Basic: Sources of Income: Taxable Income tax?

SUGGESTED ANSWER: GROSS

(1998) From what sources of income are the INCOME means all income from whatever
following persons/corporations taxable by source derived, including (but not limited to)
the Philippine government? 2) Citizen of the compensation for services, including fees,
Philippines residing therein; [1%] 3) Non- commissions, and similar items; gross
resident citizen; [1%1 4) An individual citizen income from business; gains derived from
of the Philippines who is working and dealings in property; interest; rents;
deriving income from abroad as an overseas royalties; dividends; annuities; prizes and
contract worker; [1%] 5) An alien individual, winnings; pensions; and partner's
whether a resident or not of the Philippines; distributive share of the gross income of
[1%] 6) A domestic corporation; [1%] general professional partnership (Sec. 28,
NIRC).
SUGGESTED ANSWER: (Section 23, NIRC of
1997) 1) A citizen of the Philippines residing Compensation; Income Tax: Due to
therein is taxable on all income derived from Profitable Business Deal (1995) Mr. Osorio, a
sources within and without the Philippines. bank executive, while playing golf with Mr.
2) A nonresident citizen is taxable only on Perez, a manufacturing firm executive,
income derived from sources within the mentioned to the latter that his (Osorio) bank
Philippines. 3) An individual citizen of the had just opened a business relationship with
Philippines who is working and deriving a big foreign importer of goods which Perez'
income from abroad as an overseas contract company manufactures. Perez requested
worker is taxable only on income from Osorio to introduce him to this foreign
sources within the Philippines. 4) An alien importer and put in a good word for him
individual, whether a resident or not of the (Perez), which Osorio did. As a result, Perez
Philippines, is taxable only on income was able to make a profitable business deal
derived from sources within the Philippines. with the foreign Importer. In gratitude, Perez,
5) A domestic corporation is taxable on all in behalf of his manufacturing firm, sent
income derived from sources within and Osorio an expensive car as a gift. Osorio
without the Philippines. called Perez and told him that there was
really no obligation on the part of Perez or his
Basic: Tax Benefit Rule (2003) (a) What is company to give such an expensive gift. But
meant by the "tax benefit rule"? Perez insisted that Osorio keep the car. The
company of Perez deducted the cost of the
SUGGESTED ANSWER: (a) TAX BENEFIT car as a business expense. The
RULE states that the taxpayer is obliged to Commissioner of Internal Revenue included
declare as taxable income subsequent the fair market value of the car as Income of
recovery of bad debts in the year they were Osorio who protested that the car was a gift
collected to the extent of the tax benefit and therefore excluded from income. Who is
enjoyed by the taxpayer when the bad debts correct, the Commissioner or Osorio?
were written-off and claimed as a deduction Explain.
from income. It also applies to taxes
previously deducted from gross income but Mr. Osorio is correct. The car was not
which were subsequently refunded or payment for services rendered. There was no
credited. The taxpayer is also required to prior agreement or negotiations between Mr.
report as taxable income the subsequent tax Osorio and Mr. Perez that the former will be
refund or tax credit granted to the extent of compensated for his services. Mr. Perez, in
the tax benefit the taxpayer enjoyed when behalf of his company, gave the car to Mr.
such taxes were previously claimed as Osorio out of gratitude. The transfer having
deduction from income. been made gratuitously should be treated as
a gift subject to donor's tax and should be
Basic; Income vs. Capital (1995) How does excluded from the gross income of the
"Income" differ from "capital"? Explain. recipient, Mr. Osorio. The Commissioner
should cancel the assessment of deficiency
SUGGESTED ANSWER: Income differs from income tax to Mr. Osorio and instead assess
capital in that INCOME is any wealth which deficiency donor's tax on Mr Perez' company.
flows into the taxpayer other than a return of (Sec. 28(b)(3), NIRC; Pirovano vs.
capital while capital constitutes the Commissioner)
investment which is the source of income.
Therefore, capital is fund while income is the Corporate: Income: Donor’s tax; Tax
flow. Capital is wealth, while income is the Liability (1996) X, a multinational
service of wealth. Capital is the tree while corporation doing business in the
income is the fruit (Vicente Madrigal et al v. Philippines donated 100 shares of stock of
James Rqfferty, 38 Phil. 414). said corporation to Mr. Y, its resident
manager in the Philippines. 1) What is the
Basic; Gross Income: Define (1995) What is tax liability, if any, of X corporation? 2)
"gross Income" for purposes of the Income Assuming the shares of stocks were given to
Mr. Y in consideration of his services to the corporation; the size of the particular
corporation, what are the tax implications? business; the employees' qualification and
Explain. contributions to the business venture; and
general economic conditions (Atlas Mining v.
1) Foreign corporations effecting a donation CIR, G.R. No. L26911, January 27, 1981).
are subject to donor's tax only if the property However, since the business suffers from a
donated is located in the Philippines. net operating loss, I will rule that the bonus
Accordingly, donation of a foreign is an unreasonable expense.
corporation of its own shares of stocks in
favor of resident employee is not subject to Corporate; Income: Coverage; "Off-Line"
donor's tax (BIR Ruling No. 018-87, January Airline (1994) Caledonia Aircargo is an off-
26, 1987). However, if 85% of the business of line international carrier without any flight
the foreign corporation is located in the operations in the Philippines. It has,
Philippines or the shares donated have however, a liaison office in the Philippines
acquired business situs in the Philippines, which is duly licensed with the Securities
the donation may be taxed in the Philippines and Exchange Commission, established for
subject to the rule of reciprocity. the purpose of providing passenger and flight
information, reservation and ticketing
2) If the shares of stocks were given to Mr. Y services. Are the revenues of Caledonia
in consideration of his services to the Aircargo from tickets reserved by its
corporation, the same shall constitute Philippine office subject to tax?
taxable compensation income to the
recipient because it is a compensation for SUGGESTED ANSWER: The revenues in the
services rendered under an employer- Philippines of Caledonia Aircargo as an "off-
employee relationship, hence, subject to line" airline from ticket reservation services
income tax. The par value or stated value of are taxable income from "whatever source"
the shares issued also constitutes deductible under Sec. 28(a) of the Tax Code. This case
expense to the corporation provided it is is analogous to Commissioner v. BOAC, G.R
subjected to withholding tax on wages. No. No. 65773-74, April 30, 1987 where the
Supreme Court ruled that the income
Corporate; Income Tax; Reasonableness received in the Philippines from the sale of
of the Bonus (2006) Gold and Silver tickets by an "off-line" airline is taxable as
Corporation gave extra 14th month bonus to income from whatever source.
all its officials and employees in the total
amount of P75 Million. When it filed its Corporate; Income: Coverage; "Off-Line"
corporate income tax return the following Airline (2005) An international airline with
year, the corporation declared a net no landing rights in the Philippines sold
operating loss. When the income tax return tickets in the Philippines for air
of the corporation was reviewed by the BIR transportation. Is income derived from such
the following year, it disallowed as item of sales of tickets considered taxable income of
deduction the P75 Million bonus the the said international air carrier from
corporation gave its officials and employees Philippine sources under the Tax Code?
on the ground of unreasonableness. The Explain. (5%)
corporation claimed that the bonus is an
ordinary and necessary expense that should ALTERNATIVE ANSWER: Yes. The income
be allowed. If you were the BIR derived from the sales of tickets in the
Commissioner, how will you resolve the Philippines is considered taxable income of
issue? (5%) the international air carrier from Philippine
sources. The source of income is the
SUGGESTED ANSWER: I will disallow the property, activity or service that produced
expense. A bonus is ordinary and necessary the income. The sale of tickets in the
where said expenditure is (1) appropriate Philippines is the activity that produces the
and helpful in the development of the income. The absence of landing rights in the
taxpayers business (Martens, Law of Federal Philippines cannot alter the fact that
Income Taxation, Volume IV, p. 315) and (2) revenues were derived from ticket sales
is normal in relation to the business of the within the Philippines. (Commissioner of
taxpayer and the surrounding Internal Revenue v. Japan Air Lines, G.R. No.
circumstances (p. 316, Ibid). To determine 60714, October 4, 1991 reiterating British
the reasonableness of the bonus it must be Overseas Airways Corp., Air India and
commensurate with services performed by American Airlines, Inc.)
the officials and employees. Other factors to
consider are whether the payment was made Dividends: Disguised dividends (1994)
in good faith; the character of the taxpayer's Disguised dividends in income taxation?
