Table of Contents Chapters Page I. BasicPrinciple of Taxation 8 a. Inherent limitation of Taxation 8 b. Constituti onal limitation of T axation 12 c. Exemption from Estate Tax of by Virtue of Incidental purpose 1d. International !uridical T axation 21 e. "octrine of E#uitable $ecoupment 2% II. T axable Persons &2 a. Indi'idual &2 b. Corporations &c. T rust and Estate (1 III. Kinds of Income ( a. )IT (& b. *IT (% c. +IT (, d. -CIT (e. PCIT (8 f . I/ET (8 IV . Sources of Income (0 a. Interest (0 b. ale of hares and "i'idend %1 c. er'ices %& d. $oyalties and $entals %( e. ale of $eal Property %, f. ale of Personal Property V. Capital and Ordinary Asset CH AP TE R 1
a. Inherent limitation of Taxation 8 b. Constitutional limitation of Taxation 12 c. Exemption from Estate Tax of by Virtue of Incidental purpose 17 d. International Juridical Taxation 21 e. Doctrine of Equitable Recoupment 25
II. Taxable Persons 32
a. Individual 32 b. Corporations 37 c. Trust and Estate 41
III. Kinds of Income 4
a. NIT 43 b. GIT 45 c. FIT 46 d. MCIT 47 e. OPCIT 48 f. IAET 48
IV. Sources of Income 49
a. Interest 49 b. Sale of Shares and Dividend 51 c. Services 53 d. Royalties and Rentals 54 e. Sale of Real Property 56 f. Sale of Personal Property V. Capital and Ordinary Asset
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The power to tax is an inherent prerogative of sovereignty; it can be
exercised and enforced even without constitutional or statutory provision. This
power is inherent in the national government but not in the local government units
(LGU’s). Since LGUs have no inherent power to tax, it cannot impose taxes upon
their respective inhabitants unless the power to tax is expressly granted to them by
them by the Constitutional by law passed by Congress.
The power to tax depends on the existence of the State; the moment the State exist,
automatically, the power of taxation also exists.
Inherent Limitation of Taxation
The following are inherent limitation of taxation:
1.It should be for public purpose;
2. It is inherently legislative;
3.Government is tax exempt;
4.Territoriality; and
5.International comity.
Q. What if Congress appropriate money for development of a property belonging to
a private person, is the appropriation valid?
A. The SC ruled in Pascual vs. Secretary of Public Work and Highways (G.R. No. L-10405, December 29, 1960) that “It is general rule that the legislative is without
power to appropriate public revenue for anything but a public purpose.” It is the
essential character of the direct object of expenditure, which must determine its
validity as justifying a tax, and not the magnitude of the interest to be affected nor
the degree to which the general advantage of the community, and, thus the public
welfare may be ultimately benefited by their promotion. Incident to the public or to
the State, which results from the promotion of private interest and the property of
private enterprises or business, does not justify their aid by the public money.
Q. May the government tax itself?
A.First determine who the taxing authority is. If the taxing authority are LGU’s,
the answer is no RA 7160, the local Government Code (LGC), expressly prohibits
LGUs from levying tax from the national government, its agencies and
instrumentalities and other LGUs
Under Sec. 133 (o) of the LGC, “the taxing power of the LGUs shall not extend to
taxes, fees, charges of any kind, on the national government, its agencies and
instrumentalities (except income from public utility under their jurisdiction).
The city of Manila, being a mere Municipal Corporation, has no inherent power to
tax. LGUs have no power to tax instrumentalities of the national government.PAGCOR, being an instrumentality of the national government, is therefore exempt
from local taxes, otherwise, its operations might be burdened, impeded, or
subjected to control by a mere LGU.
Mactan Cebu International Airport vs. Marcos
261 SCRA 667
Mactan cannot invoke Sec 133 (o), LGC; it refers to local taxation, And since the
last par of Sec 234 unequivocally withdrew upon the effectivity of the LGC
exemption from payment of real property taxes granted to natural person and juridical person including Government-Owned and Controlled Corporations
(GOCCs) except as provided in the said section, and the petitioner is, undoubtedly
a GOCC, it is necessarily follows that its exemption from tax granted in sec 14 of its
charter, RA 6958, has been withdrawn.
Take note that if the taxing authority is the national government the answer to the
previous question is yes. Pursuant to the provisions of National Internal Revenue
Code (NIRC), RA 8424, it can levy tax upon GOCCs (see Section 27C NIRC),
agencies and instrumentalities although income derived from the exercised of
essential government functions are exempt (see Section 32B7b of NIRC).
Q. What is the source of power to tax of LGUs outside the Autonomous Region
and those within the Autonomous Region?
A. Those LGUs outside the Autonomous Region derive its power to tax from the
1987 Constitution, Section 5 of Article X states that “Each local government unit
shall have the power to create its own sources of revenues 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.” This Constitutional
provision is a self-executing provision.
However, this rule is applicable only to LGUsoutside the Autonomous Regions
(Muslim Mindanao and the Cordilleras). The authority to tax of LGUswithin
Autonomous Region is not delegated by the constitutional provision but by the
organic act creating the LGUs with autonomous region. This is implied under
Article X, Section 20 second number of the 1987 Constitution. It states that
“Within its territorial jurisdiction and subject to the provision of this Constitution
and national laws, the organic act of autonomous regions shall provide for
legislative powers over: xxx) (2) Creation of sources of revenues.”
This constitutional provision merely authorizes the Congress to pass the Organic
act of Autonomous Region, which shall provide for legislative powers to levy taxes
upon their inhabitants. Section 20, Article X of the 1987 Constitution is not a self-
executing provision as compared to Article X section 5 of the Constitution.
Therefore, the LGUs power to tax is based on 1987 constitution subject only to
such guidelines and limitation as the Congress may provide. The power to tax
LGUs within Autonomous Region is based on the Organic act, which the 1987
Constitution authorizes Congress to pass The limitation and guidelines under LGC
is applicable only to LGUs outside the Autonomous Region.
Q. The LGC embodies local taxation, is it not the source of authority of the
LGUs to levy taxes?
A. No, as stated, the 1987 Constitution is the source of the taxing power of theLGUs (Except the autonomous region); it serves only as a guidelines and limitation
provided for the Congress in the exercise of LGUs power to tax.
Territoriality
Taxation is territorial in such a manner that the taxing authority cannot impose
taxes on subject beyond its territorial jurisdiction. However, taxing authority may
determine the tax situs.
Philippine Match Co. vs. The City of Cebu
G.R. No.L-30745 January 18, 1978
The sales in the instant case were in the city and the matches sold were stored in
the city. The fact that the matches were delivered to customers, whose places of
business were outside of the city, would not place those sales beyond the city’s
taxing power. Those sales formed part of the merchandising business being
assigned on by the company in the city. In essence, they are the same as the sled
of matches fully consummated in the city.
Furthermore, because the seller’s place of business is in Cebu City, it cannot be
sensibly argued that such sales sold be considered as transactions subject to the
taxing power of political subdivisions where the customers resided and accepteddelivery of the matches sold.
International Comity
State must recognize the generally accepted tenets of international law.
CIR vs. Lednicky
G.R. Nos. L-18169, L-18262 & L-21434, July 31, 1964
To allow an alien resident to deduct from his gross income whatever taxes he pays
to his own government amounts to conferring on the latter the power to reduce the
tax income of the Philippine government simply by increasing the tax rates on the
alien resident. Every time the rate of taxation imposed upon an alien resident is
increased by his government, his deduction, from Philippine taxes would
correspondingly increase and the proceeds for the Philippines diminished, therebysubordinating our own taxes to those levied by a foreign government. Such a result
is incompatible with the status of the Philippines as an independent and sovereign
state.
Constitutional Limitations on Power to Tax
The constitutional limitation on the power to tax are the following:
1.Due process;
2.Equal protection;
3.Non-impairment of contract;4.Non-imprisonment for non-payment of poll tax; and
5.Freedom of religion.
Due process
This prohibition refers to Section 1 of Article III of 1987 Constitution which states
that :No persons shall be deprived of life, liberty, or property without due process of
law, xxx. “The due process clause as a limitation to the power to tax refers bothto
substantive and procedural due process.
Substantive due process requires that a tax statute must be within theconstitutional authority to pass, and that it must be reasonable, fair, and just.
For instance, when the Congress passes a law exempting the 13th moth pay from
tax but with the concurrence of only majority of the quorum, the law would be
invalid because the Constitution requires “that any grant of tax exemption shall be
passed with the concurrence of the majority of all the members of the Congress”.
Hence, the constitutional provision is violated by not following the required
majority.
Procedural due process, on the other hand, requires notice and hearing or at least
the opportunity to be heard.
Q. If procedural due process requires notice and hearing, does it follow that the
adverse party in a proceeding must always be notified?
A. No. As a rule, notice and hearing or opportunity to be heard is necessary only
when expressly required by law. Where there is no such requirement, notice and
Before October 1, 1995, one can serve temporary restraining order without
notifying the adverse party. If a person is a suspect in a criminal case, he has the
right to have an opportunity to be heard if there is a law requiring such process:
otherwise, it is dispensable.
Another example is in case of search warrants: a person to be searched is not
notified. The person searched cannot claim that there is violation of due process
because there is no law requiring a person to be searched should be notified.
Fortunately, majority of proceedings requires
Equal Protection Clause
This is also based on Section 1 of Article III of 1987 Constitution. It states “ xxx nor
any person shall be denied of equal protection of the laws.” As a rule taxpayers of
the same footing are treated alike, both as to privileges conferred and liabilities
imposed. Difference in treatment is allowed only when based on substantialdistinction. Difference in treatment not based on substantial distinction is frowned,
upon as “class legislation”.
The equal protection clause is violated when taxpayers belonging to the same
classification are treated differently from one another, and when taxpayers
belonging to different classifications are treated alike.
Q. If a tax ordinance is applied to only one entity or taxpayer, is there a
violation of the equal protection clause?
A. It depends. If the ordinance is intended to apply to a specific taxpayer and to no
one else regardless of whether or not other entities belonging to the same class are
established in the future, it is a violation of the equal protection clause. But if the
ordinance is intended to apply also in the future, then the tax ordinance is valid
even if in the meantime it applies only to an entity or taxpayer for the simple
reason that there is so far only one member of the class subject to the tax
measure.
Ormoc Sugar Company vs. Ormoc City
GRN L-23794 February 17, 1968
When the taxing ordinance was enacted, Ormoc Sugar Co., Inc. was the only sugarcentral in the City. A reasonable classification should be in terms applicable to
future conditions as well. The taxing ordinance should not be singular and
exclusive as to exclude any subsequently established sugar central.
Q. What are the requirements of reasonable classification?
A. Equal protection clause applies only to persons or things identically situated
and do not bar a reasonable classification of the subject of legislation. A
Q. Why is non-imprisonment for non-payment of a poll tax a limitation on the
power to tax?
A. Because payment is optional, it is not mandatory or obligatory. The only penalty
for non-payment of a poll tax is fine not imprisonment thereby limiting the power to
tax.
Freedom of Religion
Section 5 of Article III of the 1987, Constitution states that “No law shall be made
respecting an establishment of religion xxx.” If respecting an establishment of
religion is prohibited with much more reason that a creation of religious
establishment is prohibited. Corollary, Section 5 of Article II of the 1987
Constitution observes the separation of Church and State.
Q. What happens if the government establishes a religion?
A. If it will establish a religion, it will require a special appropriation from theNational Treasury; therefore, it will violate Section 5 of Article III of the 1987
Constitution.
