TAXATION I

Prof. Maria Theresa S.P. Llamado

2ND Trimester, AY 2011-2012
DLSU College of Law

Part 1: General Principles

Reference: Vitug, Jose C. and Acosta, Ernesto D. Tax Law and Jurisprudence.
Manila: Rex Book Store, Inc. 2006. (Part I only, pp. 1-48)

I. CONCEPT

A. Taxation and Tax defined.

B. Tax as distinguished from other forms of exactions (Vitug, p. 29-30)

1. Tax vs. Tariff
2. Tax vs. license fee
Case(s):
Osmea v. Orbos (220 SCRA 703)
PAL v. Edu (164 SCRA 320)
Progressive Development v. Q.C. (172 SCRA 629)
Compania de Tabacos v. City of Manila (8 SCRA 367)
3. Tax vs. Toll
Sec. 155 of LGC
4. Tax vs. Special Assessment
Sec. 240 LGC
Case(s): Republic v. Bacolod Murcia (17 SCRA 632)

5. Tax vs. Ordinary debt

Case(s):
Philex Mining Corporation v. CIR (294 SCRA 687)
Caltex v. COA (208 SCRA 755)

II. THEORY AND BASIS OF TAXATION

A. Lifeblood Theory
B. Necessity Theory

Case(s):
Phil Guaranty Co., Inc. v. CIR (13 SCRA 775)
Ferdinand R. Marcos II v. CA (273 SCRA 47)
NPC v. City of Cabanatuan (401 SCRA 259)

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 C. Benefits-Protection Theory (Symbiotic Relationship)

Case(s):
Commissioner v. Algue (158 SCRA 9)
D. Jurisdiction over Subject and Objects

III. PURPOSES/OBJECTIVES OF TAXATION

A. Revenue-raising
B. Non-revenue/special or regulatory

Case(s):
Caltex v. Commission on Audit (208 SCRA 726)

IV. GENERAL PRINCIPLES OF A SOUND TAX SYSTEM (Vitug, pp. 2-3)

A. Fiscal adequacy
B. Theoretical justice
C. Administrative feasibility

V. SCOPE AND LIMITATIONS OF TAXATION (Vitug, pp. 3-24)

A. Inherent Limitations

1. Public Purpose
Case(s):
Pascual v. Sec. Public Works (110 Phil. 331)
Planters Products, Inc.v. Fertiphil Corporation (548 SCRA 485)

2. Inherently Legislative

General Rule: Power to tax may not be delegated

Case(s):
Tio vs. Videogram Regulatory Board (151 SCRA 208)
Commissioner vs. Santos (277 SCRA 617)
Kapatiran v. Tan (163 SCRA 372)

Exceptions from prohibition against delegation of power to tax:

a) Delegation to Local Governments

Sec. 5, Art. X, Philippine Constitution

Local Government Code (RA 7160), Book ii

Case(s):
LTO v. City of Butuan (322 SCRA 805)
Basco v. PAGCOR (197 SCRA 52)

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 b) Delegation to the President

Sec. 28(2) Art. VI, Constitution

Sec. 401, Tariff and Customs Code

Case(s):
Garcia v. Executive Secretary (210 SCRA 219)
ABAKADA v. Ermita (469 SCRA 1)

c) Delegation to Administrative Agencies

Case(s):
Maceda v. Macaraig (197 SCRA 771)
Osmea v. Orbos (220 SCRA 703)
Commissioner v. CA (261 SCRA 236)

3. Territorial

Case(s):
Iloilo Bottlers v. City of Iloilo (164 SCRA 607)
Smith vs. CIR (CTA Case No. 6268. Sep. 12, 2002)

4. International Comity

Sec. 2, Art. II Philippine Constitution

Case(s):
Taada v. Angara (272 SCRA 18)

5. Exemption of Government Entities, Agencies, and Instrumentality

Sec. 27(C), NIRC

Case(s):
Manila International Airport Authority v. CA (495 SCRA 591)
Philippine Fisheries Development Authority v. CA (528 SCRA 706)

B. Constitutional Limitations

[Note that the Constitution does not grant the power to tax on the State, since the
power is inherent. Rather, it regulates and defines, rather than grant, the power.]

1. Provisions directly affecting Taxation

a. Prohibition against imprisonment for non-payment of poll tax: No

person shall be imprisoned for non-payment of a poll tax. (Sec. 20, Art. III,
Constitution)

Community tax v. Poll tax

Sec. 156 164, Local Government Code (LGC) (RA 7160)

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 b. Uniformity and Equity in Taxation: The rule of taxation shall be
uniform and equitable. The Congress shall evolve a progressive system of
taxation. (Sec. 28(1), Art.VI, Constitution)

Case(s):

Uniformity in Taxation

City of Baguio v. de Leon (25 SCRA 938)

Commissioner v. Lingayen Gulf Electric (164 SCRA 27)

Valid Classification of taxpayers/subject matter to be taxed

Pepsi Cola v. City of Butuan (24 SCRA 787)

c. Grant By Congress Of Authority To President To Impose Tariff Rates:

The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions and 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.

d. Prohibition Against Taxation Of Religious, Charitable Entities And

Educational Entities: Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, and non-profit cemeteries, and all
lands, buildings, and improvements actually, directly, and exclusively used
for religious, charitable or educational purposes shall be exempt from
taxation. (Sec. 28(3), Art. VI, Constitution)

Case(s):
Abra Valley College v. Aquino (162 SCRA 106)
Lung Center of the Philippines v. Quezon City (433 SCRA 119)

e. Prohibition Against Taxation Of Non-Stock, Non-Profit Institutions: 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. (Sec. 4(3) and (4), Art. XIV, Constitution; Sec. 28(3),
Art. VI, Constitution)

Secs. 27(B) and 30(H) of NIRC

Revenue Memorandum Circular (RMC) No. 76-2003
Revenue Regulations No. 13-98 (Deductibility of Contributions or Gifts
Actually Paid or Made to Accredited Donee Institutions in Computing
Taxable Income)

f. Majority Vote Of Congress For Grant Of Tax Exemption: No law

granting any tax exemption shall be passed without the concurrence of a
majority of all the members of the Congress. (Sec. 28(4), Art. VI,
Constitution)

