TAXATION LAW REVIEW (CONCISE VERSION – PART I)

I. GENERAL PRINCIPLES

Classification of Taxes
1. Different Classifications
a. Separate Opinion of Justice Bersamin in CIR vs. Pilipinas Shell, GR No. 188497
dated February 19, 2014
• Excise tax is essentially a tax on goods, products or articles
• Taxes are classified, according to subject matter or object, into three groups, to
wit: (1) personal, capitation or poll taxes; (2) property taxes; and (3) excise or license
taxes. Personal, capitation or poll taxes are fixed amounts imposed upon residents or
persons of a certain class without regard to their property or business, an example of
which is the basic community tax.13 Property taxes are assessed on property or things
of a certain class, whether real or personal, in proportion to their value or other
reasonable method of apportionment, such as the real estate tax. 14 Excise or license
taxes are imposed upon the performance of an act, the enjoyment of a privilege, or
the engaging in an occupation, profession or business.15 Income tax, value-added tax,
estate and donor’s tax fall under the third group.
• Excise tax, as a classification of tax according to object, must not be confused
with the excise tax under Title VI of the NIRC. The term "excise tax" under Title VI of
the 1997 NIRC derives its definition from the 1986 NIRC,16 and relates to taxes applied
to goods manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition and to things imported.17 In contrast, an
excise tax that is imposed directly on certain specified goods – goods manufactured
or produced in the Philippines, or things imported – is undoubtedly a tax on
property.18
• Pilipinas Shell, the statutory taxpayer, is the proper party to claim the refund of
the excise taxes paid on petroleum products sold to international carriers
• The excise taxes are of the nature of indirect taxes, the liability for the payment
of which may fall on a person other than whoever actually bears the burden of the
tax.25

2. Fees vs. Charges vs. Taxes

TAX LICENSE FEE

Purpose Imposed to raise revenue For regulation and control
Basis Collected under the power of Collected under police power
taxation
Amount Generally, amount is unlimited Limited to the necessary expenses of
regulation and control
Subject Imposed on persons, property, Imposed on the exercise of a right or
rights or transaction privilege
Effect of Non-Payment Non-payment does not make the Non-payment makes the business
business illegal illegal
Time of Payment Normally paid after the start of Normally paid before the
business commencement of the business

Taxes are imposed whether you are in a legal or an illegal business.

License Fee – if the intention is to regulate a useful occupation, the license fee should not exceed the reasonable
cost of regulation or inspection but if what you will regulate is the non-useful occupation because you want to
discourage them, then the amount that can be charged can go over and above the reasonable cost of regulation and
inspection.

1. Angeles University Foundation vs. City of Angeles, GR No. 18999 dated June 27, 2012

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 • The fees in the ordinance are not impositions on the building or structure itself;
rather, they are impositions on the activity subject of government regulation, such as the
installation and construction of the structures. It is primarily regulatory in nature, and not
primarily revenue-raising. While the fees may contribute to the revenues of the
municipality, this effect is merely incidental. Thus, the fees imposed in the said ordinance
are not taxes
• A charge is broadly defined as the price of, or rate for, something, while the word
fee pertains to a charge fixed by law for services of public officers or for use of a privilege
under control of government.[22] As used in the Local Government Code of 1991 (R.A. No.
7160), charges refers to pecuniary liability, as rents or fees against persons or property,
while fee means a charge fixed by law or ordinance for the regulation or inspection of a
business or activity.[23]
• In distinguishing tax and regulation as a form of police power, the determining
factor is the purpose of the implemented measure. If the purpose is primarily to raise
revenue, then it will be deemed a tax even though the measure results in some form of
regulation. On the other hand, if the purpose is primarily to regulate, then it is deemed
a regulation and an exercise of the police power of the state, even though incidentally,
revenue is generated. Thus, in Gerochi v. Department of Energy, the Court stated:
• The conservative and pivotal distinction between these two (2) powers rests in the
purpose for which the charge is made. If generation of revenue is the primary purpose
and regulation is merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that revenue is incidentally raised does not make the imposition a
tax.[30] (Emphasis supplied.)

3. Are taxes subject to set-off?

1. Francia vs. IAC, GR No. 67649 dated June 28, 1988
• A claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off under the statutes of set-off, which are construed uniformly, in the light of
public policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction
sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-
settled that no set-off admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is that taxes are
not in the nature of contracts between the party and party but grow out of duty to, and
are the positive acts of the government to the making and enforcing of which, the
personal consent of individual taxpayers is not required. ..."
• The tax was due to the city government while the expropriation was effected by the
national government.
2. Philex Mining vs. CIR, GR No. 125704 dated August 28, 1988
• In several instances prior to the instant case, we have already made the pronouncement
that taxes cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each other. There is a
material distinction between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its sovereign capacity.
3. Domingo vs. Garlitos, GR No. L-18994 dated June 29, 1963
• GEN. RULE: taxes cannot be subject to set-off or compensation is that there is no debtor-creditor relationship
between the Government and taxpayer and that the taxes are not debts.


• EXCEPTION: Where the claims of the Government for taxes and taxpayer for services rendered have already
become due and demandable, as well as fully liquidated, then compensation takes place by operation of law in
accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to
the concurrent amount. (DOMINGO VS GARLITOS)

4. Air Canada vs. CIR, GR No. 169507 dated January 11, 2016 (set-off issue only)
• The issue of petitioner's claim for tax refund is intertwined with the issue of the proper
taxes that are due from petitioner. A claim for tax refund carries the assumption that the
tax returns filed were correct. If the tax return filed was not proper, the correctness of the
amount paid and, therefore, the claim for refund become questionable. In that case, the
court must determine if a taxpayer claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.
• To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or credit against the government which has not

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 yet been granted. It must be noted that a distinguishing feature of a tax is that it is
compulsory rather than a matter of bargain. Hence, a tax does not depend upon the
consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would adversely affect
the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall
due simply because he has a claim against the government or that the collection of the
tax is contingent on the result of the lawsuit it filed against the government.
• Here, petitioner's similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the
return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund

4. Double Taxation
There is no constitutional prohibition against double taxation in the Philippines. It is something not
favored, but is permissible, provided some other constitutional requirement is not thereby violated,
such as the requirement that taxes must be uniform (Villanueva v. City of Iloilo, 1968).
1. Kinds
Two Types:
1) As to validity –

A. Direct (Strict sense) - Double taxation in the objectionable or prohibited sense since it violates the
equal protection clause of the Constitution

Elements of Direct Double Taxation

1. The same property is taxed twice when it should be taxed only once; and
2. Both taxes are imposed
a. on the same subject matter,
b. for the same purpose,
c. by the same taxing authority,
d. within the same jurisdiction,
e. during the same taxing period; and
f. the taxes must be of the same kind or character (City of Manila v. Coca Cola Bottlers Philippines, G.R.
No. 181845, August 4, 2009).

All the elements must be present in order to apply double taxation in its strict sense.
B. Indirect (Broad sense) - It is a permissible double taxation. It is indirect when some elements of direct
double taxation are absent.

2) As to scope –

A. Domestic Double Taxation - When the taxes are imposed by the local and national government
within the same State.

B. International Double Taxation – refers to the imposition of comparable taxes in two or more States
on the same taxpayer in respect of the same subject matter and for identical periods (CIR v. SC Johnson
and Son, Inc., G.R. No. 127105, June 25, 1999).

2. Modes of eliminating double taxation

Modes of eliminating double taxation
Local legislation and tax treaties may provide for:
1. Tax credit – an amount subtracted from taxpayer’s tax liability in order to arrive at the net tax due.
2. Tax deduction – an amount subtracted from the gross amount on which a tax is calculated.
3. Tax exemption – a grant of immunity to particular persons or entities from the obligation to pay taxes.
4. Imposition of a rate lower than the normal domestic rate
5. Tax treaty - The purpose is to reconcile the national fiscal legislation of the contracting parties in
order to help the taxpayer avoid simultaneous taxation in two different jurisdictions (international
double taxation). This is to encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating robust and dynamic
economies.

Tax treaty resorts to several methods:

1. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence
with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred

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 on one of the contracting states; however, for other items of income or capital, both states are given
the right to tax, although the amount of tax that may be imposed by the state of source is limited;
2. The second method for the elimination of double taxation applies whenever the state of source is
given a full or limited right to tax together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two
methods of relief:
a. Exemption method - the income or capital which is taxable in the state of source or situs is exempted
in the state of residence, although in some instances it may be taken into account in determining the
rate of tax applicable to the taxpayer's remaining income or capital;
b. Credit method - although the income or capital which is taxed in the state of source is still taxable in
the state of residence, the tax paid in the former is credited against the tax levied in the latter.

The basic difference between the two methods is that in the exemption method, the focus is on the
income or capital itself, whereas the credit method focuses upon the tax (CIR v. S.C. Johnson and Son,
Inc., G.R. No. 127105, 1999).

Most-Favored Nation clause

The purpose of a most favored nation clause is to grant to the contracting party treatment not less
favorable than that which has been or may be granted to the "most favored" among other countries.
This is intended to establish the principle of equality of international treatment by providing that the
citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those
of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of
more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer
is also a party provided that the subject matter of taxation is the same as that in the tax treaty under
which the taxpayer is liable (CIR v. S.C. Johnson and Son, Inc., G.R. No. 127105, 1999).

3. CIR vs. Solidbank, GR No. 148191 dated November 25, 2003

• Double taxation means taxing the same property twice when it should be
taxed only once; that is, x x x taxing the same person twice by the same jurisdiction for
the same thing.[117] It is obnoxious when the taxpayer is taxed twice, when it should be but
once.[118] Otherwise described as direct duplicate taxation,[119] the two taxes must be imposed
on the same subject matter, for the same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and they must be of the same kind or
character.[120]

• First, the taxes herein are imposed on two different subject matters. The
subject matter of the FWT is the passive income generated in the form of interest on
deposits and yield on deposit substitutes, while the subject matter of the GRT is the
privilege of engaging in the business of banking.

• A tax based on receipts is a tax on business rather than on the property;

hence, it is an excise[121] rather than a property tax.[122] It is not an income tax, unlike the
FWT. In fact, we have already held that one can be taxed for engaging in business and
further taxed differently for the income derived therefrom.[123] Akin to our ruling in Velilla
v. Posadas,[124] these two taxes are entirely distinct and are assessed under different
provisions.

• Second, although both taxes are national in scope because they are
imposed by the same taxing authority -- the national government under the Tax Code --
and operate within the same Philippine jurisdiction for the same purpose of raising
revenues, the taxing periods they affect are different. The FWT is deducted and withheld
as soon as the income is earned, and is paid after every calendar quarter in which it is
earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only
after every taxable quarter in which it is earned.

• Third, these two taxes are of different kinds or characters. The FWT is an
income tax subject to withholding, while the GRT is a percentage tax not subject to
withholding.

• In short, there is no double taxation, because there is no taxing twice, by

the same taxing authority, within the same jurisdiction, for the same purpose, in different
taxing periods, some of the property in the territory. [125] Subjecting interest income to a
20% FWT and including it in the computation of the 5% GRT is clearly not double taxation.

4. Nursery Care Corporation vs. Acevedo, GR No. 180651 dated July 30, 2014

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 • Whether or not the collection of taxes under Section 21 of Ordinance No. 7794, as
amended, constitutes double taxation.
• The Court perceives of no instance of the constitutionally proscribed double taxation, in
the strict, narrow or obnoxious sense, imposed upon the petitioners under Section 15 and
17, on the one hand, and under Section 21, on the other, of the questioned Ordinance.
The tax imposed under Section 15 and 17, as against that imposed under Section 21, are
levied against different tax objects or subject matter. The tax under Section 15 is imposed
upon wholesalers, distributors or dealers, while that under Section 17 is imposedupon
retailers. In short, taxes imposed under Section 15 and 17 is a tax on the business of
wholesalers, distributors, dealers and retailers. On the other hand, the tax imposed upon
herein petitioners under Section 21 is not a tax against the business of the petitioners (as
wholesalers, distributors, dealers or retailers)but is rather a tax against consumers or end-
users of the articles sold by petitioners.
• In effect, the petitioners only act as the collection or withholding agent of the City while
the ones actually paying the tax are the consumers or end-users of the articles being sold
by petitioners. The taxes imposed under Sec. 21 represent additional amounts added by
the business establishment to the basic prices of its goods and services which are paid by
the end-users to the businesses. It is actually not taxes on the business of petitioners but
on the consumers. Hence, there is no double taxation in the narrow, strict or obnoxious
sense,involved in the imposition of taxes by the City of Manila under Sections 15, 17 and
21 of the questioned Ordinance.
5. CIR vs. S.C. Johnson and Sons, Inc., GR No. 127105 dated June 25, 1999
• ON the US-Phil and Phil- Germany treaties on double taxation vis a vis
MOST FAVOURED nation
• The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions
on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting
against German income and corporation tax of 20% of the gross amount of royalties paid
under the law of the Philippines. On the other hand, Article 23 of the RP- US Tax Treaty,
which is the counterpart provision with respect to relief for double taxation, does not
provide for similar crediting of 20% of the gross amount of royalties paid.
• Double taxation usually takes place when a person is resident of a contracting state
and derives income from, or owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate double taxation, a tax treaty
resorts to several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by the state of source is limited. [14]
• The second method for the elimination of double taxation applies whenever the
state of source is given a full or limited right to tax together with the state of residence. In
this case, the treaties make it incumbent upon the state of residence to allow relief in
order to avoid double taxation. There are two methods of relief- the exemption method
and the credit method. In the exemption method, the income or capital which is taxable
in the state of source or situs is exempted in the state of residence, although in some
instances it may be taken into account in determining the rate of tax applicable to the
taxpayers remaining income or capital. On the other hand, in the credit method, although
the income or capital which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax levied in the latter. The
basic difference between the two methods is that in the exemption method, the focus is
on the income or capital itself, whereas the credit method focuses upon the tax.[15]
• The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the most
favored among other countries.[25] The most favored nation clause is intended to establish
the principle of equality of international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges accorded by either party to
those of the most favored nation.[26] The essence of the principle is to allow the taxpayer
in one state to avail of more liberal provisions granted in another tax treaty to which the
country of residence of such taxpayer is also a party provided that the subject matter of
taxation, in this case royalty income, is the same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-
West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of
trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite
the absence of a matching credit (20% for royalties) would derogate from the design

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 behind the most favored nation clause to grant equality of international treatment since
the tax burden laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the need for
equality of treatment.
• We accordingly agree with petitioner that since the RP-US Tax Treaty does not give
a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as
allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed
entitled to the 10 percent rate granted under the latter treaty for the reason that there is
no payment of taxes on royalties under similar circumstances.
•

6. Deutsche Bank AG Manila Branch vs. GR No. 188660 dated August 19, 2013
• Issues: This Court is now confronted with the issue of whether the failure to strictly
comply with RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax
treaty.

• Ruling: RP-Germany Tax Treaty, which provides that where a resident of the Federal
Republic of Germany has a branch in the Republic of the Philippines, this branch may be
subjected to the branch profits remittance tax withheld at source in accordance with
Philippine law but shall not... exceed 10% of the gross amount of the profits remitted by
that branch to the head office.By virtue of the RP-Germany Tax Treaty, we are bound to
extend to a branch in the Philippines, remitting to its head office in Germany, the benefit
of a preferential rate equivalent to 10% BPRT.The CTA ruled that prior application for a
tax treaty relief is mandatory, and noncompliance with this prerequisite is fatal to the
taxpayer's availment of the preferential tax rate.We disagree.Simply put, tax treaties are
entered into to minimize, if not eliminate the harshness of international juridical double
taxation, which is why they are also known as double tax treaty or double tax
agreements.Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which
would indicate a deprivation of entitlement to a tax treaty relief for failure to comply
with the 15-day period.CTA's... outright denial of a tax treaty relief for failure to strictly
comply with the prescribed period is not in harmony with the objectives of the
contracting state to ensure that the benefits granted under tax treaties are enjoyed by
duly entitled persons or corporations.

• Bearing in mind the rationale of tax treaties, the period of application for the availment
of tax treaty relief as required by RMO No. 1-2000 should not operate to divest
entitlement to the relief as it would constitute a violation of the duty required by good
faith in complying... with a tax treaty.denial of the availment of tax relief for the failure of
a taxpayer to apply within the prescribed period under the administrative issuance would
impair the value of the tax treaty.

7. CBK Power Company Limited vs. CIR, GR No. 193383-84 dated January 14, 2015
(PerlasBernabe)
• The obligation to comply with a tax treaty must take precedence over the objective
of RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications
on international relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000 involve an administrative
procedure, these may be remedied through other system management processes, e.g.,
the imposition of a fine or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.
• We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but
the CTA’s outright denial of a tax treaty relief for failure to strictly comply with the
prescribed period is not in harmony with the objectives of the contracting state to ensure
that the benefits granted under tax treaties are enjoyed by duly entitled persons or
corporations.
• Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1-2000 should not operate to
divestentitlement to the reliefas it would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial of the availment of tax relief for the
failure of a taxpayer to apply within the prescribed period under the administrative
issuance would impair the value of the tax treaty. At most, the application for a tax treaty

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 relief from the BIR should merely operate to confirm the entitlement of the taxpayer to
the relief.
•

5. Taxpayer’s suit
Locus Standi
The party suing as a taxpayer must prove that he has sufficient interest in preventing the illegal
expenditure of money raised by taxation. Thus, taxpayers have been allowed to sue where there is a
claim that public funds are illegally disbursed or that public money is being deflected to any improper
purpose, or that public funds are wasted through the enforcement of an invalid or unconstitutional
law.
The taxpayer must establish that:
1. He has a personal and substantial interest in the case; and

2. He has sustained or will sustain direct injury as a result of its enforcement or that he stands to be
benefited or injured by the judgment in the case, or is entitled to the avails of the suit (Public Interest
Center, Inc. v. Roxas, 513 SCRA 457, G.R. No. 125509, January 31, 2007).

NOTE: Being a mere procedural technicality, the requirement of locus standi may be waived by the Court in the exercise
of its discretion (David v. Macapagal-Arroyo, G.R. No. 171396, May 3, 2006).

Doctrine of Transcendental Importance

The following determines the importance of transcendental importance:
1. The character of the funds or other assets involved in the case;
2. The presence of a clear case of disregard of a constitutional or statutory prohibition by the public
respondent agency or instrumentality of the government;
3. The lack of any other party with a more direct and specific interest in raising the questions being raised
(CREBA v. ERC, 624 SCRA 556, G.R. No. 174697, July 8, 2010).

In the exercise of its discretion, the Court may brush aside these technicalities and take cognizance of the petition
considering the (transcendental) importance to the public of the case and in keeping with the duty to determine
whether the other branches of the government have kept themselves within the limits of the Constitution (Coconut Oil
Refiners Association, Inc. v. Torres, 465 SCRA 47, G.R. No. 132527, July 29, 2005).

1. Mamba vs. Lara, GR No. 165109 dated December 14, 2009

• A taxpayer is allowed to sue whether there is a claim that public funds are illegally
disbursed or that the public money is being deflected to any improper purpose, or that
there is wastage of public funds through the enforcement of an invalid or
unconstitutional law.

• 2 requisites must be met:

(1) public funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is committed - Records
show an appropriation of P25 M for the interest of the bond

(2) the petitioner is directly affected by the alleged act - the court has relaxed the
stringent direct injury test bearing in mind that locus standi is a procedural technicality. By
invoking transcendental importance, paramount public interest, or far-reaching implications,
ordinary citizens and taxpayers were allowed to sue even if they failed to show direct injury. In
cases where serious legal issues were raised or where public expenditures of millions of pesos
were involved, the court did not hesitate to give standing to taxpayers.

• Another point to consider is that local government units now possess more powers,
authority and resources at their disposal, which in the hands of unscrupulous officials may
be abused and misused to the detriment of the public. To protect the interest of the
people and to prevent taxes from being squandered or wasted under the guise of
government projects, a liberal approach must therefore be adopted in determining locus
standi in public suits
2. Land Bank of the Philippines vs. Cacayuran, GR No. 191667 dated April 17, 2013
(PerlasBernabe)
• Taxpayer is allowed to sue if:

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 • public funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is
committed; and (2) the petitioner is directly affected by the alleged act.

▪ In the case, the proceeds from the Subject Loans had already been converted into public
funds by the Municipality’s receipt thereof. Funds coming from private sources become
impressed with the characteristics of public funds when they are under official custody.
Public plaza belongs to public dominion, Cacayuran need not to be a privy to the loans, as
long as taxes are involved, people have a right to question the contracts entered into by
the government.

6. Law vs. Regulation

1. Secretary of Finance vs. Philippine Tobacco Institute, Inc., GR No. 210251 dated April 17,
2017
• It is an elementary rule in administrative law that administrative rules and
regulations enacted by administrative bodies to implement the law which they are
entrusted to enforce have the force of law and are entitled to great weight and respect.
However, these implementations of the law must not override, supplant,or modify the
law but must remain consistent with the law they intend to implement. It is only Congress
which has the power to repeal or amend the law.
• In this case, Section 11 of RR17-2012 and Annex"D-1" on Cigarettes Packed by
Machine of RMC90-2012 clearly contravened the provisions of RA10351. It is a well-
settled principle that are venue regulation cannot amend the law it seeks to implement.
In Commissioner of Internal Revenue v. Seagate Technology (Philippines), 14 we held that
a mere administrative issuance, like a BIR regulation, cannot amend the law; the former
cannot purport to do any more than implement the latter. The courts will not
countenance an administrative regulation that overrides the statute it seeks to
implement.In the present case, area ding of Section 11 of RR17-2012 and Annex"D-1" on
Cigarettes Packed by Machine of RMC 90-2012 reveals that they are not simply
regulations to implement RA10351. They are amendatory provisions which require
cigarette manufacturers to be liable to pay for more tax than the law, RA10351, allows.
The BIR, in issuing these revenue regulations, created an additional tax liability for
packaging combinations smaller than 20 cigarette sticks. In so doing, the BIR amended the
law, an act beyond the power of the BIR to do.
•

7. Inherent Limitations
1. Enumeration
Inherent limitations [PITIE]
1. Public Purpose
2. Inherently Legislative
3. Territorial
4. International Comity
5. Exemption of government entities, agencies and instrumentalities

1. Public Purpose
Tax is considered for public purpose if:
1. It is for the welfare of the nation and/or for greater portion of the population;
2. It affects the area as a community rather than as individuals;
3. It is designed to support the services of the government for some of its recognized
objects.

Tests in determining public purpose

1. Duty test - Whether the thing to be furthered by the appropriation of public
revenue is something which is the duty of the State as a government to provide.

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 NOTE: The term “public purpose” is not defined. It is an elastic concept that can be
hammered to fit modern standards. Jurisprudence states that “public purpose”
should be given a broad interpretation. It does not only pertain to those purposes
which are traditionally viewed as essentially government functions, such as building
roads and delivery of basic services, but also includes those purposes designed to
promote social justice. Thus, public money may now be used for the relocation of
illegal settlers, low-cost housing and urban agrarian reform (Planters Products, Inc.
v. Fertiphil Corporation, G.R. No. 166006, March 14, 2008).
2. Promotion of general welfare test - Whether the proceeds of the tax will directly
promote the welfare of the community in equal measure. When a tax law is only a
mask to exact funds from the public when its true intent is to give undue benefit and
advantage to a private enterprise, that law will not satisfy the requirement of "public
purpose" (Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, March
14, 2008).

