 Q: Define taxation.
 A: Taxes are imprescriptible as they are the lifeblood of the
 A: It is an inherent power by which the sovereign:
1. through its law-making body
2. raises income to defray the necessary expenses of government
3. by apportioning the cost among those who, in some measure are
privileged to enjoy its benefits and, therefore, must bear its burdens
 Q: What arethe basic principles of a sound tax system (Canons of
Taxation)?
 A: FAT
1. Fiscal adequacy
a. Revenue raised must be sufficient to meet
government/public expenditures and other public needs.
(Chavez v. Ongpin, G.R. No. 76778, June 6, 1990)
2. Administrative feasibility
a. Tax laws must be clear and concise.
b. Capable of effective and efficient enforcement.
c. Convenient as to time and manner of payment; must not
obstruct business growth and economic development.
3. Theoretical justice
a. Must take into consideration the taxpayer’s ability to pay
(Ability to Pay Theory).
b. Art. VI, Sec. 28(1), 1987 Constitution mandates that the
rule on taxation must be uniform and equitable and that the
State must evolve a progressive system of taxation.
 Q: What are the theories in taxation?
 A: The theories underlying the power of taxation are the following:
1. Lifeblood theory (Necessity theory)
2. Benefits-protection theory (Doctrine of Symbiotic Relationship)
 Q: What is the Doctrine of Prospectivity of tax laws?
 A:
GR: Taxes must only be imposed prospectively.
XPN: If the law expressly provides for retroactive imposition.
Retroactive application of revenue laws may be allowed if it will not
amount to denial of due process.
 Q: Discuss the Doctrine of Imprescriptibility.
government. However, tax statutes may provide for statute of
limitations.
 Q: Define double taxation.
 A: Otherwise described as “direct duplicate taxation”, 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 the taxes must be of the same kind or
character. (City of Manila v. Coca Cola Bottlers Philippines, G.R. No.
181845, Aug. 4, 2009)
 Q: Is double taxation prohibited?
 A: No, there is no Constitutional prohibition against double taxation.
However, direct double taxation is unconstitutional as it results in
violation of substantive due process and equal protection clause.
 Q: What is impact of taxation?
 A: Otherwise known as the burden of taxation, it is the economic
cost of the tax. The impact of taxation may fall on another person
not statutorily liable to pay the tax.
 Q: What is incidence of taxation?
 A: The incidence of taxation is upon the person statutorily liable to
pay the tax.
 Q: What is tax evasion?
 A: It is the scheme where the taxpayer uses illegal or fraudulent
means to defeat or lessen payment of a tax.
 Q: What is meant by tax exemption?
 A: It is the grant of immunity, express or implied, to particular
persons or corporations, from a tax upon property or an excise tax
which persons or corporations generally within the same taxing
districts are obliged to pay.
 Q: What are the principles governing tax exemptions?
 A:
1. Tax exemptions are highly disfavored in law.
2. Tax exemptions are personal and nontransferable.
3. He who claims an exemption must justify that the legislature
intended to exempt him by words too plain to be mistaken. He must
convincingly prove that he is exempted.
4. It must be strictly construed against the taxpayer.
5. Constitutional grants of tax exemptions are self-executing.
 Note: Deductions for income tax purposes partake of the nature of
tax exemptions, hence, they are also be strictly construed against
the taxpayer.
6. Tax exemption is generally revocable.
7. In order to be irrevocable, the tax exemption must be founded on
a contract or granted by the Constitution.
8. The congressional power to grant an exemption necessarily
carries with it the consequent power to revoke the same.
9. Revocation are constitutional even though the corporate do not
have to perform a reciprocal duty for them to avail of tax exemptions
 Q: When does compensation or set-off take place?
 A: Compensation or set-off take place when two persons, in their
own right, are creditors and debtors of each other (Article 1278, Civil
Code).
 Q: What is the Doctrine of Equitable Recoupment?
 A: It is a principle which allows a taxpayer, whose claim for refund
has been barred due to prescription, to recover said tax by setting
off the prescribed refund against a tax that may be due and
collectible from him. Under this doctrine, the taxpayer is allowed to
credit such refund to his existing tax liability.
 A: It is an agreement between two or more persons who, to avoid
lawsuit, amicably settle their differences on such terms and
conditions as they may agree on. It implies the mutual agreement by
the parties in regard to the thing or subject matter which is to be
compromised.
 It is a contract whereby the parties, by reciprocal concessions avoid
litigation or put an end to one already commenced.