business; the volume and amount of its net Give an example. SUGGESTED ANSWER:
earnings; its locality; the type and extent of Disguised dividends are those income
the services rendered; the salary policy of the payments made by a domestic corporation,
which is a subsidiary of a nonresident cancellation or condonation of his
foreign corporation, to the latter ostensibly indebtedness. Since it is obvious that the
for services rendered by the latter to the creditor merely desired to benefit the debtor
former, but which payments are in view of the absence of consideration for
disproportionately larger than the actual the cancellation, the amount of the debt is
value of the services rendered. In such case, considered as a gift from the creditor to the
the amount over and above the true value of debtor and need not be included in the
the service rendered shall be treated as a latter's gross income.
dividend, and shall be subjected to the
corresponding tax of 35% on Philippine Fringe Benefit Tax: Covered Employees
sourced gross income, or such other (2001) X was hired by Y to watch over V’s
preferential rate as may be provided under a fishponds with a salary of Php 10,000.00. To
corresponding Tax Treaty. Example: Royalty enable him to perform his duties well, he was
payments under a corresponding licensing also provided a small hut, which he could
agreement. use as his residence in the middle of the
fishponds. Is the fair market value of the use
Dividends; Income Tax; Deductible Gross of the small hut by X a "fringe benefit" that is
Income (1999) A Co., a Philippine subject to the 32% tax imposed by Section
corporation, issued preferred shares of stock 33 of the National Internal Revenue Code?
with the following features: 1) Non-voting; 2) Explain your answer. (5%)
Preferred and cumulative dividends at the
rate of 10% per annum, whether or not in SUGGESTED ANSWER: No. X is neither a
any period the amount is covered by managerial nor a supervisory employee. Only
earnings or projects; 3) In the event of managerial or supervisory employees are
dissolution of the issuer, holders of preferred entitled to a fringe benefit subject to the
stock shall be paid in full or ratably as the fringe benefits tax. Even assuming that he is
assets of the issuer may permit before any a managerial or supervisory employee, the
distribution shall be made to common small hut is provided for the convenience of
stockholders; and 4) The issuer has the the employer, hence does not constitute a
option to redeem the preferred stock. A Co. taxable fringe benefit. (Section 33, NERC).
declared dividends on the preferred stock
and claimed the dividends as interests Fringe Benefit Tax: Employer required to
deductible from its gross Income for income Pay (2003) A "fringe benefit" is defined as
tax purposes. The BIR disallowed the being any good, service or other benefit
deduction. A Co. maintains that the furnished or granted in cash or in kind by an
preferred shares with their features are really employer to an individual employee. Would it
debt and therefore the dividends are realty be the employer or the employee who is
interests. Decide. (10%) legally required to pay an income tax on it?
Explain. (4%)
SUGGESTED ANSWER: The dividends are
not deductible from gross income. Preferred SUGGESTED ANSWER: It is the employer
shares shall be considered capital regardless who is legally required to pay an income tax
of the conditions under which such shares on the fringe benefit. The fringe benefit tax is
are issued and, therefore, dividends paid imposed as a FINAL WITHHOLDING TAX
thereon are not considered 'interest' which placing the legal obligation to remit the tax
are allowed to be deducted from the gross on the employer, such that, if the tax is not
income of the corporation. (Revenue paid the legal recourse of the BIR is to go
Memorandum Circular No. 17-71, July 12, after the employer. Any amount or value
1971) received by the employee as a fringe benefit
is considered tax paid hence, net of the
Effect; Condonation of Loan in Taxation income tax due thereon. The person who is
(1995) Mr. Francisco borrowed P10,000.00 legally required to pay (same as statutory
from his friend Mr. Gutierrez payable in one incidence as distinguished from economic
year without interest. When the loan became incidence) is that person who, in case of non-
due Mr. Francisco told Mr. Gutierrez that he payment, can be legally demanded to pay the
(Mr. Francisco) was unable to pay because of tax.
business reverses. Mr. Gutierrez took pity on
Mr. Francisco and condoned the loan. Mr. Partnership: Income Tax (1995) Five years
Francisco was solvent at the time he ago Marquez, Peneyra, Jayme, Posadas and
borrowed the P 10,000.00 and at the time the Manguiat, all lawyers, formed a partnership
loan was condoned. Did Mr. Francisco derive which they named Marquez and Peneyra Law
any income from the cancellation or Offices. The Commis sioner of Internal
condonation of his indebtedness? Explain. Revenue thereafter issued Revenue
Regu lation No. 2-93 implementing RA.
SUGGESTED ANSWER: No, Mr. Francisco 7496 known as the Simplified Net Income
did not derive any income from the Taxation Scheme (SNITS). Revenue
Regulation No. 2-93 provides in part: Sec. 6. that deductions are not matters of right but
General Professional Partnership. — The are matters of legislative grace.
general professional partnership and the
partners are covered by R.A. 7496. Thus, in Personal; Income Tax: Non-Resident Alien
determining profit of the partnership, only (2000) Mr. Cortez is a non-resident alien
the direct costs mentioned in said law are to based in Hong Kong. During the calendar
be deducted from partnership income. Also, year 1999, he came to the Philippines several
the expenses paid or Incurred by partners in times and stayed in the country for an
their individual capacities in the practice of aggregated period of more than 180 days.
their profession which are not reimbursed or How will Mr. Cortez be taxed on his income
paid by the partnership but are not derived from sources within the Philippines
considered as direct costs are not deductible and from abroad? (5%)
from his gross income. 1) Marquez and
Peneyra Law Offices filed a taxpayer's suit SUGGESTED ANSWER: Mr. Cortez being a
alleging that Revenue Regulation No. 2-93 non-resident alien individual who has stayed
violates the principle of uniformity in for an aggregated period of more than 180
taxation because general professional days during the calendar year 1999, shall for
partnerships are now subject to payment of that taxable year be deemed to be a non-
income tax and that there is a difference in resident alien doing business in the
the tax treatment between individuals Philippines. Considering the above, Mr.
engaged in the practice of their respective Cortez shall be subject to an income tax in
professions and partners in general the same manner as an individual citizen
professional partnerships. Is this contention and a resident alien individual, on taxable
correct? Explain. income received from all sources within the
Philippines. [Sec. 25 (A) (1), NIRC of 1997]
SUGGESTED ANSWER: 1) The contention is Thus, he is allowed to avail of the itemized
not correct. General professional deductions including the personal and
partnerships remain to be a non-taxable additional exemptions but subject to the rule
entity. What is taxable are the partners on reciprocity on the personal exemptions.
comprising the same and they are obligated
to report as income their share in the income Personal; Income Tax: Non-Resident
of the general professional partnership Citizen (1999) A Co., a Philippine
during the taxable year whether distributed corporation, has an executive (P) who is a
or not. The SNITS treat professionals as one Filipino citizen. A Co. has a subsidiary in
class of taxpayer so that they shall be treated Hong Kong (HK Co.) and will assign P for an
alike irrespective of whether they practice indefinite period to work full time for HK Co.
their profession alone or in association with P will bring his family to reside in HK and will
other professionals under a general lease out his residence in the Philippines.
professional partnership. What are taxed The salary of P will be shouldered 50% by A
differently are individuals and corporations. Co. while the other 50% plus housing, cost
All individuals similarly situated are taxed of living and educational allowances of P's
alike under the regulations, therefore, the dependents will be shouldered by HK Co. A
principle of uniformity in taxation is not Co. will credit the 50% of P's salary to P's
violated. On the contrary, all the Philippine bank account. P will sign the
requirements of a valid classification have contract of employment in the Philippines. P
been complied with (Ton vs. Del Rosario et al will also be receiving rental income for the
G.R No. 109289, Octobers, 1994). lease of his Philippine residence. Are these
salaries, allowances and rentals subject to
2) Is Revenue Regulation No. 2-93 now the Philippine income tax? (5%)
considered as having adopted a gross income
method instead of retaining the net income SUGGESTED ANSWER: The salaries and
taxation scheme? Explain. allowances received by P are not subject to
Philippine income tax. P qualifies as a
SUGGESTED ANSWER: No. Revenue nonresident citizen because he leaves the
Regulation No. 2-93 implementing RA No. Philippines for employment requiring him to
7496 have indeed significantly reduced the be physically present abroad most of the time
items of deduction by limiting it to direct during the taxable year. (Section 22(E),
costs and expenses or the 40% of gross NIRC). A nonresident citizen is taxable only
receipts maximum deduction in cases where on income derived from Philippine sources.