Determination when enacted tax law is for public purpose

It lies in the Congress. However, this will not prevent the court from questioning the
propriety of such statute on the ground that the law enacted is not for a public
purpose; but once it is settled that the law is for a public purpose, the court may no
longer inquire into the wisdom, expediency or necessity of such tax measure.
NOTE: If the tax measure is not for public purpose, the act amounts to confiscation
of property.
Principles relative to public purpose
1. Tax revenue must not be used for purely private purposes or for the exclusive
benefit of private persons.
2. Inequalities resulting from the singling out of one particular class for taxation or
exemption infringe no constitutional limitation because the legislature is free to
select the subjects of taxation.
NOTE: Legislature is not required to adopt a policy of “all or none” for the Congress
has the power to select the object of taxation (Lutz v. Araneta, G.R. No. L-7859, 22
December 1955).
3. An individual taxpayer need not derive direct benefits from the tax.
4. Public purpose is continually expanding. Areas formerly left to private initiative
now lose their boundaries and may be undertaken by the government if it is to
meet the increasing social challenges of the times.
5. The public purpose of the tax law must exist at the time of its enactment (Pascual
v. Secretary of Public Works, G.R. No. L-10405, December 29, 1960).

2. Inherently Legislative
GR: The power to tax is exclusively vested in the legislative body, being inherent in
nature; hence, it may not be delegated (Delegata potestas non potest delegari).
The powers which Congress is prohibited from delegating are those which are
strictly, or inherently and exclusively, legislative. Purely legislative power, which can
never be delegated, has been described as the authority to make a complete law,
complete as to the time when it shall take effect and as to whom it shall be
applicable; and to determine the expediency of its enactment (ABAKADA Guro Party
List v. Hon. Exec. Sec., G.R. No. 168056, September 1, 2005). It cannot be delegated
without infringing upon the theory of separation of powers (Pepsi-Cola Bottling
Company of the Phil. v. Mun. of Tanauan, 69 SCRA 460, February 27, 1976).
Non-delegable legislative powers
1. Selection of subject to be taxed

9
 2. Determination of purposes for which taxes shall be levied
3. Fixing of the rate/amount of taxation
4. Situs of tax
5. Kind of tax

XPNs
1. Delegation to Local Government – Refers to the power of LGUs to create its own
sources of revenue and to levy taxes, fees and charges (Art. X, Sec. 5, 1987
Constitution)

NOTE: Art. X, Sec. 5 of the Constitution does not change the doctrine that municipal
corporations do not possess inherent powers of taxation; what it does is to confer
municipal corporations a general power to levy taxes and otherwise create sources
of revenue and they no longer have to wait for a statutory grant of these powers
and the power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on municipal
powers. Thus, in interpreting statutory provisions on municipal fiscal powers, doubts
will be resolved in favor of municipal corporations (Quezon City et al. v. ABS-CBN
Broadcasting Corporation, G.R. No. 162015, March 6, 2006).

2. Delegation to the President – The authority of the President to fix tariff rates,
import or export quotas, tonnage and wharfage dues or other duties and imposts
(Art. VI, Sec. 28(2), 1987 Constitution).

NOTE: When Congress tasks the President or his/her alter egos to impose safeguard
measures under the delineated conditions, the President or the alter egos may be
properly deemed as agents of Congress to perform an act that inherently belongs as
a matter of right to the legislature. It is basic agency law that the agent may not act
beyond the specifically delegated powers or disregard the restrictions imposed by
the principal (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Phil., G.R. No. 158540, August 3, 2005).

3. Delegation to administrative agencies – When the delegation relates merely to

administrative implementation that may call for some degree of discretionary
powers under sufficient standards expressed by law (Cervantes v. Auditor General,
G.R. No. L-4043, May 26, 1952) or implied from the policy and purpose of the act
(Maceda v. Macaraig, G.R. No. 88291, June 8, 1993).

NOTE: Technically, this does not amount to a delegation of the power to tax because
the questions which should be determined by Congress are already answered by
Congress before the tax law leaves Congress.

3. Territorial
GR: The taxing power of a country is limited to persons and property within and
subject to its jurisdiction.
Reasons:
1. Taxation is an act of sovereignty which could only be exercised within a country’s
territorial limits.
2. This is based on the theory that taxes are paid for the protection and services
provided by the taxing authority which could not be provided outside the territorial
boundaries of the taxing State.

10
 XPNs:
1. Where tax laws operate outside territorial jurisdiction –

i.e. Taxation of resident citizens on their incomes derived abroad.

2. Where tax laws do not operate within the territorial jurisdiction of the State.
a. When exempted by treaty obligations; or
b. When exempted by international comity.

Refer to discussions on Situs of Taxation.

4. International Comity
It refers to the respect accorded by nations to each other because they are sovereign
equals. Thus, the property or income of a foreign state may not be the subject of
taxation by another State.
International comity as a limitation on the power to tax
The Constitution expressly adopted the generally accepted principles of
international law as part of the law of the land (Art. II, Sec. 2, 1987 Constitution).
Thus, a State must recognize such generally accepted tenets of international law that
limit the authority of the government to effectively impose taxes upon a sovereign
State and its instrumentalities.
Reasons:
1. Par in parem non habet imperium. As between equals there is no sovereign
(Doctrine of Sovereign Equality).
2. The concept that when a foreign sovereign enters the territorial jurisdiction of
another, it does not subject itself to the jurisdiction of the other.
3. The rule of international law that a foreign government may not be sued without
its consent so that it is useless to impose a tax which could not be collected.

5. Exemption from taxation of government entities

GR: The government is exempt from tax.
Reason: Otherwise, we would be “taking money from one pocket and putting it in
another” (Board of Assessment Appeals of Laguna v. CTA, G.R. No. L-18125, May 31,
1963).
XPN: When it chooses to tax itself. Nothing prevents Congress from decreeing that
even instrumentalities or agencies of the government performing government
functions may be subject to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom (MCIAA v. Marcos, G.R.
No. 120082, September 11, 1996).
Government may tax itself
Since sovereignty is absolute and taxation is an act of high sovereignty, the State if
so minded could tax itself, including its political subdivisions (Maceda v. Macaraig,
G.R. No. 88291, June 8, 1993).
National Government is exempt from local taxation
If the taxing authority is the LGU, R.A. 7160 expressly prohibits LGUs from levying
tax on the National Government, its agencies and instrumentalities and other LGUs.
In Manila International Airport Authority v. CA, G.R. No. 155650 (2006) MIAA's
Airport Lands and Buildings are exempt from real estate tax imposed by local
governments. Being an instrumentality of the National Government, it is exempt
from local taxation. Also, the real properties of MIAA are owned by the Republic of
the Philippines and thus exempt from real estate tax.

11
 Agency of the Government
It refers to any of the various units of the Government, including a department,
bureau, office, instrumentality, or government-owned or controlled corporation, or
a local government or a distinct unit therein.
Taxability of agencies of government
1. Performing governmental functions: tax exempt unless expressly taxed
2. Performing proprietary functions: subject to tax unless expressly exempted

Instrumentality of the Government

It refers to any agency of National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through charter.
Taxability of instrumentalities of government
A government instrumentality falls under Section 133(o) of the LGC, which states:
“SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. —
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following: xxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.”

2. Delegation to Local Government Units

a. Pepsi Cola Bottling Co. of the Phils. vs. Municipality of Tanauan, GR No. L-31156
dated February 27, 1976
• The power of taxation is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent government, without being expressly
conferred by the people. It is a power that is purely legislative and which the central
legislative body cannot delegate either to the executive or judicial department of the
government without infringing upon the theory of separation of powers. The exception,
however, lies in the case of municipal corporations, to which, said theory does not apply.
Legislative powers may be delegated to local governments in respect of matters of local
concern. This is sanctioned by immemorial practice. By necessary implication, the
legislative power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the power to tax.
• The plenary nature of the taxing power thus delegated would not suffice to
invalidate the said law as confiscatory and oppressive. When it is said that the taxing
power may be delegated to municipalities and the like, it is meant that there may be
delegated such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects, which for reasons of
public policy the State has not deemed wise to tax for more general purposes .

3. Delegation to the President

a. Sec. 28(2) Article VI of the Constitution
SECTION 28.
(2) The Congress may, by law, authorize the President to fix within specified limits,
and subject to such limitations and restrictions as it may impose, tariff rates,
import and export quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development program of the
Government.

b. Flexible Tariff Clause – Sec. 1608 of the Customs Modernization and Tariff Act

12
 c. Abakada Guro Party List vs. Executive Secretary, GR No. 168056 dated
September 1, 2005
• NOT A DELEGATION OF LEGISLATIVE POWER BUT A DELEGATION ONLY OF THE
ASCERTAINMENT OF FACTS UPON WHICH THE ENFORCEMENT OF THE LAW SHALL
BE BASED
• The case before the Court is not a delegation of legislative power. It is simply a
delegation of ascertainment of facts upon which enforcement and administration
of the increase rate under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006, contingent upon a specified
fact or condition. It leaves the entire operation or non- operation of the 12% rate
upon factual matters outside of the control of the executive.
• No discretion would be exercised by the President. Highlighting the absence of
discretion is the fact that the word shall is used in the common proviso. The use of
the word shall connotes a mandatory order. Its use in a statute denotes an
imperative obligation and is inconsistent with the idea of discretion. Where the law
is clear and unambiguous, it must be taken to mean exactly what it says, and courts
have no choice but to see to it that the mandate is obeyed.
• Thus, it is the ministerial duty of the President to immediately impose the 12% rate
upon the existence of any of the conditions specified by Congress. This is a duty
which cannot be evaded by the President. Inasmuch as the law specifically uses the
word shall, the exercise of discretion by the President does not come into play. It is
a clear directive to impose the 12% VAT rate when the specified conditions are
present. The time of taking into effect of the 12% VAT rate is based on the
happening of a certain specified contingency, or upon the ascertainment of certain
facts or conditions by a person or body other than the legislature itself.
• THE LAW DID NOT NULLIFY THE PRESIDENT’S POWER OF CONTROL OVER THE
SECRETARY OF DOF
• THERE IS NO UNDUE DELEGATION OF THE LEGISLATIVE POWER BUT ONLY OF THE
DISCRETION AS TO THE EXECUTION OF THE LAW
• Congress simply granted the Secretary of Finance the authority to ascertain the
existence of a fact, namely, whether by December 31, 2005, the value- added tax
collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one- half percent (11⁄2%).
If either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate
must be imposed by the President effective January 1, 2006.

8. Constitutional Limitations
1. Enumeration

Constitutional limitations
a. Provisions directly affecting taxation
i. Prohibition against imprisonment for non-payment of poll tax (Art. III, Sec. 20)
ii. Uniformity and equality of taxation (Art. VI, Sec. 28)
iii. Grant by Congress of authority to the president to impose tariff rates (Art. VI ,
Sec. 28)
iv. Prohibition against taxation of religious, charitable entities, and educational
entities (Art. VI, Sec. 28)
v. Prohibition against taxation of non-stock, non-profit educational institutions (Art.
IX , Sec. 4)
vi. Majority vote of Congress for grant of tax exemption (Art. VI , Sec. 28)
vii. Prohibition on use of tax levied for special purpose (Art. VI, Sec. 29)
viii. President’s veto power on appropriation, revenue, tariff bills (Art. VI, Sec. 27)
ix. Non-impairment of jurisdiction of the Supreme Court (Art. VI, Sec. 30)
x. Grant of power to the LGUs to create its own sources of revenue (Art. IX, Sec. 5)

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 xi. Origin of Revenue and Tariff Bills (Art. VI, Sec. 24)
xii. No appropriation or use of public money for religious purposes (Art. VI, Sec. 28)

b. Provisions indirectly affecting taxation (Art. III, 1987 Constitution)

i. Due process (Sec. 1)
ii. Equal protection (Sec. 1)
iii. Religious freedom (Sec. 5)
iv. Non-impairment of obligations of contracts (Sec. 10)
v. Freedom of the press (Sec. 4)

2. Due Process and Equal Protection

1. Due Process
Basis: No person shall be deprived of life, liberty, or property without due process of law xxx
(Art. III, Sec. 1).
Requirements of due process in taxation
Substantive Due Process
1. Tax must be for public purpose;
2. It must be imposed within territorial jurisdiction;

Procedural Due Process

1. No arbitrariness or oppression either in the assessment or collection.

a. PAGCOR vs. The BIR, GR No. 172087 dated March 15, 2011
• Tax.Issue: Whether or not PAGCOR’s tax privilege of paying 5% franchise tax in lieu
of all other taxes with respect to its gaming income repealed or withdrawn by its exclusion
from the enumeration of government and owned or controlled corporations exempted
from liability for corporate income tax effected by Section 1 (c) of R.A. 9337.
• Held: No, Section 13(2)(a) of P.D. 1869 as amended by R.A. No. 9487 was not
repealed by RA 9337. The repealing clause of R.A 9337 never mentioned PAGCOR’s
Charter as one of the laws being repealed. Therefore when petitioner’s franchise was
extended on June 20, 2007 without revoking or withdrawing its tax exemption for its
gaming income, it effectively reinstated and reiterated all of petitioner’s rights, privileges
and authority granted under its Charter. The tax exemption withdrawn by RA. 9337 by
repealing Section 1 of RA 8424 pertains only to PAGCOR’s income from operation of
related services. Under P.D. 1869, as amended, PAGCOR is subject to income tax only with
respect to its operation of related services. Accordingly, the income tax exemption
ordained under Section 27(c) of R.A. No. 8424, which was withdrawn by R.A. 9337, clearly
pertains only to petitioner’s income from operation of related services. With respect to
petitioner’s income from operation of other related services, thesame is subject to
income tax only. The five percent (5%) franchise tax finds no application with respect to
petitioner’s income from other related services.
b. The new rule now is this:

• The income of PAGCOR from its gambling operations is subject to 5% franchise tax;


a The income of PAGCOR which is not related to its gambling operations is subject
to the normal corporate income tax.
3. Non-impairment of obligation of contracts / Grant of Franchise
a. Sec. 10 Art. III of the Constitution
b. Sec. 11 Art. XII of the Constitution

14
 Basis: No law impairing the obligation of contracts shall be passed (Art. III, Sec. 10).
Instances when there is impairment of the obligations of contract
When the law changes the terms of the contract by:
1. Making new conditions; or
2. Changing conditions in the contract; or
3. Dispenses with the conditions expressed therein.

Rationale for the non-impairment clause in relation to contractual tax exemption

When the State grants an exemption on the basis of a contract, consideration is
presumed to be paid to the State and the public is supposed to receive the whole
equivalent therefore.
NOTE: This applies only where one party is the government and the other party, a
private person.
Rules regarding non-impairment of obligation and contract with respect to the
grant of tax exemptions
1. If the grant of the exemption is merely a spontaneous concession by the
legislature, such exemption may be revoked. (Unilaterally granted by law)
2. If it is without payment of any consideration or the assumption of any new burden
by the grantee, it is a mere gratuity and exemption may be revoked. (Franchise)
3. However, if the tax exemption constitutes a binding contract and for valuable
consideration, the government cannot unilaterally revoke the tax exemption.
(Bilaterally agreed upon)

In Tolentino v. Secretary of Finance, 1994, the Court ruled that R.A. 7716 (E-VAT Law)
does not violate the non-impairment clause. The contention that the imposition of
the VAT on the sales and leases of real estate by virtue of contracts entered into
prior to the effectivity of the law would violate the constitutional provision that “No
law impairing the obligation of contracts shall be passed” is without legal basis.
The parties to a contract cannot fetter the exercise of the taxing power of the State.
For not only are existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of sovereign power is
also read into contracts as a basic postulate of the legal order.
The Contract Clause has never been thought as a limitation on the exercise of the
State’s power of taxation save only where a tax exemption has been granted for a
valid consideration.
c. Meralco vs. Province of Laguna, GR No. 131359 dated May 5, 1999
• It is contractual tax exemptions where non-impairment clause of the Constitution can
rightly be invoked, not franchise.

• Contractual tax exemptions are those agree d to by the taxing authority in contracts,
such as those contained in government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in its private capacity, sheds
its cloak of authority and waives its govern mental immunity.

• Truly, tax exemptions of this kind may not be revoked without impairing the obligations
of contracts. These contractual tax exemptions, however, are not to be confused with
tax exemptions granted under franchises. A franchise partakes the nature of a grant
which is beyond the purview of the non-impairment clause of the Constitution. Indeed,
Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935
and the 1973 Constitutions, is explicit that no franchise for the operation of a public
utility shall be granted except under the condition that such privilege shall be subject to

15
 amendment, alteration or repeal by Congress as and when the common good so
requires.

• Under the now prevailing Constitution, where there is neither a grant nor a prohibition
by statute, the tax power must be deemed to exist although Con gress may provide
statutory limitations and guidelines. The basic rationale for the current rule is to
safeguard the viability and self-sufficiency of local government units by directly granting
them general and broad tax powers. Nevertheless, the fundamental law did not intend
the delegation to be absolute and unconditional; the constitutional objective obviously
is to ensure that, while the local government units are being strengthened and made
more autonomous, the legislature must still see to it that (a) the taxpayer will not be
over-burdened or saddled with multiple and unreasonable impositions; (b) each local
government unit will have its fair share of available resources; (c) the resources of the
national government will not be unduly disturbed; and (d) local taxation will be fair,
uniform, and just.
d. Smart Communications, Inc. vs. City of Davao, GR No. 155491 dated September
16, 2008
• Sec. 193 of R.A. No. 7160 does not apply to Smart; Prospective Effect of R.A. No. 7160
• We agree with Smart‘s contention on this matter. The withdrawal of tax exemptions or
incentives provided in R.A. No. 7160 can only affect those franchises granted prior to
the effectivity of the law. The intention of the legislature to remove all tax exemptions
or incentives granted prior to the said law is evident in the language of Section 193 of
R.A. No. 7160. No interpretation is necessary.
• Smart is not exempted from local taxation; Tax Exemption construed strictly against
Smart
We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart
from local taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise tax
equivalent to three percent (3%) of all gross receipts of the business transacted under
the franchise and the said percentage shall be in lieu of all taxes on the franchise or
earnings thereof.
• But R.A. No 7294 does not expressly provide what kind of taxes Smart is exempted from.
It is not clear whether the in lieu of all taxes provision in the franchise of Smart would
include exemption from local or national taxation. What is clear is that Smart shall pay
franchise tax equivalent to three percent (3%) of all gross receipts of the business
transacted under its franchise. But whether the franchise tax exemption would include
exemption from exactions by both the local and the national government is not
unequivocal.
• The uncertainty in the ―in lieu of all taxes‖ clause in R.A. No. 7294 on whether Smart is
exempted from both local and national franchise tax must be construed strictly against
Smart which claims the exemption. Smart has the burden of proving that, aside from
the imposed 3% franchise tax, Congress intended it to be exempt from all kinds of
franchise taxes whether local or national. However, Smart failed in this regard.
• Tax exemptions are never presumed and are strictly construed against the taxpayer and
liberally in favor of the taxing authority. They can only be given force when the grant is
clear and categorical.The surrender of the power to tax, when claimed, must be clearly
shown by a language that will admit of no reasonable construction consistent with the
reservation of the power. If the intention of the legislature is open to doubt, then the
intention of the legislature must be resolved in favor of the State.
4. Infringement of Religious Freedom
a. Sec. 5 Art. III of the Constitution
Basis: No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof. The free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall forever be allowed. No religious test shall be
required for the exercise of civil or political rights (Art. III, Sec. 5)

No public money or property shall be appropriated or used for religious purposes – in the
separation of the church and the state, the state is prohibited by the Constitution to
appropriate or set aside money in favor of a certain religion except to those religious who
are with the government like in the armed forces, in the penal colonies, in the PNP, etc. In
these instances, there is no violation because the compensation that the state provides is in
payment of services rendered. We have religious who are in the military service, in the PNP
or in the penal colonies, in leprosarium and other government institutions. Such will not be

16
 a violation of this provision because the appropriation or money given to them are not for
religious purposes but a compensation for the services rendered.

b. American Bible Society vs. City of Manila, GR No. L-9637 dated April 30, 1957
Is a municipal license tax on the sale of bibles and religious articles by a non-
stock, non-profit missionary organization at minimal profits valid?
A: NO. Such imposition of license tax constitutes curtailment of religious freedom
and worship which is guaranteed by the Constitution (American Bible Society v.
City of Manila, 101 Phil. 386).

• With regard to Ordinance No. 2529, appellant contends that it is

unconstitutional and illegal because it restrains the free exercise and
enjoyment of the religious profession and worship of appellant.
• Article III, section 1 of the Constitution of the Philippines, guarantees the
freedom of religious profession and worship. The constitutional guaranty
of the free exercise and enjoyment of religious profession and worship
carries with it the right to disseminate religious information. Any
restraints of such right can only be justified like other restraints of
freedom of expression on the grounds that there is a clear and present
danger of any substantive evil which the State has the right to prevent".
In the case at bar the license fee herein involved is imposed upon
appellant for its distribution and sale of bibles and other religious
literature.

c. Tolentino vs. Secretary of Finance, GR No. 115455 dated August 25, 1994 and
October 30, 1995 (motion for reconsideration)
• The free exercise of religion clause does not prohibit the imposition of tax on the sale
of religious materials in a religious organization.
• As held by the US Supreme Court in the case of Jimmy Swaggart Ministires vs. Board of
Equalization(1990), the Court ruled that you could tax sale of religious materials by
religious organizations without violating freedom of religion. Therefore, the sale of
religious articles by the Philippine Bible Society, does not violate the freedom of religion
in imposing the vat.
• The VAT registration fee, although fixed in amount, is not imposed for the exercise of a
privilege but only for defraying part of the cost of registration.

5. Infringement of Press Freedom

a. Sec. 4 Art. III of the Constitution
Basis: No law shall be passed abridging the freedom of speech, of expression, or of the press,
or the right of the people peaceably to assemble and petition the government for redress of
grievances (Art. III, Sec. 4)

d. Tolentino vs. Secretary of Finance, GR No. 115455 dated August 25, 1994 and
October 30, 1995 (motion for reconsideration)
• Even with due recognition of its high estate and its importance in a democratic society,
however the press is not immune from general regulation by the State. It has been held
that the publisher of a newspaper has no immunity from the application of general laws.
He has no special privilege to invade the rights and liberty of others. He must answer
for libel. He may be punished for contempt of court. Like others, he must pay equitable
and nondiscriminatory taxes on his business.
• With respect to the first contention, it would suffice to say that since the law granted
the press a privilege, the law could take back the privilege anytime without offense to
the Constitution. The reason is simple: by granting exemptions, the State does not
forever waive the exercise of its sovereign prerogative

9. Tax Rulings

17
1. Definition
BIR rulings, by the way, and the revenue regulations are not laws themselves but
they have the force and effect of laws.
2. Revenue Regulations (“RR”) No. 5-2012 dated April 2, 2012
All rulings issued prior to January 1, 1998 shall no longer have any binding effect.
Consequently, these rulings cannot be invoked as basis for any current business
transaction/s. Neither can these rulings be used as basis for securing legal tax
opinions/rulings.
3. Commissioner’s Ruling (Sec. 7(B) of the NIRC)
SEC. 7.Authority of the Commissioner to Delegate Power. - The Commissioner may
delegate the powers vested in him under the pertinent provisions of this Code to any or
such subordinate officials with the rank equivalent to a division chief or higher, subject to
such limitations and restrictions as may be imposed under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner:
Provided, however, That the following powers of the Commissioner shall not be delegated:

(b) The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau;

4. Power of the CIR to Interpret /Review/Appeal to Sec. of Finance (Sec. 4 of the NIRC)

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of Internal Revenue is vested in
the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals.

a. Honda Cars Philippines, Inc. vs. Honda Cars Technical Specialist Supervisors
Union, GR No. 204142 dated November 19, 2014
• The Voluntary Arbitrator has no competence to rule on the taxability of
the gas allowance and on the propriety of the withholding of tax. These
issues are clearly tax matters, and do not involve labor disputes. To be
exact, they involve tax issues within a labor relations setting as they pertain
to questions of law on the application of Section 33 (A) of the NIRC. They
do not require the application of the Labor Code or the interpretation of
the MOA and/or company personnel policies. Furthermore, the company
and the union cannot agree or compromise on the taxability of the gas
allowance. Taxation is the State’s inherent power; its imposition cannot be
subject to the will of the parties.
• Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive
and original jurisdiction to interpret the provisions of the NIRC and other
tax laws, subject to review by the Secretary of Finance. Consequently, if
the company and/or the union desire/s to seek clarification of these issues,
it/they should have requested for a tax ruling17 from the Bureau of Internal
Revenue (BIR). Any revocation, modification or reversal of the CIR’s ruling
shall not be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers, except in the following cases:
o Where the taxpayer deliberately misstates or omits material facts
from his return or any document required of him by the BIR;

18
 o Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; or
o Where the taxpayer acted in bad faith.18

b. Banco De Oro vs. Republic, GR No. 198756 dated January 13, 2015
• It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific and
less general interpretations of tax laws) which are issued from time
to time by the Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous.
Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.213(Citations omitted)
• In Misamis Oriental Association of Coco Traders, Inc. v. Department
of Finance Secretary,218 this court stated that the Commissioner of
Internal Revenue is not bound by the ruling of his predecessors,219
but, to the contrary, the overruling of decisions is inherent in the
interpretation of laws:
• [I]n considering a legislative rule a court is free to make three
inquiries:
o (i) whether the rule is within the delegated authority of the
administrative agency;
o (ii) whether itis reasonable; and
o (iii) whether it was issued pursuant to proper procedure.