 Q: When is compromise allowed?
 A: Compromises are generally allowed and enforceable when the
subject matter thereof is not prohibited from being compromised
and the person entering such compromise is duly authorized to do
so.
 Q: How are tax laws construed?
 A:
1. Generally, no person or property is subject to tax unless within
the terms or plain import of a taxing statute.
2. Tax laws are generally prospective in nature.
3. Where the language is clear and categorical, the words employed
are to be given their ordinary meaning.
4. When there is doubt, tax laws are strictly construed against the
Government and liberally in favor of the taxpayer.
Note: Taxes, being burdens, are not to be presumed beyond what
the statute expressly and clearly provides.
5. Provisions of the taxing act are not to be extended by implication.
6. Tax laws are special laws and prevail over general laws.
 Q: What is meant by situs of taxation?
 A: It is the place or authority that has the right to impose and collect
taxes.
 Q: What is meant by the doctrine of mobilia sequuntur personam?
 A: Literally, it means “Movable follows the person/owner”. However,
a tangible property may acquire situs elsewhere provided it has a
definite location there with some degree of permanency.
 Q: What is international comity?
 A: 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.
 Q: Explain international comity as a limitation on the power to tax.
 A: The Philippine Constitution expressly adopted the generally
accepted principles of international law as part of the law of the
land. (Sec. 2, Art. II, 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.
 Q: May the government tax itself?
 A: Yes. One of the inherent limitations on the power of taxation is
recognition of tax exemptions in favor of the government. This is
premised on the concept that with respect to the government,
exemption is the rule and taxation is the exception in order to
reduce administrative costs. But since sovereignty is absolute
andtaxationis an act of high sovereignty, the state if so minded could
tax itself, including its political subdivisions. (Maceda v. Macaraeg,
G.R. No. 88291, June 8, 1993)
 Q: What are the rules on tax exemptions of government agencies or
instrumentalities?
 A:
 1. If the taxing authority is the National Government:
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,
Sept. 11, 1996)
 Q: Are government educational institutions exempt from taxes?
 A:
GR: They shall not be taxed with respect to their income.
XPN: The income of whatever kind and character:
1. from any of their properties, real or personal, or
2. from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax imposed
(Sec. 30 [1], NIRC)
 Q: What about the constitutional tax exemption for non-stock non-
profit educational institutions?
 A: 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.
 The Constitution provides that as long as the revenue is used ADE
for educational purposes, the revenue remain tax exempt. It appears
that Section 30 of the NIRC is inconsistent with the Constitution.
Constitution should still prevail. (See page 26 for the illustrative
case)
 Note: Income derived from any public utility or from the exercise of
any essential governmental function accruing to the government or
to any political subdivision thereof is exempt from income tax. (Sec.
32[B][7][b], NIRC)
 Q: What is meant by the term “exclusive”?
 A: It is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and “exclusively” is
defined, "in a manner to exclude; as enjoying a privilege
exclusively.”
 Note: If real property is used for one or more commercial purposes,
it is not exclusively used for the exempted purposes but is subject to
taxation.
 Q: Is exclusivity synonymous with dominant use?
 A: No. The words "dominant use" or "principal use" cannot be
substituted by the words "used exclusively" without doing violence to
the Constitution and the law. Solely is synonymous with exclusively.
 Q: What is meant by “actual, direct and exclusive use of the property
for religious, charitable and educational purposes”?
 A: It is the direct and immediate and actual application of the
property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that
is determinative of whether the property is used for tax-exempt
purposes.
 Q: What is the “Flexible Tariff Clause”?
 A: This clause provides the authority given to the President to adjust
tariff rates under Section 401 of the Tariff and Customs Code.
(Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)
 Q: Is the real property tax exemption of religious organizations
violative of the non-establishment clause?
 A: No. Neither the purpose nor the effect of the exemption is the
advancement or the inhibition of religion; and it constitutes neither
personal sponsorship of, nor hostility to religion. (Walz v. Tax
Commission, 397 US 664)
 Q: Define taxes.
 A: These are enforced proportional contributions from persons and
properties, levied by the State by virtue of its sovereignty for the
support of the government and for all its public needs. (1Cooley 62).
 Q: What are the basic features of the present income tax system?
 A: Our present income tax system has the following basic features:
1. It has adopted a comprehensive tax situs by using the nationality,
residence, and source rules.