the direct costs are difficult to determine. (Section 23, NIRC). The salaries and
The allowance of limited deductions however, allowances received from being employed
is still in consonance with the net income abroad are incomes from without because
taxation scheme rather than the gross these are compensation for services rendered
income method. While it is true that not all outside of the Philippines. (Section 42,
the expenses of earning the income might be NIRC). However, P is taxable on rental
allowed, this can well be justified by the fact income for the lease of his Philippine
residence because this is an income derived How will you rule on each of the three
from within, the leased property being grounds for the protest? Explain.
located in the Philippines. (Section 42,
NIRC). SUGGESTED ANSWERS:
1) The contention that the income tax applies
Personal; Income Tax: Tax-Free Exchange to legal income and not to illegal income is
(1997) Three brothers inherited in 1992 a not correct. Section 28(a) of the Tax Code
parcel of land valued for real estate tax includes within the purview of gross income
purposes at P3.0 million which they held in all Income from whatever source derived.
co-ownership. In 1995, they transferred the Hence, the illegality of the income will not
property to a newly organized corporation as preclude the imposition of the income tax
their equity which was placed at the zonal thereon.
value of P6.0 million. In exchange for the
property, the three brothers thus each 2) The contention that the receipts from his
received shares of stock of the corporation swindling did not constitute income because
with a total par value of P2.0 million or, of his obligation to return the amount
altogether, a total of P6.0 million. No swindled is likewise not correct. When a
business was done by the Corporation, and taxpayer acquires earnings, lawfully or
the property remained idle. In the early part unlawfully, without the consensual
of 1997, one of the brothers, who was in dire recognition, express or implied, of an
need of funds, sold his shares to the two obligation to repay and without restriction as
brothers for P2.0 million. Is the transaction to their disposition, he has received taxable
subject to any internal revenue tax (other income, even though it may still be claimed
than the documentary stamp tax)? that he is not entitled to retain the money,
and even though he may still be adjudged to
SUGGESTED ANSWER: Yes. The exchange restore its equivalent (James vs. U.S.,366
in 1995 is a tax-free exchange so that the U.S. 213, 1961). To treat the embezzled
subsequent sale of one of the brothers of his funds not as taxable income would
shares to the other two (2) brothers in 1997 perpetuate injustice by relieving embezzlers
will be subject to income tax. This is so of the duty of paying income taxes on the
because the tax-free exchange merely money they enrich themselves with through
deferred the recognition of income on the embezzlement, while honest people pay their
exchange transaction. The gain subject to taxes on every conceivable type of income.
income tax in the sale is measured by the (James vs. U.S.)
difference between the selling price of the
shares (P2 Million) and the basis of the real 3) The deficiency income tax assessment is a
property in the hands of the transferor at the direct tax imposed on the owner which is an
time of exchange which is the fair market excise on the privilege to earn an income. It
value of his share in the real property at the will not necessarily be paid out of the same
time of inheritance (Section 34(b)(2), NIRC). income that were subjected to the tax. Mr.
The net gain from the sale of shares of stock Lajojo's liability to pay the tax is based on his
is subject to the schedular capital gains tax having realized a taxable income from his
of 10% for the first P100.000 and 20% for the swindling activities and will not affect his
excess thereof (Section 2l(d), NIRC). obligation to make restitution. Payment of
the tax is a civil obligation imposed by law
Taxable Income: Illegal Income (1995 Bar) while restitution is a civil liability arising
Mr. Lajojo is a big-time swindler. In one year from a crime.
he was able to earn P1 Million from his
swindling activities. When the Commissioner Taxable or Non-Taxable; Income and Gains
of Internal Revenue discovered his income (2005) Explain briefly whether the following
from swindling, the Commissioner assessed items are taxable or non-taxable: (5%) a)
him a deficiency income tax for such income. Income from JUETENG;
The lawyer of Mr. Lajojo protested the
assessment on the following grounds: SUGGESTED ANSWER: Taxable. Gross
1) The income tax applies only to legal income includes "all income derived from
income, not to illegal income; whatever source" (Sec. 32[A], NIRC), which
2) Mr. Lajojo's receipts from his swindling did was interpreted as all income not expressly
not constitute income because he was under excluded or exempted from the class of
obligation to return the amount he had taxable income, irrespective of the voluntary
swindled, hence, his receipt from swindling or involuntary action of the taxpayer in
was similar to a loan, which is not income, producing the income. Thus, the income may
because for every peso borrowed he has a proceed from a legal or illegal source such as
corresponding liability to pay one peso; and from jueteng. Unlawful gains, gambling
3) If he has to pay the deficiency income tax winnings, etc. are subject to income tax. The
assess ment, there will be hardly anything tax code stands as an indifferent neutral
left to return to the victims of the swindling. party on the matter of where the income
comes from. (Commissioner of Internal return; for this reason, the income tax on
Revenue v. Manning, G.R. No. L-28398, income derived from within must be collected
August 6, 1975) through the withholding tax system and thus
relieve the recipient of the income the duty to
b) Gain arising from EXPROPRIATION OF file income tax returns. (Section 51, NIRC).
PROPERTY;
Withholding Tax: Retirement Benefit
SUGGESTED ANSWER: Taxable. Sale (2000) To start a business of his own, Mr.
exchange or other disposition of property to Mario de Guzman opted for an early
the government of real property is taxable. It retirement from a private company after ten
includes taking by the government through (10) years of service. Pursuant to the
condemnation proceedings. (Gonzales v. company's qualified and approved private
Court of Tax Appeals, G.R. No. L-14532, May retirement benefit plan, he was paid his
26, 1965) retirement benefit which was subjected to
withholding tax. Is the employer correct in
c) TAXES paid and subsequently refunded; withholding the tax? Explain. (2%)
SUGGESTED ANSWER: Taxable only if the
taxes were paid and claimed as deduction SUGGESTED ANSWER: (a) It depends. An
and which are subsequently refunded or employee retiring under a company's
credited. It shall be included as part of gross qualified and private retirement plan can
income in the year of the receipt to the extent only be exempt from income tax on his
of the income tax benefit of said deduction. retirement benefits if the following requisites
(Sec. 34[C][1], NIRC) Not taxable if the taxes are met: (1) that the retiring employee must
refunded were not originally claimed as have been in service of the same employer for
deductions. at least ten (10) years; (2) that he is not less
than 50 years of age at the time of
d) Recovery of BAD DEBTS previously retirement; and (3) the benefit is availed of
charged off; only once. In the instant case, there is no
mention whether the employee has likewise
SUGGESTED ANSWER: Taxable under the complied with requisites number (2) and (3).
TAX BENEFIT RULE. Recovery of bad debts
previously allowed as deduction in the Withholding Tax: Retirement Benefit
preceding years shall be included as part of (2000) Under what conditions are retirement
the gross income in the year of recovery to benefits received by officials and employees
the extent of the income tax benefit of said of private firms excluded from gross income
deduction. (Sec. 34[E][1], NIRC) This is and exempt from taxation? (3%)
sometimes referred as the RECAPTURE
RULES. SUGGESTED ANSWER: The conditions to be
met in order that retirement benefits received
e) Gain on the sale of a car used for by officials and employees of private firms
personal purposes. are excluded from gross income and exempt
from taxation are as follows: 2. Under
SUGGESTED ANSWER: Taxable. Since the Republic Act No. 4917 (those received under
car is used for personal purposes, it is a reasonable private benefit plan): a. the
considered as a capital asset hence the gain retiring official or employee must have been
is considered income. (Sec. 32[A][3] and Sec. in service of the same employer for at least
39[A][1], NIRC) ten (10) years; b. that he is not less than fifty
(50) years of age at the time of retirement;
Withholding Tax: Non-Resident Alien and c. that the benefit is availed of only once.