But the court is not free to substitute its judgment as to the

desirability or wisdom of the rule for the legislative body, by its
delegation of administrative judgment, has committed those
questions to administrative judgments and not to judicial judgments.

In the case of an interpretative rule, the inquiry is not into the validity
but into the correctness or propriety of the rule. As a matter of power
a court, when confronted with an interpretative rule, is free to (i) give
the force of law to the rule; (ii) go to the opposite extreme and
substitute its judgment; or (iii) give some intermediate degree of
authoritative weight to the interpretative rule.

5. Confederation for Unity, Recognition and Advancement of Government Employees vs.

Commissioner - BIR, GR No. 213446 dated July 3, 2018
• The CIR's exercise of its power to interpret tax laws comes in the form of
revenue issuances, which include RMOs that provide "directives or
instructions; prescribe guidelines; and outline processes, operations,
activities, workflows, methods and procedures necessary in the
implementation of stated policies, goals, objectives, plans and programs
of the Bureau in all areas of operations, except auditing."43 These
revenue issuances are subject to the review of the Secretary of Finance.
In relation thereto, Department of Finance Department Order No. 007-
0244 issued by the Secretary of Finance laid down the procedure and
requirements for filing an appeal from the adverse ruling of the CIR to

19
 the said office. A taxpayer is granted a period of thirty (30) days from
receipt of the adverse ruling of the CIR to file with the Office of the
Secretary of Finance a request for review in writing and under oath.

• As earlier stated, Section 4 of the NIRC of 1997, as amended, grants the

CIR the power to issue rulings or opinions interpreting the provisions of
the NIRC or other tax laws. However, the CIR cannot, in the exercise of
such power, issue administrative rulings or circulars inconsistent with the
law sought to be applied. Indeed, administrative issuances must not
override, supplant or modify the law, but must remain consistent with
the law they intend to carry out.61 The courts will not countenance
administrative issuances that override, instead of remaining consistent
and in harmony with the law they seek to apply and implement.62 Thus,
in Philippine Bank of Communications v. Commissioner of Internal
Revenue,63the Court upheld the nullification of RMC No. 7-85 issued by
the Acting Commissioner of Internal Revenue because it was contrary to
the express provision of Section 230 of the NIRC of 1977.
6. Non-Retroactivity of Rulings (Sec. 246 of the NIRC)
SEC. 246. Non- Retroactivity of Rulings. - Any revocation, modification or
reversal of any of the rules and regulations promulgated in accordance with
the preceding Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the
following cases:

(a) Where the taxpayer deliberately misstates or omits material facts

from his return or any document required of him by the Bureau of
Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal

Revenue are materially different from the facts on which the ruling is
based; or

(c) Where the taxpayer acted in bad faith.

a. CIR vs. Phil. Healthcare Providers, GR No. 168129 dated April 24, 2007
• Relative to the second issue, Section 246 of the 1997 Tax Code, as
amended, provides that rulings, circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue have no retroactive
application if to apply them would prejudice the taxpayer. The exceptions
to this rule are: (1) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the
Bureau of Internal Revenue; (2) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based, or (3) where the taxpayer acted in bad faith.
• It is thus apparent that when VAT Ruling No. 231-88 was issued in
respondents favor, the term health maintenance organization was yet
unknown or had no significance for taxation purposes. Respondent,
therefore, believed in good faith that it was VAT exempt for the taxable
years 1996 and 1997 on the basis of VAT Ruling No. 231-88.

b. CIR vs. Burmeister and Wain, GR No. 153205 dated Jaunary22, 2007

20
 • Petitioners filing of his Answer before the CTA challenging respondents
claim for refund effectively serves as a revocation of VAT Ruling No. 003-
99 and BIR Ruling No. 023-95. However, such revocation cannot be given
retroactive effect since it will prejudice respondent. Changing respondents
status will deprive respondent of a refund of a substantial amount
representing excess output tax.[30] Section 246 of the Tax Code provides
that any revocation of a ruling by the Commissioner of Internal Revenue
shall not be given retroactive application if the revocation will prejudice
the taxpayer. Further, there is no showing of the existence of any of the
exceptions enumerated in Section 246 of the Tax Code for the retroactive
application of such revocation.
c. CIR vs. CA, GR No. 117982 dated February 6, 1997 [read also concurring opinion of
Justice Vitug]
• Without doubt, private respondent would be prejudiced by the retroactive
application of the revocation as it would be assessed deficiency excise tax.
• VITUG, J.:I concur in the ponencia written by my esteemed colleague, Mr.
Justice Josue N. Bellosillo. I only would like to stress that the 1988 opinion
of the Commissioner of Internal Revenue cannot be considered void,
considering that it evinces what the former commissioner must have felt
to be a real inconsistency between Section 127 and Section 142 of the Tax
Code. The non-retroactivity proscription under Section 246 of the Tax Code
can thus aptly apply. I reserve my vote, however, in a situation where, as
the Solicitor General so points out, the revoked ruling is patently null and
void in which case it could possibly be disregarded as being inexistent from
the very beginning.
• TAXATION; NATIONAL INTERNAL REVENUE CODE; AD VALOREM TAX; DEFICIENCY TAX
.ASSESSMENT BASED ON THE RETROACTIVE APPLICATION OF BIR RULING, WITHOUT
LEGAL BASIS. — We cannot sustain petitioner. The deficiency tax assessment issued by
petitioner against private respondent is without legal basis because of the prohibition
against the retroactive application of the revocation of BIR rulings in the absence of bad
faith on the part of private Respondent. The present dispute arose from the discrepancy
in the taxable base on which the excise tax is to apply on account of two incongruous BIR
Rulings: (1) BIR Ruling 473-88 dated 4 October 1988 which excluded the VAT from the tax
base in computing the fifteen percent (15%) excise tax due; and, (2) BIR Ruling 017-91
dated 11 February 1991 which included back the VAT in computing the tax base for
purposes of the fifteen percent (15%) ad valorem tax. The question as to the correct
computation of the excise tax on cigarettes in the case at bar has been sufficiently
addressed by BIR Ruling 017-91 dated 11 February 1991 which revoked BIR Ruling 473-88
dated 4 October 1988.

d. CIR vs. Filinvest Development Corporation, GR Nos. 163653 and 167689 dated
July 19, 2011
• In its appeal before the CA, the CIR argued that the foregoing ruling was
later modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined
that inter-office memos evidencing lendings or borrowings extended by a
corporation to its affiliates are akin to promissory notes, hence, subject to
documentary stamp taxes.[64] In brushing aside the foregoing argument,
however, the CA applied Section 246 of the 1993 NIRC[65] from which
proceeds the settled principle that rulings, circulars, rules and regulations
promulgated by the BIR have no retroactive application if to so apply them
would be prejudicial to the taxpayers.[66] Admittedly, this rule does not
apply: (a) where the taxpayer deliberately misstates or omits material facts
from his return or in any document required of him by the Bureau of
Internal Revenue; (b) where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different from the facts on

21
 which the ruling is based; or (c) where the taxpayer acted in bad
faith.[67] Not being the taxpayer who, in the first instance, sought a ruling
from the CIR, however, FDC cannot invoke the foregoing principle on non-
retroactivity of BIR rulings.

e. CIR vs. San Roque Power, GR No. 187485 dated February 12, 2013 and other cases

• Under Section 246, taxpayers may rely upon a rule or ruling issued by the
Commissioner from the time the rule or ruling is issued up to its reversal
by the Commissioner or this Court. The reversal is not given retroactive
effect. This, in essence, is the doctrine of operative fact. There must,
however, be a rule or ruling issued by the Commissioner that is relied upon
by the taxpayer in good faith. A mere administrative practice, not
formalized into a rule or ruling, will not suffice because such a mere
administrative practice may not be uniformly and consistently applied. An
administrative practice, if not formalized as a rule or ruling, will not be
known to the general public and can be availed of only by those within
formal contacts with the government agency.
• Since the law has already prescribed in Section 246 of the Tax Code
how the doctrine of operative fact should be applied, there can be no
invocation of the doctrine of operative fact other than what the law has
specifically provided in Section 246. In the present case, the rule or ruling
subject of the operative fact doctrine is BIR Ruling No. DA-489-03 dated 10
December 2003. Prior to this date, there is no such rule or ruling calling for
the application of the operative fact doctrine in Section 246. Section246,
being an exemption to statutory taxation, must be applied strictly against
the taxpayer.
• San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03
because it filed its judicial claim prematurely on 10 April 2003, before the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003. To repeat, San
Roque cannot claim that it was misled by the BIR into filing its judicial claim
prematurely because BIR Ruling No. DA-489-03 was issued only after San
Roque filed its judicial claim.
• Taganito, however, filed its judicial claim with the CTA on 14 February
2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December
2003. Truly, Taganito can claim that in filing its judicial claim prematurely
without waiting for the 120-day period to expire, it was misled by BIR
Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling
No. DA-489-03, which shields the filing of its judicial claim from the vice of
prematurity.
• Philex’s situation is not a case of premature filing of its judicial claim but of
late filing, indeed very late filing. BIR Ruling No. DA-489-03 allowed
premature filing of a judicial claim, which means non-exhaustion of the
120-day period for the Commissioner to act on an administrative claim.
Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex
did not file its judicial claim prematurely but filed it long after the lapse of
the 30-day period following the expiration of the 120-day period. In fact,
Philex filed its judicial claim 426 days after the lapse of the 30-day period.
f. CIR vs. San Roque Power, GR No. 187485 dated October8, 2013
• Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.
Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the
time of its issuance on 10 December 2003 up to its reversal by this

22
 Court in Aichi on 6 October 2010, where this Court held that the
120+30 day periods are mandatory and jurisdictional
• However, BIR Ruling No. DA-489-03 cannot be given retroactive
effect for four reasons: first, it is admittedly an erroneous
interpretation of the law; second, prior to its issuance, the BIR held
that the 120-day period was mandatory and jurisdictional, which is
the correct interpretation of the law; third, prior to its issuance, no
taxpayer can claim that it was misled by the BIR into filing a judicial
claim prematurely; and fourth, a claim for tax refund or credit, like a
claim for tax exemption, is strictly construed against the taxpayer.
g. Banco De Oro vs. Republic, GR No. 198756 dated August 16, 2016 – resolution on
the Motion for Reconsideration
• The phrase "at any one time" is ambiguous in the context of the financial
market. Hence, petitioner-intervenor RCBC and the rest of the investors
relied on the opinions of the Bureau of Internal Revenue in BIR Ruling Nos.
020-2001, 035-2001160 dated August 16, 2001, and DA-175-01161 dated
September 29, 2001 to vested their rights in the exemption from the final
withholding tax. In sum, these rulings pronounced that to determine
whether the financial assets, i.e., debt instruments and securities, are
deposit substitutes, the "20 or more individual or corporate lenders" rule
must apply. Moreover, the determination of the phrase "at any one time"
to determine the "20 or more lenders" is to be determined at the time of
the original issuance. This being the case, the PEACe Bonds were not to be
treated as deposit substitutes.

• The previous interpretations given to an ambiguous law by the

Commissioner of Internal Revenue, who is charged to carry out its
provisions, are entitled to great weight, and taxpayers who relied on the
same should not be prejudiced in their rights.166 Hence, this Court's
construction should be prospective; otherwise, there will be a violation of
due process for failure to accord persons, especially the parties affected by
it, fair notice of the special burdens imposed on them.
7. Appeal of Rulings – RTC or CTA?
a. Banco De Oro vs. Republic, GR No. 198756, January 13, 2015 and resolution on the
Motion for reconsideration, GR No. 198756 dated August 16, 2016
• [W]hile there is no express grant of such power, with respect to the CTA,
Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that
judicial power shall be vested in one Supreme Court and in such lower
courts as may be established by law and that judicial power includes the
duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether
or not there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality of the
Government.
• On the strength of the above constitutional provisions, it can be fairly
interpreted that the power of the CTA includes that of determining
whether or not there has been grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of the RTC in issuing an interlocutory
order in cases falling within the exclusive appellate jurisdiction of the tax
court. It, thus, follows that the CTA, by constitutional mandate, is vested
with jurisdiction to issue writs of certiorari in these cases.59 (Emphasis in
the original)

23
 • This Court further explained that the Court of Tax Appeals' authority to
issue writs of certiorari is inherent in the exercise of its appellate
jurisdiction:
• A grant of appellate jurisdiction implies that there is included in it the
power necessary to exercise it effectively, to make all orders that will
preserve the subject of the action, and to give effect to the final
determination of the appeal. It carries with it the power to protect that
jurisdiction and to make the decisions of the court thereunder effective.
The court, in aid of its appellate jurisdiction, has authority to control all
auxiliary and incidental matters necessary to the efficient and proper
exercise of that jurisdiction. For this purpose, it may, when necessary,
prohibit or restrain the performance of any act which might interfere with
the proper exercise of its rightful jurisdiction in cases pending before it.

• Lastly, it would not be amiss to point out that a court which is endowed
with a particular jurisdiction should have powers which are necessary to
enable it to act effectively within such jurisdiction. These should be
regarded as powers which are inherent in its jurisdiction and the court
must possess them in order to enforce its rules of practice and to suppress
any abuses of its process and to defeat any attempted thwarting of such
process.

• In this regard, Section 1 of RA 9282 states that the CTA shall be of the same
level as the CA and shall possess all the inherent powers of a court of
justice.

b. Confederation for Unity, Recognition and Advancement of Government

Employees vs. Commissioner - BIR, GR No. 213446 dated July 3, 2018
• SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases. – The power to interpret the provisions of this
Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary
of Finance.
• The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under this Code or other laws or
portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals.
• In The Philippine American Life and General Insurance Co. v. Secretary of
Finance,49 the Court held that rulings of the Secretary of Finance in its exercise of
its power of review under Section 4 of the NIRC of 1997, as amended, are
appealable to the CTA.50 The Court explained that while there is no law which
explicitly provides where rulings of the Secretary of Finance under the adverted
to NIRC provision are appealable, Section 7(a)51 of RA No. 1125, the law creating
the CTA, is nonetheless sufficient, albeit impliedly, to include appeals from the
Secretary's review under Section 4 of the NIRC of 1997, as amended.
• Moreover, echoing its pronouncements in City of Manila v. Grecia-Cuerdo,52 that
the CTA has the power of certiorari within its appellate jurisdiction, the Court
declared that "it is now within the power of the CTA, through its power
of certiorari, to rule on the validity of a particular administrative rule or
regulation so long as it is within its appellate jurisdiction. Hence, it can now rule
not only on the propriety of an assessment or tax treatment of a certain
transaction, but also on the validity of the revenue regulation or revenue
memorandum circular on which the said assessment is based."53
• Subsequently, in Banco de Oro v. Republic,54 the Court, sitting En Banc, further
held that the CTA has exclusive appellate jurisdiction to review, on certiorari, the

24
 constitutionality or validity of revenue issuances, even without a prior issuance
of an assessment. The Court En Banc reasoned:
• We revert to the earlier rulings in Rodriguez, Leal, and Asia International
Auctioneers, Inc. The Court of Tax Appeals has exclusive jurisdiction to determine
the constitutionality or validity of tax laws, rules and regulations, and other
administrative issuances of the Commissioner of Internal Revenue.

On the strength of the above constitutional provisions, it can be

fairly interpreted that the power of the CTA includes that of
determining whether or not there has been grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of
the RTC in issuing an interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. It, thus, follows that
the CTA, by constitutional mandate, is vested with jurisdiction to
issue writs of certiorari in these cases. (Emphasis in the original)
This Court further explained that the Court of Tax Appeals'
authority to issue writs of certiorari is inherent in the exercise of its
appellate jurisdiction:
• A grant of appellate jurisdiction implies that there is included in it
the power necessary to exercise it effectively, to make all orders
that will preserve the subject of the action, and to give effect to the
final determination of the appeal. It carries with it the power to
protect that jurisdiction and to make the decisions of the court
thereunder effective. The court, in aid of its appellate jurisdiction,
has authority to control all auxiliary and incidental matters
necessary to the efficient and proper exercise of that jurisdiction.
For this purpose, it may, when necessary, prohibit or restrain the
performance of any act which might interfere with the proper
exercise of its rightful jurisdiction in cases pending before it.
• In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level
as the CA and shall possess all the inherent powers of a court of justice.

c. Compare with CIR vs. CTA and Petron, GR No. 207843 dated July 15, 2015 (Perlas-
Bernabe)

The CTA is a court of special jurisdiction, with power to review by appeal

decisions involving tax disputes rendered by either the CIR or the
COC.1âwphi1 Conversely, it has no jurisdiction to determine the validity of a
ruling issued by the CIR or the COC in the exercise of their quasi-legislative
powers to interpret tax laws. These observations may be deduced from a
reading of Section 7 of RA 1125,22 as amended by RA 9282,23 entitled "An
Act Creating the Court of Tax Appeals," enumerating the cases over which
the CT A may exercise its jurisdiction:

Sec. 7. Jurisdiction. -The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under the

25
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a denial;

3. Decisions, orders or resolutions of the Regional Trial Comis in local tax

cases originally decided or resolved by them in the exercise of their original
or appellate jurisdiction;

4. Decisions of the Commissioner of Customs in cases involving liability for

customs duties, fees or other money charges, seizure, detention or release
of property affected, fines, forfeitures or other penalties in relation thereto,
or other matters arising under the Customs Law or other laws administered
by the Bureau of Customs;

5. Decisions of the Central Board of Assessment Appeals in the exercise of its

appellate jurisdiction over cases involving the assessment and taxation of
real property originally decided by the provincial or city board of assessment
appeals;

6. Decisions of the Secretary of Finance on customs cases elevated to him

automatically for review from decisions of the Commissioner of Customs
which are adverse to the Government under Section 2315 of the Tariff and
Customs Code;

7. Decisions of the Secretary of Trade and Industry, in the case of

nonagricultural product, commodity or article, and the Secretary of
Agriculture in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard measures under
Republic Act No. 8800, where either party may appeal the decision to impose
or not to impose said duties.

b. Jurisdiction over cases involving criminal offenses as herein provided:

1. Exclusive original jurisdiction over all criminal offenses arising from

violations of the National Internal Revenue Code or Tariff and Customs Code
and other laws administered by the Bureau of Internal Revenue or the
Bureau of Customs: Provided, however, That offenses or felonies mentioned
in this paragraph where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One million pesos (₱1,000,000.00)
or where there is no specified amount claimed shall be tried by the regular
Courts and the jurisdiction of the CTA shall be appellate. Any provision of law
or the Rules of Court to the contrary notwithstanding, the criminal action
and the corresponding civil action for the recovery of civil liability for taxes
and penalties shall at all times be simultaneously instituted with, and jointly
determined in the same proceeding by the CT A, the filing of the criminal
action being deemed to necessarily carry with it the filing of the civil action,
and no right to reserve the filling of such civil action separately from the
criminal action will be recognized.

2. Exclusive appellate jurisdiction in criminal offenses:

a. Over appeals from the judgments, resolutions or orders of the Regional

Trial Courts in tax cases originally decided by them, in their respective
territorial jurisdiction.

b. Over petitions for review of the judgments, resolutions or orders of the

Regional Trial Courts in the exercise of their appellate jurisdiction over tax

26
 cases originally decided by the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in their respective jurisdiction.

c. Jurisdiction over tax collection cases as herein provided:

1. Exclusive original jurisdiction in tax collection cases involving final and

executory assessments for taxes, fees, charges and penalties: Provided,
however, That collection cases where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is less than One million pesos
(₱1,000,000.00) shall be tried by the proper Municipal Trial Court,
Metropolitan Trial Court and Regional Trial Court.

2. Exclusive appellate jurisdiction in tax collection cases:

a. Over appeals from the judgments, resolutions or orders of the Regional

Trial Courts in tax collection cases originally decided by them, in their
respective territorial jurisdiction.

b. Over petitions for review of the judgments, resolutions or orders of the

Regional Trial Courts in the exercise of their appellate jurisdiction over tax
collection cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective
jurisdiction. (Emphasis supplied)

In this case, Petron's tax liability was premised on the COC's issuance of CMC
No. 164-2012, which gave effect to the CIR's June 29, 2012 Letter interpreting
Section 148 (e) of the NIRC as to include alkyl ate among the articles subject
to customs duties, hence, Petron's petition before the CTA ultimately
challenging the legality and constitutionality of the CIR's aforesaid
interpretation of a tax provision. In line with the foregoing discussion,
however, the CIR correctly argues that the CT A had no jurisdiction to take
cognizance of the petition as its resolution would necessarily involve a
declaration of the validity or constitutionality of the CIR's interpretation of
Section 148 (e) of the NIRC, which is subject to the exclusive review by the
Secretary of Finance and ultimately by the regular courts. In British American
Tobacco v. Camacho,24 the Court ruled that the CTA's jurisdiction to resolve
tax disputes excludes the power to rule on the constitutionality or validity of
a law, rule or regulation, to wit:

While the above statute confers on the CTA jurisdiction to resolve tax
disputes in general, this does not include cases where the constitutionality
of a law or rule is challenged. Where what is assailed is the validity or
constitutionality of a law, or a rule or regulation issued by the administrative
agency in the performance of its quasi-legislative function, the regular courts
have jurisdiction to pass upon the same. x x x.25

II. INCOME TAX

A. General Principles on Income Taxation 1. General

Situs Rules:
a. Sec. 23 of the NIRC

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided
in this Code:

27
 (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within
and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in international
trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived
from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable
only on income derived from sources within the Philippines.

