sales returns,
allowances and discounts. banks under the expanded foreign currency deposit
system, including interest income from foreign
(B) Proprietary Educational Institutions and currency loans granted by such depository banks
Hospitals. - Proprietary educational institutions and under said expanded foreign currency deposit system
hospitals which are nonprofit shall pay a tax of ten to residents, shall be subject to a final income tax at
percent (10%) on their taxable income except those the rate of ten percent (10%) of such income.
covered by Subsection (D) hereof: Provided, that if the
gross income from unrelated trade, business or other Any income of nonresidents, whether individuals or
corporations, from transactions with depository banks
activity exceeds fifty percent (50%) of the total gross

APP 85
INCOME TAX REVIEWER
under the expanded system shall be exempt from specialists directly rendering the service and (B) cost
income tax. of facilities directly utilized in providing the service
(4) Intercorporate Dividends. - Dividends received by a such as depreciation or rental of equipment used and
domestic corporation from another domestic cost of supplies: Provided, however, That in the case of
corporation shall not be subject to tax. banks, 'cost of services' shall include interest expense.
(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 b. Foreign
presumed to have been realized on the sale, exchange
or disposition of lands and/or buildings which are not
Sec. (D) The term 'foreign,' when applied to a
actually used in the business of a corporation and are
corporation, means a corporation which is not
treated as capital assets, based on the gross selling
domestic.
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. SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident Alien Engaged in trade or Business
(E) Minimum Corporate Income Tax on Domestic Within the Philippines. -
Corporations. - (1) In General. - A nonresident alien individual engaged
(1) Imposition of Tax. - A minimum corporate income tax in trade or business in the Philippines shall be subject
of two percent (2%0 of the gross income as of the end to an income tax in the same manner as an individual
of the taxable year, as defined herein, is hereby citizen and a resident alien individual, on taxable
imposed on a corporation taxable under this Title, income received from all sources within the
beginning on the fourth taxable year immediately Philippines. A nonresident alien individual who shall
following the year in which such corporation come to the Philippines and stay therein for an
commenced its business operations, when the aggregate period of more than one hundred eighty
minimum income tax is greater than the tax computed (180) days during any calendar year shall be deemed a
under Subsection (A) of this Section for the taxable 'nonresident alien doing business in the Philippines'.
year. Section 22 (G) of this Code notwithstanding.
(2) Carry Froward of Excess Minimum Tax. - Any excess of (2) Cash and/or Property Dividends from a Domestic
the minimum corporate income tax over the normal Corporation or Joint Stock Company, or Insurance or
income tax as computed under Subsection (A) of this Mutual Fund Company or Regional Operating
Section shall be carried forward and credited against Headquarter or Multinational Company, or Share in the
the normal income tax for the three (3) immediately Distributable Net Income of a Partnership (Except a
succeeding taxable years. General Professional Partnership), Joint Account, Joint
(3) Relief from the Minimum Corporate Income Tax Under Venture Taxable as a Corporation or Association.,
Certain Conditions. - The Secretary of Finance is Interests, Royalties, Prizes, and Other Winnings. - Cash
hereby authorized to suspend the imposition of the and/or property dividends from a domestic corporation,
minimum corporate income tax on any corporation or from a joint stock company, or from an insurance or
which suffers losses on account of prolonged labor mutual fund company or from a regional operating
dispute, or because of force majeure, or because of headquarter of multinational company, or the share of
legitimate business reverses. a nonresident alien individual in the distributable net
income after tax of a partnership (except a general
The Secretary of Finance is hereby authorized to
professional partnership) of which he is a partner, or
promulgate, upon recommendation of the
the share of a nonresident alien individual in the net
Commissioner, the necessary rules and regulation that
income after tax of an association, a joint account, or a
shall define the terms and conditions under which he
joint venture taxable as a corporation of which he is a
may suspend the imposition of the minimum corporate
member or a co-venturer; interests; royalties (in any
income tax in a meritorious case.
form); and prizes (except prizes amounting to Ten
(4) Gross Income Defined. - For purposes of applying the thousand pesos (P10,000) or less which shall be
minimum corporate income tax provided under subject to tax under Subsection (B)(1) of Section 24)
Subsection (E) hereof, the term 'gross income' shall and other winnings (except Philippine Charity
mean gross sales less sales returns, discounts and Sweepstakes and Lotto winnings); shall be subject to
allowances and cost of goods sold. "Cost of goods sold' an income tax of twenty percent (20%) on the total
shall include all business expenses directly incurred to amount thereof: Provided, however, that royalties on
produce the merchandise to bring them to their books as well as other literary works, and royalties on
present location and use. musical compositions shall be subject to a final tax of
For a trading or merchandising concern, 'cost of goods ten percent (10%) on the total amount thereof:
sold' shall include the invoice cost of the goods sold, Provided, further, That cinematographic films and
plus import duties, freight in transporting the goods to similar works shall be subject to the tax provided
the place where the goods are actually sold including under Section 28 of this Code: Provided, furthermore,
insurance while the goods are in transit. That interest income from long-term deposit or
For a manufacturing concern, cost of 'goods investment in the form of savings, common or
manufactured and sold' shall include all costs of individual trust funds, deposit substitutes, investment
production of finished goods, such as raw materials management accounts and other investments
used, direct labor and manufacturing overhead, freight evidenced by certificates in such form prescribed by
cost, insurance premiums and other costs incurred to the Bangko Sentral ng Pilipinas (BSP) shall be exempt
bring the raw materials to the factory or warehouse. from the tax imposed under this Subsection:
Provided, finally, that should the holder of the
In the case of taxpayers engaged in the sale of service, certificate pre-terminate the deposit or investment
'gross income' means gross receipts less sales returns, before the fifth (5th) year, a final tax shall be imposed
allowances, discounts and cost of services. 'Cost of on the entire income and shall be deducted and
services' shall mean all direct costs and expenses withheld by the depository bank from the proceeds of
necessarily incurred to provide the services required the long-term deposit or investment certificate based
by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and

APP 86
INCOME TAX REVIEWER
on the remaining maturity thereof: the same tax treatment shall apply to a Filipino
employed and occupying the same position as an alien
Four (4) years to less than five (5) years - 5%; employed by petroleum service contractor and
subcontractor.
Three (3) years to less than four (4) years - 12%; and
Any income earned from all other sources within the
Less than three (3) years - 20%.
Philippines by the alien employees referred to under
(3) Capital Gains. - Capital gains realized from sale, Subsections (C), (D) and (E) hereof shall be subject to
barter or exchange of shares of stock in domestic the pertinent income tax, as the case may be, imposed
corporations not traded through the local stock under this Code.
exchange, and real properties shall be subject to the
tax prescribed under Subsections (C) and (D) of
Section 24. i. Resident (NET FR. SOURCES
(B) Nonresident Alien Individual Not Engaged in Trade or W/IN ONLY)
Business Within the Philippines. - There shall be levied,
collected and paid for each taxable year upon the Sec. 22 (h). The term “resident foreign corporation,”
entire income received from all sources within the applies to a foreign corporation engaged in trade or
Philippines by every nonresident alien individual not business w/in the Philippines.
engaged in trade or business within the Philippines as
interest, cash and/or property dividends, rents,
salaries, wages, premiums, annuities, compensation, Com. vs. BOAC
remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, Facts: Supra
profits, and income, and capital gains, a tax equal to Held: In order that a foreign corp. may be
twenty-five percent (25%) of such income. Capital
gains realized by a nonresident alien individual not regarded as doing business w/in a state, there
engaged in trade or business in the Philippines from must be continuity of conduct & intention to
the sale of shares of stock in any domestic corporation establish a continuous business, such as the
and real property shall be subject to the income tax appointment of a local agent & not one of a
prescribed under Subsections (C) and (D) of Section
24.
temporary character. BOAC, although it does
not operate any airplane in the Phils., is a
(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of resident foreign corp. It maintains a general
Multinational Companies. - There shall be levied, sales agent in the country w/c is engaged in
collected and paid for each taxable year upon the selling & issuing tickets, receiving fare, etc.-
gross income received by every alien individual activities in the exercise of the functions
employed by regional or area headquarters and
regional operating headquarters established in the normally incident to, & are in progressive
Philippines by multinational companies as salaries, pursuit of, the purpose & object of its
wages, annuities, compensation, remuneration and organization as an international carrier.
other emoluments, such as honoraria and allowances,
from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent ii. Non-resident (GROSS FR.
(15%) of such gross income: Provided, however, That SOURCES W/IN ONLY)
the same tax treatment shall apply to Filipinos
employed and occupying the same position as those of
aliens employed by these multinational companies. For
Sec. 22 (I). The term “non-resident foreign corp.”
purposes of this Chapter, the term 'multinational
company' means a foreign firm or entity engaged in applies to a foreign corporation NOT engaged in trade
or business w/in the Philippines.
international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other
foreign markets.
Marubeni vs. Com.
(D) Alien Individual Employed by Offshore Banking Units.
- There shall be levied, collected and paid for each Facts: Marubeni is a Japanese corp. duly
taxable year upon the gross income received by every licensed in the Phils. to do business. M had
alien individual employed by offshore banking units
established in the Philippines as salaries, wages, equity investments w/ Atlantic, Gulf & Pacific.
annuities, compensation, remuneration and other A,G & P declared & paid cash dividends to M
emoluments, such as honoraria and allowances, from by directly remitting the cash dividend to M’s
such off-shore banking units, a tax equal to fifteen Tokyo office net of the 10% final intercorporate
percent (15%) of such gross income: Provided,
however, That the same tax treatment shall apply to
dividend tax & 15% branch profit remittance
Filipinos employed and occupying the same positions tax. M argues that following the principal-
as those of aliens employed by these offshore banking agent relationship theory, it is a resident
units. foreign corp., subject only to the 10% final tax
(E) Alien Individual Employed by Petroleum Service on dividends. It argues that must be
Contractor and Subcontractor. - An Alien individual who considered a resident foreign corp. because it
is a permanent resident of a foreign country but who is
employed and assigned in the Philippines by a foreign is engaged in business in the Phils. through its
service contractor or by a foreign service Phil. branch. It reasons that the Phil. branch &
subcontractor engaged in petroleum operations in the the Tokyo head office are one & the same corp.
Philippines shall be liable to a tax of fifteen percent entity, whoever made the investment in A,G,
(15%) of the salaries, wages, annuities, compensation,
remuneration and other emoluments, such as
& P.
honoraria and allowances, received from such
contractor or subcontractor: Provided, however, That

