Taxation 2019 TSN 2nd Exam Complete

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From the lecture of Atty. Percy Valsan Jun P. Donalvo | 3-Manresa 2019-2020
August 13, 2019 | Apostol - Meaning the burden of taxation also falls on a single tax
Lets begin with the preliminaries. First is the Income Tax System. payer. The tax incidence and impact of taxation falls within
There are basically 3 Income Tax System which are: a single person. If that person does not pay his income
taxes, the govt may go after him.
3 TYPES OF INCOME TAX SYSTEMS: - Why is it a direct tax? Because it will be very difficult to
imagine that it can be transferred to someone else, when
1. Global Tax System the taxpayer will only know if he will earn income only at
2. Schedular Tax System the end of the tax period.
3. Semi-Schedular/Semi-Global Tax System - Income tax is actually an annual tax
Global Tax System Progressive

- It is a system employed where the tax system views - The PH income tax is generally progressive in nature
indifferently the tax base and generally treats in because the higher the income that the person will
common all categories of taxable income of the receive, the higher that the taxes that he will pay
individual.
- In other words when you say Global System of Taxation, Comprehensive
it does not look into the tax base, it does not look into the - The PH income tax is comprehensive in nature because it
type of income earned by the person whether individual encompasses all types of income. If you go by the
or a corporation. Because after all there will be a single or definition of “gross income” under the NIRC. You will see
unitary tax rate. Is it applicable here in the Philippines? this clause “income from whatever sources” SO wherever
Yes it is also applicable on certain types of income only. the taxpayer earnes that income, its part of the income,
what about the type of sources? Legal? Illegal? It doesn’t
Schedular Tax System really matter. So long as the taxpayer is earning income,
- By the word itself, “schedule”. It is a system employed it will be part of the gross income subject to PH income
where the income tax treatment varies and is made to tax.
depend on the kind or category of taxable income of the
taxpayer. OTHER CHARACTERISTICS OF PHILIPPINE INCOME TAX
- So by the term itself, there a certain bracketing or SYSTEM
schedule depending on the amount of income
earned by the individual or corporate tax payer. Or it Excise Tax
depends on the type of income being earned by that - It is a tax on the privilege of earning income. It is not a
taxpayer. That’s why there is a schedule. property tax, we do not tax the money, we tax the right
- The strong example of that is our income taxation for of the person to earn, whether by business, profession or
individuals. Depende sa income mo, there will be a bracket employment
if you have higher income, you will be in the higher
brackets with more income tax payable. Kung mababa National Tax
naman income mo, for example you income for the entire - Kaya nga National Internal Revenue diba? Meaning the
year will not exceed 250,000, you are practically exempt money taken from income taxation will go to the general
from income taxation. funds of the government there is no specific public
purpose to which these income taxes will be applied on
Semi-Schedular/Semi-Global Tax System
- Is a combination of both. Strictly speaking, the Internal Revenue Tax
Philippine tax employs the semi-schedular tax - Strictly speaking, when you say internal revenue tax those
system. Because there are certain types of income are imposed under the NIRC. Income tax is just one
earned by the taxpayer which will be subjected to the aspect, one type of internal revenue tax, you have others,
schedule. And also types of income earned by the tax donor’s taxes, estate tax, business taxes, the VAT and
payer which will be subjected to a single unitary tax rate OPT, excise taxes on certain articles and DST
regardless of where it is earned so long as it is earned here
in the Philippines. CRITERIA/FACTORS TO CONSIDER SO INCOME WILL BE
SUBJECTED TO PHILIPPINE INCOME TAX
You must be able to distinguish the Global and schedular tax system,
from time to time, lumalabas to sa bar exam. Basically there are many determinant, but let us start with the type
of the taxpayer. Everything will start on the type of taxpayer. Which
FEATURES OF THE PHILIPPINE INCOME TAX LAW is why, this is a very important aspect of income taxation. Kailangan
mo malaman, sino nagbayad? Sino ang taxpayer ditto? Is it an
Semi-schedular/Semi-Global individual or is it a corporation?
- We have already discussed it, for corporations normally
you apply the global system, unitary tax rate and then its Now, basically there are 3 criteria to determine the taxability of
tax base is based on the net taxable income. For certain income.
types of income also, single unitary tax rate for example 1. Citizenship
those which are subjected to final taxes, later on we will 2. Residence
delve more into those types of taxes. And for those subject 3. Source
to schedule, normally if the taxpayer is an individual
taxpayer, they will be subjected to the schedular tax These factors are very important because these will essentially
determine whether or not the type of income is taxable within the
Direct Tax
APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

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Philippines. If you have noticed, we have discussed this last time, it - A tax consisting of a series of separate quasi-personal
has something to do with the situs of taxation. taxes assessed to a particular source of income with a
superimposed personal tax on the income as a whole.
TYPES OF INCOME TAXATION
5. Unitary Income Tax
1. Gross income Tax - The income is arranged according to source then a tax
- In Gross income taxation, the tax base is the gross is imposed of that income from a particular source. An
income, for now let us just imagine the GI is that example for this is the final taxes imposed oncertain
income which is received by the taxpayer actually or passive income earned in the Philippines
constructively without the benefit of deductions. Like
for example if you go to SG, if you go there and buy TAX PERIOD
stuff, patungan nila ng tax, later on paguwi mo,
magtaxrefund ka. As a general rule, when we say PH income taxes, these are annual
- GI will basically depend on the type of business and taxes, meaning by the end of the year, dyan ka magbayad. Annual
the accounting method applied by the taxpayer. When taxes, the determination of how much the taxpayer would pay
is it applicable? Normally GI taxation is applicable would be determined at the end of the year. But it doesn’t mean
when the taxpayer is a non-resident alien not engaged that you have to pay everything at the end of the year because if
in trade and business. So kung yan ang classification you are an individual taxpayer, and you’re engaged in trade and
ng taxpayer, normally they will be subjected to a gross business, you should pay your estimated tax quarterly and if for
income tax. They are not allowed to have the benefit corporate tax payer, they should file their income tax return
of any deduction at all. Kung pila ilang nadawat, that quarterly also. But at the end of the year, what if lugi ka sa business
will be the basis for the income taxation. mo? Its alright because you can always claim for a refund.
2. Net Income Taxation But for the tax period, if you go back to the definition of taxes, paid
- This time, kung kanina gross, the tax basis is the net in regular intervals. Sabi natin pag dating sa income tax, annual tax.
income. Meaning you have the gross income, minus The tax period in income taxation is found in Section 43 and 47 of
the deductions allowed by law, NIRC or special law. the NIRC.
Then you will have your net income. Salin. Normally,
when you say Net Income tax, these are applicable to SEC. 43. General Rule. - The taxable income shall be
individuals engaged in business, because these computed upon the basis of the taxpayer's annual accounting
individuals or corporation are allowed to deduct their period (fiscal year or calendar year, as the case may be) in
legitimate business expenses. If di ka engaged in accordance with the method of accounting regularly employed in
business, wala ka man allowable deductions normally. keeping the books of such taxpayer, but if no such method of
accounting has been so employed, or if the method employed
So if you put it in to an equation it will look like this: does not clearly reflect the income, the computation shall be
made in accordance with such method as in the opinion of the
Gross income xxx Commissioner clearly reflects the income. If the taxpayer's
Less: Deductions xxx annual accounting period is other than a fiscal year, as defined
Net Income: xxx in Section 22(Q), or if the taxpayer has no annual accounting
period, or does not keep books, or if the taxpayer is an individual,
3. Presumptive Income Tax the taxable income shall be computed on the basis of the
- As a general rule, the income of an individual to be calendar year.
taxable under the Philippine income tax system, there
must be an actual or constructive receipt of income, Under Section 43, you can see here that the legal basis why our
dapat naa jud kay nadawat. But there are certain income taxes are annual taxes. Essentially, in this provision, the
transactions under the NIRC, that even if you sold your NIRC allows the taxpayer to use whether the fiscal or calendar
property at a loss, the law deems it as if that period to compute the income tax. If you also read Section 47:
transaction earned income which will be subject to
income taxation. That’s why we have this presumptive SEC. 47. Final or Adjustment Returns for a Period of Less
income tax. than Twelve (12) Months. -
- An example for this is our capital gains taxation, when
you sell real property situated in the Philippines, (A) Returns for Short Period Resulting from Change of Accounting
classified as capital asset, ano mangyari niyan? What Period. - If a taxpayer, other than an individual, with the approval
if I have a condominium, I bought for 5 million, I sold of the Commissioner, changes the basis of computing net income
that concominium, I just want to dispose of it, I sold it from fiscal year to calendar year, a separate final or adjustment
for 2 million, diba lugi? But under the eyes of the law, return shall be made for the period between the close of the last
it will be subjected to capital gains tax of 6% based on fiscal year for which return was made and the following December
the Selling Price or the Zonal Value or the assessed 31. If the change is from calendar year to fiscal year, a separate
value whichever is higher. Why is it that the law would final or adjustment return shall be made for the period between
tax me (kahit lugi?) Wala tayo magawa, the law says the close of the last calendar year for which return was made and
there will be a presumed gain in case you sell a real the date designated as the close of the fiscal year. If the change
property classified as capital asset. is from one fiscal year to another fiscal year, a separate final or
adjustment return shall be made for the period between the close
4. Composite Tax of the former fiscal year and the date designated as the close of
the new fiscal year.

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(B) Income Computed on Basis of Short Period. - Where a lacks juridical personality. If you have a sum collectible against a
separate final or adjustment return is made under Subsection (A) dead person, you file it against the heirs not the estate. But for
on account of a change in the accounting period, and in all other purposes of income taxation, what will happen if someone will die.
cases where a separate final or adjustment return is required or
permitted by rules and regulations prescribed by the Secretary of Under the previous rule, you send a notice of death to the BIR, right
Finance, upon recommendation of the Commissioner, to be made now that is no longer required under the TRAIN law, and then when
for a fractional part of a year, then the income shall be computed the BIR is already notified of the death of that person, the BIR will
on the basis of the period for which separate final or adjustment issue a new TIN, so that person now already has 2 TINs, normally,
return is made. one person, one TIN, because if you have 2 TINs, (nacut iyang
discussion kay nagakatawa siya sa 2 TINs and nagstory siya about
It somehow allows a period which is shorter than the calendar undergrad stories)
period. You call this the short period of accounting.
General Rule: A person is already allowed one TIN.
Calendar Year Exception: The Estate. Why is it the Estate is provided with another
- The twelve (12) consecutive months starting on TIN separate and distinct from the person who is already dead? Its
January 1 and ending on December 31. because under taxation laws, the estate is actually considered a
- Sayon ra kayo. You just follow the calendar, it starts in separate and distinct juridical personality for purposes of (1) Estate
January 1 and ends in December 31. That is one Taxation and (2) Income Taxation.
accounting period.
So basically when you talk about taxpayers, there essentially you
Fiscal Year have:
- It is a period of twelve (12) months ending on the last
day of any month other than December. 2 Broad Types of Income Taxpayers:
- Its still 12 months, a twelve month period but I doesn’t 1. Individual; and
necessarily start on January 1, any period as long as it 2. Corporations
starts sometime and it ends 12 months after.
Why is it again important for us to determine the type or
The thing is while all types of taxpayer are allowed to use the classification of taxpayers? Because it will have an impact on you
calendar period in computing income taxes, Only corporations are income taxation later on. This importance is also made manifest in
allowed to use the Fiscal Period. So kung individual taxpayer ka, the general principles of taxation as stated in Sec 23 of the NIRC.
dapat you should use you calendar period only, but under sec 46
and 47, the law somehow allows the taxpayer to file an income tax SEC. 23. General Principles of Income Taxation in the
return for a period less than 12 months. What are these instances? Philippines. - Except when otherwise provided in this Code:
Section 46:
(A) A citizen of the Philippines residing therein is taxable
SEC. 46. Change of Accounting Period. - If a taxpayer, other on all income derived from sources within and without the
than an individual, changes his accounting period from fiscal year Philippines;
to calendar year, from calendar year to fiscal year, or from one
fiscal year to another, the net income shall, with the approval of (B) A nonresident citizen is taxable only on income derived
the Commissioner, be computed on the basis of such new from sources within the Philippines;
accounting period, subject to the provisions of Section 47.
(C) An individual citizen of the Philippines who is working and
Sec 46, when there is a change in accounting period, in relation to deriving income from abroad as an overseas contract worker
Section 47. If the corporate taxpayer would shift from fiscal period is taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the
to calendar period, then it is required that these corporations file a
short period tax return. Philippines and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged
TYPE OF TAXPAYERS exclusively in international trade shall be treated as an overseas
contract worker;
How do you define a taxpayer?
(D) An alien individual, whether a resident or not of the
NIRC Philippines, is taxable only on income derived from sources
within the Philippines;
Sec. 22. (N) The term 'taxpayer' means any person subject to
tax imposed by this Title.
(E) A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
Sec. 22. (A) The term 'person' means an individual, a trust,
estate or corporation.
(F) A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived from
If you notice, the definition of person under the NIRC, for tax
sources within the Philippines.
purposes, it does not necessarily mean juridical persons. Because
for purposes of taxpayers, some of these entities are considered
As you can see, under the general principles of taxation laid down
juridical persons only for purposes of taxation. Like what? A prime
in Sec 23, it sets the taxability of the income depending upon the :
example is the Estate. Under your civil procedure, what if you will
• Citizenship;
file a case against a dead person? You cannot file a case against a
• Residency; and
dead person because he loses his juridical personality upon his
• Source of Income
death diba? What about the Estate? So if you file a case, the estate

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INDIVIDUALS are considered as resident citizen, you already know the implication.
Pag dito ka nakatira and pinoy ka you will be taxable in your income
So basically, individuals are classified as to earned globally.
• Citizenship; and
• Residency Second, Non-resident citizens, pinoy but abroad. That’s the basic
definition. Loosely speaking a non-resident citizen is a Filipino not
For Citizenship, you only have 2: residing here in the Philippines, stupid definition but under Sec 22(E)
• Filipino Citizens; and it provides a more detailed explanation:
• Aliens
Sec. 22. (E) The term 'nonresident citizen' means;
Residency, they are either:
• Residents of the Philippines; and (1) A citizen of the Philippines who establishes to the satisfaction
• Non-Residents of the Philippines of the Commissioner the fact of his physical presence abroad
with a definite intention to reside therein.
What are the Rules on Taxability?
(2) A citizen of the Philippines who leaves the Philippines during
Resident Citizens the taxable year to reside abroad, either as an immigrant or for
- Are taxable on their income within and without the PH. employment on a permanent basis.
In other words, for resident citizens, they are taxable for
income earned globally. (3) A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be
Other Types of Individuals (NRC, RA, NRA) physically present abroad most of the time during the
- They are taxable only on income earned within the PH. taxable year.
That is the prime difference. (4) A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during the
Who are those classified as individuals? Of course, human taxable year to reside permanently in the Philippines shall likewise
beings, but tax-like individuals also are: be treated as a nonresident citizen for the taxable year in which he
1. Trusts – they are treated as human beings as if they are arrives in the Philippines with respect to his income derived from
individual taxpayers. sources abroad until the date of his arrival in the Philippines.
2. Estates – especially those estates which are income
generating. Pending to the distribution of the estate to the (5) The taxpayer shall submit proof to the Commissioner to show
heirs, it will be regarded as a separate and distinct entity his intention of leaving the Philippines to reside permanently abroad
of it is earning income, it will be subjected to income or to return to and reside in the Philippines as the case may be for
taxation. Treated as if they are individuals purpose of this Section.
CORPORATIONS (1) A citizen of the Philippines who establishes to the

satisfaction of the Commissioner the fact of his physical
Classified into 3: presence abroad with a definite intention to reside therein.
1. Domestic Corporations;
2. Resident Foreign Corporations; and So isipin niyo nalang yung mga greencard holders, I would like to
3. Non-Resident Foreign Corporation maintan my Filipino citizenship kasi mahal ko ang bayan ko but I
would like to live in the US (the American dream). So this is just a
If you read Section 23, what is the rule to follow with respect to the classic definition of what a non-resident citizen is all about. I want
corporation? Almost pretty much the same. to reside abroad and I establish the satisfaction of the Commissioner
that I intend to permanently reside abroad
Domestic corporations are taxable on their income within and
without the PH. (2) A citizen of the Philippines who leaves the Philippines
during the taxable year to reside abroad, either as an
Whereas when you talk about Foreign Corporations, they are immigrant or for employment on a permanent basis.
taxable only on their income earned within the Philippines.
In other words, lets look at it this way permanent employee abroad,
How do you determine the Residency of Foreign
the second type of citizen is either:
corporation? The residency of the foreign corporation is
1. Immigrant;
determined by knowing whether or not these corporations are
2. For employment on a personal basis,
engaged in business here in the PH.
Looks like wala siyang difference (sa 1 and 2) but for the heck of it,
If the foreign corp is engaged in business here in the PH they are
so basically he leaves the PH during the taxable year to reside
considered as resident but if they are engaged only on isolated
abroad and the reason is because of his immigrant status or for
transaction, they are not doing business here in the PH, but
employment on a personal basis. No problem. Supposing here you
nevertheless because of that transaction they are earning income
have a pinoy nurse, employed in Davao Doc. And you also have a
within the PH, they are classified as non-resident foreign
restaurant here in Davao city and a parlor in Japan. Supposing this
corporation.
year, sabihin nating Aug 1, my Visa for US has already approved,
okay im gonna leave the PH now, and im going to leave Aug 30.
First, resident citizens wala tayong problema, its actually self
explanatory. You are a Filipino citizen, living here in davao city, you

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Question: What about for my income for the year 2018(sabihin documents and then you argue with the facts and then the BIR
natin 2018)? Income within the PH, is it subject to income tax? So will issue a BIR ruling.
kelan ang alis? Aug 30, 2018, so im still here in the PH until Aug 30,
what about my compensation income in Davao Doc is it still taxable So eto nangyari sa kanila local workers with local employers sent
here in the PH? Yes diba, why? Because its earned in the PH diba, abroad and they asked for a BIR ruling.
doesn’t really matter because I am a citizen.
ISSUE:
What about my income sa parlor sa Japan? What about sa The question is what is the status of those engineers? Are they
restaurant sa davao city? Dito wala tayong problema because its considered non-residents citizens?
taxable here in the PH, but what about my 2018 income in Japan?
Under the law, if you read the provi, (2). Aug 30 I leave davao city It has something to do with their compensation, if they are
to live abroad for employment. What is my classification now? Am I considered as a non-resident citizen because they are working
still considered as a Filipino citizen at the time that I leave abroad? abroad then their compensation from their work abroad would
That is a legitimate question because it will somehow have an be exempt from income tax. Right?
impact on my income that is earned from my restaurant in Japan
diba? RULING:
So basically I try to take up the old revenue regulation, RR No. 1- However the BIR, ruled that aside from the length of time, the
1979 this has not been amended as far as I know. Under the BIR this time has considered the employer. Under the set of facts
revenue regulation, if the situation is like that, I will be the employer is a local employer situated here in the Philippines.
considered as a non-resident citizen only during that time The BIR ruled that the phrase “employment thereat” as used
that I will leave the PH. So from August 1 to Aug 30, my income in paragraph 3 of section 23(e) means that an employee must
from Japan is, I am still considered as a resident citizen, so my also be employed abroad. It has something to do with the
income in Japan will be subjected to PH income taxation up to Aug employer already. It’s not enough that you would be working
30 only, after that, because I have already left the PH, I will be abroad, the length of time is not enough because the law says
considered a non-resident citizen that’s why from Sept1 – Dec 31 “employment thereat” means that you are employed
my income from my parlor in Japan is no longer subject to PH abroad.
income Taxation.
This is weird because it is a deviation from the 183- day
August 15, 2019 | Baban rule. I am saying this is weird because what is the nature of
compensation income? Where do you derive it? It is essentially from
CONTRACT WORKERS services right? What is the situs of taxation when it comes to
rendition of services? The place where service is rendered. But
(3) A citizen of the Philippines who works and derives where was the service rendered in this case? Diba abroad?
income from abroad and whose employment thereat
requires him to be physically present abroad most of the So now there is a seeming confusion on the applicability of the
time during the taxable year. general principles of taxation and also the national internal revenue
code. Sadly, there is no SC decision to clarify this yet.
DIFFERENCE BETWEEN SEC 23(E)(2) and SEC 23 (E) (3)
SEC. 23. (E) (2) SEC. 23 (E)(3) FROM 2018 TSN
The Filipino citizen is The Filipino citizen is abroad The above rule is kind of weird for 3 reasons:
permanently abroad most of the time during the 1. It disregarded the 183-day rule. There is a Revenue
because of employment. taxable year because of his Regulation providing this 183-day ruling and yet, the BIR
employment. seems to disregard that Revenue Regulation.
2. For the first time, the BIR tried to define the term
“employment thereat”. In here, it said that there must
be an employment contract and that said
PHYSICALLY PRESENT ABROAD MOST OF THE TIME: employment contract must be abroad.
Under Revenue Regulation 1-1979, the phrase means: 3. The ruling disregarded the rules on situs of
A Filipino citizen whose stay outside the Philippines for not taxation. For purposes of rendition of service, if there is
less than 183 days. an income arising from rendition of service, what is the
situs of the income? It is supposed to be the place where
BIR Ruling 517-2011 service was rendered. In this case, where was the service
Facts: rendered, is it in the Ph? No! And yet, the BIR chose to
Local engineers were employed by Filipino corporations and yet look at the contract instead of the place where the actual
they are sent abroad to work there. Their employers are Filipino services are rendered by his employees.
Corporations yet they are sent abroad to work there and they
work for more than 183 days. What does this mean? Does this mean that the BIR is abandoning
its own revenue regulation that is just time based?
This is the usual rule if you will be applying for tax exemption.
The BIR will not regard you as a tax exempt entity or person or BIR Ruling 305-2016
your transaction is not exempt until and unless the BIR will issue There is another later ruling that was 305-2016 which somehow
a BIR ruling. affirms this previous BIR ruling the facts are essentialy the same
iba lng ang circumstances ng employment.
How do you ask for a BIR ruling?
Normally you just write a letter to the BIR. It is like presenting a FACTS:
position paper. Of course it is accompanied by your supporting

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Who is involve here is a government employee was assigned in in which he arrives in the Philippines with respect to
this government employee and for reasons na assign siya sa his income derived from sources abroad until the date
abroad as an ASEAN secretatriat. The government involve here of his arrival in the Philippines.
is the DSWD. So what happen was that since you would be assign
abroad you would be off from DSWD, for the time being that you Now this refers to the “BALIKBAYAN”. At the time that I will return
are assigned abroad, the DSWD will not pay your employment, to the Philippines and I already proved to the commissioner that “ok
although you are still considered as their employee. Who will pay I will reside here”.
the compensation? It’s actually the foreign employer. And di ka
tanggal sa trabaho. The proper term for this arrangement is a With regard to what is the Status of my income both within and
“secondment”. It’s a temporary transfer of person from one without the Philippines. Wala paman tayong problema jan because
assignment to another. Its similar to reassignment. Nadestino lng non-residents are only taxable on their income within the
saibang lugar. But there was a memorandum of agreement Philippines, right? But what about the income he receives
between the DSWD and the employer that the wages for the abroad prior to his arrival here in the PH.
meantime would be paid by the foreign employer.
What is the status of such income? Is it taxable or not taxable?
But how did the BIR rule in this case? I have a diverse opinion with Dean on that matter:
RULING: The position of Dean is this:

The BIR still said that “employment thereat” means that you If in the middle of the taxable year he arrives here with the intention
must be employed outside. What is involved in this case is that to reside here, during the year of his arrival, he is still considered as
yes, you are working abroad but you remain to be the employee a non-resident citizen. Thus, his income abroad is still not taxable
of DSWD. It’s just by contract that the foreign employer would within the Philippines.
pay your compensation.
Apparently when I try to look at the legal basis, his thrust in the
The BIR says that essentially that the determining factor whether legal basis is this “shall likewise be treated as a non-resident citizen
or not the individual remains to be the employee of a local for the taxable year in which he arrives in the Philippines”. So the
employer is: year following his arrival pa siya maconsider as resident citizen.
“whether or not the individual is still connected with the That is his position.
local employer.”
Dean Quibod: You still have to show your intention. The last
Thus, it would seem that the BIR is “abandoning” the time-limit provision of Sec. 23(E)(5) provides:
based in interpreting such this rule. “The taxpayer shall submit proof to the commissioner to show
Which is to be followed? In case you will be asked with this kind his intention of leaving the Philippines to reside permanently
of question which do we follow? abroad or to return to and reside in the Philippines as the case
may be for purpose of this Section. (Section 23(E)(5),
POSITION OF DEAN: NIRC)”
Dean said that it is actually being done in practice, for example Bank
employees of international banks who are made to work abroad and The take of Dean is:
then go back here, temporary and more than 183 days. And then “For the ENTIRE TAXABLE YEAR, you will still be considered as A
they already have this tax benefit. Whatever they earned abroad are NON-RESIDENT CTIZEN, but the following year, in 2020, you are
not taxed here as they are already considered as non-resident now a RESIDENT CITIZEN.”
citizens.
That’s how Dean interprets it. Because of that “INTENTION”, how
BIR COMMIONERS POWER TO INTERPRET TAX LAWS are you supposed to show that?
So, do we say now that the BIR commissioner in ruling this revenue
regulation does not have a point? Please take note, as the BIR The position of Sir Donalvo:
commissioner, has the authority to interpret tax laws, it just so My position is kind of different but it still has a legal basis. His
happens that she made an interpretation of such phrase income abroad prior to the date of his arrival is not yet
“Employment thereat”. San yung thereat nayan? Is it local or taxable, but the moment he steps here, he will now begin to
abroad? There is a seeming confusion already. be tax as a resident citizen. What is my legal for this? Let’s
continue the clause which seems to be the legal basis of dean:
Sir Donalvo’s take: “in which he arrives in the Philippines with respect to his income
“My personal take is that let us just wait for a Supreme Court derived from sources abroad until the date of his arrival in the
decision. But if this will be asked during the bar exam then you just Philippines.”
cite the law” Cite the law then put the revenue regulation because
after all the BIR ruling will apply only to the taxpayer who has Somehow if you read the complete text of the law, my interpretation
requested that ruling”. of this is until the date of his arrival, that is the only portion of his
income that is exempt from tax. Since it is still vague, thus we must
BALIKBAYAN provide for another legal basis.
(continuation of Sec. 23(E)) How do we interpret tax laws providing for tax exemption?
(4) A citizen who has been previously considered as It is interpreted strictly against the tax payer in favor of the
nonresident citizen and who arrives in the Philippines government. Right?
at any time during the taxable year to reside
permanently in the Philippines shall likewise be
treated as a nonresident citizen for the taxable year

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(In short, intention wise, it is still need to be proved according to (G) The term "nonresident alien" means an individual whose
Dean. However, according to Sir Percy, your are considered a residence is not within the Philippines and who is not a citizen
resident citizen at the time of your arrival) thereof.
So how do you answer if it is asked? You just have to feel it kay
Dean ba ito or kay sir percy. Non-resident Aliens are further classified in to two, which are:
(someone sings akala ko ekaw ay aken) 1. NONRESIDENT ALIEN ENGAGED IN TRADE AND
BUSINESS (NRAETB)
(continuation of Sec. 23(E)) 2. NONRESIDENT ALIEN NOT ENGAGED IN TRADE AND
The taxpayer shall submit proof to the Commissioner to BUSINESS (NRANETB)
show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the NONRESIDENT ALIEN ENGAGED IN TRADE AND BUSINESS
Philippines as the case may be for purpose of this Section.
According to Revenue Regulation 8-2018, these two requisites
So in either case if your leaving permanently or residing must be present:
permanently as a resident here in the Philippines you must prove it 1. They are engaged in business in the Philippines.
to the Commissioner. Usually this is in the form of updating your 2. They stay here for at least an aggregate period of
personal status to the BIR. Update. more than 180 days.
Now there is another type of non-resident citizen its found in Section So, they’re foreigners doing business here in the Philippines but they
23 (c) , they are the OFW’s. don’t really live here. Meron lang silang business dito. If they don’t
Sec. 23. General Principles of Income Taxation in the satisfy these two requirements then they fall under the next
Philippines. – Except when otherwise provided in this Code: classification.
xxx
NONRESIDENT ALIEN NOT ENGAGED IN TRADE AND
(C) An individual citizen of the Philippines who is working and BUSINESS
deriving income from abroad as an overseas contract worker is
taxable only on income from sources within the Philippines: Revenue Regulation 8-2018, Section 2(L) - refers to
Provided, That a seaman who is a citizen of the Philippines and nonresident aliens who stay in the Philippines for an aggregate
who receives compensation for services rendered abroad as a period of 180 days or less.
member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract There is a time factor. They stay here for 180 days or less. Why is
worker. it important to know the distinction? Because later when we discuss
their taxability, you will see there are different tax consequences
So these are OFW. And included to the term OFW are the seamen. and tax treatments for these types of individuals.
August 22, 2019 | Bajao SPECIAL CLASS OF INDIVIDUAL EMPLOYEES
ALIENS MINIMUM WAGE EARNERS (MWEs)

SEC. 22. Definitions. – When used in this Title: x x x
1. RESIDENT ALIENS:
(HH) The term 'minimum wage earner' shall refer to a worker
Section 22(F) of the NIRC in the private sector paid the statutory minimum wage or to an
employee in the public sector with compensation income of not
(F) The term "resident alien" means an individual whose more than the statutory minimum wage in the non-agricultural
residence is within the Philippines and who is not a citizen sector where he/she is assigned.
thereof.
a. He is not a mere transient or sojourner Minimum Wage Earner (MWE) - refers to a worker in the private
b. He has no definite intention as to his or her stay sector who is paid with a statutory minimum wage (SMW)
c. His purpose is of such nature that an extended stay may be rates, or to an employee in the public sector with compensation
necessary for its accomplishment income of not more than the statutory minimum wage rates
in the non-agricultural sector where the worker/employee is
Example: The most common are aliens who are members of the assigned. Such statutory minimum wage rates are exempted from
NGOs. They are aliens that are made to stay for 1 to 3 years in the income tax. Likewise, the exemption covers the holiday pay,
Philippines and they are already considered Resident Aliens for overtime pay, night shift differential pay, and hazard pay
income tax purposes. earned by an MWE. (Revenue Regulation 8-2018, Section
2(I).
So here, you need to look at the intention of the foreigner. If his or
her intention is to stay in an extended capacity then that person is So remember, the tax treatment of MWEs are different. Their
a resident alien. compensation income and supplementary benefits are exempt from
income tax.
2. NONRESIDENT ALIENS:
CORPORATIONS
Section 22 (G) of the NIRC
Don’t be confused with the definition of a Corporation. The definition
under the Corporation Code is different from Taxation.

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SEC. 22. Definitions. - When used in this Title: x x x 2 CLASSIFICATIONS OF CORPORATIONS

1. DOMESTIC CORPORATION
(B) The term 'corporation' shall include partnerships, no matter 2. FOREIGN CORPORATION
how created or organized, joint-stock companies, joint accounts a. RESIDENT FOREIGN CORPORATIONS
(cuentas en participacion), association, or insurance companies, b. NON-RESIDENT FOREIGN CORPORATIONS
but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking ONLY DOMESTIC CORPORATIONS ARE TAXABLE ON THEIR
construction projects or engaging in petroleum, coal, geothermal INCOME GLOBALLY. The rest of the corporations are taxable on
and other energy operations pursuant to an operating consortium their income earned within the Philippines.
agreement under a service contract with the Government.
'General professional partnerships' are partnerships formed by DOMESTIC CORPORATION
persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from SEC. 22. Definitions. – x x x
engaging in any trade or business. (C) The term 'domestic', when applied to a corporation, means
created or organized in the Philippines or under its laws.
What are considered CORPORATIONS under the NIRC?
They are the following: THE INCORPORATION TEST – used by the NIRC to determine
1. Partnership no matter how created or organized – we all the nationality of a corporation. If it is a Filipino Corporation, it is a
know partnership is different from corporation. domestic corporation.
2. Joint Stock Companies
3. Joint Accounts “If the corporation is organized by 95% Japanese but incorporated
4. Associations here in the Philippines, what is the classification of that corporation?
5. Insurance and Trust companies It does not matter for as long as it is created or organized in the
Philippines or under its laws. Thus, it is still a domestic corporation
The following are NOT CONSIDERED CORPORATIONS under regardless of its composition.” - (2018 TSN)
the NIRC:
1. General Professional Partnerships – these are FOREIGN CORPORATION
partnerships formed for the sole purpose of exercising a
common profession. SEC. 22. Definitions. – x x x
(D) The term 'foreign', when applied to a corporation, means a
Take note, GPPs are not taxpayers. A GPP is a tax-exempt corporation which is not domestic.
entity. Even if they are considered juridical personalities,
they are not considered as persons/taxpayers in the NIRC. Two kinds of Foreign Corporations:
1. Resident Foreign Corporation - applies to a foreign
GPP is for the common exercise of profession. Example, corporation engaged in trade and business in the
you are all Lawyers in the professional partnership, then Philippines.
that is a GPP.
2. Nonresident Foreign Corporation - applies to a foreign
However, if you are a mix of professionals, let’s say, you’re corporation not engaged in trade and business in the
a lawyer and the other partners are CPA, Doctor, Dentist Philippines but nevertheless earn income through an
etc. It is no longer a GPP. It is now a General Co- isolated transaction.
Partnership, which in the eyes of Income Tax Law, will be
taxed as a Corporation. Know these classifications so you will know the tax implications of
these entities.
2. Joint Venture or Consortium - formed for the purpose
of undertaking construction projects or engaging in PARTNERSHIPS
petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a You have 2 Types:
service contract with the Government. 1. General Professional Partnership – tax exempt.
2. General Co-Partnership - taxed as a corporation. It is
The following are not considered as corporations under the subjected to regular corporate tax.
NIRC:
• Construction Projects Co-ownerships - as a rule are not taxable. They have no legal
• Energy Operations personalities at all and are not considered entities to begin with. The
fact that they are co-owners does not mean that they formed a
Question: What if these corporations are earning lots of money? partnership.
How do you tax them?
Answer: The Joint Venture itself is not a corporation and not a Question: But sir, we are already sharing Gross-returns, it is
taxable entity but the income arising from the Joint Venture will be already a partnership.
split between the corporations forming that joint venture and each Answer: No, the mere sharing of gross-returns does not necessarily
corporation will be taxed on the basis of their earnings from the JV. mean that a partnership is established by persons co-owning such
property.
However, Ordinary joint ventures are considered as corporations
and will be considered as a taxable entity. In such a case, the Joint Ventures - in joint ventures, you have first identify the
corporations forming part of the JV will be taxed differently. activities of that joint ventures.

9
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General Rule: Joint ventures are corporations. portion which refers to the increase of your net worth in a
Exception: Joint venture or consortium formed for the purpose of transaction.
:
1. undertaking construction projects or Is the term income synonymous with receipt?
2. engaging in petroleum, coal, geothermal and other energy The term receipt is broader than income because the receipt does
operations pursuant to an operating consortium not necessarily mean that you will have income afterwards. Which
agreement under a service contract with the Government. brings us to the difference.
What is the effect then if the JV is not considered a corporation? What is the difference between income and capital?
Like GPP, the JV becomes a non-taxable entity. But once the when This is important because we do not tax the capital, we only tax the
the profits are distributed to the corporations composing the JV, income.
each corporation or persons receiving income will be taxable on their
own income. INCOME CAPITAL
Estate and Trusts - Ordinarily, they have no legal personalities but Flow of such wealth Wealth
for purposes of income taxation, they have limited personality. It is
Fruit Tree
found under Section 60 of NIRC.
August 27, 2019 | Bentayao 1. Capital is wealth. Income is the profit or gain which flows
from that wealth.
What is income? How do you define income?
An author defines income as all wealth that flows into the taxpayer Example: The basic example I could give you is you
other than mere return of capital. It is an accumulation of wealth. deposited a money in the bank. You have P1,000,000
In the case of Fisher vs. Trinidad, the Supreme Court gave several deposited in the bank in a time deposit. Here, you
definitions of income based on different dictionaries. earn interest even if you do nothing. When it matures,
1. Income is the amount of property coming to a person or you withdraw the P1,000,000 including the interest you
corporation with a specified time whether for services, earn from that time deposit.
interest, and profit from investment. • P1,000,0000 is your wealth your
2. Income is the return of money from one’s labor or
business or capital investment, gains profit or private CAPITAL and from that,
revenue • There is a corresponding increase in the wealth
the increase is the INCOME.
SOURCES OF INCOME
2. And if you want to be metaphorical about it, capital is the tree
1. Services rendered or labor
while income is the fruit. So, which brings us to the case of
2. Capital
ASSOCIATION OF NON-PROFIT CLUBS v. BIR.
This is not limited to money or property. You can also have
your own profession or own services as capital ASSOCIATION OF NON-PROFIT CLUBS v. BIR
Ex:If maayo ka mamasahe, you can make a business out
June 26, 2019
of it; if you’re a lawyer, you render services
Facts: BIR issued RMC 35-2012 which states that “clubs which are
3. Gains from Exchange of Properties organized and operated exclusively for pleasure, recreation, and
The most basic definition of income is a “gains from
other non-profit purposes are subject to income tax under the
profit.” It is not limited merely on money or property. NIRC.
According to the BIR, under the doctrine of casus omissus the
Is income synonymous from receipts?
provision of NIRC granting tax exemption to such recreational clubs
No. Pagsinabi mong income it’s the gain or profit pag sinabi mong
was omitted in the current list of tax exempt corporations under the
receipt it doesn’t necessarily result to income. Receipts is a broader
present NIRC. Hence the income of recreational clubs, from
term something which you receive and includes income.
whatever sources including but not limited to membership fees,
assessment dues, rental income, and service fees are subject to
These sources of income are discussed in passing in the case of CIR
income tax.
v. CA. The SC said that INCOME in tax law is the amount of money
coming to a person with a specified time whether as payment of
In addition as to VAT the gross receipts also of recreational clubs
services, interest or profit from investment. It is gain derived from
for the like fees and dues are subject to VAT citing Section 105 that
and separate from capital.
even nonstock and non-profit organization or government entity is
liable to pay VAT on the sale of goods or services.
But if you want to simplify everything, you go back to the case of
MADRIGAL V. RAFFERTY. The simple definition is this: income is
ANPC requested the non-application of RMC 35-2012 for income tax
gains or profit. There is income when there is gain; you gain
and VAT liability on membership fees, association dues, and fees of
something when you work.
similar nature collected by the exclusive membership clubs from
their members which are used to defray the expenses of the said
When there is a gain, there is supposedly an increase of your net
clubs. But despite 2 years BIR has not acted upon the request and
worth. That is our basic precept of income. For instance if I buy a
all member clubs of ANPC were subjected to income tax and VAT
car worth P800, 000 then I sold it at P800,000 is there a gain to
on all the membership fees, assessment dues and service fees.
begin with? No, there is none right? So basically in the kind of
transaction, supposedly there is not income tax implication. Why?
Because what is being taxed by the government is the income. That

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TAXATION
ANPC filed a Petition for Declaratory Relief before the RTC seeking recreational clubs" that are "subject to VAT." It is a basic principle
that RM 35-2012 be declared violative of the due process clause of that before a transaction is imposed VAT, a sale, barter or exchange
the Constitution that BIR acted beyond its rule making authority. of goods or properties, or sale of a service is required.
RTC denied the petition and upheld the constitutionality of RMC 35-
2012. As ANPC aptly pointed out, membership fees, assessment dues, and
Factual Circumstance in Issue: the like are not subject to VAT because in collecting such fees, the
RMC 35-2012 provides interpretation that since the old tax club is not selling its service to the members. Conversely, the
exemption under the 1977 Tax Code to recreational clubs was members are not buying services from the club when dues are paid;
deleted in the 1997 NIRC, then the income of recreational clubs hence, there is no economic or commercial activity to speak of as
from whatever sources, including but not limited to membership these dues are devoted for the operations/maintenance of the
fees, assessment dues, rental income, and service fees is subject to facilities of the organization. As such, there could be no "sale, barter
income tax. or exchange of goods or properties, or sale of a service" to speak
of, which would then be subject to VAT under the 1997 NIRC
Issue: Are the membership dues and assessment dues subject to
income tax liability? – No. Discussion:
If you read the definition of gross income under the NIRC, it
Held: (1) Erroneous sweeping interpretation. – RMC No. 35- includes income from whatever source. So wala syang qualification
2012 erroneously foisted a sweeping interpretation that but then again what is our subject here? Income tax. As far as old
membership fees and assessment dues are sources of income of cases, the Supreme Court said we are not supposed to tax capital
recreational clubs from which income tax liability may accrue. because that would be illegal. If we do not tax capital we first
distinguish what is the nature of these fees and dues.
The distinction between capital and income is well-settled in our
jurisprudence. The essential difference between capital and income In this case, the Court ruled that the membership fees and dues are
is that capital is a fund and income is a flow. A fund of property not income but merely capital. Just for reimbursement or
existing at an instant of time is called capital. A flow of services replenishment of the capital for the maintenance and upkeep of the
rendered by that capital by the payment of money from it or any organization. They are just infusing income in that association.
other benefit rendered by a fund of capital in relation to such fund
through a period of time is called income. Capital is wealth and Pag income-generating sya, it will be subject to tax. But if it just for
income is the service of wealth. infusion capital then it is not subject of tax.
Okay, let us continue next meeting.
As correctly argued by ANPC, membership fees, assessment dues
and other fees of similar nature only constitute contributions August 29, 2019 | Codilla
and/or the replenishment of the funds and for the maintenance
and operations of the facilities offered by recreational clubs to their INCOME
exclusive members. They represent held in trust to defray their
operating and general costs and hence, only constitute De Leon: Income is all wealth that flows to the tax payer other than
infusion of capital. as a mere return of capital. It is an accumulation of wealth
(2) Forms part of capital. – In order to constitute income Fisher vs. Trinidad: defines an income as "the amount of money
there must be a realized gain. Clearly, because of the nature of coming to a person or corporation within a specified time whether
membership fees and assessment dues as funds inherently as payment or corporation within a specified time whether as
dedicated for the maintenance, preservation, ad upkeep of the payment for services, interest, or profit from investment."
clubs’ general operations and facilities, nothing is to be gained from
their collection. This stands in contrast to the fees received by Revenue Regulation: It includes the forms of income specifically
recreational clubs coming from their incomegenerating facilities. described as gains and profits including gains derived from the sale
or other disposition of capital assets.
Given these recreational clubs’ non-profit nature, membership fees
and assessment dues cannot be considered as funds that would COMMISSIONER OF INTERNAL REVENUE v. COURT OF
represent these clubs’ interest or profit from any investment. In APPEALS
fact, these fees are paid by the clubs’ members without any G.R. No. 108576, January 20, 1999
expectation of any yield or gain but only for the above-stated Income in tax law is “an amount of money coming to a person within
purposes and in order to retain their membership therein. a specified time, whether as payment for services, interest, or profit
from investment.” It means cash or its equivalent. It is gain derived
In fine, for as long as these membership fees, assessment dues, and severed from capital, from labor or from both combined - so
and the like are treated as collections by recreational clubs from that to tax a stock dividend would be to tax a capital increase rather
their members as an inherent consequence of their membership, than the income. In a loose sense, stock dividends issued by the
and are, by nature, intended for the maintenance, preservation, and corporation, are considered unrealized gain, and cannot be
upkeep of the clubs' general operations and facilities, then these subjected to income tax until that gain has been realized. Before the
fees cannot be classified as "the income of recreational realization, stock dividends are nothing but a representation of an
clubs from whatever source" that are "subject to income interest in the corporate properties. As capital, it is not yet subject
tax." Instead, they only form part of capital from which no to income tax. It should be noted that capital and income are
income tax may be collected or imposed. different. Capital is wealth or fund; whereas income is profit or gain
or the flow of wealth. The determining factor for the imposition of
(3) Not Subject to VAT. - The Court declares as invalid the income tax is whether any gain or profit was derived from a
BIR's interpretation in RMC No. 35-2012 that membership fees, transaction.
assessment dues, and the like are part of "the gross receipts of

11
TAXATION
Income may be received in the form of cash, property, service, or a TAXABLE INCOME
combination of the three.
Section 31. Taxable Income Defined. – The term ‘taxable
SOURCES OF INCOME income’ means the pertinent items of gross income specified in this
Code, less deductions, if any, authorized for such types of income
1. Services rendered or labor Capital by this Code or other special laws.
This is not limited to money or property. You can also have your If you go by the definition, you start with Gross Income. This is not
own profession or own services as capital. If maayo ka mag masahe, yet your taxable income. This is the point before any deductions.
you can make a business out of it; if you’re a lawyer, you render
services. REQUIREMENTS FOR TAXABLE INCOME
1. There must be a gain or profit;
2. Gains from Exchange of Properties 2. The gain or profit must be received or realized; and
3. The income must not be excluded by law
The most basic definition of income is a “gains from profit.” It is not
limited merely on money or property which you Illustration: In 2014, I bought a land in Davao worth 2,000,000.
In 2016, Duterte became President increasing all the real estate
Q: Is income synonymous with receipts? prices here. Now, under The land that I bought is now pegged at
5,000,000. Is there a gain?
A: No. Pagsinabi mong income it’s the gain or profit pag sinabi mong
receipt it doesn’t necessarily result to income. Receipts is a broader No, wala pa. If there is an increase in the value of the property it’s
term something which you receive and includes income. a mere expectation of profit meaning it cannot be considered as a
gain. Yes there is an appreciation of value, but mere appreciation of
CAPITAL v. INCOME the property is not a gain which is subject to tax.
One favorite bar question is distinguish income from capital, so how One of the reasons why the increase of the value of that property is
do you distinguish it? not taxable to begin with, aside from there is no gain if there only
The fact is that property is a tree, income is the fruit; labor is a tree, an expectancy as to the rise or appreciation of the property’s value,
income the fruit; capital is a tree, income the fruit." A tax on income is the fact that it’s not yet realized; it’s not received.
is not a tax on property. "Income," as here used, can be defined as
"profits or gains."[Madrigal v. Rafferty] Q: How do you know that there is a realization of an income? What
is this realization, what are the requisites of realization?
Income Capital
Denotes a flow of wealth Fund or property existing at A: Realization is a determinative factor of the earning process.
during a definite period of time one distinct point in time Income is not deemed realized until the fruit is plucked from the
Service of wealth Wealth itself tree. There is a realization of that income if there is a corresponding
Subject to tax Return of capital is not subject transaction which gave rise to that earning process of income. There
to tax must be a transaction. Meaning, there must have to be some sort
Fruit Tree of sacrifice; a giving up of a thing for you to receive something of
value which is higher than the value sacrificed.
Illustration: The basic example I could give you is you deposited
a money in the bank. You have P1,000,000 deposited in the bank. Q: When will there be a realization of income?
Here, you earn interest even if you do nothing. When it matures,
you withdraw the P1,000,000 including the interest you earn from A: There are basically 2 conditions: (1) the earning process is
that time deposit. complete or virtually complete, and (2) there must be an exchange
that has taken place.
P1,000,0000 is your wealth your capital and from that, there is a
corresponding increase in the wealth the increase is the income. That’s why, in the earlier example that I gave you, nag appreciate
yung lupa, there is no taxable income because there is no
When we talk about income, we actually talk about the net worth of transaction involved. There is no realization of income. Sabi natin
a person or an entity. kanina, there must be an income which is realized or has been
received.
Net Worth = Assets – Liabilities
Actual v. Constructive Receipt
Assets are the properties that we own. Liabilities are your
obligations – mga utang. What remains is your net worth. If there There are two kinds of receipts. It’s either actual receipt or
is an increase in net worth, there is income. constructive receipt of the income.
What is being taxed by our NIRC is the income and not the capital. Actual Receipt
There must be something which increases your wealth. So anoang
ita-tax ninyo? Yung increase lang. It’s not enough that you Wala tayong problema sa actual receipt, if I give you the money,
determine if it is income. Going further you must determine if that then probably you have already earned the income. It’s just the
income is taxable. actual or physical receipt of the money or property involved.