(2001) Is a non-resident alien who is not 3. Under Republic Act No. 7641 (those
engaged in trade or business or in the received from employers without any
exercise of profession in the Philippines but retirement plan): Those received under
who derived rental income from the existing collective bargaining agreement and
Philippines required to file an income tax other agreements are exempt; and • In the
return on April of the year following his absence of retirement plan or agreement
receipt of said income? If not, why not? providing for retirement benefits the benefits
Explain your answer. (5%) are excluded from gross income and exempt
from income tax if: i. retiring employee must
SUGGESTED ANSWER: No. The income tax have served at least five(5) years; and ii. that
on all income derived from Philippine he is not less than sixty (60) years of age but
sources by a non-resident alien who is not not more than sixty five (65).
engaged in trade or business in the
Philippines is withheld by the lessee as a Withholding Tax; Coverage (2004) Citing
Final Withholding Tax. (Section 57(A), NIRC). Section 10, Article VIII of the 1987
The government can not require persons Constitution which provides that salaries of
outside of its territorial jurisdiction to file a judges shall be fixed by law and that during
their continuance in office their salary shall SUGGESTED ANSWER: None. The P200.000
not be decreased, a judge of MM Regional moral and exemplary damages are
Trial Court questioned the deduction of compensation for injuries sustained by Mr.
withholding taxes from his salary since it Infante. The P400.000.00 reimbursement for
results into a net deduction of his pay. Is the hospitalization expenses and the P60.000.00
contention of the judge correct? Reason for salaries he failed to receive are 'amounts
briefly. (5%) of any damages received whether by suit or
agreement on account of such injuries.'
SUGGESTED ANSWER: No. The contention Section 28(b)(5) of the Tax Code specifically
is incorrect. The salaries of judges are not exclude these amounts from the gross
tax-exempt and their taxability is not income of the individual injured. (Section
contrary to the provisions of Section 10, 28(b), NIRC and Sec. 63 Rev. Reg. No. 2)
Article VIII of the Constitution on the non-
diminution of the salaries of members of the Exclusions & Inclusions: Executive
judiciary during their continuance in office. Benefits (1995) Mr. Adrian is an executive of
The clear intent of the Constitutional a big business corporation. Aside from his
Commission that framed the Constitution is salary, his employer provides him with the
to subject their salaries to tax as in the case following benefits: free use of a residential
of all taxpayers. Hence, the deduction of house in an exclusive subdivision, free use of
withholding taxes, being a manner of a limousine and membership in a country
collecting the income tax on their salary, is club where he can entertain customers of the
not a diminution contemplated by the corporation. Which of these benefits, if any,
fundamental law. (Nitafan et. al. v. CIR, 152 must Mr. Adrian report as income? Explain.
SCRA 284 [1987]).
SUGGESTED ANSWER: Mr. Adrian must
Withholding Tax; Income subject thereto report the imputed rental value of the house
(2001) What is meant by income subject to and limousine as income. If the rental value
"final tax"? Give at least two examples of exceeds the personal needs of Mr. Adrian
income of resident individuals that is subject because he is expected to provide
to the final tax. (3%) accommodation in said house for company
guests or the car is used partly for business
SUGGESTED ANSWER: Income subject to purpose, then Mr. Adrian is entitled only to
final tax refers to an income wherein the tax a ratable rental value of the house and
due is fully collected through the withholding limousine as exclusion from gross income
tax system. Under this procedure, the payor and only a reasonable amount should be
of the income withholds the tax and remits it reported as income. This is because the free
to the government as a final settlement of the housing and use of the limousine are given
income tax due on said income. The recipient partly for the convenience and benefit of the
is no longer required to include the item of employer (Collector vs. Henderson).
income subjected to "final tax" as part of his
gross income in his income tax returns. Exclusions & Inclusions; Assets; Resident
Examples of income subject to final tax are Alien (2005) Ralph Donald, an American
dividend income, interest from bank citizen, was a top executive of a U.S.
deposits, royalties, etc company in the Philippines until he retired
in 1999. He came to like the Philippines so
Exclusions & Inclusions: Benefits on much that following his retirement, he
Account of Injury (1995) Mr. Infante was decided to spend the rest of his life in the
hit by a wayward bus while on his way to country. He applied for and was granted a
work. He survived but had to pay permanent resident status the following
P400.000.00 for his hospitalization. He was year. In the spring of 2004, while vacationing
unable to work for six months which meant in Orlando, Florida, USA, he suffered a heart
that he did not receive his usual salary of P attack and died. At the time of his death, he
10,000.00 a month or a total of P60.000.00. left the following properties: (a) bank
He sued the bus company and was able to deposits with Citibank Makati and Citibank
obtain a final judgment awarding him Orlando, Florida; (b) a resthouse in Orlando,
P400.000.00 as reimbursement for his Florida; (c) a condominium unit in Makati;
hospitalization, P60.000 for the salaries he (d) shares of stock in the Philippine
failed to receive while hospitalized, subsidiary of the U.S. Company where he
P200,000.00 as moral damages for his pain worked; (e) shares of stock in San Miguel
and suffering, and P 100,000.00 as Corp. and PLOT; (f) shares of stock in Disney
exemplary damages. He was able to collect in World in Florida; (g) U.S. treasury bonds;
full from the judgment. How much income and (g) proceeds from a life insurance policy
did he realize when he collected on the issued by a U.S. corporation. Which of the
judgment? Explain. foregoing assets shall be included in the
taxable gross estate in the Philippines?
Explain. (5%)
SUGGESTED ANSWER: All of the properties received by JR from his employer, is subject
enumerated except (g), the proceeds from life to income tax under Sec. 2.78.1 (a) (7) of R.R.
insurance, are included in the taxable gross No. 2-98.
estate in the Philippines. Ralph Donald is
considered a resident alien for tax purposes Exclusions & Inclusions; Compensation
since he is an American Citizen and was a for personal injuries or sickness (2003) X,
permanent resident of the Philippines at the while driving home from his office, was
time of his death. The value of the gross seriously injured when his automobile was
estate of a resident alien decedent shall be bumped from behind by a bus driven by a
determined by including the value at the reckless driver. As a result, he had to pay
time of his death of all property, real or P200,000.00 to his doctor and P100, 000.00
personal, tangible or intangible, wherever to the hospital where he was confined for
situated. (Sec. 85, NIRC) The other item, (g) treatment. He filed a suit against the bus
proceeds from a life insurance policy, may driver and the bus company and was
also be included on the assumption that it awarded and paid actual damages of P300,
was Ralph Donald who took out the 000.00 (for his doctor and hospitalization
insurance upon his own life, payable upon bills), P100,000.00 by way of moral damages,
his death to his estate. (Sec. 85[E], NIRC) and P50,000.00 for what he had to pay his
attorney for bringing his case to court.
Exclusions & Inclusions; Benefits on Which, if any, of the foregoing awards are
Account of Death (1996) X, an employee of taxable income to X and which are not?
ABC Corporation died. ABC Corporation gave Explain. (8%)
X’s widow an amount equivalent to X’s salary
for one year. Is the amount considered SUGGESTED ANSWER: Nothing is taxable.
taxable income to the widow? Why? Under the Tax Code, any amount received as
compensation for personal injuries or
SUGGESTED ANSWER: No. The amount sickness, plus the amounts for any damages
received by the widow from the decedent's received whether by suit or agreement, on
employer may either be a gift or a separation account of such injuries or sickness shall be
benefit on account of death. Both are excluded from gross income. Since the entire
exclusions from gross income pursuant to amount of P450, 000.00 received are award
provisions of Section 28(b) of the Tax Code. of damages on account of the injuries
sustained; all shall be excluded from his
Exclusions & Inclusions; Benefits on gross income. Obviously, these damages are
Account of Injury (2005) JR was a considered by law as mere return of capital.
passenger of an airline that crashed. He (Section 32(B)(4), 1997 Tax Code)
survived the accident but sustained serious
physical injuries which required Exclusions & Inclusions; Facilities or
hospitalization for 3 months. Following Privileges; MilitaryCamp (1995) Capt.
negotiations with the airline and its insurer, Canuto is a member of the Armed Forces of
an agreement was reached under the terms the Philippines. Aside from his pay as
of which JR was paid the following amounts: captain, the government gives him free
P500,000.00 for his hospitalization; uniforms, free living quarters in whatever
P250,000.00 as moral damages; and military camp he is assigned, and free meals
P300,000.00 for loss of income during the inside the camp. Are these benefits income
period of his treatment and recuperation. In to Capt. Canuto? Explain.
addition, JR received from his employer the
amount of P200,000.00 representing the SUGGESTED ANSWER: No, the free
cash equivalent of his earned vacation and uniforms, free living quarters and the free
sick leaves. Which, if any, of the amounts he meals inside the camp are not income to
received are subject to income tax? Explain. Capt. Canute because these are facilities or
(5%) privileges furnished by the employer for the
employer's convenience which are necessary
SUGGESTED ANSWER: All amounts incidents to proper performance of the
received from the airline company are military personnel's duties.
excluded from gross income. Under Sec.