APP 87
INCOME TAX REVIEWER
Held: The gen. rule that a foreign corp. is the Held: P&G Phil’s is not entitled to the refund.
same juridical entity as its branch office in the It is merely a w/holding agent of the gov’t. the
Phils. cannot apply here. This rule is based on real party to file the claim should have been
the premise that the business of the foreign P&G USA. P&G Phil. also failed to meet certain
corp. is conducted through its branch office, req’ts in order that the dividends received by
following the principal-agent theory. It is its non-resident for. com. may be subj. to
understood that the branch becomes its agent preferential tax rate of 15%.
here. So that when the foreign corp. transacts 1. It did not show actual amount credited
business independently of its branch, the to P&G USA by US gov’t against the
prin.-agent relationship is set aside. The TXN income tax due on the dividends received
becomes one of the foreign corp., not of the by it fr. the Phil’s.
branch. Consequently, the taxpayer is the
foreign corp., not the branch or resident 2. Failed to present ITR of mother co. when
foreign corp. Corollarily, is the business TXN dividends were received.
is conducted through the branch office the 3. Failed to submit a duly authenticated
latter becomes the taxpayer & not the foreign doc. showing that the US gov’t credited
corp. the P&G USA the 20% tax deemed paid in
In the CAB, the investment was made the Phil’s.
for the purposes peculiarly germane to the
conduct of the corporate affairs of M, but
Wander Philippines
certainly not of the branch in the Phils. It is
thus clear that M, having made the Facts: Wander Phil’s is a domestic corp.
independent investment attributable only to organized under Phil. laws. It is wholly owned
the head office, cannot now claim the subsidiary of the Glaro SA ltd, a Swiss Corp.
increments as ordinary consequence of its not engaged in trade or business in the Phil’s.
trade or business in the Phils. It claimed a preferential tax rate on dividends
remitted to Glaro. Under Swiss law, no tax is
imposed on dividends received by the Swiss
Com. v. Procter & Gamble 204 S 277 Corp. fr. corp. domiciled in foreign countries.
Facts: P&G Phil’s declared dividends payable Held: While it is true that the claims for
to its parent company & sole stockholder, P&G refund are construed strictly against the
USA; fr. w/c the 35% w/holding tax at source claimant, nevertheless, the fact that
was deducted. P&G Phil’s claimed a refund Switzerland did not impose any tax on the
based on 24(b) (1) allowing a reduced rate at dividends received by Glaro should be
15% if the country of the domicile of the considered as a full satisfaction of the given
foreign stockholder corporation “shall allow” condition.
such corp. a tax credit for taxes deemed paid
in the Phil’s.
Domestic
Held: Sec. 24(b)(1) does not require that the
US must give a deem paid tax credit for the
sources w/in sources w/o
dividend tax waived by the Phil. to make the
preferred rate applicable. the law only
requires that the US shall allow tax credit in an
amount equivalent to 20 % percentage points. Net Income
the court interpreted the US Tax Code & ruled tax base
that the US allow such tax credit.
A requirement relating to administrative Foreign
implementation is not property imposed as a
condition for the applicability, as a matter of Sources w/o sources w/in
law, of a particular rate. Nor an interpretation
of a tax statute that produces a revenue flow
resident non-
for the gov’t is not, for that reason alone, nec. resident
the correct reading of the statute.
net income gross
Com. v. Procter & Gamble 160 S 560 income

Facts: P&G- Phil. declared dividends in favor

of P&G USA, w/c was subjected to the 35% tax
in 1975. In 1977, P%G Phil. sought a refund
of 20% invoking the tax sparing credit
provision under Sec. 24(b) of NIRC.
APP 88
INCOME TAX REVIEWER
(2) A citizen of the Philippines who leaves the Philippines
during the taxable year to reside abroad, either as an
c. Branch & Subsidiary of a Foreign immigrant or for employment on a permanent basis.
Corporation for income tax (3) A citizen of the Philippines who works and derives
purposes income from abroad and whose employment thereat
requires him to be physically present abroad most of
the time during the taxable year.
Marubeni v. Commissioner (4) A citizen who has been previously considered as
Facts: Marubeni is a foreign corp. organized nonresident citizen and who arrives in the Philippines
at any time during the taxable year to reside
under the laws of Japan. It invested in a permanently in the Philippines shall likewise be
construction business in the Phil’s. in AG&P. treated as a nonresident citizen for the taxable year
AG&P remitted the profits to Marubeni in which he arrives in the Philippines with respect to
w/holding the 15% profit remittance tax. The his income derived from sources abroad until the
date of his arrival in the Philippines.
CIR ruled that the profit remitted to Marubeni
shld. not be subject to the 15% profit (5) The taxpayer shall submit proof to the Commissioner
to show his intention of leaving the Philippines to
remittance tax bec. only profits remitted reside permanently abroad or to return to and reside
abroad to its head office w/c are effectively in the Philippines as the case may be for purpose of
connected w/ its trade or business in the Phil’s. this Section.
are subj. to the tax. Marubeni is now claiming
a refund of the 15% tax paid. Sec. 23 (B). A nonresident citizen is taxable only on
income derived from sources within the Philippines;
Held: Marubeni is not liable to pay the 15%
profit remittance tax bec. the profits remitted
Revenue Reg. 1-79. Regulations Governing the
to it were not income effectively connected w/ taxation of non-resident citizens
its business in Japan. ( Note: MC was liable to Sec. 2. Who are considered as non resident
pay other kind of tax, as it derived income fr. citizens. The term “non-resident citizen”-
source w/in the Phil’s. but not a profit  means one who establishes to the satisfaction of the
remittance tax). CIR the fact of his physical presence abroad w/ the
definite intention to reside therein &
 shall include any Filipino who leaves the country
C. INDIVIDUAL TAXPAYERS during the taxable year as :

SEC. 23. General Principles of Income Taxation in

the Philippines. - Except when otherwise provided in
this Code: 1. Immigrant one who leaves the Phils. to
(A) A citizen of the Philippines residing therein is taxable reside abroad as an
on all income derived from sources within and without immigrant for w/c a foreign
the Philippines; visa as such has been
secured.
(B) A nonresident citizen is taxable only on income
derived from sources within the Philippines; 2. one who leaves the Phils. to
Permanent reside abroad for
(C) An individual citizen of the Philippines who is working
EE employment on a more or
and deriving income from abroad as an overseas
less permanent basis.
contract worker is taxable only on income derived from
sources within the Philippines: Provided, That a 2. Contract one who leaves the Phils. on
seaman who is a citizen of the Philippines and who worker account of a contract of
receives compensation for services rendered abroad as employment w/c is renewed
a member of the complement of a vessel engaged from time to time w/in or
exclusively in international trade shall be treated as an during the taxable year
overseas contract worker; under such circumstances as
to require him to be
(D) An alien individual, whether a resident or not of the
physically present abroad
Philippines, is taxable only on income derived from
most of the time during the
sources within the Philippines;
taxable year
(physically present abroad
1. Citizens most of the time during the
taxable year = outside of the
a. Resident (NET from SOURCES Phils. for not less than 180
WITHIN AND WITHOUT) days during such taxable
year
b. Non-resident citizen (NET
from sources WITHIN ONLY) Sec. 3. Proof of Intention
Sec. 4. Manner of filing returns. xxx
Sec. 22. (E) The term 'nonresident citizen' means: (1) What to include as gross income. The gross income
(1) A citizen of the Philippines who establishes to the of a non-resident citizen derived from sources
satisfaction of the Commissioner the fact of his outside of the Phils. includes all income enumerated
physical presence abroad with a definite intention to under Sec. 29 of NIRC, WON such income is
reside therein. exempted from the income tax in the foreign
country where it was derived.

APP 89
INCOME TAX REVIEWER
2.) Rate of tax. Sec. 22. (F) The term 'resident alien' means an
individual whose residence is within the Philippines
and who is not a citizen thereof.

Y $6000 1%
b. Non-resident alien
$6000 Y  $60 plus 2% if
$20,000 excess over $6000
Y$20,000 $340 plus 3% of Sec. 22. (G) The term 'nonresident alien' means an
individual whose residence is not within the Philippines
excess over $20,000 and who is not a citizen thereof.

(3) Computation of gross income

Gross income less:
i. Engaged in trade or business
 Personal exemptions ($2000 if single or married but
(NET from SOURCES WITHIN
legally separated) ONLY)
 total amt. of national income tax actually paid to the
national gov’t of the foreign country of his residence.
 180 day test
= GROSS ADJUSTED INCOME

Sec. 25. (B) Nonresident Alien Individual Not

Conwi vs. IAC Engaged in Trade or Business Within the
Philippines. - There shall be levied, collected and paid
Facts: Petitioners are employees of for each taxable year upon the entire income received
Procter & Gamble-Phils. & were assigned to from all sources within the Philippines by every
other subsidiaries of P & G in other countries. nonresident alien individual not engaged in trade or
business within the Philippines as interest, cash and/or
The question is : what exchange rate should be property dividends, rents, salaries, wages, premiums,
used. Cir: prevailing free market exchange annuities, compensation, remuneration, emoluments,
rate. Pets: par value of the peso as per CB or other fixed or determinable annual or periodic or
circular: casual gains, profits, and income, and capital gains, a
tax equal to twenty-five percent (25%) of such income.
Held: For the proper enforcement of the NIRC, Capital gains realized by a nonresident alien individual
the Sec. of Finance is empowered to not engaged in trade or business in the Philippines
promulgate all needful rules & regulations to from the sale of shares of stock in any domestic
corporation and real property shall be subject to the
effectively enforce its provisions. Pursuant to income tax prescribed under Subsections (C) and (D)
this authority, RMC 7-71 & 41-71 were issued of Section 24.
to provide a uniform rate of exchange for $ &
Php for internal tax revenue purposes.
ii. not engaged in trade or
Pets. argue that since there were no business (GROSS from
remittances & acceptances of their salaries & SOURCES WITHIN ONLY)
wages in $ into Phils. they are exempt from
the coverage of such circulars. Pets. forge
that they are citizens of the Phils. & their Sec. 25. (B) supra.
income, w/in or w/o & in this case wholly w/o,
are subject to income tax. iii. Special Aliens
 employed by:
c. Filipino overseas workers (NET 1. regional HQ’s or area HQ’s of multinational
from SOURCES WITHIN ONLY) corps.
Sec. 23. (C) An individual citizen of the Philippines who 2. off-shore banking units
is working and deriving income from abroad as an 3. petroleum service contractors.
overseas contract worker is taxable only on income
derived from sources within the Philippines: Provided,
That a seaman who is a citizen of the Philippines and D. Fiduciary Taxpayers: Estates & Trusts
who receives compensation for services rendered
abroad as a member of the complement of a vessel 1. Definition of taxable estate & trust/
engaged exclusively in international trade shall be exception
treated as an overseas contract worker;

Sec. 22. (J) The term 'fiduciary' means a guardian,

trustee, executor, administrator, receiver, conservator
2. Aliens (not Filipino citizens)
or any person acting in any fiduciary capacity for any
a. Resident alien (NET from person.
SOURCES WITHIN ONLY)
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title
upon individuals shall apply to the income of estates or
of any kind of property held in trust, including:

APP 90
INCOME TAX REVIEWER
(1) Income accumulated in trust for the benefit of unborn distributed to the beneficiary or accumulated, there
or unascertained person or persons with contingent shall be allowed as an additional deduction in
interests, and income accumulated or held for future computing the taxable income of the estate or trust
distribution under the terms of the will or trust; the amount of the income of the estate or trust for its
(2) Income which is to be distributed currently by the taxable year, which is properly paid or credited during
fiduciary to the beneficiaries, and income collected by such year to any legatee, heir or beneficiary but the
a guardian of an infant which is to be held or amount so allowed as a deduction shall be included in
distributed as the court may direct; computing the taxable income of the legatee, heir or
beneficiary.
(3) Income received by estates of deceased persons
during the period of administration or settlement of (C) In the case of a trust administered in a foreign
the estate; and country, the deductions mentioned in Subsections (A)
and (B) of this Section shall not be allowed: Provided,
(4) Income which, in the discretion of the fiduciary, may That the amount of any income included in the return
be either distributed to the beneficiaries or
of said trust shall not be included in computing the
accumulated. income of the beneficiaries.