2. The individual income tax system is mainly progressive in nature
in that it provides graduated rates of income tax.
 Note: Corporations in general are taxed at a flat rate of 30% of net
income.
3. It has retained a more schedular than global features with respect
to individual taxpayers but has maintained a more global treatment
on corporations.
4. Direct Tax – tax burden is borne by the income tax receipient
upon whom the tax is imposed
 Q: Distinguish global system from schedular system of income
taxation.
 A: Under a scheduler system, the various types or items of income
(compensation, business or professional income) are classified
accordingly and are accorded different tax treatments, in accordance
with schedules characterized by graduated tax rates. Since these
types of income are treated separately, the allowable deductions
shall likewise vary for each type of income.
Under the global system, all income received by the taxpayer are
grouped together, without any distinction as to the type or nature of
the income, and after deducting therefrom expenses and other
allowable deductions, are subjected to tax at a fixed rate.
 Q: What is a semi-schedular or semi-global tax system?
 A: A system where the compensation, business or professional
income, capital gain and passive income not subject to final tax, and
other income are added together to arrive at the gross income, and
after deducting the sum of allowable deductions from business or
professional income, capital gain and passive income not subject to
final tax, and other income, in the case of corporations, as well as
personal and additional exemptions, in the case of individual
taxpayers, the taxable income is subjected to one set of graduated
tax rates; method of taxation under the law.
 Q: What are the criteria in imposing Philippine income tax?
1. Citizenship Principle – A citizen taxpayer is subject to income tax:
a. On his worldwide income, if he resides in the Philippines.
b. Only on his income from sources within the Philippines, if he
qualifies as non-resident citizen.
2. Residence Principle – a resident alien is liable to pay income tax
on his income from sources within the Philippines but exempt from
tax on his income from sources outside the Philippines.
3. Source Principle – a non-resident alien is subject to Philippine
income tax because he derives income from such sources within the
Philippines such as dividend, interest, rent or royalty
 Q: What are the two periods that may be used by the taxpayer in
the computation of taxable income?
 A:
1. Fiscal year period – accounting period of 12 months ending on the
last day of any month other than Dec.
2. Calendar year period – accounting period from Jan. 1 to Dec. 31.
 Q: What are the classifications of individual taxpayers
 A:
 1. Resident Citizen (RC) – Citizens of the Philippines who are residing
therein.
2. Non-resident Citizen (NRC) –
a. A citizen of the Philippines who establishes to the satisfaction of
the CIR the fact of his physical presence abroad with a definite
intention to reside therein;
b. A citizen of the Philippines who leaves the Philippines during a
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis;
c. 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;
d. A citizen who has been previously considered as NRC and who
arrives in the Philippines at any time during 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;
e. The taxpayer shall submit proof to the CIR 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 purposes of
this section. (Sec. 22 [E], NIRC)
3. Resident Alien (RA) – An individual whose residence is within the
Philippines but who is not a citizen thereof. (Sec. 22 [F], NIRC)
Note: He is one who is actually present in the Philippines and not a
mere transient or sojourner. Residence does not mean mere physical
presence, an alien is considered a resident or non-resident
depending on his intention with regard to the length and nature of
his stay.
 4. Non-resident Alien (NRA) – an individual whose residence is not
within the Philippines and who is not a citizen thereof. (Sec. 22 [G],
NIRC)
 Q: What are the kinds of corporation under the NIRC?
 A:
1. Domestic Corporation (DC) – a corporation created or organized in
the Philippines or under its laws and liable for income from sources
within and without the Phillipines (Sec 22[C], NIRC)
2. Resident Foreign Corporation (RFC) – a corporation which is not
domestic and not engaged in trade or business in the Philippines is
liable for income from sources within.
Note: In order that a foreign corporation may be regarded as doing
business within a State there must be continuity of conduct and
intention to establish a continuous business, such as the
appointment of a local agent and not one of a temporary character.
(CIR v. BOAC, GR L-65773-74, Apr. 30, 1987)
3. Non-Resident Foreign Corporation (NRFC) – a corporation which is
not domestic and not engaged in trade or business in the Philippines
is liable for income from sources within. (Sec.22 [I], NIRC)
4. Special Types of Corporation – those corporations subject to
different tax rates.
a. Proprietary educational institutions and non-profit hospitals
b. Domestic depositary bank (foreign currency deposit units)
c. International carriers
d. Offshore banking units
e. Regional or Area Headquarters and Regional operating
Headquarters of multinational companies
f. Non-resident cinematographic film owners, lessors or distributors
g. Non-resident owners or lessors of vessels chartered by Philippine
nationals
h. Non-resident lessors of aircraft, machinery and other equipment
 Q: What are the classifications of partnerships in so far as tax is
concerned?