32(B)(4) of the NIRC, amounts of damages Exclusions & Inclusions; Gifts over and
received, whether by suit or agreement, on above the Retirement Pay (1995) Mr.
account of personal injuries or sickness are Quiroz worked as chief accountant of a
excluded from gross income. Since the hospital for forty-five years. When he retired
amounts received from the airline company at 65 he received retirement pay equivalent
were received as damages by agreement on to two months' salary for every year of service
account of personal injuries, all shall be as provided in the hospital BIR approved
excluded from JR's gross income. The retirement plan. The Board of Directors of
amount of P200,000.00, less the equivalent the hospital felt that the hospital should give
of not more than 10 days of vacation leave, Quiroz more than what was provided for in
the hospital's retirement plan in view of his Exclusions & Inclusions; ITR; Income
loyalty and invaluable services for forty-five realized from sale (2005) State with reasons
years; hence, it resolved to pay him a gratuity the tax treatment of the following in the
of P1 Million over and above his retirement preparation of annual income tax returns:
pay. The Commissioner of Internal Revenue Income realized from sale of: (i) capital
taxed the P1 Mil lion as part of the gross assets; and (ii) ordinary assets.
compensation income of Quiroz who
protested that it was excluded from income SUGGESTED ANSWER: (i) Income realized
because (a) it was a retirement pay, and (b) it from sale of capital assets is subject to the
was a gift. 1) Is Mr. Quiroz correct in claiming final withholding tax at source and therefore
that the additional P1 Million was retirement excluded from the Income Tax Return (Sec.
pay and therefore excluded from income? 24[C] and [D], NIRC); (ii) Income realized
Explain. 2) Is Mr. Quiroz correct in claiming from sale of ordinary assets is part of Gross
that the additional P1 Million was gift and Income, included in the Income Tax Return.
therefore excluded from income? Explain. (Sec. 32[A][3], NIRC)

SUGGESTED ANSWERS: 1) No. The Exclusions & Inclusions; ITR; Proceeds of

additional P1 million is not a retirement pay life insurance (2005) State with reasons the
but a part of the gross compensation income tax treatment of the following in the
of Mr. Quiroz. This is not a retirement benefit preparation of annual income tax returns:
received in accordance with a reasonable Proceeds of life insurance received by a child
private benefit plan maintained by the as irrevocable beneficiary;
employer as it was not paid out of the
retirement plan. Accordingly, the amount SUGGESTED ANSWER: Not to be reported in
received in excess of the retirement benefits the annual income tax returns because the
that he is entitled to receive under the BIR- proceeds of the life insurance are excluded
approved retirement plan would not qualify from gross income. Proceeds of Life
as an exclusion from gross income. 2) No. insurance policies paid to the heirs or
The amount received was in consideration of beneficiaries upon the death of the insured
his loyalty and invaluable services to the is an exclusion from gross income.
company which is clearly a compensation (Sec.32[B][l],NIRC)
income received on account of employment.
Under the employer's 'motivation test,' Exclusions & Inclusions; Life Insurance
emphasis should be placed on the value of Policy (2003) On 30 June 2000, X took out
Mr. Quiroz services to the company as the a life insurance policy on his own life in the
compelling reason for giving him the amount of P2,000,000.00. He designated his
gratuity, hence it should constitute a taxable wife, Y, as irrevocable beneficiary to
income. The payment would only qualify as a P1,000,000.00 and his son, Z, to the balance
gift if there is nothing but 'good will, esteem of P1,000,000.00 but, in the latter
and kindness' which motivated the employer designation, reserving his right to substitute
to give the gratuity. (Stonton vs. U.S., 186 F. him for another. On 01 September 2003, X
Supp. 393). Such is not the case in the died and his wife and son went to the insurer
herein problem. to collect the proceeds of X's life insurance
policy. (8%) (a) Are the proceeds of the
Exclusions & Inclusions; ITR; 13th month insurance subject to income tax on the part
pay and de minimis benefits (2005) State of Y and Z for their respective shares?
with reasons the tax treatment of the Explain. (b) Are the proceeds of the
following in the preparation of annual insurance to form part of the gross estate of
income tax returns: 13th month pay and de X? Explain.
minimis benefits;
SUGGESTED ANSWERS: (a) No. The law
SUGGESTED ANSWER: The 13th month pay explicitly provides that proceeds of life
not exceeding P30,000.00 shall not be insurance policies paid to the heirs or
reported in the income tax return because it beneficiaries upon the death of the insured
is excluded from gross income (Sec. 32[B][7], are excluded from gross income and is
[e], NIRC) The amount of the 13th month pay exempt from taxation. The proceeds of life
in excess of P30,000.00 shall be reported in insurance received upon the death of the
the annual income tax return. De minimis insured constitute a compensation for the
benefits which do not exceed the ceilings are loss of life, hence a return of capital, which
excluded from gross income, and not to be is beyond the scope of income taxation.
considered for determining the P30,000.00 (Section 32(B)(1) 1997 Tax Code) (b) Only the
ceiling hence not reportable in the annual proceeds of P1,000,000.00 given to the son,
income tax return. (Sec. 2.78.1[A][3], R.R. 2- Z, shall form part of the Gross Estate of X.
98 as amended by Sec. 2.33 [C] and further Under the Tax Code, proceeds of life
amended by R.R. No. 8-2000) insurance shall form part of the gross estate
of the decedent to the extent of the amount
receivable by the beneficiary designated in whether or not it will subject any of these
the policy of the insurance except when it is payments to WT. Explain your advice. (5%)
expressly stipulated that the designation of
the beneficiary is irrevocable. As stated in the SUGGESTED ANSWER: For category A
problem, only the designation of Y is employees, all the benefits received on
irrevocable while the insured/decedent account of their separation are not subject to
reserved the right to substitute Z as income tax, hence no withholding tax shall
beneficiary for another person. Accordingly, be imposed. The benefits received under the
the proceeds received by Y shall be excluded BIR-approved plan upon meeting the service
while the proceeds received by Z shall be requirement and age requirement are
included in the gross estate of X. (Sect/on explicitly excluded from gross income. The ex
85(E), 1997 Tax Code) gratia payment also qualifies as an exclusion
from gross income being in the nature of
Exemptions: Prizes & Awards; Athletes benefit received on account of separation due
(1996) Onyoc, an amateur boxer, won in a to causes beyond the employees' control.
boxing competition sponsored by the Gold (Section 32(B), NIRC). The cash equivalent of
Cup Boxing Council, a sports association unused vacation and sick leave credits
duly accredited by the Philippine Boxing qualifies as part of separation benefits
Association. Onyoc received the amount of excluded from gross income (CIR v. Court of
P500,000 as his prize which was donated by Appeals, GR No. 96O16, October 17, 1991).
Ayala Land Corporation. The BIR tried to For category B employees, all the benefits
collect income tax on the amount received by received by them will also be exempt from
Onyoc and donor's tax from Ayala Land income tax, hence not subject to withholding
Corporation, which taxes, Onyoc and Ayala tax. These are benefits received on account
Land Corporation refuse to pay. Decide. of separation due to causes beyond the
employees' control, which are specifically
SUGGESTED ANSWER: The prize will not excluded from gross income. (Section 32(B),
constitute a taxable income to Onyoc, hence NIRC)
the BIR is not correct in imposing the income
tax. R.A. No. 7549 explicitly provides that 'All Exemptions: Separation Pay (1994) Pedro
prizes and awards granted to athletes in local Reyes, an official of Corporation X, asked for
and international sports tournaments and an "earlier retirement" because he was
competitions held in the Philippines or emigrating to Australia. He was paid
abroad and sanctioned by their respective P2.000.000.00 as separation pay in
national sports associations shall be exempt recognition of his valuable services to the
from income tax". Neither is the BIR correct corporation. Juan Cruz, another official of
in collecting the donor's tax from Ayala Land the same company, was separated for
Corporation. The law is clear when it occupying a redundant position. He was
categorically stated "That the donor's of said given P1,000.000.00 as separation pay. Jose
prizes and awards shall be exempt from the Bautista was separated due to his failing
payment of the donor's tax." eyesight. He was given P500.000.00 as
separation pay. All the three (3) were not
Exemptions: Retirement Benefits: Work qualified to retire under the BIR-approved
Separation (1999) A Co., a Philippine pension plan of the corporation. 1) Is the
corporation, has two divisions — separation pay given to Reyes subject to
manufacturing and construction. Due to the income tax? 2) How about the separation pay
economic situation, it had to close its received by Cruz? 3) How about the
construction division and layoff the separation pay received by Bautista?