Exemption from Real Estate Tax by Virtue of Incident Purpose
To fully understand this concept, four Supreme Court decisions should be fully
scrutinized:
1.Herrera vs. QC Board of Assessment Appeals;
2.Abra Valley College vs. Aquino;
3.Province of Abra vs. Hernando; and
4.Philippine Lung Center vs. QC Board of assessment Appeal.
In these four cases we have to know the governing constitution at the time the
cause of action arouses; otherwise, we will not understand the relevance of these
cases.
In Herrera vs. QC, the governing constitution is the 1935 Constitution ; in Province
of Abra vs. Hernando, the 1973 Constitution, Abra Valley vs. Aquino, the 1935
Constitution; and in Philippine Lung Center vs. QC, the 1987 Constitution.
Q. What is the importance of determining the prevailing Constitution at the
time the cause of action arises?
A. The requirements for exemption of the entity involved are different. In 1935
Constitution, the exemption from real estate tax requires that the real property
should be exclusively used for the entity exempted. In 1987, and 1973
Constitutions, the requirements is “exclusively, actually and directly.”
Q . Who are the entities covered under these constitutions?
A. in 1987 and 1935 Constitutions, the entities covered of such exemption are
religious, charitable and education. In 1973 Constitution, it only provides for
charitable and religious institutions.
Take note that under NIRC or in any other Philippine statutes, there is no such
thing as exemption by virtue of incidental purpose. This principle refers only to one
and only tax; the real property tax. This principle originated in the Supreme Courtdecision in the case of Herrera vs. QC.
Herrera vs. QCBAA
GRN L-15270, September 30, 1961
The entity involve here is a charitable institution. QC wanted to collect real
property tax because St, Catherine hospital sometime collects fees from certain
patients. It also operates midwifery and nursing school, and dormitory. Quezon
City contends that the real property must be used exclusively using the land from
charitable purpose; hence, liable for real property tax.
The Supreme Court ruled the exemption from real property tax by virtue of
incidental purpose. The exemption granted was to all properties of St, Catherine
whether for paying or non-paying patient, whether it is used by the nursing school,
midwifery school and dormitory.
This is the case were the SC coined the term exemption by virtue of incidental
purpose from real property tax.
The provincial prosecutor filled a petition declaratory relief. The issue is whether or
not the property of the Roman Catholic in Bangued, Abra is exempt or not exempt
from real property tax. In this case, the judge merely stated that the RomanCatholic of Bangued is exempt without conducting a hearing. Take notice that this
case is under the 1973 Constitution. The petitioner went to SC and filed certiorari
for violation of the procedural process on the part of the Province of Abra.
The SC stated that if only the judge had read the 1973 Constitution, he should
have known the difference between the 1935 and the 1973 Constitution and he
could not have summarily dismissed the case. There is a substantial distinction
between the 1935 nag 1973 Constitution. In the 1935 institution, the requirement
for exemption for real property is “exclusively” while the 1973 Constitution requires
“actually, directly and exclusively.” The SC remanded to the court of origin for
further hearing.
The important thing in this case is that the SC had already noticed the great
difference of the substantial distinction between exemptions from real property
The entity involve in this case is an educational institution and the cause of action
arouse under the 1935 Constitution. The school entered into a contract of lease as
a lessor. The lessees are Northern Marketing Corporation in the ground floor and
the director of school in the second floor. The Province of Abra contended that the
property was not exclusively used for educational purposes and it tried to collect
real property tax.
The SC ruled that the provincial government of Abra is partially correct. With
regard to the lease where the lessee is a domestic corporation, it is not exempt
because it has nothing to do with the operation of the entity of the school. But with
regard with the lease to the director of the school, it is still exempt based on
exemption by virtue of incidental purpose. In other words, it merely reiterated its
prior ruling in the Herrera case.
However, the ruling here is not the same as Herrera, the exemption granted in
Herrera is total while in this case, the exemption is partial. Take note that both
cases arouse under the 1935 constitution.
Philippine Lung Center vs. QC
G.R. No. 144104, June 29, 2004
The cause of action arouses under 1987 Constitution. The petitioner is a charitable
institution. QC contended that the petitioner is liable for real property tax because
the ground floor was leased to drugstore, clinic, and grocery and the vacant land
was leased planters of orchid. QC further contended that under the 1987
Constitution, the real property exemption entities must be used “actually, directly
and exclusively.” For charitable purpose and the petitioner failed to fall within theexemption because of leases to private entities and the acceptance of paying
patients. The Lung Center invoked the SC ruling in the case of Herrera.
The SC ruled that the Herrera ruling is no longer applicable because the cause of
action arouse under the 1935 Constitution. However, the SC ruled that the
property leased to private entities should be assessed real estate tax but those
which are used by patient paying or non-paying is exempt from tax.
Analysis
When the SC rejected the Herrera ruling, it is correct. But when it ruled that the
property leased to private entities should be assessed real estate tax but those
which are used by patient, paying or non-paying, are exempt from tax, it impliedly
reiterated its ruling in Abra Valley vs. Aquino where the SC reiterated the
exemption by virtue of incidental purpose enunciated in Herrera.
Q. Is exemption by virtue of incidental purpose still applicable in this case?
1. Yes. In Philippine Lung Center vs. QC, the SC adhered to this policy.
Implied, it goes back to the principle of exemption by virtue of incidental
purpose. The SC adopted the case of Abra Valley vs. Aquino where it reiterated
the ruling in Herrera on exemption by virtue of incidental purpose.
2.No. This principle originated from a SC decision in the case of Herrera
during the time where the 1935 Constitution says that real property must be“exclusively” used for educational, religious or charitable purposes. With the
additional requirement under the 1987 Constitution, it must be used
“actually, directly and exclusively.” The Herrera ruling is no longer controlling
because of the principle that the governing law in an action is the law or
constitution t the time the cause of action arouse. The Herrera ruling was
decided under the 1935 Constitution while the Phil. Lung Center is under the
1987 Constitution. In addition, Philippine Lung Centers expressly reject the
Herrera ruling in which the principle of exemption by virtue of incidental
purpose originated.
International Juridical Double Taxation
The principle of international juridical double taxation is enunciated by the
Supreme Court in the case of Commissioner of Internal Revenue vs. Johnson and
Johnson, infra. The discussion of this principle has been incorporated in the
digested case below.
CIR vs. Johnson and Johnson (Philippines)
GRN 127605, June 25, 1999
This is a landmark decision because the SC enunciated, for the first time, the principle of international juridical double taxation.
In this case, Johnson and Johnson (Philippines) and Johnson and Johnson (USA),
a non-resident foreign corporation (NRFC), entered into a agreement allowing
Johnson and Johnson Philippines to use its trademark, trade name, goodwill and
the secret formula. In turn, the domestic corporation (DC) will pay a certain sum of
money known in law as royalty. The income earner in this case is SC Johnson and
Johnson USA. This income is subjected to income tax in the Philippines and US.
In this case, the SC coined the term international juridical double taxation because
a particular income is subjected to two income taxes; the Philippine income tax lawand the income tax law under Federal Revenue Code of US.
The income earned by SC Johnson USA was subjected to Philippine income tax
law. Johnson withheld income tax of 25% of the royalties transmitted to the
Johnson USA. After payment, the SC Johnson discovered that under the subtitle
the “Most Favored Nation,” the rate of income tax is 10% if it was paid under similar
For instance, the government initiated an expropriation proceeding. The
government is obliged to pay the taxpayer for just compensation, for example
500,000.00 pesos. On the other hand, the taxpayer is obliged to pay tax, for
instance, an income tax amount to 100,000.00 pesos. The government will collect
the income tax of 100,000.00 pesos, and then the taxpayer may say, “Why not pay
me not 500,000.00 pesos but 400,000.00 pesos.” The taxpayer, in this example, is
requesting the application of compensation under the New Civil Code.
The doctrine of equitable recoupment is different from doctrine of set-off. Under
thedoctrine of equitable recoupment, the taxpayer is entitled to claim for a
refund which was already barred by law on prescription, and subsequently, he was
obliged again to pay income tax.
To illustrate, a taxpayer is liable only to pay income tax of 10,000.00 pesos, instead
of paying such income tax, he paid an income tax of 100,000.00 pesos. Therefore,
he is entitled to a claim for 90,000.00 pesos refund. For failure to claim the
refund, his right to claim has prescribed.
Subsequently, the taxpayer is being obliged again to pay income tax of 100,000.00
pesos. Can the taxpayer tell the BIR,“I do not deny my liability for this year of
100,000.00 pesos income tax but I have a claim of 90,000.00 pesos tax refund
which I failed to recover because of prescription, may I request that the 90,000.00
pesos be credited so that I am going to pay only 10,000.00 pesos?”If doctrine of
equitable of recoupment is applicable, the request will probably be granted.
Take note that the doctrine of equitable recoupment is not allowed in our country.
The prohibition is an absolute prohibition. The reason is that to allow such
prohibition, the government will be tempted to delay the collection of tax and the
taxpayer will be also tempted to delay payment of their tax liability. Secondly, ifthis doctrine will become applicable in our jurisdiction, the government will be
bombarded with so many claims for tax credit.
The study of set off in taxations is best illustrated in the following cases:
1.Republic vs, Mambulao Lumber;
2.Domingo vs. Garlitos;
3.Francia vs.CIR;
4.CALTEX vs. CIR; and
5.Philex Mining vs. COA.
Republic vs. Mambulao
GRN L-177725, February 28, 1962
The tax being claimed by the government against Mambulao is forest charges (Take
note that by virtue of E.O. 37 issued by Pres. Aquino, forest charges was abolished in
1987). Mambulao lumber refused to pay the forest charges alleging that the
government did not use reforestation charges under RA 115 for reforestation which
they had consistently paid in past year. Mambulao contended that their liability to
pay forest charges should be offset from the reforestation charges they had paid
considering that the government did not spend it for reforestation. In summary,
Mambulao is claiming the application of the principle set-off or compensation
under the New Civil Code.
The SC did not agree on the contention of Mambulao. According to SC, thegovernment and Mambulao are not mutually debtors and creditors with one
another and that a tax is not a debt to be a subject matter of set off or
compensation.
Q. What do we mean by the word “mutual”?
A.“Mutual” means that the cause of action must arouse from the same source.
Considering the causes of action of the parties in this case came from different
sources, it is not a proper subject matter of a set off. Moreover, tax is not a debt.
The subject matter of a compensation or set-off under the Civil Code should be adebt; therefore, set off or compensation was not allowed in this case.
Domingo vs. Garlitos
GRN L-18994, June 29, 1963
The government is trying to collect from the estate of the decedent inheritance tax
and estate tax. (Take note that we do not have inheritance tax as well as donee’s
tax. These were abolished in 1974 by virtue of PD 6_). The surviving spouse is the
administratrix of the estate and contended that her late husband has a claim
against the government for the services rendered as cadastral surveyor. Theadministratrix, in turn is invoking the application of doctrine of set-off or
compensation in taxation under the New Civil Code.
The SC ruled that set off is allowed in this case on the ground that both demands
are due, demandable and fully liquidated.Fully liquidated means that the amount
is already determined up to the last centavo. Why is it fully liquidated? The
amount due is already determined because the Congress enacts RA 2700 for the
appropriation of sum of money to the estate of the decedent for his service
rendered as cadastral surveyor.
Take note that inheritance tax is not a debt. Normally, this would not have been a
subject matter of compensation or set-off. Also, the causes of action arouse from
different sources.
Q. Why did the SC ruled otherwise although the facts of the case are almost
identical with the case of Mambulao? What is the compelling reason why the
compensation because RA 6952 expressly states that set-off or compensation
should not be made against the funds of OPSF. With this reasoning, the claim for
set-off was rejected by SC.