(B) Exception. - The tax imposed by this Title shall not

apply to employee's trust which forms part of a 2. Taxable income of fiduciary
pension, stock bonus or profit-sharing plan of an taxpayers
employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by
such employer, or employees, or both for the purpose
of distributing to such employees the earnings and SEC. 61. Taxable Income. - supra.
principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust
instrument it is impossible, at any time prior to the 3. Trust exempt from income tax
satisfaction of all liabilities with respect to employees SEC. 60. Imposition of Tax. -
under the trust, for any part of the corpus or income to
be (within the taxable year or thereafter) used for, or (B) Exception. - The tax imposed by this Title shall not
diverted to, purposes other than for the exclusive apply to employee's trust which forms part of a
benefit of his employees: Provided, That any amount pension, stock bonus or profit-sharing plan of an
actually distributed to any employee or distributee employer for the benefit of some or all of his
shall be taxable to him in the year in which so employees (1) if contributions are made to the trust by
distributed to the extent that it exceeds the amount such employer, or employees, or both for the purpose
contributed by such employee or distributee. of distributing to such employees the earnings and
principal of the fund accumulated by the trust in
(C) Computation and Payment. - accordance with such plan, and (2) if under the trust
(1) In General. - The tax shall be computed upon the instrument it is impossible, at any time prior to the
taxable income of the estate or trust and shall be paid satisfaction of all liabilities with respect to employees
by the fiduciary, except as provided in Section 63 under the trust, for any part of the corpus or income to
(relating to revocable trusts) and Section 64 (relating be (within the taxable year or thereafter) used for, or
to income for the benefit of the grantor). diverted to, purposes other than for the exclusive
(2) Consolidation of Income of Two or More Trusts. - benefit of his employees: Provided, That any amount
Where, in the case of two or more trusts, the creator of actually distributed to any employee or distributee
the trust in each instance is the same person, and the shall be taxable to him in the year in which so
beneficiary in each instance is the same, the taxable distributed to the extent that it exceeds the amount
income of all the trusts shall be consolidated and the contributed by such employee or distributee.
tax provided in this Section computed on such
consolidated income, and such proportion of said tax
shall be assessed and collected from each trustee Commissioner v. CA
which the taxable income of the trust administered by
him bears to the consolidated income of the several Facts: Castaneda retired fr. the gov’t service
trusts. in 1982. He received benefits including
terminal benefits pay fr. w/c the CIR w/held
SEC. 61. Taxable Income. - The taxable income of the income tax. Castaneda filed a claim for refund
estate or trust shall be computed in the same manner contending that the cash equivalent of his
and on the same basis as in the case of an individual,
except that:
terminal leave is exempt fr. tax.
(A) There shall be allowed as a deduction in computing Held: The terminal leave pay received by a
the taxable income of the estate or trust the amount of gov’t official or employee is not subj. to
the income of the estate or trust for the taxable year w/holding income tax. In the exercise of
which is to be distributed currently by the fiduciary to
the beneficiaries, and the amount of the income sound policy. the gov’t encourages unused
collected by a guardian of an infant which is to be held leaves to be accumulated. The gov’t
or distributed as the court may direct, but the amount recognizes that for most public servants,
so allowed as a deduction shall be included in retirement pay is always less than generous. It
computing the taxable income of the beneficiaries,
whether distributed to them or not. Any amount
is not a part of the gross salary or income of
allowed as a deduction under this Subsection shall not the gov’t official but a retirement benefit not
be allowed as a deduction under Subsection (B) of this subj. to income tax.
Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of
deceased persons during the period of administration
or settlement of the estate, and in the case of income
which, in the discretion of the fiduciary, may be either 4. Deductions allowed

APP 91
INCOME TAX REVIEWER
limited to sales outlets, places of production,
warehouses or storage places.
SEC. 62. Exemption Allowed to Estates and Trusts.
- For the purpose of the tax provided for in this Title,
there shall be allowed an exemption of Twenty Sec. 236 (J). Supplying of TIN. Any person required
thousand pesos (P20,000) from the income of the under the authority of this Code to make, render or file
estate or trust. a return, statement or other document shall be
supplied with or assigned a TIN which shall indicate in
such return, statement or doc filed w/ the BIR for his
proper identification for tax purposes, and w/c shall
5. Revocable trust indicate in certain docs, such as, but not ltd. to, the ff.:
SEC. 63. Revocable trusts. - Where at any time the 1. sugar quedans, refined sugar release order or
power to revest in the grantor title to any part of the similar instruments;
corpus of the trust is vested (1) in the grantor either
2. domestic bills of lading;
alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such 3. docs to be registered w/ the Register of Deeds or
part of the corpus or the income therefrom, or (2) in Assessor’s office;
any person not having a substantial adverse interest in 4. registration cert. of transportation equipment by
the disposition of such part of the corpus or the income land, sea or air;
therefrom, the income of such part of the trust shall be 5. docs to be registered w/ the SEC;
included in computing the taxable income of the
6. bldg. construction permits;
grantor.
7. application for loan w/ banks, financial institutions,
or other financial intermediaries;
6. Income for benefit of grantor 8. application for mayor’s permit;
9. application for business license w/ the DTI; &
10. such other docs w/c may hereafter be required
SEC. 64. Income for Benefit of Grantor.- under rules and regs to be promulgated by the Sec.
(A) Where any part of the income of a trust (1) is, or in of Finance, upon recommendation of the
the discretion of the grantor or of any person not Commissioner.
having a substantial adverse interest in the disposition In cases where a registered taxpayer dies, the
of such part of the income may be held or accumulated administrator or executor shall register the estate of
for future distribution to the grantor, or (2) may, or in the decedent in accordance w/ subsection A hereof & a
the discretion of the grantor or of any person not new TIN shall be supplied in accordance w/ the
having a substantial adverse interest in the disposition provision of this Sec.
of such part of the income, be distributed to the In the case of a nonresident decedent, the exec or admin
grantor, or (3) is, or in the discretion of the grantor or of the estate shall register the estate w/ the RDO
of any person not having a substantial adverse interest where he is registered; Provided, however, That in case
in the disposition of such part of the income may be such exec or admin is not registered, registration of the
applied to the payment of premiums upon policies of estate shall be made w/ … & the TIN supplied by the
insurance on the life of the grantor, such part of the RDO having jurisdiction over his legal residence.
income of the trust shall be included in computing the
taxable income of the grantor. Only one TIN shall be assigned to a taxpayer. Any person
who shall secure more than one TIN shall be criminally
(B) As used in this Section, the term 'in the discretion of liable x x x.
the grantor' means in the discretion of the grantor,
either alone or in conjunction with any person not
having a substantial adverse interest in the disposition Rev. Memo. Circular 63-91. Issuance of the new
of the part of the income in question. TIN to taxpayers and its use on documents and
receipts.

Use of new TIN. Only persons required to make,

render, or file a return, statement or document w/ the
E. REGISTRATION and TAX IDENTIFICATION BIR shall be supplied w/ or assigned a TIN to be
NO. of taxpayers indicated on such documents. In addition to the
persons enumerated in RMO 23-91, Filipinos who are
immigrants to other countries may apply for the
Sec. 236 (A) Requirements. Every person subject to issuance of a TIN.
any internal revenue tax shall register once w/ the
appropriate Rev. Dist. Officer: The new TIN shall replace the existing
1. Within 10 days fr. date of employment, or  TAN
2. On or before the commencement of the business, or  VAT reg. numbers
3. Before payment of any tax due, or  non-VAT reg. numbers &
4. Upon filing of a return, statement or declaration as  w/holding tax agent identification numbers.
required in this Code.
Therefore, only the TIN shall be reflected on all
The registration shall contain the taxpayer’s name, style, documents, papers, &/or records that previously
place of residence, business, and such other required the indication/reflection of any of the
information as may be required by the commissioner in aforementioned numbers.
the form prescribed therefor.
A person maintaining the head office, branch or facility
shall register w/ the RDO having jurisdiction over the
head office, branch or facility. For purposes of this VII. EXEMPTION AND APPLICABLE TAX
Section, the term facility may include but not be RATES.

APP 92
INCOME TAX REVIEWER
improvements actually, directly & exclusively used for
religious, charitable or educational purposes shall be
A. Corporations exempt form taxation.
1. TAX-EXEMPT CORPS. Sec. 4 (3,4) Art. XIV. All revenues & assets of non-stock
non-profit educ. institutions used A,D,E for educ.
purposes shall be exempt fr. taxes & duties. X X X
SEC. 30. Exemptions from Tax on Corporations. - Proprietary educ. institutions including those
The following organizations shall not be taxed under cooperatively owned may be entitled to such
this Title in respect to income received by them as exemptions subject to the limitations provided by law…
such: Subject to conditions prescribed by law, all grants,
(A) Labor, agricultural or horticultural organization not endowments, donations or contributions used A,D, E,
organized principally for profit; for educ, purposes shall be exempt fr. tax.
(B) Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without BIR RULINGS
capital stock organized and operated for mutual
purposes and without profit;
(173 – 88) Non-stock non-profit educ. institutions, they
(C) A beneficiary society, order or association, operating are exempted fr. internal revenue taxes & customs
fort he exclusive benefit of the members such as a duties, in appropriate cases imposed by natl. govt. on
fraternal organization operating under the lodge all revenues & assets used A,D,E, for educational
system, or mutual aid association or a nonstock purposes.
corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits Exempt fr. tax – tuition, matriculation & other similar
exclusively to the members of such society, order, or fees; income fr. bank deposit interests & money market
association, or nonstock corporation or their placement incident to school operations; canteen
dependents; owned & operated by the school as ancillary activity &
located w/in the school premises; value-added tax on
(D) Cemetery company owned and operated exclusively sale of books, school supplies, uniform, & other school
for the benefit of its members; related items & sale of misc. school items like car
(E) Nonstock corporation or association organized and stickers.
operated exclusively for religious, charitable, scientific, Not exempt fr. tax – income fr. trade, business or other
athletic, or cultural purposes, or for the rehabilitation activity not related to the exercise of its educational
of veterans, no part of its net income or asset shall purpose or function (i.e. school canteen operated by a
belong to or inures to the benefit of any member, concessionaire)
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 (171 – 88 ) A technical/vocational school accepting jobs
income of which inures to the benefit of any private fr. the public in order to fully utilize its machines,
stock-holder, or individual; income derived is not exempt fr. tax.
(G) Civic league or organization not organized for profit
but operated exclusively for the promotion of social (105 – 91) The National Tobacco Admin., an attached
welfare; agency of the Dept of Agriculture is not exempted fr.
(H) A nonstock and nonprofit educational institution; paying income tax on gains to be derived fr. the sale of
its properties w/c are no longer needed for its
(I) Government educational institution; operations. (It is not among those specifically
(J) Farmers' or other mutual typhoon or fire insurance exempted by the Tax Code, Sec. 26) As such it is liable
company, mutual ditch or irrigation company, mutual to the 5% creditable w/holding tax based on gross
or cooperative telephone company, or like organization selling price or total amount of consideration or its
of a purely local character, the income of which equivalent paid to the NTA as seller, gross selling price
consists solely of assessments, dues, and fees being, sale price on the document, the fair market
collected from members for the sole purpose of value, or zonal value w/cever is higher.
meeting its expenses; and
(K) Farmers', fruit growers', or like association organized (042 – 91) The amount of tax to be paid by a non-
and operated as a sales agent for the purpose of resident foreign corporation (non-stock foundation,
marketing the products of its members and turning duly organized under the laws of the State of Hawaii) ,
back to them the proceeds of sales, less the necessary not engaged in business in the Philippines as to its
selling expenses on the basis of the quantity of income derived fr. Phil. currency bank deposit = shall
produce finished by them; be 35% of gross income received during the taxable
year fr. all sources w/in the Philippines such as interest,
Notwithstanding the provisions in the preceding dividends, rents, royalties etc. except capital gains.
paragraphs, the income of whatever kind and However, under the RP-US Tax Treaty, Art. 12; Interest
character of the foregoing organizations from any of derived by a resident of the Contracting States fr.
their properties, real or personal, or from any of their sources w/in the other Contracting State shall not be
activities conducted for profit regardless of the taxed by the other CS at a rate in excess of 15 % of the
disposition made of such income, shall be subject to gross amount of such interest. Thus, said income fr. its
tax imposed under this Code. Phil, currency bank deposit is to be taxed at 15% of
gross income.