employees in that division. A Co. has a
retirement plan approved by the BIR, which SUGGESTED ANSWER: 1) The separation
requires a minimum of 50 years of age and pay given to Reyes is subject to income tax
10 years of service in the same employer at as compensation income because it arises
the time of retirement. There are 2 groups of from a service rendered pursuant to an
employees to be laid off: 1) Employees who employer-employee relationship. It is not
are at least 50 years of age and has at 10 considered an exclusion from gross income
years of service at the time of termination of because the rule in taxation is tax construed
employment. 2) Employees who do no meet in strictissimi juris or the rule on strict
either the age or length of service A Co. plans Interpretation of tax exemptions. 2) The
to give the following: For category (A) separation pay received by Cruz is not
employees - the benefits under the BIR subject to income tax because his separation
approved plan plus an ex gratia payment of from the company was involuntary (Sec. 28
one month of every year of service. For b (7), Tax Code). 3) The separation pay
category (B) employees - one month for every received by Bautista is likewise not subject
year of service. For both categories, the cash to tax. His separation is due to disability,
equivalent of unused vacation and sick leave hence involuntary. Under the law, separation
credits. A Co. seeks your advice as to
pay received through involuntary causes are Code. (a) Cite the instances under the Tax
exempt from taxation. Code where gifts made are exempt from
donor’s tax. (3%) (b) Does the above
Exemptions: Stock Dividends (2003) On 03 transaction fall under any of the exemption?
January 1998, X, a Filipino citizen residing Explain. (2%)
in the Philippines, purchased one hundred
(100) shares in the capital stock of Y SUGGESTED ANSWERS: (a) The following
Corporation, a domestic company. On 03 are the instances where gifts made are
January 2000, Y Corporation declared, out exempt from donor’s tax: i. Gifts made to or
of the profits of the company earned after 01 for the use of the National Government or
January 1998, a hundred percent (100%) any entity created by any of its agencies
stock dividends on all stockholders of record which is not conducted for profit, or to any
as of 31 December 1999 as a result of which political subdivision of the said Government;
X holding in Y Corporation became two and, ii. Gifts in favor of an educational
hundred (200) shares. Are the stock and/or charitable, religious, cultural or
dividends received by X subject to income social welfare corporation, institution,
tax? Explain. (8%) SUGGESTED ANSWER: accredited nongovernment organization,
No. Stock dividends are not realized income. trust or philanthropic organization or
Accordingly, the different provisions of the research institution or organization, not
Tax Code imposing a tax on dividend income more than 30% of said gifts shall be used by
only includes within its purview cash and such donee for administration purposes.
property dividends making stock dividends
exempt from income tax. However, if the (b) No, the transaction does not fall under
distribution of stock dividends is the any of the exemption. However, the
equivalent of cash or property, as when the transaction may still be exempt from donor’s
distribution results in a change of ownership tax even when the shares of stock were sold
interest of the shareholders, the stock on a selling price that is less than the fair
dividends will be subject to income tax. market value of the shares provided that the
(Section 24(B)(2); Section 25(A)&(B); Section sale is made in the ordinary course of
28(B)(5)(b), 1997 Tax Code) business, in a transaction which is a bona
fide, at arm’s length, and free from any
Terminal Leave Pay A, an employee of the donative intent.
Court of Appeals, retired upon reaching the
compulsory age of 65 years. Upon XYZ Air, a 100% foreign-owned airline
compulsory retirement, A received the money company based and registered in
value of his accumulated leave credits in the Netherlands, is engaged in the international
amount of P500.000.00. Is said amount airline business and is a member signatory
subject to tax? Explain. of the International Air Transport
Association. It’s commercial airplanes
SUGGESTED ANSWER: No. The neither operate within the Philippine
commutation of leave credits, more territory nor as its service passengers
commonly known as terminal leave pay, i.e., embarking from Philippine airports.
the cash equivalent of accumulated vacation Nevertheless, XYZ Air is able to sell its
and sick leave credits given to an officer or airplane tickets in the Philippines through
employee who retires, or separated from the ABC Agency, it’s general agent in the
service through no fault of his own, is exempt Philippines. As XYZ Air’s ticket sales, sold
from income tax. (BIR Ruling 238-91 dated through ABC Agency for the year 2013,
November 8, 1991; Commissioner v. CA and amounted to 5,000,000. 00, the Bureau of
Efren Castaneda, GR No. 96016, October 17, Internal Revenue (BIR) assessed XYZ Air
1991) deficiency income taxes on the ground that
the income from the said sales constituted
Due to rising liquidity problems and income derived from sources within the
pressure from its concerned suppliers, P. Philippines. Aggrieved, XYZ Air filed a
Corp. instituted a flash auction sale of its protest, arguing that, as a non-resident
shares of stock. P. Corp. was then able to sell foreign corporation, it should only be taxed
its treasury shares to Z, Inc., an unrelated for income derived from sources within the
corporation, for P1, 000, 000.00, which was Philippines. However, since it only serviced
only a little below the valuation of P Corp.’s passengers outside the Philippine territory,
shares based on its latest audited financial the situs of the income from its ticket sales
statements. In connection therewith, P Corp. should be considered outside the
sought a Bureau of Internal Revenue ruling Philippines. Hence, no income tax should be
to confirm that, notwithstanding the price imposed on the same. Is XYZ Air’s protest
difference between the selling price of the meritorious? Explain. (5%)
shares and their book value, the said
transaction falls under one of the recognized SUGGESTED ANSWER: No, the protest of
exemptions to donor’s tax under the Tax XYZ Air is not meritorious. Under the law, an
international air carrier with no landing property is transferred to a corporation by a
rights in the Philippines is a resident foreign person in exchange for stock or unit of
corporation if its local sales agent sells and participation in such a corporation of which
issues tickets in its behalf. An offline as a result of such exchange said person,
international carrier selling passage tickets alone or together with others, not exceeding
in the Philippines through a local general four persons, gains control of said
sales agent, is considered a resident foreign corporation: provided, that stocks issued for
corporation doing business in the services shall not be considered as issued in
Philippines. As such, it is taxable on income return for property (NIRC. Sec. 40 C (6)(c)).
derived from sources within the Philippines Moreover, control, in the said case, means
and not on Gross Philippine Billings, subject ownership of stocks in a corporation
to any applicable tax treaty. (Air Canada vs. possessing at least (51%) of the total voting
Commissioner of Internal Revenue G.R. No. power of all classes of stocks entitled to vote.
169507, January 11,2016). In the case at In the case, B transferred his ownership over
bar, XYZ Air was able to sell its airplane a 1,000-square meter commercial land and
tickets in the Philippines through ABC three-door. As a result, B acquired 51%
Agency, it’s general agent in the Philippines. ownership of ABC Corp., with all the shares
As such, it is taxable on income derived from of stock having the right to vote.
sources within the Philippines and not on
Gross Philippine Billings, subject to any Mr. D, a Filipino amateur boxer, joined an
applicable tax treaty. Olympic qualifying tournament held in Las
Vegas, USA, where he won the gold medal.