Philex Mining vs. CIR
GRN 125704, August 28, 1998
The tax being collected in this case is excise tax under title VI of NIRC (Take note
that excise tax is not covered in the bar exam for the simple reason that most of this
provision are about the rates. During this time, forest charges were abolished
because under the excise tax law one of the subject matters is mining companies like
Philex Mining). Philex, on the other hand, alleged that they have a pending claim
for refund under the VAT law. In sum, Philex do not deny their liability to pay
excise tax but invokes the principle of set-off or compensation in taxation.
The SC did not agree with Philex. The SC reiterated its prior pronouncement in
Mambulao, Francia and CALTEX where government and taxpayer are not mutuallycreditors and debtors with each other. In addition, the SC added that the demand
must be due and demandable. In this case, the claim for refund of Philex is not
yet granted, hence, it cannot be determined how much is the actual amount to be
refunded. It cannot be a subject matter of set off or compensation simply because
the amount is not yet determined.
Philex mining invoked the application of Itogon case. However, nowadays, the
claim for refund with the BIR is not automatic. It has to be assessed and studied
before it will be granted. Unlike in old days, it would seem refund is automatic. If
the refund is not yet granted, then the amount is not yet fully liquidated. Corollary,the claim for application of set off is denied.
This was asked in the 2000 bar.
Discussions
We will notice that in these five cases, with the exception of Domingo vs. Garlitos,
compensation or set off was denied. In all these cases where compensation was
denied, there is a common ground; a tax is not a debt because the subject matters
under the Civil Code of compensation must be a debt. Secondly, the SC keeps on
repeating that the taxpayer and the government are not mutually creditors and
debtors with each other.
However, in all of these cases where set off was denied by the government, there is
always a second reason after reiterating the rule in the case of Mambulao. To
begin with, in the case of Francia, the SC, after reiterating the Mambulao ruling, it
ruled the money was already paid in the PNB account of Francia. In CALTEX, we
have the same reason. In addition, the SC states that RA 6952 do not allow set off
A.No. What is necessary is that he resides in the Philippines because Section 5
of RR-2 provides that RA is neither a traveller nor a sojourner, meaning a tourist.
Nonresident Alien Engaged in Trade or Business
The terms “nonresident alien” means an individual whose residence is not within
the Philippines ad who is not a citizen thereof (Section 22G).
When we say “engage or not engaged,” we are referring to an individual taxpayer.
Use this phrase to NRA becausethere is no RA engaged in trade. As far as
individuals are concerned, when we say “engaged or not engaged in trade,” this
refers only to NRA. We do not use this terms to other individuals. Why as far as
individuals? We have another concept when it comes to corporation.
There are three kinds of NRAE stated in Section 25A1 and RR-2-98.
1.NRA engaged in trade or business in the Philippines;
2.NRA who stay in the Philippines an aggregate of more than 180 days in one
calendar year; and
3.NRA who exercise profession here in the Philippines (see RR 2-98).
Foreigners who stay in the Philippines for an aggregate period of more than 180 in
one calendar year are deemed to be NRAE; underscore the 180 in one calendar
year in Section 25A1.
Q. Supposed a foreigner stayed in the Philippines for 100 days in 2005 and
100 days in 1006, is he NRAE?
A.No. The stay of the foreigner of more than 180 days must be within the same
calendar year.
Nonresident Alien not Engaged in Trade or Business
NRANE is included in income tax simply because there is a possibility that they
may derive income from sources within the Philippines. NRANE is subject to tax,on their gross income received from sources within the Philippines. This is the
only individual subject to gross income tax (GIT).
Aliens Employed in Multinational Organization Offshore Banking Units,
AEMOP are subject to final income tax (FIT) of 15% on their gross income received
from the employer. RR-2-98 requires thatonly alien individuals occupying
managerial and technical positionsare required to pay FIT of 15%.
However, if AEMOP derives income from other sources within the Philippines, it
shall be subject to NIT. Why? This is because of second paragraph of Section 25E
which states “Any income earned from all other sources within the Philippines by
the alien employees referred to under Subsections (C), (D) and (E) hereof shall be
subject to the pertinent income tax, as the case may be, imposed under this Code.”
Alien employed in multinational organizations and offshore baking may be
classified as RA, NRAE or NRANE if they derived income other than their
compensation from their employers. In case of alien employed I petroleum serve,
they are either NRAE or NRANE because Section 22E, first sentence, states that
they are permanent resident of a foreign country.
Take note that the same treatment applies to the Filipinos employed and occupyingthe same position as those aliens employed and occupying the same position as
those AEMOPs.
Corporations
There are three kinds of corporations as a taxable person:
1.Domestic Corporations (DC);
2.Resident Foreign Corporations (RFC); and
3.Nonresident Foreign Corporation (NRFC).
Domestic Corporations
Section 22C states “The term “domestic”, when applied to a corporation, means
created or organized, in the Philippines or under its law. DCs are those created or
organized in the Philippines or under its laws. It is taxable on all income derived
from sourceswithin andwithoutthe Philippines (see Section 23E). Corollary, its
counterpart is the RC, which is also taxable from sources within and without (see
Section23A).
Resident Foreign Corporation
The terms “resident foreign corporation” applies to a foreign corporation engaged in
trade or business within the Philippines (Section 22H). RFCs are taxable only
The definition of corporation, under NIRC, is broader that the definition of the
Corporation Code. Nonetheless, this definition is for taxation purposes only. The
interpretations of the term “no matter how created” in Section 22B is not limited to
partnership; this applies also to corporations.
Q. Is a corporations whose purpose is against the law, a corporation within
the purview of NIRC?
A. Yes. Under the NIRC, any corporations no matter how created is considered a
corporation for taxation purposes.
Q. How about a corporation created under foreign law, is this corporation in
terms of the definition in Section 22B?
A. Yes. Section 22B includes all corporation no matter how created; either by local
law or a foreign law.
Q. How about an organization, can we consider it as a corporation?
A. Yes, although the NIRC is limited to the terms association, organization is
similar to association and operates lie an association. It is considered as an
association which is included I the definition of corporation under Section 22B.
Q. How about a non-stock, non-profit corporation, is this subject to income
tax?
A. Yes. Although a corporation is a non-stock and a non-profit, it may still incurprofit that could be subject to tax. The SC in this case of CIR vs. CTA, 329 SCRA
237, explained this issue.
Q. Is a GPP a corporation in the concept of taxation?
A. No. GPP is not a deemed corporation under NIRC. GPPs are partnerships
formed by persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or business.
There are two kinds of GPP as enunciated by the SC in the case of Tan vs. Del
Rosario, 237 SCRA 324.
1.GPP which is not deemed corporation under section 22B; and
2.GPP which is deemed corporation. These are GPPs which derived income
from engaging in any trade or business.
The definition of GPPs is not interpreted literally.
Q. A GPP composed of lawyers deposited their attorney’s fee I a bank.
Though some time, it earned income. Can we consider the GPP as deemed
corporation for earning income, hence, liable to income tax?
A. No. Although the GPP earned income, it is still exempt from tax. It does not
earned income by engaging to trade or business. Additionally, the bank interest is
already subject to tax ad this income is not mentioned in the income tax return
(ITR) of the GPP because the bank had already filed another return for the interest.
Hence, the income derived is not within the meaning of engaging in any trade or
business.
Remember that a partner in a GPP, which is exempt from taxation, has to file a
return in their individual capacity. Any interest derived by the GPP, which was
given to the partners, shall be subjected to net income tax (NIT) (see Section 26).
In GPPs which are deemed corporation, the interest earned by the shareholder
shall be subject to FIT (section 24B2).
Q. How about joint venture, as a rule, is it tax-exempt?
A.No. As a rule, joint venture are not tax exempt; unlike GPPs, which as a rule,
is tax exempt. However, if the joint venture is engaged in public construction and
projects engaging in petroleum, coal, geothermal ad other energy operation, then
such joint venture is tax exempt (see Section 22B).
Q. How many individuals are present in a joint venture?
A. There are three persons involved in a joint venture: the two corporations which
combine for a particular purpose, and the joint venture itself. This was discussed
in Batangas vs. Collector, 102 Phil. 822.
Trust and Estate
Although trust and estate is separate thing under the Civil Code, they are
considered the same for purposes of taxation. They are of same category; hence,
they are taxed the same.
Estate is the property of the decedent whether located within or without thePhilippines. During the pendency of the settlement of the estate, there is a
possibility that it may earn income, hence, it shall be liable for income tax. Take
note, tax on the income of the estate and estate tax are two separate taxes. The
first one is discussed under Chapter XI which refers to income tax and the other
The term net income tax was not mentioned in NIRC. However, this kind of tax
was referred to as thetaxable income or thegross income. Section 31 states “The
term taxable income means the pertinent items of gross income specified in this
Code, less the deductions and/or personal and additional exemptions, if any,
authorized for such type of income by this Code or other special law.
Section 31 does not state NIT; however, only NIT allows deductions and exemptions.
No other tax allows the same. Thus, taxable income refers to NIT.
Under revenue regulations, NIT is referred to as “the ordinary way of paying income
tax” or the “normal way of paying income tax.” Accountants use the phrase
“includable in the gross income” or “ payment by the net.”
In computing the NIT, it is important to determine whether there is actual gain or
loss. Gain is the flow of wealth to the taxpayer. NIT is applicable only if there isgain or profit. If there is no profit, NIT is not applicable; otherwise, it is
tantamount to taxing the capital.
Formula
[(Gross Income – Deductions/Exemptions) x rate] – tax credit = NIT
For individuals, tax is progressive. For corporations, tax is fixed at 35% (as
amended by RA 9337).
Q. Who are liable to pay NIT?
A. The following are liable to pay the NIT:
1.RC – Section 24A1a and 31;
2.RC – Section 24A1b and 31;
3.OCW and Seamen – Section 24A1b and 31;
4.RA – Section 24A1c ad 31;
5.NRAE – Section 25A1 (same manner as citizen);
6.DC – Section 27 and 31;7.RFC – Section 28a1; and
8.AEMOP – Section 25CDE for other income.
NRANE and NRFC are the only person not liable to by way of et; the rule is
absolute. NRANE and NRFC are liable for the payment of GIT. They are not liable
Take note that aliens who come and stay I the Philippines for a aggregate period of
more than 180 days during the taxable calendar year are considered NRAE.
Therefore, if his stay is only 180 days or less, he becomes NRANE, which is taxable
by way of GIT.
AEMOR as a general rule are not liable for NIT but FIT of 15% under Section
25CDE except if they receive income from sources other than from their respectiveemployers. If they receive income other than those which came from their
employers, the same may be subject to NIT (see second paragraph of Section 25E).
Take note that aliens employed in multinational company and onshore banking
may be classified as RA or NRAE if they receive income other than those received
from their employer, his income may be subject to NIT (see Section 25E of NIRC).
Aliens employed in petroleum contractor and subcontractor is always a permanent
resident of foreign country, hence, he may be classified as NRAE or NRANE. If he is
an NRAE his income may be subject to NIT. If NRANE, then GIT of 35%.
It is a rule that when an income is subjected to GIT, it shall not be subjected
to NIT.
The withholding system for NIT is the “Creditable Withholding System”. The
following are creditable I the withholding of tax:
1.Income tax of foreign countries – Section 34C3;
2.Excess input or output tax – Section 110B; and
3.Tax credit certificate – Section 204.