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 g. Prohibition On Use Of Tax Levied For Special Purpose: All money
collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only. If the purpose for which a
special fund was created has been fulfilled or abandoned, the balance, if
any, shall be transferred to the general funds of the Government. (Sec. 29,
Art. VI, Constitution)

Case(s):
Osmea v. Orbos (220 SCRA 703)
Gaston v. Republic Planters Bank (158 SCRA 626)

h. Presidents Veto Power On Appropriation, Revenue And Tariff Bills:

The President shall have the power to veto any particular item or items in
an appropriation, revenue, or tariff bill, but the veto shall not affect the
item or items to which he does not object. (Sec. 25(2) and Sec. 27(2), Art.
VI, Constitution)

Case(s):
Gonzales v. Macaraig (191 SCRA 452)

i. Non-impairment of Jurisdiction of the Supreme Court: The Supreme

Court shall have the power to review and revise, reverse, modify or affirm
on appeal or certiorari, as the law or the Rules of Court may provide, final
judgment or decrees of lower courts in all cases involving the legality of any
tax, impost, assessment, or toll, or any penalty imposed in relation thereto.
(Sec. 2 and 5(b), Art. VIII, Constitution)

j. Grant Of Power To LGUs To Create Its Own Sources Of Revenue: Each

local government unit shall have the power to create its own sources of
revenue and to levy taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees and charges shall accrue exclusively to
the local governments. Local government units shall have a just share, as
determined by law, in the national taxes which shall be automatically
released to them.

2. Provisions indirectly affecting Taxation

a. Due Process.

Sec. 1, Art. III, Constitution

Case(s):
Tan v. Del Rosario (237 SCRA 324)
Sison v. Ancheta (130 SCRA 654)

b. Religious Freedom.

Sec. 5, Art. III, Constitution

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 Case(s):
American Bible Society v. City of Manila (101 Phil 386)
Tolentino vs. Sec. of Finance (235 SCRA 630)

c. Non-impairment of Obligations of Contracts.

Sec. 10, Art. III, Constitution

Sec. 11, Art. XII, Constitution

Case(s):
Tolentino v. Sec. of Finance (235 SCRA 630)

VI. STAGES OF TAXATION (Vitug, pp. 25-26)

A. Levy

B. Assessment and Collection

C. Payment

D. Refund

VII. KINDS OF TAXES (Vitug, pp. 26-31)

A. As to Object

1. Personal, capitation or poll tax (e.g. basic community tax)

2. Property tax (e.g. realty tax)

3. Privilege tax (e.g. internal revenue taxes, customs duties)

Case(s):
Villanueva v. City of Iloilo (26 SCRA 578)
Ass. of Customs Brokers v. Municipal Board (93 Phil 106)

B. As to Burden or Incidence

1. Direct (e.g. income, estate and donors tax)

2. Indirect (e.g. excise, VAT)

Case(s):
Tolentino v. Secretary of Finance (235 SCRA 630)
Philippine Acetylene v. Commissioner (20 SCRA 1056)
Maceda v. Macaraig (197 SCRA 771; 223 SCRA 217)
Comm. v. John Gotamco (148 SCRA 36)
CIR v. PLDT (478 SCRA 61)

C. As to Tax Rates

1. Specific tax

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 2. Ad valorem

3. Mixed

D. As to Purposes

1. General or Fiscal (e.g. income taxes)

2. Special, Regulatory or Sumptuary (e.g SEF under the LGC)

E. As to Scope or Authority to Impose

1. National internal revenue taxes

2. Local real property tax, municipal tax

F. As to Graduation

1. Progressive (e.g. income tax)

2. Regressive

3. Proportionate (e.g. real estate tax (Sec. 233 Local Government Code))

VIII. DOCTRINES IN TAXATION (Vitug, pp. 39-48)

A. Prospectivity of Tax Laws

Secs. 203, 222, NIRC

Sec. 1603, TCC
Secs. 222, 225, LGC

B. Imprescriptibility

C. Situs of Taxation (Vitug, p.10)

Case(s):
Wells Fargo v. Collector (70 Phil 325)
Commissioner v. BOAC (149 SCRA 395)
CIR vs. Japan Airlines (202 SCRA 450)
Tan v. Del Rosario (237 SCRA 324)

D. Double Taxation

1. Strict Sense

Case(s):
Alcan Packaging Starpack Corporation v. The Treasurer Of The City Of
Manila (C.T.A. AC NO. 17. September 11, 2006)

2. Broad Sense

Case(s):

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 Villanueva v. City of Iloilo (26 SCRA 578)
Commissioner Of Internal Revenue vs. Solidbank Corporation (416 SCRA
436)

3. Constitutionality of Double Taxation

Case(s):
China Banking Corporation v. Court Of Appeals, Court Of Tax Appeals, and
CIR (403 SCRA 634)

4. Tax Treaties (as Relief from Double Taxation)

Commissioner Of Internal Revenue v. S.C. Johnson And Son, Inc. (309 SCRA
87)

E. Escape from Taxation

1. Shifting of tax burden

a. Ways of Shifting the tax burden

b. Taxes that can be shifted

c. Meaning of impact and incidence of taxation

2. Tax avoidance

Case(s):
Delpher Trades Corp. v. IAC (157 SCRA 349)
Yutivo v. CTA (1 SCRA 160)

3. Tax evasion

Case(s):
Republic v. Gonzales (13 SCRA 633)
CIR v. Estate of Benigno Toda (438 SCRA 290)

4. Exemption from Taxation

a. Meaning of Exemption from Taxation

b. Nature of Tax Exemption

Case(s):
Tolentino v. Sec. of Finance (235 SCRA 630)
CIR v. PLDT (478 SCRA 61)
CIR vs. John Gotamco and Sons, Inc. (148 SCRA 36)

c. Kinds of tax exemption

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 i. Express

ii. Implied

iii. Contractual

d. Nature of the power to grant tax exemption

e. Rationale/grounds for tax exemption

f. Revocation of tax exemption

F. Compensation and Set-Off (Vitug, p. 43)

Case(s):
Philex Mining Corp. vs. CIR (294 SCRA 687)
CIR vs. ESSO Standard Eastern, Inc. (172 SCRA 364)