Differentiate tax exclusions from tax Pleased with Mr. D’s accomplishment, the
deductions. (3%) Philippine Government, through the
Philippine Olympic Committee, awarded him
SUGGESTED ANSWER: Tax exclusions a cash prize amounting to P1,000,000.00.
pertain to the computation of gross Income Upon receipt of the funds, he went to a
while tax deductions pertain to computation casino in Pasay City and won the
of net Income. Tax exclusions are something P30,000,000.00 jackpot in the slot machine.
received or earned by the taxpayer which do The next day, he went to a nearby Lotto
not form part of gross income while tax outlet and bought a Lotto ticket which won
deductions are something spent or paid in him a cash prize of P5,000.00. Which of the
earning gross income. Lastly, the former is above sums of money is/are subject to
flow of wealth to the taxpayer which are not income tax? Explain (5%)
treated as part of gross income for purposes
of computing the taxpayer’s taxable income SUGGESTED ANSWER: Mr. D’s winnings
due to the following reasons a. it is exempted from the casino in Pasay City, worth
by the fundamental law; b. b. It is exempted P30,000,000.00 is subject to income tax.
by a statute; and (. c. It does not fall within Under the TRAIN Law, other prizes and
the definition of income. On the other hand, winnings in excess of P10,000 shall be
tax deductions are the amounts which the subject to a 20% final tax on the entire
law allows to be subtracted from gross amount of the winnings. In this case, Mr. D’s
income in order to arrive at net income. winnings from the casino in Pasay City are
more than P10,000. Hence, it shall be
B transferred his ownership over a 1,000- subject to income tax. With regard to Mr. D’s
square meter commercial land and three- cash prize award after winning in an Olympic
door apartment to ABC Corp., a family qualifying tournament held in Las Vegas, it
corporation of which B is a stockholder. The is not subject to income tax. Under the NIRC,
transfer was in exchange of 10,000 shares of prizes and awards granted to athletes in local
stock of ABC Corp. As a result, B acquired and international sports competitions and
51% ownership of ABC Corp., with all the tournaments whether held in the PH or
shares of stock having the right to vote. B abroad and sanctioned by their national
paid no tax on the exchange, maintaining sports associations, which in this case is the
that it is a tax avoidance scheme allowed Philippine Olympic Committee, shall not be
under the law. The Bureau of Internal subject to income tax. With regard to Mr. D’s
Revenue, on the other hand, insisted that B’s Lotto winnings, it is not subject to income
alleged scheme amounted to tax evasion. tax. Under the NIRC, any winnings through
Should B pay taxes on the exchange? the PCSO Lotto that are in the amount of
Explain. (3%) P10,000 or less shall be exempt from income
tax. In this case, Mr. D won P5,000 thru the
SUGGESTED ANSWER: No, B should not PCSO Lotto. Hence, it shall not be subject to
pay taxes on the said exchange. As a general income tax.
rule, upon the sale or exchange of property,
the entire amount of the gain or loss, as the JKL-Philippines is a domestic corporation
case may be, shall be recognized. One of the affiliated with JKL-Japan, a Japan-based
accepted exceptions to th said rule is when a information technology company with
affiliates across the world. Mr. F is a Filipino Hence, he is considered as a NRANETB, and
engineer employed by JKL-Philippines. In shall be subjected to flat rate of 25% based
2018, Mr. F was sent to the Tokyo branch of on gross income earned within the
JKL-Japan based on a contract entered into Philippines.
between the two (2) companies. Under the
said contract, Mr. F would be compensated As a way to augment the income of the
by JKL-Philippines for the months spent in employees of DEF Inc., a private corporation,
the Philippines, and JKL-Japan for months the management decided to grant a special
spent in Japan. For the entirety of 2018, Mr. stipend of P50,000.00 for the first vacation
F spent ten (10) months in the Tokyo branch. leave that any employee takes during a given
On the other hand, Mr. J., a Japanese calendar year. In addition, the senior
engineer employed by JKL-Japan, was sent engineers were also giving housing inside the
to Manila to work with JKL Philippines as a factory compound for the purpose of
technical consultant. Based on the contract ensuring that there are available engineers
between the two (2) companies, Mr. J’s within the premises everytime there is a
annual compensation would still be paid by breakdown in the factory machineries and
JKL-Japan. However, he would be paid equipment. a. Is the special stipend part of
additional compensation by JKL Philippines the taxable income of the employees
for the months spent working as a receiving the same? I f so, what tax is
consultant. For 2018, Mr. J stayed in the applicable and what tax rate? Explain. (3%)
Philippines for five (5) months. In 2019, the b. Is the cash equivalent value of the housing
Bureau of Internal Revenue (BIR) assessed facilities received by the senior engineers
JKL-Philippines for deficiency withholding subject to fringe benefits tax? Explain. (3%)
taxes for both Mr. F and Mr. J for the year
2018. As to Mr. F, the BIR argued that he is SUGGESTED ANSWER: (a) Yes, the special
a resident citizen, hence, his income tax stipend is part of the taxable income of the
should be based on his worldwide income. As employees since the same may very well be
to Mr. J, the BIR argued that he is a resident considered income on his part. (b) No, the
alien; hence, his income tax should be based cash equivalent value of the housing
on his income from sources within the facilities received by the senior engineers is
Philippines at a schedular rate under Sec 24 not subject to fringe benefits tax. The same
(A) (2) of the Tax Code, as amended by is exempt from FBT since the housing is
Republic Act No. 10963, or the “Tax Reform located within the Company's premises and
for Acceleration and Inclusion” Law. (a) Is the is generally for the convenience of the
BIR correct in basing its income tax employer.
assessment on Mr. F’s worldwide income?
Explain. (3%) (b) Is the BIR correct in basing Kim, a Filipino national, worked with K-
its income tax on Mr. J’s income within the Square, Inc. (KSI), and was seconded to
Philippines at a schedular rate Explain (3%). various KSl-affiliated corporations: 1. from
1999 to 2004 as Vice President of K-Gold
SUGGESTED ANSWER: (a) No, the BIR is not Inc., 2. from 2004 to 2007 as Vice President
correct in basing its income tax assessment of KPB Bank; 3. from 2007 to 2011 as CEO
on Mr. F’s worldwide income. Under the of K-Com Inc.; 4. from 2011 to 2017 as CEO
NIRC, non-resident citizens are only taxed of K-Water Corporation, where Kim served as
for income earned within the Philippines. In CEO for seven years until his retirement last
this case, the hybrid status of the taxpayer December 12, 2017 upon reaching the
cannot be applied, regardless of his initial 2- compulsory retirement age of 60 years. All
month stay in the Philippines and the corporations mentioned are majority-
subsequent transfer to Japan. For all intents owned in common by the Koh family and
and purposes, F is considered a non-resident covered by a BIR qualified multiemployer-
citizen in the year 2018. Hence, the income employee retirement plan (MEE RP), under
tax for 2018 should only be assessed on which the employees may be moved around
income earned within the Philippines. within the controlled group (i.e., from one
KSI subsidiary or affiliate to another) without
(b) No, the BIR is not correct in basing its loss of seniority rights or break in the tenure.
income tax on Mr. J’s income within the Kim was well-loved by his employer and
Philippines at a schedular rate. Under the colleagues, so upon retirement, and on his
NIRC, non-resident aliens not engaged in last day in office, KSI gave him a Mercedes
trade or business are subject to a flat of rate Benz car worth PhP 5 million as a surprise,
of 25% based on the gross income. The NIRC with a streamer that reads: "You'll be missed.
states that non-resident aliens that have an Good luck, Sir Kim." (a) Are the retirement
aggregate number of days staying in the benefits paid to Kim pursuant to the MEERP
Philippines less than 180 days, are taxable? (2.5%) (b) Which internal revenue
considered to be not engaged in trade or tax, if any, will apply to the grant of the car
business. In this case, Mr. J only stayed for to Kim by the company? (2.5%)
five months or 150 days in the Philippines.
 SUGGESTED ANSWER: (a) Exempt. Sec 32 SUGGESTED ANSWER No. Since World
(B)(6)(a): Retirement benefits received under Health Organization (WHO), the contractee,
RA No. 7641 (Retirement Pay Law, Art. 287 is exempt from direct and indirect taxes
of the Labor Code); or those received by pursuant to an international agreement
officials and employees of private firms, where the Philippines is a signatory, the
whether individual or corporate, under a exemption from indirect taxes should mean
reasonable private benefit plan maintained that the entity or person exempt is the
by the employer, provided the following contactor itself because the manifest
requisites are present: • The retiree has been intention of the agreement is to exempt the
in the service of the same employer for at contractor so that no tax may be shifted to
least 10 years; • The retiree is not less than the contractee (CIR v. John Gotamco & Sons,
50 years of age; • Exemption is availed of only Inc., G.R. No. L-31092, February 24, 1987,
once. Considered as within 10 years due to 148 SCRA 36). The immunity of WHO from
the fact that “employees may be moved indirect taxes extends to the contractor by
around within the controlled group without treating the sale of service as effectively
loss of seniority rights or break in the zero rated when the law provided that,
tenure”. “services rendered to persons or entities
whose exemption under special laws or
(b) Donor’s tax. Not in consideration of international agreements to which the
services rendered but by reason of gratuity. Philippines is a signatory effectively subjects
the supply of such service to zero percent
The Board of Directors of Sumo Corporation, (0%) rate” (Section 108(B) 3, NIRC).