4.Sales discounted granted to senior citizens
Q. What are the requisite in the withholding of NIT of the taxpayer?
A. Withholding of NIT depends on whether there is a law explicitly stating that the
NIT should be withheld. Absence of such law or if the law is silent with regard to
withholding, the income is not subject to withholding of NIT.
Q. Suppose the taxpayer is RC, he derives income, is he going to included it I
filing of ITR?
A. Determine first if the income is passive. If the income is passive and was
already subjected to FIT, then, the income would no longer appear in the annual
ITR, otherwise, there would be obnoxious double taxation. If the income is not
passive, he should include it in the filing of the ITR.
A. Yes. Because the dividend declared by DC is a automatic one, it is a income
within.
Q. What about the one declared by the RFC?
A. It depends, if 50% of the gross income of such FC for the three-year period
ending with the close of its taxable year preceding the declaration of such
dividends was derived from spuroes within the Philippines, then it is an income
within.
Q. If one or two of the elements are absent, is it an income within?
A.It is a income without the Philippines. Corollarily, either of the two is absent
or both of the elements absent, then it is a income from sources without.
Hence, if the income is a source within, the receiver is liable; if it is an income
without, he is not liable.
It is not a matter of whether the money was received in abroad or in the
Philippines. For DC, it is automatic.
For FC declaring divided may be a income within or without depending if the
elements are present.
Services
Now we go o 42A3. This was asked in the 2000 and 1999 bar. Normally in the bar,
the example is a FC with a branch in the Philippines. But in the 1999 bar, theexample was reversed.
1999 Bar
A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co.
has a subsidiary in HK (HK Co.) and will assign P for a indefinite period to work full
time for HK Co. P will bring his family to reside in HK and will lease out his
residence in the Philippines. The salary of P will be shouldered 50% by A Co.
while the other 50% plus housing, cost of living and educational allowances of P’s
dependents will be shouldered by HK Co. will credit the 50% of P’s sales to P’sPhilippines bank account. P will also sign the contract of the employment in the
Philippines. P will also be receiving rental income for the lease of his Philippine
residence.
Q. Is that Filipino branch manager in HK liable to pay income tax in the
A.It is not taxable. The taxpayer is a OCW. Under Section 23, the liability of
OCWs are only those income derived from sources within. Under section 42, the
income is an income without the Philippines, therefore, he is not liable for income
tax.
In the 1991 bar, the example is a DC, San Miguel manufacturing equipment. It
hired a Singaporean from a NRFC. The Singapore firm will advertise all theproducts in Singapore, and as a result, the Singaporean Corporation received a
compensation from San Miguel.
Q. is the compensation to be paid by San Miguel subject to withholding tax
system?
A.No, because that income is exempt from income tax. The income earner is a
NRFC. It rendered services in Singapore. Being a NRFC, tax liability can only be
from income within, but the income here is an income without because the
payment and the performance were in Singapore.
This is applicable not only to workers but also to entertainers so long as it if
personal or organized service.
Q. Supposed the examiner as, a performer lives in Australia before she
performs in Manila. Can she refuse payment of income tax?
A.No, because the performance was made within the Philippines.
Q. David Pomeranz manifested to reside in the Philippines, hence, a residentalien. Supposed he will be hired in Guam, can he refuse to pay tax in the
Philippines for the performance made in Guam?
A. Yes, because that is an income without and being a foreigner, his liability is
only from sources within.
In conclusion, the place of the performance of the service for personal or labor
services depends on the place of the service.
Royalties & Rentals
We go on number 4 on royalties and rentals. Because of Section 42A4, the
following are sources within:
1. The use of the right or privilege to use in the Philippines any copy right,
patent, design or model or plan, secret formula or process, goodwill,
trademark, trade brand, or other like property or right.
2.The use, or, or the right to use in the Philippines any industrial, commercial
or scientific equipments.
For example, McDonald: the one granting the royalty is a NRFC. It authorized a
Filipino proprietor, DC and partnership. It authorizes to use the trademark.
They established a restaurant using the name McDonald. The agreement is thatthe Filipino will pay a certain sum of money, may be 5% of the gross or 2% of the
net. That is known under law as royalty.
Who is obliged to file the return? The Filipino proprietor is the one obliged to file
the return. What is the income tax of a NRFC? Gross income tax. How much is
the withholding then? It is 35% because the income earner is a NRFC.
Supposed we are franchise owners of Jollibee. The one granting the franchise is a
DC. Under RR 12-2002, the DC pays by way of the net income tax of 35%. How
much is the withholding tax? It is much lower than 35% because thecomputations of NIT there are deductions. In the computation, nowadays, it was
decreased to 15%. Take note of that defense. The reason behind the law is that
after the deductions, the tax rate of 35% will be more or less equivalent to 15%.
Let us go to secret formula. For example KFC, it authorizes the use of the secret
formula for cooing chicken this is subject also to tax. Rubber World (?) was
authorized by Adidas to manufacture shoes. This is also covered. But the most
important is the last phrase, “and other like property or rights.”
Now we go on letter b; the use of, or the right to use in the Philippines any
industrial, commercial or scientific equipments; revenue from Philippines from the
privilege to use scientific, commercial and industrial equipment. One example is
the privilege to use the cellular site in the Philippines by foreign companies.
Now we go to the third one, the supply of scientific, technical, industrial or
commercial knowledge or information. Whatever scientific and technical
knowledge, it is also an income from sources within. Therefore, whatever supplies
of scientific or technical knowledge of a cellular site is an income from sources
within.
We go letter D of number 4. The supply or any assistance that is ancillary andsubsidiary to, and is furnished as a means of enabling the application or
enjoyment of, any such property or right as in 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).
Letter 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 purchase from such
nonresident person. For example, a nonresident had sold a machine or equipment
in the Philippines and supplied services including his workers that are an income
from sources within.
Paragraph 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.
Paragraph G. The use of or the right to use.
a.Motion picture films;
b.Films or video tapes for the use in connection with television; and
c.Tapes for use in connection with radio broadcasting.
So the use or the right to use of foreign movies, videos and tapes, whenever used, it
is an income from the Philippines.
Sale of Real Property
Now we go to Section 42A5, the sale of real property.
Q. When do we consider sale of real property an income from sources within?
Without?
A.It is an income within, if the property is located in the Philippines. Therefore,
if it is located abroad, it is an income without. This is the very simple rule withregard to sale of real property.
Sale of Personal Property
Let us see in the sale of personal property. It is covered by Section 42E.
Q. In the sale of personal property, is it income within or without?
A.It depends. If the sale of personal propertywas produced or manufactured in
the Philippines and sold in abroad or manufactured abroad and sold within, it isan income partly within and partly without and that is under Section 42E.
Q. How about personal property purchased within and sold abroad and vice
versa?
A.It shall be treated as derived entirely from sources within the country in which
Q. Let us see the 2003 BQ, what is a capital asset? 2005 BQ, do you iclude it
in your ITR, the capital gains?
A.Capital asset is an asset or property, which is not an ordinary asset.
In Section 39A1, cross our the phrase whether or not connected in trade or business. If the property is used in business, it is usually included in the
inventory at the close of the taxable year, hence, it becomes an ordinary asset.
In Section 39A1, cross out the phrase whether or not connected in trade or
business. If the property is used in business, it is usually included in the
inventory at the close of the taxable year; hence, it becomes an ordinary asset.
Q. Why is it that the capital loss can be deducted from capital gain but not in
ordinary gain? Why is it that the ordinary loss is deducted from capital gains
and ordinary gains?
A.It has something to do with Section 34D. Supposed the deduction in Section
34D is required, the deducted must be connected or directly connected with the
trade or business of the taxpayer. If the capital loss isnot connected with the trade
or business, then it must not be allowed to be deducted from the gross income of
the ordinary gain. It is the reason why a capital loss cannot be deducted from an
ordinary gain because in ordinary gain, the law requires under Section 34D that it
must be connected with the trade or business of the taxpayer. In capital loss, it
has nothing to do with the trade or business.
Q. Do we include in our annual ITR in gross income the capital gains?
A. As rule, yes. If the taxpayer is a businessman, he shall include in this gross
income the capital gains. Together with the capital gain, he needs to include in
the gross income the ordinary gains.
The taxpayer, of course, will claim the deductions. In crediting and applying the
deduction on ordinary losses, it will cover all those mentioned in gross income then
he will deduct all the deduction.
Q. So what are included in the gross income?
A.Capital gains and ordinary gains. And that is the reason why an ordinary loss
is deductible from either capital gains or ordinary gains because you include in the
gross income not only the ordinary gain but also the capital gains.
Net Capital Carry-Over Rule
Let us say, in year 2000, sometime we are not allowed to deduct capital loss
because there was no capital gains. Is there a remedy because of that? There is a
remedy. We have to applythe net capital loss carry over rule.
Meaning to say, in the following year of 2001, we will be allowed to deduct,
provided, in2001, we have capital gains, provided further, that the capital lossincurred in 2000 should not exceed the amount of net income in 2000. So if the
capital loss in2000 is P100,000.00 and the net income was P75,000.00, in 2001,
assuming there is capital gain, we are only allowed up to P75,000.00 deductions,
provided finally, that the holding period shall be under the short-term holding
period.
Q. Is it possible that in 2000 we will not be allowed to claim ordinary loss”
Q. In the 2003 bar, it was asked: “What do you mean by stock dividend?”
A. Stock dividend is a mode of transfer of surplus profit to the authorized capital
stock of the corporation.
Assuming there are five incorporators. Each of them contributed 10 million pesos.
After successful operation, the DC earned a surplus profit of 1 million. How ca
the corporation divide the profits? There are only three: cash, property and stock
dividend. Liquidating dividend was not included here. Under Section 24B2, it
refers to cash dividend and property dividend.
Let us go to stock dividend. There are five incorporators and the surplus profit is
one million. Dividing the profit, each incorporator will receive P200,000.00
because they own same share of stock. If property dividend, they will also receive
the same property, let us say, motor vehicle.
In stock dividend, the one million will be transferred to the authorized capital of 50million to make it 51 million.
Q. In 2003 bar, the question is what is a stock dividend? Is it subject to
income tax?
A.No. It is not subject to income tax because the profits did not go to the hands
of the stockholders. Second, the controlling interests before and after the
declaration of the stock dividend remains the same.
Before the declaration of the stock dividend, the controlling interest of eachincorporator is 20%. After the declaration of the stock dividend, the controlling
interest of each stockholder is still 20%.
Pursuant to the rule that stock dividend is not subject to income, there is an
exemption of payment of FIT under Section 73B; if the issuance of stock dividend
is equivalent to redemption or cancellation. In simple language, when the
corporation purchased the stock dividend, Section 73B says it is subject to income
tax to be paid as taxable income.
Q. Who is now liable?
A. The stockholder because it is the seller. We have to remember that in a
common term, normally, it is the creditor or the oblige that is the one liable to pay
income tax unless there is agreement to the contrary.
So tht stockholder is the one liable and that is the subject matter in the case of
ANSCOR vs. CIR 301 SCRA 152. The SC ruled that in case of redemption, the
stockholder cannot escape the payment of income tax.
A. The answer is found under Section 42A2b. If the two elements are present at
least 50% of the foreign corporation declaring dividend is an income from sources
within from the three-year period preceding the declaration of dividend, it is a
source within. If one or both of these two elements, the 50% and the three-year
period, is not present, then the dividend issued by the FC is an income without.
If it is an income without, most of the taxpayers mentioned under Section 23are example except the RC and DC. If it is an income within because the two
elements are present all of them are liable to pay by way of the net except NRFC
and NRANE, which pays by way of the gross income tax.