G. Taxpayers Suit

Case(s):
Pascual v. Sec. of Public Works, 110 Phil. 331
Dumlao v. Comelec (95 SCRA 392)
Lozada and Igot v. Comelec (120 SCRA 337)
Gonzales v. Marcos (65 SCRA 624)

H. Compromises

Sec. 204, NIRC

Sec. 709, Sec. 2316, TCC

I. Tax Amnesty

1. Definition

2. Distinguished from tax exemption

IX. CONSTRUCTION AND INTERPRETATION OF TAX LAWS

A. Tax Laws

1. General Rule

2. Exception

B. Tax Exemption and Exclusion

1. General Rule
Case(s):
CIR v. YMCA (298 SCRA 83)

2. Exceptions

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 Case(s):
Maceda v. Macaraig (197 SCRA 771)
Maceda v. Macaraig (223 SCRA 217)

C. BIR Rules and Regulations (Secs. 4 and 244 of the NIRC)

1. Administrative rules and regulations are intended to carry out not to modify
the law.

Case(s):
CIR v. C.A., R.O.H Auto Prodcuts Phil., Inc., et.al. (240 SCRA 368)

2. Interpretative regulations need not be published and neither is hearing

required if intended only to clarify statutory provisions for proper observance.

Case(s):
CIR vs. CA, CTA and Fortune Tobacco (261 SCRA 236)

3. BIR Rulings and circulars, rules and regulations promulgated by the

Commissioner of Internal Revenue would have no retroactive application if to
so apply them would be prejudicial to the taxpayers.

Sec. 246, NIRC

Case(s):
CIR v. Telefunken Semiconductor Philippines, Inc. (249 SCRA 401)
CIR v. Mega General Merchandising Corp. (166 SCRA 166)
CIR v. Burroughs (142 SCRA 324)
ABS-CBN v. CTA (108 SCRA 142)

4. Any revocation, modification, reversal of such rules/regulations including

rulings of the CIR shall not be given retroactive effect except in case of rulings
(a) where taxpayer deliberately misstates or omits material facts; (b) where
facts subsequently gathered materially differ from the facts on which rulings
are based; and (c) where taxpayer acted in bad faith.

Case(s):
CIR v. Benguet Corporation (463 SCRA 28)

5. There is requirement of notice and hearing when promulgated rules

substantially adds to or increases the burden of those governed.

Case(s):
CIR vs. CA, CTA and Fortune Tobacco (261 SCRA 236)

6. Tax regulations differentiated: Interpretative v. Legislative

Case(s):
BPI Leasing Corporation v. CA, CTA and CIR (416 SCRA 4)

D. Penal Provisions of Tax Laws

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 Part 2: Income Taxation

References: 1. Mamalateo, Victorino C., Philippine Income Tax. Manila: Rex Bookstore,
Inc. 2010 Edition.

2. National Internal Revenue Code of 1997. Mandaluyong City: National

Book Store, July 2009 Edition.

I. INTRODUCTION (Mamalateo, pp. 1-10)

A. Income Tax Systems

1. Global Tax System

2. Schedular Tax System

3. Semi-schedular or semi-global tax system

B. Features of the Philippine Income Tax Law

1. Direct tax

2. Progressive tax

3. Comprehensive

4. Semi-schedular or semi-global tax system

C. Criteria in Imposing Philipppine Income tax

1. Citizenship principle

2. Residence principle

3. Source principle

D. Types of Philippine Income tax

E. Taxable Period (Mamalateo, pp. 345-350)

1. Calendar Year

2. Fiscal Year

Secs. 46, 47, NIRC

3. Short Period

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II. CONCEPT OF INCOME

A. Income Tax Defined

Madrigal v. Rafferty (38 Phil 414)

Fisher v. Trinidad (43 Phil 973)

B. When is income taxable? (Mamalateo, pp. 11-12)

1. Existence of income

2. Realization of income

a. Tests of Realization

Fisher v. Trinidad (43 Phil 973)

b. Actual v. constructive receipt

Limpan v. CIR (17 SCRA 703)

Republic v. dela Rama (18 SCRA 861)

3. Recognition of Income

4. Methods of accounting for taxable income and deductible expenses

(Mamalateo, pp. 335-345; pp. 350-354)

a. Cash v. accrual method of accounting

Secs. 43 45, 50, NIRC

Sec. 51- 53 Rev. Reg. No. 2 (RR 2)

b. Installment v. deferred payment v. percentage of completion (in long term

contracts)

Sec. 44, RR 2

c. Distinction between tax accounting and financial accounting

C. Tests in determining income (Mamalateo, pp. 79-81)

1. Realization Test
Eisner v. Macomber (252 US 189)
Fisher v. Trinidad (43 Phil 973)

2. Claim of Right doctrine or Doctrine of ownership, command, or control

3. Economic benefit test / Doctrine of proprietary interest

4. Severance Test

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III. KINDS OF TAXPAYERS

A. Individual Taxpayers (Mamalateo, pp. 21-37)

1. Citizens

a. Resident citizens

b. Non-resident citizens

2. Aliens

a. Resident aliens

b. Non-resident aliens

i. 180 day rule

ii. NRA engaged in trade or business in the Philippines

iii. NRA not engaged in trade or business in the Philippines

c. Special Class of Individual Employees

d. Estates and Trusts

e. Co-ownerships

f. General Professional Partnerships

i. GPP is not taxable entity

ii. Professional fee of GPP exempt from expanded withholding tax

iii. Share of partners in partnership profit deemed distributed to partners

in year profit earned

B. Corporations (Mamalateo, pp. 37-59)

1. Domestic corporation, defined

2. Partnership taxable as corporation

3. Joint Venture (JV) and Consortium

a. Exempt JV and consortium

b. Taxable JV consortium

4. Foreign Corporations

a. Resident foreign corporation

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 b. Non-resident foreign corporation

c. Subsidiary v. branch of a foreign corporation

IV. GROSS INCOME (Mamalateo, pp. 60-148)

A. Gross Income Defined

B. Gross Income v. Net Income v. Taxable Income

C. Sources of Income Subject to Tax

1. Compensation income

Sec. 32(A)(1), NIRC

Sec. 2.78 RR 2-98
Convenience of the Employer Rule
Collector v. Henderson (1 SCRA 649)