(011 – 91) Municipal corporation is not exempt form tax

REVIEW: EXEMPTIONS UNDER THE CONSTITUTION
on interest income fr. time & savings deposits. PD
1931, (6/11/84), has w/drawn all the tax & duty
Sec. 28 (3) Art. VI . Charitable institutions, churches, & privileges, including preferential tax treatment of all
parsonages or convents appurtenant thereto, units of government; the Natl. govt., all its agencies &
mosques, non-profit cemeteries & all lands, buildings & political subdivisions as well as GOCCs. Also EO 93

APP 93
INCOME TAX REVIEWER
(3/10/87) w/drew all tax & duty incentives granted to (3) Relief from the Minimum Corporate Income Tax Under
govt., & private entities subject to certain exceptions. Certain Conditions. - The Secretary of Finance is
With tax exemption laws strictly construed, the burden hereby authorized to suspend the imposition of the
is on the claimant to prove he is w/in the terms of the minimum corporate income tax on any corporation
statute. In the absence of a clear grant of exemption, which suffers losses on account of prolonged labor
the Mun. is subject to 20% final w/holding tax on its dispute, or because of force majeure, or because of
interest income on bank deposits. legitimate business reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Hospital de San Juan de Dios v. Pasay City Commissioner, the necessary rules and regulation that
shall define the terms and conditions under which he
Facts: Pet’r paid under protest electrical & may suspend the imposition of the minimum corporate
inspection fees allegedly due the City by virtue income tax in a meritorious case.
of an Ordinance that was passed. The hospital (4) Gross Income Defined. - For purposes of applying the
claimed that as a charitable institution, it was minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall
exempt fr. the payment of the inspection fees mean gross sales less sales returns, discounts and
provided in the ordinances. But the Mayor allowances and cost of goods sold. "Cost of goods sold'
refused to issue a building permit if the said shall include all business expenses directly incurred to
fees were not paid. produce the merchandise to bring them to their
present location and use.
Held: The lower court erred in not considering For a trading or merchandising concern, 'cost of goods
the hospital as a charitable institution & thus sold' shall include the invoice cost of the goods sold,
exempt fr. the payment of the fees under Sec. plus import duties, freight in transporting the goods to
5 of the said ordinance. The articles of the place where the goods are actually sold including
insurance while the goods are in transit.
incorporation of the hospital show that it has
For a manufacturing concern, cost of 'goods
no capital stock & that no part of the net
manufactured and sold' shall include all costs of
income inures to the benefit of any individual. production of finished goods, such as raw materials
A ruling by the Workmen’s Compensation used, direct labor and manufacturing overhead, freight
Commissioner said it is a charitable institution cost, insurance premiums and other costs incurred to
exempt fr. the scope of the Act. Also, the bring the raw materials to the factory or warehouse.
hospital cashier attested that it maintains 2 In the case of taxpayers engaged in the sale of service,
'gross income' means gross receipts less sales returns,
free wards at 60 beds each & 6 free beds at allowances, discounts and cost of services. 'Cost of
the pediatric ward. Thus there is sufficient services' shall mean all direct costs and expenses
evidence that the hospital doles out charity & necessarily incurred to provide the services required
should therefore be exempt. by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and
Note: The fact that the hospital is charging specialists directly rendering the service and (B) cost
fees for paying beds does not make it lose its of facilities directly utilized in providing the service
character as a charitable institution if the same such as depreciation or rental of equipment used and
cost of supplies: Provided, however, That in the case of
were used to partly finance the expenses of banks, 'cost of services' shall include interest expense.
the free wards maintained by the hospital. The
mere charging of medical & hospital fees fr. SEC. 28. Rates of Income Tax on Foreign
those who could afford to pay does not make Corporations. -
an institution one established for profit or gain. (A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this
1. Minimum Corporate Income Tax Code, a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in
On Domestic & Resident Foreign trade or business within the Philippines, shall be
Corps. (MCIT) 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
Sec. 27. (E) Minimum Corporate Income Tax on Philippines: provided, That effective January 1, 1998,
Domestic Corporations. - the rate of income tax shall be thirty-four percent
(1) Imposition of Tax. - A minimum corporate income tax (34%); effective January 1, 1999, the rate shall be
of two percent (2%0 of the gross income as of the end thirty-three percent (33%), and effective January 1,
of the taxable year, as defined herein, is hereby 2000 and thereafter, the rate shall be thirty-two
imposed on a corporation taxable under this Title, percent (32%).
beginning on the fourth taxable year immediately In the case of corporations adopting the fiscal-year
following the year in which such corporation accounting period, the taxable income shall be
commenced its business operations, when the computed without regard to the specific date when
minimum income tax is greater than the tax computed sales, purchases and other transactions occur. Their
under Subsection (A) of this Section for the taxable income and expenses for the fiscal year shall be
year. deemed to have been earned and spent equally for
(2) Carry Froward of Excess Minimum Tax. - Any excess of each month of the period.
the minimum corporate income tax over the normal The reduced corporate income tax rates shall be applied
income tax as computed under Subsection (A) of this on the amount computed by multiplying the number of
Section shall be carried forward and credited against months covered by the new rates within the fiscal year
the normal income tax for the three (3) immediately by the taxable income of the corporation for the
succeeding taxable years. period, divided by twelve.

APP 94
INCOME TAX REVIEWER
Provided, however, That a resident foreign corporation (7) Tax on Certain Incomes Received by a Resident
shall be granted the option to be taxed at fifteen Foreign Corporation. -
percent (15%) on gross income under the same (a) Interest from Deposits and Yield or any other
conditions, as provided in Section 27 (A). Monetary Benefit from Deposit Substitutes, Trust Funds
(2) Minimum Corporate Income Tax on Resident Foreign and Similar Arrangements and Royalties. - Interest
Corporations. - A minimum corporate income tax of from any currency bank deposit and yield or any other
two percent (2%) of gross income, as prescribed under monetary benefit from deposit substitutes and from
Section 27 (E) of this Code, shall be imposed, under trust funds and similar arrangements and royalties
the same conditions, on a resident foreign corporation derived from sources within the Philippines shall be
taxable under paragraph (1) of this Subsection. subject to a final income tax at the rate of twenty
(3) International Carrier. - An international carrier doing percent (20%) of such interest: Provided, however,
business in the Philippines shall pay a tax of two and That interest income derived by a resident foreign
one-half percent (2 1/2%) on its 'Gross Philippine corporation from a depository bank under the
Billings' as defined hereunder: expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and
(a) International Air Carrier. - 'Gross Philippine Billings'
one-half percent (7 1/2%) of such interest income.
refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail (b) Income Derived under the Expanded Foreign
originating from the Philippines in a continuous and Currency Deposit System. - Income derived by a
uninterrupted flight, irrespective of the place of sale or depository bank under the expanded foreign currency
issue and the place of payment of the ticket or passage deposit system from foreign currency transactions with
document: Provided, That tickets revalidated, local commercial banks including branches of foreign
exchanged and/or indorsed to another international banks that may be authorized by the Bangko Sentral
airline form part of the Gross Philippine Billings if the ng Pilipinas (BSP) to transact business with foreign
passenger boards a plane in a port or point in the currency deposit system units, including interest
Philippines: Provided, further, That for a flight which income from foreign currency loans granted by such
originates from the Philippines, but transshipment of depository banks under said expanded foreign
passenger takes place at any port outside the currency deposit system to residents, shall be subject
Philippines on another airline, only the aliquot portion to a final income tax at the rate of ten percent (10%) of
of the cost of the ticket corresponding to the leg flown such income.
from the Philippines to the point of transshipment shall Any income of nonresidents, whether individuals or
form part of Gross Philippine Billings. corporations, from transactions with depository banks
(b) International Shipping. - 'Gross Philippine Billings' under the expanded system shall be exempt from
means gross revenue whether for passenger, cargo or income tax.
mail originating from the Philippines up to final (c) Capital Gains from Sale of Shares of Stock Not Traded
destination, regardless of the place of sale or in the Stock Exchange. - A final tax at the rates
payments of the passage or freight documents. prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the
(4) Offshore Banking Units. - The provisions of any law to sale, barter, exchange or other disposition of shares of
the contrary notwithstanding, income derived by stock in a domestic corporation except shares sold or
offshore banking units authorized by the Bangko disposed of through the stock exchange:
Sentral ng Pilipinas (BSP) to transact business with Not over P100,000………………………… 5%
offshore banking units, including any interest income On any amount in excess of P100,000……. 10%
derived from foreign currency loans granted to
(d) Intercorporate Dividends. - Dividends received by a
residents, shall be subject to a final income tax at the
resident foreign corporation from a domestic
rate of ten percent (10%) of such income.
corporation liable to tax under this Code shall not be
Any income of nonresidents, whether individuals or subject to tax under this Title.
corporations, from transactions with said offshore
banking units shall be exempt from income tax.
REVENUE REGULATION 9-98.
(5) Tax on Branch Profits Remittances. - Any profit
remitted by a branch to its head office shall be subject
to a tax of fifteen (15%) which shall be based on the
total profits applied or earmarked for remittance a. When imposed
without any deduction for the tax component thereof
(except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be Sec. 2.27 (E) (1) RR 9-98
collected and paid in the same manner as provided in
Sections 57 and 58 of this Code: provided, that
interests, dividends, rents, royalties, including Conditions:
remuneration for technical services, salaries, wages
premiums, annuities, emoluments or other fixed or  beginning on the 4th taxable year immediately
determinable annual, periodic or casual gains, profits, ff. the year in w/c such corp. commenced its
income and capital gains received by a foreign business operations,
corporation during each taxable year from all sources  when the min income tax is greater than the
within the Philippines shall not be treated as branch tax regular tax
profits unless the same are effectively connected with
the conduct of its trade or business in the Philippines.  Specific rules:
(6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies. Sec. 2.77 (E) (5) RR 9-98.
(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 b. tax rate – 2% of gross income as of
Section 22(EE) shall pay a tax of ten percent (10%) of the end of the taxable year
their taxable income.