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TAXATION
Constructive Receipt A: The GR is no. However, what is being required is the taxpayer
Constructive receipt is somewhat different or abstract. It occurs must be able to more or less accurately determine the amount of
when the money or consideration or its equivalent is placed at the income that he has earned during the taxable period.
control of the person who rendered the service or sold the goods
without restriction to the payor. It’s possible that there is no actual Section 43. General Rule. – The taxable income shall be
receipt of the money or the property but there is a total transfer of computed upon the basis of the taxpayer’s annual accounting period
control. (fiscal year or calendar year, as the case may be) in accordance with
the method of accounting regularly employed in keeping the books
The prime example that I always give to my students is deposit sa of such taxpayer, but if no such method of accounting has been so
banko. You earn interest income. Mag deposit ka lang sa banko and employed, or if the method employed does not clearly reflect the
mag tubo na yan siya doon. Do you actually receive the money? No. income, the computation shall be made in accordance with such
But essentially if you earn that interest income, the bank essentially method as in the opinion of the Commissioner clearly reflects the
gives you complete control over that deposit, such that you can income. If the taxpayer’s annual accounting period is other than a
withdraw it anytime without any restrictions. fiscal year, as defined in Section 22(Q), or if the taxpayer has no
annual accounting period, or does not keep books, or if the taxpayer
Another example is set-off. That is also constructive receipt. If you is an individual, the taxable income shall be computed on the basis
put it in taxation parlance, taxes withheld. If you’re an employee of the calendar year.
tapos ako employer mag bayad ako ng sweldo, but kaltasan ko yan
diba. A part of it is withholding tax. Kunin ko siya but I will remit it Under Section 43 of the NIRC, the taxable income must be
to the BIR. That is actually somewhat similar to constructive receipt. computed based on the taxpayer’s annual accounting period in
You did not actually receive the money but essentially that is part accordance with the method of accounting regularly employed in
of your income. keeping the books of the taxpayer.
LIMPAN INVESTMENT CORPORATION v. COMMISSIONER In other words, the law leaves it to the taxpayer to as to what
OF INTERNAL REVENUE accounting method to apply for his or her business.
G.R. No. L-21570, July 26, 1966
The consignment was resorted to due to the refusal of petitioner to Q: Is it possible for the BIR to impose the type of accounting method
accept the same, and was not the fault of its tenants; hence, to be employed by the taxpayer?
petitioner is deemed to have constructively received such rentals in
1957. The payment by the subtenant in 1957 should have been A: Yes. There are several occasions. They are under the same
reported as rental income in said year, since it is income just the section 43. Simply speaking, (1) no accounting method, (2)
same regardless of its source. inaccurate results
Discussion: Merong internal squabble sa corporation which is Naa koy kliyente dako na corporation pero wa may accounting
renting out several properties. Some of the renters were paying the record, binungkig2 ra ang gamit sa nisulod og nigawas na kwarta,
president, and some were paying the corporation. Nagkaproblema walay resibo. Gi padalhan og jeopardy assessment sa BIR based on
sila tapos ang renters ayaw rin magkaproblema so ginawa nila they the increase in net worth and their surveillance/investigation. So the
consigned their rental payments with the court. And then the BIR BIR just used the net worth method, to determine how much is the
assessed them of deficiency income taxes, kulang ang binayaran mo income of that person.
because you have underdeclared your income. Why is there an
underdeclaration? Because the corporation did not recognize those Cash method
monies consigned to the court and paid to the president. “Wa man Under this method of accounting, income is recognized only when
mi’y nadawat, so we excluded it from our declaration of income.” Is cash is actually or constructively received and expenses are incurred
there a taxable income? SC held yes, there is a taxable income, you only when they have been actually paid. In other words, it’s just the
did not actually receive the rent payments but you have inflow and outflow of money. Kung naa kay nadawat na kwarta,
constructively received the rent payments. But the corporation said, income na siya, kung naa kay gipagawas na kwarta expense na siya.
wala mang authority ang president to receive the money. However, We don’t care about the receivables or payables. As long as we
it was proven that the renters were paying to the president and receive or pay cash, that’s the time when you recognize income or
other officers sa una pa. So the SC says the corporation is estopped you will incur an expense.
from denying the authority of the president to receive the rent
payments. What about consignment? It’s good as payment under Accrual method
your civil code. In accrual method, the income is only recognized when it is earned
and regardless of whether or not it has been actually or
Methods of accounting constructively received, and expenses are accounted for in the
period in which they are incurred even if they are not yet paid. You
What are the several methods of accounting. Here you have cash recognize income even if you have not received anything to begin
method, accrual method, installment payment, deferred payment, with so parang weird.
percentage of completion. We will not discuss everything in detail
because you are not accountants. I just want you to have a little In accrual method, you recognize income when all the requisites of
understanding of what these accounting methods are all about. the ALL-EVENTS TEST have been complied with. Tinanong ito sa
bar exam, what is the all-events test. There are two requisites.
Q: Does the BIR prescribe or mandate a particular accounting First, fixing a right to the income or liability. It’s just a right, not
method? necessarily receipt or payment of money. Second, availability of a
reasonably accurate determination of such income or liability.

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TAXATION
Illustration: Supposing you are in the business of buying and (A) General Definition. – Except when otherwise provided in this
selling of cars, sometime in December 2018 someone bought a car Title, gross income means all income derived from whatever source,
from you. Binili mo yun na sasakyan 300k pero benta mo 400k. That including (but not limited to) the following items:
was December 2018. On the following year, that was the only time
you delivered the car because on January 2019, that was the only (1) Compensation for services in whatever form paid, including,
time you have received the money. So magkano ang income natin but not limited to fees, salaries, wages, commissions, and
dyan? 100k. similar items;
(2) Gross income derived from the conduct of trade or business
Supposing you are applying the CASH METHOD and you are or the exercise of a profession;
determining your taxable income for 2018, you will not receive any (3) Gains derived from dealings in property;
income as of 2018. You will only recognize an income only for the (4) Interests;
taxable year 2019 because that is the only time you have received (5) Rents;
the income, the 100k gain from the selling of that car. (6) Royalties;
(7) Dividends;
Under ACCRUAL METHOD, when was the contract of sale (8) Annuities;
perfected? Assuming even if you already delivered the car in 2018 (9) Prizes and winnings;
pa, even if you did not receive the consideration of 400k, you will (10) Pensions; and
already recognize it as income already in 2018. Because during that (11) Partner’s distributive share from the net income of the general
time, the all-events test have already been complied with. First, professional partnership.
fixing a right to the income or liability. From the time that the car
has already been delivered in 2018, is there already a right to So to illustrate income we will draw a pie. This pie is your gross
income? Yes of course diba. If the buyer will not pay the 400k? income. A portion of it is your exclusions, or receipts of money or
Anong meron ka? You still have a right to that consideration, or in property which may be income, but are specifically excluded by law
accounting terms, meron ka nang receivables. Second, the in determining the gross income. And then you have which are those
availability of a reasonably accurate determination of such income subjected to final taxes. And then you have deductions, these are
or liability. How is that possible to determine under this scenario? business expenses allowed by law to be deducted by law to be
Probably meron nang acknowledgement receipt or contract of sale deducted from your gross income. This differs from exclusions
that was executed by the parties. because exclusions are receipts of money or property, whereas,
deductions are outlay of money, nagbayad ka. And the prior to your
Installment basis TRAIN LAW, you have exemptions or personal exemptions. And the
remaining chunk is your net taxable income or your tax base para
This is applied when the payment or collection extends over a sa imong income tax rate.
relatively long period of time, usually more than a year. Usually lang,
kase merong namang installment payments na 6 months lang. Who
may apply this installment basis of accounting? First, dealers of
personal property. Second, casual sellers of personal property under
the following requirements: 1. The price of the thing exceeds 1k,
and 2. The initial payments do not exceed 25% of the selling price.
Pag sinabi mong casual sellers, nag benta ka lang, hindi mo siya
business. Third, sellers of real property If the initial payment do not
exceed 25% of the selling price. In this installment method, in each
payment the buyer makes, the seller recognizes income on the same
in proportion of the cash collected. So kunware 20k per month. It is
NOT the entire 20k you will recognize as income. A portion of it is
considered as income, a portion of it is a return of capital.
Deferred payment Taxation is about identification, not computation. Ano yung mga
Similar to installment method, the payment is also extended for a kailangan i identify natin. First, is this income to begin with? Second,
long period of time, but the taxpayer will apply deferred payment if assuming income siya, is it part of the gross income or is it excluded
the initial payment, ung unang bayad, will exceed 25% of the total by the law from taxation? Third, sa imong expenses, is it a
contract price or consideration. What is the difference of this deductible expense? Or is it a non-deductible expense? Fourth, isipin
installment basis and deferred payment? Sa installment, kada niyo pa anong klaseng taxpayer siya. So it’s all about identification
payment gina apportion nato siya, a part of it is income, a part of it and if you master these things, you master taxation.
is return of capital. Sa deferred, the entirety of the initial payments
is recognized as income. Composition of Gross Income
Percentage of completion Pag basahin natin yung text ng Section 32(A), there are only 3
Long term contracts, usually construction. Example Aeon Towers, categories: 1. Compensation income, 2. Business income, and 3.
halos every year ready for turnover daw (hehehe) Other income. That’s the general overview of Sec. 32.
GROSS INCOME Does the kind of income matter? An income does not necessarily
mean money. It also involves exchange of properties. Form does
The definition of Gross Income is under Section 32(A) of the NIRC: not matter, source does not matter, location does not matter. As
long as there is income it’s supposed to be a part of your gross
Section 32. Gross Income. – income.
The legality or illegality of the income does not matter so long as
the person would earn income then that should form part of the

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TAXATION
gross income. We are employing the system of self-assessment, A: It depends. If that person is also a corporate officer, or employee,
tayo ang mag declare sa BIR sa income natin for a certain taxable that’s part of the compensation income. But, if he is just an outsider
year. Dapat yang mga druglords mag report din sila ng income nila or probably he is an independent director, it’s not compensation
from selling juts. income, because there is no employer-employee relationship.
“Except as otherwise provided by the tax code” - what does What are those included in the term compensation?
this phrase mean? If the tax code provides for a 1. Separate tax First, the salaries and wages. Understandable, sweldo. And this also
treatment or 2. The tax code or any other law exempts an item from includes the overtime, night shift differential, holiday pay, hazard
income tax then such item is excluded from your gross income. pay. In other words, the supplementary benefits and other
To simply, as a rule all income forms part of your gross income for premiums are also included as part of the compensation income.
taxation purposes. Exceptions, there are only 2. First, income which Second, honoraria. Nag attend ng meeting or probably you were
are excluded by law. Second, those income which are subject to asked to lecture by your employer and you were given a certain
final tax. amount of money, that’s part of your income.
TYPES OF INCOME TAX Third, allowances. Alam nyo yang PERA (Personal Economic Relief
and Allowances) or RATA (Representation and Travel Allowances).
1. Regular Income Tax As a general rule, these allowances are part of your gross income.
Exception, these allowances, if given to the employee, is excluded
The regular income tax rate for Individuals is found in your tax table from your gross income if the same is subject to: 1. Liquidation and
under the NIRC, the rate depends on the tax bracket where the 2. It is ordinary and necessary for the business of the employer.
taxpayer belongs. For Corporations, the tax rate is generally 30%.
So if the allowance given to you is subject to liquidation, then that
2. Final Taxes is not your income. You don’t gain anything from it.
When you say income subject to final tax, this is income subject to What are the types of allowances? We have Fixed and Variable
a different tax rate and taxed finally at source. You call it final allowances. Pag Fixed allowance, fixed in nature, kada bulan naa
because once the income is subject to final tax, there is no other kay 10k pesos. Pag Variable allowance, it varies, for this month since
income tax implication. So example, interests from bank deposits we need to boost sales we will give you this amount.
are subject to 20% final tax, the interest income is no longer part
of your gross income. Does it matter if the allowance is fixed or variable? No. What is
important is those two requirements of liquidation and
COMPENSATION INCOME ordinary/necessary for the business are complied with then the
allowance is excluded from your gross income. Another requirement
This only applies to individuals. Wala namang sweldo ang for the exception is that these allowances must be substantiated by
corporation eh. It’s found in Section 32(A)(1) of your NIRC. receipts or competent supporting documents.
Compensation for services in whatever form paid, Fourth, Tips and gratuities. Kain ka sa restaurant, diba bigay ka ng
including, but not limited to fees, salaries, wages, tip. So is this part of the compensation income? It depends. If these
commissions, and similar items; tips are coursed through the employer and given to the employee,
then it’s part of the compensation income. But if the tip is given by
Compensation here means all remuneration for services performed the customer directly to the employee, then it’s already other
by an employee for his employer unless exempted by law from income, dili na compensation income.
taxation. Take note when you say compensation income, there must
be an element of employer-employee relationship. Fifth, Hazard or emergency pay.
If you receive money because you rendered service but it’s not Sixth, Retirement pay and separation pay. Retirement pay, that
under the employer-employee relationship, it’s not compensation also arises from employer-employee relationship. So as a rule, when
income. It’s probably a business income or part of your other we talk about retirement pay and separation pay, it forms part of
income. your gross income, that’s the general rule.
If I am going to ask you to paint me like one of your French girls. Seventh, Vacation and Sick Leaves. As a general rule, it’s part of
Then I am going to give you 50k afterwards. Is that considered as your gross income. Exception, monetized value of unutilized
compensation income? A taxable income but not under vacation leave credits of 10 days or less.
compensation. It is under business income.
Eighth, Employee Awards. Yang sa Jollibee na employee of the
Q: Should the compensation be in money? month tapos meron silang parang mga mugshot.
A: Not necessarily. Meron namang ibang employers na example Ninth, Profit Sharing. Meron namang mga employer na profit
pagawaan ng shampoo, bigyan ka ng stock nag shampoo. Or diba sharing sila. They are still employed but they are receiving a share
yang sa Herbalife, aside sa sweldo bigyan ka rin ng produkto? of the profits because of the efforts they have put into the business.
Q: What about per diems ng mga corporate board of directors? Per September 3, 2019 | Honorico
diems, like when you attend a board meeting you receive a certain
amount of money. FRINGE BENEFITS
SEC. 33. Special Treatment of Fringe Benefit.—

15
TAXATION
(A) Imposition of Tax.— Effective January 1, 2018 and onwards, by the employer to the employee and the employer is not required
a final tax of thirty-five percent (35%) is hereby imposed on the by law to afford the employee that benefit.
grossed-up monetary value of fringe benefit furnished or granted to
the employee (except rank and file employees as defined herein) by It includes facilities and supplements under the Labor Code.
the employer, whether an individual or a corporation (unless the
fringe benefit is required by the nature of, or necessary to the trade, Example:
business or profession of the employer, or when the fringe benefit You are an employee of Pfizer then your employer gives you a car.
is for the convenience or advantage of the employer). The tax herein That is an example of FB.
imposed is payable by the employer which tax shall be paid in the
same manner as provided for under Section 57(A) of this Code. The What does the term FB include?
grossed-up monetary value of the fringe benefit shall be determined (refer to Sec. 33 b)
by dividing the actual monetary value of the fringe benefit by sixty Who gives the FB?
five percent (65%) effective January 1, 2018 and onwards: It is given by the employer to the employee
Provided, however, That fringe benefit furnished to employees and This Fringe Benefit is ordinarily compensation income because it is
taxable under Subsections (B), (C), (D), and (E) of Section 25 shall given out of EE-ER relationship.
be taxed at the applicable rates imposed thereat: Provided, further,
That the grossed-up value of the fringe benefit shall be determined Does type of employment matter? NO
by dividing the actual monetary value of the fringe benefit by the
difference between one hundred percent (100%) and the applicable Please take note that Sec. 33 has been amended by the TRAIN Law.
rates of income tax under Subsections (B), (C), (D), and (E) of (as provided above)
Section 25.
There are 2 types of employees who receive FBs:
(B) Fringe Benefit defined.- For purposes of this Section, the 1. Rank and File Employees
term "fringe benefit" means any good, service or other 2. Managerial Employees
benefit furnished or granted in cash or in kind by an
employer to an individual employee (except rank and file RANK AND FILE EMPLOYEES
employees as defined herein) such as, but not limited to, the
following: Section 22(AA), NIRC provides:
(1) Housing;
(2) Expense account; (AA) The term "rank and file employees" shall mean all
(3) Vehicle of any kind; employees who are holding neither managerial nor supervisory
(4) Household personnel, such as maid, driver and others; position as defined under existing provisions of the Labor Code of
(5) Interest on loan at less than market rate to the extent of the the Philippines, as amended.
difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the So alam na natin kng sino ang rank and file. Its basically a definition
employer for the employee in social and athletic clubs or other based on exclusion. If he is not a manger or a supervisor, he is
similar organizations; considered a rank and file employee. But if you read the Labor Code
(7) Expenses for foreign travel; there are two definitions. Sa Labor Standards ang isa sa Labor
(8) Holiday and vacation expenses; Relations.
(9) Educational assistance to the employee or his dependents;
and MANAGERIAL EMPLOYEES
(10) Life or health insurance and other non-life insurance How do they define a managerial or supervisory employee? Art.
premiums or similar amounts in excess of what the law allows. 212 (m) of the Labor Code.
(C) Fringe Benefits Not Taxable. - The following fringe benefits “Managerial employee” is one who is vested with the powers
are not taxable under this Section: or prerogatives to lay down and execute management policies
(1) Fringe benefits which are authorized and exempted from tax and/or to hire, transfer, suspend, lay-off, recall, discharge, assign
under special laws; or discipline employees.
(2) Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization benefit plans; When you say Supervisory Employee, how is this type of employee
(3) Benefits given to the rank and file employees, whether different from the managerial? Basically in the supervisory
granted under a collective bargaining agreement or not; and employee, if you come to the definition:
(4) De minimis benefits as defined in the rules and regulations
to be promulgated by the Secretary of Finance, upon Supervisory employees are those who, in the interest of the
recommendation of the Commissioner. employer, effectively recommend such managerial actions if the
The Secretary of Finance is hereby authorized to promulgate, upon exercise of such authority is not merely routinary or clerical in
recommendation of the Commissioner, such rules and regulations nature but requires the use of independent judgment. All
as are necessary to carry out efficiently and fairly the provisions of employees not falling within any of the above definitions are
this Section, taking into account the peculiar nature and special considered rank-and-file employees for purposes of this Book.
need of the trade, business or profession of the employer.
Now, what is the tax consequence? We said earlier that the type
What are Fringe Benefits? of employees matter.
Money or properties given by the employer to the employee in
addition to their regular salary. It is over and above their regular a. If the fringe benefit is given to a rank and file
salary. That is already considered. It is the amount of money given employee, the
GR: It forms part of the gross income

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TAXATION
XPN: It does not form part of the gross income if it is excluded COMPOSITION OF THE GROSSED UP MONETARY VALUE
by law.
Generally speaking, the actual value of the fringe benefit, the
b. If the fringe benefit is received by a managerial or amount of cash plus the fringe benefit tax being paid by the
supervisory employee, employer.
GR: It does not form part of the gross income because the 1. For non-resident aliens who are not engaged
fringe benefit is subject to a fringe benefit tax or FRINGE in Trade and Business (NRANETB) - the tax rate
BENEFIT TAX, which is a final tax. is 25%
2. Special individuals/aliens – 15%
NATURE OF FRINGE BENEFIT TAX
4 TYPES OF SPECIAL ALIENS:
FRINGE BENEFIT TAX is a final tax. It is the tax imposed on the
fringe benefit received by a managerial or supervisory employee. 1. Aliens who are employees in regional
It’s a FINAL TAX that’s why it is not included in the Gross operating headquarters of multinational companies.
Income(GI) of the managerial or supervisory employee. 2. Those who are engaged in offshore banking units of
foreign banks.
Just to Simplify: 3. Those who are employed in petroleum service contractors
The job of a manager is policy implementation and personnel action. or sub-contractors in the Philippines.
When you talk about supervisory employees, they only make 4. Filipino citizens but they are employed here in either the 3
effective recommendations of these managerial actions. (e.g. to companies occupying the same position as those special
hire, transfer or fire). The role is not clerical in nature but it requires aliens.
independent judgment.
What is the nature of FRINGE BENEFIT TAX?
TAX RATE OF FRINGE BENEFIT TAX. Its a Final Tax. Another thing is, its actually the employer who pays
Under the TRAIN law: It’s now 35% the tax. Its a tax on the compensation of the employee but
ultimately it is the employer who bears the burden of the tax. It is
Prior to January 2018, it’s just 32% that is the tax rate, that’s because of the very nature of the computation of the FRINGE
the fringe benefit tax rate. BENEFIT TAX.
TAX BASE OF FRINGE BENEFIT TAX: What is the MONETARY VALUE?

The tax base of fringe benefit is the GROSSED UP MONETARY FOR THE EXAM: But do not worry I will not be asking about
VALUE. numbers, I will only be asking what is the monetary value, which
necessarily does not mean that you should explain it in figures. I
It’s not the monetary value, it’s not the amount of money or want you to put it in writing. What is the monetary value for this?
property received by the employee. But it’s the grossed up monetary What is the tax base of this? How will you get the GUMV? So, dapat
value. alam nyo ang Monetary Value. You must be able to explain it into
words.
So if the tax rate is 35%, it’s just the monetary value of the fringe
benefit divided by the difference between 100 and 35. Fringe Benefit is valued as follows:
GUMV = MONETARY VALUE OF THE FRINGE BENEFIT It’s given in money or thing
100-35 = 65
1. If it’s in MONEY or if the FB paid by the employer to the
employee then the monetary value is THE AMOUNT
FOR NON-RESIDENT ALIENS WHO ARE NOT ENGAGED GIVEN OR THE MONEY PAID.
IN TRADE AND BUSINESS
Kung pila ang kwarta na gihatag. It’s either the employer
GUMV = MONETARY VALUE OF THE FRINGE BENEFIT will give you money or the employer will pay for whatever
100-25 = 75 expenses that the employee would incur.
2. If it’s other than money (thing), the trick here is you see
whether there is a chance of transfer of ownership.
FOR SPECIAL INDIVIDUALS/ALIENS
a. If there is a transfer of ownership: The monetary
GUMV = MONETARY VALUE OF THE FRINGE BENEFIT value would be the FAIR MARKET VALUE OF THE
100-15 = 85 PROPERTY
a. Ex: Ihatag nako ni sa imoha ning laptop and it

yours already.
FRINGE BENEFIT TAX = GUMV x Tax rate
(35%,25%,15%) b. If there is no transfer of ownership: Meaning it’s just
an assignment, then normally it just the DEPRECIATION
VALUE OF THE PROPERTY
You determine the monetary value first. Then divide by 65%. You
will have your grossed up monetary value. Then you multiply by the
tax rate of 35%.

17
TAXATION
*There are specific properties to which the law declares specific 4. Employer purchases a housing and gives it to the
monetary values for that kind of property. It’s mostly provided employee (there is a transfer of ownership)
by REVENUE REGULATIONS.
SPECIFIC PROPERTIES MV = Acquisition Cost (AC) or the Zonal Value of the

Under the Revenue Regulations, there are separate tax treatment property, whichever is higher
depending on the type of property or benefit given to the employee.
Example: 5. Transfer of ownership at less than employers

1. housing privilege acquisition cost
2. expenses account
3. motor vehicles Employer will buy a property and part of the purchase price of
4. interests in loan not less than the market rate that property will be shouldered by the employee.
5. expenses for foreign travel
6. educational assistance.
7. de minimis benefits MV = the difference between the Zonal Value or
FMV whichever is higher and the Cost to the
HOUSING PRIVILEGE employee.
The tip here is you determine if there is TRANSFER OF OWNERSHIP.