2. Specific Situs Rules:

a. Sec. 42 of the NIRC
SEC. 42. Income from Sources Within the Philippines. -

(A)Gross Income from Sources Within the Philippines. - The following items of gross
income shall be treated as gross income from sources within the Philippines:

(1) Interests. - Interests derived from sources within the Philippines, and interests
on bonds, notes or other interest-bearing obligation of residents, corporate or
otherwise;

(2) Dividends. - The amount received as dividends:

(a) From a domestic corporation; and

(b) From a foreign corporation, unless less than fifty percent (50%) of the gross
income of such foreign corporation for the three-year period ending with the close
of its taxable year preceding the declaration of such dividends or for such part of
such period as the corporation has been in existence) was derived from sources
within the Philippines as determined under the provisions of this Section; but only
in an amount which bears the same ratio to such dividends as the gross income of
the corporation for such period derived from sources within the Philippines bears
to its gross income from all sources;

(3) Services.- Compensation for labor or personal services performed in the

Philippines;

(4) Rentals and Royalties. - Rentals and royalties from property located in the
Philippines or from any interest in such property, including rentals or royalties for -

(a) The use of or the right or privilege to use in the Philippines any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark, trade brand
or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or
scientific equipment;

28
(c) The supply of scientific, technical, industrial or commercial knowledge or
information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished
as a means of enabling the application or enjoyment of, any such property or right
as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph
(b) or any such knowledge or information as is mentioned in paragraph (c);

(e) The supply of services by a nonresident person or his employee in connection

with the use of property or rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased from such nonresident person;

(f) Technical advice, assistance or services rendered in connection with technical

management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.

(5) Sale of Real Property. -Gains, profits and income from the sale of real property
located in the Philippines; and

(6) Sale of Personal Property. - Gains; profits and income from the sale of personal
property, as determined in Subsection (E) of this Section.

(B) Taxable Income From Sources Within the Philippines. -

(1) General Rule. - From the items of gross income specified in Subsection (A) of this
Section, there shall be deducted the expenses, losses and other deductions properly
allocated thereto and a ratable part of expenses, interests, losses and other
deductions effectively connected with the business or trade conducted exclusively
within the Philippines which cannot definitely be allocated to some items or class of
gross income: Provided, That such items of deductions shall be allowed only if fully
substantiated by all the information necessary for its calculation. The remainder, if
any, shall be treated in full as taxable income from sources within the Philippines.

(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed
from the item of gross income specified in subsection (A) unless indebtedness was
actually incurred to provide funds for use in connection with the conduct or
operation of trade or business in the Philippines.

(C) Gross Income From Sources Without the Philippines. - The following items of
gross income shall be treated as income from sources without the Philippines:

(1) Interests other than those derived from sources within the Philippines as
provided in paragraph (1) of Subsection (A) of this Section;

(2) Dividends other than those derived from sources within the Philippines as
provided in paragraph (2) of Subsection (A) of this Section;

(3) Compensation for labor or personal services performed without the Philippines;

29
(4) Rentals or royalties from property located without the Philippines or from any
interest in such property including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents, copyrights, secret processes and
formulas, goodwill, trademarks, trade brands, franchises and other like properties;
and

(5) Gains, profits and income from the sale of real property located without the
Philippines.

(D) Taxable Income From Sources Without the Philippines. - From the items of gross
income specified in Subsection (C) of this Section, there shall be deducted the
expenses, losses, and other deductions properly apportioned or allocated thereto
and a ratable part of any expense, loss or other deduction which cannot definitely
be allocated to some items or classes of gross income. The remainder, if any, shall
be treated in full as taxable income from sources without the Philippines.

(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of
gross income, expenses, losses and deductions, other than those specified in
Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner. Where items of
gross income are separately allocated to sources within the Philippines, there shall
be deducted (for the purpose of computing the taxable income therefrom) the
expenses, losses and other deductions properly apportioned or allocated thereto
and a ratable part of other expenses, losses or other deductions which cannot
definitely be allocated to some items or classes of gross income. The remainder, if
any, shall be included in full as taxable income from sources within the Philippines.
In the case of gross income derived from sources partly within and partly without
the Philippines, the taxable income may first be computed by deducting the
expenses, losses or other deductions apportioned or allocated thereto and a ratable
part of any expense, loss or other deduction which cannot definitely be allocated to
some items or classes of gross income; and the portion of such taxable income
attributable to sources within the Philippines may be determined by processes or
formulas of general apportionment prescribed by the Secretary of Finance. Gains,
profits and income from the sale of personal property produced (in whole or in part)
by the taxpayer within and sold without the Philippines, or produced (in whole or in
part) by the taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the Philippines.

Gains, profits and income derived from the purchase of personal property within
and its sale without the Philippines, or from the purchase of personal property
without and its sale within the Philippines shall be treated as derived entirely form
sources within the country in which sold: Provided, however, That gain from the
sale of shares of stock in a domestic corporation shall be treated as derived entirely
form sources within the Philippines regardless of where the said shares are sold.
The transfer by a nonresident alien or a foreign corporation to anyone of any share
of stock issued by a domestic corporation shall not be effected or made in its book
unless: (1) the transferor has filed with the Commissioner a bond conditioned upon
the future payment by him of any income tax that may be due on the gains derived
from such transfer, or (2) the Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized from such sale or transfer have
been paid. It shall be the duty of the transferor and the corporation the shares of
which are sold or transferred, to advise the transferee of this requirement.

30
 (F) Definitions. - As used in this Section the words 'sale' or 'sold' include 'exchange'
or 'exchanged'; and the word 'produced' includes 'created', 'fabricated',
'manufactured', 'extracted', 'processed', 'cured' or 'aged'.

b. National Development Company vs. CIR, G.R. No. 53961 dated June 30, 1987

The law specifies: 'Interest derived from sources within the Philippines, and
interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.' Nothing there speaks of the 'act or activity' of non-
resident corporations in the Philippines, or place where the contract is
signed. The residence of the obligor who pays the interest rather than the
physical location of the securities, bonds or notes or the place of payment, is
the determining factor of the source of interest income
c. CIR vs. British Overseas Airways Corporation, GR Nos. L-65773-74 dated April 30,
1987
The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines.

In this case, the sale of tickets in the Philippines is the activity that produced the income.
The tickets exchanged hands here and payments for fares were also made here in Philippine
currency. The SITUS of the source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine territory, enjoying the protection accorded
by the Philippine Government.

d. CIR vs. Juliane Baier-Nickel, GR No. 153793 dated August 29, 2006
The source of an income is the property, activity or service that produced
the income. For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest
the burden of proving that the transaction subjected to tax is actually exempt from taxation.

In the instant case, respondent failed to give substantial evidence to prove that she
performed the incoming producing service in Germany, which would have entitled her to a
tax exemption for income from sources outside the Philippines.
B. Individual Income Taxation
1. Resident Citizens vs. Non-Resident Citizens
With the passage of RA 8424, however, nonresident citizens became subject to tax only on
their income from Philippine sources. Only resident citizens are taxed on their
worldwide income. Clearly, for Philippine income tax purposes, it is vital to determine
whether a Filipino is a resident or a nonresident citizen

2. Nonresident Citizens vs. Overseas Contract Workers

a. Sec. 22(E) of the NIRC
(E) The term 'nonresident citizen' means;

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.

31
 (3) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year.

(4) A citizen who has been previously considered as nonresident citizen and who arrives in
the Philippines 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 in which he arrives in
the Philippines with respect to his income derived from sources abroad until the date of his
arrival in the Philippines.

(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be for purpose of this Section.
b. BIR Ruling No. 033-00 dated September 5, 2000
Section 23(C) of the Tax Code of 1997 provides that an individual citizen of the Philippines
who is working and deriving income from abroad as an overseas contract worker is taxable
only on income from sources within the Philippines.
Corollary thereto, Section 22(E)(3) of the same Code provides that a citizen of the Philippines
who works and derives income from abroad and whose employment thereat requires him
to be physically present abroad most of the time during the taxable year.
Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sourced
income for being a non-resident citizen or for being an overseas contract worker (CW). All
employees whose services are rendered abroad for being seconded or assigned for at least
183 days may fall under the first category and are therefore exempt from payment of
Philippine income tax. The phrase "most of the time" shall mean that the said citizen shall
have stayed abroad for at least 183 days in a taxable year. (Sec. (2)(c), Revenue Regulations
No. 1-79)

The same exemption applies to an overseas contract worker but as such worker, the time
spent abroad is not material for tax exemption purposes. All that is required is for the
worker's employment contract to pass through and be registered with the Philippine
Overseas Employment Agency (POEA). (BIR Ruling No. 033-2000 dated September 05, 2000)
c. RR No. 1-2011 dated February 24, 2011
• OCW is exempt from IT for income arising from his overseas employment. All his
earnings within- subject to tax.
• Subject to VAT – 1.5M (not VAT registered) > 3% GS/R
• Exemption in travel tax = OEC
• Remittance – exempted.

3. Nonresident Aliens Engaged in Trade or Business vs. Nonresident Aliens Not Engaged in
Trade or Business
a. Sec. 25(A)(1) of the NIRC
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall
be subject to an income tax in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within the Philippines. A nonresident alien
individual who shall come to the Philippines and stay therein for an aggregate period of more than
one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing
business in the Philippines'. Section 22 (G) of this Code notwithstanding .
b. BIR Ruling No. DA-056-05 dated February 16, 2005

4. Minimum Wage Earners

a. Sec. 22(HH) of the NIRC
The term 'minimum wage earner' shall refer to a worker in the private sector paid the statutory
minimum wage or to an employee in the public sector with compensation income of not more than
the statutory minimum wage in the non-agricultural sector where he/she is assigned.
b. Sec. 2.78.1(B)(13) of RR No. 11-2018 dated January 31, 2018
Compensation income of Minimum Wage Earners (MWEs) who work in the private sector and
being paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and

32
 Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to
the place where he/she is assigned, as well as the compensation of employees in the public
sector who are paid not more than the SMW applicable to non-agricultural sector, as fixed by RTW
PB/NWPC, applicable to the place where he/she is assigned.

‘Statutory Minimum Wage’ (SMW) shall refer to the rate fixed by theRegional Tripartite Wage and
Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment (DOLE). The RTWPB of each region shall determine
the wage rates in the different regions based on established criteriaand shall be the basis of
exemption from income tax for this purpose.

The NWPC shall officially submit a Matrix of Wage Order by region, and any changes thereto, within
ten (10) days after its effectivity to the Assistant Commissioner, Collection Service, for
circularization in the BIR.

Aside from the SMW, the holiday pay, overtime pay, night shift differential pay, and hazard pay,
earned by the aforementioned MWE shall likewise be covered by the above exemption. For
purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs
who were actually assigned to danger or strife-torn areas, disease-infested places, or in distressed
or isolated stations and camps, which expose them to great danger or contagion or peril to life.
Any hazard paid to MWEs which does not satisfy the above criteria is deemed subject to income
tax and consequently, withholding tax on the said hazard pay.

In case of hazardous employment, the employer shall indicate in the Alphabetical List of
Employees, the MWEs who received the hazard pay, the period of employment, the amount of
hazard pay, and the justification for such payment as certified by the concerned DOLE/allied
agency, which certification is part of the attachment in the filing of the Annual Information
Return (BIR Form 1604-C). In the case of employees under the public sector, the document to be
attached is the Department of Budget Management (DBM) Circular related to such payment of
hazard pay.

Additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of ₱90,000.00, taxable allowances, and other taxable income given to
an MWE by the same employer other than those which are expressly exempt from income tax shall
be subject to withholding tax using the withholding tax table.

Likewise, MWEs receiving other income from other sources in addition to compensation income,
such as income from other concurrent employers, from the conduct of trade, business, or practice
of profession, except income subject to final tax, are subject to income tax only to the extent of
income other than SMW, holiday pay, overtime pay, night shift differential pay, and
hazard pay earned during the taxable year.

Any income subject to income tax may be subject to withholding tax; however, income exempt
from income tax is consequently exempt from withholding tax. Further, income not subject to
withholding tax does not necessarily mean that it is not subject to income tax.

Any reduction or diminution of wages for purposes of exemption from income tax shall constitute
misrepresentation and therefore, shall result to the automatic disallowance of expense, i.e.
compensation and benefits account, on the part of the employer. The offenders may be criminally
prosecuted under existing laws.

(13) Compensation during the year not exceeding Two hundred fifty thousand pesos (₱250,000).

c. Sec. 3(B) of RR No. 8-2008 dated January 25, 2018 X

d. Q10-13/A10-13 of Revenue Memorandum Circular (“RMC”) No. 50-2018 dated
May 11, 2018
10. Prescribed Stat. Min. Wage per geographical region.
11. MWE exempt- basic SMW, OT, holiday pay, night shift deferential pay and
hazard pay.

33
 12. The MWE will still be exempt from income tax on his SMW including the
other income earned specifically enumerated as exempt under the law. However,
income other than those in the enumeration shall already be taxable. The taxable
income shall be computed by deducting the non-taxable/exempt portion and other
deductions from the gross compensation income. Then the resulting taxable
income shall be multiplied to the applicable income tax rate using the prescribed
tax table to get the amount of income tax due.

GCI – (Exempt + deductions) = Taxable income

TI * Scheduled rate

e. Soriano vs. Secretary of Finance, GR No. 184450 dated February 8, 2017

This Court ruled in the affirmative, considering that the increased exemptions were already
available on or before 15 April 1992, the date for the filing of individual income tax returns.
Further, the law itself provided that the new set of personal and additional exemptions
would be immediately available upon its effectivity. While R.A. 7167 had not yet become
effective during calendar year 1991, the Court found that it was a piece of social legislation
that was in part intended to alleviate the economic plight of the lower-income taxpayers.
For that purpose, the new law provided for adjustments "to the poverty threshold level"
prevailing at the time of the enactment of the law

T]he Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991

In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended
to afford immediate tax relief to individual taxpayers, particularly low-income compensation
earners. Indeed, if R.A. 9504 was to take effect beginning taxable year 2009 or half of the
year 2008 only, then the intent of Congress to address the increase in the cost of living in
2008 would have been negated.

The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be
computed on the basis of the calendar year.[30] The taxpayer is required to fi1e an income
tax return on the 15th of April of each year covering income of the preceding taxable
year.[31] The tax due thereon shall be paid at the time the return is filed

In the present case, the increased exemptions were already available much earlier than the
required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008,
more than nine months before the deadline for the filing of the income tax return for taxable
year 2008. Hence, individual taxpayers were entitled to claim the increased amounts for the
entire year 2008. This was true despite the fact that incomes were already earned or
received prior to the law's effectivity on 6 July 2008.
5. Option to be Taxed at 8% on Gross Sales/Receipts
a. Sec. 24(A)(2)(b) of the NIRC (as amended by RA 10963)
“(b) Rate of Tax on Income of “Purely Self-employed Individuals and/ or Professionals
Whose Gross Sales or Gross Receipts and Other Non-operating Income Does Not Exceed
the Value-added Tax (VAT) Threshold as Provided in Section 109(BB).— Self-employed
individuals and/or professionals shall have the option to avail of an eight percent (8%) tax
on gross sales or gross receipts and other non-operating income in excess of Two hundred
fifty thousand pesos (₱250,000) in lieu of the graduated income tax rates under Subsection
(A)(2)(a) of this Section and the percentage tax under Section 116 of this Code.
GS/ GR/ non operating income >250K = option 8% in lieu of graduated ITR.

b. Sec. 3(C) of RR No. 8-2018 dated January 25, 2018

(C) Self-Employed Individuals Earning Income Purely from Self-Employment or
Practice of Profession. - Individuals earning income purely from self-employment
and/or practice of profession whose gross sales/receipts and other non-operating
income does not exceed the value-added tax (VAT) threshold as provided under
Section 109 (BB) of the Tax Code, as amended, shall have the option to avail of:

34
 1. The graduated rates under Section 24(A)(2)(a) of the Tax Code, as
amended; OR
2. An eight percent (8%) tax on gross sales or receipts and other
nonoperating income in excess of two hundred fifty thousand pesos (P250,000.00)
in lieu of the graduated income tax rates under Section 24(A) and the percentage
tax under Section 1 16 all under the Tax Code, as amended.

• signify to elect 8% in the 1st quarter (otherwise graduated)

• irrevocable/ no amendment – taxable year.
• Not available to VAT registered/ subject to other PERCENTAGE taxes
• Not available to Partners under GPP (distributive shares
• Financial statement not required
• Automatic graduated rates – income exceeds VAT threshold
o allowed tax credit for the quarter under 8%
c. Sec. 3(D) of RR No. 8-2018 dated January 25, 2018

(D)Individual Earning Income Both from Compensation and from Self-employment (business or
practice of profession)
For mixed income earners, the income tax rates applicable are:
1. The compensation income shall be subject to the tax rates prescribed under Section 24(A)(2(a)
of the Tax Code, as amended; AND
2. The income from business or practice of profession shall be subject to the following:

a. If the gross sales receipts and other non-operating income do not exceed the
VAT threshold, the individual has the option to be taxed at:
1. Graduated income tax rates prescribed under Section 2a(AX2Xa) of the Tax Code,
as amended; OR
2. Eight percent (8%) income tax rate based on gross sales/receipts and other non-
operating income in lieu of the graduated income tax rates and percentage rates
under Section 116 of the Tax code, as amended,
b. If the gross sales/receipts and other non-operating income exceeds the VAT
threshold, the individual shall be subject to the graduated income tax rates
prescribed under Section2a(A)(2(a) of the Tax code, as amended.

The provision under Section 24(AX2Xb) of the Tax Code, as amended, which allows an option of 8%
income tax rate on gross sales/receipts and other non-operating income in excess of P250,000.00
is available only to purely self- employed individuals and/or professionals. The P250,000.00
mentioned is not applicable to mixed income earners since it is already incorporated in the first
tier of the graduated income tax rates applicable to compensation income. Under the said
graduated rates the excess of the P250,000.00 over the actual taxable compensation income is not
deductible against the taxable income from business/practice of profession under the 8% income
tax rate option.
• VAT threshold 3 Million
Computation for Mixed Income: If he opted for 8%
Total Compensation income - Non Taxable benefit (90K) = Compensation Income
Tax due = based on graduated * percent on excess
Business income =GS +Non-operating income= taxable income
Taxable income *8% = Tax Due on Business
CI+TDB= Tax Due
If he opted for graduated:
Add and subtract lang

BRACKET TAXABLE INCOME PER YEAR INCOME TAX RATE

1 P250,000 and below 0%

2 Above P250,000 to P400,000 20% of the excess over P250,000

35
 BRACKET TAXABLE INCOME PER YEAR INCOME TAX RATE

3 Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000

4 Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000

5 Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000

6 Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

d. Relevant portions of RMC No. 50-2018 dated May 11, 2018

The following individuals are not qualified to avail of the 8% Income Tax rate:

a) Purely compensation income earners

b) VAT – registered taxpayers, regardless of the amount of gross sales/receipts and other non-operating income
c) Non-VAT taxpayers whose gross sales/receipts and other non-operating income exceed the P3 Million VAT threshold
d) Taxpayers who are subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those under Section 116 of the same title
e) Partners of a General Professional Partnership (GPP) since their distributive share from the GPP is already net of costs and expenses, and

Individuals enjoying income tax exemption such as those registered under the Barangay Micro Business Enterprise (BMBEs), etc.,
since taxpayers are not allowed to avail of double or multiple tax exemptions under different laws, unless specifically provided by
law.

6. Compensation Income
a. Definition
Compensation means all remuneration for services performed by an employee for his
employer under an employer-employee relationship unless specifically excluded by the Tax
Code. This includes the cash value of all remuneration paid in any medium other than cash.
(see Section 78, NIRC, Section 2.78.3, RR No. 2-98). Compensation may be paid in money,
or in some medium other than money as for example, stocks, bonds, or other forms of
property.

Compensation for services, under an employer-employee relationship,

includes payments “in whatever form paid including but not limited to:
1. Fees
2. Salaries
3. Wages
4. Commissions; and
5. Similar items

Thus, salaries, wages, emoluments and honoraria, allowances, commissions, fees, (including
director's fees, if the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject to the fringe benefits
tax under Section 33 of the Tax Code), pensions, retirement pay, and other income of a
similar nature, constitute compensation income71that are taxable and subject to
withholding

b. Exempt Compensation Income

(1) For agricultural labor paid entirely in products of the farm where the labor is
performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government
or an international organization.

c. Confederation for Unity, Recognition and Advancement of Government

Employees vs. Commissioner - BIR, GR No. 213446 dated July 3, 2018

36
Under Section 32(A) of the NIRC of 1997, as amended, compensation for services, in whatever form paid and no
matter how called, form part of gross income. Compensation income includes, among others, salaries, fees, wages,
emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the
like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation;
taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Section 33 of
the NIRC; taxable pensions and retirement pay; and other income of a similar nature.

The foregoing also includes allowances, bonuses, and other benefits of similar nature received by officials and
employees of the Government of the Republic of the Philippines or any of its branches, agencies and
instrumentalities, its political subdivisions, including government-owned and/or controlled corporations (herein
referred to as officials and employees in the public sector) which are composed of (but are not limited to) the
following:

A. Allowances, bonuses, honoraria or benefits received by employees and officials in the Legislative
Branch, such as anniversary bonus, Special Technical Assistance Allowance, Efficiency Incentive
Benefits, Additional Food Subsidy, Eight[h] (8th) Salary Range Level Allowance, Hospitalization
Benefits, Medical Allowance, Clothing Allowance, Longevity Pay, Food Subsidy, Transition Allowance,
Cost of Living Allowance, Inflationary Adjustment Assistance, Mid-Year Economic Assistance,
Financial Relief Assistance, Grocery Allowance, Thirteenth (13th Month Pay, Cash Gift and
Productivity Incentive Benefit and other allowances, bonuses and benefits given by the Philippine
Senate and House of Representatives to their officials and employees, subject to the exemptions
enumerated herein.

B. Allowances, bonuses, honoraria or benefits received by employees and officials in the Judicial Branch,
such as the Additional Compensation (ADCOM), Extraordinary and Miscellaneous Expenses (EME),
Monthly Special Allowance from the Special Allowance for the Judiciary, Additional Cost of Living
Allowance from the Judiciary Development Fund, Productivity Incentive Benefit, Grocery Allowance,
Clothing Allowance, Emergency Economic Allowance, Year-End Bonus, Cash Gift, Loyalty Cash Award
(Milestone Bonus), SC Christmas Allowance, anniversary bonuses and other allowances, bonuses and
benefits given by the Supreme Court of the Philippines and all other courts and offices under the
Judicial Branch to their officials and employees, subject to the exemptions enumerated herein.

C. Compensation for services in whatever form paid, including, but not limited to allowances, bonuses,
honoraria or benefits received by employees and officials in the Constitutional bodies (Commission
on Election, Commission on Audit, Civil Service Commission) and the Office of the
Ombudsman, subject to the exemptions enumerated herein.

D. Allowances, bonuses, honoraria or benefits received by employees and officials in the Executive
Branch, such as the Productivity Enhancement Incentive (PEI), Performance-Based Bonus,
anniversary bonus and other allowances, bonuses and benefits given by the departments, agencies
and other offices under the Executive Branch to their officials and employees, subject to the
exemptions enumerated herein.