APP 95
INCOME TAX REVIEWER
Sec. 27 (E). (4) Gross Income Defined. - For  Or because of legit business reverses.
purposes of applying the minimum corporate income
tax provided under Subsection (E) hereof, the term
'gross income' shall mean gross sales less sales e. Exceptions:
returns, discounts and allowances and cost of goods
sold. "Cost of goods sold' shall include all business
expenses directly incurred to produce the merchandise Sec. 2.27 (E) (8) RR 9-98
to bring them to their present location and use. Sec. 2.28 (A) (2) RR 9-98
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 3. IMPOSITION OF IMPROPERLY
the place where the goods are actually sold including
insurance while the goods are in transit.
ACCUMULATED EARNINGS TAX.
For a manufacturing concern, cost of 'goods a. Gen. rule
manufactured and sold' shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight SEC. 29. Imposition of Improperly Accumulated
cost, insurance premiums and other costs incurred to Earnings Tax. –
bring the raw materials to the factory or warehouse.
(A) In General. - In addition to other taxes imposed by
In the case of taxpayers engaged in the sale of service, this Title, there is hereby imposed for each taxable
'gross income' means gross receipts less sales returns, year on the improperly accumulated taxable income of
allowances, discounts and cost of services. 'Cost of each corporation described in Subsection B hereof, an
services' shall mean all direct costs and expenses improperly accumulated earnings tax equal to ten
necessarily incurred to provide the services required percent (10%) of the improperly accumulated taxable
by the customers and clients including (A) salaries and income.
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 b. Tax rate: 10% of the improperly
cost of supplies: Provided, however, That in the case of accumulated taxable income
banks, 'cost of services' shall include interest expense.
c. When applicable
“normal tax rate” defined in Sec. 2.27 (E) (1) RR 9-98
Sec. 29. (B) Tax on Corporations Subject to
Improperly Accumulated Earnings Tax. -
c. Carry forward of excess min tax – (1) In General. - The improperly accumulated earnings
for the 3 immediately succeeding tax imposed in the preceding Section shall apply to
taxable years. every corporation formed or availed for the purpose of
avoiding the income tax with respect to its
shareholders or the shareholders of any other
Sec. 27 E. (2) Carry Froward of Excess Minimum corporation, by permitting earnings and profits to
Tax. - Any excess of the minimum corporate income accumulate instead of being divided or distributed.
tax over the normal income tax as computed under (2) Exceptions. - The improperly accumulated earnings
Subsection (A) of this Section shall be carried forward tax as provided for under this Section shall not apply
and credited against the normal income tax for the to:
three (3) immediately succeeding taxable years.
(a) Publicly-held corporations;
See illustration in RR 9-98 (b) Banks and other nonbank financial intermediaries;
and
(c) Insurance companies.
d. Relief fr. the MCIT

(d) Exceptions.
Sec. 27 (E) (3) Relief from the Minimum Corporate
Income Tax Under Certain Conditions. - The
Secretary of Finance is hereby authorized to suspend  Publicly-held corps.,
the imposition of the minimum corporate income tax
 Banks and other nonbank financial
on any corporation which suffers losses on account of
prolonged labor dispute, or because of force majeure, intermediaries; and
or because of legitimate business reverses.  Insurance companies.
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 e. Evidence of purpose to avoid
may suspend the imposition of the minimum corporate income tax
income tax in a meritorious case.
f. Evidence to determine reasonable
needs of business
 When corp. suffers losses on account of g. Improperly accumulated taxable
prolonged labor dispute, income means taxable income
 Or because of force majeure, adjusted by:

APP 96
INCOME TAX REVIEWER
Mil. Bases Agreement of 1947 fr. income tax.
The BIR ruled that the Robertsons are not
entitled to the exemption as they are born in
 Income exempt fr. tax, the Phil’s.
 Income excluded fr. gross income;
 Income subject to final tax; & Held: The Robertsons are exempt fr. taxation
 The amount of net operating loss carry-over by virtue of the treaty. In order to avail
deducted; oneself of the tax exemption under the RP US
mil. Bases Agreement: he must be a national
And reduced by the sum of: of the US employed in connection w/ the
const., maintenance, operation or defense of
 Dividends actually or constructively paid; and the bases residing in the Phil’s. by reason of
 Income tax paid for the taxable year. such employment & the income derived is fr.
the US Gov’t. The obli. to fulfill in GF a treaty
F. INDIVIDUAL TAXPAYERS EXEMPT FROM engagement requires that the stipulations be
INCOME TAX observed in their spirit as well as accdg. to
their letter & that what has been promised be
performed w/o evasion or subterfuge.
1. Senior citizens
RA 7432.
Sec. 5 The gov’t shall provide the ff. assistance to those VIII. FILING OF TAX RETURN/
caring for & living w/ the senior citizen: PAYMENT OF TAX/
a) the senior citizen shall be treated as dependents COMPLIANCE REQUIREMENTS.
provided in the NIRC & as such, individual tax[payers
caring for them, be they relatives or not shall be
accorded the privileges granted by the Code insofar as
having dependents are concerned. A. INDIVIDUAL.
b) Ind. or non-governmental institutions establishing
homes, residential communities or retirement villages
solely for the senior citizens shall be accorded the ff.: Sec. 2.83 (4) RR 2-98
1. realty tax holiday for the first 5 years starting fr. the
first year of operation; SEC. 51. Individual Return. -
2. Priority in the bldg. &/ or maintenance of prov. or (A) Requirements. -
mun. roads leading to the aforesaid home, res. com. & (1) Except as provided in paragraph (2) of this
retirement village. Subsection, the following individuals are required to
file an income tax return:
Rev. Reg. 2-94 §7. A qualified senior citizen living w/ & (a) Every Filipino citizen residing in the Philippines;
taken care of by a benefactor whether related to him or (b) Every Filipino citizen residing outside the Philippines,
not, shall be treated as a personal exemption of on his income from sources within the Philippines;
P12,000 as head of the family.
(c) Every alien residing in the Philippines, on income
For the purpose of claiming personal exemption as head derived from sources within the Philippines; and
of the family w/ dependent senior citizen, the
(d) Every nonresident alien engaged in trade or business
identification card number issued by the OSCA (Office
or in the exercise of profession in the Philippines.
for Senior Citizens Affairs) shall be indicated in the
Income Tax Return to be filed by the benefactor who
will be granted the exclusive right to claim him as (2) The following individuals shall not be required to file
dependent for tax purposes. an income tax return;
Caring for a dependent senior citizen shall not, however, (a) An individual whose gross income does not exceed
entitle the benefactor to claim additional exemption his total personal and additional exemptions for
allowable to a married woman or head of a family w/ dependents under Section 35: Provided, That a citizen
qualified dependent children under Section 29 (l) 2. of the Philippines and any alien individual engaged in
business or practice of profession within the Philippine
In Short: Senior citizen as a qualified dependent to
shall file an income tax return, regardless of the
enable “single” benefactor to claim exemption as
amount of gross income;
head-of-the-family.
(b) An individual with respect to pure compensation
income, as defined in Section 32 (A)(1), derived from
2. Exemptions granted under sources within the Philippines, the income tax on which
has been correctly withheld under the provisions of
International Agreements and tax treaty Section 79 of this Code: Provided, That an individual
deriving compensation concurrently from two or more
employers at any time during the taxable year shall file
Reagan v. Com,: supra an income tax return: Provided, further, That an
individual whose compensation income derived from
sources within the Philippines exceeds Sixty thousand
Com. v. Robertson pesos (P60,000) shall also file an income tax return;
(c) An individual whose sole income has been subjected
Facts: The Robertsons are Phil. born US to final withholding tax pursuant to Section 57(A) of
citizens working in the US bases in Subic. this Code; and
They are claiming exemptions under the RP US

APP 97
INCOME TAX REVIEWER
(d) An individual who is exempt from income tax (G) Signature Presumed Correct. - The fact that an
pursuant to the provisions of this Code and other laws, individual's name is signed to a filed return shall be
general or special. prima facie evidence for all purposes that the return
was actually signed by him.
(3) The forgoing notwithstanding, any individual not
required to file an income tax return may nevertheless
be required to file an information return pursuant to 1. Individual taxpayers
rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
(4) The income tax return shall be filed in duplicate by SEC. 51. Individual Return. -
the following persons: (A) Requirements. -
(a) A resident citizen - on his income from all sources; (1) Except as provided in paragraph (2) of this
(b) A nonresident citizen - on his income derived from Subsection, the following individuals are required to
sources within the Philippines; file an income tax return:
(c) A resident alien - on his income derived from sources (a) Every Filipino citizen residing in the Philippines;
within the Philippines; and (b) Every Filipino citizen residing outside the Philippines,
(d) A nonresident alien engaged in trade or business in on his income from sources within the Philippines;
the Philippines - on his income derived from sources (c) Every alien residing in the Philippines, on income
within the Philippines. derived from sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business
(B) Where to File. - Except in cases where the or in the exercise of profession in the Philippines.
Commissioner otherwise permits, the return shall be
filed with an authorized agent bank, Revenue District (2) The following individuals shall not be required to file
Officer, Collection Agent or duly authorized Treasurer an income tax return;
of the city or municipality in which such person has his
legal residence or principal place of business in the (a) An individual whose gross income does not exceed
Philippines, or if there be no legal residence or place of his total personal and additional exemptions for
business in the Philippines, with the Office of the dependents under Section 35: Provided, That a citizen
Commissioner. of the Philippines and any alien individual engaged in
business or practice of profession within the Philippine
shall file an income tax return, regardless of the
(C) When to File. - amount of gross income;
(1) The return of any individual specified above shall be (b) An individual with respect to pure compensation
filed on or before the fifteenth (15th) day of April of income, as defined in Section 32 (A)(1), derived from
each year covering income for the preceding taxable sources within the Philippines, the income tax on which
year. has been correctly withheld under the provisions of
(2) Individuals subject to tax on capital gains; Section 79 of this Code: Provided, That an individual
(a) From the sale or exchange of shares of stock not deriving compensation concurrently from two or more
traded through a local stock exchange as prescribed employers at any time during the taxable year shall file
under Section 24(c) shall file a return within thirty (30) an income tax return: Provided, further, That an
days after each transaction and a final consolidated individual whose compensation income derived from
return on or before April 15 of each year covering all sources within the Philippines exceeds Sixty thousand
stock transactions of the preceding taxable year; and pesos (P60,000) shall also file an income tax return;
(b) From the sale or disposition of real property under (c) An individual whose sole income has been subjected
Section 24(D) shall file a return within thirty (30) days to final withholding tax pursuant to Section 57(A) of
following each sale or other disposition. this Code; and
(d) An individual who is exempt from income tax
(D) Husband and Wife. - Married individuals, whether pursuant to the provisions of this Code and other laws,
citizens, resident or nonresident aliens, who do not general or special.
derive income purely from compensation, shall file a
return for the taxable year to include the income of
both spouses, but where it is impracticable for the a. Required to file
spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall b. Exempt fr. filing return
be consolidated by the Bureau for purposes of
verification for the taxable year.
(E) Return of Parent to Include Income of Children. - The 2. Filing of return by husband & wife/
income of unmarried minors derived from properly consolidated but computing
received from a living parent shall be included in the
return of the parent, except (1) when the donor's tax
separately
has been paid on such property, or (2) when the
transfer of such property is exempt from donor's tax.
Sec. 51. (D) Husband and Wife. - Married individuals,
(F) Persons Under Disability. - If the taxpayer is unable
whether citizens, resident or nonresident aliens, who
to make his own return, the return may be made by his
do not derive income purely from compensation, shall
duly authorized agent or representative or by the
file a return for the taxable year to include the income
guardian or other person charged with the care of his
of both spouses, but where it is impracticable for the
person or property, the principal and his representative
spouses to file one return, each spouse may file a
or guardian assuming the responsibility of making the
separate return of income but the returns so filed shall
return and incurring penalties provided for erroneous,
be consolidated by the Bureau for purposes of
false or fraudulent returns.
verification for the taxable year.