2. Fringe Benefits

Sec. 33, NIRC

RR 3-98

3. Income from Business

Sec. 32(A), NIRC

4. Professional Income

5. Income from dealings in property (Mamalateo, pp. 302 333)

Sec. 32 (A, 3) NIRC

Rodriguez v. Collector (28 SCRA 1119)
Gonzales v. CTA (14 SCRA 71)
Gutierrez v. CTA (101 Phil 173)

i. Type of properties
aa. ordinary assets
bb. capital assets
What is capital asset

Sec. 39 (A), NIRC

Rev. Regs. 07-03

Distinction between ordinary and capital asset

Long term (capital) asset v. short term (capital) asset

14
 Sec. 39 (B), NIRC
ii. Types of gains from dealings in property
aa. Ordinary income v. capital gain

Sec. 39, NIRC and Sec. 22 (Z), NIRC

bb. Actual v. presumed gain

Sec. 6 (E), NIRC

Sec. 24(D), NIRC
Sec. 27(D)(5), NIRC
Sec. 100, NIRC
cc. Net capital gain (loss)

Sec. 39 (A), NIRC

Tuason v. Lingad (58 SCRA 170)
Ferrer v. Collector (5 SCRA 1022)
Calasanz v. Commissioner (144 SCRA 664)
Gonzales v. CTA (14 SCRA 79)

iii. Special rules pertaining to income/loss from dealings in property

classified as capital asset
aa. Computation of the amount of the gain (loss)
Sec. 40 (A), NIRC

Cost or basis of the property sold

Sec. 40 (B), NIRC

Cost or basis of property exchanged in corporate readjustment

Sec. 40 (C) (5), NIRC

Recognition of gain/loss in exchange of property
General rule
Sec. 40 (C, 1), NIRC

Exceptions:

* Where no gain/loss shall be recognized

Sec. 40 (C)(2), NIRC
Meaning of merger/consolidation/control securities

Sec. 40 (C) (6), NIRC

Com. v. Rufino (148 SCRA 42)

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 Revenue Memo Order 26-92
Rev. Regs. 18-2001
Rev. Memorandum Ruling No. 01-01
Rev. Memorandum Ruling No. 01-02

* Transaction where gain is recognized but not the loss

Exchange not solely in kind

Sec. 40 (C)(3), NIRC

Wash sales/compared with short selling

Sec. 38, NIRC
Sec. 39 (F), NIRC

Transactions between related taxpayers

Sec. 36 (B)

Illegal transactions

Sec. 96, RR 2

* Gains and losses attributed to exercise privilege or options to

buy/sell property

Percentage of gain or loss taken into account (note: for individuals

only)

Sec. 39 (B), NIRC

bb. Income tax treatment of capital loss

Capital loss limitation rule (applicable to both corporations and

individuals)

Sec. 39 (C), NIRC

Net loss Carry-Over Rule (applicable only to individuals)

Sec. 39 (D), NIRC

iv. Income from dealings in capital asset subject to special rules

aa. Dealings in real property situated in the Philippines

Rev. Regs. 07-03

Rev. Regs. 13-99

bb. Dealings in shares of stock of Philippine corporations

Definition of shares

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 Sec. 22 (L), NIRC
Sec. 24(C), NIRC
Sec. 27(D)(2), NIRC
Sec. 28(A)(7)(c), NIRC
Sec. 55, RR 2
Rev. Regs. 6-2008

shares listed and traded in the stock exchange

shares not listed and traded in the stock exchange

cc. Other capital assets

v. Sale of Principal Residence

Rev. Regs. No. 13-99

Rev. Regs. No. 14-2000
6. Passive investment income
a. Interest income
Sec. 32(A)(4) NIRC
Sec. 24(B)(1) NIRC
Sec. 22(Y) NIRC
Sec. 22(FF) NIRC
Sec. 28(A)(4), NIRC
Sec. 27(D)(3), NIRC
Sec. 57 RR2
b. Dividend income
i. Dividends, defined
ii. Kinds of dividends
aa. Cash dividend
bb. Stock dividend
cc. Property dividend
dd. Liquidating dividend
Sec. 73, NIRC
Sec. 59, NIRC
Commissioner v. Wander Phils. (160 SCRA 573)

ee. Disguised dividend

Sec. 32 (A)(7), NIRC

Revenue Memo No. 31-90
Secs. 250-253, 58, 71 RR 2
CIR v. Manning (66 SCRA 14)
Republic v. de la Rama (18 SCRA 861)
c. Royalty income

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 Sec. 32(A)(6)
Sec. 42(A)(4)
d. Rental income
Sec. 32 (A)(5) NIRC
Sec. 74, 79, 58 RR 2
Limpan v. CIR (17 SCRA 703)
i. Lease of Personal Property
ii. Lease of real property
iii. Tax Treatment of
aa. Leasehold improvements by lessee
bb. VAT added to rental/paid by the lessee
cc. Advance rental/long term lease
7. Annuities/Proceeds from life insurance/other types of insurance
Sec. 32(A)(8), NIRC
Sec. 48 RR 2
8. Prizes and awards
Sec. 32(A)(9), NIRC
9. Pensions/retirement benefits/separation pay
Sec. 32(A)(10), NIRC
10. Income from any source whatever
a. Forgiveness of indebtedness
Sec. 30, RR 2
b. Recovery of accounts previously written off
Sec. 34(E)(1), NIRC
c. Receipt of tax refunds or credit
Sec. 34(C)(1), NIRC
d. Income from any source whatever
D. Situs/Sources of Income (Mamalateo, pp. 64-74)
1. Meaning of situs of income
2. Classification of income as to source
Sec. 42, NIRC
Sec. 152-165, RR2
a. Gross or taxable income from sources within the Philippines
Sec. 42(A), (B), NIRC
Sec. 28(A)(3)(a)(b), NIRC
Commissioner v. JAL (202 SCRA 450)
Commissioner v. BOAC (149 SCRA 395)