IV. NON-TAXABLE COMPENSATION INCOME – Subject to existing laws and issuances, the following income received
by the officials and employees in the public sector are not subject to income tax and withholding tax on
compensation:

A.
A. Thirteenth (13th Month Pay and Other Benefits not exceeding Thirty Thousand Pesos
(P30,000.00) paid or accrued during the year. Any amount exceeding Thirty Thousand Pesos
(P30,000.00) are taxable compensation. This includes:

1. Benefits received by officials and employees of the national and local government pursuant
to Republic Act no. 6686 ("An Act Authorizing Annual Christmas Bonus to National and Local
Government Officials and Employees Starting CY 1998");

2. Benefits received by employees pursuant to Presidential Decree No. 851 ("Requiring All
Employers to Pay Their Employees a 13th Month Pay"), as amended by Memorandum Order
No. 28, dated August 13, 1986;

3. Benefits received by officials and employees not covered by Presidential Decree No. 851, as
amended by Memorandum Order No. 28, dated August 19, 1986;

4. Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gift in
cash or in kind and other benefits of similar nature actually received by officials and
employees of government offices, including the additional compensation allowance (ACA)
granted and paid to all officials and employees of the National Government Agencies (NGAs)
including state universities and colleges (SUCs), government-owned and/or controlled

37
 corporations (GOCCs), government financial institutions (GFIs) and Local Government Units
(LGUs).

B. Facilities and privileges of relatively small value or "De Minimis Benefits" as defined in existing
issuances and conforming to the ceilings prescribed therein;

C. Fringe benefits which are subject to the fringe benefits tax under Section 33 of the NIRC, as amended;

D. Representation and Transportation Allowance (RATA) granted to public officers and employees under
the General Appropriations Act;

E. Personnel Economic Relief Allowance (PERA) granted to government personnel;

F. The monetized value of leave credits paid to government officials and employees;

G. Mandatory/compulsory GSIS, Medicare and Pag-Ibig Contributions, provided that, voluntary

contributions to these institutions in excess of the amount considered mandatory/compulsory are
not excludible from the gross income of the taxpayer and hence, not exempt from Income Tax and
Withholding Tax;

H. Union dues of individual employees;

I. Compensation income of employees in the public sector with compensation income of not more than
the Statutory Minimum Wage (SMW) in the non-agricultural sector applicable to the place where
he/she is assigned;

J. Holiday pay, overtime pay, night shift differential pay, and hazard pay received by Minimum Wage
Earners (MWEs);

K. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity/benefits
received by government officials and employees under pertinent retirement laws;

L. All other benefits given which are not included in the above enumeration but are exempted from
income tax as well as withholding tax on compensation under existing laws, as confirmed by BIR. 77

Clearly, Sections III and IV of the assailed RMO do not charge any new or additional tax. On the
contrary, they merely mirror the relevant provisions of the NIRC of 1997, as amended, and its
implementing rules on the withholding tax on compensation income as discussed above. The
assailed Sections simply reinforce the rule that every form of compensation for personal services
received by all employees arising from employer-employee relationship is deemed subject to
income tax and, consequently, to withholding tax,78 unless specifically exempted or excluded by
the Tax Code; and the duty of the Government, as an employer, to withhold and remit the correct
amount of withholding taxes due thereon.

While Section III enumerates certain allowances which may be subject to withholding tax, it does
not exclude the possibility that these allowances may fall under the exemptions identified under
Section IV – thus, the phrase, "subject to the exemptions enumerated herein." In other words,
Sections III and IV articulate in a general and broad language the provisions of the NIRC of 1997, as
amended, on the forms of compensation income deemed subject to withholding tax and the
allowances, bonuses and benefits exempted therefrom. Thus, Sections III and IV cannot be said to
have been issued by the CIR with grave abuse of discretion as these are fully in accordance with
the provisions of the NIRC of 1997, as amended, and its implementing rules.

C. Corporate Income Taxation

1. Definition of corporations for tax purposes
a. Sec. 22(B) of the NIRC

(B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), association, or insurance companies, but does
not include general professional partnerships and a joint venture or consortium formed for the purpose
of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract with the
Government. 'General professional partnerships' are partnerships formed by persons for the sole

38
 purpose of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.

2. Partnerships taxed as a corporation

a. CIR vs. Batangas Transportation Co., GR No. L-9692 dated January 6, 1958 (take
note of the discussion of the Evangelista Case)
Although no legal personality may have been created by the Joint Emergency Operation,
nevertheless said joint venture or joint management operated the business affairs of the 2
companies as though they constituted a single entity, company or partnership, thereby obtaining
substantial economy and profits in the operation.
The Court ruled on this issue by citing the case of Eufemia Evangelista, et. al v. CIR – agency case.
This involved the 3 sisters who borrowed from their father money which they invested inland and
then improved upon and later sold. The sisters also hired their brother to oversee the buy-and-sell
of land. Contrary to their claim that said operation was merely a co-ownership, the Court ruled that
considering the facts and circumstances surrounding the said case, the 3 sisters had purpose to
engage in real estate transactions for monetary gain and then divide the profits among themselves,
making them co-partners. When the Tax Code included “partnerships” among the entities subject
to the tax on corporations, it must refer to organizations which are not necessarily partnerships in
the technical sense of the term, and that furthermore, said law defined the term "corporation" as
including partnerships no matter how created or organized.

Further, from the standpoint of income tax law, the procedure and practice of the 2 bus companies
in determining the net income of each was arbitrary and unwarranted. After all, the 2 companies
operates in 2 different lines, in different provinces or territories, with different equipment and
personnel it cannot possibly be true and correct to say that the end of each year, the gross receipts
and income in the gross expenses of two companies are exactly the same for purposes of the
payment of income tax. Thus, the Court held that the Joint Emergency Operation or sole
management or joint venture in this case falls under the provisions of section 84 (b) of the Internal
Revenue Code, and consequently, it is liable to income tax provided for in section 24 of the same
code.

b. Ona vs. CIR, GR No. L-19342 dated May 25, 1972

Unregistered partnership. Instead of distributing the estate among the heirs after the
approval of the project of partition, the properties remained under the mgt of Lorenzo who
used the same in business. As a result of which, their investments and properties steadily
increased. From the moment the petitioners allowed Lorenzo to use their inherited
properties and the incomes from their respective shares as a common fund in undertaking
several business ventures, with the intention of deriving profit from it and dividing the
profit proportionally among themselves, such act was tantamount to actually contributing
such incomes to a common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the provisions of the Tax Code.
The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition, the heirs allowed their properties to remain
under the management of Oña and let him use their shares as part of the common fund for
their ventures, even as they paid corresponding income taxes on their respective shares.

From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly, he
becomes liable individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single management to be
used with the intent of making profit thereby in proportion to his share, there can be no
doubt that, even if no document or instrument were executed, for the purpose, for tax
purposes, at least, an unregistered partnership is formed.

c. Obillos vs. CIR, GR No. L-68118 dated October 29, 1985

DOCTRINE: The sharing of gross returns does not of itself establish a partnership, whether
or not the persons sharing them have a joint or common right or interest in any property

39
 from which the returns are derived. There must be an unmistakable intention to form a
partnership or joint venture.
d. Pascual vs. CIR, GR No. 78133 dated October 18, 1988
There is no partnership, the sharing of returns does not by itself establish a partnership. The
existence of a juridical personality different from the individual partners and the freedom to
each party to transfer or assign the whole property. They shared in the gross profits as co-
owners and paid their capital gains taxes on their profits.
e. AFISCO Insurance Corporation vs. CA, GR No. 112675 dated January 25, 1999
Insurance pool in the case at bar is deemed a partnership or association taxable as a
corporation –In the case at bar, petitioners-insurance companies formed a Pool Agreement,
or an association that would handle all the insurance businesses covered under their quota-
share reinsurance treaty and surplus reinsurance treaty with Munich is considered a
partnership or association which may be taxed as a corporation.
3. Joint Ventures engaged in construction projects
a. Secs. 2 and 3 of RR No. 10-2012 dated June 1, 2012
Section 2. BACKGROUND. Pursuant to Section 22(B) of the NIRC of 1997, as
amended, the term ‘corporation’ shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or
insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.

The tax exemption of joint ventures formed for the purpose of construction projects was
pursuant to Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist local contractors
in achieving competitiveness with foreign contractors by pooling their resources in
undertaking big construction projects.

Section 3. JOINT VENTURES NOT TAXABLE AS CORPORATIONS. A joint venture or

consortium formed for the purpose of undertaking construction projects not considered as
corporation under Sec 22 of the NIRC of 1997 as amended, should be:
(1) for the undertaking of a construction project; and
(2) should involve joining or pooling of resources by licensed local contracts; that
is, licensed as general contractor by the Philippine Contractors Accreditation
Board (PCAB) of the Department of Trade and Industry (DTI);
(3) these local contractors are engaged in construction business; and
(4) the Joint Venture itself must likewise be duly licensed as such by the Philippine
Contractors Accreditation Board (PCAB) of the Department of Trade and
Industry (DTI)
4. General Professional Partnerships vs. Regular Partnerships
ELEMENTS OF A TAXABLE PARTNERSHIP (InGenCom)
1. An intent to form the same;
2. Generally participating in both profits and losses;
3. Such community of interest, as far as third persons are concerned as enables each party to
make contract, manage the business and dispose of the whole property.

a. Sec. 26 of the NIRC

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional
partnership as such shall not be subject to the income tax imposed under this Chapter. Persons
engaging in business as partners in a general professional partnership shall be liable for income tax
only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership
shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively received,
in the net income of the partnership.
b. RMC No. 3-2012 dated January 11, 2012
• GP not subject to tax
• Individual partners subject to tax on their income tax and
distributive shares.
c. Sec. 73(D) of the NIRC

40
 (D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable
income declared by a partnership for a taxable year which is subject to tax under Section 27
(A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed
to have been actually or constructively received by the partners in the same taxable year
and shall be taxed to them in their individual capacity, whether actually distributed or not.
d. Q58/A58 of RMC No. 50-2018 dated May 11, 2018
Yes they are required to register as professionals. However there is no optionto
avail the 8% ITR since their distributive share in the net incomeof the GPP is already
net of cost and expenses. No special registration is required.
5. Resident Foreign Corporation vs. Nonresident Foreign Corporation
It is important to know the kinds of foreign corporations for income taxation purposes to
determine the allowable deductions. While a resident foreign corporation is taxable on income
solely from sources within the Philippines, it is permitted to deductions from gross income but
only to the extent connected with income earned in the Philippines. On the other hand, non-
resident foreign corporations cannot avail of deductions .
a. Marubeni Corporation vs. CIR, GR No. 76573 dated September 15, 1989
Marubeni Corporation is a non-resident foreign corporation, with respect to the
transaction. Marubeni Corporation’s head office in Japan is a separate and distinct income
taxpayer from the branch in the Philippines. The investment on Atlantic Gulf and Pacific Co.
was made for purposes peculiarly germane to the conduct of the corporate affairs of
Marubeni Corporation in Japan, but certainly not of the branch in the Philippines.
6. Private Educational Institutions and Non-Profit Hospitals
a. Sec. 27(B) of the NIRC
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent
(10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the
gross income from 'unrelated trade, business or other activity' exceeds fifty percent (50%) of the
total gross income derived by such educational institutions or hospitals from all sources, the tax
prescribed in Subsection (A) hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any
trade, business or other activity, the conduct of which is not substantially related to the exercise
or performance by such educational institution or hospital of its primary purpose or function. A
'proprietary educational institution' is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of Education, Culture
and Sports (DECS) [17], or the Commission on Higher Education (CHED), or the Technical Education
and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws
and regulations.
The Proprietary Educational Institutions and Hospitals are ordinarily taxed also at 30% of their taxable income, however, they could avail of the special tax
rate of 10% on their taxable income if the predominant income pertains to educational and hospital income. So, if the educational or hospital income is
the predominant income, then, the other income (the non-educational/non-hospital) will be taxed at 10%. Otherwise, it will be taxed at 30%.

What is taxed here, whether 10% or 30%, pertains to the non-educational or non-hospital income. Kasi yung educational and hospital income nila, hindi
taxable yun. In so far as the educational and hospital income, exempted yan. Pero pag meron silang non-educational and non-hospital income, that is the
one subject to tax. Ang question lang is 10% ba or 30%.

b. Sec. 34(A)(2) of the NIRC

(2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable
as deductions under this Chapter, a private educational institution, referred to under Section 27
(B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred during the taxable year for the expansion of school
facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof.

c. Obiter in CIR vs. St. Luke’s Medical Center, GR Nos. 195909 and 195960 dated
September 26, 2012
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned.

This ruling is based not only on a strict interpretation of a provision granting tax
exemption,but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and
(G) of the NIRC requires that an institution be ―operated exclusively‖ for charitable or social
welfare purposes to be completely exempt from income tax.

41
 An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under the last paragraph
of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but
now at the preferential 10% rate pursuant to Section 27(B).

St. Luke‘s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to
its members and such profits are reinvested pursuant to its corporate purposes.

d. Obiter in CIR vs. De La Salle University, GR No. 196596 dated November 9, 2016
A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational
activities or activities related to the purposes of an educational institution. The phrase all
revenues is unqualified by any reference to the source of revenues.
Thus, so long as the revenues and income are used actually, directly and exclusively for
educational purposes, then said revenues and income shall be exempt from taxes and
duties. Thus, when a non-stock, non-profit educational institution proves that it uses its
revenues actually, directly, and exclusively for educational purposes, it shall be exempted
from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets
in the form of real property for educational purposes, it shall be exempted from RPT
7. International Carriers
a. Sec. 28(A)(3) of the NIRC
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax
of two and one-half percent (2 1/2 %) on its 'Gross Philippine Billings' as defined hereunder:
b. Sec. 1 of RA No. 10378 dated March 7, 2013
(a) International Air Carrier. — ‘Gross Philippine Billings’ refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo, and mail originating from the Philippines
in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings if the passenger
boards a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any part outside the
Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine
Billings.

"(b) International Shipping. — ‘Gross . Philippine Billings’ means gross revenue whether for
passenger, cargo or mail originating from the Philippines up to final destination, regardless of the
place of sale or payments of the passage or freight documents.

"Provided, That international carriers doing business in the Philippines may avail of a preferential
rate or exemption from the tax herein imposed on their gross revenue derived from the carriage
of persons and their excess baggage on the basis of an applicable tax treaty or international
agreement to which the Philippines is a signatory or on the basis of reciprocity such that an
international carrier, whose home country grants income tax exemption to Philippine carriers, shall
likewise be exempt from the tax imposed under this provision.

c. Secs. 1 to 4 of RR No. 15-2013 dated September 20, 2013 X

d. South African Airways vs. CIR, GR No. 180356 dated February 16, 2010
Yes. Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income
GR: Resident foreign corporations shall be liable for a 32% income tax on their income from
within the Philippines (Sec. 28(A)(1) of the 1997 NIRC)
Exception: Resident foreign corporations that are international carriers maintaining flights
to and from the Philippines shall be taxed at 2 1/2% of their Gross Philippine Billings (Sec.
28(A)(3)):
SAA, being an international carrier with no flights originating from the Philippines, does not
fall under the exception, it is not taxable under Sec. 28(A)(3)(a). Firmatregulam in casibus

42
 non exceptis. A thing not being excepted must be regarded as coming within the purview of
the general rule.
In CIR vs. BOAC, which was decided under similar factual circumstances, this Court ruled that
off-line air carriers having general sales agents in the Philippines are engaged in or doing
business in the Philippines and that their income from sales of passage documents here is
income from within the Philippines. Thus, the off-line air carrier is liable for the 32% tax on
its taxable income.
e. Air Canada vs. CIR, GR No. 169507 dated January 11, 2016 (Tax Treaty issue)
YES. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) on its
taxable income from sale of airline tickets in the Philippines, it could only be taxed at a maximum
of 1½% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax
Treaty that applies to petitioner as a “foreign corporation organized and existing under the laws of
Canada.”
The second paragraph of Article VIII states that “profits from sources within a Contracting State
derived by an enterprise of the other Contracting State from the operation of ships or aircraft in
international traffic may be taxed in the first-mentioned State but the tax so charged shall not
exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in
that State; and b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise
of a third State.” “By reason of our bilateral negotiations with Canada, we have agreed to have our
right to tax limited to a certain extent.” Thus, we are bound to extend to a Canadian air carrier
doing business in the Philippines through a local sales agent the benefit of a lower tax equivalent
to 1½% on business profits derived from sale of international air transportation.
8. Exempt Corporations
a. Sec. 27(C) as amended by RA 10963
(C) Government-owned or -Controlled Corporations, Agencies or Instrumentalities.— The
provisions of existing special or general laws to the contrary notwithstanding, all corporations,
agencies, or instrumentalities owned or controlled by the Government, except the
Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine
Health Insurance Corporation (PHIC), and the local water districts (LWD) shall pay such rate of
tax upon their taxable income as are imposed by this Section upon corporations or associations
engaged in similar business, industry, or activity.
b. Sec. 30 of the NIRC - Enumeration
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank
without capital stock organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the members
such as a fraternal organization operating under the lodge system, or mutual aid association or a
nonstock corporation organized by employees providing for the payment of life, sickness, accident,
or other benefits exclusively to the members of such society, order, or association, or nonstock
corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no part
of the net income of which inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion
of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to them the proceeds of sales,
less the necessary selling expenses on the basis of the quantity of produce finished by them;

43
 Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any
of their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.
c. RMC No. 35-2012 on taxability of clubs operated exclusively for pleasure,
recreation and other non-profit purposes.
• Subject to income tax.
• Subject to VAT
d. CIR vs. Club Fililpino de Cebu, GR No. L-12719 dated May 31, 1962 - on definition
of "Non-profit", discussed in the St. Luke's Case.
The facts that the capital stock of the respondent Club is divided into shares, does not detract from
the finding of the trial court that it is not engaged in the business of operator of bar and restaurant.
What is determinative of whether or not the Club is engaged in such business is its object or
purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not
controlled by the corporate form or by the commercial aspect of the business prosecuted, but may
be shown by extrinsic evidence, including the by-laws and the method of operation. From the
extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business
as a barkeeper and restaurateur.

Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a
capital stock divided into shares and (2) an authority to distribute to the holders of such shares,
dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459).
In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority
for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be
considered a stock corporation, within the contemplation of the corporation law.

A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit,
nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE
Elks Club, et al., supra), which is not the case in the present appeal.
e. Non-stock non-profit educational institutions
i. Sec. 4(3) Art. XIV of the Constitution
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes
and duties. Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may

likewise be entitled to such exemptions subject to the limitations provided by law
including restrictions on dividends and provisions for reinvestment.

j. DOF Order No. 137-1987 dated December 16, 1987

k. DOF Order No. 149-1995 dated November 24, 1995
l. Sec. 30 of RR No. 2-1940 on what may be considered income exempt
from income tax
1. CIR vs. V. G. Sinco Educational Corporation, GR No. L-9276 dated October 23,
1956
While the acquisition of additional facilities, may redound to the benefit of the institution
itself, it cannot be positively asserted that the same will redound to the benefit of its
stockholders, for no one can predict the financial condition of the institution upon its
dissolution. It has been held that the mere provision for the distribution of its assets to the
stockholders upon dissolution does not remove the right of an educational institution from tax
exemption. The fact that the members may receive some benefit on dissolution upon
distribution of the assets is a contingency too remote to have any material bearing upon the
question where the association is admittedly not a scheme to avoid taxation and its good
faith and honesty or purpose is not challenged.

2. CIR vs. St. Luke’s Medical Center, GR Nos. 195909 and 195960 dated
September 26, 2012 reiterated in CIR vs. St. Luke’s Medical Center, GR Nos.
203514 dated February 13, 2017

44
 The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned.
This ruling is based not only on a strict interpretation of a provision granting tax exemption,but
also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC
requires that an institution be ―operated exclusively‖ for charitable or social welfare purposes
to be completely exempt from income tax.
An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under the last paragraph
of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but
now at the preferential 10% rate pursuant to Section 27(B).

3. CIR vs. De La Salle University, GR No. 196596 dated November 9, 2016

The requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer
falls under the classification non-stock, non-profit educational institution ; and (2) the income it
seeks to be exempted from taxation is used actually, directly and exclusively for educational
purposes.
The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so long as
the revenues and income are used actually, directly and exclusively for educational purposes, then
said revenues and income shall be exempt from taxes and duties.
D. Income Tax applicable to Corporations
1. Minimum Corporate Income Tax
a. Secs. 27(E) and 28(A)(2) of the NIRC
(E) Minimum Corporate Income Tax on Domestic Corporations. -
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross income
as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable
under this Title, beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum income tax is greater than
the tax computed under Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over
the normal income tax as computed under Subsection (A) of this Section shall be carried forward
and credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of
Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on
any corporation which suffers losses on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that shall define the terms and conditions under
which he may suspend the imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided
under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. 'Cost of goods sold' shall include all business
expenses directly incurred to produce the merchandise to bring them to their present location and
use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods are
actually sold including insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to
the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less
sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including (A) salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly utilized in providing the service such
as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the
case of banks, 'cost of services' shall include interest expense.

(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum

corporate income tax of two percent (2%) of gross income, as prescribed under

45
 Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident
foreign corporation taxable under paragraph (1) of this Subsection.

The MCIT is applicable to Domestic and Resident Foreign Corporations taxable at the regular rate of 30%. If the corporation is not subject to the 30% regular
rate, then the MCIT will not apply.

Corporations subject to the MCIT are to compute their taxable income twice:
• based on the 30% normal corporate income tax (NCIT) and
• the 2% of the gross income MCIT –

- whichever is higher, that will be the tax that the corporation will pay.

The MCIT shall be applied in the corporate quarterly returns as well as in the corporate annual consolidated returns.

As to new corporations, the MCIT will begin on the 4th taxable year in which the corporation commenced its business.

Suspension from the MCIT is allowed:

• in case of losses,
• on account of prolonged labor dispute,
• force majeure or
• legitimate business reverses.

Let us say you have X corporation. In 2011, the corporate income tax due computed under the:
• NCIT = 100T
• while the MCIT = 150T

- The amount to be paid is whichever is higher; therefore, the corporation will pay the MCIT of 150T.

Thus, in 2011, there is an excess of 50T. This excess MCIT is to be applied for the next 3 years, in the event the NCIT is higher than the MCIT. The 50T excess
is creditable against the tax due if the NCIT is higher than the MCIT in the next 3 years (2012, 2013, 2014).

In 2012, the tax due under the:

• NCIT = 180T
• while MCIT = 210T

- Thus, the amount to be paid in 2012 is the MCIT.

Can the 50T excess MCIT in 2011 be creditable? It cannot kasi higher yung MCIT. However, in 2012, because the MCIT is higher, there is another excess of
30T. This will be creditable again for the next 3 years (2013, 2014, 2015).

In tax year 2013, the tax due computed under the:

• NCIT = 220T
• while MCIT = only 180T

- Thus, the amount to be paid is the NCIT.

But in paying the 220T, can we credit the excess in the previous years? Yes. 2013 is within the 3 years of both excess amounts of 50T and 30T. Therefore,
for the year 2013, we pay only 140T.

b. RR No. 9-1998 dated August 25, 1998 X

The minimum corporate income tax (MCIT) shall apply only to domestic corporations subject to the
normal corporate income tax prescribed under these Regulations. Accordingly, the minimum
corporate income tax shall not be imposed upon any of the following:
(a) Domestic corporations operating as proprietary educational institutions subject to tax at ten
percent (10%) on their taxable income; or
(b) Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten
percent (10%) on their taxable income; and
(c) Domestic corporations engaged in business as depository banks under the expanded foreign
currency deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs), on their
income from foreign currency transactions with local commercial banks, including branches of foreign
banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency deposit system units and other depository banks under the foreign currency deposit
system, including their interest income from foreign currency loans granted to residents of the
Philippines under the expanded foreign currency deposit system, subject to final income tax at ten
percent (10%) of such income.
(d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916
and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).