Mostly, if there is no transfer, the monetary value is 50% of the ZV or FMV (whichever is higher)
value. - Cost to the EE
Monetary Value
If there is transfer of ownership the monetary value is either:
1. acquisition cost
2. zonal value
NON-TAXABLE HOUSING PRIVILEGES: [TAX EXEMPT]
3. assessed value
1. Housing Privileges of the Armed Forces of the Philippines.
Whichever is higher.
(PNP excluded)
Lets go now to specific situations.
2. Housing unit situated inside or adjacent to the business
is there a transfer of ownership or only an assignment?
premises or the factory
HOUSING PRIVILEGES
Example: you are a good doctor and one hospital would
You are living outside of Davao City and you are working in a branch
employ you but dili ka taga didto. they just put you in a
here, and the employer will provide for your housing.
house near the hospital so that when there are
emergencies you can easily be called
1. Leased by the employer for the use of the employee
The Revenue Regulations defines “adjacent” as within a
50-meter radius from the business premises.
MV(monetary value) = 50% of the rent amount
3. Temporary Housing for three (3) months or less
EXPENSE ACCOUNT
2. Employer owns a real property and assigns it to the
employee This means that the employer already had incurred personal
expenses and yet even if its personal, it will be shouldered by the
ER. (eg. grocery).
MV = 50% of the AV (Annual Value)
As a general rule, it is subject to FRINGE BENEFIT TAX.
To get AV:
MOTOR VEHICLES
Annual Value = 5% (FMV or ZV)
The principles in Housing Privileges is also applicable to Motor
Vehicles Privileges.
What is the annual value? 5% of the FMV (Fair Market Value)
or the ZV (Zonal Value) of the property whichever is higher 1. Motor Vehicle is purchased by the employer in the name of
the employee (transfer of ownership)
3. Employer purchases a real property/housing for the
employees use
MV = Acquisition Cost
MV = 50% of the AV
2. Cash is given by the employer to the employee
To get AV:
MV = Cash Value given
AV = 5% of the Acquisition Cost exclusive of interest

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TAXATION
3. Purchased by the employer on an installment basis (no (2) Inland travel expenses,
transfer of ownership) o EXCEPT lodging cost, amounting to an average
USD 300 or less per day. If it is already excess of
USD 300 then the excess is subject to FRINGE
MV = Acquisition Cost exclusive of the interest BENEFIT TAX. When you say inland travel
divided by 5 years expenses this does not include lodging cost.
4. Price is shouldered by the employer (3) The cost of economy or business class airplane
fares.
o What about first class tickets- the non-taxable
MV = amount shouldered by the employer amount is 70% of the first class air fare.
1. Taxable foreign travel expenses subject to FRINGE

5. Fleet of motor vehicles maintained by the employer for the BENEFIT TAX:
use of the employee (no transfer of ownership) · Foreign travel expenses which are not supported by
documentary exhibits – no brochures, no receipts
presented to the BIR
· 30% of the first-class airfare
MV = 50% of the Value of the Benefit which is the
· Traveling expenses of the family members paid for
Acquisition cost of all the vehicles divided by 5
by the employer – that is taxable because that is not
years
related to business
· Foreign travel expenses not related to business
meetings or conventions
6. Fleet of motor vehicles leased by the employer
EDUCATIONAL ASSISTANCE
MV = 50% of the rental payments There are some employers who provide educational assistance not
only to the employees but also to the dependents to those
employees. The rules we have to follow pertaining to educational
7. Yacht assistance:
MV = depreciation amount which is based on its GR: Educational assistance given to the employee or managerial
useful life of 20 years staff is subject to FRINGE BENEFIT TAX
EXP: 2 types of exceptions:
8. Aircrafts (including helicopters) 1. If it is given to the employee the following

Not subject to FRINGE BENEFIT TAX anymore. requirements must be complied with so that it will be
It is presumed that it is for business use. exempted from FRINGE BENEFIT TAX:
a. The educational assistance is directly related or
INTEREST ON LOAN connected with the employer’s business; and
b. There is a written contract between the
Employee will loan money from the employer at interest rate less employer and the employee that the employee
than the legal interest. shall remain in the employ of the employer for a
particular period of time. There is a employee
The Fringe Benefit here is just the difference between the legal bond or is a tie-up provision.
interest of 6% and the interest imposed by the employer.
2. Those which are given to the dependents of the
EXPENSES FOR FOREIGN TRAVEL employee it is exempt from FRINGE BENEFIT TAX
under the following requirement:
1. Non- taxable foreign travels shouldered by the employer - a. provided for through a competitive scheme
before these fringe benefits are exempted from the taxes, they under the company’s scholarship program
must be supported by receipts. You have to follow the
“SUBSTANTIATION RULE”. Must be supported by NON-TAXABLE FRINGE BENEFITS
documentary evidences showing that the travel was for
business purposes and the receipts for expenses was actually What are those FBs which are not subject to FRINGE BENEFIT TAXs?
incurred
Section 33 NIRC
Non-taxable foreign travel expenses not subject to Section 33. Special Treatment of Fringe Benefit.-
FRINGE BENEFIT TAX: XXX
(1) Reasonable business expenses for foreign (C) Fringe Benefits Not Taxable. - The following fringe benefits
business travel - for foreign business meeting or are not taxable under this Section:
foreign business conventions. (1) Fringe benefits which are authorized and exempted
o If you notice the definition of fringe benefit those from tax under special laws;
which are necessary to the business of the (2) Contributions of the employer for the benefit of the
employer. They are not subject to FRINGE employee to retirement, insurance and hospitalization
BENEFIT TAX. benefit plans;

19
TAXATION
(3) Benefits given to the rank and file employees, c) Medical cash allowance to dependents of employees, not
whether granted under a collective bargaining exceeding ₱1,500 per employee per semester of ₱250 per
agreement or not; and month;
(4) De minimis benefits as defined in the rules and d) Rice subsidy of ₱2,000 or one sack of 50kg. rice per month
regulations to be promulgated by the Secretary of amounting to not more than ₱2,000;
Finance, upon recommendation of the Commissioner. e) Uniform and clothing allowance not exceeding ₱6,000 per
annum;
From 2018 TSN: Benefits given to Rank-and-File EEs, whether f) Actual medical assistance, e.g., medical allowance to cover
granted under a CBA or not is exempt from FRINGE BENEFIT TAX medical and healthcare needs, annual medical/executive
because they are part of GI. check-up, maternity assistance, and routine consultations,
not exceeding P10,000 per annum
If you read the codal provision, there are at least 2 kinds: g) Laundry allowance not exceeding P300 per month
(1) Those required by the nature of, or necessary to the h) Employees achievement awards, e.g., for length of service
trade, business or profession of the employer; or safety achievement, which must be in the form of a
(2) Those granted for the convenience or advantage of tangible personal property other than cash or gift certificate,
the employer with an annual monetary value not exceeding P10,000
received by the employee under an established written plan
DE MINIMIS BENEFITS (DMBs) which does not discriminate in favor of highly paid
employees
These are facilities or privileges furnished or offered by the employer i) Gifts given during Christmas and major anniversary
to his employees that are of a relatively small value and are offered celebrations not exceeding P5,000 per employee per annum
or furnished by the employer as a means of promoting health, j) Daily meal allowance for overtime work and night/graveyard
goodwill, contentment or efficiency of his employees. shift not exceeding twenty five percent (25%) of the basic
minimum wage on a per region basis; and,
De minimis benefits are still compensation income but it does not k) Benefits received by an employee by virtue of a collective
mean that if the employer gives you something that is of small value bargaining agreement (CBA) and productivity incentive
it is considered as a de minimis benefit because the definition itself schemes provided that the total annual monetary value
is confined or the context or the things falling under the de minimis received from both CBA and productivity incentive schemes
benefits are listed in the revenue regulations. The list is EXCLUSIVE. combined do not exceed ten thousand pesos (Php
10,000.00) per employee per taxable year.
4 principles that you have to remember in De Minimis Benefit:
September 12, 2019 | Emuy
1. The list is exclusive. If its not in the list then its not a de
minimus benefit.
GAINS
2. In each de minimis benefit there is a corresponding figure that is
Definition: his refers to the income derived from the sale and/or
mentioned.
exchange of assets which results in a gain.
Example: rice allowance: ceiling is 1,500 per month
Sale of certain asset or property or exchange of one property for
another and because of such transaction, there will be a
As long as it will not exceed the ceiling as indicated by the revenue
corresponding gain which will form part of GI as a general rule
regulation, the de minimis benefit is excluded from GI.
EXCHANGE OF ASSETS
3. What if the employer will give all the de minimis benefits under
- TRANSFER of property from one person to another for a
the listing? Is it still excluded?
good consideration
YES. So long as it will not exceed the ceiling.
- This refers to onerous transactions
- Does not include donation or succession
What if the amounts of the de minimis benefits will exceed
the ceiling?
TWO TYPES OF GAINS:
It does not matter because the excess de minimis benefit can fall
1. Ordinary Gain
under the 90,000 exception under 13th month pay and other
- gains derived from the sale of ORDINARY ASSETS
bonuses. They are considered as other bonuses which may be
- an ordinary gain is what you get when one
included under the 90,000 rule.
deals with an ordinary asset as a profit. It you
deal and it ends with a loss, its ordinary loss.
4. De minimis benefits given to managerial employees are
- Taxability – Ordinary gains form part of GI
exempt from FRINGE BENEFIT TAX. It applies to both rank and file
and managerial employees.
2. Capital Gain
- it is from the sale, exchange, or barter of CAPITAL
Under RR No. 1-2018, the De Minimis benefits are as ASSETS
follows: - Same: capital gain and capital loss.
- Taxability:
a) Monetized unused vacation leave credits of private GR: for part of your GI except as otherwise provided by law.
employees not exceeding ten (10) days during the year; XPN:
b) Monetized value of vacation and sick leave credits paid to 1. Gains from the Sale or exchange of real properties
government officials and employees; 2. Gains from the Sale or exchange of domestic stocks

20
TAXATION
Q: What are ordinary assets? STOCKS TRANSACTIONS (Domestic Stocks)
SECTION 39, NIRC. First identify the classification of the assets covered by the stock
SEC. 39. Capital Gains and Losses. - dealing
(A) Definitions. - As used in this Title - 1. Those which are sold or transferred by stock dealers in the
(1) Capital Assets. - The term 'capital assets' means ordinary course of business
property held by the taxpayer (whether or not connected ü These are ordinary assets which results to ordinary
with his trade or business), BUT DOES NOT INCLUDE gain which forms part of the GI
§ stock in trade of the taxpayer or other property of
a kind which would properly be included in the 2. Those which are sold or transferred by those who are non-
inventory of the taxpayer if on hand at the close of dealers in stocks
the taxable year (inventories)or
§ property held by the taxpayer primarily for sale to i. Those which are listed in a local stock exchange
customers in the ordinary course of his trade or – when there is sale, you avail of the facilities and
business (inventories), or services of a local stock exchange.It are subject to a
§ property used in the trade or business, of a Stock Transaction Tax (Section 127 (a) of NIRC)
character which is subject to the allowance for which is in the nature of a final tax. The gains will no
depreciation provided in Subsection (F) of Section longer form part of the GI.
34 (depreciable assets); or • Tax Rate: 6/10 of 1%
§ real property used in trade or business of the • Tax Base: Gross Selling Price
taxpayer.
ii. Direct sale- those which are not listed in a local stock
Based in the entire definition as a whole, CAPITAL ASSETS are exchange which means that stocks are traded or sold
those which are not used in business. The ORDINARY ASSETS through direct selling. This will be subjected to CAPITAL
which are used in the ordinary course of business. This is the GAINS TAX. Capital gains tax is in the nature of a final
meaning under capital gains taxation. Don’t mind the phrase “ tax. Therefore, the gains in Direct sale of domestic stocks
Whether or not connected in his trade”. are excluded from GI.
• Tax Rate: 15% Capital Gains tax
Look at the EXCEPTIONS: • Tax Base: net capital gains during the taxable
1. Stock in trade of the taxpayer or other property of year:
a kind which would properly be included in the Selling price
inventory of the taxpayer if on hand at the close of Less Cost of the shares sold
the taxable year Less Cost of selling
§ inventories Less Documentary stamp tax___
2. Property held by the taxpayer primarily for sale to =Net Capital Gains
customers in the ordinary course of his trade or
business, or For INDIVIDUAL TAX PAYERS, refer to Section24(c) as
§ still part of the inventory amended by the TRAIN LAW which applies to all types of tax payers
3. Property used in the trade or business, of a in Philippines. This is for sale outside the Local Tax Exchange.
character which is subject to the allowance for
depreciation provided in Subsection (F) of Section Section 24 (C) Capital Gains from Sale of Shares of Stock not
34; or Traded in the Stock Exchange The provisions of Section 39(B)
§ DEPRECIABLE ASSETS notwithstanding, a final tax at the rates of 15 % below is hereby
4. Real property used in trade or business of the imposed upon the net capital gains realized during the taxable year
taxpayer from the sale, barter, exchange or other disposition of shares of
stock in a domestic corporation, except shares sold, or disposed of
Ex: Carwash. The property in which the carwash stands, even if the through the stock exchange
owner is not primarily engage in the sale of real property, is
considered as an ordinary asset. If your going to sell the carwash This provision refers to Direct sale of Stock. The assets involved
and the Land where its situated, these properties are going to be here are domestic shares only. This is the 15% capital gains tax.
considered ordinary assets. Residential House is an example of a Does the 15% capital gains tax apply to corporations?
capital asset.
GR: apply to corporations
How do determine whether or not there is a gain or loss in a EXP: For foreign corporations apply the 5-10 % Rule
transaction? 1. Resident foreign corporations – apply the old rule before
Section 24(c) was amended by TRAIN LAW.
Selling price – Cost of the goods = Gain or Loss Instead of 15 %, you follow this:
Not over P100,000………………………………. 5%
3 types of assets which may be dealt with by the tax payer that On any amount in excess of P100,000… 10%
has a corresponding capital gains tax implication 2. Non Resident Foreign Corporations – apply the old rule
1. Domestic stocks
2. Real properties situated in the Philippines 5-10 % Rule:
3. Other capital assets - First 100,000 gains will be subject to 5% tax
- Any excess will be subject to 10% tax

21
TAXATION
Sept. 17, 2019 | Ulangkaya (3) Capital Gains. - Capital gains realized from sale, barter or
exchange of shares of stock in domestic corporations not traded
Review: For you to understand Capital Gains Taxation, you have through the local stock exchange, and real properties shall be
to identify the type of asset being sold. It’s either of the three: subject to the tax prescribed under Subsections (C) and (D) of
1. Domestic Stocks Section 24.
2. Real Properties situated in the Philippines
3. Other properties or properties other than domestic stock For NRANETB
and real properties situated in the Philippines SEC. 25. Tax on Nonresident Alien Individual
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Take note the CGT here concerns about the capital gains from the Within the Philippines.
sale or exchange of properties in the Philippines, so domestic siya. Capital gains realized by a nonresident alien individual not engaged
in trade or business in the Philippines from the sale of shares of
We have discussed the type of assets. stock in any domestic corporation and real property shall be subject
to the income tax prescribed under Subsections (C) and (D) of
• Ordinary Asset – you will have ordinary gains. It will form Section 24.
part of your gross income subject to regular tax.
• Capital Asset – you will have capital gains. The taxability
These Sections pertaining to NRAETB and NRANETB, the 25(A)(3)
of the capital gain would depend on the type of property
and 25(B), they make reference back to this Section 24 (D)(1).
involved. Yun na yung tatlong property na sabi ko kanina.
Conclusion: Basically, the same tax treatment for these type of
Domestic Stock
individuals.
Sold by a trader or Ordinary gain
dealer Second point, the rule on Capital Gains Taxation on real properties
Not sold by a trader or is applicable only to real properties within the Philippines.
dealer
Listed in the Stock Transaction Tax – 6/10 of 1% What if the real property classified as capital asset is
stock of GROSS SELLING PRICE abroad?
exchange If it is abroad and you sell it, you are a resident citizen, any capital
Direct Selling Capital Gains Tax – 15% of NET gain will form part of your gross income. Walang capital gains
CAPITAL GAIN taxation diyan.
Exception: NRANETB – 5%, 10% What is the tax treatment if the property is a real property
Rule. and the taxpayer involved is a RA?
It is tax exempt. Resident Aliens are taxed only on their income
First 100,000 – 5% earned within the Philippines.
Any excess on the 100,000 – 10%
You all start with the classification of the taxpayer. And then you
REAL PROPERTIES apply the tax implication kung taxable ba siya or hindi. Sunod lang
kayo sa rules. You start with the classification of the taxpayer and
For Citizens and Resident Alien then you go to the type of transaction producing the income. So
SEC. 24. Income Tax Rates. – huwag niyo yan kalimutan, everything that we have discussed so
(D) Capital Gains from Sale of Real Property. – far are interconnected.
(1) In General. – The provisions of Section 39(B) notwithstanding,
a final tax of six percent (6%) based on the gross selling price How do you define real property?
or current fair market value as determined in accordance with It is defined same with the New Civil Code. Art. 415.
Section 6(E) of this Code, whichever is higher, is hereby
imposed upon capital gains presumed to have been realized What is the tax rate? 6%
from the sale, exchange, or other disposition of real property What is the tax base? Based on either:
located in the Philippines, classified as capital assets, including 1. Selling price
pacto de retro sales and other forms of conditional sales, by 2. Zonal value or fair market value - valuation of real property
individuals, including estates and trusts: Provided, That the tax as provided by the BIR
liability, if any, on gains from sales or other dispositions of real 3. Assessed value – determined by the local assessor where
property to the government or any of its political subdivisions the property is located
or agencies or to government-owned or controlled corporations
shall be determined either under Section 24 (A) or under this § Whichever is highest among the three.
Subsection, at the option of the taxpayer;
Yan ang tax base natin, so tatlo ang basehan natin.
Take note this provision applies to individuals which includes
estates and trusts. We have discussed last time that estates and In real time setting here in Davao City. Marami nagasabi na babaan
trusts are taxable entities and they are adjudicated as if they are mo ang selling price para maliit lang ang tax. That is actually a type
individuals. of tax evasion. But this will not work anymore because the zonal
value here in Davao City is very very high. Magugulat na lang sila.
For NRAETB Kasi the tax base is whichever is the highest among the selling price,
SEC. 25. Tax on Nonresident Alien Individual zonal value or assessed value. So kahit na maliit lang ang selling
(A) Nonresident Alien Engaged in trade or Business Within the price mo, but the zonal value is highest among the three, the zonal
Philippines. value will be your tax base.

22
TAXATION
Who is liable for the CGT? Seller. SMI-ED vs. CIR

G.R. No. 175410 November 12, 2014
If you will see in some contract, there is a provision that the CGT
will be paid by the buyer for and in account of the seller. But I always For corporations, the National Internal Revenue Code of 1997 treats
advise them do not put that provision in the contract. If you will the sale of land and buildings, and the sale of machineries and
make the buyer liable for the CGT, they would add it up and consider equipment, differently. Domestic corporations are imposed a 6%
it in the computation of the 6%. So in this case, the selling price will capital gains tax only on the presumed gain realized from the sale
not only be the amount indicated in the contract but will also include of lands and/or buildings. The National Internal Revenue Code of
all the other fees that will have to be paid by the buyer in connection 1997 does not impose the 6% capital gains tax on the gains realized
to such sale. Kasali siya sa selling price. from the sale of machineries and equipment.
What are the transactions included here? How about barter?

(1) Sale – benta. This is the usual. Basically barter, I will exchange my land for your land. There will be
(2) Exchange – my property for your property. So me and you a capital gains tax implication there. Based on what? The selling
will be liable for the CGT. price, zonal value or assessed value whichever is higher? So ano
(3) Other disposition of real property – refers to onerous man ang selling price mo na wala man pera? You compare the zonal
transfers located in the Philippines classified as capital value of the land to be acquired, yan ang selling price mo and the
assets. zonal value of property that you will give out or the assessed value
of you will give out whichever is higher.
You have to look at the type of taxpayer involved because it will
have an income tax implication. Lets correlate it with the definition There is this BIR Ruling that I found, I also encountered a similar
of real property. For individuals wala tayo problema. case when I was still in my former firm.
For Individuals – Real properties as defined in the Art. 415 NCC. So this is one big chunk of land, magkatabi sila. Lot A and Lot B.
So everything listed therein and is classified as capital assets, then Two properties involved, same size, very identical. However, kung
it will be subject to CGT. tingnan ang title ni A, dapat ang property niya yung nasa kabila,
yung B. Pretty much the same with B, under the title, yung property
For corporations – the rule is different. Only sales, barters or niya dapat is yung kay A. So what they did is they just echanged
exchanges of land and buildings is subject to CGT. You try their proeprties. Kasi nagkamali naman tayo. Honest error. And then
comparing the provision, itong Section 24 (D)(1) pertaining to they wrote the BIR. They explained everything. What is the ruling
resident citizens and Section (27) (D) (5). of the BIR? According to the BIR, there is no capital gains tax
implication because it is just an honest mistake and there is actually
SEC. 24. Income Tax Rates. – no exchange involved. It is just a correction of an error. If you will
(D) Capital Gains from Sale of Real Property. – look at it, there is really no gain involved because it’s just a barter
(1) In General. – The provisions of Section 39(B) notwithstanding, of the property. Identical property, situated in the same area and
a final tax of six percent (6%) based on the gross selling price or adjacent lots. But if you go back, what is being taxed under the
current fair market value as determined in accordance with Section NIRC if you talk about CGT, presumed gain di ba? So I don’t know
6(E) of this Code, whichever is higher, is hereby imposed upon why the BIR ruled like that.
capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Pacto de Retro Sale
Philippines xxx Sale with a buy back provision. It is still subject to CGT and any
form of conditional sales.
SEC. 27. Rates of Income tax on Domestic Corporations. -
(5) Capital Gains Realized from the Sale, Exchange or Partition
Disposition of Lands and/or Buildings. - A final tax of six It’s not subject to CGT because it’s not a sale, not even an exchange,
percent (6%) is hereby imposed on the gain presumed to have been not a barter, not even a disposition. You are just dividing the
realized on the sale, exchange or disposition of lands and/or property amongst yourselves so that you will get your own shares.
buildings which are not actually used in the business of a So no CGT tax implication in partition.
corporation and are treated as capital assets, based on the gross
selling price of fair market value as determined in accordance with Foreclosure Sale
Section 6(E) of this Code, whichever is higher, of such lands and/or You have to identify the situation. So ibenta siya sa public auction.
buildings. The sheriff will levy, a notice of levy will be annotated at the back
of the title, then publication and posting then public auction. During
That interpretation is actually pronounced in the SC Case of SMI- the public auction, the sheriff will issue a certificate of sale. From
ED vs. CIR, GR. 175410. the issuance of the certificate of sale, there is registration of that
document in the Registry of Deeds, one year redemption period.
So basically if it is a corporation, what will only be subjected to the After the redemption period, a final certificate of sale will be issued.
6% CGT is the selling or exchange or transfers of land and building. And this is the only time that the ownership of the property is
transferred to the winning bidder. In a BIR ruling that I found, the
So what about machineries bolted in the building such that taxable transaction there is not during the auction sale, but
it has some sort of permanence, real property by during the issuance of the final certificate of sale. Still a
incorporation? taxable transaction, a conditional sale if you think about it. The
It will not be subjected to the CGT of 6%. Is it still a capital gain? person liable for the transfer, supposedly the seller. But this case is
Yes, it is still a capital gain as long as it is a capital asset but that peculiar, it is the buyer who will pay on account of the seller.
capital gain will form part of your gross income.
Property sold to the Government

23
TAXATION
It is provided for under Section 24 (A) (1) last paragraph. What if I only own the house and that is my principal
residence, then I sell the house to the owner of the land, it
SEC. 24. Income Tax Rates. – that still covered?
(D) Capital Gains from Sale of Real Property. – Yes, the house itself even if you do not own the land, that is
(1) In General. – xxx Provided, That the tax liability, if any, on considered as residence under the eyes of NIRC.
gains from sales or other dispositions of real property to the
government or any of its political subdivisions or agencies or to What do you mean residence?
government-owned or controlled corporations shall be determined It is the same with you Election Law. So medyo loose ang kanyang
either under Section 24 (A) or under this Subsection, at the option definition. Residency is the trace of a home characterized by a
of the taxpayer; permanency obtained by an individual, whenever absent intends to
return.
In other words, sale, barter, exchange or other disposition of real
properties classified as capital assets in favor of the government, REQUIREMENTS FOR THE SALE OF PRINCIPAL RESIDENCE
the seller has the option either: TO BE EXEMPTED FROM CGT:
1. To have the gains form part of the gross income subject 1. The taxpayer must be an individual.
to normal tax; or ü This tax exemption will not apply to
2. Have it subjected to a Capital Gains Tax. corporations.
2. The sale or disposition is that of the principal residence
Expropriation of the taxpayer.
The above provision is still applicable. So the seller has the 2 above 3. The proceeds of the sale must be fully utilized to
options. So medyo weird no kasi forced sale. Gipugos na gani ka ug purchase or construct another principal residence.
baligya, magbayad pa gyud kag tax. It’s so unfair. 4. The taxpayer must purchase or construct another principal
residence within 18 months from the date of sale or
Deferred Payment of Capital Gains Tax or Complete disposition.
exemption from Capital Gains Tax 5. The historical cost or adjusted basis of the real property
When the property sold is the principal residence of the seller. sold or disposed is carried over to the new principal
residence built or acquired;
6. CIR must be informed within 30 days from the date of
SEC. 24. Income Tax Rates. –
sale or disposition through the appropriate tax form.
(D) Capital Gains from Sale of Real Property. -
7. This tax exemption may be availed of only once in every
(2) Exception. - The provisions of paragraph (1) of this Subsection
10 years.
to the contrary notwithstanding, capital gains presumed to have
been realized from the sale or disposition of their principal residence
Situation: What if I sell my principal residence for 10M and I want
by natural persons, the proceeds of which is fully utilized in acquiring
to downgrade, I bought another house for 5M. what will happen to
or constructing a new principal residence within eighteen (18)
the excess? There will be a proportionate reduction of the Capital
calendar months from the date of sale or disposition, shall be
Gains Tax. The law says:
exempt from the capital gains tax imposed under this Subsection:
“Provided, finally, That if there is no full utilization of the
Provided, That the historical cost or adjusted basis of the real
proceeds of sale or disposition, the portion of the gain
property sold or disposed shall be carried over to the new principal
presumed to have been realized from the sale or disposition
residence built or acquired: Provided, further, That the
shall be subject to capital gains tax.”
Commissioner shall have been duly notified by the taxpayer within
thirty (30) days from the date of sale or disposition through a
In other words, that portion of the proceeds which is not utilized
prescribed return of his intention to avail of the tax exemption herein
shall be subject to the CGT. So in that case, the unutilized portion
mentioned: Provided, still further, That the said tax exemption can
of 5M shall be subject to CGT.
only be availed of once every ten (10) years: Provided, finally, That
if there is no full utilization of the proceeds of sale or disposition,
If you follow the Revenue Regulations, it provides an
the portion of the gain presumed to have been realized from the
additional requirement: (Lifted from 2018 TSN)
sale or disposition shall be subject to capital gains tax. For this
1. Escrow Agreement.
purpose, the gross selling price or fair market value at the time of
- It goes like this, magdeposit ka sa bank, i-deposit
sale, whichever is higher, shall be multiplied by a fraction which the
nimo ang capital gains tax, when you were able to
unutilized amount bears to the gross selling price in order to
comply all the requirements, you can still withdraw it.
determine the taxable portion and the tax prescribed under
But if you are not able to comply the requirements,
paragraph (1) of this Subsection shall be imposed thereon.”
then that is good as payment of your CGT.
2. You have to file Capital Gain Tax Return even it is a
In short, when the property involved is the principal residence of an
tax-exempt transaction
individual, this may be exempted from CGT when the certain 3. Then you also have to follow the post-reporting
conditions are met.
requirements
4. You also have to follow the procedure for Escrow
What is Principal Residence?
Agreement
The term refers to the dwelling house including the lot on 5. Also there is limitation for tax exemption privilege. I
which the dwelling house is situated where the individual think if you want to extend the discussion of the rules, it
resides. is found in the De Leon Book.
Is the status of an individual necessary? OTHER INCOME
Under the Old Tax Code kasi, you have single, married, head of the
family. But, it does not really matter. As long as the individual sells Gains from the sale, exchanges or dispositions of other assets. This
his principal residence, then it is covered. constitutes properties that are neither stocks nor real properties –