Q. What about the MCIT. Is it possible to pay the MCIT in dividends?
A. Yes. For DC receiving dividend from a foreign corporation they are liable to pay
by way of the net whether it is an income within or without. If the NIT is lower the
MCIT, the DC has to pay MCIT.
For RFC receiving taxable dividend from sources without it is exempt, so we do notapply the MCIT. If the taxable dividend is from sources within, the RFC is liable
by way of the NIT, and if it is lower than the MCIT, then the latter shall be applied.
In 24B2, it speaks that if the taxable dividend was earned before January 1, 1998,
nonetheless, it is exempt because beginning 1987 down to 1998; individuals are
exempt from FIT from the receipt of a taxable dividend from a DC.
We go to Section 24C. The first to be understood under Section 24C is the phrase:
“The provisions of the section 39B notwithstanding xxx”.
Q. What is Section 39B all about?
A. It is about the holding period entitled: “Percentage taken into account.”
Q. What is the relevance of that?
A.Because both 39B and 24C speaks of a capital assets. When it is a capital
asset, the holding period applies.
However, we have to remember that the holding period do not apply in the
following:
1.Sale of shares which are capital assets;
2.Sale of real property which are capital assets;
3.Capital assets of corporation.
Q. Why does the capital assets of a corporation not subject to holding
period?
A.Section 39B states: “taxpayer other than the corporation.”
Q. What is holding period?
A. It is the length of time where the taxpayer held the property. If it is held more
than 12 months and if the elements are present, 50% of the net capital gains areexempt; the remaining ½ is subject to income tax. So that is why the holding
period does not apply to the sale of shares because the basis there is not the
Q. What happen now to alien employed in MOPs? Are we going to determine
whether they are not RA, NRAE, or NRANE?
A. No more because whether they are engaged or not, they will be liable for the
same rate.
Q. How about DC?
A.For DC, we have Section 27D2; we have the same rate.
Q. How about RFC?
A. We have Section 27A7c.
Q. NRFC?
A. We have Section 28B5c.
In other words, all income taxpayers will be liable for the FIT of 5% or the 10%.
That is if the elements are present.
Let us see the first element: It must be shares in a DC.
Q. What if the share is owned by a foreign corporation, whether resident or
non-resident?
A. We have to determine whether it is an income within or without.
If it is a sale from a DC, it is always an income from sources within and that is
according to Section 42E second paragraph saying “that gain from the sale of
shares of stock in a DC shall be treated as derived entirely from sources within the
Philippines regardless of where the said shares are sold.”
Q. What about the shares of stock in a foreign corporation?
A. We see Section 42E second paragraph saying “Gains, profits and income derived from the purchase of personal property within ad 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 from sources within the country it was sold.”
So if the shares in foreign corporation are sold in the Philippines, it is an income
If it is an income without because the shares in a foreign corporation were sold
outside the Philippines, most of the taxpayer is exempt from income tax under
Section 23. Only two taxpayers are liable: the RC and DC, they have to pay by
way of the NIT.
With regard to whether it is an income within or without, most of the taxpayer pays
by way of the net except the NRANE and NRFC which pays by way of the gross. Soif one of the elements is not present and the gains are still an income within, most
of the taxpayer pays by way of the net except the two which pays by way of the
gross.
Second element, the shares of stock must be a capital asset.
Q. When is a share considered a capital asset?
A. It was answered in China Bank vs. CIR, 336 SCRA 178. The shares of stock
can only be classified as ordinary asset if it is being sold by dealers or brokers ofshares that is an ordinary asset.
It means to say that those shares not being sold by dealers, those shares are
capital assets. If the share is classified as capital assets, assuming all other
elements are present, the FIT of 5% or the 10% will be applied.
Q. Suppose it is an ordinary asset, what will be the rule?
A. The rule will be the same, if it is an income within, (the share in a DC), most of
the taxpayers will be liable for NIT except only to NRFC and NRANE, which will beliable for GIT.
If it is an ordinary but an income without (shares in a foreign corporation), most of
the taxpayers are exempt except only the DC and RC which will be liable for NIT.
Let us go to the third elements: the sale of shares are not transacted and listed in
a local stock exchange..
Q. Supposed it is listed, what tax should be applied?
A.It is the percentage tax under Section 127.
UnderRA 7717, if it is listed and transacted in the local stock market, the
percentage tax, which is a nature of a business tax under Section 127, will apply.
Q. If Section 127 will be applied, is the percentage tax in lieu of the other
2.Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business. It refers also to realtors;
3.Real property, which is a subject matter of depreciation except a parcel of
land. Depreciation do not apply in parcel of land, we apply it other than the
parcel of land;
4.Real property used in trade or business of the taxpayer.
Those are the ordinary assets. Other real properties not included in these
enumerations are capital assets.
Q. If the realty is an ordinary asset and located abroad, what tax will be
applied?
A. If the real property is located abroad, it is necessary to determine whether the
real property is an ordinary or capital assets. Most of the taxpayers are exempt
from income tax except RC and DC, which will be liable by way of the net.
Q. What if it is an ordinary asset, assuming it is located in the Philippines,
what tax should be applied?
A. Most of the taxpayer will be liable by way of the net except the NRANE and
NRFC, which will be liable by way of the gross.
Q. How about the NRANE, is it also liable for the FIT of 6% for sale of realty,
assuming all the elements are present?
A. Yes. Section 25B last sentence says, “Capital gains realized by NRANE xxx
real property shall be subject to the income tax prescribed under Subsection D of
Section 24.” The GIT will not apply but the FIT 6%.
Hence, for NRANE if the elements are not present and the income from sale of real
property is an income within, the GIT will apply.
We go to the last elements: the seller must be any kind of individual. As stated
earlier, any kind of individual shall be liable for FIT of 6%, assuming other elements
are present. For corporations, the DC is the only liable for this tax under Section27D5. For RFC and NRFC, the FIT of 6% do not apply. RFC is liable for NIT and
NRFC will be liable for GIT even if all the elements are present as long it is an
income within.
Q. What is the difference if the seller is an individual or a corporation?
A. Section 27D5 says that the FIT will be applied on real property which refers to
land or building. For any kind of individual, it includes any kinds of real property
enumerated under Article 415 of the Civil Code.
Q. Assuming all the elements are present and the seller is a RC, is there a
possibility that the NIT will be applied?
A. Yes. If the buyer is the government, or any of its political subdivisions or
agencies or to GOCC, taxpayer is given the choice to pay the FIT of 6% or the NIT.
Q. If you are the lawyer of an individual who is selling his real property to
the government which is located in the Philippines, will you advise the
payment of the FIT of 6% or the NIT?
A. It depends. Determine whether there is substantial profit or not. If sale of
realty will incur loss, e.g. the price of the land is one million and the government bought it for P750,000.00, then it is better to apply the NIT because there is no
profit; hence, the NIT will not apply simply because NIT presupposes that there is
profit. If there is a substantial profit, e.g. the land was sold for two million pesos,
the rate will be the 32%; therefore, it is advisable to pay the 6% FIT.
If the buyer is government, the option can only be exercised by those enumerated
under Section 24A. It cannot be exercised other than those mentioned under 24A.
Q. Who can exercise such options?
A. Under Section 24A, it says RC,NRC, OCW and RA.
For NRAE, it can only be taxed for FIT, assuming the elements are present, under
Section 25A3. For NRANE, if the elements are present, it is still the FIT as
mentioned in the last portion of Section 25B. For aliens employed in MOPs, there
is no need to distinguish whether they are resident alien or not, they have to pay
____.
For DC under 27D5, we have the same elements except that it is only limited to
lands and building. For RFC, it is the NIT because the law is silent. For NRFC, it
is the GIT of 35%.
Q. What about in involuntary sale, like auction sale, do we apply this tax?
A. Yes. Because the law says, sale, barter or other modes of disposition.
However, while it is true that auction sale is considered in the phrase, “and other
modes of disposition”, RR-4-99 says that if the mortgagee is a ban or a financing
A. If the seller is a realtor, the realty property is not a capital asset but rather an
ordinary asset because it belongs to the same enumeration under RR 7-2003 as
copies under Section 39A1. Hence, if it is an ordinary asset, the FIT of 6% will not
apply.
Q. If it is not subject to FIT, does it mean it is exempt from income tax?
A. No. It is subject to NIT.
Q. Is it a violation of the equal protection clause?
A. No. If it is subject to FIT because it is a capital asset, there is no way that VAT will be imposed. The rule is absolute. It is no longer subject to VAT the moment it
is subject to FIT.
Q. But is the other way around true?
A. No. If the VAT has been applied although FIT does not apply, the NIT will be
applied. However, if the FIT of 6% applies, it will not be subject to VAT. The rule is
absolute.
We go to Section 24D2.
If the purpose of selling the real property is to acquire new principal residence, if
the elements are present, there is a chance that the taxpayer may be exempt from
FIT of 6%.
The elements are as follows:
1.The real property being sold is a residential property;
2.The seller must inform the BIR within 30 days from the date of the
transaction;
3.The proceeds of the sale is fully utilized in acquiring or construction a new
principal residence within eighteen months from date of sale/disposal;4.The historical cost will be carried over to the real property;
5.The privileged can only be availed once on every 10 years;
6.Exemption available to those with principal residence in Philippines.
Let us say an individual sold his residential place worth 10 million pesos but he
had purchased a new realty for a total cost of six million used for residential
purposes. The balance of four million will be subject to FIT.
A. No. It must be proven that the revenue was used actually, directly and
exclusively for educational purpose. In addition, of Section 30 says that
educational institution is exempt from income tax received by them “as such.”
Meaning, the exemption of the school shall only with regard to an income received
by them as an educational institution. Further, the last paragraph qualifies that
income of whatever kind and character from any sale of real or personal property or
from any of their activities conducted for profit regardless of the disposition madeof such income is subject to income tax.
This income should be subject to income tax because it is an activity conducted for
profit, and it is not an income received by the educational institution as such.
Q. Other commentator says that the last paragraph of Section 30 of NIRC is
unconstitutional; does it mean that in the given problem the educational
institutional is now exempt from tax?
A.No. Assuming arguendo that Section 30 is unconstitutional, nonetheless, alaw is presumed constitutional until it has been invalidated by the SC. There is a
need for declaration of unconstitutionality of the SC before the law may become
inoperative. A law may be unconstitutional but still valid until there is a final
decision by SC that the said law is null and void. Therefore, Section 30 is very
much enforceable.
There is no conflict between Section 30 of NIRC and Article XIV of the 1987
Constitution; the former speaks in particular, the income tax, while the latter
speaks in general.
Therefore, if we are lawyer of a non-stock and non-profit educational institution, we
must invoke Section 30 of NIRC because we do not have to prove that the income is
actually, directly and exclusively used for educational purposes.
Let us go now totax on proprietary education institutions embodied under
Section 27B.
Q. What is the income tax being referred to in Section 27B?
A. NIT because it speaks of “taxable income”. It refers to NIT, not of 35%, but10%. So schools, if the elements are present, are not liable to pay NIT of 30%, but
10%. The requirements are the following:
1.The school must be non-profit, proprietary educational institution;
2.The gross income from unrelated trade, business or other activity does not
exceed 50%; meaning exactly 50% or more of the gross income must not
come from unrelated activities. So, if the school earned 51% of its gross
income from selling “balut”, then it cannot avail the 10% NIT;
4.Non-stock, profit educational institution – There is no such animal.
Q. But if the school wants to be exempt from real estate tax, what are the
requirements?
A. The real property mustbe actually, directly and exclusively used for
educational purposes as stated under Section 28 paragraph 3 of Article VI of 1987
Constitution. It has an identical provision under Section 234b of LGC. But thisSection 234b is more specific; it speaks of exemption from real property tax. This
was asked in the 2006 bar.