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 NDC v. Commissioner (151 SCRA 472)
Howden v. Collector (13 SCRA 601)
b. Gross or taxable income from sources without the Philippines
Sec. 42 (C) and (D), NIRC
c. Income partly within/partly without the Philippines
Sec. 42 (E), NIRC
3. Source Rules in determining income from within and without
a. Interests residence of debtor
b. Dividends residence of corporation paying dividend
c. Services place of performance of service
d. Rentals and royalties location of property or interest in such
property
e. Sale of real property location of real property
f. Sale of personal property
g. Shares of stock of domestic corporation

V. EXCLUSIONS FROM GROSS INCOME AND EXEMPT CORPORATIONS

A. Exclusions From Gross Income (Mamalateo, pp. 149-170)
1. Rationale of the exclusions
2. Taxpayers who may avail of the exclusions
3. Exclusions distinguished from deductions and tax credit
4. Under the Constitution
a. Income derived by the government or its political subdivision from the
exercise of any essential governmental function
Sec. 32 (B)(7), NIRC
Sec. 4 (3) Art. XIV Constitution
Sec. 4 (4) Art. XIV, Constitution
Sec. 28 (3) Art. VI, Constitution
5. Under the Tax Code
a. Proceeds of Life Insurance Policies
Sec. 32(B)(1), NIRC
Sec. 62 RR 2
b. Return of premium paid
Sec. 32(B)(2), NIRC
Sec. 48 RR 2
c. Amounts received under life insurance, endowment or annuity
contracts

19
d. Value of property acquired by gift, bequest, devise or descent
e. Amounts received through accident or health insurance
Sec. 32(B)(4), NIRC
Sec. 63 RR2
f. Income exempt under tax treaty
Sec. 32(B)(5), NIRC
g. Certain passive income of foreign governments from their Philippine
investments
Section 32 (B)(7,a) NIRC as amended by RA 8424
Com. V. Mitsubishi Metal (181 SCRA 214)
h. Interest income from long term deposit or investment

Sec. 22 (FF), NIRC

Sec. 24 (B)(1), NIRC
Sec. 25 (A)(2), NIRC
Note: Exemption applies only to individual taxpayers except non-
resident alien not engaged in trade or business. They are taxed at
25%.

For corporate taxpayers no exemption

i. Retirement benefits, pensions, gratuities, etc.
Sec. 32(B)(6), NIRC
i. Retirement benefits received under R.A. No. 7641, 4917 and Sec.
60(B) of Tax Code
ii. Separation pay for causes beyond control of employee
iii. Retirement benefits from foreign government agencies
iv. Payments under US Veterans Administration
j. Winnings/Prizes
i. Philippine Charity Sweepstakes and lotto winnings
Sec. 24 (B)(1), NIRC
ii. Prizes and awards in sports competition
Sec. 32 (B)(7,d), NIRC
Reference: RA 7549
iii. Prizes and awards / religious / charitable / scientific / artistic /
literary
Sec. 32 (B)(7,c) - Requisites for exclusion
k. Gain derived from buying and selling shares of stocks classified as
capital asset listed and traded in the local exchange excluded/exempt
from income tax but subject to percentage tax
Sec. 127, NIRC

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 RR 6-08 dated April 22, 2008
6. Under a Tax Treaty
7. Under special laws
B. Exempt Corporations (Mamalateo, pp. 170-177)

VI. COSTS, DEDUCTIONS AND PERSONAL EXEMPTIONS (Mamalateo, pp. 178-277)

A. Deductions from Gross Income, General Rules
1. Deductions construed strictly against taxpayers claiming it
2. Deductions must be paid or incurred in connection with the taxpayers trade,
business or profession
3. Deductions must be supported by adequate receipts or invoices (except for
optional standard deduction)
B. Return of Capital (Cost of Sales/Services)
1. Sale of inventory of goods by manufacturers and dealers of properties
2. Sale of stock in trade by a real estate dealer and dealer in securities
3. Sale of Services
C. Itemized Deductions
1. Business expenses (Sec. 65, RR 2)
a. Requisites for Deductibility
Nature: Ordinary and necessary
CIR v. General Foods (Phils.), Inc. (401 SCRA 545)
Paid and incurred during taxable year
CIR vs. Isabela Cultural Corporation (515 SCRA 556)
b. Salaries, wages and other forms of compensation for personal services
actually rendered, INCLUDING the grossed-up monetary value of the
fringe benefit subjected to FBT which tax should have been paid

Sec. 34(A), NIRC

Secs. 70-73 RR2
Kuenzle & Streiff, Inc. v. CIR (16 Phil 670)
C.M. Hoskins v. Commissioner (30 SCRA 434)
Aguinaldo Industries v. Com. (112 SCRA 33)
c. Traveling/Transportation expenses (Sec. 66 RR2; RR 3-98)
d. Cost of materials (Sec. 67, RR 2)
e. Rentals and/or other payments for use or possession of property (Sec.
74, RR 2)
f. Repairs and Maintenance (Sec. 68, RR 2)
Com. V. Soriano Cia (38 SCRA 67)

21
 Gutierrez v. Collector (14 SCRA 33)
g. Expenses under lease agreements (Sec. 74, RR 2)
h. Expenses for professionals (Sec. 69, RR 2)
i. Entertainment expenses (RR 3-98)
RR 10-2002 (Ceilings for entertainment, amusement and
recreational expenses (July 10, 2002)
j. Political campaign expenses
k. Training Expenses
2. Interest
Sec. 34 (B), NIRC
RR 13-00
Secs. 78-79 RR2
a. Requisites for deductibility
Com. v. Prieto (109 Phil 592)
Kuenzle v. Coll (28 SCRA 365)
b. Non-deductible interest expense
c. Interest subject to special rules
Sec. 34(B)(2), NIRC
aa. Interest paid in advance
bb. Interest periodically amortized
Sec. 34(B)(3), NIRC
cc. Interest expense incurred to acquire property for use in
trade/business/profession
3. Taxes