24
TAXATION
those capital assets which are not situated in the Philippines and (B) Rate of Tax on Certain Passive Income (1) Interests, Royalties,
those which are not domestic shares of stock. Prizes, and Other Winnings. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest
Rule: Any Capital Gains will form part of the gross income, ganun from any currency bank deposit and yield or any other monetary
lang siya kasimple. But up to what amount? You have 2 things to benefit from deposit substitutes and from trust funds and similar
remember: arrangements;
1. HOLDING PERIOD The interest involved here are as follows:

SEC. 39. Capital Gains and Losses. 1. Domestic, any currency bank deposit
(B) Percentage Taken Into Account. - In the case of a taxpayer, 2. Yield or other monetary benefits from deposit substitutes
other than a corporation, only the following percentages of the gain 3. Trust funds and similar arrangements
or loss recognized upon the sale or exchange of a capital asset shall
be taken into account in computing net capital gain, net capital loss, The source of passive income are domestic in nature, within the
and net income: (1) One hundred percent (100%) if the capital Philippines. Pag sinabi natin na final taxes on passive income, these
asset has been held for not more than twelve (12) months; and (2) are the income which are eraned here in the Philippines.
Fifty percent (50%) if the capital asset has been held for more than
twelve (12) months; What if the interest is earned outside the Philippines?
It will form part of your gross income. But as what I have said
The concept of holding period is applicable only for individual earlier, you have to consider the type of taxpayer involved.
taxpayers. It does not apply to corporations. To simplify, the net
capital gain (loss) to be recognized by the taxpayer will depend on What is the tax rate? 20% based on the interest income earned.
how long the taxpayer held on the capital asset.
How will the taxpayer pay this? Usually, when you talk about final
The holding period is the length of time that the taxpayer holds the taxes from passive income, it is collected through withholding. So in
property before disposing the same. textbooks, it says Final Witholding Tax. What happens here? For
SHORT TERM Not more than 1 Must recognize example I am the bank, nagdeposit ka. Then you have interest
HOLDING year 100% of the gain. income of 10,000. So that is subject to 20% final tax, that is 2,000.
PERIOD So the bank will just give you the 8,000 and the 2,000 is withheld
LONG TERM More than 1 year Must recognize by the bank. The bank will remit it to the government. Kaninong tax
HOLDING 50% of the gain. yan? It’s the tax of the taxpayer but gunitan lang na siya sa bank
PERIOD and they will remit it to the government.
Example: I sold a car in Sept 2018 for P500,000 (selling price). Applicability of 20% Final Tax on Interest Income:
Considering the depreciation, the price is P400,000 (depreciated 1. All types of individuals EXCEPT NRANETB. They are
value/cost) na lang pala siya. So I have a gain of P100,000. subject to 25% tax based on gross.
2. All type of corporations EXCEPT Non Resident Foreign
If my holding period is short-term (i.e. I bought the car in Jan Corporations. They are normally subject to 30% based on
2018), I have to recognize 100% of the gain. I will recognize the their gross income.
entire amount of gain of P100,000 as part of my gross income.
SEC. 24. Income Tax Rates -
If my holding period is long-term (i.e. I have owned the car for (B) Rate of Tax on Certain Passive Income (1) Interests, Royalties,
3 years), I will only recognize 50% of the gain. What I will put in Prizes, and Other Winnings. – xxx Provided, however, That interest
my income tax return is the P 50,000 (P 100,000 x 50%), because income received by an individual taxpayer (except a nonresident
I held that property on a long-term basis. That is the essence of the individual) from a depository bank under the expanded foreign
holding period. But take note, the holding period applies only to currency deposit system shall be subject to a final income tax at the
individual taxpayers. Wala itong concept nato sa corporations. rate of fifteen percent (15%) of such interest income:
2. CAPITAL LOSS INVOLVED (will be discussed when we It's interest income from expanded foreign currency deposit system.
reach deductions)
Tax Exempt interest income:
INTEREST 1. Interest Income from Expanded Currency Deposit
System by Nonresident individuals and
Interest is a compensation allowed by law or fixed by the parties for corporations.
the used or forbearance of money or damages for its detention.
Simply, it is income when you loan money to someone else. 2. Long-term deposits or investment. It’s a long-term if
it for 5 years.
What is the nature of interest income?
Passive Income. You do not have to do anything for you to gain that But if there is a pre-termination, it will now become
money. You just deposit money to the bank and the bank will pay subject to final tax depending on the remaining maturity
you interest. You will just sit around. period:
Tax Treatment: 5 years or more Tax Exempt

GR: Form part of your gross income. Four (4) years to less than five 5%;
EXC: If it is subject to final tax. They are found in Section 24. (5) years
Three (3) years to less than (4) 12%
SEC. 24. Income Tax Rates - years

25
TAXATION
Less than three (3) years 20% the lease contract the property value will be
apportioned, and the depreciation of that
3. Interest earned by members of Cooperatives. Case building will form part of the income of the
in point is Dumaguete Cathedral vs CIR (G.R. 182722, lessor.
Jan. 22,2010)
What does the BIR prefer?
Dumaguete Cathedral vs CIR None, it’s a matter of accounting. As I have said earlier, when it
(G.R. 182722, Jan. 22,2010 comes to accounting method, the taxpayer has the initial say on
how he will recognize the income that he will earn in a particular tax
Cooperatives are not required to withhold taxes on interest period.
from savings and time deposits of their members.
ROYALTIES
RENTS
Royalties means payment of any kind received as consideration for
Rent is another type of a passive income. It is the amount received the use of or the right to use any copyright or literary or artistic or
for the use or lease or enjoyment of real property or personal scientific work including cinematographic films or tapes used for
property. It is a passive income because you don’t have to do radio, tv broadcasting and any patent, trademark, or design or
anything before you earned the income. You only have to do is buy model, plan, secret formula or process or other like right or property.
that property, or earned or hold that property and you just sit and
wait for the rents to come along. So to put it simply, royalties are monies received by the taxpayer
for using his intellectual property rights.
GR: Rent forms part of the gross income.
SECTION 24(B) Rate of Tax on Certain Passive Income
Composition of Rent Income: (1) Interests, Royalties, Prizes, and Other Winnings. - A
1. Regular rent payments final tax at the rate of twenty percent (20%) is hereby imposed
upon x x x.royalties, except on books, as well as other literary
2. Security deposits given without any restrictions works and musical compositions, which shall be imposed a final
Meaning the lessor receives the security deposit and he tax of ten percent (10%); x x x
will have the control over that money that he can spend it
whenever he wants. And he is not required to return the Tax Treatment
security deposit at the end of the period. General Rule: The royalty income is part of your gross income.
What if the security deposit is with restrictions? 2 TYPES OF ROYALTIES

The lessor will not be able to cash it in any way, it will not Under our income tax laws, what are the two types of Royalties?
form part of the gross income.
(1) ACTIVE ROYALTY - is that which the taxpayer has to do
3. Taxes and other expenses relating to the rent paid substantial work or service for him to earn that royalty
by the lessee. income.
Normally there is a stipulation in the lease contract that
payment of real property taxes shall be shouldered by the (2) PASSIVE ROYALTY - is somehow similar to interest
lessee, then it will form part of the gross income of the income. The taxpayer owns the intellectual property and
lessor. he allows someone else to use that intellectual property at
some price.
4. Leasehold improvements
The lessee introduces structures in that property. Let’s Example: App. I am a computer geek and you want me to
say a building, what happens with that building? Is it the create an app for your business. You will pay me for the
property of the landowner or is it an income on the part creation of that app. At the end of that period when I have
of the lessor? In the lease contract, there can be a already created the app to your liking, I will let you use it.
stipulation that by the end of the term, the building and But I will not give you the rights. The app remains mine.
other structures, which cannot be removed, or anything So because I already let you use the app, you will pay me.
placed there as part of improvements will not be removed
by the person renting the property. If that’s the case, that The amount that you pay me to create that app that is
is what we called as leasehold improvements. Even though active royalty. But during that time that I let you use the
in the meantime the lot owner cannot own yet the app but I retained the ownership, that is called as passive
property but later he will earn such property. Such royalty.
improvements will form part of your rent.
Active royalty: forms part of the gross income.
Two ways of recognizing gross income involving Passive royalty: 20% Final Tax based on the royalty
leasehold improvements income received.
1. Outright method – the value of the property
introduced or the fair market value of the Exception: 10% Final Tax on royalties on books, literary
acquisition cost of the property introduced in works and musical compositions earned within the
that land will form part of the gross income of Philippines.
the property owner. Income is recognized at the
time the building was completed. Who are subject to this final tax on passive royalties?
2. Spread out method – during the life time of 1. Citizens

26
TAXATION
2. Resident aliens Corporation Domestic Tax Exempt

3. NRAETB s Corporation
Resident Tax Exempt
NRANETB are taxed 25% based on gross income. Foreign
Corporation
DIVIDENDS Non- Subject to 15%
Resident Final Tax (subject
Dividends are earnings distributed by a stock corporation to its Foreign to Tax-Sparing
stockholders. Corporation Rule)*
On the part of the stockholders, of course it is income. You own a Foreign Resident Citizens and Part of Gross
piece of the corporation, such that if the corporation will be Corporatio Domestic Corporations Income
profitable because you have a unit of ownership, you will earn n
DIVIDEND INCOME. That’s one way of earning from corporations. (Note: Only Resident
You own a stock, depende sa kung gaano karami, how many share Citizens and Domestic
do you own in that corporation and if the corporation will distribute Corporations are taxable on
dividends, its also parallel to the amount of paramount share that their income within and
you have in that corporation. without. Other taxpayers
are taxable only on income
TYPES OF DIVIDENDS within).
1. CASH DIVIDENDS- most common of all.
The corporation will earn a profit then a portion of it will be *What is the condition so that these dividends will be
distributed to the stockholders and it will be distributed through subject to 15% final tax?
cash. When the TAX SPARING RULE applies.
2. PROPERTY DIVIDENDS Tax Sparing Rule

Payable in properties other than cash. For example, what will be A non-resident foreign corporation will be subject to 15%
distributed by the corporation is its own products. preferential tax rate on the amount of cash/property
dividends received from a domestic corporation provided
3. STOCK DIVIDENDS that the country in which it is domiciled shall allow
Those which are payable in stocks, the consideration of which is a tax credit against the tax due from its taxes
the amount of unrestricted earnings converted into equity in the deemed to have been paid in the Philippines.
corporation’s books.
What if the tax sparing rule does not apply?
4. LIQUIDATING DIVIDENDS
The dividend income received by a non-resident foreign corporation
Dividends distributed to the stockholders upon dissolution and
from domestic corporation will be part of NFRC’s gross income.
liquidation of the corporation.
Tax Exempt Dividends
GR: it’s part of your GI (gross income) subject to normal tax.
1. Pure stock dividends.
XPN: if it is subject to final tax or exempted by law.
2. Liquidating dividends.
3. Dividends received from cooperatives.
1. Cash or property dividends received by individuals from a
domestic corporation is subject to Final Tax of 10%.
What about partnership?
2. For Citizens and Resident Aliens: The Final Tax rate is just
For General Co-partnerships, treat it as if it is a distribution of
10%
dividends from a domestic corporations.
3. For Non-resident Aliens Engaged in Trade and Business
(NRAETB): The rate is 20%
For General Professional Partnership, not subject to final tax. But
4. For Non-resident Aliens Not Engaged in Trade and
whatever the partners received from the GPP will form part of their
Business (NRANETB): The rate is 25%
gross income.
So you have to look at the type of the corporation distributing and
PRIZES AND WINNINGS
the type of taxpayer receiving such dividend.
Prize is a reward from a contest or competition. There must be some
Given By: Received By: TAX
sort of act. Winning on the other hand is a reward for an event that
TREATMENT
depends on chance.
Resident Subject to 10%
Domestic Individuals Citizen Final Tax
Corporatio Sec. 24 (B) (1)
Resident Subject to 10%
(B) Rate of Tax on Certain Passive Income: -
n Alien Final Tax
NRA-ETB Subject to 20%
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax
Final Tax
at the rate of twenty percent (20%) is hereby imposed
NRA-NETB Subject to 25%
upon xxx prizes (except prizes amounting to Ten
Tax Rate (NRA-
thousand pesos (P10,000) or less which shall be subject
NETB are taxed
to tax under Subsection (A) of Section 24; and other
based on their
winnings (except Philippine Charity Sweepstakes and
gross income)
Lotto winnings), derived from sources within the
Philippines:

27
TAXATION
What are the rules that we have to remember in prizes and It is a partnership organized for business purposes in general.
winnings? Why? Because these GCPs are treated as if they are a
corporation. What is the tax treatment of the distribution of
PRIZES profits when it comes to GCPs? You treat the GCPs as if they
GR: Part of gross income. are a corporation. So kung may matanggap ang partner ng
XPN: When prizes are subject to final tax: isang GCP, it is subject to final tax.
Domestic prizes earned by a taxpayer is subject to 20%
final tax. OTHERS
Exception to final tax rule: If the value or the amount
of the prize 10K or below. 1. Forgiveness of Indebtedness – it depends on the
Tax Consequence? It will form part of the gross income situation,if there is no consideration at all meaning out of love
of the taxpayer. so it is a donation, of course, it’s not part of Gross Income
anymore. It’s a gift. So therefore, it will be subjected to
WINNINGS a Donor’s Tax. But if it is in consideration of services, in
GR: Part of gross income. that instance, it will already form part of your gross income.
XPN: When winnings are subject to final tax.
Domestic winnings are subject to 20% final tax. 2. Recovery of Debts Written-Off – for example
uncollectible may utang na di pa nabayaran tapos na
Exception to final tax rule: Winnings from PCSO bankrupt. Then nanalo sya sa lotto so he will be able to
Sweepstakes or Lotto, but ONLY IF the winnings do not pay you again. What is the rule? It will form part of your
exceed 10K. gross income but will be subject to the TAX BENEFIT
Tax Consequence? Tax exempt. RULE. Recovery of Debts previously charged-off is taxable
to the extent of the income tax benefit. This is pretty
*Prior to the TRAIN Law: The rule is if it is from the much the same with tax refund or tax credit.
PCSO Sweepstakes and Lotto, the entire amount is
exempt. 3. Tax Refund or Tax Credit – It is part of your gross
income but only to the extent of the income tax benefit
What if nipatad ko sa US and I won $150Million? What is derived therefrom.
the tax implication? It will depend on the type of the taxpayer.
September 19, 2019 | Laguting
The rules in winnings and prizes are applicable only to
individuals. You compare it with the provisions in the corporation, EXCLUSIONS
walang nakasabing prizes and winnings. So what will happen to the
prizes and winnings of corporations? It will form part of the gross What do you understand by the term of exclusions?
income subject to normal tax. Exclusion as, used in income taxation, refers to items of income
received or earned but are not taxable as income because they are
PENSIONS, ANNUITIES AND PROCEEDS OF LIFE exempt by law or treaty.
INSURANCE
Exclusions are usually income or property received by the tax payer
GR: it is part of the gross income. but because of provision of law you have to exclude it in the
determination of the gross income (GI).
PENSION – in the event you retire, you receive pensions. These
pensios include retirement pay and separation pay. They are Is it the same with deductions?
taxable, as a rule, because they are payment for services rendered. No, this different from deductions.
They will be excluded only when they comply with the requirements
for purposes of exclusion. What are the differences?
ANNUITIES – Like interest income, this pertains to periodic EXCLUSION DEDUCTION

payment. There is a fund set up, and that fund earns or generates Not considered in the Deductions are subtractions
income in the form of annuities. This is taxable income in the hands determination of the GI. from the GI.
of the beneficiary.
Exclusions are in the nature of Whereas in deduction, these
GENERAL PROFESSIONAL PARTNERSHIP (GPP) receipts. The taxpayer would are outlays (pagawas ug
receive the money or property kwarta) because deductions
Please take note that a General Professional Partnership (GPPs) is but it is not included in the GI. are expenses which are
a tax-exempt entity. But it doesn’t mean that the practitioners allowed to be deducted from
or the professionals composing the GPPs are exempt from tax. you GI.
So syempre partners sila, there will be a distribution of income
kase yun naman ang purpose ng partnership, the GPP is Exclusion is something that the While in deductions, in
exempt from income tax but the partners composing it are taxpayer receives general, are items which are
not exempt. So that’s why the distribution of income given to paid or some sort of an outlay
the partners are part of the partner’s respective gross income. on the part of the taxpayer.
It is different, however, if the partnership involved is a General Who may avail of this exclusions?
Co-Partnership (GCPs).

28
TAXATION
Practically, all types of taxpayers whether individuals or corporation It is not important in income taxation but is important estate
except those exclusions which pertains only to individuals like 13th taxation in determining the gross estate.
month pay etc.. The exclusions are found in sec. 32.
Please also take note of the last clause in the provision:
Are the list in sec. 32 exclusive? “but if such amounts are held by the insurer under an
NO. We have already discussed a few items excluded from the agreement to pay interest thereon, the interest payments
gross income, such as income earned abroad by non-residents and shall be included in gross income.”
non-citizens outside of the Philippines and those subject to final tax.
If there is something apart from the insurance proceeds, there is a
How do we construe provisions on exclusions? stipulation that the insurance company will pay interests in the
Provisions on exclusions are in the nature of tax exemptions, premium, then that interests received by the heirs/beneficiaries will
therefore, you must follow the requirements of exclusions. All the form part of their gross income.
requirements of exclusions must be complied with before you will
allowed to exclude it in the GI. So strictly construed against the RETURN OF PREMIUM
taxpayer and in favor of the government.
(2) Amount Received by Insured as Return of
So let's discuss sec 32 one by one. First is life insurance. Premium.
LIFE INSURANCE The amount received by the insured, as a return of premiums

paid by him under life insurance, endowment, or annuity
Sec. 32 (B) Exclusions from Gross Income. - The contracts, either during the term or at the maturity of the term
following items shall not be included in gross income and shall mentioned in the contract or upon surrender of the contract.
be exempt from taxation under this Title:
Return of premium is excluded from GI because it is actually a return
(1) Life Insurance. - The proceeds of life insurance of capital. Pag magbayayd ka ng premiums normally what the
policies paid to the heirs or beneficiaries upon the death of the insurance company will give you is over and above the premium
insured, whether in a single sum or otherwise, but if such payments. That is why if there is return of premium it’s a return of
amounts are held by the insurer under an agreement to pay capital thus it is excluded from GI because to begin with it is not
interest thereon, the interest payments shall be included in income. Giuli lang a capital. Take not that here you are not taxed
gross income. on capital but only in income.
xxx
WHAT ARE THE REQUIREMENTS FOR EXCLUSION?
What is life Insurance? 1. The amounts received are return of premiums paid by the
Life insurance is an insurance on human life, any insurance taxpayer to the insurance company;
pertaining thereto or connected therewith. 2. It is by virtue of a life insurance, endowment or annuity
contract;
Basically the very essence of Life insurance is what you are insuring 3. It is paid either during the term or at the maturity of the
is the life of the person. Someone will die and someone will receive term mentioned in the contract or upon surrender of the
the money. contract.
WHAT ARE THE REQUISITES FOR EXCLUSION UNDER THIS The surrender of the contract of life insurance or anything that
SECTION? entails insurance is when the insurer cancels the insurance policy.
Upon surrender, the cash surrender value is returned to the
1. The proceeds are from life insurance; insurer.
2. The proceeds are paid to the heirs or the beneficiaries;
3. The proceeds are paid upon the death of the insured. Let's simplify the tax treatment when it comes to life insurance and
return of premiums because they are interrelated.
What is the tax effect if all the 3 requirement are complied DEAD OR ALIVE RULE
with? I call this the “Dead or Alive Rule.” Atty. Donalvo coined this term,
The life insurance proceeds are excluded from the GI. so please don’t use this in the exam. Nonetheless, please be guided
by it.
But GI of whom? estate or heirs?
Ang sabi dito "paid to the heirs or beneficiaries upon the death of DEAD OR ALIVE RULE
the insured" so walang problema sa heirs or any beneficiary thereof
like asawa gf or bf. It is excluded from the GI of that person. It is
IF THE The beneficiary or his heirs will receive something.
not about the GI of the deceased but that of the recipient.
INSURED The amount they receive is excluded from the gross
IS DEAD income.
What if the beneficiary of the Life insurance proceeds is the
estate of the deceased? Can the estate avail of the If it refers to:
exclusions? (a) Excess of Premiums It is part of the Gross
Of course, because trusts and estates are treated as if they are IF THE (b) Payment of Interest Income
individuals. INSURED Excluded from the
IS ALIVE (c) Return of Premiums Gross income
Does it matter if the life insurance policy is revocable in
nature?