A:
1. General Professional Partnership (GPP);
2. Business Partnership.
 Q: What is a co-partnership or business partnership?
 A: These are partnerships, other than GPP, whether registered or
not. They are considered as corporations and therefore are taxed as
corporation.
 Q: What is a GPP?
 A: A GPP is a partnership formed by persons for the sole purpose of
exercising their common profession. (Sec. 22 [B], NIRC)
 Q: Is GPP subject to income tax?
 A: No, they are not subject to income tax but are required to file
information returns for its income for the purpose of furnishing
information as to the share in net income of the partnership which
each partner should include in his individual return. Partners shall be
liable for income tax in their separate and individual capacities. The
share in thepartnership income is taxable to the individual partners,
whether or not the share has been distributed, because the GPP
itself is not taxable. Thus, there is a constructive receipt of income in
case of GPPs.
 Q: What is income tax?
 A: A tax on all yearly profits arising from property, profession, trade
or business, or a tax on person’s income, emoluments, profits and
the like. (Fisher v. Trinidad, GR L-19030. Oct. 20, 1922)
 Q: What is the basis of income tax?
 A: Income tax is based on income, either gross or net, realized in
one taxable year.
 Q: What is the nature of income tax?
 A: It is generally regarded as an excise tax. It is not levied upon
persons, property, funds or profits but on the privilege of receiving
said income or profit.
 Q: What is income?
 A: It refers to all wealth which flows into the taxpayer other than as
mere return of capital. It includes the forms of income specifically
described as gains and profits, including gains derived from the sale
or other disposition of capital assets. (Sec. 36, RR No.2)
 Income is a flow of service rendered by capital by payment of money
from it or any benefit rendered by a fund of capital in relation to
such fund through a period of time. (Madrigal v. Rafferty, GR 12287,
Aug. 8, 1918)
 Q: What is gross income taxation?
 A: It is a system of taxation where the income is taxed at gross. The
taxpayer und
 What is the definition of “gross income” under the NIRC?
 A: Except when otherwise provided, gross income means all income
derived from whatever source, including (but not limited to) to the
following items: [CG2I- R2DAP3]
1. Compensation for services in whatever form paid, including, but
not limited to fees, salaries, wages, commissions and similar items;
2. Gross income derived from the conduct of trade or business or the
exercise of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities
9. Prizes and winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general
professional partnership. (Sec. 32 [A], NIRC)
 Q:What is net income taxation?
 A: It is a system of taxation where the income subject to tax may be
reduced by allowable deductions.
 Q: What is taxable income or net income?
 A: All pertinent items of gross income specified in the NIRC, less the
deductions and/or personal and additional exemptions, if any,
authorized for such types of income by the NIRC or other special
laws.
 Q: What is compensation income?
 A: It includes all remuneration for services rendered by an employee
for his employer unless specifically excluded under the NIRC. (Sec.
2.78.1, RR 2-98)
 Q: Define fringe benefit.
 A: Fringe benefit is any good, service or other benefit furnished or
granted by an employer in cash or in kind in addition to basic
salaries, to an individual employee, except a rank and file employee,
such as but not limited to:
HEV-HIM-HEEL
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver and others
5. Interest on loans at less than market rate to the extent of the
difference between the market rate and the 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
10. Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows (Sec. 33 [B],
NIRC; Sec. 2.33 [B], RR 3-98)
 Q: What comprises business income?
 A: It refers to income derived from merchandising, mining,
manufacturing and farming operations.
 Note: Business is any activity that entails time and effort of an
individual or group of individuals for purposes of livelihood or profit.
 Q: What is professional income?
 A: It refers to the fees received by a professional from the practice
of his profession, provided that there is no employer-employee
relationship between him and his clients.
 Q: Distinguish "capital asset" from "ordinary asset".
 A: The term capital asset is defined by an exclusion of all ordinary
assets. Thus, those properties not specifically excluded in the
statutory definition constitutes capital assets, the profits or losses on
the sale or the exchange of which are treated as capital gains or
capital losses. Conversely, all those properties specifically excluded
are considered as ordinary assets and the profits or losses realized
must have to be treated as ordinary gains or ordinary losses.