Sec. 34(C), NIRC

RMC 13-80
Sec. 80-83, RR2
a. Requisites for deductibility
b. Non-deductible taxes
c. Treatments of surcharges/interests/fines for delinquency
d. Treatment of special assessment
e. Tax Credit v. Deduction
CIR v. Lednicky, et al. (11 SCRA 603)
CIR v. Bicolandia Drug Corp. (496 SCRA 176)
4. Losses

Sec. 34 (D), NIRC

22
 Sec. 93-101 and 104, RR2
RR 12-77

Plaridel Security v. Com (21 SCRA 1187)

Com. v. Priscilla Estate (11 SCRA 130)
Fernandez Hermanos v. Com (29 SCRA 552)

a. Requisites for deductibility

b. Other types of losses
i. Capital losses
ii. Securities becoming worthless
iii. Shrinkage in value of stocks
iv. Losses on wash sales of stocks or securities
v. Wagering losses
vi. NOLCO
5. Bad Debts

Sec. 34(E), N IRC

Secs. 102-103, RR2
RR 25-2002; RR 5-99
a. Definition
b. Requisites for deductibility
Collector v. Goodrich (21 SCRA 1336)
PRC v. CA (256 SCRA 667)
6. Depreciation

Sec. 34(F), NIRC

Sec. 110-115, RR2
a. Definition
b. Requisites for deductibility
c. Methods of computing depreciation allowance
i. Straight-line method
ii. Declining-balance method
iii. Sum-of-the-years-digit method
Basilan v. Com (21 SCRA 17)

7. Depletion

Sec. 34(G), NIRC

23
 Sec. 3, RR 5-76
a. Definition
b. Requisites for deductibility

8. Charitable and Other Contributions

Sec. 34(H), NIRC

RMC No. 88-07
EO 720 dated 11 April 2008
a. Definition
b. Requisites for deductibility

Roxas v. CTA (23 SCRA 276)

9. Contributions to Pension Trusts

Sec. 34(J), NIRC
a. Definition
b. Requisites for deductibility
D. Optional standard deduction
1. Sec. 34(L), NIRC
2. RR 16-08 dated Nov. 16, 2008
RR 2-2010 dated Feb. 24, 2010
The following may claim OSD in lieu of itemized deductions
a. Individuals
i. Resident Citizen
ii. Non-resident citizen
iii. Resident Alien
iv. Estates and Trusts
b. Corporations

E. Personal and additional exemptions (R.A. 9504, Minimum Wage Earner Law)
1. Basic personal exemptions
2. Additional exemptions for taxpayer with dependents
3. Status-at-the-end-of-the-year rule
F. Items not deductible
1. Personal, living or family expenses
2. Amount paid for new buildings or for permanent improvements (Capital
expenditures)

24
 3. Amount expended in restoring property
4. Premiums paid on life insurance policy covering life or any other officer or
employee financially interested
5. Interest expense, bad debt and losses from sales of property between related
parties
Sec. 36 NIRC

VII. TAX BASE AND TAX RATES (Mamalateo, pp. 278-300)

A. Computation of Tax

Tax payable by a taxpayer is computed as follows:

Applicable Tax Base

Multiplied by: Applicable Tax Rate
Income Tax
Less: Any Tax Credit (either
creditable withholding
tax or foreign taxes
paid)
Tax Payable

B. Tax Base
1. Taxable income
a. Compensation Income, Business and Professional Income, Capital gain not
subject to Final Tax, Passive income not subject to final tax and other
income LESS
b. Deductions
c. Exemptions (in case of individuals)
2. Gross Income
a. Under NIRC - Generally, passive income subject to final tax
b. Under special laws PEZA, SBMA registered entities
3. HIGHEST between Gross selling price, fair market value per tax declaration
and zonal value per BIR in case of capital asset
Section 6(E), NIRC
4. Gain from sale of Real property
5. Net capital gain in case of sale of shares not listed and traded in the stock
exchange
C. Tax Rates

25
1. Individuals
a. Graduated income tax rates on taxable income
b. Capital gains Flat rate
i. on sales of shares of stock of domestic corporation (except dealers in
securities
aa. of 1% Gross selling price listed shares
bb. 5% for 1st 100,000 and 10% in excess of 100,000 of Net Capital
Gains shares not listed and exchanged in stock exchange
ii. on sale of real property classified as capital asset by individual Flat
rate of 6%
c. Passive income subject to final tax at preferential rates
2. Corporations
a. Domestic
i. Regular of normal income tax rate flat rate (30% starting 2009)
ii. MCIT
Sec. 27, NIRC
RR 9-98
RR 12-07
iii. Domestic corporations entitled to preferential tax rates
aa. Proprietary educational institutions 10% of taxable income
bb. Foreign Currency deposit unit of local universal or commercial
bank 10% final tax
cc. Firms taxed under special income tax regimes (e.g., registered
entities under PEZA law (RA 7916) and Bases Conversion and
Devt. Act (RA 7227) 5% final tax on gross income
iv. Resident Foreign Corporations (RFC)
aa. General Rule: 30% of net taxable income from sources within the
Philippines
bb. Exempt entities
1. Regional Area Headquarters
2. Representative Office
cc. RFCs subject to preferential tax rates
1. International Carrier 2 % on Gross Philippine billings
2. Offshore banking units (OBUs) 10% final tax
3. Regional Operating Headquarters 10% net taxable income
4. Foreign currency deposit unit in Philippines of foreign bank
10% final tax

26
 5. Branch of foreign corp. registered with PEZA, SBMA, CDA, etc.
5% final tax on gross income
6. Qualified Service Contractor and sub-contractor engaged in
petroleum operations in the Philippines
P.D. 87
P.D. 1354

dd. Branch profits remittance tax

v. Non-resident Foreign Corporations (NRFC)

aa. General Rule: 30% of gross income

bb. NRFCs subject to preferential tax rates

VIII. TAXATION OF INDIVIDUALS (Mamalateo, pp. 23-37)

A. Classification of Individual Taxpayers

1. Citizens of the Philippines

a. Resident Citizen (RC)

b. Non-resident (NRC)
Sec. 22(E), NIRC
Sec. 23(C); 24(A.1,b)
2. Aliens

a. Resident Alien (RA)