APP 98
INCOME TAX REVIEWER
Sec. 2.83 (40 (C) RR 2-98 (C) Definition of Estimated Tax. - In the case of an
individual, the term 'estimated tax' means the
amount which the individual declared as income tax in
his final adjusted and annual income tax return for the
3. When and where to file regular/ preceding taxable year minus the sum of the credits
special return/ annual adjusted allowed under this Title against the said tax. If, during
return/ quarterly returns the current taxable year, the taxpayer reasonable
expects to pay a bigger income tax, he shall file an
Sec. 51. (B) Where to File. - Except in cases where
amended declaration during any interval of installment
the Commissioner otherwise permits, the return shall
payment dates.
be filed with an authorized agent bank, Revenue
District Officer, Collection Agent or duly authorized
Treasurer of the city or municipality in which such
person has his legal residence or principal place of Revenue Regulation 7-93 Re: Filing of quarterly
business in the Philippines, or if there be no legal return & payment of income tax quarterly by
residence or place of business in the Philippines, with self-employed taxpayers
the Office of the Commissioner.
Sec. 1 Self-employment income refers to income from
(C) When to File. - the practice of profession or conduct of trade or
(1) The return of any individual specified above shall be business carried on as a sole proprietor or by general
filed on or before the fifteenth (15th) day of April of partnership of which he is a member, taxable under
each year covering income for the preceding taxable SNITS.
year.
(2) Individuals subject to tax on capital gains; Sec. 2 A return of summary declaration of gross income
(a) From the sale or exchange of shares of stock not and deductions for each of the first 3 quarters of the
traded through a local stock exchange as prescribed calendar year, and a final or adjustment return shall be
under Section 24(c) shall file a return within thirty filed by the individual.
(30) days after each transaction and a final
consolidated return on or before April 15 of each year Sec. 3 This is lieu of the filing of a declaration of
covering all stock transactions of the preceding estimated income for the current taxable year and the
taxable year; and payment of estimated tax under Sec. 67 NIRC.
(b) From the sale or disposition of real property under
Section 24(D) shall file a return within thirty (30)
days following each sale or other disposition. The tax returns shall be filed on or before:

SEC. 74. Declaration of Income Tax for Individuals. First quarterly return : May 15 of the current year
- Second quarterly return : August 15 of the current
(A) In General. - Except as otherwise provided in this year
Section, every individual subject to income tax under Third quarterly return: Nov. 15 of the current year
Sections 24 and 25(A) of this Title, who is receiving Final return : April 15 of the following year
self-employment income, whether it constitutes the
sole source of his income or in combination with
salaries, wages and other fixed or determinable Sec. 5 To determine the taxable income to be reported
income, shall make and file a declaration of his in the quarterly returns, the gross income and
estimated income for the current taxable year on or deductions shall be computed on a cumulative basis.
before April 15 of the same taxable year. In general, The gross income to be reported are those subject to
self-employment income consists of the earnings tax under Sec. 21 (f) NIRC. The deduction shall be
derived by the individual from the practice of computed on a cumulative basis. The gross income to
profession or conduct of trade or business carried on be reported are those subject to tax under Sec. 21 (F)
by him as a sole proprietor or by a partnership of NIRC. The deductions that shall be allowed for the first
which he is a member. Nonresident Filipino citizens, 3 quarters shall not include the amount for the
with respect to income from without the Philippines, personal and additional exemptions of the individual. It
and nonresident aliens not engaged in trade or is only in the last quarter when these amounts for
business in the Philippines, are not required to render a exemptions can be claimed as deduction.
declaration of estimated income tax. The declaration
shall contain such pertinent information as the Income tax due every quarter shall be computed in
Secretary of Finance, upon recommendation of the accordance with Sec. 21 (f) based on the cumulative
Commissioner, may, by rules and regulations taxable income for the quarters. The amount if income
prescribe. An individual may make amendments of a tax to be paid shall be the balance of the income tax
declaration filed during the taxable year under the after deducting therefrom the total quarterly tax
rules and regulations prescribed by the Secretary of previously paid and any taxes withheld.
Finance, upon recommendation of the Commissioner.
(B) Return and Payment of Estimated Income Tax
by Individuals. - The amount of estimated income as Any excess of the total quarterly payment and taxes
defined in Subsection (C) with respect to which a withheld over the income tax computed in the final
declaration is required under Subsection (A) shall be return shall at the option of the taxpayer, either be (1)
paid in four (4) installments. The first installment shall issued a tax refund or tax credit certificate, or (2)
be paid at the time of the declaration and the second treated as a credit for the succeeding year.
and third shall be paid on August 15 and November 15
of the current year, respectively. The fourth installment Revenue Regulation 14-93 payment of taxes by
shall be paid on or before April 15 of the following checks & banks debit memo
calendar year when the final adjusted income tax
return is due to be filed.

APP 99
INCOME TAX REVIEWER
Sec. 2 “Payment of the internal revenue taxes return and incurring penalties provided for erroneous,
amounting to P10,000 or more shall be made in check false or fraudulent returns.
or bank debit memos. However, payment for capital
gains tax and creditable withholding tax by individuals
on sales or transfers of real property classified as 5. General professional partnership
capital assets as well as doc stamp tax shall be made
only by or through Manager’s or Cashier’s check or
BDM regardless of amount. Provided, that, in the case SEC. 55. Returns of General Professional
of check payment, the taxpayer shall issue a separate Partnerships. - Every general professional
check for each kind and nature of tax to be paid. If the partnership shall file, in duplicate, a return of its
payment is through a BDM, the kind and nature of the income, except income exempt under Section 32 (B) of
tax to be paid should also be separately identified by this Title, setting forth the items of gross income and
the bank and reflected in its reports. of deductions allowed by this Title, and the names,
Taxpayer Identification Numbers (TIN), addresses and
Only checks specially issued and drawn for credit to BIR shares of each of the partners.
and collectible within the local clearing facilities of the
CB, the Phil. Clearing House Corp., other established
clearing channels may be accepted as payment for 6. Fiduciary taxpayers: Estate and trust
national internal revenue taxes. However, the following
checks are not acceptable: 7. Payment of tax
SEC. 56. Payment and Assessment of Income Tax
a) Accommodation checks - issued/drawn by a party for Individuals and Corporation. -
other than the taxpayer except the following: (A) Payment of Tax. -
(1) In General. - The total amount of tax imposed by this
1. Manager’s or cashier’s checks. Title shall be paid by the person subject thereto at the
time the return is filed. In the case of tramp vessels,
2. Checks drawn against joint or multiple accounts for
the shipping agents and/or the husbanding agents, and
the payment purposes by anyone of them or either
in their absence, the captains thereof are required to
himself or in behalf of other members thereof.
file the return herein provided and pay the tax due
3. Checks issued by either of the spouses to pay the thereon before their departure. Upon failure of the said
tax liability of anyone of them. agents or captains to file the return and pay the tax,
4. Checks issued by a parent for the tax liability of the Bureau of Customs is hereby authorized to hold the
his/her child or vice-versa. vessel and prevent its departure until proof of payment
5. Checks drawn by a corp./partnership for the tax of the tax is presented or a sufficient bond is filed to
liability of its officers/partners only; and answer for the tax due.
6. Other special; arrangements duly approved by the (2) Installment of Payment. - When the tax due is in
BIR. excess of Two thousand pesos (P2,000), the taxpayer
other than a corporation may elect to pay the tax in
two (2) equal installments in which case, the first
b) Out of town checks - drawn on banks outside the installment shall be paid at the time the return is filed
local area coverage of the CB? PCHC clearing house and the second installment, on or before July 15
c) Stale checks - dated more than 6 months prior to following the close of the calendar year. If any
presentation installment is not paid on or before the date fixed for
its payment, the whole amount of the tax unpaid
d) postdated checks
becomes due and payable, together with the
e) unsigned checks; and delinquency penalties.
f) checks with unauthorized erasure/alternations (3) Payment of Capital Gains Tax. - The total amount of
tax imposed and prescribed under Section 24 (c),
Sec. 3 “…Checks, including manager’s or cashier’s 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be
checks, shall be made payable to the BIR and paid on the date the return prescribed therefor is filed
parenthetical reference to the payor and the kind of by the person liable thereto: Provided, That if the seller
tax to be paid.” submits proof of his intention to avail himself of the
benefit of exemption of capital gains under existing
special laws, no such payments shall be required :
Provided, further, That in case of failure to qualify for
4. Income of minor children and exemption under such special laws and implementing
disabled rules and regulations, the tax due on the gains realized
from the original transaction shall immediately become
due and payable, subject to the penalties prescribed
Sec. 51. (E) Return of Parent to Include Income of under applicable provisions of this Code: Provided,
Children. - The income of unmarried minors derived finally, That if the seller, having paid the tax, submits
from properly received from a living parent shall be such proof of intent within six (6) months from the
included in the return of the parent, except (1) when registration of the document transferring the real
the donor's tax has been paid on such property, or (2) property, he shall be entitled to a refund of such tax
when the transfer of such property is exempt from upon verification of his compliance with the
donor's tax. requirements for such exemption.
(F) Persons Under Disability. - If the taxpayer is unable to "In case the taxpayer elects and is qualified to report the
make his own return, the return may be made by his gain by installments under Section 49 of this Code, the
duly authorized agent or representative or by the tax due from each installment payment shall be paid
guardian or other person charged with the care of his within (30) days from the receipt of such payments.
person or property, the principal and his representative No registration of any document transferring real
or guardian assuming the responsibility of making the property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized

APP 100
INCOME TAX REVIEWER
representative has certified that such transfer has Commission of the Certificate of Dissolution or
been reported, and the tax herein imposed, if any, has Reorganization, as may be defined by rules and
been paid. regulations prescribed by the Secretary of Finance,
(B) Assessment and Payment of Deficiency Tax. - After upon recommendation of the Commissioner, secure a
the return is filed, the Commissioner shall examine it certificate of tax clearance from the Bureau of Internal
and assess the correct amount of the tax. The tax or Revenue which certificate shall be submitted to the
deficiency income tax so discovered shall be paid upon Securities and Exchange Commission.
notice and demand from the Commissioner. (D) Return on Capital Gains Realized from Sale of Shares
As used in this Chapter, in respect of a tax imposed by of Stock not Traded in the Local Stock Exchange. -
this Title, the term 'deficiency' means: Every corporation deriving capital gains from the sale
or exchange of shares of stock not traded through a
(1) The amount by which the tax imposed by this Title
local stock exchange as prescribed under Sections 24
exceeds the amount shown as the tax by the taxpayer (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c),
upon his return; but the amount so shown on the
shall file a return within thirty (30) days after each
return shall be increased by the amounts previously transactions and a final consolidated return of all
assessed (or collected without assessment) as a
transactions during the taxable year on or before the
deficiency, and decreased by the amount previously fifteenth (15th) day of the fourth (4th) month following
abated, credited, returned or otherwise repaid in
the close of the taxable year.
respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer
upon this return, or if no return is made by the SEC. 53. Extension of Time to File Returns. - The
taxpayer, then the amount by which the tax exceeds Commissioner may, in meritorious cases, grant a
the amounts previously assessed (or collected without reasonable extension of time for filing returns of
assessment) as a deficiency; but such amounts income (or final and adjustment returns in case of
previously assessed or collected without assessment corporations), subject to the provisions of Section 56 of
shall first be decreased by the amounts previously this Code.
abated, credited returned or otherwise repaid in SEC. 54. Returns of Receivers, Trustees in
respect of such tax. Bankruptcy or Assignees. - In cases wherein
receivers, trustees in bankruptcy or assignees are
operating the property or business of a corporation,
 Installment payment subject to the tax imposed by this Title, such receivers,
 special returns trustees or assignees shall make returns of net income
as and for such corporation, in the same manner and
form as such organization is hereinbefore required to
B. Corporation. make returns, and any tax due on the income as
returned by receivers, trustees or assignees shall be
assessed and collected in the same manner as if
1. Filing quarterly returns/ final assessed directly against the organizations of whose
adjusted return businesses or properties they have custody or control.