2006 Bar
Q. The Constitution provides “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.” This provision
exempts charitable institution and religious institutions from what kind of taxes?Choose the best answer. Explain 5%
1.From all kinds of taxes, i.e., income, VAT, customs duties, local taxes and
A. Not really because Section 154 of the LGC states that LGUs may fix the rates
for the operation of public utilities owned, operated and maintained by them within
their jurisdiction.
We have numerous cases about this topic.
Basco vs. PAGCOR
G.R. No. 91649 May 14, 1991
The City of Manila imposes tax on PAGCOR. PAGCOR objected the tax on so
many grounds and one of these objections is that PAGCOR is a government agency.
It invoked Section 133 paragraph (o) of Local Tax Code PD 231. The SC agreed
with PAGCOR that Manila being a LGU cannot impose tax on PAGCOR because it
is prohibited by the Local Tax Code and also of so many grounds. Hence, the SC
declared the tax ordinance of City of Manila null and void for being contrary to law.
Mactan Cebu International Airport vs. City of CebuGRN 120082 September 11, 1996
The City Government of Cebu tried to collect real property tax from Mactan Cebu
International Airport. Mactan Cebu invoked Section 133 paragraph (o) of LGC and
also invoked the SC ruling in Basco vs. PAGCOR. Unfortunately, the SC was
misled. But fortunately, it has a correct conclusion: Mactan Airport should pay
real estate tax.
The argument of lawyers of City of Cebu was not discussed by the SC. That is why
the ruling of the MIAA vs. City of Paranaque, the SC was misled again.
Q. Was the argument of Mactan Cebu correct?
A. Absolutely no. We cannot invoke the case of Basco because it is not about
real property tax; it is about local tax. We cannot invoke Section 133 paragraph
(o) because it governs only local taxation. It does not apply to real estate taxation.
LRT vs. CBAA
GRN 127316 October 12, 2000
The City Government of Manila tried to collect real property tax from LRT becausethe stations of LRT have railroads and stations. These are real property because
these are attached to the immovable. The LRT did not argue that the government
owns the real property; it argues that it exclusively used for public use.
A. On bank interest, the long-term holding period under Section 24B1 does not
apply if the depositor is a DC. With respect to royalty, the lower rate of 10% on
individual does not apply if the income earner is a DC.
Tax Under Expanded Foreign Currency Deposit System
Section 27D3, tax on income under expanded foreign currency deposit system, was
substantially amended by RA 9337; we do not read Section 27D3 but we have to
read RA 9337. Section 27D3 is identical paragraph in Section 28A7b which is
amended by RA 9337. But even under RA 9337, it is worded identically.
Q. Who is liable for this tax?
A. In income tax derived under EFCDS, it is the ban which could be either a DC
or RFC. For DC 27D3; for RFC it is 28A7b. It is a bank, which is either a DC or
RFC authorized by the Banko Sentral ng Pilipinas to transact business not only in
the Philippine currency but also in acceptable foreign currency.
Q. Normally what is the income tax imposed on the bank?
A. It is the NIT because it is under the topic of DC which normally pays by way of
the net and also it under the topic of RFC Section 28A which nor5mally pays also
by 3way of the NIT.
The first paragraph nowadays, unlike before, provides for two things; it provides
exemption from income tax. The first paragraph under RA 9337 speaks ofexemption but the latter portion of the first paragraph speaks also of income tax
liability.
Q. What now is the first portion?
A. The first portion of the first paragraph speaks now of exemption and the last
paragraph speaks of the income liability of the excluded foreign currency deposit,
the bank itself, whether the DC or RFC, if transacting business of acceptable
foreign currency because it is also allowed to transact Philippine currency. When
it transacts business in acceptable foreign currency and it earns income, referringto the expanded, the bank, it earns income from the following:
1.Nonresident;
2.Local commercial bank;
3.Branches of foreign ban authorized by the Banko Sentral ng Pilipinas to
The tax on taxable dividend was revived in 1998. Together with this revival, IAET
was also revived. On the revival on the FIT on dividend, the IAET was also revived
so that DC will be obliged to issue dividends.
Q. Are there instances where corporations liable to pay IAET exempt from
this tax?
A. Yes. Those corporations who accumulated profits for “reasonable needs of the
business” are exempt from this tax. This is the first group exempt from this kind
of tax under RR 2-2001.
Q. Give example of “reasonable needs of the business”?
A. Example is expenses for expansion of business.
In other words, there are two groups of exemption. The first one is that DC ca
prove that the accumulation of profits was used for “reasonable needs of the
business.” In relation to this is the case ofCYAMIDE vs. CIR, 322 SCRA 639
saying that the failure to declare dividend is not justified if the corporation merely
asserted that the earnings was withheld for “reasonable needs of the business”
without any documentary evidence to prove the same.
In other words, normally the DC will be liable for IAET. But if the was able to
prove that it used the earnings for “reasonable needs of the business” they are
exempt for this tax.
Under the second group, these are the DCs that are totally exempt regardless of whether or not it will be for “reasonable needs of the business”. These are the
following:
1.Publicly held corporations;
2.Banks and other nonbank financial intermediaries; and
3.Insurance companies.
Q. What is the antonym of publicly-held corporation?
A. Closely-held corporations (hindi privately-held corporation).
Q. What is the distinction between the two?
A. It is closely-held when at least 50% of stocks are owned by not more than 20
stockholders under RR 2-2001, if it exceeds20 stockholders, then it is publicly-held
Normally, since this is under the topic of RFC, it pays by way of the NIT. Now, the
law says, the RFC pays the 2 ½ %, which is the nature of FIT if the following
elements are present.
If the following elements are not present, the income tax to be paid by RFC is NIT of
35% if it is an income within. If it is an income without, then it is exempt.
Hence, the application of 2 ½ % occurs only when the elements are present and itdepends on whether it is an airplane or a ship. For an airline company, it should
be classified as RFC. But RR 15-2002 says the RFC can only be a RFC if it has a
landing rights and it is known asonline airline company. If it has no landing
rights, it is an offline, and if it is anoffline, it is a NRFC not liable to pay this tax
but liable to pay the gross income of 30%.
RR 15-2002 and Section 28A3 superseded and abrogated the old cases of BOAC,
Air India, American Airline and Japan Airline. These jurisprudence are now
substantially modified. Why? In these old cases, the airlines have no landing
rights in the Philippines but have office in the Philippines selling tickets anddocuments. The ruling in this cases is that the 2 ½% can still be applied in Gross
Philippine Billings because the law says then that “Gross Philippine Billings
includes gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold
therein, whether for passenger, excess baggage or mail provided the cargo or mail
originates from the Philippines.”
Q. Is the rulings in these cases were totally abrogated?
A. No. Because the ruling here which says that if the ticket were sold in thePhilippines is an income within that follows from the provision under Section 42A3,
the place of the performance of the service. Since the place of the performance of
service is in Manila, it is an income within. To that certain extent, those ruling is
still applicable.
But those decisions are no longer controlling. It is only controlling with respect to
the application of Section 42A3. With regard to the Philippine Gross Billing, those
decisions are substantially abrogated. The new law now says that the trip must
originate from the Philippines; in this case it originated in foreign port. That is
why RR 15-2002 clarified it; to be considered as a RFC, which will be liable to 2 ½
%; it must have landing rights which is known asonline.
If the airline has no landing rights it will not be considered RFC but NRFC which
will be liable for 30% GIT.
The Gross Philippine Billings, which is the nature of a FIT, is applicable on
international common carrier, either a ship or an airplane, provided the elements
A. It depends. If it is an income within, the RFC will be liable for 30% NIT
because it is a RFC. If it is an income without, meaning the ticket was sold
outside the Philippines, it is exempt in view of Section 23F.
Q. What do you mean by the element “irrespective of the sale of ticket and
passage documents”?
A. If the other elements are present, the 2 ½% will be applied. If one or all the
elements is not present, then place of sale of ticket now becomes material.
We go on the second instance, revalidation, exchange and endorsement.
Exchange:
Two passengers going to abroad, the other one will go on December, the other will
be on January.
P1. Palit tayo.
P2.Okay lang.
P3.Oryt.
That is exchange. But the exchange must beto another airline because if it is with
the3 same airline, the 2 ½% will not apply.
Endorsement:
P1.Di na ko babalik sa ‘tate, ayoko na , o ikaw pinsan babalik ka ron?
P2.Oo, pero wala pa kong ticket,
P1.(Nagendorse, parang tsee). Sa yon na to.”
But it must be to another airline.
Revalidation:
“Yung mga nahuli ng byahe, o wala, irevalidate,” but to another airline.
The 2 ½% will apply but it must be to another airline and the trip must beoriginated from the Philippines because the passenger must originate from a port
within the Philippines.
We go the third one,transshipment. For example, Philippines to USA, halfway of
the trip is Guam before going to California. The transhipment occurred in Guam
but the law says to another airline and that the trip must originate from the
Philippines. So the passenger must originate from the Philippines.
offshore bank earns income, it is exempt from income tax provided the other parties
to which the offshore bank earned income, are the following(see below), but only
limited to acceptable foreign currency.” For expanded unauthorized to transact
business in Philippine money, are they exempt? No. They are not exempt when
earning income from income tax from transacting business even assuming the
parties are those enumerated below:
1.Nonresidents;
2.Local commercial banks author5ized by Banko Sentral to operate in the
Philippines;
3.Braches of foreign banks authorized by Banko Sentral to transact in the
Philippines;
4.Other offshore banks.
We will notice that there are only four here; for expanded there are five. What is
missing here is other depositary bank under expanded. But the last portion of the
first paragraph is very much similar to expanded where it says “where the offshoreban is the lender of money, the borrower is a resident of the Philippines, except the
offshore and expanded,” the income tax is FIT of 10%.
In second paragraph, if a non-resident, whether individual or corporation, earned
income from transacting business with the offshore bank, it is exempt
Tax on Branch Profits Remittances
Foreign corporations have the following choices in conducting business in the
Philippines:
1.Establish a branch and the governing statute as far as income taxation is
concern is Section 28A5; or
2.The foreign corporation may purchase stock in a DC and be a stockholder;
or
3.It might establish a subsidiary in the Philippines.
Q. What do we mean to “establish a subsidiary in the Philippines”?
A. The foreign corporation will organize a corporation in the Philippines and
become a stockholder of that corporation. Since it is established under the
Philippine laws, the said corporation is a DC.
For the second and third options, being a stockholder or creating a subsidiary, the
governing statute will be Section 28B5b, the intercorporate dividend.
If the foreign corporation chooses to establish a branch, the law says that the
branch is always a RFC simply because it is under the topic of RFC in Section 28A.
paid the following income taxes: 10% intercorporate dividend“under the old law,
intercorporate dividend is taxable, not it is exempt”and the branch profit remittance
of 15% arguing that Marubeni is a RFC because it has a branch in the Philippines.
Issue: Is the payment of branch profits remittances of 15% correct?
Ruling: The SC says it is not correct because the branch did not participate in anycapacity so it is erroneous to pay the 15% branch profits remittance tax because
the law says, “it must be effective connected with the conduct of its trade or business
in the Philippines.”
These interpretations are both correct. Hence, if the mother corporation abroad is
selling motor vehicle and establishes a branch here in the Philippines and sells
“balut” and “one-day old chick,” this income tax will not apply. Therefore, they are
exempt.
CHAPTER IX TAX ON NONRESIDENT FOREIGN CORPORATIONS
Paragraph B of Section28 speaks of NRFC and, according to Section 221, these are
foreign corporation not engaged in trade or business in the Philippines.