29
TAXATION
GIFTS, BEQUESTS AND DEVISES 3. Damages received whether by suit or agreement, on

account of such injuries or sickness.
Sec. 32. Gross Income. —
(2) Exclusions from Gross Income. — The following items Just remember MENTAL.
shall not be included in gross income and shall be exempt
from taxation under this Title: Example: A lineman of PLDT. Nagsaka ug pole then suddenly
xxx he fell down. Napiang sya. He will receive something because
(3) Gifts, Bequests, and Devices. — The value of he was injured at the line of work. The amounts that he will
property acquired by gift, bequest, devise, or receive is excluded from gross income. It will also include
descent: Provided, however, That income from such damage received whether by suit or agreement on account of
property, as well as gift, bequest, devise or descent of such injuries. So normally tort cases.
income from any property, in cases of transfers of
divided interest, shall be included in gross income. Another example: After the class I decided to eat in Roxas.
When I started to cross the road, a wild car appeared. I got hit
The rule is simple. by the car then when I woke up I was in the hospital. Broken
GR: If someone receives property by reason of donation or legs/ribs I wasn't able to work 1 month. Then I filed a case in
succession, the same is excluded from gross income. court and I won. Judge said defendant to pay moral damages
XPN: When it pertains to income derived from the property 100k, exemplary damages 100k, and loss profits of 100k.
donated or received under succession, it is part of the gross
income. Are the amount of damages excluded from gross
income?
Its not income anyway. Even if you consider it as income You have to distinguish.
because it will increase your net worth, still it has different
tax implications. It is not income tax but donor’s tax. But take What about moral damages?
note that the property receive in donation or succession is Excluded from gross income because it arose from personal
one thing and the income coming therefrom is also another injuries
thing. The property donated or received by succession that
is excluded from the gross income but any income derived What about exemplary damages?
therefrom is included in the gross income. Remember that it is awarded merely to ‘set an example.’ Is that
an award on account of such injuries or sickness?
COMPENSATION FOR INJURIES OR SICKNESS
2 SCHOOLS OF THOUGHT:
Sec. 32. Gross Income. —
(B) Exclusions from Gross Income. — The following items 1. Exemplary Damages is part of the gross income because
shall not be included in gross income and shall be exempt it is not by reason of injuries or sickness. It is imposed by
from taxation under this Title: way of example or correction for the public good. It is not
xxx about compensating a person for injuries.
(4) Compensation for Injuries or Sickness. — amounts
received, through Accident or Health Insurance or under 2. Exemplary Damages is excluded from the gross income
Workmen's Compensation Acts, as compensation for because the law merely says “Damages.” If the law does
personal injuries or sickness, plus the amounts of any not distinguish, we should not distinguish.
damages received, whether by suit or agreement, on ® Atty Donalvo suggests that we go with the 2nd school
account of such injuries or sickness. of thought = Exemplary damages is excluded from
the gross income.
® 2018 BIR Ruling: Compensatory damages, actual
ITEMS CONSIDERED UNDER THIS SECTION: damages, exemplary damages, attorney’s fees and
1. Amounts received through Health or Accident the costs of suit are excluded from gross income. But
Insurance as compensation for personal injuries or damages which results to loss of earning capacity are
sickness not excluded from tax.
To get the amount involved in a life insurance, the insured has How about the salaries I was not able to receive for a
to die. Annuities are given every year survived by the insured. month? That is loss profits. That is included in the gross
This is not so in a health or accident insurance. The insurance income. Because whether or not you are injured, you will
company will give something to the insured when he meets an receive it anyway. You will earn such amount. So loss of profits
accident or when he gets sick. part of GI, all other damages are excluded. Legal basis is
section 32(b) number 4 NIRC.
The amount received by virtue of a health or accident insurance
is excluded from the gross income. RETIREMENT BENEFITS, PENSIONS, and GRATUITIES
2. Amounts received through the Workman’s SEC. 32. Gross Income. —

Compensation Act as compensation for personal (2) Exclusions from Gross Income. — The following items
injuries or sickness shall not be included in gross income and shall be exempt
I think this refers to persons engaged in hazardous from taxation under this Title:
occupations. If you receive something by virtue of WCA, aside xxx
from the health insurance, it is still excluded from the gross
income. (6) Retirement Benefits, Pensions, Gratuities, etc.—

30
TAXATION
(a) Retirement benefits received under RA 7641 and What are the retirement benefits referred under this law or
those received by officials and employees of private subsection?
firms, whether individual or corporate, in accordance 1. Retirement benefits under the labor code, provided the employer
with a reasonable private benefit plan maintained by does not have any retirement benefit plan.
the employer: Provided, That the retiring official or
employee has been in the service of the same 2. Employer maintained reasonable private benefit plan.
employer for at least ten (10) years and is not less
than fifty (50) years of age at the time of his What are the requirements for the Exclusion?
retirement: Provided, further, That the benefits
granted under this subparagraph shall be availed of UNDER THE LABOR CODE
by an official or employee only once. For purposes of Requirements:
this Subsection, the term 'reasonable private benefit 1. There is no agreement as to the employees retirement
plan' means a pension, gratuity, stock bonus or benefit;
profit-sharing plan maintained by an employer for 2. The retiring employee must have served at least five (5)
the benefit of some or all of his officials or years with the employer;
employees, wherein contributions are made by such 3. The retiring employee is not less than sixty (60) years
employer for the officials or employees, or both, for old;
the purpose of distributing to such officials and 4. It must be availed of by the employee only once.
employees the earnings and principal of the fund
thus accumulated, and wherein its is provided in said The rule is different if the employer maintained reasonable private
plan that at no time shall any part of the corpus or benefit plan. Iba ang periods.
income of the fund be used for, or be diverted to,
any purpose other than for the exclusive benefit of What are the conditions for exclusion should the employer
the said officials and employees. have this private benefit plan?
(b) Any amount received by an official or employee or 1. There must be a qualified funding source- we don’t have
by his heirs from the employer as a consequence of any problem with the qualified funding source kasi nga we
separation of such official or employee from the have a reasonable private benefit plan that is
service of the employer because of death sickness or approved by the BIR. Kailangan approval sa BIR. There
other physical disability or for any cause beyond the are documentary requirements that must be proven with
control of the said official or employee. the BIR.
(c) The provisions of any existing law to the contrary 2. There must be a qualified employee to avail of the
notwithstanding, social security benefits, retirement exclusion:
gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the
Philippines or aliens who come to reside permanently a. Service requirement- 10 years
in the Philippines from foreign government agencies b. Age- not less than 50 years old at the time of
and other institutions, private or public. availment
c. It must be availed of only once
(d) Payments of benefits due or to become due to any
person residing in the Philippines under the laws of Should the length of service be successive?
the United States administered by the United States The law does not require successive service. What is important is
Veterans Administration you been in the same company and you have attained the number
of years of service on that same company.
(e) Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of Read the cases of In Re: Zialcita, CIR vs CA (GR no. 95022)
Republic Act No. 8282. and CIR vs CA (GR no. 96016)
The second CIR case was about terminal leave pay. Terminal leave
(f) Benefits received from the GSIS under Republic Act pay receive by a government official or employee is not subject to
No. 8291, including retirement gratuity received by income tax.
government officials and employees.
SEPARATION PAY
When it comes to retirement benefits, there is a listing provided by
the NIRC. (b) Any amount received by an official or employee or by his
heirs from the employer as a consequence of separation of such
official or employee from the service of the employer because of
1. Retirement benefits under RA 7641 or the Labor Code death sickness or other physical disability or for any cause
2. Retirement benefits under a reasonable private benefit beyond the control of the said official or employee.
plan.
3. Separation pay under certain conditions How is separation pay different from retirement pay?
4. Foreign Social security retirement pensions or gratuities Retirement pay entails separation from employment but the reason
5. United States Veterans Administration benefits is age. When you talk about separation pay, the separation is due
6. SSS to death, sickness or disability or for any causes beyond the control
7. GSIS of the employee.
Pagnakita niyo yan, excluded sa Gross Income. Is the separation pay included or excluded from the gross
income?

31
TAXATION
Answer: You can say it’s excluded because separation is by reason

GR: Separation Pay is compensation income it forms part of the of death but you can also argue that separation will form part of the
gross income- gross taxable income. gross income because the separation was not involuntary.
XPN: Separation pay is excluded from gross income when:
Other exclusions:
1. Employee receives his separation pay from the employer 1. Benefits given by the United States Veterans
2. The amounts was received as a consequence of the Administration;
employees separation 2. Benefits received from Social Security System;
3. The reasons for separation: 3. Benefits received from the GSIS.
MISCELLANEOUS ITEMS
a. Death,
b. sickness, Income Derived by Foreign Government
c. or other physical disability or “(a) Income Derived by Foreign Government. - Income
d. for any cause beyond the control of the said official or derived from investments in the Philippines in loans, stocks,
employee bonds or other domestic securities, or from interest on
deposits in banks in the Philippines by (i) foreign
The most important condition here is the last one. Causes governments, (ii) financing institutions owned, controlled, or
beyond the control of the employee. This means that the enjoying refinancing from foreign governments, and (iii)
separation is involuntary on the part of the employee. international or regional financial institutions established by
foreign governments.”
Example: The employee was a lineman, nisaka sa poste. He was
fixing the cable then suddenly he fell down then nabaldado sya. He The reason for this is the inherent limitation of International
can no longer work as a lineman. So what did the PLDT do? Comity. So you don’t tax income derived from investments made by
foreign governments here in the Philippines.
September 19, 2019 | Bajao
Income Derived by the Government or its Political
In that case, that is an example of disability. The employer has no Subdivisions
choice but to let go of the employee. Accordingly, separation pay (b) Income Derived by the Government or its Political
must be paid. On the part of the employee receiving the separation Subdivisions. - Income derived from any public utility or from
pay, it is excluded from his gross income because of the exercise of any essential governmental function accruing
involuntary separation. to the Government of the Philippines or to any political
subdivision thereof.
What if the employee resigns? Is it beyond his control? No. When
you talk about separation pay received after voluntary resignation, What are the exemptions here? They are the income derived from
that forms part of gross income. any public utility or the exercise of any essential government
functions. These incomes accrue to the GRP or to any political
What are other examples of Involuntary separation from subdivision thereof. But let’s say the government agency is engaged
employment? in commercial or proprietary purposes, the income there is taxable.
1. Retrenchment This is also related to the inherent limitations of taxation.
2. Automation
3. Lay off General Rule: If earned by the government, not taxable. The
4. Closure of business government need not tax itself.
In other words, those authorized causes under the labor code. Previously, PAGCOR was tax exempt. But we not have this case of
Separation pay in these cases are excluded. PAGCOR vs. CIR G.R. No. 215427 (December 10, 2014)
Question: What if there was an employee na “na-nguot”. Tapos The rule now is this:
the employee na gi-kuotan kay nagsumbong. Tapos yung offender • PAGCOR is exempt from income tax from their gaming
kay gisendan ng first, second and third notice then got terminated. operations
Is that voluntary of involuntary? • The income of PAGCOR from its gambling operations is
Answer: The nature of that separation is voluntary. It will be part subject to 5% franchise tax;
of his Gross Income. • The income of PAGCOR which is not related to its gambling
operations is subject to the normal corporate income
Question: What if I fought it out in a Labor case and I won. It was tax (30%).
duly proven na dili jud siya na-nguot. Gidautan lang ko sa
empleyado and there is not a strained relationship between the PRIZES AND AWARDS
employer and employee. Therefore, there was separation pay
awarded. Is it included or excluded from Gross income? Is it (c) Prizes and Awards. - Prizes and awards made primarily
voluntary on the part of the employee who was illegally terminated? in recognition of religious, charitable, scientific, educational,
Voluntary or involuntary? artistic, literary, or civic achievement but only if:
Answer: I think that is involuntary (According to sir)
(i) The recipient was selected without any
Question: What if the employee commits suicide due to job related action on his part to the contest or proceeding; and
stress? Is the voluntary or involuntary? He inflicts on himself a work
related injury resulting to his death.

32
TAXATION
(ii) The recipient is not required to render (ii) Benefits received by employees pursuant to
substantial future services as a condition to Presidential Decree No. 851, as amended by Memorandum
receiving the prize or award. Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not
(d) Prizes and Awards in sports Competition. - All prizes and covered by Presidential decree No. 851, as amended by
awards granted to athletes in local and international sports Memorandum Order No. 28, dated August 13, 1986; and
competitions and tournaments whether held in the Philippines (iv) Other benefits such as productivity incentives and
or abroad and sanctioned by their national sports Christmas bonus:
associations.
Provided, That every three (3) years after the effectivity of
General Rule: It is part of your Gross Income. this Act, the President of the Philippines shall adjust the
Exception: Except when the law provides for another tax amount herein stated to its present value using the
treatment. Consumer Price Index (CPI), as published by the National
Statistics Office.
First exception, prizes received within the Philippines.
The magic amount is P10,000. (i) This talks about the benefits of employees of the government
• If it’s more than P10,000, it’s subject to a final tax who have at least rendered 4 months of service. This talks about
of 20% based on the prize. Christmas bonus of such employees.
• If it’s P10,000 and below, it’s part of your gross
income. (ii) This is the 13th month pay law.
Second exception, religious, charitable, artistic, etc. – this is in (iii) Still the 13 month pay law.
Section 32(6)(c).
(iv) other benefits.
What are the requirements for these prizes to be excluded
from your gross income? Take note, the 13th month pay up to the amount of 90,000 is
a. Purpose – it is because of your religious, charitable, excluded from Gross Income. It’s not just the 13th month pay but
artistic, etc. achievement; includes other bonuses. What if your 13th month pay is 120,000. Is
b. You must be selected without any action on your part; the whole 120,000 subject to Income tax? No. Only the excess from
c. You must not be required to render substantial future the 90,000.
service.
What about 14th month pay? That also a bonus right? If you have
Example: The Church held a contest and invited churchgoers to not yet exhausted the 90,000 from the 13th month pay, then you
paint the blessed Virgin Mary. Now there’s this old man who was a can put it there. But if the 90,000 is already exhausted, the excess
really good painter who joined. He signed up. Painted the blessed forms part of the Gross Income.
Virgin, Then he won. The church gave him 100,000.00 and only
required him to show up for photo op. In your outline, I have included the De Minimis Benefits.
Remember, we discussed this before:
Question: Is the 100k excluded from Income tax?
Answer: No. It forms part of the Gross Income because the second 1. The list is exclusive.
requisite was not complied with. There was action on his part. 2. Even if the employer will give all the De Minimis Benefits,
Remember, he signed up to join. When you answer the exam, so long as it does not exceed the ceiling it is excluded from
enumerate the elements. the Gross Income.
3. What if the amounts in the expected De Minimis Benefits
Third Exception, sports competition The keyword here is, it must would exceed the ceiling? You can add that excess to the
be sanctioned by the National Sports Organization. Under 90,000 exemption. Should the 90,000 exemption already
the current Revenue Regulations, it is the Philippine Sports have been exhausted, the De Minimis Benefits will then
Commission through its Philippine Olympics Committee. form part of the Gross Income.
It does not matter if it is held within the Philippines or abroad
or if it is sponsored by a domestic or international sponsor. What is GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS
important is that it is sanctioned by the Philippine Sports
Commission. That’s why, pag mga professional like Manny Pacquiao, (f) GSIS, SSS, Medicare and Other Contributions. - GSIS,
it is no longer tax exempt. Kase professional na. SSS, Medicare and Pag-Ibig contributions, and union dues
of individuals.
13TH MONTH PAY AND OTHER BENEFITS
Medicare, this is now PhilHealth. Yung luma kase Medicare
(e) 13th Month Pay and Other Benefits. - Gross benefits yan. “Other Contributions” – like what? Union Dues. It’s also
received by officials and employees of public and private exempt from taxation.
entities: Provided, however, That the total exclusion under
this subparagraph shall not exceed ninety thousand pesos These 2 have been removed by the TRAIN LAW:
(P90,000) which shall cover:
GAINS FROM THE SALE OF BONDS, DEBENTURES OR
(i) Benefits received by officials and employees of the OTHER CERTIFICATE OF INDEBTEDNESS
national and local government pursuant to Republic Act No.
6686; (g) Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the same

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TAXATION
or exchange or retirement of bonds, debentures or other Over P2M, but not over P8M P490,000 + 32%
certificate of indebtedness with a maturity of more than of the excess
five (5) years over P2M
GAINS FROM REDEMPTION OF SHARES IN MUTUAL Over P8M P2,410,000

FUND +35% of the Excess over
P8M
(h) Gains from Redemption of Shares in Mutual Fund. -
Gains realized by the investor upon redemption of shares Tax Schedule Effective January 1, 2023 and onwards:
of stock in a mutual fund company as defined in Section
22 (BB) of this Code. Not over P250,000 0%
September 26, 2019 | Apostol Over P250,000 but not over P400,000 15% of the
excess over
Review: P250,000
First the resident citizens, the non-resident citizens and also Over P400,000 but not over P800,000 P22,500 +20%
the resident aliens, these three individuals have the same of the excess
income tax implications. Ofcourse they will only differ on that over P400,000
matter that only those resident citizens are taxable on their income
within the Philippines. Now, please do not forget the general Over P800,000 but not over P2M P102,500+25%
principles of taxation. The tax treatment will be the same but of the excess
whether or not a particular income is taxable, you always have to over P800,000
look into the source of income as well as the nationality and
residency of the taxpayer involved. For the citizens, their tax Over P2M but not over P8M P402,500+ 30%
treatment is generally governed by Sec 24. But take note that this of the excess
Sec. 24 has been extensively amended by TRAIN law. So rates of over P2M
the income tax on individuals citizens and individual resident aliens
of the philippines. Over P8M P2,202,500+
35% of the
Now if you read Sec 24 (A) (1), in here you will find the legal basis excess over P8M
why the income subject to final withholding taxes are excluded from
the gross income. In here we will find the general rule that GI of What is the normal income tax for individuals? that is
the taxpayers are subject to regular scheduler income tax except provided under Sec. 24 (a) (2) as amended by TRAIN law. In this
those subject to the Final Tax. article, there is a certain tax schedule which would be, a tax table
that would change overtime, for now the applicable tax table is in
“On the taxable income defined in Section 31 of this Code, other (A), this would apply from Jan 1 2018 until Dec 31 2022. And then
than income subject to tax under Subsections (B), (C) and (D) of you will have a tax table. But how do we use this tax table to
this Section”. So this refer to certain domestic passive income and compute the regular income tax of an individual?
also the capital gains taxation.
If you look at the first portion of the tax table, “not over 250,000 -
GRADUATED INCOME TAX RATES FOR INDIVIDUALS 0%”, this basically means that the first 250,000 income of an
SEC. 24. individual citizen is exempt from income tax. Compare it to the old
(2) Rates of Tax on Taxable Income of Individuals. – The law which says “not over 10,000” its kinda weird. Kaya binago na
tax shall be computed in accordance with and at the rates ito ng TRAIN LAW.
established in the following schedule:
The next is over 250,000 – 400,000. Lets say your income for a
(a) Rates of Tax on Taxable Income of Individuals. — The single year, ang net income mo, this will be your tax base later on,
tax shall be computed in accordance with and at the rates your NI = 300,000. Question, how much will be your regular income
established in the following schedule: tax? So you look at the bracket:
Tax Schedule Effective January 1, 2018 until December NI = 300, 000

31, 2022: (So it falls under the “over 250,000-400,000”)
Not over P250,000 0% 300,000 – 250,000 = 50,000

50,000 x 20% = 10,000
Over P250,000 but not over P400,000 20% of the
excess over Another problem,
P250,000
NI = 650,000
Over P400,000 but not over P800,000 P30,000 +25%
of the excess over (So it falls under the “over 400,000 – 800,000”)
P400,000
650,000 – 400,000 = 250,000
Over P800,000 but not over P2M P130,000 + 30% 250,000 x 25% = 62,500
of the excess
over P800,000

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TAXATION
62,500 + 30,000(this is a fixed amount under the tax table) = 92, taxation, the tax base would be your net taxable income. This time,
500 if he will choose the 8%, this individual taxpayer will be subject to
8% based on the gross sales or gross receipts and non-
But take note that starting January 1, 2023 and onwards, there will operating income. Wala tayong problema sa gross sales or gross
be a different tax table already. Right now medyo mataas pa siya receipts this comes from the business, but what about that non-
tas magbaba pa yan siya overtime. operating income? Ano ba composition natin sa gross income? Diba
meron tayong compensation income, business income, other
The next succeeding portions of sec 24 has already been amended income. Wala man tayong compensation income dito, what is the
by Train law composition of other income by the way? Basically tatlo yan, meron
tayong subject to final tax, meron tayong tax exempt. This means
Husband and wife shall compute their individual income tax that the tax base of the 8% will consist of the business income and
separately based on their respective taxable income; if any the other income which will form part of your GI.
income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same September 26, 2019 | Baban
shall be divided equally between the spouses for the purpose of
determining their respective taxable income. WHAT ARE THE CONDITIONS TO ENABLE TAXPAYER TO
AVAIL OF SEC. 24(B)?
Under sec 51(b) the married individuals are supposed to submit a 1. Taxpayer is a purely self-employed individual and/or
consolidated tax return which would show the income of both the professional
husband and wife but for purposes of determining the individual 2. Gross sales or gross receipts and other non-operating
income tax of the spouses, they should compute it separately. What income of the taxpayer does not exceed the VAT
if I cannot attribute that particular income as coming from the threshold of P3M
husband or wife? If you cannot point out, it will be divided equally. 3. Taxpayer should not be a VAT registered taxpayer
because once he is, he or she will be subjected to VAT
Next, Minimum wage earners, Sec. 22(hh) of the code, is self regardless of the amount of the gross income.
explanatory and this has been carried over under the TRAIN LAW. 4. Taxpayer indicated in his tax income return at the
start of the taxable period that he will be availing of the
(HH) The term 'minimum wage earner' shall refer to a worker 8% gross sales or gross receipts tax option.
in the private sector paid the statutory minimum wage or to an
employee in the public sector with compensation income of not Why is it necessary that the taxpayer is not a vat-registered
more than the statutory minimum wage in the non-agricultural taxpayer?
sector where he/she is assigned.
Just a preview, a person is liable to a business tax called vat if:
Under the TRAIN law, (RR. 08-2018)
Minimum wage earners shall be exempt from the payment of 1. His gross sales or gross receipts in a particular period
income tax based on their statutory minimum wage rates. The would exceed 3M
holiday pay, overtime pay, night shift differential pay and hazard 2. Even if his gross sales/receipts in a given period would not
pay received by such earner are likewise exempt. exceed 3M threshold, he will register himself as a vat
taxpayer.
Let us now proceed to the extensive changes on income taxation
relative to individual taxpayers under the train law. Vat registration may be:
1. Mandatory
Self-Employed Individuals Earning Income Purely from 2. Optional
Self-Employment or Practice of Profession. - Individuals
earning income purely from self-employment and/or practice of That is why i am saying here that if you are a vat registered
profession whose gross sales/receipts and other non-operating taxpayer, you cannot avail of the 8% option. Why?
income does not exceed the value-added tax (VAT) threshold as
provided under Section 109 (BB) of the Tax Code, It’s because of the percentage tax. A person who is not a vat
registered person and whose gross sales or gross receipts will not
So let us just summarize, if you want a detailed explanation of this exceed the 3m threshold, they will not be subjected under the 12%
section, you refer to RR 08-2018. vat rather they will be subjected under to the 3% other percentage
tax. Please understand here that in order to avail of the 8% option,
Who are the individual tax payers covered under this section? The must not be a vat registered taxpayer.
law says this section covers only purely self employed
individuals or professionals, meaning these are types of What if the taxpayer does not choose between the
individuals who are business men, they are engaged in business graduated or 8% option?
only and they are deriving their income solely from their business or The default here is the graduated tax. If the taxpayer will not choose
the exercise of their profession. anything it is deemed that the taxpayer chose to be taxed under the
regular income tax (graduated).
What is the income tax rate here? For these types of self
employed individuals, they have the option to be taxed at either What if i have several businesses? But my income will not
1. the graduated tax rate or exceed 3M in a single year?
2. the 8% income tax option It does not matter. So long as your gross sales or receipts will not
exceed the 3M threshold and you have the following conditions
Supposing the individual tax payer, would opt to be taxed at 8%, applied with, you can avail of the 8% option.
what is the tax base? Because if you apply the regular income

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TAXATION
The 8% option is hassle free. What you only have to show to the MIXED INCOME EARNER
BIR is that you have this much gross sales or receipts and you did
not exceed the threshold and you just have to make an option at Sec. 24(A)(1)
the start of the taxable year. But you realized that your expenses
are really huge. (c)Rate of Tax for Mixed Income Earners. – Taxpayers
earning both compensation income and income from business
Remember, if you opt for the 8% option, you are not allowed to or practice of profession shall be subject to the following taxes:
deduct your business expenses. What if in the middle of the
year you decide to not opt for the 8% option anymore? Can (1) All income from Compensation – The rates prescribed
you do that? No. under Subsection (A)(2)(a) of this Section.
(2) All Income from Business or Practice of Profession
Once the option is taken the same shall be irrevocable for the year –
it was made. (a) If Total Gross Sales and/or Gross Receipts and
Other Non-operating Income Do Not Exceed
So if in the year 2018, at the start of the taxable year i chose to be the VAT Threshold as Provided in Section
taxed at the 8% option for that entire year, it shall be irrevocable. 109(BB) of this Code. – The rates prescribed
Pag ka 2019, pili nanaman ako whether or not i would be tax at the under Subsection (A)(2)(a) of this Section on taxable
8% option or the regular income tax rate. income, or eight percent (8%) income tax based on
gross sales or gross receipts and other non-
What will happen if in the middle of the year i would exceed operating income in lieu of the graduated income tax
the 3M threshold? rates under Subsection (A)(2)(a) of this Section and
the percentage tax under Section 116 of this Code.
For income tax purposes, the 8% option will automatically be
unavailable for the taxpayer. Meaning for that entire year the (b) If Total Gross Sales and/or Gross Receipts and
taxpayer would be deemed as tax under the regular income tax rate. Other Non-operating Income Exceeds the VAT
The thing with the 8% option is it is supposed to be paid quarterly. Threshold as Provided in Section 109(BB) of
this Code. – The rates prescribed under Subsection
So what happens when we exceed the 3M threshold in the (A)(2)(a) of this Section.
middle of the year? What will happen to the payments?
This time, the taxpayer is a mixed income earner. It means he has
You need not worry because at the end of the year, upon his own business or exercising his own profession and at the same
computation of your total net income and the computation of your time he is earning compensation income. So let us summarize this
net income tax under the rates, you can avail of the 8% taxes you section 24, there at least four rules that you must follow with respect
have paid as tax credit, meaning your taxes will still be reduced at to the income taxation of mixed income earner:
the end of the year.
RULES ON MIXED INCOME EARNERS:
Next, what are the differences between the 2 tax schemes?
1) Compensation Income will always be subject to the
GRADUATED 8% graduated income tax rates.
(1) Tax Base Uses the gross sales Therefore, 8% gross sales or gross receipts tax is
Uses the net and gross receipts inapplicable to Compensation Income
taxable income as and non-operating
tax base income as tax base. 2) For the Business Income and Other Non-operating Income
(2) Tax rates Self-explanatory Self-explanatory the individual as an option:
(3) Availment Can claim allowable No allowable (a) to be subject to the graduated income tax rates
of allowable deductions. deductions are (b) the 8%
deductions Meaning, their allowed because they
gross income can are taxed at gross REQUIREMENTS:
be reduced by their (1) The gross sales or gross receipts will not exceed
business expenses the VAT threshold of P3M
(4) Nature Percentage is a Will no longer pay the (2) The taxpayer is a non-VAT-registered taxpayer
business tax 3% (3) The taxpayer has indicated in his ITR that he will
be availing of the 8% gross sales or gross receipts
Examples of PT: The 8% includes the tax.
(1) VAT 3%. (no need to add
(2) Percentage 3%) 3) If the gross receipts or the gross sales and other non-operating
(3) Excise taxes income exceeds the vAT threshold, the taxpayer will
So if hindi ka umabot automatically be subjected to the graduated income tax rates
Will still pay the 3% sa P3M mark, 5% for individuals.
percentage tax. lang yung income tax
mo since the 8% 4) This is related to the compensation income. The tax base of the
already includes the 8% is just the gross receipts or gross sales and other non-
3% percentage tax. operating income. You do not reduce it with the 250,000 tax
exempt income anymore. So magkaiba yung kanina sa purely
self employed, the tax based is deducted by 250,000 pesos. But
in this case, the tax base is the gross sales or gross receipts and