 Accordingly, "Capital assets" includes property held by the taxpayer
whether or not connected with his trade or business, but the term
does not include any of the following, which are consequently
considered as "ordinary assets": [SOUR]
1. 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
 2. Property held by the taxpayer primarily for sale to customers in
the Ordinary course of trade or business
3. Property Used in the trade or business of a character which is
subject to the allowance for depreciation provided in the NIRC
4. Real property used in trade or business of the taxpayer
 Q: Distinguish ordinary gain from capital gain.
 A: Ordinary gain is a gain derived from the sale or exchange of
ordinary assets such as SOUR while Capital gain is a gain derived
from the sale or exchange of capital assets or property not
connected with the trade or business of the taxpayer other than
SOUR.
 Q: Differentiate capital gain from capital loss.
 A: Capital Gain includes the gain derived from the sale or exchange
of an asset not connected with the trade or business. Capital Loss is
the loss that may be sustained from the sale or exchange of an asset
not connected with the trade or business. Capital loss may not
exceed capital gains when used as a deduction to income
 Q: Define “passive income.”
 A: Passive income refers to income derived from any activity on
which the taxpayer has no active participation or involvement.
 Q: What is meant by “income subject to final tax?” Give at least two
examples of income of resident individuals that is subject to the final
tax.
 A: Income subject to final tax refers to an income wherein the tax
due is fully collected through the withholding tax system. Under this
procedure, the payor of the income withholds the tax and remits it
to the government as a final settlement of the income tax due on
said income. The recipient is no longer required to include the item
of income subjected to "final tax" as part of his gross income in his
income tax returns.
 Examples of income subject to final tax are dividend income, interest
from bank deposits, royalties.
 Q: What is interest income?
 A: It is the amount of compensation paid for the use of money or
forbearance from such use.
 Q: How is interest income taxed?
 A: Interest income is considered as passive income subject to final
tax.
 Q: What is dividend income?
 A: Dividend income is a corporate profit set aside, declared and
distributed by the board of director of a corporation to be paid to
stockholders on demand or at a fixed time.
 Q: How is dividend income taxed?
 A: Dividend income is considered as passive income subject to final
tax.
 Q: What are royalties?
 A: Royalties are sums of money paid to a creator or a participant in
an artistic work, based on individual sales of the work. In order to
receive royalties, the work must generally have a copyright or
patent.
 Q: What is rental income and what is its scope?
 A: Rental income is a fixed sum, either in cash or in property
equivalent, to be paid at a definite period for the use or enjoyment
of a thing or right.
 All rentals derived from lease of real estate or personal property, of
copyrights, trademarks, patents and natural resources under lease.
 Q: When is prepaid rent taxable?
 A: Prepaid or advance rental is taxable income to the lessor in the
year received, if received under a claim of right and without
restriction as to its use, regardless of method of accounting
employed.
 Q: What is an annuity?
 A: It refers to the periodic installment payments of income or
pension by insurance companies during the life of a person or for a
guaranteed fixed period of time, whichever is longer, in
consideration of capital paid by him.
 The portion representing return of premium is not taxable while that
portion that represents interest is taxable.
 Q: What is the meaning of prizes and winnings for the purposes of
income taxation?
 A: It refers to amount of money in cash or in kind received by
chance or through luck and are generally taxable except if
specifically mentioned under the exclusion from computation of
gross income under Sec. 32[B] of NIRC.
 Q: What is pension?
 A: It refers to amount of money received in lump sum or on
staggered basis in consideration of services rendered given after an
individual reaches the age of retirement.
 Q: When is pension taxable?
 A: Pension being part of gross income is taxable to the extent of the
amount received except if there is a BIR approved pension plan
 Q: Is the income of GPP taxable?
 A: GPP is not taxable as an entity but the partner’s share in the net
income of GPP is included in his gross income.
 Q: How do we compute the distributive share of each partner in the
net income of a GPP?
 A: For purposes of computing the distributive share of each partner,
the net income of the partnership shall be computed in the same
manner as a corporation. (Sec. 26, NIRC)
 Each partner shall report as gross income in his return, his
distributive share in the net income of the GPP, whether actually or
constructively received.
 Q: Define deductions from gross income.
 A: Deductions from gross income refer to items or amounts
authorized by law to be subtracted from pertinent items of gross
income to arrive at the taxable income.
 Q: What are the requisites for deductibility of expenses (in general)?