Sec. 2.28(A)(2) MINIMUM CORPORATE INCOME TAX (MCIT) ON RESIDENT FOREIGN CORPORATION
— A minimum corporate income tax of two percent (2%) of the gross income from sources within
the Philippines is hereby imposed upon any resident foreign corporation, beginning on the fourth
(4th) taxable year (whether calendar or fiscal year, depending on the accounting period employed)
immediately following the taxable year in which the corporation commenced its business operations,
whenever the amount of the minimum corporate income tax is greater than the normal income tax

46
 due for such year. In computing for the minimum corporate income tax due from a resident foreign
corporation, the rules prescribed under Sec. 2.27(E) of these Regulations shall apply:
Provided, however, that only the gross income from sources within the Philippines shall be
considered for such purposes.

Exceptions — The minimum corporate income tax shall only apply to resident foreign corporations
which are subject to normal income tax. Accordingly, the minimum corporate income tax shall not
apply to the following resident foreign corporations:
(a) Resident foreign corporations engaged in business as "international carrier" subject to tax at two
and one-half percent (2 ½%) of their "Gross Philippine Billings";
(b) Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their
income from foreign currency transactions with local commercial banks, including branches of
foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with Offshore
Banking Units (OBUs), including interest income from foreign currency loans granted to residents of
the Philippines, subject to a final income tax at ten percent (10%) of such income; and
(c) Resident foreign corporations engaged in business as regional operating headquarters subject to
tax at ten percent (10%) of their taxable income.
(d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916
and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).

c. CREBA vs. Romulo, GR No. 160756 dated March 9, 2010

Yes. The imposition of the MCIT is constitutional.
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an
MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax
imposed under Section 27(A). If the regular income tax is higher than the MCIT, the corporation
does not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and
credited against the normal income tax for the three immediately succeeding taxable
years. The SC ruled that MCIT is not violative of due process and thus is not unconstitutional.

MCIT is not a tax on capital. Furthermore, the MCIT is not an additional tax imposition.

d. Manila Banking Corporation vs. CIR, GR No. 168118 dated August 28, 2006
CIR’s contensions are without merit. He contended that based on RR# 9-98, Manila Bank should
pay the min. corporate income tax beg. 1998 as it did not close its operations in 1987 but merely
suspended it. Even if placed under suspended receivership, its corporate existence was never
affected. Thus falling under the category of a existing corporation recommencing its banking
business operations
** Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (mcit) on Domestic
Corporations.

o (1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable year, as defined
here in, is hereby imposed on a corporation taxable under this title, beginning on the 4th taxable
year immediately following the year in which such corp commenced its business operations, when
the mcit is greater than the tax computed under Subsec. A of this section for the taxable year.

o (2) Any excess in the mcit over the normal income tax… shall be carried forward and credited
against the normal income tax for the 3 succeeding taxable years.

• Let it be stressed that RR 9-98 imposed the mcit on corps, the date when business operations
commence is the year in which the domestic corporation registered with the BIR. But under RR 4-
95, the date of commencement of operations of thrift banks, is the date of issuance of certificate
by Monetary Board or registration with SEC, whichever comes later. Clearly then, RR 4-95 applies
to Manila banks, being a thrift bank. 4-year period= counted from June 1999.

2. Branch Profits Remittance Tax

a. Sec. 28(A)(5) of the NIRC

47
 (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be
subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for
remittance without any deduction for the tax component thereof (except those activities which
are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in
the same manner as provided in Sections 57 and 58 of this Code: Provided, that interests,
dividends, rents, royalties, including remuneration for technical services, salaries, wages
premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains,
profits, income and capital gains received by a foreign corporation during each taxable year from
all sources within the Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the Philippines.

Branch profit remittances.15% on profits applied on remittances abroad for the resident foreign corporations.

b. Bank of America NT & SA vs. CA, GR No. 103092 dated July 21, 1994
In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad."
There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is
imposed on the amount sent abroad, and the law (then in force) calls for nothing further. The
taxpayer is a single entity, and it should be understandable if, such as in this case, it is the local
branch of the corporation, using its own local funds, which remits the tax to the Philippine
Government.

3. Improperly Accumulated Earnings Tax

a. Sec. 29 of the NIRC
(A) In General. - In addition to other taxes imposed by this Title, there is hereby
imposed for each taxable year on the improperly accumulated taxable income of
each corporation described in Subsection B hereof, an improperly accumulated
earnings tax equal to ten percent (10%) of the improperly accumulated taxable
income.
Q: What is an improperly accumulated earnings tax?
This is the income tax imposed on a corporation if its earnings and profits are
accumulated (undistributed) instead of being divided and distributed to its
stockholders.
An improperly accumulated earnings tax (IAET) equal to 10% is imposed for each
taxable year on the improperly accumulated taxable income of each corporation.
It is imposed on domestic corporations which are classified as closely-held
corporations.

Q: Define “improperly accumulated taxable income.”

The term “improperly accumulated taxable income” means taxable income adjusted by:
1. Income exempt from tax
2. Income excluded from gross income
3. Income subject to final tax; and
4. The amount of net operating loss carry-over deducted; and
5. Reduced by the sum of:

a. dividends actually or constructively paid; and

b. income tax paid for the taxable year
c. amount reserved for the reasonable needs of the business
b. RR No. 2-01 dated February 12, 2001
The IAET is being imposed in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders
who are supposed to pay dividends tax on the earnings distributed to them by the corporation.

As a general rule, the IAET shall apply to every corporation formed or availed for the purpose of
avoiding the income tax with respect to its shareholders or the shareholders of any other corporation,
by permitting earnings and profits accumulate instead of being divided or distributed.
As provided in RR 2-01, this refers to all domestic corporations which are classified as closely held
corporations. A closely held corporation are those at least 50% in value of the outstanding capital

48
 stock or at least 50% of the total combined voting power of all classes of stock is owned directly or
indirectly by not more than 20 individuals.

As exceptions, the IAET shall not apply to:

1. Publicly-held corporations
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies
4. GPPs
5. Non-taxable joint ventures
6. Enterprises registered under SEZs

Q: What is meant by “reasonable needs”?

Reasonable needs means the immediate needs of the business. Examples of what can be considered
reasonable needs include:
1. Allowance for the increase of accumulated earnings up to 100% of the paid-up capital
2. Earnings reserved for building, plant or equipment acquisitions
3. Earnings reserved for compliance with any loan or obligation established under a legitimate business
agreement
4. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or
reserved for investments in the Philippines.
5. Earnings required by law to be retained
6. Anticipated losses or reserves in business.
Q: What is the “Immediacy Test?”
The Immediacy Test is used to determine the “reasonable needs” of business” in order to justify an
accumulation of earnings. Under this test, the term "reasonable needs of the business" are hereby construed
to mean the immediate needs of the business, including reasonably anticipated needs.

Q: Are there ways by which to avoid liability from IAET?

Yes, when the accumulation is justified by reasonable needs of the business such as:
1. Accumulation up to 100% of the paid-up capital
2. For definite corporate expansion projects or programs
3. For buildings, plants or equipment acquisitions
4. For compliance with a loan covenant or pre-existing obligation under a legitimate business agreement
5. When there is a legal prohibition for its distribution
6. In the case of Philippine subsidiaries of foreign corporations, undistributed earnings intended or reserved for
investments within the Philippines

c. Clarification by RMC No. 35-2011 dated March 14, 2011

In relation to 5(c), RMC 35-2011 [March 14, 2011] states that the amount that may be
retained, taking into consideration the reasonable needs of the business shall be 100%
of the paid-up capital or the amount contributed to the corporation representing the
par value of the shares of stock. Any excess capital over and above the par shall be
excluded.

d. Cynamid Phils., Inc. vs. CA, GR No. 108067 dated January 20, 2000

Court stated that the provision of the NIRC particularly Section 25 is intended to prevent its
shareholders or members of another corporation, through the medium of permitting its gains and
profits to accumulate instead of being divided or distributed, hence avoiding the imposition of income
tax on such profit or dividend of the shareholders. It The provision discouraged tax avoidance through
corporate surplus accumulation.

When corporations do not declare dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax
designed to compel corporations to distribute earnings so that the said earnings by shareholders could,
in turn, be taxed.

E. Specific Items of Income

1. Final Tax Rates amended by RA 10963
a. Tax Tables (to be provided – must be memorized verbatim)

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 INTEREST, ROYALTIES, WINNINGS, AND PRIZES

Except P10,000 or below kasi taxable ‘yan under the normal rate at 0%-35%.

In the case on interest, you have a tax of 20% final withholding. Take note that this interest income are within – kung foreign source ‘yan siya for resident
citizen, 0%-35%. But if you have NRANETB, you have the 25% tax.

For royalties, this is not from books, literary works and musical compositions kasi may special tax treatment ‘yung royalties for books which is at 10%. Pero
king hindi siya books, literary works, or musical compositions, then your withholding rate will be 20%.

Then winnings and prizes which are not P10,000 or less, subject to final withholding tax.

Item number four is the royalties for books, literary works, or musical compositions, at 10%. For NRANETB that would be 25%.

INTEREST ON LONGTERM INVESTMENTS

These are investments or deposits which cannot be withdrawn within five years. So, meron ‘yan siyang lock-in na naka-attach, unless you would pre-
terminate. So, long-term investments are those which mature for five years or more, then it is tax free. But, in case of NRANETB it is taxable at 25%
withholding.

Balik tayo doon sa royalties, winnings, and prizes. If they are foreign-sourced, you do not apply the 20% but 0%-35% kasi within ‘yan siya. Withholding
applies only to income within. So, if it is a foreign source 0%-35%.

For royalties from books within, apply mo ‘yung 10%. Pero kung without ‘yan or foreign-sourced, that would be 0%-35%.
Below item number two, the foreign source income of the resident citizens and all other income subject to preferential or special rate will be taxed also at
0%-35%.

INTEREST ON LONG TERM DEPOSITS

Let’s go back to interest on long term deposits of investments. In case of pre-termination, then you have the applicable withholding rate depending on
the time it was pre-terminated:

• Four years to less than five years – 5% withholding

• Three years to less than four years – 12% withholding
• Less than three years – 20%withholding

In the pre-termination of long-term investments abroad, basta foreign source regardless whether it is pre-terminated or you wait for the maturity, the
income is taxable at 0%-35%.

CASH AND PROPERTY DIVIDENDS

It is taxable at 10% for resident citizen, resident alien, and the non-resident citizen. But, if it is a NRAETB, 20% and for NRANETB 25%.

Cash and property dividends includes profit distributions from business partnerships, joint ventures, etc. including those no matter how created.

INTEREST INCOME ON FOREIGN CURRENCY DEPOSITS

This is not foreign source. These are local deposits but in foreign currencies. It used to be taxable at 7.5% but double na ‘yung rate niya ngayon– 15%.
That is for the RC and RA. For the non-residents, whether citizens on alien, exempted. If the interest in foreign source, that is taxable at 0%-35% and not
the 15%.

CAPITAL GAINS ON THE SALE OF SHARES OF STOCKS (NOT TRADED)

It used to be 5% and 10%. Ngayon15% na of the net capital gains. It cuts across all types of individuals.

SALE OF SHARES OF STOCKS (TRADED)

We apply Section 127 of the NIRC. The rate used to be ½ of 1%. Now, 6/10 of 1% or 60% of 1% of the selling price – not as an income tax but as a percentage
tax.

WINNINGS FROM PHILIPPINE SWEEPSTAKES

That used to be exempted. Ngayon, exempted nalang ‘yungP10,000 or less ‘yung winnings. Pero kung foreign source ‘yan, regardless of the amount, it is
taxable. If a resident citizen won from a sweepstakes or lotto abroad, then that is taxable at 0%-35%. Pero kung within na winnings from lotto and Philippine
sweepstakes at P10,000 or less – exempted. But if the prize is more than P10,000, that is 20% withholding. It does not mean that if you won P1,000,000,
ibabawas ‘yung P10,000. No. You are taxable with the entire P1,000,000. Only if you won P10,000 or less (like swer-tres or the draw during noon time or
small-time lottery), then it will be exempted.

2. Royalties
Royalties are any payment of any kind received as consideration for the use of or right to
use any patent, trademark, design or model, secret formula or process, industrial
commercial or scientific equipment, information concerning industrial, commercial or
scientific experience.
Q: What is the tax treatment of royalty income?
A sale of royalty on a regular basis for a consideration is considered an active business
and any gain therefrom shall be subject to the normal corporate income tax (see RMC 77-
2003). Where a person pays royalty to another for the use of its intellectual property, such
royalty is passive income of the owner and is therefore subject to final withholding tax.
a. Iconic Beverages, Inc. vs. CIR, CTA Case No. 860 7 dated August 14, 2015

50
 Royalties received forms part of the gross income and should be subject to regular income
tax. The payment received as Royalties by Iconic Beverages "from the active conduct of
trade or business is considered ordinary business income subject to the 30% regular
corporate income tax pursuant to Section 27 (A) of the Tax Code. Royalties, to be subject to
20% final tax, must be in the nature of passive income. In the case of Chamber of Real
Estate and Builders Associations, Inc. vs. The Hon. Executive Secretary Alberto Romulo, et
al., the Supreme Court explained that the BIR defines passive income by stating what it is
not: xxx if the income is generated in the active pursuit and performance of the corporation's
primary purposes, the same is not passive income xxx In other words, passive income is
"income generated by the taxpayer's assets. These assets can be in the form of real
properties that return rental income, shares of stock in a corporation that earn dividends or
interest income received from savings.
3. Interest
A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements.
Interest income means the amount of compensation paid for the use of money or forbearance from such
use.
Q: What is the tax treatment of interest income?
Interests received or credited to the account of the depositor or investors are included in their gross income,
unless they are exempt from tax or subject to a final tax.

a. Compare with gains relative to bonds

b. BDO vs. Republic of the Philippines, GR No. 198756 dated January 13, 2015 and
dated August 16, 2016 (motion for reconsideration).

SC held that the PEACe Bonds are not subject to the 20 percent final withholding tax and
ordered the BTr to release and pay to the bondholders the amount it withheld. The Supreme
Court declared BIR Ruling No. 370-11 as void because it completely disregarded the 20 or
more rule and created a distinction for government debt instruments as against those issued
by private corporations when there was none.

In deciding that the PEACe Bonds are not to be taxed as deposit substitutes, the Supreme
Court clarified that the 20-lender rule – 20 or more individuals or corporate lenders at any
one time, is determinative of whether a debt instrument should be considered a deposit
substitute and consequently subject to 20 percent final withholding tax. The court likewise
expounded on the meaning of the phrase “at any one time”.
c. CIR vs. Filinvest Development Corporation, GR No. 16353 dated July 19, 2011
ISSUE: Can the CIR impute theoretical interest on the advances made by Filinvest to its affiliates?

HELD:
NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross
income under (now) Section 50 of the Tax Code, the same does not include the power to impute
theoretical interests even with regard to controlled taxpayers’ transactions. This is true even if the
CIR is able to prove that interest expense (on its own loans) was in fact claimed by the lending
entity. The term in the definition of gross income that even those income “from whatever source
derived” is covered still requires that there must be actual or at least probable receipt or realization
of the item of gross income sought to be apportioned, distributed, or allocated. Finally, the rule
under the Civil Code that “no interest shall be due unless expressly stipulated in writing” was also
applied in this case.

The Court also ruled that the instructional letters, cash and journal vouchers qualify as loan
agreements that are subject to DST.

d. Rule on OCWs
i. RR No. 1-2011 dated February 24, 2011
• Compensation Income derived from work abroad – exempt.
• All other income derived from Phils. – taxable
• Note: EXEMPT from 7.5% Interest Income on deposits under EFCD – proof of
non-residency (OEC)

51
 o But if joint account with someone who is a resident – 50% shall be subject to
7.5% Final Withholding Tax
4. Dividends

Q: What are dividends?

The term “dividends” means any distribution made by a corporation to its shareholders out of its earnings
or profits and payable to its shareholders, whether in money or in other property.

Note: To simplify matters – If the distribution is in money, it is called a cash dividend. If it is in property, it is called a
property dividend. If it is in stock, it is called a stock dividend. If it results from the distribution by a corporation of all its
property or assets in complete liquidation or dissolution, it is called a liquidating dividend.

Q: When is dividend income subject to tax?

It is taxable at the time of their declaration by the corporation, and not at the time of actual payment of
dividends, since dividend income is taxable whether actually or constructively received.
Q: Are property dividends taxable?
Yes. As provided in Section 251, RR No. 2, dividends paid in securities or other property (other than its own
stock), in which the earnings of a corporation have been invested, are income to the recipients to the amount
of the full market value of such property when receivable by individual stockholders.
Q: Are stock dividends subject to income tax?
No. As discussed earlier, a stock dividend only represents the transfer of surplus to capital account and, as
such, is not subject to income tax.
Q: What are the exceptions to the rule that stock dividends are not subject to income tax?
1. Change in the stockholder’s equity, right or interest in the net assets of the corporation
2. Recipient is other than the shareholder
3. Cancellation or redemption of shares of sock
4. Distribution of treasury stocks
5. Dividends declared in the guise of treasury stock dividend to avoid the effects of income
taxation
6. Different classes of stocks were issued.

Stock dividends constitute as income if a corporation redeems stock issued so as to make a distribution. This
is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption
considered as taxable income. (see COMMISSIONER VS. MANNING [AUGUST 7, 1975])

The redemption converts into money the stock dividends which become a realized profit or gain and
consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape
income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income
taxation regardless of the existence of any business purpose for the redemption. (see CIR VS. CA [JANUARY
20, 1999])

As provided in Section 252, RR No. 2: A stock dividend constitutes income if it gives the shareholder an
interest different from that which is former stock holdings represented. A stock dividend does not constitute
income if the new shares confer no different rights or interests that did the old.
.
Q: What are disguised dividends?
These are payments, usually for services, made in the form of dividends in order to evade the higher taxes
imposed on gross income. They are not dividends in legal contemplation because they are not return from
investments. They are payment for services rendered and as such, they are taxable as part of compensation
income or income derived from self-employment or exercise of a profession.

a. Stock Dividends
Generally, stock dividends represent capital and do not constitute as income to its recipient. Mere
issuance thereof is not yet subject to income tax as they are nothing but an enrichment through
increase in value of capital investment. Such are considered unrealized gain and cannot be subjected
to income tax until that gain has been realized.
1. Sec. 73(B) of the NIRC
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent that it represents a distribution of earnings or
profits.
When Dividends are distributed it is sourced from the accumulated retained earnings, the dividends is a taxable distribution. When Stock dividends are
distributed instead of cash ibigay nila they issue their own shares of stock, such distribution is NOT a taxable distribution as it is only a transfer of capital

52
to the stockholder. However if stock dividends are cancelled or redeemed later on after 4 years they were recalled in exchange for cash then the exchange
now is considered as taxable distribution, but the stock dividend is not taxable because it is a transfer of surplus to capital.

A. CIR vs. Manning, GR No. L-28398 dated August 6,1975

Dividends means any distribution made by a corporation to its shareholders out of its
earnings or profits. Stock dividends which represent transfer of surplus to capital account
is not subject to income tax. But if a corporation redeems stock issued so as to make a
distribution, this is essentially equivalent to the distribution of a taxable dividend the
amount so distributed in the redemption considered as taxable income.

The distinctions between a stock dividend which does not and one which does constitute
taxable income to the shareholders is that a stock dividend constitutes income if its gives
the shareholder an interest different from that which his former stockholdings
represented. On the other hand, it does constitute income if the new shares confer no
different rights or interests than did the old shares. Therefore, whenever the companies
involved parted with a portion of their earnings to bnuy the corporate holdings of Reese,
they were making a distribution of such earnings to respondents. These amounts are thus
subject to income tax as a flow of cash benefits to respondents. Hence, respondents are
liable for deficiency income taxes.

B. CIR vs. CA, GR No. 108576 dated January 20, 1999

Stock dividends, strictly speaking, represent capital and do not constitute income
to its recipient.So that the mere issuance thereof is not yet subject to income tax
as they are nothing but anenrichment through increase in value of capital
investment. However, the redemption or cancellation of stock dividends,
depending on the time and manner it was made, is essentially equivalent to a
distribution of taxable dividends, making the proceeds thereof taxable income to
the extent it represents profits. The exception was designed to prevent the
issuance and cancellation or redemption of stock dividends, which is
fundamentally not taxable, from beingmade use of as a device for the actual
distribution of cash dividends, which is taxable.
b. Cash and/or Property Dividends / Tax Sparing Rule
Q: What is the tax treatment on dividends received from a domestic corporation by a non-resident
foreign corporation?
For non-resident foreign corporations, the dividend is subject to:
1. Tax treaty rate, if applicable
2. 15% if no tax treaty but satisfies the tax-sparing provision
3. 30% if no tax treaty and does not comply with the tax-sparing provision

a. Marubeni Corporation vs. CIR, GR No. 76573 dated September 15, 1989
The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific
Co. are not income arising from the business activity in which Marubeni
Corporation is engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits subject to Branch Profit Remittance Tax.

b. CIR vs. Goodyear Philippines, Inc., GR No. 216130 dated August 3, 2016 (Perlas-
Bernabe)
"[t]he term 'dividends' x x x means any distribution made by a corporation to its shareholders out of
its earnings or profits and payable to its shareholders, whether in money or in other property."

The Court therefore holds that the redemption price representing the amount of P97,732,314.00
received by Goodyear US could not be treated as accumulated dividends in arrears that could be
subjected to 15% final withholding tax. Verily, Goodyear PH's Annual Financial Statements covering the
years 2003 to 2009 show that it did not have unrestricted retained earnings, and in fact, operated from
a position of deficit. Thus, absent the availability of unrestricted retained earnings, the board of
directors of Goodyear PH had no power to issue dividends. Consistent with Section 73 (A) of the Tax
Code, this rule on dividend declaration was further edified in Section 43 of The Corporation Code of the
Philippines.

It is also worth mentioning that one of the primary features of an ordinary dividend is that the
distribution should be in the nature of a recurring return on stock which, however, does not obtain in
this case.

53
 "The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in
each case depending on the particular circumstances of the case and the intent of the parties. If the
distribution is in the nature of a recurring return on stock it is an ordinary dividend. However, if the
corporation is really winding up its business or recapitalizing and narrowing its activities, the
distribution may properly be treated as in complete or partial liquidation and as payment by the
corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out all
parts of the stockholders' interest in the company.

c. CIR vs. Wander Philippines, Inc., GR No. 68375 dated April 15, 1988
In the instant case, the fact that Switzerland did not impose any tax on the dividends
received by Glaro from the Philippines should be considered as a full satisfaction of the
given condition. To deny Wander the privilege to withhold only 15% tax provided for
under PD No. 369, amending Sec. 24 (B) (1) of the tax Code would run counter to the
very spirit and intent of the said law and will adversely affect the foreign corporations’
interest and discourage them from investing capital in our country.

***Conditions for Tax Sparing Rule:

1. The country in which the non-resident foreign corporation is domiciled allows a tax
credit against the tax due from the NRFC taxes deemed to have been paid in the
Philippines equivalent to 15%; or
2. Such country does not impose tax on dividends (NIRC, Sec. 28(B)(5)(b).
d. CIR vs. Procter & Gamble Philippine Manufacturing Corp., GR No. 66838 dated December
2, 1991

Q: What is a tax-sparing provision?