Sec. 22(F), NIRC

b. Non-resident alien (NRA)

Sec. 22(G), NIRC

i. NRA-engaged in trade or business (NRA-TB)

180-day test
Sec. 25(A.1), NIRC

ii. Non-resident alien not engaged in trade or business (NRA-XTB)

iii. Aliens employed by regional headquarters of multinational/by offshore

banking units/petroleum service contractors
Secs. 25 (C), 22 (DD) and 22 (EE), NIRC

iv. Aliens employed by OBUs

Sec. 25 (D), NIRC

v. Aliens employed by petroleum contractors/subcontractors

Sec. 25(E), NIRC

27
B. Taxation of Income of Resident Citizens:
1. General Rule:
a. Residents who are Citizens Taxable on income from ALL sources (within
and without the Philippines)
b. Resident Aliens - taxable on income from sources WITHIN the Philippines

2. General: Taxation of Compensation Income

a. Inclusions
i. Monetary compensation

Regular salary/wage

Separation pay/retirement benefit not otherwise exempt under

Sec. 32(B), NIRC

RR 1-68 as amended by RR 1-83 and RR 10-83

Bonuses, 13th Month Pay and other benefits unless exempt under
Sec. 32(B), NIRC

Directors Fees
RMC 34-08
ii. Non-monetary compensation income

Fringe benefits not subject to fringe benefits tax (FBT)

Sec. 33, NIRC
RR 2-98
RR 3-98
b. Exclusions
i. Fringe benefits already subject to FBT
RR 3-98, as amended by RR 8-00; RR 10-00; RR 5-08
ii. De Minimis Benefits

RR 3-98, as amended by
RR 10-00 dated Dec. 14, 2000
RR 5-08 dated April 17, 2008
RR 010-08 dated July 8, 2008
iii. 13th month pay and other benefits and payments specifically excluded
from taxable compensation income
Sec. 32(B)(7,e), NIRC
c. Deductions
Sec. 35, NIRC
i. Personal Exemptions and Additional Exemptions
Sec. 35, NIRC

28
 RA No. 9504
RR 10-2008
Pansacola vs. CIR (507 SCRA 81)
ii. Health and hospitalization insurance
Sec. 34(M), NIRC
3. Taxation of Compensation Income of a Minimum Wage Earner
Republic Act No. 9504
Definition of Statutory Minimum Wage
Definition of Minimum Wage Earner
Income also subject to tax exemption: holiday pay,
overtime pay, night shift differential, and hazard
4. Taxation of Business Income/Income from the Practice of Profession
Formula: (pure business/professional income)

Gross Business Income &/or Income from Practice of xxx

Profession
Less: (a) Allowable Deduction (itemized or optional (xxx)
deduction)
(b) Personal & Additional Exemptions and (xxx)
hospitalization/health insurance premium
Total Taxable Income xxx
Multiplied by: Tax Rate xxx
Income Tax xxx
Less: Creditable Withholding Tax on Compensation (xxx)
Income / Other Allowable Tax Credit
Tax Payable xxx

a. Gross Income includes all income from business or practice of profession

during the taxable year (whether accrued or actually received, depending
on the accounting method used)
Refer to Part IV of Outline
b. Allowable deductions from Gross Income
Refer to Part VI (C) (E) of Outline
5. Income from dealings in properties other than capital assets (e.g. sale of
office equipment)

- Included as part of business income or income from the practice of

profession
6. Taxation of Passive Income
a. Passive income subject to final tax (withheld at source and remitted to
the BIR by the payor of the income: no longer to be reported in the ITR)

29
 i. Interest income
Sec. 24(B), NIRC

Interest from ANY CURRENCY bank deposit/any other monetary

benefit from deposit substitutes/trust funds / similar
arrangements

Interest income received by a resident individual taxpayer from a

depository bank under the FCDU System
RR 10-98

Interest income from long-term (5-yr) deposit / investment

evidenced by certificates prescribed by BSP
ii. Royalties
Sec. 24 (B), NIRC
RMC 44-05
RMC 77-2003
iii. Dividends from domestic corp.
Sec. 24(B), NIRC
iv. Prizes (except prizes amounting to ten thousands pesos (P10,000.00)
or less which shall be subject to tax under Sec. 24(A) of the Code)
Sec. 24(B), NIRC
v. Other winnings (except PCSO / lotto winnings) derived from sources
within R.P.
Sec. 24(B), NIRC
b. Passive Income NOT Subject to Final Tax (to be reported in the
taxpayers ITR)
Sec. 24(A)(1), NIRC
7. Taxation of Capital Gains
a. Income from sale of shares of stock of a Philippine corporation
i. Shares traded and listed in the stock exchange
Sec. 24(C); Sec. 127, NIRC
RR 6-08 dated April 22, 2008
RMC 73-07
ii. Shares not listed and traded in the stock exchange
Sec. 24(C), NIRC
RR 6-08 dated April 22, 2008
b. Income from the sale of real property situated in the Philippines
i. General rule
Sec. 24(D.1), NIRC
RR 8-98

30
 ii. Exception
Sec. 24 (D,2), NIRC
RR 13-99, as amended by RR 14-00
RMC 45-02
c. Income from the sale / exchange / other disposition of other capital
assets
i. Special rules to be applied
Sec. 39 (B) (D), NIRC

Loss limitation rule

Loss carry-over rule
Holding period rule
ii. Taxation of capital gain
Sec. 24(A), NIRC
C. Taxation of Non-resident Citizens
Secs. 23(B) and 24(A), NIRC

1. General Rule:
Income from sources within the Philippines are taxed exactly as income of
resident citizens, except as indicated below.