 A: D-STROWN
1. Paid or incurred During the taxable year;
2. The expense must be Substantiated by proof; (substantation rule)
3. The expense must be incurred in Trade or business carried on by
the taxpayer;
4. The expense must be Reasonable;
5. The expense must be Ordinary and necessary;
6. If subject to Withholding taxes, proof of payment to BIR; and
7. Expenses must Not be against public policy, public moral or law
such as bribes, kickbacks, for immoral purposes.
 Q: What is ordinary expense?
 A: It is any expense that is normal or usual in relation to the
taxpayer’s business and the surrounding circumstances. (General
Electric [P.I.] Inc. v. Collector, CTA Case 1117, July 14, 1963)
 Q: What is necessary expense?
 A: Necessary expense is one which is appropriate and helpful in the
development of taxpayer’s business and is intended to minimize
losses or to increase profits. (Ibid.)
 Q: How is interest as a deduction from gross income defined?
 A: Interest shall refer to the payment for the use or forbearance or
detention of money, regardless of the name it is called or
denominated. It includes the amount paid for the borrower’s use of
money during the term of the loan, as well as for his detention of
money after the due date for its repayment. (Sec. 2 [a], RR 13-
2000)
 Q: What is Tax Benefit Rule?
 A: Taxes allowed as deductions, 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. (Sec. 34 C [1], NIRC).
 Q: What are considered “losses” for purposes of deductions from
gross income?
 A: Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity. (Sec. 34
D [1], NIRC)
 Q: What is NOLCO?
 A: It is the excess of allowable deductions over gross income of
business for any taxable year which had not been previously offset
as deduction from gross income.
 Q: What are bad debts?
 A: Bad debts refer to debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amount due to the taxpayer by
others, arising from money lent or from uncollectible amounts of
income from goods sold or services rendered. (Sec. 2, RR 5-99)
 Q: What is optional standard deduction (OSD)?
 A: The OSD is a scheme whereby a taxpayer is given the option to
deduct from his gross revenue or gross income a lump sum
equivalent to a percentage of such gross revenue or gross income
for purposes of computing the net taxable income on which the
income tax rate will be applied.
 Note: This is in lieu of the itemized deduction where the taxpayer
lists down all his expenses and the corresponding amounts incurred
to determine the amount of allowable deductions.
 Q: How much is allowed as OSD?
 A: The optional standard deduction is an amount not exceeding:  A: It is applicable to domestic and resident foreign corporations.
1. 40% of the gross sales or gross receipts of a qualified individual  Q: To what corporations is the minimum corporate income tax
taxpayer; or (MCIT) applicable?
2. 40% of the gross income of a qualified corporation. (Sec. 34 [L],  A: It is applicable to domestic and resident foreign corporations
NIRC) which are subject to regular income tax.
 Q: Differentiate itemized deduction from OSD.  Note: Under its charter, Philippine Airlines is exempt from the MCIT.
 A: Itemized Deduction must be substantiated by receipts while OSD (CIR v. Philippine Airlines, Inc., GR 180066, July 7, 2009)
requires no proof of expenses incurred because the allowable  Q: What is the treatment under the MCIT?
deduction is 40% of gross sales or receipts or gross income as the  A: Under the MCIT, tax is imposed on a corporation at the rate of
case may be. 2% based on gross income
 Q: What are personal exemptions?
 A: These are arbitrary amounts allowed as deductions from gross
income of an individualrepresenting personal, living and family
expenses of the taxpayer.
 Q: What are the kinds of personal exemptions?
 A:
1. Basic Personal Exemption – the amount subtracted from gross
income which is allowed for the theoretical personal, family, and
living expenses of an individual taxpayer regardless of status,
whether single or married individual judicially decreed as legally
separated with no qualified dependents or head of the family.
2. Additional Exemptions – these are exemptions in addition to the
basic personal exemptions that are granted to certain individual who
have dependents that qualify them for this exemption.
 Q: What is taxable income?
 A: The term taxable income means the pertinent items of gross
income specified in the NIRC, less the deductions and/or personal
and additional exemptions, if any, authorized for such types of
income by the NIRC or other special laws.
 Q: How are corporations treated under normal corporate income tax
(NCIT)?
 A: Under the normal income tax, the taxable income of a corporation
during each taxable year is multiplied with the applicable rate of
30%.
 Note: The resulting amount should then be compared with the
income tax payable using the MCIT. Whichever is higher between
the two shall be the tax due.
 Q: To what corporations is the NCIT applicable?