As explained in the case of CIR V. PROCTER & GAMBLE PHILIPPINES [DECEMBER 2, 1999]: A more general way of mitigating the impact
of double taxation is to recognize the foreign tax as a tax credit. However, the principal defect of the tax credit system is when
low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments.
For instance, if the usual tax rate is 35 percent but a concession rate accrues to the country of the investor rather than to the
investor himself.106 To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are
considered as having been fully paid.
In the Philippines, the 15% tax on dividends received by a non-resident foreign corporation from a domestic corporation is
imposed subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit
against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to
15%, which represents the different between the regular income tax of 30% and the 15% tax on dividends.

c. Liquidating Dividends
i. Sec. 73(A) of the NIRC
(A) Definition of Dividends. - The term 'dividends' when used in this Title means any distribution
made by a corporation to its shareholders out of its earnings or profits and payable to its
shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or
a deductible loss, as the case may be.
Q: Are liquidating dividends subject to income tax?
Yes. Where a corporation distributes all of its property or assets in complete liquidation or
dissolution, the gain realized from the transaction by the stockholder, whether individual or
corporate, is taxable income or a deductible loss, as the case may be

ii. Sec. 8 of RR No. 6-2008 dated April 22, 2008

-taxable at Gross Income??

iii. Wise & Co., Inc. vs. Meer, GR No. L-48231 dated June 30, 1947
Liquidating dividend v Ordinary dividend•

The distinction between a distribution in liquidation and an ordinary dividend

is factual; the result in each case depending on the particular circumstances of
the case and the intent of the parties.
• If the distribution is in the nature of a recurring return on stock it is an
ordinary dividend.
• However, if the corporation is really winding up its business or
recapitalizing and narrowing its activities, the distribution may properly be

54
 treated as in complete or partial liquidation and as payment by the corporation
to the stockholder for his stock.

5. Sale of Shares of Stock

a. Unlisted Shares (Secs. 24 to 28 of the NIRC, as amended by RA 10963)
b. Net Capital Gain
i. Jardine Davies, Inc. vs. CIR, CTA Case No. 5738 dated August 1, 2000.
It is clear from the statute that what is being taxed is only the "net capital gains" realized from
the sale or exchange or other disposition of shares of stock not traded through a local stock
exchange. the legislature had intended to impose the tax on "capital gains", it would not have
added the word "net" before "capital gains" in then Section 24(e)(2) of the Tax Code, as
amended.
Petitioner's capital losses sustained during the taxable year from sales of shares of stock may
be deducted currently from its capital gains derived during the same taxable year. As a
consequence thereof, We hold that Petitioner erred in disallowing Petitioner's off.setting of its
capital losses cuned from its sales of shares of stock and in subjecting Petitioner to deficiency
capital gains tax.
c. Listed Shares (Sec. 127 of the NIRC, as amended by RA 10963)
d. Redemption of Shares vs. Treasury Shares
i. Sec. 9 of RR No. 6-2008 dated April 22, 2008
When preferred shares are redeemed at a time when the issuing corporation is still in its "going-
concern" and is not contemplating in dissolving or liquidating its assets and liabilities, capital
gain or capital loss upon redemption shall be recognized on the basis of the difference between
the amount/value received at the time of redemption and the cost of the preferred shares. -
REGULAR INCOME TAX RATES
Treasury shares – depends if unlisted/listed
- listed ½ of 1%
- not listed 5%/10%
6. Sale of Real Property
a. Secs. 24 to 27 of the NIRC
Q: What is the rule on capital gains from dispositions of real property?
The rate of 6% shall be imposed on capital gains presumed to have been realized by the seller from the
sale, exchange, or other disposition of real properties located in the Philippines classified as capital assets,
including lacto de retro sales and other forms of conditional sales based on the gross selling price or fair
market value as determined by the CIR, whichever is higher.
The tax base shall be the entire selling price.
The capital gains tax must be paid within 30 days following each sale or disposition. In case of installment
sale, the return shall be filed within 30 days following the receipt of the first down payment and within 30
days following the subsequent installment payments.

b. SMI-ED Technology Corporation, Inc. vs. CIR, GR No. 175410 dated November 12,
2014
6% applicable to sale of land and building, not to machineries.

c. Republic vs. Spouses Salvador, GR No. 205428 dated June 7, 2017

d. Foreclosure Sales
i. RR No. 4-99 dated March 9, 1999
RR 4-99 [MARCH 9, 1999] provides that in case the mortgagor exercises his right of
redemption within one year from the issuance of the certificate of sale, no capital gains
tax shall be imposed because no capital gains has been derived by the mortgagor and
no sale or transfer of real property was realized. If the mortgagor does not exercise his
right of redemption, capital gains tax on the foreclosure sale shall become due. In such
case, the capital gains tax due will be based on the bid price of the highest bidder.
j. ii. RMC No. 058-08 dated August 15, 2008 – who should pay/statutory
seller

55
 BANK mortgagee will pay.

k. iii. RR No. 9-2012 dated May 31, 2012

a. Buyer of the property who is deemed to have withheld the CGT/
CWT will file the CGT and remit the tax within 30 days from the
expiration of redemption period.
e. Sale of Principal Residence
i. RR No. 13-99 dated July 26, 1999 X
ii. RR No. 14-00 dated November 20, 1999 X

As provided in RR 13-99 [JULY 26, 1999], as amended by RR 14-2000 [NOVEMBER 20, 2000]:52
1. The 6% capital gains tax due shall be deposited in an account with an authorized agent bank under
an Escrow Agreement. It can only be released upon showing that the proceeds have been fully utilized
within 18 months.
2. The proceeds from the sale, exchange or disposition must be fully utilized in acquiring or
constructing his new principal residence within 18 calendar months from date of its sale. Proof
must be submitted.53
3. The tax exemption may be availed of only once every 10 years
4. The historical cost or adjusted basis of his old principal residence sold, exchanged disposed shall
be carried over to the cost basis of his new principal residence
5. If there is no full utilization of the proceeds of sale, exchange or disposition of his old principal
residence, he shall be liable for deficiency capital gains tax of the utilized portion.

7. Others – Tax Benefit Rule

a. Refunded Taxes
i. Sec. 34(C)(1) of the NIRC
(1) In General. - Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction, except:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire to have to any
extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign
countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of the income tax benefit
of said deduction.
b. Recovered Bad Debts
i. Sec. 34(E)(1) of the NIRC
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off
within the taxable year except those not connected with profession, trade or business and those
sustained in a transaction entered into between parties mentioned under Section 36 (B) of this
Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years
shall be included as part of the gross income in the year of recovery to the extent of the income tax
benefit of said deduction.

ii. Sec. 4 of RR No. 5-99 dated March 10, 1999 X

F. Exclusions from Gross Income

Q: What is the rationale for the exclusions?
Some receipts are excluded from gross income because they are not income. Even if they are by
definition income, the exclusions are not subject to tax because of policy considerations such as to
avoid the effects of double taxation or to provide incentives for certain socially desirable activities.
Q: Who are the taxpayers who may avail of the exclusions?
All taxpayers can avail of exclusions because excluded receipts are not considered as income for tax
purposes.

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 1. Specific Items Excluded:
a. Sec. 32(B) of the NIRC as amended by RA 10963

1. EXCLUSIONS

These are not included as part of gross income and so not taxed. They are not considered as
income/compensation (in the nature of either reimbursement or payment for damages). To qualify as an
exclusion, the amount received must comply with the elements of each. For example, if one received separation
pay or backwages upon dismissal from service after losing an administrative case, the amounts shall from part of
the gross income.

1. A. Proceeds of life insurance paid to the heirs or beneficiaries upon the death of the insured, whether
in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay
interest thereon, the interest payments shall be included in gross income.
2. B. Amount received by insured as return of premium paid by the taxpayer under life insurance,
endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in
the contract or upon surrender of the contract.
3. C. Donated or inherited property, provided, that income from such property shall be included in gross
income
4. D. Compensation for injuries or sickness received through accident or health insurance or under
Workmen's Compensation Acts plus the amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness
5. E. Retirement benefits, pensions, gratuities, etc.
1. separation of such official or employee from the service of the employer because of death
sickness or other physical disability or for any cause beyond the control of the said official or
employee
2. from the SSS and GSIS
3. F. Miscellaneous items
1. Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement if there was no effort from the
recipient to enter and no required to render substantial future services as a condition
to receiving the prize
2. 13th month pay and other benefits provided that the total exclusion shall not exceed
P90,000 which shall cover:

i. “(i) Benefits received by officials and employees of the national and local
government pursuant to Republic Act No. 6686;

ii. Benefits received by employees pursuant to Presidential Decree No. 851, as

amended by Memorandum Order No. 28, dated August 13, 1986;

iii. Benefits received by officials and employees not covered by Presidential Decree No.
851, as amended by Memorandum Order No. 28, dated August 13,1986; and
“Christmas bonus” and cash gift

iv. 13th month pay

1. The “13th month pay” is for private sector employees

only. Government employees receive “Christmas bonus” and cash gift.

v. other benefits such as productivity incentives

i. The PBB, PEI, and PIB fall under this category. This is confirmed by the
PRs issued by BIR last year.
ii. GSIS, SSS, Medicare, and Pag-ibig contributions—except for voluntary
contributions (Revenue Memorandum Circular 27-2011, 1 July 2011)—
and union dues
b. Representation and transportation allowance (RATA) granted to employees
and officials under the General Appropriations Act and Personal Economic
Relief Allowance (PERA) are not considered as items of income and essentially
constitute reimbursement for the employees’ expenses in the performance of
their duties are excluded (Revenue Regulations 8-2000, 2 November 2000)

57
 2. Are Damages Taxable?
a. O'Gilvie v. United States, 519 U.S. 79 (1996)
Punitive damages are not covered.
They are excluded because they are forms of indemnity from such accident or disability suffered by the taxpayer. He was injured or he got sick, then by
such injury or sickness he received compensation through an accident or health insurance or workmen’s compensation, then that is excluded because they
represent receipt of capital.

Or you suffered an injury and you sued the offender. As an offended party, you filed a case for reckless imprudence and you were awarded damages, or
you entered into a compromise agreement where the offender paid, so you have received actual damages for the hospitalization, moral damages, loss of
income etc., are all these damages whether by suit or agreement excluded? In the case of loss of earning capacity or loss of profits, they are the losses
which were paid to you in the form of damages which will be considered as income, all the other forms of damages will be excluded.

Again, the loss of earning capacity or loss of profits will be the one taxable, but all the other forms of damages, whether by suit or agreement will be
excluded.

b. Take note of exempt damages mentioned in Confederation for Unity,

Recognition and Advancement of Government Employees vs. Commissioner -
BIR, GR No. 213446 dated July 3, 2018

Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant to
a final judgment or compromise agreement arising out of or related to an employer-employee
relationship.

Amounts received through Accident or Health Insurance or under Workmen's Compensation Acts,
as compensation for personal injuries or sickness, plus the amount of any damages received
whether by suit or agreement on account of such injuries or sickness.

Amounts received through Accident or Health Insurance or under Workmen's Compensation Acts,
as compensation for personal injuries or sickness, plus the amount of any damages received
whether by suit or agreement on account of such injuries or sickness.

c. Compare with backwages – RMC No. 39-2012 dated August 3, 2012

Backwages -taxable.

4. Retirement Pay

Now, they are excluded under 32 B (6) (a), when:

▪ The retirement benefits come from the Labor Code (LC) under RA 7641, and
▪ Under reasonable retirement benefit plan (RPBP) or a retirement plan or a pension plan accredited by the BIR and maintained by the employer for
the benefit of the employees.

RETIREMENT BENEFIT UNDER THE LABOR CODE

The first retirement benefit is under the provisions of the LC, so you follow the provisions of the LC for purposes of the exclusion. If that laborer or employee
retires less than the provisions of the LC and the employer pays the retirement benefits, then that will be taxable, because you have to comply with the
mandatory provisions of the LC.

RETIREMENT BENEFIT SET UP BY THE EMPLOYER

The second retirement benefit refers to the one set-up by the employer, the RPBP. For purposes of the exclusion, you have the following requirements:
1. It must be a private benefit plan maintained by the employer which is approved by the BIR
2. The retiring employee must be in service for at least 10 years
3. The age requirement – not less than 50 years of age
4. Has availed of the benefit for only once

If under the RPBP, the employee retires less than 10 years, it will be taxable. If he retires at least 10 years but is less than 50 years of age then it is still
taxable. All the requisites must be present.

The second variation of the RPBP set-up by the employer is when the standards are not under the NIRC. For purposes of the retirement, 15 years ang sa
employer, or it may be less. For the age requirement it can be more than 50 years, etc. So, when the employer sets up a higher standard than that of the
NIRC, then it must be followed should the employee retire. The rule that will prevail is the standard set by the employer. Absent such standard set by the
employer, the rule that will prevail is the standard set by the NIRC.

a. Sec. 32(B)(6)(a) of the NIRC

b. Art. 287 of the Labor Code, as amended

58
 c. International Broadcasting Corporation, Inc. vs. Amarilla, GR No. 162775 dated
October 27, 2006
RULING: for the retirement benefits to be exempt from the withholding tax, the taxpayer is
burdened to prove the concurrence of the following elements: (1) a reasonable private benefit
plan is maintained by the employer; (2) the retiring official or employee has been in the service of
the same employer for at least 10 years; (3) the retiring official or employee is not less than 50
years of age at the time of his retirement; and (4) the benefit had been availed of only once.

Respondents were qualified to retire optionally from their employment with petitioner. However,
there is no evidence on record that the 1993 CBA had been approved or was ever presented to
the BIR; hence, the retirement benefits of respondents are taxable.
d. BIR Ruling No. DA-151-04 dated March 31, 2004
e. BIR Ruling No. 052-00 dated October 30, 2000
4. Terminal Leave Pay
a. CIR vs. CA, GR No. 96016 dated October 17, 1991
Is terminal leave pay considered part of gross income of the recipient?
No. In COMMISSIONER OF INTERNAL REVENUE VS. CA & EFREN CASTANEDA [OCTOBER 17, 1991], the
Supreme Court held that terminal leave pay received by a government official or employee is not subject to
withholding (income) tax. The rationale behind the employee’s entitlement to an exemption from withholding
tax on his terminal leave is that commutation of leave credits, more commonly known as terminal leave, is
applied for by an officer or employee who retires, resigns or is separated from the service through no fault of
his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be
accumulated. Terminal leave payments are given not only at the same time but also for the same policy
considerations governing retirement benefits. In fine, not being part of the gross salary or income of a
government official or employee but a retirement benefit, terminal leave pay is not subject to income tax.
(see RE: REQUEST OF ATTY. BERNANDINO ZIALCITA [OCTOBER 18, 1990])
b. In Re: Zialcita, AM No. 90-6-015-SC dated October 18, 1990
Since terminal leave is applied for by an officer or employee who has already severed his
connection with his employer and who is no longer working, then it follows that the terminal leave
pay, which is the cash value of his accumulated leave credits, is no longer compensation for services
rendered. It cannot be viewed as salary.
c. BIR Ruling No. 496-14 dated December 12, 2014
5. Income of the government
The first one is the Income Derived by Foreign Government. So this is an example of the principle that
we do not tax another sovereign. We do not tax them under the principle of International Comity.
a. CIR vs. Mitsubishi Metal Corporation, GR No. 54908 dated January 22, 1990
The interest income of the loan paid by Atlas to Mitsubishi is therefore entirely different from the
interest income paid by Mitsubishi to Eximbank of Japan. What was the subject of the 15%
withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the interest income
earned by Mitsubishi from the loan to Atlas.
6. Gains from Bonds
a. BDO vs. Republic of the Philippines, GR No. 198756 dated January 13, 2015 and
dated August 16, 2016 (motion for reconsideration).
The interest income earned from bonds is not synonymous with the “gains”
contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue
Code, which exempts gains derived from trading, redemption, or retirement of
long-term securities from ordinary income tax.

The term “gain” as used in Section 32(B)(7)(g) does not include interest, which represents
forbearance for the use of money. Gains from sale or exchange or retirement of bonds or other
certificate of indebtedness fall within the general category of “gains derived from dealings in
property” under Section 32(A)(3), while interest from bonds or other certificate of indebtedness
falls within the category of “interests” under Section 32(A)(4).204 The use of the term “gains from
sale” in Section 32(B)(7)(g) shows the intent of Congress not to include interest as referred under
Sections 24, 25, 27, and 28 in the exemption.
Hence, the “gains” contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading
of the bonds before their maturity date, which is the difference between the selling price of the
bonds in the secondary market and the price at which the bonds were purchased by the seller; and
(2) gain realized by the last holder of the bonds when the bonds are redeemed at maturity, which

59
 is the difference between the proceeds from the retirement of the bonds and the price at which
such last holder acquired the bonds.

7. Rule on Excess De Minimis Benefits

a. Q5/A5 of RMC No. 50-2018 dated May 11, 2018

included as “other benefits” subject to the 90,000 ceiling.

G. Fringe Benefits Tax

1. Sec. 33 of the NIRC (as amended by RA 10963) - 35%
Q: What is a fringe benefit?
As defined by Section 33(B), the term “fringe benefit” means any good, service or
other benefit furnished or granted in cash or in kind by an employer to an individual
employee (except rank and file employees as defined herein) such as, but not limited
to, the following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and

10. Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows.

As defined in RR 3-98 [JANUARY 1, 1998], the grossed-up monetary value of the fringe
benefit represents the whole amount of income received by the employee which
includes the net amount of money or net monetary value of property which has been
received plus the amount of the fringe benefit tax thereon otherwise due from the
employee, but paid by the employer for and in behalf of his employee.
In essence, the purpose of getting the grossed-up monetary value is to preserve the
benefit to the employer as a whole.

2. RR No. 3-98 dated May 21, 1998 as amended by RR No. 11-2018 dated January 31,
2018 (exclude tax accounting rules) X
3. CIR vs. Secretary of Justice and PAGCOR, GR No. 177387 dated November 9, 2016
CTA held that PAGCOR failed to substantiate its claim that the car plan was required by the nature of
or was necessary to its business operation. It was unable to present sufficient and convincing evidence
that the subject fringe benefit was required or necessary in the conduct of its business or without such
fringe benefit its operation would be hampered or adversely affected. Neither was petitioner able to
prove that the car plan extended to its employees inured to its benefit. For the company’s failure to
substantiate its claim, the CTA upheld the deficiency FBT.
4. Rules on Health Insurance and Housing
Q: Is the cost of life or health insurance paid for by the employer subject to fringe benefit tax?
The cost of life or health insurance and other non-life insurance premiums borne by the employer for
his employees shall be treated as taxable fringe benefits except:
1. Contributions of the employer for the benefit of the employee to the SSS, GSIS and other similar
contributions

60
 2. The cost of premiums borne by the employer for the group insurance of his employees

Q: In what instances is the housing privilege subject to fringe benefit tax?

1. Employer leases residential property and assigns the same for use by the employee
2. Employer owns a residential property on installment basis and allows use by the employee
3. Employer purchases a residential property and transfers ownership to the employee
4. Employees provides a monthly fixed amount for the employee to pay his landlord

Q: What housing privileges are not subject to fringe benefit tax?

1. Housing privilege of military officials of the AFP38
2. Housing unit which is situated inside or adjacent to the premises of a business or factory (it is considered adjacent if its located
within the maximum of 50 meters from the perimeter of the business premises)
3. Temporary housing for an employee who stays in a housing unit for three months or less

5. De Minimis Benefits
a. Q4/A4 of RMC No. 50-2018 dated May 11, 2018
b. Q5/A5 of RMC No. 50-2018 dated May 11, 2018

As of January 1, 2018, under the train tax law, the following are:

1. Monetized unused vacation leave credits of private employees not exceeding 10 days during a year.
2. Monetized value of vacation and sick leave credits paid to government officials and employees
3. Medical cash allowance to dependents of employees not exceeding 1,500 per semester (before was
750.00) or 250.00 per month (before 125.00)
4. Rice subsidy of 2, 000.00 (replaced the amount of 1, 500.00) or one sack of 50 kg. rice per month
amount to not more than 2, 000.00
5. Uniform and clothing allowance not exceeding 6, 000 per year (replaced the amount of 5, 000)
6. Actual medical assistance e.g. medical allowance to cover medical and healthcare needs, annual
medial/executive check-up, maternity assistance, and routine consultations, not exceeding 10, 000 per year.
7. Laundry allowance not exceeding 300 per month
8. Employees achievement awards, e.g. for a length of service or safety achievement, which must be in
the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not
exceeding 10,000 received by the employee under an established written plan which does not discriminate in
favor of highly paid employees
9. Gifts are given during Christmas and major anniversary celebrations not exceeding 5, 000 per
employee per year
10. Daily meal allowance for overtime work and nigh/graveyard shift not exceeding 25% of the basic
minimum wage on per region basis
11. Benefits received by an employee by a collective bargaining annual monetary value received from
both CBA and productivity incentive schemes combined do not exceed 10, 000 per employee per taxable year.
Therefore, all other benefits given by the employer which are not part of the enumerated above will be
included as other benefits which are subject to 90, 000 ceiling amounts. If there are other benefits not listed
above, it doesn’t mean they are already exempted from taxes under this new regulations.

H. Deductions from Gross Income

Q: What are the general requisites before deductions are allowed?
1. There must be a specific provision of law allowing the deductions, since deductions do not exist by
implication
2. The requirements of deductibility must be met
3. There must be proof of entitlement to the deductions
4. The deductions must not have been waived
5. The withholding and payment of the tax required must be shown
Q: Who can avail of the deductions provided for under the law?
On compensation income of citizens, whether resident or nonresident, and exemptions
1) Deductions for premium payments on health and/or hospitalization insurance
2) Personal and additional resident aliens
On incomes (other than compensation income) of citizens, whether resident or nonresident, and resident
aliens
1) Itemized deductions or optional standard deduction
2) Deductions for premium payments on health and/or hospitalization insurance
3) Personal and additional exemptions
On income of non-resident aliens engaged in trade, business, or profession in the Philippines

61
 1) Itemized deductions but not allowed optional standard deduction
2) Deductions for premium payments on health and/or hospitalization insurance
3) Personal and additional exemptions subject to reciprocity
Non-resident alien individuals not engaged in trade or business in the Philippines
Their income (whether compensation or other income) is subject to tax on their gross income. Hence, no deductions or exemptions
Domestic Corporations and Resident foreign corporations
1) Itemized deductions or optional standard deduction
Non-resident foreign corporation
Their income (whether compensation or other income) is subject to tax on their gross income. Hence, no
deductions or exemptions
1. Expenses
a. Sec. 34(A) of the NIRC
Q: What are the requisites for deductibility of business expenses?
The requisites are:
1. The expense must be ordinary and necessary
2. Paid or incurred during the taxable year
3. In carrying on the trade or business of the taxpayer
4. It must be supported by adequate invoices and receipts
5. Must not be against law, morals, public policy, or public order78
6. It must be reasonable
7. The tax required to be withheld on the expense paid or payable is shown to have been remitted
to the BIR
Q: What is meant by ordinary and necessary expenses?
An expense is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and
the surrounding circumstances.
An expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of
the taxpayer's business
b. RR No. 10-02 dated July 10, 2002 X
c. Sec. 36(A) of the NIRC
SEC. 36. Items not Deductible. -
(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect
to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements, or betterments made
to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs incurred in petroleum
operations which are deductible under Subsection (G) (1) of Section 34 of this Code.
(3) Any amount expended in restoring property or in making good the exhaustion thereof for which
an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of
any person financially interested in any trade or business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or indirectly a beneficiary under such policy.
(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in
any case be allowed in respect of losses from sales or exchanges of property directly or indirectly -
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall
include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and
lineal descendants; or
(2) Except in the case of distributions in liquidation, between an individual and corporation more
than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly,
by or for such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more than fifty
percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for
the same individual if either one of such corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was under the law applicable to such
taxable year, a personal holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or

62
 (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the
same person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
d. Sec. 45 of the NIRC
SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title
shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon
the method of accounting upon the basis of which the net income is computed, unless in order to
clearly reflect the income, the deductions should be taken as of a different period. In the case of
the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls
the date of his death, amounts accrued up to
the date of his death if not otherwise properly allowable in respect of such period or a prior period .
e. Sec. 34(K) of the NIRC
(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable
which is otherwise deductible from, or taken into account in computing gross income or for which
depreciation or amortization may be allowed under this Section, shall be allowed as a deduction
only if it is shown that the tax required to be deducted and withheld therefrom has been paid to
the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code.

f. CIR vs. Isabela Cultural Corporation, GR No. 172231 dated February 12, 2007
Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of
accounting, expenses not being claimed as deductions by a tax payer in the current year
when they are incurred cannot be claimed as deductions from the income for the succeeding
year
g. CIR vs. General Foods, Inc., GR No. 143672 dated April 24, 2003
DOCTRINE INVOLVED:
1. Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly construed.