SEC. 75. - Declaration of Quarterly Corporate

SEC. 52. Corporation Returns. - Income Tax. - Every corporation shall file in duplicate
(A) Requirements. - Every corporation subject to the tax a quarterly summary declaration of its gross income
herein imposed, except foreign corporations not and deductions on a cumulative basis for the
engaged in trade or business in the Philippines, shall preceding quarter or quarters upon which the income
render, in duplicate, a true and accurate quarterly tax, as provided in Title II of this Code, shall be levied,
income tax return and final or adjustment return in collected and paid. The tax so computed shall be
accordance with the provisions of Chapter XII of this decreased by the amount of tax previously paid or
Title. The return shall be filed by the president, vice- assessed during the preceding quarters and shall be
president or other principal officer, and shall be sworn paid not later than sixty (60) days from the close of
to by such officer and by the treasurer or assistant each of the first three (3) quarters of the taxable year,
treasurer. whether calendar or fiscal year.
(B) Taxable Year of Corporation. - A corporation may
employ either calendar year or fiscal year as a basis SEC. 76. - Final Adjustment Return. - Every
for filing its annual income tax return: Provided, That corporation liable to tax under Section 27 shall file a
the corporation shall not change the accounting period final adjustment return covering the total taxable
employed without prior approval from the income for the preceding calendar or fiscal year. If the
Commissioner in accordance with the provisions of sum of the quarterly tax payments made during the
Section 47 of this Code. said taxable year is not equal to the total tax due on
(C) Return of Corporation Contemplating Dissolution or the entire taxable income of that year, the corporation
Reorganization. - Every corporation shall, within thirty shall either:
(30) days after the adoption by the corporation of a (A)Pay the balance of tax still due; or
resolution or plan for its dissolution, or for the (B)Carry-over the excess credit; or
liquidation of the whole or any part of its capital stock,
including a corporation which has been notified of (C)Be credited or refunded with the excess amount paid,
possible involuntary dissolution by the Securities and as the case may be.
Exchange Commission, or for its reorganization, render In case the corporation is entitled to a tax credit or
a correct return to the Commissioner, verified under refund of the excess estimated quarterly income taxes
oath, setting forth the terms of such resolution or plan paid, the excess amount shown on its final adjustment
and such other information as the Secretary of Finance, return may be carried over and credited against the
upon recommendation of the commissioner, shall, by estimated quarterly income tax liabilities for the
rules and regulations, prescribe. taxable quarters of the succeeding taxable years. Once
The dissolving or reorganizing corporation shall, prior to the option to carry-over and apply the excess quarterly
the issuance by the Securities and Exchange income tax against income tax due for the taxable
quarters of the succeeding taxable years has been

APP 101
INCOME TAX REVIEWER
made, such option shall be considered irrevocable for agent banks or Revenue District Officer or Collection
that taxable period and no application for cash refund Agent or duly authorized Treasurer of the city or
or issuance of a tax credit certificate shall be allowed municipality having jurisdiction over the location of the
therefor. principal office of the corporation filing the return or
place where its main books of accounts and other data
from which the return is prepared are kept.
SEC. 77. Place and Time of Filing and Payment of
Quarterly Corporate Income Tax. - (B)Time of Filing the Income Tax Return. - The corporate
quarterly declaration shall be filed within sixty (60)
(A)Place of Filing. -Except as the Commissioner other days following the close of each of the first three (3)
wise permits, the quarterly income tax declaration
quarters of the taxable year. The final adjustment
required in Section 75 and the final adjustment return return shall be filed on or before the fifteenth (15 th) day
required I Section 76 shall be filed with the authorized
of April, or on or before the fifteenth (15 th) day of the
agent banks or Revenue District Officer or Collection fourth (4th) month following the close of the fiscal year,
Agent or duly authorized Treasurer of the city or
as the case may be.
municipality having jurisdiction over the location of the
principal office of the corporation filing the return or (C)Time of Payment of the Income Tax. - The income tax
place where its main books of accounts and other data due on the corporate quarterly returns and the final
from which the return is prepared are kept. adjustment income tax returns computed in
accordance with Sections 75 and 76 shall be paid at
(B)Time of Filing the Income Tax Return. - The corporate the time the declaration or return is filed in a manner
quarterly declaration shall be filed within sixty (60)
prescribed by the Commissioner.
days following the close of each of the first three (3)
quarters of the taxable year. The final adjustment
return shall be filed on or before the fifteenth (15 th) day
of April, or on or before the fifteenth (15 th) day of the Com. v. TMX Sales
fourth (4th) month following the close of the fiscal year,
as the case may be. Facts: TMX filed its quarterly return in the
(C)Time of Payment of the Income Tax. - The income tax
first quarter of 1981 & paid the income tax due
due on the corporate quarterly returns and the final thereon. However, in its Annual Income Tax
adjustment income tax returns computed in filed for year ended Dec. 31, 1981, it declared
accordance with Sections 75 and 76 shall be paid at a net loss. TMX is now claiming a refund on
the time the declaration or return is filed in a manner
the tax it paid during the first quarter of 1981.
prescribed by the Commissioner.
The CIR denied the same on the ground that
the claim is now already barred considering
SEC. 47. Final or Adjustment Returns for a Period
of Less than Twelve (12) Months. that two years have already elapsed between
(A) Returns for Short Period Resulting from Change of
the time of payment, May, 15, 1981 & the
Accounting Period. - If a taxpayer, other than an filing of the claim, March 14, 1984.
individual, with the approval of the Commissioner,
Held: the two year prescriptive period
changes the basis of computing net income from fiscal
year to calendar year, a separate final or adjustment commenced fr. the date of filing the final
return shall be made for the period between the close annual return on Apr. 15, 1982, not fr. the filing
of the last fiscal year for which return was made and on May 15, 1981. The audit is to be
the following December 31. If the change is from conducted yearly, it is the final adjusted return
calendar year to fiscal year, a separate final or
adjustment return shall be made for the period where the figures of the gross receipts &
between the close of the last calendar year for which deductions have been audited & adjusted that
return was made and the date designated as the close is truly reflective of the results of the
of the fiscal year. If the change is from one fiscal year operations of a business enterprise. Thus, it is
to another fiscal year, a separate final or adjustment
return shall be made for the period between the close
only when the adjustment return covering the
of the former fiscal year and the date designated as whole year is filed that the taxpayer would
the close of the new fiscal year. know whether a tax is still due or refund can
(B) Income Computed on Basis of Short Period. - Where a be claimed based on the adjusted & audited
separate final or adjustment return is made under figures.
Subsection (A) on account of a change in the
accounting period, and in all other cases where a The filing of quarterly ITRs req. by Sec. 68 &
separate final or adjustment return is required or payment of quarterly income tax should be
permitted by rules and regulations prescribed by the considered mere installments of the annual tax
Secretary of Finance, upon recommendation of the
Commissioner, to be made for a fractional part of a
due. these payments w/c are computed based
year, then the income shall be computed on the basis on the cumulative figures of gross receipts &
of the period for which separate final or adjustment deductions in order to arrive at net taxable
return is made. income shld. be treated as advances on
portions of annual income tax due, to be
adjusted at the end of the fiscal year.
2. When and where to file

SEC. 77. Place and Time of Filing and Payment of ACCRA Investment v. CA
Quarterly Corporate Income Tax. - Facts: Petitioner ACCRA is a domestic
(A)Place of Filing. -Except as the Commissioner other Corporation engaged in bus. of real estate
wise permits, the quarterly income tax declaration
required in Section 75 and the final adjustment return
invest. & management consultancy. On Apr.
required I Section 76 shall be filed with the authorized 15, 1982, pet. filed w/ BIR annual corp. income

APP 102
INCOME TAX REVIEWER
tax return for cal. year ending Dec. 31, 1981 promulgate, upon the recommendation of the
( The end of fiscal year of the corp. ). The Commissioner, requiring the filing of income tax return
by certain income payees, the tax imposed or
corp. declared a net loss of 2,957,142.00 & prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)
declared all taxes w/held at source by (1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E),
w/holding agents in the total amount of 82, 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)
751.01. The w/holding agents remitted the (5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
w/held taxes to the BIR fr. Feb. to Dec. 1981. 28(B)(5)(c); 33; and 282 of this Code on specified
The corp. is now claiming a refund as it had no items of income shall be withheld by payor-corporation
tax liability against w/c to credit the amounts and/or person and paid in the same manner and
w/held ( the corp. declared a loss), as subject to the same conditions as provided in Section
58 of this Code.
overpaid income taxes. The CTA dismissed the
pet. on the ground that the claim for refund (B) Withholding of Creditable Tax at Source. - The
Secretary of Finance may, upon the recommendation of
had already prescribed . the Commissioner, require the withholding of a tax on
Held: Claims for tax refunds, accdg. to Sec. 8 the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-
of Rev. Reg. 13-78 shall be given in due course corporation/persons as provided for by law, at the rate
only when it is shown on the return that the of not less than one percent (1%) but not more than
income payment received was declared as part thirty-two percent (32%) thereof, which shall be
of the gross income & the fact of w/holding is credited against the income tax liability of the
taxpayer for the taxable year.
established by a copy of the statement.
Furthermore, the return contemplated under (C) Tax-free Covenant Bonds. In any case where bonds,
mortgages, deeds of trust or other similar obligations
the REV. Reg. is not the quarterly ret. filed by of domestic or resident foreign corporations, contain a
corp. but the final adjusted return filed after contract or provisions by which the obligor agrees to
the close of the fiscal year. Obviously, the pay any portion of the tax imposed in this Title upon
corp. cannot claim a tax refund UNLESS it files the obligee or to reimburse the obligee for any portion
of the tax or to pay the interest without deduction for
its return first so that it can be det. WON it is any tax which the obligor may be required or permitted
really entitled to the refund. Thus, the tow to pay thereon or to retain therefrom under any law of
year period should commence, at the latest, fr. the Philippines, or any state or country, the obligor
the time of filing the final adj., return, w/c in shall deduct bonds, mortgages, deeds of trust or other
obligations, whether the interest or other payments
CAB, on Apr. 15, 1981.
are payable annually or at shorter or longer periods,
and whether the bonds, securities or obligations had
been or will be issued or marketed, and the interest or
San Carlos Milling Co. v. Com. other payment thereon paid, within or without the
Philippines, if the interest or other payment is payable
Facts: SCM is a domestic corp. & paid its to a nonresident alien or to a citizen or resident of the
taxes for 1982. It an overpayment reflected as Philippines.
creditable income tax in its annual final adj.
return. In 1984, SCM informed the CIR of its SEC. 58. Returns and Payment of Taxes Withheld
intent to apply the total creditable amount at Source. -
against the 1984 tax dues consistent w/ Sec. (A) Quarterly Returns and Payments of Taxes Withheld. -
86 coupled w/ a comforting alternative request Taxes deducted and withheld under Section 57 by
withholding agents shall be covered by a return and
for a refund or tax credit. The CIR disallowed paid to, except in cases where the Commissioner
the automatic credit scheme & held that prior otherwise permits, an authorized Treasurer of the city
authority fr. the CIR is nec. before a taxpayer or municipality where the withholding agent has his
could avail of the provisions of Sec. 86 of the legal residence or principal place of business, or where
the withholding agent is a corporation, where the
Tax Code. principal office is located.
Held: The choice of a corporate taxpayer for The taxes deducted and withheld by the withholding
an automatic tax credit does not ipso facto agent shall be held as a special fund in trust for the
confer on it the right to immediately avail of government until paid to the collecting officers.
the same. prior approval by the CIR of the tax The return for final withholding tax shall be filed and the
payment made within twenty-five (25) days from the
credit is nec. An opportunity must be given to close of each calendar quarter, while the return for
the internal rev. branch of the gov’t to creditable withholding taxes shall be filed and the
investigate & confirm the veracity of the payment made not later than the last day of the month
claims of the taxpayer. following the close of the quarter during which
withholding was made: Provided, That the
Commissioner, with the approval of the Secretary of
Finance, may require these withholding agents to pay
C. Withholding of INCOME tax or deposit the taxes deducted or withheld at more
frequent intervals when necessary to protect the
interest of the government.
Rev. Reg. 2-98.
(B) Statement of Income Payments Made and Taxes
Withheld. - Every withholding agent required to deduct
SEC. 57. Withholding of Tax at Source. - and withhold taxes under Section 57 shall furnish each
(A) Withholding of Final Tax on Certain Incomes. - Subject recipient, in respect to his or its receipts during the
to rules and regulations the Secretary of Finance may calendar quarter or year, a written statement showing