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other non-operating income. The 250,000 is already carried over Except, 10,000 below from PCSO and sweepstakes, it’s tax exempt.
or used at the compensation income. The tax table already Except if the winner is NRAETB, he’s totally tax exempt.
considers the 250,000 income. Minagmadali kasi ng mga senador natin.
If you noticed, the P250,000 is taken in consideration in Interest from EFCDS, right now it’s 15%, previously it’s 7.5%.
computing the 8%. But when it comes to mixed income earners, Interest from long-term deposits, tax exempt, except if they are
the P250,00 tax exemption will apply only to the compensation preterminated.
income – That is if the taxpayer opts to be taxed 8% for his
business or professional income. And you also have dividends from domestic corporations, 10% final
tax .
When the taxpayer opts to go with the 8%.
Since this the compensation income is subjected to the Capital gains, 6% if real property.
graduated rates, the P250,000 tax exemption, will only pertain
to the compensation income. If stocks, you look whether or not it’s listed and traded in the PSE.
If it’s in the PSE, STT will apply. Outside the stock exchange, you
Since the P250,000 is already incorporated in the graduated apply the rule on capital gains, 15% flat rate, based on the net
rates for compensation income, whatever business income I capital gains. The same tax treatment would apply with respect to
receive, it can no longer benefit from the P250,000 exemption. non-resident citizens and resident aliens. (Sir just discussed the
If I’m going to simplify this: portion of Section 24 dealing with Passive Income as “way of
• if the taxpayer opted to be taxed at 8% for his review”)
business income and the taxpayer is a mixed income
earner, the P250,000 tax exemption will apply solely Non-Resident Alien Engaged in Trade or Business
to the compensation income.
This is found in Section 25(A).
Sir what if my salary/compensation is only 100,000? How
about the 150,000? Section 25. – (A) Non-resident Alien Engaged in Trade or Business
You cannot do anything about the excess anymore. “thank you” Within the Philippines. –
nlng.
(1) In General. – A non-resident alien individual engaged in trade or
If we go with the 8% option, will the tax due be always business in the Philippines shall be subject to an income tax in the
smaller than that if we go with the graduated rates? same manner as an individual citizen and a resident alien individual,
Not necessarily. If your business expense is bigger, the tax due will on taxable income received from all sources within the Philippines.
necessarily be bigger. A non-resident alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than one hundred
This is one way of tax avoidance. If a taxpayer’s business expenses eighty (180) days during any calendar year shall be deemed a ‘non-
are bigger, he should opt for the graduated rates. You have to resident alien doing business in the Philippines’, Section
substantiate all your expenses. But if you don’t have any receipts, 22(G) of this Code notwithstanding.
then you opt for the 8%. Under the 8% scheme, you will be taxed
gross. (2) Cash and/or Property Dividends from a Domestic Corporation or
Joint Stock Company, or Insurance or Mutual Fund Company or
What if I am operating at a loss, and under the 8% scheme? Regional Operating Headquarters of Multinational Company, or
You are still made to pay the 8% because the tax base is the gross. Share in the Distributable Net Income of a Partnership (Except a
Wala kang deductions. General Professional Partnership), Joint Account, Joint Venture
Taxable as a Corporation or Association, Interests, Royalties, Prizes,
(Please check the illustrations in RR 8-2018) and Other Winnings. – Cash and/or property dividends from a
domestic corporation, or from a joint stock company, or from an
October 1, 2019 | Codilla insurance or mutual fund company or from a regional operating
headquarter of multinational company, or the share of a non-
Review: resident alien individual in the distributable net income after tax of
If you read further about the Section 24, most of the thing there a partnership (except a general professional partnership) of which
have already been discussed. Most of it will deal with passive he is a partner, or the share of a non-resident alien individual in the
income. net income after tax of an association, a joint account, or a joint
venture taxable as a corporation of which he is a member or a co-
interest income from bank deposits, depositary substitutes, trust venturer; interests; royalties (in any form); and prizes (except prizes
funds, and any other similar arrangements. The tax is 20% based amounting to Ten thousand pesos (PhP10,000) or less which shall
on the income received. be subject to tax under Subsection (B)(1) of Section 24); and other
winnings (except Philippine Charity Sweepstakes and Lotto
Royalties, as a rule 20%. winnings); shall be subject to an income tax of twenty percent
Exception, literary works and music, 10%. (20%) on the total amount thereof: Provided, however, That
royalties on books as well as other literary works, and royalties on
Prizes, 20%. musical compositions shall be subject to a final tax of ten percent
Exception, except prizes which are 10,000 below which is subject (10%) on the total amount thereof: Provided, further, That
to regular income tax. cinematographic films and similar works shall be subject to the tax
provided under Section 28 of this Code: Provided, furthermore, That
What about winnings? 20%. interest income from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes,

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TAXATION
investment management accounts and other investments evidenced Special Aliens

by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax imposed under this Section 25. — (C) Alien Individual Employed by Regional or Area
Subsection: Provided, that should the holder of the certificate pre- Headquarters and Regional Operating Headquarters of Multinational
terminate the deposit or investment before the fifth (5th) year, a Companies. – There shall be levied, collected and paid for each
final tax shall be imposed on the entire income and shall be taxable year upon the gross income received by every alien
deducted and withheld by the depository bank from the proceeds of individual employed by regional or area headquarters and regional
the long-term deposit or investment certificate based on the operating headquarters established in the Philippines by
remaining maturity thereof: multinational companies as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as
Four (4) years to less than five (5) years — 5%; honoraria and allowances, from such regional or area headquarters
Three (3) years to less than four (4) years — 12%; and Less than and regional operating headquarters, a tax equal to fifteen percent
three (3) years — 20%. (15%) of such gross income: Provided, however, That the same tax
treatment shall apply to Filipinos employed and occupying the same
(3) Capital Gains. – Capital gains realized from sale, barter or position as those of aliens employed by these multinational
exchange of shares of stock in domestic corporations not traded companies. For purposes of this Chapter, the term ‘multinational
through the local stock exchange, and real properties shall be company’ means a foreign firm or entity engaged in international
subject to the tax prescribed under Subsections (C) and (D) of trade with affiliates or subsidiaries or branch offices in the Asia-
Section 24. Pacific Region and other foreign markets.
Points to remember: Section 25. — (D) – There shall be levied, collected and paid for
• First rule, NRAETB are taxed like resident citizen. The tax each taxable year upon the gross income received by every alien
base is the net taxable income, the 8% is still applicable individual employed by o shore banking units established in the
to them, and they can be subjected to the regular tax rate Philippines as salaries, wages, annuities, compensation,
if they choose not to be taxed under the 8% rule. remuneration and other emoluments, such as honoraria and
allowances, from such o shore banking units, a tax equal to fifteen
• Second, you have to determine whether the NRA is percent (15%) of such gross income: Provided, however, That the
engaged in trade or business. You have “more than 180 same tax treatment shall apply to Filipinos employed and occupying
days”. the same position as those of aliens employed by these offshore
banking units.
• Last, cinematographic films and similar works are
subjected to 25% final tax.
Section 25. — (E) Alien Individual Employed by Petroleum Service
Contractor and Subcontractor. – An alien individual who is a
Non-Resident Alien Not Engaged in Trade or Business
permanent resident of a foreign country but who is employed and
assigned in the Philippines by a foreign service contractor or by a
Section 25. — (B) Non-resident Alien Individual Not Engaged in
foreign service subcontractor engaged in petroleum operations in
Trade or Business Within the Philippines. – There shall be levied, the Philippines shall be liable to a tax of fifteen percent (15%) of
collected and paid for each taxable year upon the entire income
the salaries, wages, annuities, compensation, remuneration and
received from all sources within the Philippines by every non-
other emoluments, such as honoraria and allowances, received from
resident alien individual not engaged in trade or business within the
such contractor or subcontractor: Provided, however, That the same
Philippines as interest, cash and/or property dividends, rents,
tax treatment shall apply to a Filipino employed and occupying the
salaries, wages, premiums, annuities, compensation, remuneration,
same position as an alien employed by petroleum service contractor
emoluments, or other fixed or determinable annual or periodic or
and subcontractor.
casual gains, profits, and income, and capital gains, a tax equal to
twenty-five percent (25%) of such income. Capital gains realized by
a non-resident alien individual not engaged in trade or business in Any income earned from all other sources within the Philippines by
the Philippines from the sale of shares of stock in any domestic the alien employees referred to under Subsections (C), (D), and (E)
corporation and real property shall be subject to the income tax hereof shall be subject to the pertinent income tax, as the case may
prescribed under Subsections (C) and (D) of Section 24. be, imposed under this Code.
Points to remember: If you are asked who these special aliens are, you just think of 3
The general rule with respect to NRANETB is they will be taxed at companies.
the rate of 25%. The tax base is the gross income. The composition 1. Regional Area Headquarters/Regional Operating
of the gross income is almost everything. Headquarters
2. Offshore Banking Units and
Exception, capital gains from real property classified as capital 3. Petroleum Service Contractor.
asset and capital gains from sale of domestic shares of stock. Again,
look into the type of transaction. If it sold in the PSE, you apply the Pag sinabi nating special aliens, these are not strictly “aliens”
Stock Transaction Tax. If not, you apply the capital gains tax of because these provisions would also apply to filipino workers
15%. working in these institutions occupying the same positions with
these special aliens.
Take note that the 25% tax here is in the form of a final withholding
tax. It’s in the form of a withholding tax because of the nature of The tax rate is the same at 15%. Where do you apply this?
the taxpayer. He’s located abroad so whatever income will be given Compensation received from these institutions. If the Special Alien
to him, an amount will be withheld and remitted to the Government. derives income within the Philippines, we determine WON he is a

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TAXATION
Resident Alien or Non-Resident Alien, then you apply the tax components of gross income (Compensation income, business
treatment accordingly. income and other income), in corporations there is no compensation
income. There is only business and other income. Another term for
Now, there’s this paragraph (F): other income is other non operating income.
Section 25. — (F) The preferential tax treatment provided in SPECIAL DOMESTIC CORPORATIONS
Subsections (C), (D), and (E) of this Section shall not be applicable
to regional headquarters (RHQs), regional operating headquarters Sec. 27. Rates of Income Tax on Domestic Corporations. —
(ROHQs), o shore banking units (OBUs) or petroleum service (B) Proprietary Educational Institutions and Hospitals.— x x
contractors and subcontractors registering with the Securities and x A 'proprietary educational institution' is any private school
Exchange Commission (SEC) after January 1, 2018: Provided, maintained and administered by private individuals or groups with
however, That existing RHQs/ROHQs, OBUs or petroleum service an issued permit to operate from the Department of Education,
contractors and subcontractors presently availing of preferential tax Culture and Sports (DECS), or the Commission on Higher Education
rates for qualified employees shall continue to be entitled to avail of (CHED), or the Technical Education and Skills Development
the preferential tax rate for present and future qualified employees. Authority (TESDA), as the case may be, in accordance with existing
laws and regulations.
What does this mean? Prior to 2018, they will enjoy the special tax
treatment of 15%. But, if these institutions are registered with the Provided, that if the gross income from 'unrelated trade,
SEC, after January 1, 2018, they can no longer enjoy the business or other activity' exceeds fifty percent (50%) of the
15%. So meaning, these aliens will now be subjected to your total gross income derived by such educational institutions or
regular tax rate, as resident aliens or non-resident aliens. This was hospitals from all sources, the tax prescribed in Subsection (A)
VETOED by the President. hereof shall be imposed on the entire taxable income. For purposes
of this Subsection, the term 'unrelated trade, business or other
October 1, 2019 | Emuy activity' means any trade, business or other activity, the conduct
of which is not substantially related to the exercise or performance
GENERAL PROFESSIONAL PARTNERSHIP (GPP) by such educational institution or hospital of its primary purpose or
function.x x x
SEC. 26, NIRC Tax Liability of Members of General
Professional Partnerships. – Proprietary educational institutions and hospitals are subject to a
A general professional partnership as such shall not be subject to preferential tax rate of 10%based on the net taxable income. But
the income tax imposed under this Chapter. there must be compliance with the condition. Otherwise, they will
be subject to the 30% tax rate based on the net taxable income.
Persons engaging in business as partners in a general professional
partnership shall be liable for income tax only in their separate and Condition for the preferential tax rate: the gross income from
individual capacities. 'unrelated trade, business or other activity' exceeds fifty
percent (50%) of the total gross income derived by such
For purposes of computing the distributive share of the partners, educational institutions or hospitals from all sources, the
the net income of the partnership shall be computed in the same tax prescribed in Subsection (A) hereof shall be imposed on
manner as a corporation. Each partner shall report as gross income the entire taxable income.
his distributive share, actually or constructively received, in the net
income of the partnership. Take note of the definition of the proprietary educational
institutions and the unrelated trade, business or other
A General Professional Partnership (GPPs) is a tax-exempt entity. activity.
There shall be a determination of the net income of the GPPs as if GOCC

these are corporations but they are not subject to tax. The one taxed
are the partners.Each partner shall report as gross income his Sec. 27. Rates of Income Tax on Domestic Corporations. —
distributive share, actually or constructively received, in the (C) Government-Owned or Controlled Corporations,
net income of the partnership. Its for different for General Co- Agencies or Instrumentalities. -- The provisions of existing
Partnership (GCPs) which are treated like corporations for special or general laws to the contrary notwithstanding, all
taxation purposes corporations, agencies, or instrumentalities owned or controlled by
the Government, except the Government Service Insurance System
DOMESTIC CORPORATIONS (GSIS), the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC), the local water districts (LWDs), and
Sec. 27. Rates of Income Tax on Domestic Corporations. — the Philippine Charity Sweepstakes Office (PCSO) and the Philippine
(A) In General. — Except as otherwise provided in this Code, an Amusement and Gaming Corporation (PAGCOR), shall pay such rate
income tax of thirty-five percent (35%) is hereby imposed upon the of tax upon their taxable income as are imposed by this Section
taxable income derived during each taxable year from all sources upon corporations or associations engaged in s similar business,
within and without the Philippines by every corporation, as defined industry, or activity.
in Section 22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of the General Rule: 30% tax rate based on the net taxable
Philippines: Provided, That effective January 1, 2009, the rate of income
income tax shall be thirty percent (30%).
Except:
The tax rate for domestic corporations is pegged at 30%. The tax 1. GSIS
base for this is the net taxable income. Before there are three 1. SSS

39
TAXATION
2. PHIC They will still subjected to regular corporate rate. It’s just that with
3. LWDs respect to any other taxes, they are exempt from taxes.
PCSO is now taxable entity. Also with respect to PAGCOR, it is no Let us further codify such provision
longer in the list of exempted GOCCs. With respect to their income
from gambling, it will be subject to a franchise tax of 5% in lieu of The last portion:
all other taxes. But with respect to their income from its unrelated "Provided, however, That interest income from foreign currency
activities, they will be subject to the regular tax on domestic loans granted by such depository banks under said expanded
corporations. system to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system,
PASSIVE INCOME of Corporations shall be subject to a final tax at the rate of ten percent (10%).''
Ano young subject sa 10% dito? Interest income coming from
Interest of deposits and yield or any other 20% final foreign currency loans granted to depository banks under the said
monetary benefit from deposit withholding tax EFCDS to residents shall be subject to the 10% tax.
substitutes and from trust funds and
similar arrangements EXP to the 10% rule:(not subject to 10% final tax)
1. OBUs (offshore banking units)
2. interest income from foreign currency loans granted to
other depository banks under the EFCDS
Passive Royalties (no distinction as to
INTERCORPORATE DIVIDENDS
whether its music,literary, etc.)
Sec. 27. Rates of Income Tax on Domestic Corporations.
Interest derived by a domestic corporation 15% final tax
—
from a depositary bank under the
(D) Rates of Tax on Certain Passive Incomes.—
expanded foreign currency deposit system
(4) Intercorporate Dividends. — Dividends received by a
(EFCDS)
domestic corporation from another domestic corporation shall not
be subject to tax.
October 1, 2019 | Honorico
In Short, domestic dividends received by domestic corporations are
TAX ON INCOME DERIVED UNDER THE EFCDS
tax exempt.
Sec. 27. Rates of Income Tax on Domestic Corporations. —
CAPITAL GAINS
(3) Tax on Income Derived under the Expanded Foreign
Sec. 27. Rates of Income Tax on Domestic Corporations.
Currency Deposit System — Income derived by a depository
—
bank under the expanded foreign currency deposit system from
foreign currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks including branches
of foreign banks that may be authorized by the Bangko Sentral ng (5) Capital Gains Realized from the Sale, Exchange or
Pilipinas (BSP) to transact business with foreign currency deposit Disposition of Lands and/or Buildings. - A final tax of six
system shall be exempt from all taxes, except net income from such percent (6%) is hereby imposed on the gain presumed to have
transactions as may be specified by the Secretary of Finance, upon been realized on the sale, exchange or disposition of lands and/or
recommendation by the Monetary Board to be subject to the regular buildings which are not actually used in the business of a
income tax payable by banks: Provided, however, That interest corporation and are treated as capital assets, based on the gross
income from foreign currency loans granted by such depository selling price of fair market value as determined in accordance with
banks under said expanded system to residents other than offshore Section 6(E) of this Code, whichever is higher, of such lands
banking units in the Philippines or other depository banks under the and/or buildings.
expanded system, shall be subject to a final tax at the rate of ten
percent (10%). Real Property is 6%. With respect to corporations its just land and
buildings.
Any income of nonresidents, whether individuals or corporations,
from transactions with depository banks under the expanded system Machineries even if its a capital asset already, the gains from the
shall be exempt from income tax. sale of such is part of the GI subject to regular tax.
If there is a domestic bank engaged in EFCDS and the SMI-ED v. CIR

clients are: Gr 175410, November 12, 2014
1. non residents
2. OBUs (offshore banking units) On the Imposition of Capital Gains Tax
3. local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Thus, "capital assets" refers to taxpayer’s property that is NOT any
Pilipinas (BSP) engaged in EFCDS of the following:
1. Stock in trade;
>shall be exempt from tax 2. Property that should be included in the taxpayer’s inventory at
the close of the taxable year;
EXP: with respect to the net income of theses depositary banks. 3. Property held for sale in the ordinary course of the taxpayer’s
business;

40
TAXATION
4. Depreciable property used in the trade or business; and 2. The MCIT will apply only if the corporation will suffer a
5. Real property used in the trade or business. net loss or a zero net income or the corporation's
MCIT is bigger than the RCIT
The properties involved in this case include petitioner’s buildings, 3. The computation of the MCIT also applies to the quarterly
equipment, and machineries. They are not among the exclusions payment of income taxes by corporations
enumerated in Section 39(A)(1) of the National Internal Revenue 4. If the taxpayer is a corporation, they are required to file
Code of 1997. None of the properties were used in petitioner’s trade their quarterly income tax return and also pay their
or ordinary course of business because petitioner never quarterly income tax return on a cumulative basis. So in
commenced operations. They were not part of the inventory. case in the 2nd quarter, the corporation will suffer a net
loss, they will still be liable to pay the MCIT.
None of them were stocks in trade.
Is it unfair? Isn't it the principle is that we tax only the income and
Based on the definition of capital assets under Section 39 of the not the loss?
National Internal Revenue Code of 1997, they are capital assets. NIRC itself provides for a relief under the MCIT system:
Respondent insists that since petitioner’s machineries and
equipment are classified as capital assets, their sales should be Excess MCIT Carry over
subject to capital gains tax. Respondent is mistaken. Sec. 27. Rates of Income Tax on Domestic Corporations. —
(E) Minimum Corporate Income Tax on Domestic
Limited only to Lands and Buildings Corporations. -
Since this Involves a Domestic Corporation (2) Carry Froward of Excess Minimum Tax. - Any excess of
the minimum corporate income tax over the normal income tax as
Therefore, only the presumed gain from the sale of petitioner’s land computed under Subsection (A) of this Section shall be carried
and/or building may be subjected to the 6% capital gains tax. forward and credited against the normal income tax for the three
(3) immediately succeeding taxable years.
The income from the sale of petitioner’s machineries and equipment
is subject to the provisions on normal corporate income tax. Meaning, if there is a difference between the MCIT and NCIT and
the MCIT is bigger than the NCIT, the excess can be carried over
MINIMUM CORPORATE INCOME TAX (MCIT) on the succeeding years as a tax credit. Bawas parin sa tax
mo.
Sec. 27. Rates of Income Tax on Domestic Corporations. —
(E) Minimum Corporate Income Tax on Domestic What if hindi nagamit ang deduction because i keep on
Corporations. - suffering losses?
(1) Imposition of Tax. - A minimum corporate income tax of two If the corporation is keep on suffering losses even until the 4th year
percent (2%) of the gross income as of the end of the taxable year, and he was not able to utilize the excess of the MCIT over the
as defined herein, is hereby imposed on a corporation taxable under RCIT/NCIT he cannot carry over anymore because the law sets
this Title, beginning on the fourth taxable year immediately a sort of prescription on the applicable on the excess MCIT.
following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than Sir lugi na naman. It does not really matter because the law
the tax computed under Subsection (A) of this Section for the provides for another relief:
taxable year. Sec. 27. Rates of Income Tax on Domestic Corporations. —
(E) Minimum Corporate Income Tax on Domestic
When the taxpayer is a corporation, particularly a domestic and a Corporations. -
resident foreign corporation. They have to compute 2 sets of taxes (3) Relief from the Minimum Corporate Income Tax Under
1. Normal Corporate Income tax or Regular Income tax Certain Conditions. - The Secretary of Finance is hereby
2. MCIT authorized to suspend the imposition of the minimum corporate
income tax on any corporation which suffers losses on account of
This law on MCIT was passed because they were many prolonged labor dispute, or because of force majeure, or because
unscrupulous corporation declaring low income. Such that they of legitimate business reverses.
would pay lower taxes or no taxes at all. It was passed by the
Congress in order to compel such corporations to pay taxes. The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and
Types of Corporations subject to MCIT regulation that shall define the terms and conditions under which
1. Domestic Corporation he may suspend the imposition of the minimum corporate income
2. Resident Foreign Corporations tax in a meritorious case.
It does not apply to nonresident foreign corporation What are the grounds?
(NRFCs) and corporations subject to a preferential or The corporate taxpayer suffers losses on account of:
special tax rate. 1. prolonged labor dispute
2. Force Majeure
For instance, if the corporation is a proprietary educational 3. Legitimate business reverses
institution and it will be covered by the 10% preferential tax rate,
there is no need for this corporation to compute or to pay MCIT. FOREIGN CORPORATIONS
Take note of the definition of foreign corporation > organized under
The Requirement for its(MCIT) application are as follows: laws abroad
1. It begins on the 4th taxable year immediately following
the year which the corporation commence its operation Resident Foreign Corporations

41
TAXATION
Resident foreign corporations are those foreign corporations doing • passenger,

business in the Philippines. When you say doing business, it refers • cargo or
to acts that imply a continuity of commercial dealings its not merely • mail
casual or occasional. Systematic and regular as to manifest originating from the Philippines up to final
continuity. In other words, it performs acts of going destination, regardless of the place of sale or
concern, magpadayun kog magpalambo sa akong business diri sa payments of the passage or freight documents.
pilipinas.
What is the tax consequence of a Resident Foreign Provided, That international carriers doing business in the
Corporation? Philippines may avail of a preferential rate or exemption from the
GR: Subject to the regular corporate income tax (30% based on net tax herein imposed on their gross revenue derived from the
taxable income) carriage of persons and their excess baggage on the basis of an
applicable tax treaty or international agreement to which the
RFCs are also subject to MCIT. These RFCs are covered under MCIT Philippines is a signatory or on the basis of reciprocity such that
system only of they are not subject to a special tax rate. an international carrier, whose home country grants income tax
exemption to Philippine carriers, shall likewise be exempt from the
October 1, 2019 | Ulangkaya tax imposed under this provision.
What are the Resident Foreign Corporations not subject to What is the tax treatment for these International Carriers?
MCIT? International Carriers are Foreign Corporation ha. International
1. International Carriers – subject to 2.5% tax on the Gross Carriers shall pay a tax of 2.5% of its Gross Philippine Billings.
Philippine Billings Dean would usually refer this to as the Gross Philippine Billings Tax.
2. OBUS
3. ROHs Two types of Carriers:
4. Those under RA 7916, 7927 PEZA law / Bases conversion 1. Air Carriers
development tax 2. Vessels
INTERNATIONAL CARRIERS For international Air Carriers, two types:

1. Offline – if it does not have any landing rights in the
Sec. 28. Rates of Income Tax on Foreign Corporations. — Philippines.
(A)Tax on Resident Foreign Corporations.— Is it possible to earn income here in the Philippines? What
xxx if there are ticketing established here in the Philippines?
1) International Carrier. — An international carrier 2. Online – which have landing rights in the Philippines.
doing business in the Philippines shall pay a tax of 2
1/2% on its “Gross Philippine Billings’ as defined Coverage of GPB Income Tax Rule: The Online Carriers only.
hereunder:
How about the offline air carriers? Identify whether it is a
(a) International Air Carrier. — ‘Gross resident foreign or non resident foreign corporation and apply the
Philippine Billings’ refers to the amount of general rule.
gross revenue derived from
• carriage of persons, What is Gross Philippine Billings?
• excess baggage, 1. Amount of gross revenue derived from carriage of
• cargo, and persons, excess baggage, cargo, and mail
• mail originating from the Philippines 2. Trip originating in the Philippines
in a continuous and uninterrupted flight, 3. in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the 4. irrespective of the place of sale or issue and the place of
place of payment of the ticket or passage payment of the ticket or passage document.
document:
Provided that tickets are validated, exchanged and/or endorsed to
Provided, another international airline form part of the GPB if the passenger
✓ That tickets revalidated, exchanged and/or boards the plane in a port or point in the Philippines.
indorsed to another international airline form
part of the Gross Philippine Billings The for a flight which originates in the Philippines but transshipment
✓ if the passenger boards a plane in a port or of passenger takes place at any port outside the Philippines or on
point in the Philippines: another airlines, only an aliquot portion of the cost of the ticket
corresponding the leg flown from the Philippines to the
Provided, further, That for a flight which originates point of transshipment shall form part of Gross Philippine
from the Philippines, but transshipment of Billings.
passenger takes place at any part outside the
Philippines on another airline, Philippines ® Dubai ® US
• only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Only that leg flown coming from the Philippines until Dubai will form
Philippines to the point of transshipment shall part the GPB.
form part of Gross Philippine Billings.
The rule on GPB also applies on an International Shipping.
(b) International Shipping. — ‘Gross Philippine
Billings’ means gross revenue whether for

42
TAXATION
South African Airways vs CIR the Philippines, although during the period covered by the
G.R. No. 180356 February 16, 2010 assessments, it maintained a general sales agent in the
Philippines — Wamer Barnes and Company, Ltd., and later
FACTS: Petitioner South African Airways (SAA) is a foreign Qantas Airways — which was responsible for selling BOAC tickets
corporation organized and existing under and by virtue of the covering passengers and cargoes.
laws of the Republic of South Africa. Its principal office is located
at Airways Park, Jones Road, Johannesburg International Airport, The CTA sided with BOAC citing that the proceeds of sales of
South Africa. BOAC tickets do not constitute BOAC income from Philippine
In the Philippines, it is an international air carrier having NO sources since no service of carriage of passengers or freight was
LANDING RIGHTS in the country. Petitioner herein has a general performed by BOAC within the Philippines and, therefore, said
sales agent in the Philippines in the person of Aerotel Limited income is not subject to Philippine income tax. The CTA position
Corporation (Aerotel). They weren't selling tickets. Aerotel was that income from transportation is income from services so
sells passage documents for compensation or commission for that the place where services are rendered determines the
petitioner’s off-line flights for the carriage of passengers and source.
cargo between ports or points outside the territorial jurisdiction
of the Philippines. ISSUE: Are the revenues derived by BOAC from sales of ticket
for air transportation, while having no landing rights here,
Petitioner is not registered with the SEC as a corporation, branch constitute income of BOAC from Philippine sources, and
office, or partnership. It is not licensed to do business in the accordingly, taxable?
Philippines. It paid a corporate tax in the rate of 32% of its
gross billings. HELD: Yes. The source of an income is the property, activity or
service that produced the income. For the source of income to
However, it subsequently claim for refund contending that its be considered as coming from the Philippines, it is sufficient that
income should be taxed at the rate of 2 1/2% of its gross the income is derived from activity within the Philippines. In
billings. BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and
ISSUE: Is petitioner’s income sourced within the Philippines and payments for fares were also made here in Philippine currency.
is to be taxed at 32% of the gross billings? The site of the source of payments is the Philippines. The flow of
wealth proceeded from, and occurred within, Philippine territory,
HELD: Yes. enjoying the protection accorded by the Philippine government.
In consideration of such protection, the flow of wealth should
General Rule: Resident foreign corporations shall be liable for share the burden of supporting the government.
a 32% income tax on their income from within the Philippines,
OFF SHORE BANKING UNITS (OBUS)
Except: for resident foreign corporations that are international
carriers that derive income “from carriage of persons, excess Sec. 28. Rates of Income Tax on Foreign Corporations.—
baggage, cargo and mail originating from the (A) Tax on Resident Foreign Corporations. –
Philippines” which shall be taxed at 2 1/2% of their Gross (1) Offshore Banking Units. - The provisions of any law
Philippine Billings. to the contrary notwithstanding, income derived by
offshore banking units authorized by the Bangko
Petitioner, being an international carrier with no flights Sentral ng Pilipinas (BSP), from foreign currency
originating from the Philippines, does not fall under the transactions with nonresidents, other offshore banking
exception. As such, petitioner must fall under the general rule. units, local commercial banks, including branches of
foreign banks that may be authorized by the Bangko
(This principle is embodied in the Latin maxim, exception firmat Sentral ng Pilipinas (BSP) to transact business with
regulam in casibus non exceptis, which means, a thing not being offshore banking units shall be exempt from all taxes
excepted must be regarded as coming within the purview of the except net income from such transactions as may be
general rule.) specified by the Secretary of Finance, upon
recommendation of the Monetary Board which shall be
To reiterate, the correct interpretation of the above provisions is subject to the regular income tax payable by banks:
that, if an international air carrier maintains flights to and from Provided, however, That any interest income derived
the Philippines, it shall be taxed at the rate of 2 1/2% of from foreign currency loans granted to residents other
its Gross Philippine Billings, while international air carriers than offshore banking units or local commercial banks,
that do not have flights to and from the Philippines including local, branches of foreign banks that may be
but nonetheless earn income from other activities in the authorized by the BSP to transact business with
country will be taxed at the rate of 32% of such income. offshore banking units, shall be subject only to a final
tax at the rate of ten percent (10%).
COMMISSIONER vs. BOAC
GR No. L-65773-74 April 30, 1987 Any income of nonresidents, whether individuals or corporations,
from transactions with said offshore banking units shall be
FACTS: BOAC is a 100% British Government-owned corporation exempt from income tax
organized and existing under the laws of the United Kingdom,
and is engaged in the international airline business. During the The tax of OBUs is pegged at 10% of their income.
periods covered by the disputed assessments, it is admitted that
BOAC had no landing rights for traffic purposes in the Philippines.
Consequently, it did not carry passengers and/or cargo to or from

43
TAXATION
TAX ON BRANCH PROFITS REMITTANCES October 3, 2019 | Ulangkaya
Sec. 28. Rates of Income Tax on Foreign Corporations. — NON RESIDENT CORPORATIONS
(5) Tax on Branch Profits Remittances. - Any profit remitted
by a branch to its head office shall be subject to a tax of fifteen There are many discussions here, most of them are memory work
(15%) which shall be based on the total profits applied or na lang. Like the definition of a Non Resident Foreign Corporation,
earmarked for remittance without any deduction for the tax how they are treated, what is the tax treatment.
component thereof (except those activities which are
registered with the Philippine Economic Zone Authority). SEC. 28. Rates of Income Tax on Foreign Corporations. -
The tax shall be collected and paid in the same manner as
provided in Sections 57 and 58 of this Code: Provided, that (B) Tax on Nonresident Foreign Corporation. - (1) In General.
interests, dividends, rents, royalties, including remuneration for - Except as otherwise provided in this Code, a foreign corporation
technical services, salaries, wages premiums, annuities, not engaged in trade or business in the Philippines shall pay a tax
emoluments or other fixed or determinable annual, periodic or equal to thirty percent (30%) of the gross income received
casual gains, profits, income and capital gains received by a during each taxable year from all sources within the
foreign corporation during each taxable year from all sources Philippines, such as interests, dividends, rents, royalties, salaries,
within the Philippines shall not be treated as branch profits unless premiums (except reinsurance premiums), annuities, emoluments
the same are effectively connected with the conduct of its trade or other fixed or determinable annual, periodic or casual gains,
or business in the Philippines. profits and income, and capital gains, except capital gains subject
to tax under subparagraphs (C) and (d) xxx
Please take note of the exception: except those activities which
are registered with the Philippine Economic Zone Authority. As a general rule, Non Resident foreign corporations are taxed at
gross. And this is in the form of withholding tax. Withholding is
REGIONAL OR AREA HEADQUARTERS AND REGIONAL necessary because of the very nature of Non Resident Foreign
OPERATING HEADQUARTERS OF MULTINATIONAL corporation. There will be difficulty in collecting the tax if the
COMPANIES government will not first withhold any income paid to these Non
Resident Foreign Corporation.
Sec. 28. Rates of Income Tax on Foreign Corporations. —
(6) Regional or Area Headquarters and Regional What is the coverage of the gross income here? From all
Operating Headquarters of Multinational sources. Basically all types of income. Interest, dividends, rents,
Companies. - royalties, etc. except those which are subject to special tax rate.
(a) Regional or area headquarters as defined in
Section 22(DD) shall not be subject to income Tax base: Gross income and NOT Net taxable income. Unlike
tax. normally when you talk about resident foreign corporations.
(b) Regional operating headquarters as defined in
Section 22(EE) shall pay a tax of ten percent Special Non Resident Corporations
(10%) of their taxable income.
Non Resident Cinematographic Film Owner/Lessor or
Regional or area headquarters shall mean a branch established Distributor
in the Philippines by multinational companies and which Tax Rate: 25%
headquarters do not earn or derive income from the Philippines and Tax Base: Gross Income from all sources within the Philippines
which act as supervisory, communications and coordinating center pertaining to their business, cinematographic film.
for their affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets. Nonresident Owner or Lessor of Vessels Chartered by
Philippine Nationals
Regional operating headquarters shall mean a branch Tax Rate: 4 1/2%
established in the Philippines by multinational companies which are Tax Base: Gross rentals, lease or charter fees from leases or
engaged in any of the following services: general administration and charters to Filipino citizens or corporations, as approved by the
planning; business planning and coordination; sourcing and Maritime Industry Authority.
procurement of raw materials and components; corporate finance
advisory services; marketing control and sales promotion; training Nonresident Owner or Lessor of Aircraft, Machineries and
and personnel management; logistic services; research and Other Equipment
development services and product development; technical support Tax Rate: 7 1/2%
and maintenance; data processing and communications; and Tax Base: Gross rentals or fees.
business development.
I cannot think of any corporation subject to this kind of tax. But
PASSIVE INCOME what can I think of is airbus. Cebu pacific do not buy the plane.
The same Rules apply: What they do is the they will just rent the plane. So is the airbus
• Bank Deposits and Yields from Deposit Substitutes, doing business here in the Philippines. They do not have any office
etc. and Royalties here in the Philippines. But they get a contract outside the
• Income Derived under the EFCDS Philippines wherever the principal office is of the airline companies.
• Capital Gains So, I think they are subject to this kind of tax, 4 and ½%
• Shares of Stock
• Intercorporate Dividends (Sec. 28 (7) (d))

44
TAXATION
Imposition of Improperly Accumulated Earnings Tax - 2. Is owned directly or indirectly by or for not more than
twenty (20) individuals. (20-Individual Rule)
SEC. 29. Imposition of Improperly Accumulated Earnings
Tax - Sec. 29 (C) Evidence of Purpose to Avoid Income Tax. –
(A) In General. - In addition to other taxes imposed by this Title, (1) Prima Facie Evidence. - The fact that any corporation is a
there is hereby imposed for each taxable year on the improperly mere holding company or investment company shall be prima
accumulated taxable income of each corporation described in facie evidence of a purpose to avoid the tax upon its shareholders
Subsection B hereof, an improperly accumulated earnings tax equal or members.
to ten percent (10%) of the improperly accumulated
taxable income. We said that IAET is a penalty tax. This means that there must be
some sort of proof on the part of the government that this
Basically, this is a tax on hoarding. The corporation will hoard corporation is actually hoarding profits.
income. The corporations in essence must not hoard profits. Once
a corporation has profit, it must distribute dividends on its So how do we know that earnings are improperly
stockholders. accumulated? The law provides for presumptions.
Nature: Surtax. This is essentially penalty tax for corporation who If the presumption is in your favor, you don’t have to prove
hoards its income or profits by not distributing dividends. Stock anything. It is the other party that must prove that the presumption
corporations are composed of stockholders. Stockholders are is wrong.
entitled to dividends. And what do you get when you are a
stockholder? If the corporation will declare dividends, you are This is actually a disputable presumption. There is a prima facie
supposed to receive that. evidence of hoarding of this dividends if the corporation is organized
as a holding company only or an investment company only. In
What will happen if the corporation will not declare effect, if the corporation is one of these two corporation, investment
dividends? In effect, the corporation now is depriving the or mere holding company, it is up now to the corporate
government of additional taxes. Magkano ba ang tanggapin ng taxpayer that it is not liable for the IAET.
individual stockholder? Granting the stockholder is an individual,
how much is the tax supposedly? 10% tax di ba? Final Witholding Sec. 29 (C) Evidence of Purpose to Avoid Income Tax. –
Tax of the Stockholders. To avoid these corporations from hoarding (2) Evidence Determinative of Purpose. - The fact that the
profits, and depriving the government from additional taxes that earnings or profits of a corporation are permitted to accumulate
would be acquired by reason of dividend income, there is this IAET. beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its shareholders
If you notice, the tax rate of IAET is 10%. So parehas lang sa or members unless the corporation, by the clear preponderance of
dividend income. Supposedly, the final tax on dividend is 10%. evidence, shall prove to the contrary.
Basis for liability: The touchstone of the liability is the purpose How do you define Reasonable needs of the business?
behind the accumulation of income and not the consequence of the
Sec. 29 (E) Reasonable Needs of the Business - For purposes
accumulation. This IAET does not prohibit the corporation to hoard
of this Section, the term 'reasonable needs of the business'
profits. What is prohibited actually is the withholding of distribution
includes the reasonably anticipated needs of the business.
of dividends. Of course, a corporation may hoard profits because of
some sort of legal purpose. For example, corporate expansion, it’s
a legitimate ground. But if there is no other reason behind that, then The BIR adheres to the so called “Immediacy Test” under the
American jurisprudence. Even the revenue regulation does not
there must be IAET imposed on the corporation. What is prohibited
provide for a particular definition, it provides for examples.
is the purpose of non distribution of dividends.
What corporations are subject to IAET? REVENUE REGULATIONS NO. 2 - 2001

SEC. 3. Determination of Reasonable Needs of the
Sec 29 (B) Tax on Corporations Subject to Improperly
Business.
Accumulated Earnings Tax. -
x xx
(1) In General - The improperly accumulated earnings tax imposed
a. Allowance for the increase in the accumulation of earnings
in the preceding Section shall apply to every corporation
up to 100% of the paid-up capital of the corporation as of
formed or availed for the purpose of avoiding the income
Balance Sheet date, inclusive of accumulations taken from
tax with respect to its shareholders or the shareholders of any other
other years;
corporation, by permitting earnings and profits to accumulate
b. Earnings reserved for definite corporate expansion projects
instead of being divided or distributed.
or programs requiring considerable capital expenditure as
approved by the Board of Directors or equivalent body;
Under Revenue Regulations 2-2001, the IAET is imposed on c. Earnings reserved for building, plants or equipment
improperly accumulated taxable income domestic corporation only acquisition as approved by the Board of Directors or
which are classified as closely held corporations. equivalent body;
d. Earnings reserved for compliance with any loan covenant or
What is a closely held corporation? pre-existing obligation established under a legitimate
1. For purposes of these Regulations, closely-held business agreement;
corporations are those corporations at least fifty e. Earnings required by law or applicable regulations to be
percent (50%) in value of the outstanding capital retained by the corporation or in respect of which there is
stock or at least fifty percent (50%) of the total legal prohibition against its distribution;
combined voting power of all classes of stock entitled f. In the case of subsidiaries of foreign corporations in the
to vote Philippines, all undistributed earnings intended or reserved

45
TAXATION
for investments within the Philippines as can be proven by 3. Publicly-held corporations

corporate records and/or relevant documentary evidence. 4. Taxable partnerships
5. General professional partnerships
(b) Earnings reserved for definite corporate expansion 6. Non taxable joint ventures
projects or programs requiring considerable capital 7. Enterprises duly registered with PEZA
expenditure as approved by the Board of Directors or 8. Foreign corporations
equivalent body;
So probably, you will show to the BIR that there is board resolution EXEMPTIONS FROM TAX ON CORPORATIONS
that 2 years from now that there will be a new building that will be
Section 30. Exemptions from Tax on Corporations. - The
built or that this is for a new land acquisition.
following organizations shall not be taxed under this Title in
respect to income received by them as such:
(c) Earnings reserved for building, plants or equipment
(A) Labor, agricultural or horticultural organization not
acquisition as approved by the Board of Directors or
organized principally for profit;
equivalent body;
For example, if all the vehicles owned by the corporation are already
(B) Mutual savings bank not having a capital stock
obsolete or already passed the depreciation period, they have to
represented by shares, and cooperative bank without capital
replace them and have to set aside money for procurement of
stock organized and operated for mutual purposes and
vehicles.
without profit;
(d) Earnings reserved for compliance with any loan
(C) A beneficiary society, order or association, operating fort
covenant or pre-existing obligation established under a
he exclusive benefit of the members such as a fraternal
legitimate business agreement;
organization operating under the lodge system, or mutual
There are banks or corporate clients of the bank sometimes when
aid association or a nonstock corporation organized by
they get a loan, the banks will require them to have a certain
employees providing for the payment of life, sickness,
amount of capital before the loan is granted. It will be stipulated in
accident, or other benefits exclusively to the members of
the loan agreement. You can present that to the BIR. I need this
such society, order, or association, or nonstock corporation
much capital that will to be distributed to the stockholders because
or their dependents;
I am under contract in a loan agreement with a bank.
(D) Cemetery company owned and operated exclusively for
(f) In the case of subsidiaries of foreign corporations in the
the benefit of its members;
Philippines, all undistributed earnings intended or reserved
for investments within the Philippines as can be proven by
(E) Nonstock corporation or association organized and
corporate records and/or relevant documentary evidence.
operated exclusively for religious, charitable, scientific,
Ito mahirap, because if the records are within the taxpayer, most
athletic, or cultural purposes, or for the rehabilitation of
often than that, the BIR will not believe that.
veterans, no part of its net income or asset shall belong to
or inures to the benefit of any member, organizer, officer or
How is IAET determined?
any specific person;
Sec. 29 (D) Improperly Accumulated Taxable Income. -
For purposes of this Section, the term 'improperly accumulated (F) Business league chamber of commerce, or board of
taxable income' means taxable income' adjusted by: trade, not organized for profit and no part of the net income
(1) Income exempt from tax; of which inures to the benefit of any private stock-holder, or
(2) Income excluded from gross income;
individual;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted; (G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and (H) A nonstock and nonprofit educational institution;
(2) Income tax paid for the taxable year.
(I) Government educational institution;
Hindi ko man kayo tanungin how much. You just memorize this just
in case you will be asked “How will IAET be computed?”. So you (J) Farmers' or other mutual typhoon or fire insurance
answer this. Don’t give us the numbers, you give us the law. company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a
Corporations exempt from IAET purely local character, the income of which consists solely
Sec. 29 (2) Exceptions - The improperly accumulated of assessments, dues, and fees collected from members for
earnings tax as provided for under this Section shall not apply the sole purpose of meeting its expenses; and
to:.
(a) Publicly-held corporations; (K) Farmers', fruit growers', or like association organized
(b) Banks and other nonbank financial intermediaries; and and operated as a sales agent for the purpose of marketing
(c) Insurance companies. the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on
The Revenue Regulation provides for an additional exempted the basis of the quantity of produce finished by them;
corporations from IAET.
Notwithstanding the provisions in the preceding paragraphs, the
Corporations exempted from IAET: income of whatever kind and character of the foregoing
1. Banks and other non-bank financial intermediaries organizations from any of their properties, real or personal, or
2. Insurance companies from any of their activities conducted for profit regardless of the

46
TAXATION
disposition made of such income, shall be subject to tax imposed St. Luke is not considered as non-profit. 'Non-profit' does not
under this Code. necessarily mean 'charitable.'
So you just have to familiarize the above provision. 'Non-profit' means no net income or asset accrues to or benefits
any member or specific person, with all the net income or asset
For this matter you have to read the St. Luke’s case. You go back devoted to the institution's purposes and all its activities conducted
to the Test of Charity. not for profit.
CIR vs. St. Luke’s Medical Center If the corporation is engaged in an activity for profit making, then
that corporation is excluded in the term non-profit.
The point of contention of St. Luke’s here is that they are a tax
exempt corporation because of Sec. 30 (e) and (g): Applying the foregoing requisite that I mentioned earlier, St. Luke
is no longer tax exempt.
“(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural So what is the tax treatment? You must be able to distinguish
purposes, or for the rehabilitation of veterans, no part of its net how much of the total gross income is for it purpose. If it’s more
income or asset shall belong to or inures to the benefit of any that 50%, you apply the 30% tax rate. If it is not, then you apply
member, organizer, officer or any specific person the 10% preferential tax rate.
xxx
(G) Civic league or organization not organized for profit but In this case, St. Luke should be subjected to the 10% preferential
operated exclusively for the promotion of social welfare x xx ” tax rate. But what will be covered by the preferential tax rate? Only
those income coming from the for profit activities of St. Lukes
BIR contends that they are subjected to tax. But it should be at
the 10% preferential tax rate. So just read the St. Luke’s case.
Issue: WON St. Luke’s is a taxable corporation – Yes END OF SECOND EXAM COVERAGE
Held:
On Sec. 30 (e): St. Luke’s is a charitable institution. But for it to "N othing is im pos s ible.
be exempted from taxation, there are four requirements. T he w ord itself says, 'I ’m possible.'"
Section 30(E) of the NIRC provides that a charitable institution

must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific
person.
On the 2nd requirement, St. Luke failed to comply with this since
it also accepts paying patients in its hospital. St. Luke does not
fall under Sec. 30 (e) and (g) because the law requires that the
corporation must be exclusively for charitable purposes. That is
why it is not tax exempt.
What is the tax treatment on the income derived by the

corporation?
Held: Its income will be subjected to preferential tax rate of
10%. But what portion of the income? It only involves those
incomes coming from the profit activities of St. Luke.
Discussion:
It’s not because the corporation is designated as non-profit
corporation, it is automatically exempt. The requirements for the
exemption must be complied with.
In this case, St. Luke’s is considered as a proprietary institution.

When it is proprietary, it is considered as private. It is maintained
by a private individuals or groups. At the same time even if it is
proprietary in nature, it is still considered as a charitable institution.
Because of its very nature in its by laws and articles of incorporation
and the fact that it provides free medical services to some persons.
Is St. Luke considered as non profit? – NO.

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1

Global Tax System Progressive

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

CORPORATIONS (1) A citizen of the Philippines who establishes to the

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

RULING: The position of Dean is this:

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

August 22, 2019 | Bajao SPECIAL CLASS OF INDIVIDUAL EMPLOYEES

ALIENS MINIMUM WAGE EARNERS (MWEs)

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SEC. 22. Definitions. - When used in this Title: x x x 2 CLASSIFICATIONS OF CORPORATIONS

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APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

SEC. 33. Special Treatment of Fringe Benefit.—

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APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

TAX BASE OF FRINGE BENEFIT TAX: What is the MONETARY VALUE?

a. Ex: Ihatag nako ni sa imoha ning laptop and it

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SPECIFIC PROPERTIES MV = Acquisition Cost (AC) or the Zonal Value of the

Example: 5. Transfer of ownership at less than employers

The tip here is you determine if there is TRANSFER OF OWNERSHIP.

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1. Taxable foreign travel expenses subject to FRINGE

8. Aircrafts (including helicopters) 1. If it is given to the employee the following

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

Q: What are ordinary assets? STOCKS TRANSACTIONS (Domestic Stocks)

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APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

Who is liable for the CGT? Seller. SMI-ED vs. CIR

What are the transactions included here? How about barter?

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APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

1. HOLDING PERIOD The interest involved here are as follows:

Tax Treatment: 5 years or more Tax Exempt

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What if the security deposit is with restrictions? 2 TYPES OF ROYALTIES

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2. Resident aliens Corporation Domestic Tax Exempt

2. PROPERTY DIVIDENDS Tax Sparing Rule

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

ANNUITIES – Like interest income, this pertains to periodic EXCLUSION DEDUCTION

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

LIFE INSURANCE The amount received by the insured, as a return of premiums

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

GIFTS, BEQUESTS AND DEVISES 3. Damages received whether by suit or agreement, on

2. Amounts received through the Workman’s SEC. 32. Gross Income. —

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA

Answer: You can say it’s excluded because separation is by reason

APOSTOL | BABAN | BAJAO | BENTAYAO | CODILLA | EMUY | HONORICO | LAGUTING | ULANGKAYA