2. Exceptions:

a. Taxation of interest income from depository banks under the expanded

foreign currency deposit system
RR 10-98

b. Income from sources outside of the Philippines not subject to Phil. income
tax
D. Taxation of Non-resident Aliens Engaged in Trade or Business in the Philippines
Sec. 25(A), NIRC

1. General Rule:

They are taxed exactly as resident citizens but only on their income from
sources within the Philippines., except as indicated below. Their income from
foreign sources are exempt from Philippine income tax.

2. Exceptions:

a. Limitation on deductible tax credit

Sec. 34(C)(2), NIRC

b. Interest income from foreign currency-denominated deposits with FCDUs

EXEMPT from tax

31
 Sec. 24(B), NIRC
RR 10-98

c. Amount of deductible personal exemption

Sec. 35(D)

E. Taxation of Non-resident Aliens NOT Engaged in Trade or Business in the

Philippines

1. General Rule: Gross income (i.e. WITHOUT deductions) from Philippine sources
shall be taxes at the fixed FLAT rate of 25%.
Sec. 25(B), NIRC

2. Exceptions:

a. Capital gain from sale of shares of stock exactly the same as resident
citizens

b. Capital gain from sale of real property situated in the Philippines exactly
the same as resident citizens

c. Interest income from foreign currency-denominated deposits with FCDUs

EXEMPT from tax
Sec. 24(B), NIRC
RR 10-98
F. Individual Taxpayers Exempt from Income Tax

1. Senior citizens
RA No. 7432
RA 9257
Rev. Regs. 4-2006
Carlos Superdrug v. DSWS (526 SCRA 130)

2. Exemptions granted under international agreements

Reagan v. Com. (30 SCRA 968)
Com. v. Robertson (143 SCRA 397)
Tax treaty provision

G. Individuals Subject to Special Rates

1. Aliens employed by regional headquarters of multinational / by offshore

banking units / petroleum service contractors
Secs. 25(C), 22(DD) and 22(EE), NIRC

2. Aliens employed by OBUs

Sec. 25(D), NIRC

32
 3. Aliens employed by petroleum contractors / subcontractors
Sec. 25(E), NIRC

IX. TAXATION OF CORPORATIONS (Mamalateo, pp. 37-59)

A. Classification of Corporate Taxpayers (Recall: Part III(B))
1. Domestic corporation, defined
a. Partnership taxable as corporation
Test whether an entity is a taxable partnership
Ona v. Commissioner (45 SCRA 74)
b. Joint Venture (JV) and Consortium
i. Exempt JV/consortium
ii. Taxable JV/consortium
2. Foreign Corporations
a. Resident foreign corporation (RFC)
b. Non-resident foreign corporation (NRFC)
Marubeni v. Com. (177 SCRA 500)
c. Subsidiary v. branch of a foreign corporation
3. Tax-exempt corporations

Sec. 30; 27(C), NIRC

RMC 76-2003
Review: Exemption under the Constitution
Hospital de San Juan de Dios v. Pasay City (16 SCRA 226)
B. Taxation of Domestic Corporation
1. Taxation of Business Income
a. Computation of Allowable Deductions

i. Itemized Deduction (Refer to VII (C))

ii. Optional Standard Deduction (Refer to VII(D))

b. Computation of Tax Payable

i. Regular Tax: Section 27, NIRC

ii. MCIT (Mamalateo, pp. 445-463)

Section 27(E), NIRC

RR 9-98
RR 12-07
RMC 30-08
2. Taxation of Passive Income

33
 a. Passive Income Subject to Final Tax
b. Passive Income NOT Subject to Final Tax
3. Taxation of Capital Gains
a. Income from sale of shares of stock
RR-6-08
b. Income from the sale of real property situated in the Philippines
c. Income from the sale / exchange / other disposition of other capital
assets

4. Other Taxes Imposed on Corporations: Improperly Accumulated Earnings Tax

(IAET) (Mamalateo, pp. 463-470)
RR 2-2001
Cyanamid Phils., Inc. v. CA (322 SCRA 639)

C. Taxation of Resident Foreign Corporations with respect to their income from

sources WITHIN the Philippines
1. Definition
Section 22(H), NIRC
Includes:
Offshore Banking Units (OBUs)
Regional Operating Headquarters (ROHQs)
2. Taxation of RFCs:
Section 28(A), NIRC
3. Taxation of Branch Profits Remittance Tax
a. Entities exempt from BRFT: PEZA, SBMA-registered enterprises
b. Not deemed remittance of branch profit: remittable profits transferred to a
Philippine corporation; remittance of assigned capital
c. Deemed Branch Profit Remittance: see Revenue Memorandum Ruling 1-2001
(IV)
Marubeni vs. CIR 177 SCRA 500
D. Taxation of Non-resident Foreign Corporations with respect to their income from
sources WITHOUT the Philippines

1. Definition: Section 22(1), NIRC

2. Taxation of NRFCs:
Section 28(B), NIRC
CIR vs. Procter and Gamble (204 SCRA 377; 160 SCRA 560)

34
X. RETURNS AND PAYMENT OF TAX (Mamalateo, pp. 354 379)

A. Individual return (Sec. 51, Sec. 56, NIRC)

1. Who are required to file

2. Those not required to file
3. Where to file
4. When to file
5. Where to pay
6. Capital gains on shares of stocks and real estate
7. Quarterly declaration of income tax (Sec. 74, NIRC)

B. Corporate regular returns (Sec. 52, Sec. 53, Sec. 56, NIRC)

1. Quarterly income tax (Sec. 75, NIRC)

2. Final adjustment return (Sec. 76, NIRC)

3. When to file

4. Where to file

5. When to pay

6. Capital gains on shares of stock

7. Return of corporations contemplating dissolution / reorganization

a. Sec. 244, NIRC, RR 2
b. BPI v. Commissioner of Internal Revenue (CA GR SP 38304, April 14,
2000)
XI. WITHHOLDING TAX (Mamalateo, pp. 380-440)
A. Final withholding tax at source (Sec. 57, NIRC)
B. Creditable Withholding Tax
1. Expanded withholding tax
2. Withholding tax on compensation
C. Fringe benefits tax (RR 3-98)

35