2. To be deductible from gross income, the subject advertising expense must comply with
the following requisites:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the taxable year;
c. it must have been paid or incurred in carrying on the trade or business of the taxpayer;
d. it must be supported by receipts, records or other pertinent papers

3. Advertising is generally of two kinds:

a. 1stkind: Advertising to stimulate the current sale of merchandise or use of service: except
as to the question of the reasonableness of amount, there is no doubt such expenditures
are deductible as business expenses.

b. 2nd kind: Advertising designed to stimulate the future sale of merchandise or use of services:
The second type involves expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayer’s trade or business or for the industry or profession
of which the taxpayer is a member.

If, however, the expenditures are for advertising of the second kind, then normally they should be spread out
over a reasonable period of time.

h. Atlas Consolidated Mining & Dev’t Corp., GR No. L-29111 dated January 27, 1981
i. H. Tambunting Pawnshop, Inc. vs. CIR, GR No. 173373 dated July 29, 2013

2. Interest
a. Sec. 34(B)of the NIRC
(B) Interest. -
(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayer's profession, trade or business shall be allowed as deduction from
gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest
expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax:
Provided, That effective January 1, 2009, the percentage shall be thirty-three percent (33%).

b. Sec. 36 of the NIRC

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 2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding
subparagraphs:

(a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That
such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided,
further, That if the indebtedness is payable in periodic amortizations, the amount of interest which
corresponds to the amount of the principal amortized or paid during the year shall be allowed as
deduction in such taxable year;

(b) If both the taxpayer and the person to whom the payment has been made or is to be made are
persons specified under Section 36 (B); or

(c) If the indebtedness is incurred to finance petroleum exploration.

c. RR No. 13-00 dated November 20, 2000
SECTION 3. Requisites for Deductibility of Interest Expense. — In
general, subject to certain limitations, the following are the requisites for the
deductibility of interest expense from gross income, viz:
(a) There must be an indebtedness;
(b) There should be an interest expense paid or incurred upon such indebtedness;
(c) The indebtedness must be that of the taxpayer,
(d) The indebtedness must be connected with the taxpayer's trade,
business or exercise of profession;
(e) The interest expense must have been paid or incurred during the
taxable year;
(f) The interest must have been stipulated in writing;
(g) The interest must be legally due;
(h) The interest payment arrangement must not be between related
taxpayers as mandated in Sec. 34(B)(2)(b), in relation to Sec.
36(B), both of the Tax Code of 1997;
(i) The interest must not be incurred to finance petroleum operations; and
(j) In case of interest incurred to acquire property used in trade,
business or exercise of profession, the same was not treated as a
capital expenditure.
d. Tax Arbitrage Rule/Scheme
Q: What is the limitation on the amount of interest expense allowed to be deductible?
The amount of interest expense paid or incurred by a taxpayer in connection with his trade,
business, or exercise of a profession from an existing indebtedness shall be reduced by an amount
equal to 33% of the interest income earned which had been subject to final withholding taxes.
Q: What is interest arbitrage?
Interest arbitrage results in the reduction of the interest expense by a percentage of the interest
income subject to final tax. It is also defined as a circumstance which is presumed to exist because
by putting excess funds in deposits/securities subject to 20% withholding, taxpayers are able to
avoid the 32% tax which will happen if the same funds are invested in revenue-generating activities.
Tax arbitrage rule will apply when the taxpayer borrows money and the money is used to invest in securities of some
forms of investments where it will earn interest income. So if the amount borrowed is used in investments where
interest income is earned, then, the interest expense for the cost of borrowing cannot be deducted 100%, it will be
subject to the deduction of 33%.

Do not be confused because the treatment here is not applicable in all types of transactions. Ordinarily, the interest
expense is deductible entirely for as long as they are related to the business or profession of the taxpayer. But if the
money borrowed of which you pay an interest expense was used to acquire investment where interest income is
earned, then you are not allowed to claim the entire interest expense. It will be reduced by 33% of the interest
income. Not 33% of the interest expense.

Example: Interest expense is 100,000. Interest income is 10,000.

10,000 x 33% = 3,300
100,000 – 3,300 = 96,700 (Allowable interest expense)

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 e. CIR vs. Vda. De Prieto, GR No. L-13912 dated September 30, 1960
In this case, the last two requirements are undisputed. The only question is if interest on account
of late payments of taxes be considered as indebtedness. Indebtedness has been defined as an
unconditional and legally enforceable obligation for the payment of money. Within the meaning of
that definition, it is apparent that a tax may be considered indebtedness. Although taxes already
due have not, strictly speaking, the same concept as debts, they are, however, obligations that may
be considered as such. Where statute imposes a personal liability for a tax, the tax becomes, at
least in a board sense, a debt. It follows that the interest paid by herein respondent for the late
payment of her donor's tax is deductible from her gross income.

In conclusion, interest payment for delinquent taxes is not deductible as tax but the taxpayer is not
precluded thereby from claiming said payment as deduction on account of interest.
f. Paper Industries Corporation of the Philippines vs. CA, GR Nos. 106949-50 dated
December 1, 1995
g. Sky Internet, Inc. vs. CIR, CTA Case No. 6587 dated August 10, 2005
The interest expense should be ALLOWED as deduction. It was shown that there
was an indebtedness incurred by the petitioner and there was legal liability to pay interest.
The subject transaction is NOT AN EXCEPTION under Section 34 (B)(2) in relation to
Section 36 of the 1997 NIRC because Sky Internet and Sky Vision are NOT RELATED PARTIES
since no individual owns, directly or indirectly more than 50% of the outstanding capital
stock of petitioner and Sky Vision.

3. Taxes
a. Sec. 34(C)of the NIRC

(C) Taxes. -

(1) In General. - Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction, except:

(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire to have to any
extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign
countries);

(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.

Provided, That taxes allowed under this Subsection, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of the income tax benefit
of said deduction.

(2) Limitations on Deductions. - In the case of a non resident alien individual engaged in trade
or business in the Philippines and a resident foreign corporation, the deductions for taxes
provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent
that they are connected with income from sources within the Philippines.
In the case of taxes, not all taxes are deductible, like VAT, percentage, and income tax.

TAX BENEFIT RULE

Important here is the tax benefit rule is case of tax refund. Last paragraph of Sec 34, C, 1.
This occurs when the tax payer claims a deduction for taxes.

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 Example: It was discovered that it was erroneous slip – he overpaid the tax. He claims now
a refund, then it was granted. He was issued a tax credit certificate or refunded.

The treatment will depend whether the taxpayer benefited of not from the deduction. If
there was a benefit at the time the deduction was made, then the refund will be subject to
tax. But is there was no tax benefit at the time the deduction was made then the refund will
not be taxable.

Q: What is the Tax Benefit Rule in relation to recovery of accounts previously written off?
Under the Tax Benefit Rule or Equitable Doctrine of Tax Benefit, the recovery of amounts
deducted in previous years shall be included as part of the gross income in the year of
recovery to the extent of the income tax benefit of said deduction.
If in the year the taxpayer claimed deduction of bad debts written-off, he realized a
reduction of the income tax due from him on account of said deduction, his subsequent
recovery thereof from his debtor shall be treated as a receipt of realized taxable income.
Conversely, if the said taxpayer did not benefit from the deduction if the said bad debt
written-off, then his subsequent recovery shall be treated as a mere recovery or a return of
capital, hence, not treated as receipt of realized taxable income.

b. CIR vs. Vda. De Prieto, GR No. L-13912 dated September 30, 1960
4. Losses
Q: What are the conditions for deductibility of losses?
In order that losses may be allowed as deductions, the following conditions must concur:
1. The losses must actually be sustained and charged off within the taxable year
2. Evidenced by a closed and completed transaction
3. Loss is not compensated by insurance or otherwise
4. In the case of an individual, the loss must have been incurred in the business, trade or profession
of the taxpayer or incurred in any transaction entered into for profit though not connected with his
trade or business
5. In the case of casualty loss, declaration of loss is filed within 45 days from the occurrence of the
casualty loss
Note: (1) Losses are deductible only by the person sustaining them. They are purely personal and
cannot be used as deductions by another
(2) The loss shall not be allowed as a deduction if such loss was claimed as a deduction for estate tax
purposes (see Section 34(D)(1)(c))
(3) It is not required that the loss must be a result of transactions in the taxable year only. The
taxpayer need only prove that a closed and completed transaction sets the loss in the taxable year or
in the year claimed and it is not compensated by insurance or otherwise.
a. Sec. 34(D)of the NIRC
b. Casualty Losses
Q. What are casualty losses?
These are the loss or physical damage suffered by property used in trade, business,
or the profession that results from unforeseen, identifiable events that are
sudden, unexpected, and unusual in character.
Q: Define casualty, theft, and embezzlement for purposes of tax deduction
Casualty - means the complete or partial destruction of property resulting from an
identifiable event of a sudden, unexpected or unusual nature.
Theft - Criminal appropriation of another’s property to the use of the taker
Embezzlement - Fraudulent appropriation of another’s property by a person to
whom it has been entrusted or into whose hands it has lawfully come
i. RMO 31-09 dated October 16, 2009 ii.
H. Tambunting Pawnshop, Inc. vs. CIR, GR No. 173373 dated July 29, 2013
c. Net Operating Loss Carry-Over

Q: What is a net operating loss?

Net Operating loss refers to the excess of allowable deduction over gross income of a
business for any taxable year.
Q: What are the requisites for the deductibility of NOLCO from gross income?

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 1. The net operating loss of the business or enterprise
2. for any taxable year immediately preceding the current taxable year
3. which had not been previously offset as deduction from gross income
4. shall be carried over as a deduction from gross income
5. for the next 3 consecutive taxable years immediately following the year of such loss
6. Provided, any net loss incurred in a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction
7. Provided, further, a net operating loss carry-over shall be allowed only if there has been
no substantial change in the ownership of the business or enterprise.

Net operating loss is one that results from the operation of the business ending with no
income - loss. When the taxpayer will be contemplating of not continuing the business.
However, he would continue and the losses may be allowed to be claimed as a deduction as
a net operating loss carry-over.

Q: How long is he allowed to claim a deduction?

That can be allowed only for the next 3 consecutive taxable years.

This is allowed when there is no change in the ownership of the business. If the ownership
has changed, yet the business name is the same, the one who took over is not allowed to
continue with that loss carry-over.

Q: What is meant by “substantial change in the ownership of the business or enterprise?”

The 75% equity rule or ownership or interest rule shall only apply to a transfer or assignment
of the taxpayer’s net operating losses as a result of or arising from the said taxpayer’s merger
or consolidation or business combination with another person.
The transferee or assignee shall not be entitled to claim the same as a deduction from gross
income except when as a result of the said merger, consolidation, or combination, the
shareholders of the transferor/assignor, or the transferor gains control of:
(a) not less than 75% in nominal value of outstanding issued shares or paid up capital of the
transferee/assignee in case the transferee/assignee is a corporation or
(b) Not less than 75% of the interest in the business of the transferee/assignee in case he
transferee/assignee is not a corporation.

Q: Who are the taxpayers who are entitled to the deduct NOLCO from gross income?
1. Any individual engaged in trade or business or in the exercise of his profession
2. Domestic and resident foreign corporations subject to normal corporate income tax

Q: Discuss the relationship between NOLCO and the Minimum Corporate Income Tax
(MCIT)
Domestic and resident foreign corporations are liable to the 2% MCIT (computed based on
gross income) whenever the amount of MCIT is greater than the normal income tax due
(which would be computed with the benefit of NOLCO if any). Thus, such corporation cannot
enjoy the benefit of NOLCO when it is subject to MCIT.
Q: Will the three-year reglementary period on the carry-over of NOLCO continue to run
notwithstanding that the corporation is subject to MCIT (and hence, cannot avail of the
benefit of NOLCO)?
Yes. RR 14-01 [AUGUST 27, 2001] provides that the three-year reglementary period on the
carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation
paid its income tax under the MCIT computation

i. RR No. 14-01 dated August 27, 2001 ii. X

Paper Industries Corporation of the Philippines vs. CA, GR Nos. 106949-50
dated December 1, 1995
5. Bad Debts

Q: What are bad debts?

Bad debts shall refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts
due the taxpayer by others, arising from money lent or form uncollectable amounts of income from goods sold or
services rendered.
Q: How do you distinguish bad debts from loss?
Voluntary cancellation or forgiveness of a debt does not give rise to a deductible loss. However, if the debt is actually
worthless, there may be a bad debt deduction. That deduction would be allowed because the debt was worthless, not
because it was forgiven.
Q: What are the conditions for bad debts to be deductible?

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As provided in RR 5-99 [March 10, 1999], the requisites for deductibility of bad debts are:
1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable
2. The same must be connected with the taxpayer’s trade, business or practice of profession
3. The same must not be sustained in a transaction entered into between related parties
4. The same must actually be charged-off within the taxable year
5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.
6. The debts are uncollectible despite diligent efforts exerted by the taxpayer

Note: RR 5-99 [March 10, 1999] provides for two exceptions to requisite no. 5, namely:

1. The BSP, through the Monetary Board, shall ascertain the worthlessness and uncollectibility of the bad debts and it shall approve
the writing off of the said indebtedness from the banks; books of accounts at the end of the taxable year.
2. In no case may a receivable from an insurance or surety company be written-off from the taxpayer's books and claimed as bad
debts deduction unless such company has been declared closed due to insolvency or for any such similar reason by the Insurance
Commissioner

a. Sec. 34(E)of the NIRC

b. RR No. 5-99
c. Philippine Refining Company vs. CA, GR No. 118794 dated May 8, 1996
For debts to be considered as worthless, and thereby qualify as bad debts making them
deductible, the taxpayer should show that:
(1) there is a valid and subsisting debt;
(2) the debt must be actually ascertained to be worthless and
uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year; and
(4) the debt must arise from the business or trade of the taxpayer.

Additionally, before a debt can be considered worthless, the taxpayer must also show that
it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be
undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz:
(1) sending of statement of accounts;
(2) sending of collection letters;
(3) giving the account to a lawyer for collection; and
(4) filing a collection case in court.

Mere allegations cannot prove the worthlessness of debts.

d. Fernandez Hermanos vs. CIR, GR No. L-21551 dated September 30, 1969
6. Optional Standard Deduction

Q: What is meant by “Optional Standard deduction?”

Section 34(L) provides that in lieu of the itemized deductions, an individual subject to tax excluding
a nonresident alien may elect a standard deduction of not exceeding 40% of his gross sales or gross
receipts, as the case may be. In the case of a domestic corporation and a resident foreign
corporation, it may elect a standard deduction in an amount not exceeding 40% of its gross income.
A non-resident alien (whether engaged or not) and a non-resident foreign corporation cannot claim
OSD.
The election to use OSD when made in the return shall be irrevocable for the taxable year for which
the return is made.
Q: Who may avail of the OSD?
1. A citizen, whether resident or non-resident
2. Resident alien
3. Taxable estate or trust

Note: A non-resident alien and a non-resident foreign corporation cannot claim OSD.
Q: What are the rules in the determination of the amount of OSD?
RR 16-2008 [NOVEMBER 26, 2008] provides for the following rules:
1. For individuals
a. If on accrual basis of accounting, the OSD shall be based on gross sales
b. If on cash basis of accounting, the OSD shall be based on gross receipts
c. Cost of sales and cost of services are not allowed to be deducted for purposes of determining the
basis of the OSD

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 2. For corporations
a. It shall be based on gross income

a. Sec. 34(L) of the NIRC (as amended by RA 10963)

b. Sec. 8 of RR No. 8-2018 dated January 25, 2018
ITEMIZED DEDUCTIONS – from Sections 34 (A) – (J)
(A) – Expenses;
(B) – Interest;
(C) – Taxes;
(D) – Losses;
(E) – Bad Debts;
(F) – Depreciation;
(G) – Depletion;
(H) – Charitable and Other Contributions;
(I) – Research and Development; and
(J) – Pension Trusts.
• Application for the selection of 40% OSD otherwise – itemized deduction.
• Entire quarter. Must be selected on the 1st quarter.
• GPP allowed OSD. Partners allowed OSD
• If the GPP availed of the itemized deductions in computing its net income, a partner may
still claim itemized deductions from his share in the net income of the partnership.
• However, if the GPP availed of the OSD in computing its net income, the partner can no
longer claim further deduction from his share in the said net income.

I. Gains and Losses from Sale or Exchange of Property

1. Capital Gains and Losses
Capital Loss can only be subtracted from capital gains.
Ordinary Loss can be subtracted from ordinary gains and capital gains.
Shares of stock :
<100K – 5%
>100k – 10%
Real property: 6%
Note: (1) Shares listed and traded in the stock exchange are not subject to capital gains tax. Instead,
such shall be subject to the ½ of 1% stock transaction tax. (2) If the real property is not a capital asset,
the gain will form part of ordinary income, subject to the graduated income tax rates.
Capital losses are deductible when there are capital gains, not deductible against gross income. Losses are derived
from capital asset transactions under Sec. 39 (capital loss and capital gain).

Dean: Capital losses arise when there is a capital asset transaction and the resulting transaction is that there is loss.

2. Capital Assets vs. Ordinary Assets

a. Sec. 39(A)(1) of the NIRC
(1) Capital Assets. - The term 'capital assets' means property held by the taxpayer (whether
or not connected with his trade or business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property
used in the trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34; or real property used in trade or
business of the taxpayer.
b. Secs. 1 to 3 of RR No. 7-03 dated February 11, 2003
SECTION 2. Definition Of Terms. — For purposes of these Regulations,
the following terms shall be defined as follows:
a. Capital assets shall refer to all real properties held by a taxpayer, whether
or not connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under Sec. 39(A)(1) of the Code.
b. Ordinary assets shall refer to all real properties specifically excluded from the definition
of capital assets under Sec. 39(A)(1) of the Code, namely:

69
 1. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec. 34(F)
of the Code; or
4. Real property used in trade or business of the taxpayer.

Real properties acquired by banks through foreclosure sales are considered as

their ordinary assets. However, banks shall not be considered as habitually engaged in
the real estate business for purposes of determining the applicable rate of withholding
tax imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended.
c. Sec. 22(Z) of the NIRC
(Z) The term 'ordinary income' includes any gain from the sale or exchange of property
which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale
or exchange of property which is treated or considered, under other provisions of this Title,
as 'ordinary income' shall be treated as gain from the sale or exchange of property which is
not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss
from the sale or exchange of property which is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered, under other provisions of this Title, as
'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a
capital asset.
d. Calasanz vs. CIR, GR No. L-26284 dated October 8, 1986
e. China Banking Corporation vs. CA, GR No. 125508 dated July 19, 2000
Ordinary Gain Capital Gain
any gain from the sale or exchange of property which is not a The gains realized from the sale, exchange, or other disposition of the
capital asset or property. properties of a taxpayer classified as capital assets.

Derived from property used in trade or business Derived from property not used in trade or business whether or not
connected thereto
Ordinary gains are not adjusted by the holding period in Section Some types of capital gains are adjusted by the holding period in Section
39(B) 39(B)
Only ordinary losses may be deduced from ordinary gains Ordinary losses may be deducted from certain types of capital gains

The concept of net operating loss carryover (NOLCO) applies to The concept of net loss carryover applies to capital gains taxation

ordinary gains taxation (NELCO)

Deductions are usually allowed for ordinary gains Generally no deductions are allowed from capital gains

Ordinary gains are subject to the graduated rates or corporate Capital gains are subject to final taxes
income tax rate as the case may be
Ordinary income is to be included in the annual income tax return Income from capital gains tax are not included in the annual income tax
return

3. Holding Period Rule

a. Sec. 39(B) of the NIRC
In the case of a taxpayer other than a corporation, the following percentages of the gain upon the sale
or exchange of a capital asset shall be taken into account in computing net capital gain:
1. 100% if the capital asset has been held for not more than 12 months
2. 50% if the capital asset has been held for more than 12 months

4. Loss Limitation Rule

a. Sec. 39(C) of the NIRC
(C) Limitation on Capital losses. - Losses from sales or exchange capital assets shall be
allowed only to the extent of the gains from such sales or exchanges. If a bank or trust
company incorporated under the laws of the Philippines, a substantial part of whose
business is the receipt of deposits, sells any bond, debenture, note, or certificate or
other evidence of indebtedness issued by any corporation (including one issued by a
government or political subdivision thereof), with interest coupons or in registered
form, any loss resulting from such sale shall not be subject to the foregoing limitation

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 and shall not be included in determining the applicability of such limitation to other
losses.
b. China Banking Corporation vs. CA, GR No. 125508 dated July 19, 2000
In sum -
(a) The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong
subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an
ordinary, asset.
(b) Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained
is a capital, not an ordinary, loss.
(c) The capital loss sustained by CBC can only be deducted from capital gains if any derived by it
during the same taxable year that the securities have become "worthless."
5. Net Capital Loss Carry-over Rule
a. Sec. 39(D) of the NIRC
(D) Net Capital Loss Carry-Over. - If any taxpayer, other than a corporation, sustains in any taxable year
a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated
in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more
than twelve (12) months.
6. Tax Free Exchanges
a. Sec. 40(C)(2) of the NIRC – Basic provisions only
(C) Exchange of Property. -
(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire
amount of the gain or loss, as the case may be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation
-
(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock
in a corporation, which is a party to the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation,
solely for the stock of another corporation also a party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his
securities in such corporation, solely for stock or securities in such corporation, a party to the merger
or consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such a corporation of which as a result of
such exchange said person, alone or together with others, not exceeding four (4) persons, gains
control of said corporation: Provided, That stocks issued for services shall not be considered as issued
in return for property.

J. Estates and Trusts

1. Secs. 60-66 of the NIRC (as amended by the RA 10963)
2. Employees’ Trust
a. Sec. 60(B) of the NIRC
b. RMC 39-14 dated May 12, 2014
c. Ossorio Pension Foundation, Inc., vs. CA, GR No. 162175 dated June 28, 2010

K. Returns and Payment of Tax under the NIRC

1. Persons not Required to File Income Tax Returns
a. Sec. 51(A)(2) of the NIRC (as amended by RA 10963)
2. Substituted Filing
a. Sec. 51-A of the NIRC (as amended by RA 10963)
b. RR No. 03-02 dated March 22, 2002, as amended X
c. Section 13 of RR No. 11-2018 dated January 31, 2018
3. Creditable Withholding Tax vs. Final Withholding Tax
a. CREBA vs. Romulo, GR No. 160756 dated March 9, 2010
b. Time of Withholding
c. Sec. 2.57 of RR No. 2-98, as amended by RR No. 12-2001. X

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d. Sec. 2.78 and 2.83 of RR No. 2-98. X
e. ING Bank vs. CIR, GR No. 167679 dated July 22, 2015

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