a company primarily engaged in the business Accordingly, the BIR is wrong in assessing
of marketing and distributing pest control the 12% VAT from the contractor, Precision
products, approved the partial cessation of Construction Corporation.
its commercial operations, resulting in the
separation of 32 regular employees. Only half Ms. C, a resident citizen, bought ready-to-
of the affected employees were notified of the wear goods from Ms. B, a non-resident
board resolution. Rule on the taxability of the citizen. (A) If the goods were produced from
separation pay and indemnity that will be Ms. B’s factory in the Philippines, is Ms. B’s
received by the affected employees as the income from the sale to Ms. C taxable in the
result of their separation from service. Philippines? Explain. (2%) (B) If Ms. B is an
Explain your answer. (3%) alien individual and the goods were produced
in her factory in China, is Ms. B’s income
SUGGESTED ANSWER It shall be tax- from the sale of the goods to Ms. C taxable in
exempt. Section 30(B)(6)(b) of the 1997 NIRC, the Philippines? Explain. (2%)
as amended, provides that any amount
received by an official or employee or by his SUGGESTED ANSWER (A) Yes, the income of
heirs from the employer as a consequence of Ms. B from the sale of ready-to-wear goods to
separation of such official or employee from C is taxable. A nonresident citizen is taxable
the service of the employer because of death, only on income derived from sources within
sickness or other physical disability or for the Philippines (Sec. 23(B), NIRC). In line
any cause beyond the control of the said with the source rule of income taxation,
official or employee shall be exempt from since the goods are produced and sold within
taxation. the Philippines, Ms. B’s Philippine-sourced
income is taxable in the Philippines. (B) Yes,
Pursuant to Sec. 11 of the “Host Agreement but only a proportionate part of the income.
between the United Nations and the Gains, profits and income from the sale of
Philippine government, it was provided that personal property produced by the taxpayer
the World Health Organization (WHO), “its without and sold within the Philippines,
assets, income and other properties shall be: shall be treated as derived partly from
a) exempt from all direct and indirect taxes.” sources within and partly from sources
Precision Construction Corporation (PCC) without the Philippines (Sec. 42E, NIRC).
was hired to construct the WHO Medical Note: The problem does not indicate where
Center in Manila. Upon completion of the the sale took place. The suggested answers
building, the BIR assessed a 12% VAT on the in a and b above assume that the sale took
gross receipts of PCC derived from the place in the Philippines. A non-resident alien
construction of the WHO building. The BIR is to be taxed by the Philippine government
contends that the 12% VAT is not a direct nor only on her income derived from an activity
an indirect tax on the WHO but a tax that is conducted in the Philippines such as the sale
primarily due from the contractor and is of goods irrespective where produced.
therefore not covered by the Host Agreement.
The WHO argues that the VAT is deemed an Indicate whether each of the following
indirect tax as PCC can shift the tax burden individuals is required or not required to file
to it. Is the BIR correct? Explain. (5%) an income tax return; (A) Filipino citizen
residing outside the Philippines on his
income from sources outside the Philippines. considered as de minimis benefits: (Note: The
(1%) (B) Resident alien on income derived examinee may choose any three) • Monetized
from sources within the Philippines. (1%) (C) unused vacation leave credits of private
Resident citizen earning purely employees not exceeding 10 days during the
compensation income from two employers year; • Monetized value of vacation and sick
within the Philippines, whose income taxes leave credits paid to government officials and
have been correctly withheld. (1%) (D) employees; • Medical cash allowance to
Resident citizen who falls under the dependents of employees, not exceeding
classification of minimum wage earners. (1%) P750 per employee per semester or P125 per
(E) An individual whose sole income has been month; • Rice subsidy of P1,500 or 1 sack of
subjected to final with holding tax. (1%) 50 kg rice per month amounting to not more
than P1,500; • Uniform and clothing
SUGGESTED ANSWER allowance not exceeding P5,000 per annum;
• Actual medical assistance not exceeding
(A) Not required. The income of a non- P10,000 per annum; Laundry allowance not
resident Filipino citizen are taxable only on exceeding P300 per month; • Employees
income sourced within the Philippines. achievement awards, e.g., for length of
Accordingly, his income from sources service or safety achievement, which must be
outside the Philippines is exempt from in the form of a tangible personal property
income tax (Sec. 51A (1)(b), NIRC). other than cash or gift certificate, with an
annual monetary value not exceeding
(B) Required. A resident alien is taxable only P10,000 received by the employee under an
for income derived from sources within the established written plan which does not
Philippines (Sec. 51A (1)(c), NIRC). discriminate in favor of highly paid
employees; • Gifts given during Christmas
(C) Required. A resident citizen who is and major anniversary celebrations not
earning purely compensation income from exceeding P5,000 per employee per annum;
two employers should file income tax return.
• Daily meal allowance for overtime work and
If the compensation income is received
night/graveyard shift not exceeding 25% of
concurrently from two employers during the
the basic minimum wage on a per region
taxable year, the employee is not qualified for
basis; • Benefits received by an employee by
substituted filing (Sec. 51A (2)(b), NIRC).
virtue of a collective bargaining agreement
(CBA) and productivity incentive schemes,
(D) Not required. Under the law, all minimum
provided that the total annual monetary
wage earners in the private and public sector
value received from both CBA and
shall be exempt from payment of income tax
productivity incentive schemes combined do
(Sec. 51A (2)(d), NIRC in relation to Republic
not exceed P10,000 per employee per taxable
Act No. 9504).
year (Rev. Regs. 2-98, as amended).
(E) Not required. Under the law, an
Mr. De Sarapen is a candidate in the
individual whose sole income has been
upcoming Senatorial elections. Mr. De
subjected of final withholding tax pursuant
Almacen, believing in the sincerity and
to Sec. 57(A), NIRC, need not file a return.
ability of Mr. De Sarapen to introduce much
What he received is a tax-paid income (Sec.
needed reforms in the country, contributed
51A (2)(c) NIRC).
P500,000.00 in cash to the campaign chest
of Mr. De Sarapen. In addition, Mr. De
What are de minimis benefits and how are
Almacen purchased tarpaulins, t-shirts,
these taxed? Give three (3) examples of de
umbrellas; caps and other campaign
minimis benefits. (4%)
materials that he also donated to Mr. De
Sarapen for use in his campaign,” Is the
SUGGESTED ANSWER De minimis benefits
contribution of cash and campaign
are facilities and privileges furnished or
materials subject to donor’s tax? (4%)
offered by an employer to his employees,
which are not considered as compensation
SUGGESTED ANSWER: The Tax Code
subject to income tax and consequently to
provides that any contribution in cash or in
withholding tax, if such facilities or privileges
kind to any candidate, political party or
are of relatively small value and are offered
coalition of parties for campaign purposes
or furnished by the employer merely as
shall be governed by the Election Code
means of promoting the health, goodwill,
(Section 99(C), NIRC). On the other hand, the
contentment, or efficiency of his employees.
Omnibus Election provides, that any
If received by rank and-file employees, they
provision of the law to the contrary
are exempt from income tax on wages; if
notwithstanding, any contribution in cash or
received by supervisory or managerial
in kind to any candidate or political party or
employees, they are exempt from the fringe
coalition of parties for campaign purposes,
benefits tax (RR No. 2-98, as amended by RR
duly reported to the Commission shall not i
No. 8-2000). The following shall be
be subject to axy payment of gift tax (Section
13, R.A. 7166). Hence, the contributions will
be exempt from donor’s tax if they are duly
reported to the Commission. Otherwise, the
contributions will be subject to donor’s tax.

Triple Star, à domestic corporation, entered

into a Management Service Contract with
Single Star, a non resident foreign
corporation with no property in the
Philippines. Under the contract, Single Star
shall provide managerial services for Triple
Star’s Hongkong branch. All said services
shall be performed in Hong Kong. Is the
compensation for the services of Single Star
taxable as income from sources within the
Philippines? Explain. (4%)

SUGGESTED ANSWER: No. The

compensation for services rendered by Single
Star is an income derived from sources
without the Philippines. To be considered as
income from within, the labor or service
must be performed within the Philippines
(Section 42(A)(3) and Section 42(C)(3) NIRC).
Since all the services required to be
performed by Single Star, a non- resident
foreign corporation, is to be performed in
Hongkong, the entire income is from sources
without.