Q. What are the income taxes to be paid by NRFC?
A. GIT and FIT. There are only two income taxes out of six income taxes. FIT ismentioned in Section 28B2, 3, 4 and 5 paragraph a, b and c.
First in the list is Section 28B2; lessor in movies.
Q. Who is the lessor here?
A. The NRFC, which will be liable for FIT of 25%.
Q. Supposed the lessor is DC, what will be the income tax?
A. NIT of 30% under Section 27A.
Lets go to Section 28B3; the lessor of vessels chartered by Philippine nationals.
The borrower of the money here is Atlas Mining Corp. a DC. The lender of money
is Mitsubishi but sine the money borrowed by Atlas was substantial, the former
obtained a loan from Exim Bank. The trouble arouse when Mitsubishi claims that
it is tax-exempt because Exim Bank under the present law, Section 32B7a, it is
exempt. But Mitsubishi is governed nowadays by Section 28B5a because it is a
plan and simple NRFC. However, BIR claimed that interest of loans is subject to
income tax because the lender of the money is Mitsubishi. However, Mitsubishi
claims tht the real lender of money was Exim Bank because they only borrowed
money from the latter, which is tax-exempt because the latter is owned by
Japanese government.
The SC invoked the principle ofres inter alios acta (the contract is only binding
between the parties), under the provision of Article 1311 of Civil Code. The
contract is only between Atlas and Mitsubishi. The fact that Mitsubishi borrowedmoney from Exim Bank is of no moment because it was not mentioned in the
contract. When Mitsubishi secured the loans, it was in its own independent
capacity as a private entity and not as a conduit of Exim Bank.
That is material because if the parties are those mentioned in Section 32B7a, the
interest is foreign loans is considered to be exclusion from gross income, hence,
exempt.
Intercorporate Dividend
Let us go to Section 28B5b.
Q. What are the intercorporate dividends mentioned under the NIRC?
A. We have the following:
1.DC to DC under Section 27D4;
2.DC to RFC, meaning the stockholder is the RFC, under Section 28A7d;
3.DC to NRFC under 28B5b.
The first two are exempt while in number three it is not. When a NRFC received
dividend from a DC, it is now subject to FIT of 30% as increased by RA 9337 from
32% to 25%, subject to a lower rate of 15%.
In this topic, we must visit the case of Marubeni, Proctor and Gamble and Wander
Marubeni paid a FIT of 10% for intercorporate dividend having in mind that
Marubeni is a RFC. At that time, RFC is liable for FIT of 10% for intercorporate
dividend but now it is exempt under Section 28A7d.
The SC ruled that the payment is not correct because Marubeni is not RFC but aNRFC. Since it is a NRFC, it is liable for 35%. The claim for tax refund by
Marubeni, the 10% intercorporate dividend and branch profit tax of 15% with a
total of 25%, was indirectly granted by SC. However, in the ultimate analysis it
was denied because it was not given to them because the 25% was applied by the
SC to the payment of FIT on dividend pursuant to the tax treaty between Japan
and Philippines; the rate of 35% has been lowered to 25%.
The moral lesson here is that although Marubeni has a branch here in the
Philippines, but the fact that the branch did not participate in the transaction,
Marubeni is still considered a NRFC.
Q. What is the significance of determination whether it is a RFC or NRFC?
A. Under the present law, RFC is exempt for intercorproate dividend.
Q. When do we apply the 30% and the 15%?
CIR vs. Proctor and Gamble
160 SCRA 560
PGC Philippines is a corporation duly organized and existing under Philippines
laws; it is engaged in business in the Philippines and is wholly-owned subsidiary
of PGC USA, a NRFC, PGC Philippines declared cash dividends in favour of its
parent corporation, PGC USA, which was subjected to 35% tax. PGC Philippines
discovered that there was an overpayment because only 15% should be paid based
on the “tax-sparing rule”, so it filed a refund of 20%.
The SC denied the claim on two grounds:
1.PGC Philippines is not the proper party to claim reimbursement of thealleged overpaid taxes. The real party in interest is PGC USA because PGC
Philippines is a mere withholding agent; and
2.No complete requirements were submitted in order that the tax-sparing rule
may be applied. PGC Philippines failed to present income tax return to its
mother corporation when the dividends were received.
The“tax-sparing rule”is also known as the“tax-deemed paid credit rule”or
the“reciprocity rule.” There is only tax credit by virtue of the technical
First thing to remember, if an income is mentioned in this section, it does not
exclusively refer to the payment of the NIT. We have to determine what kind of
income it is.
For example, in number one, wages and salary, it does not necessarily follows that
it is included in the payment of NIT because this section states that “The followingshall be included in the computation of the gross income except as provided for in this
code xxx.” Take note, that this is the one mentioned in the computation of the
annual ITR for individual.
However, the following shall not be included in the computation of the gross income
in the filing of the annual net income returns:
1.Income which are exclusions;
2.Income which are exempt;
3.Income subject to FIT; and4.Income subject to GIT.
Therefore, if the taxpayer is not allowed to pay by way of the NIT, Section 32A does
not apply.
Q. Who are those not allowed to pay by way of the net?
A. The NRFC and NRANE.
If an income is mentioned in this section, it does not follow that it is subject toincome tax. Nor it follows that it is the one to be included in the annual ITR.
First, in the list is wages and salary. It is the wages and salary that is not
included in the four mentioned above. The moment the taxpayer is a NRANE or a
NRFC, automatically, Section 32A does not apply because they are only allowed to
pay the GIT.
Q. Assuming the taxpayer is paying by way of the net, he received wages and
salary, should it be included in the computation of the annual ITR?
A. Yes, but the rule is not absolute.
For Filipinos, whether resident or non-resident, they pay by way of the NIT.
Filipinos employed in multinational, off-shore and petroleum, as a rule, they pay by
way of FIT of 15% on their wages and salary. However, if the Filipino is employed
in multinational, they have the option to pay by way of the net or the final income
tax irrespective whether or not they are holding a managerial position under
Section 25C as amended by RR 12-2001. If the Filipino is deployed in offshore
A. It depends. If the PNB is located abroad, the interest shall be included in the
NIT, if within the Philippines, FIT.
Take note that this is only limited to RC and DC because to all other income earner,
they are exempt from interest earned from ban abroad.
We go to rent.
Assuming the taxpayer is paying by way of the net, this is always included in the
computation of the gross income unless the income earner is a NRANE or NRF.
This is subject to the GIT.
We go to royalties.
Take note that royalties have no definition under the tax code or in the revenue
regulations.
Q. What is the distinction of sale of service from royalties?
A. If it is royalties which is derived from the Philippines, it is not subject to NIT; if
it is sale of services and was derived from the Philippines, it is subject to NIT.
Q. If we are the composers of Sugarfree and Sugar Babes, do we include the
royalties received from these bands?
A. For Sugarfree, we do not include that because it is subject to FIT; for SugarBabe, it is included in NIT because it is an income from sources without.
On annuity, normally it is subject to NIT and will be included in the ITR. We will
discuss this in Section 32B2.
We go to prizes and winnings.
With regard to prized, the one to be included in the ITR is the one derived outside
the country. Also, for income derived within the country, if the prize does not
exceeds ten thousand pesos. Also, those received by DC whether it is an income within or without the Philippines. For winnings, the only one subject to NIT is the
winnings derived outside the country and this is only with regard to RC and DC.
For pensions which are not exempt, then, it is included in the NIT. This will be
Q. Is the share of the partners will be included in the ITR?
A. Not really. Section 32A11 is the one mentioned under Section 26 third
paragraph where the GPP is exempt. The share of the partner is subject to the
NIT because the law says it shall be3 included in the computation of the gross
income.
If the GPP is deemed to be a corporation, it is not the one mentioned in
Section32A11 because it is subject to FIT.
Exclusions from computation of Gross Income
We go to Section 32B1.
Q. Are proceeds of life insurance subject or exempt from NIT?
A. We have to determine whether the proceeds of life insurance are under Section
32B1 or 32B2.
In Section 32B1,it says that the proceeds of life insurance is an exclusion provided
it is payable upon the death of the insured. The only qualification that it is an
exclusion is when it is payable upon the death of the insured. It does not matter
on who is the beneficiary and whether the beneficiary is appointed as revocable or
irrevocable. The most important thing is tht it is payable upon the death. It does
not matter whether it will be paid in lump sum or in instalment so long as it is
payable upon the death of the insured.
However, this exclusion provides a provision: “If such amounts are held by theinsurer under an agreement to pay interest thereon, the interest payment shall be
included in the gross income.”
For example, in addition to one million as life insurance proceeds, the beneficiary
also received fifty thousand as interest; then, the latter is not exclusion. The fifty
thousand is subject to gross income but the entire one million is exclusion.
We go to Section 32B2.
This is proceeds of life insurance when the insured is still alive. As a matter offact, it is called thereturn of the premium.
Let us say, the life insurance contract is ten years, after ten years, the insurance
now matures, then the insured will collect the proceeds.
Q. If the proceed is one million, how much will be exclusion?
A. We have to determine how much is the premium paid in the whole ten years.
If the insured had paid a total of one hundred thousand, then the one included in
the exclusion is only one hundred thousand. The remaining nine hundred
thousand is subject to income tax and that is so-calledannuityunder Section
32A8. It is only the return of the premium which is subject to exclusions.
2003 and 2005 Bar
Q. Is it subject to estate tax?
A. The related provision is Section 85E. The following are requirements:
First, this is only applicable if the person is insured himself and he is the one who
died. The rule does not apply if the person insured the life of another one. If the
proceed is included in the computation of the gross estate, the proceeds is exempt
from payment of NIT because it is an exclusion.
Second, if beneficiary of the insured is the estate, execution or administrator, the
proceed of the life insurance shall always be included in the gross estate, whether
the appoint of the estate as a beneficiary is revocable or irrevocable.
If the beneficiary is other than the estate, we have to determine whether the
designation of the beneficiary is revocable or irrevocable. Assuming the first
requirement has been complie3d with and the appointment of the beneficiary is
other than the estate and the designation is irrevocable, it should be included in
the gross estate, and, therefore, subject to estate tax.
If the appointment of the beneficiary is other than the estate and the designation isirrevocable, it will not be included in the gross estate and therefore, exempt.
We go to contract of donations.
Q. Why is it, that property by virtue of donation is exempt from income tax?
A. It is exempt because these are exclusions. It does not matter whether the
subject matter is donated is real or personal. Hence, donee is exempt from income
tax because donation is exclusions.
We go to compensation under Workmen’s Compensation Act.
With regard to “health and accident insurance,” here, it is only the one mentioned
in Workmen’s Compensation Act. We cannot say that this is different from the
Workmen’s Compensation Act because under the word “or” after the word accident,
there is no comma. It means to say that this is the only one mentioned under the
Workmen’s Compensation Act. Take note in statutory construction, in
enumeration without comma, it means that it mention only one thing.
But that is not the only one which is deemed exclusion under number four. It
includes amounts received by nature of injury or illness, including damages on
account of such injury or illness.
Q. Suppose the taxpayer died, is it the one mentioned here?
A. Yes. Under independent civil actions under the Civil Code, the term injury
includes death.
We go to number five; income under treaty. These are also exclusion under the
law.
We have number six; the concept of retirement pay, separation pay and terminal
leave benefits. Unfortunately, the tax code is silent on terminal leaves benefits.
First, we have to determine whether the sum of money we receive is a retirementpay, separation pay or a terminal pay because the requirement for classifying it for
exclusion varies. They have the different requirements.