APP 103
INCOME TAX REVIEWER
the income or other payments made by the upon gains, profits, and income not falling under the
withholding agent during such quarter or year, and the foregoing and not returned and paid by virtue of the
amount of the tax deducted and withheld therefrom, foregoing or as otherwise provided by law shall be
simultaneously upon payment at the request of the assessed by personal return under rules and
payee, but not late than the twentieth (20th) day regulations to be prescribed by the Secretary of
following the close of the quarter in the case of Finance, upon recommendation of the Commissioner.
corporate payee, or not later than March 1 of the The intent and purpose of the Title is that all gains,
following year in the case of individual payee for profits and income of a taxable class, as defined in this
creditable withholding taxes. For final withholding Title, shall be charged and assessed with the
taxes, the statement should be given to the payee on corresponding tax prescribed by this Title, and said tax
or before January 31 of the succeeding year. shall be paid by the owners of such gains, profits and
(C) Annual Information Return. - Every withholding agent income, or the proper person having the receipt,
required to deduct and withhold taxes under Section custody, control or disposal of the same. For purposes
57 shall submit to the Commissioner an annual of this Title, ownership of such gains, profits and
information return containing the list of payees and income or liability to pay the tax shall be determined
income payments, amount of taxes withheld from each as of the year for which a return is required to be
payee and such other pertinent information as may be rendered.
required by the Commissioner. In the case of final
withholding taxes, the return shall be filed on or before
January 31 of the succeeding year, and for creditable 1. Items of gross income/ payments
withholding taxes, not later than March 1 of the year placed under the w/holding
following the year for which the annual report is being system
submitted. This return, if made and filed in accordance
with the rules and regulations approved by the SEC. 57. Withholding of Tax at Source. - (A)
Secretary of Finance, upon recommendation of the Withholding of Final Tax on Certain Incomes. -
Commissioner, shall be sufficient compliance with the Subject to rules and regulations the Secretary of
requirements of Section 68 of this Title in respect to Finance may promulgate, upon the recommendation of
the income payments. the Commissioner, requiring the filing of income tax
The Commissioner may, by rules and regulations, grant return by certain income payees, the tax imposed or
to any withholding agent a reasonable extension of prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)
time to furnish and submit the return required in this (1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E),
Subsection. 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)
(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
(D) Income of Recipient. - Income upon which any 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
creditable tax is required to be withheld at source 28(B)(5)(c); 33; and 282 of this Code on specified
under Section 57 shall be included in the return of its items of income shall be withheld by payor-corporation
recipient but the excess of the amount of tax so and/or person and paid in the same manner and
withheld over the tax due on his return shall be subject to the same conditions as provided in Section
refunded to him subject to the provisions of Section 58 of this Code.
204; if the income tax collected at source is less than
the tax due on his return, the difference shall be paid
in accordance with the provisions of Section 56. Sec. 2.57.1 RR 2098
All taxes withheld pursuant to the provisions of this Code
and its implementing rules and regulations are hereby
considered trust funds and shall be maintained in a 2. Items exempt from w/holding tax
separate account and not commingled with any other
funds of the withholding agent. SEC. 57. Withholding of Tax at Source. -
(E) Registration with Register of Deeds. - No registration (A) Withholding of Final Tax on Certain Incomes. - Subject
of any document transferring real property shall be to rules and regulations the Secretary of Finance may
effected by the Register of Deeds unless the promulgate, upon the recommendation of the
Commissioner or his duly authorized representative Commissioner, requiring the filing of income tax return
has certified that such transfer has been reported, and by certain income payees, the tax imposed or
the capital gains or creditable withholding tax, if any, prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)
has been paid: Provided, however, That the information (1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E),
as may be required by rules and regulations to be 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)
prescribed by the Secretary of Finance, upon (5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
recommendation of the Commissioner, shall be 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
annotated by the Register of Deeds in the Transfer 28(B)(5)(c); 33; and 282 of this Code on specified
Certificate of Title or Condominium Certificate of Title: items of income shall be withheld by payor-corporation
Provided, further, That in cases of transfer of property and/or person and paid in the same manner and
to a corporation, pursuant to a merger, consolidation subject to the same conditions as provided in Section
or reorganization, and where the law allows deferred 58 of this Code.
recognition of income in accordance with Section 40, (B) Withholding of Creditable Tax at Source. - The
the information as may be required by rules and Secretary of Finance may, upon the recommendation of
regulations to be prescribed by the Secretary of the Commissioner, require the withholding of a tax on
Finance, upon recommendation of the Commissioner, the items of income payable to natural or juridical
shall be annotated by the Register of Deeds at the persons, residing in the Philippines, by payor-
back of the Transfer Certificate of Title or Condominium corporation/persons as provided for by law, at the rate
Certificate of Title of the real property involved: of not less than one percent (1%) but not more than
Provided, finally, That any violation of this provision by thirty-two percent (32%) thereof, which shall be
the Register of Deeds shall be subject to the penalties credited against the income tax liability of the
imposed under Section 269 of this Code. taxpayer for the taxable year.
(B) Tax-free Covenant Bonds. In any case where bonds,
SEC. 59. Tax on Profits Collectible from Owner or mortgages, deeds of trust or other similar obligations
Other Persons. - The tax imposed under this Title of domestic or resident foreign corporations, contain

APP 104
INCOME TAX REVIEWER
a contract or provisions by which the obligor agrees refunded to the employee not later than January 25 of
to pay any portion of the tax imposed in this Title the succeeding year.
upon the obligee or to reimburse the obligee for any
portion of the tax or to pay the interest without
deduction for any tax which the obligor may be
4. Final tax v. creditable w/holding
required or permitted to pay thereon or to retain
therefrom under any law of the Philippines, or any tax
state or country, the obligor shall deduct bonds,
mortgages, deeds of trust or other obligations,
whether the interest or other payments are payable Sec. 2.57 RR 2-98
annually or at shorter or longer periods, and whether
the bonds, securities or obligations had been or will
be issued or marketed, and the interest or other 5. Persons required to deduct and
payment thereon paid, within or without the
Philippines, if the interest or other payment is w/hold
payable to a nonresident alien or to a citizen or
resident of the Philippines.
Sec. 2.57.3 RR 2-98.

SEC. 78. Definitions. - As used in this Chapter:

(A) Wages. - The term 'wages' means all remuneration
(other than fees paid to a public official) for services
performed by an employee for his employer, including
the cash value of all remuneration paid in any medium
other than cash, except that such term shall not include
remuneration paid:
(1) For agricultural labor paid entirely in products of the
farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's
trade or business, or
(4) For services by a citizen or resident of the Philippines
for a foreign government or an international
organization.
If the remuneration paid by an employer to an employee
for services performed during one-half (1/2) or more of
any payroll period of not more than thirty-one (31)
consecutive days constitutes wages, all the
remuneration paid by such employer to such employee
for such period shall be deemed to be wages; but if the
remuneration paid by an employer to an employee for
services performed during more than one -half (1/2) of
any such payroll period does not constitute wages,
then none of the remuneration paid by such employer
to such employee for such period shall be deemed to
be wages.

SEC. 79. Income Tax Collected at Source.-

(A) Requirement of Withholding. - Every employer
making payment of wages shall deduct and withhold
upon such wages a tax determined in accordance with
the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner: Provided, however, That no withholding
of a tax shall be required where the total compensation
income of an individual does not exceed the statutory
minimum wage, or five thousand pesos (P5,000.00) per
month, whichever is higher .

3. Finality of the tax on

compensation income
Sec. 79. (H) Year-end Adjustment. - On or before
the end of the calendar year but prior to the payment
of the compensation for the last payroll period, the
employer shall determine the tax due from each
employee on taxable compensation income for the
entire taxable year in accordance with Section 24(A).
The difference between the tax due from the employee
Prayer before Examination
for the entire year and the sum of taxes withheld from
January to November shall either be withheld from his
salary in December of the current calendar year or

APP 105
INCOME TAX REVIEWER
My Jesus, who listened so attentively to the
doctors in the temple, humbly asked them
questions, & aroused their admiration by prudent
answers, grant me the light to seek out &
remember important matters of this subject I am
studying for Your greater honor & glory.

O God, I ask Your help, as I approach the coming

examination with some anxiety, that I may be able
to pass the test successfully, if it is Your will, O
Lord.

Enlighten my mind, O Heavenly Dispenser of

Grace, God the Holy Spirit, that I may understand
rightly the questions to be answered by me, that I
may see clearly the solution of problems put before
me; & that I may avoid the pitfalls of superficial,
hasty & wrong answers; that I may keep my cool in
the face of trying circumstances, & thus avoid
confusion w/c may disturb my thinking power &
obfuscate my memory.

Then, O Lord, guide also my teachers that they

may form their questions clearly & intelligently that
I may be able to answer them in such a way as it is
expected of me. And after the test, O Lord, Eternal
Wisdom, illuminate the mind of the correctors &
open their eyes that they may be able to read my
handwriting & understand my answers & evaluate
them fairly & justly.

O loving Mother, who are called by your children

“Seat of Wisdom,” assist me in my examination
that I may pass them. If it is the will of your Divine
Son, the Incarnate Wisdom, and all you my dear
patron saints, be with me during these crucial
moments of my examination which mean so much
to me in reaching my goal.

Lord, we pray to You, let our doings be prompted

by Your inspiration & furthered by Your help, so that
every prayer & work of ours may begin from You &
through You be accomplished. Amen.

Based on the outline of Prof. J. Ricalde and as

UPDATED BY ELLA C.H. DEL ROSARIO, THE
Obiter Master™
With input from: Ricky Sandoval, Dennis
Quintero, Dinah dela Pena, Jig Fado, Lourie
Garcia, Marisa Mauricio, Mamay Quitain, Chip
Perdon, Sharon Rivera, Abbie Santiago, Fritzie
Tangkia, & Marc Aseoche .

APP 106