Retirement pay is the sum of money received when the employee reached the
maximum age for employment. Separation pay is the amount received by virtue
of illness, injury, sickness, physical disability or other injury. Terminal leaveis
the unused vacation and sick leave converted into cash money.
The governing rules for retirement pay is Section 32B6 a, c, d, e and f; in other
words, all other enumeration under 32B6 except paragraph b.
For separation pay, it is Section 32B6, b and c. For terminal leave, it all depends
on whether it is granted on a yearly basis or upon retirement or separation. If
granted on a yearly basis, we have Section 2.78.1 par. A7 of RR 2-98 and
Executive Order 291 of the former Pres. Estrada, RMC 16-2000. If granted in a
yearly basis, we have the following cases: In Re Atty. Zialcita, 190 SCRA 851,
Borromeo vs. Civil Service 199 SCRA 911, Castaneda vs. CA, 203 SCRA 70.
Retirement Benefits
The proper way to read it is to begin at Section 32B6c. Never mind the statement
there “if receive by resident or nonresident citizen of the Philippines xxx” because we
already have Section 23. It further states “from foreign government agencies and
other institution, private or public” which means to say, retirement benefits given
by foreign government agencies and foreign corporation, public or private. Why
foreign corporation? Because it is says “and other institution, private or public.”
Hence, it includes foreign corporation, whether public or private.
If we receive retirement benefits from foreign government or foreign corporation
located in the City of Makati, it is automatically deemed exclusions. There are no
requirements with respect to the years of service and age of the retiree. The
reason is that we copy this provision from US, Canada, Germany and England
where the retirement age is forty.
If the one granting the benefits is the Philippine government or DC under Section33B6 d and e, the PVAO, SSS and GSIS, these are all exclusion without any
qualification.
The following retirement benefits are exempt from tax:
1.RA 7641 – Retirement benefits received under this law pertains to private
firms without retirement trust fund.
2.RA 4917 – Retirement benefits pursuant to RA 4917 received by official and
employees of private firms whether individual or corporate in accordance
with a “reasonable private benefit plan” maintained by the employerprovided the following requirements are met:
a.Retiring employee has been in the service of the same employer for the
past 10 years;
b.He is not less than 50 years of age at the time of his retirement;
c.He avails of the benefits only once;
d.The private benefit plan is approved by the BIR [RR-2-98].
If the retirement benefit is given by private institution by virtue of Sec. 32B6a,
determine if there is a private benefit plan. If there is a private benefit plan, there
are requirements for exemption. If there is no private benefit plan, the
requirements are different.
RA 7641 applies to private firms without retirement plan. The following are
the requirements:
1.The first has no retirement trust fund;
2.Retiring employee is at least 60 years old but not more than 65;
3.The benefits are equivalent to 15 days salary and ½ of the 13th month pay
for every year of service; and
4.The employee has been in the service for 5 years. Here the source of the
benefit is the management.
RA 4917 applies to private firms with retirement plan. The requirements are:
1.Retiring employee has been in the service of the same employer for the past
10 years;
2.He is not less than 50 years of age at the time of his retirement;
It is given on a yearly basis upon retirement. If given on a yearly basis, determine
whether sick leave or vacations leave.
Rule if Sick Leave:If sick leave given in a yearly basis, it is subject to income tax.
Rule if Vacation Leave:If vacation leave, it is subject to income tax except if it is
10 days or less, in which case it is exempt.
RR-2-98 [January 1999] - covers only private sector
EO 291 [Under ERAP Administration adopted in RMC-16-200] – covers government
terminal leave benefits.
Q. Does it matter if the worker received it from the government?
A. Yes.
Private Sector - given on a yearly basis, subject toincome tax
Government Sector - vacation leave, regardless of number
of days is not subject to income tax
Q. How about if given in retirement?
A. We have three rulings:
1.In Re: Zialcita, 190 SCRA 851
2.Borromeo vs. Civil Service Commission, 199 SCRA 9113.CIR vs. Castaneda
In Re: Zialcita
190 SCRA 851
Zialcita is a retiree of DOJ. The DOJ withhold the sum of money. Zialcita did not
agree to the deduction. He claimed that it is exclusion. He cited PD 220 which
provides that terminal leave benefits received by employees of the government and
the private sectors are exempt from tax. It is under the phrase “other similar benefits received by the retiring employee” (similar to the retirement benefit pay).
The SC agreed with Zialcita. It ruled that it is in the nature of retirement pay.
Note: Ruling is based on the old law, but it is still relevant in the new law because
what was changed is only the section number. The SC committed a mistake that
is in the nature of a retirement pay, SEC 28, but the ruling is still correct.
Also on the issue of whether or not the government may tax itself, correlate this
provision with Sec 133 (o), LGC [RA7160] which states that LGU cannot impose
taxes on the national government or any of its political subdivisions.
Prizes and Awards [Sec 32B7c]
Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievements(are exclusion from the gross
income) but only if:
1.The recipient was selected without any action on his part to enter the
contest of proceeding; and
2.The recipient is not required to render substantial future services as acondition to receiving the prize or award.
Prizes and Awards in Sports Competition [Sec 32B7d]
All prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations (are exclusions from gross
income).
Note:Requirements for exemption:
1.Granted to athletes in local and international sports competitions and
tournaments;
2.Whether held in the Philippines or abroad; and
3.Sanctioned by their national sports associations.
Example: In the case of Grand Master Antonio, his award was sanctioned by the
National Sports Association (NSA) hence exempt from tax.
In the case of Onyok Velasco, the proper answer at that time would be it is notexempt from tax (because it was not sanctioned by the NSA, it was sanctioned by
the Philippine Olympic Committee).
Q. Is the amendment from Philippine Olympic Committee to National Sports
Association important?
A. Yes, because it covers all associations under the umbrella of NSA.
The status of estate shall depend upon the status of the decedent immediately
before his death whether he is a RC, or any of the seven kind of the taxpayers.
Same thing is true with trust; the status of the trust will depend upon the status of
the grantor, or trustor or creator of the trust.
We go to estate.
We are talking here if a person dies and he has properties. While the property is
being partitioned among the heirs, the property left is brief only; there is no income
tax to talk about. Here, we are talking of person who dies with substantialamount of property, e.g., a Manila boy who has manufacturing company of hotdog,
chorizo de bilbao, footlong and hotdog de ocho, or maybe, he died owning a bakery
producing money or maybe he owns a plantation of eggplant 12 inches long!
Before the property could be partitioned, it will take some time especially when
there are oppositors which are usually children outside the wedlock. Pending the
The other instance is where there is no contribution of money, property or industry.
The heirs merely divide the profit. For instance, in the eggplant plantation, there
are only two compulsory heirs, and they divide the profits among themselves,
there is only a creation of co-ownership. Since co-ownership cannot be deemed a
corporation, the income tax shall be imposed on different co-owners in their
individual capacity. Therefore, the income tax is to be imposed upon the
individual.
These are supported by SC rulings: for creation of unregistered partnership, we
have Evangelista vs. CIR, 102 Phil 114, Reyes vs.CIR, 24 SCRA 198,Ona vs.
Bautista, 45 SCRA 74, and AFISCO vs. CIR 301 SCRA 2; for creation of co-
ownership, we have Obillos vs. CIR,139 SCRA 436, Pascual vs. CIR 160 SCRA 566.
We go to Section 61.
If the income tax to be imposed shall be the one to be paid by the estate, meaning,
this is during the pendency of the judicial settlement. Section 61 says that itshould be paid in the same manner with that of individual.
Q. Is it really the same with that of individual?
A. It is similar but it is not identical. There are distinctions: on the personal
exemption, an individual may claim personal exemption depending on whether he
is legally married, single or head of the family, while if the estate is the one liable,
Section 62 governs; that the personal exemption shall always be an exemption
similar to a single individual of twenty thousand pesos whether or not the decedent
is legally married, single or head of the family.
If the income tax of the income tax is the estate itself, there are special deductions
provided for inSection 61. By virtue of Section 61, the following are special
deductions:
1.Distribution of profit to the heirs;
The option of the administrator or the executor here is to give partial distribution of
the income. If he does not distribute anything within the taxable year, he could
not claim special deduction of distribution. If he gave all the profits to the heirs,
he is not going to file income tax to be paid by the state because the gross incomeof the estate will become zero. If he will give only partial, for example 30% of the
income, this will constitute special deduction from the gross income of the estate.
On the part of the heirs, they will be liable for the income received from the estate.
With more reason if all of the income were given to them, they have to pay income
tax in their own individual capacity as individual.
Supposed the administrator did not give any income to the heirs within the taxable
period, he could not claim special deductions for distribution but the heirs upon
receipt of their shares, they are no longer liable to pay income tax for that.
2.Payment made by the administrator to the creditor of the decedent; and
3.Expense to preserve the estate of the decedent.
These special deductions with the special personal exemption shall apply only to
the income tax of the estate if the income taxpayer is the estate itself. If the
corporate income tax or the income tax on individual should be applied, these
special exemption and deductions does not apply.
We go to second one, thetrust.
There are three parties in a contract of trust: the grantor or trustor or creator, the
trustee or the fiduciary, and cestui que trust or the beneficiary.
Q. When can trust be held liable to pay income tax?
A. A trust can be held liable to pay income tax when it is irrevocable trust.
When the trust is revocable or for the benefit of the grantor, the income tax to be
paid by the trust does not apply.
Q. If the trust is liable because it is irrevocable, who is the one obliged to
file the return and pay the tax?
A. The one obliged to file the return and remit the tax is the trustee but not on
its own capacity but in behalf of the trust itself.
If the trust is irrevocable, the provision of Section 61 and 62 shall be applied on
personal exemption and special deductions. Those are also applicable. But if it is
the liability of the grantor, he shall file the tax return on his own behalf, in his own
individual capacity or personal liability; not in behalf of the trust. Then there will
be exemption with regard to Section 61 and 62.
Q. The lessor lease a parcel of land to the lessee for free in the conditionthat any improvement introduced by the lessee to the parcel of land shall be
transferred to the lessor after the termination of the lease. Assuming there
is improvement introduced by the lessee and the lease is terminated, how
will the lessor report that income? Should he report that for only one year?
A. In RR 2 issued in 1949, it gives two options to the lessor. If the contract is for
25 years, the value of the property will be spread into 25 years. Supposed the
A. The one liable is the managerial employee not the employer, notwithstanding
the statement under Section 33A because it says that “The tax herein imposed is
payable by the employer which tax shall be paid in the same manner as provided
for under Section 57A of this Code.”
Reading Sections 57 and 58, the management of the employee is a mere final
withholding agent to file the return and remit the tax in behalf of the taxpayer, thistime the managerial employee. Hence, the employer is only acting as mere
withholding agent.
Section 33 does not says that it is the liability of the management but it says it is
payable. To pay and to be held liable are two different things. The liability falls
upon the managerial worker but the one obliged by law to file the return is the
management. The management is a mere withholding agent.
The rule now is that the management is one liable to file the final income tax
return and remit the tax in behalf of the managerial employee. But there are twoinstances there where the managerial worker is exempt:
1.If it is for the convenience of the management;
2.If it is necessary to the trade and business of the management.
This is now provided for in RR 3-98.
1998 BQ
Q. A worker enjoys free housing. If that will be leased, the value would beP10,000.00 per month. Is the rental exempt from income tax?
A. It depends. We have to distinguish if the worker is a managerial employee or a
rank-and-file.
For rank-and-file employee, RR 2-98 says that if he is enjoying free housing, he is
exempt from income tax provided it is for the convenience of the management.
One example of “for the convenience of the management” if the free housing is very
near to the premises of the management so that anytime he may be called to work.
For managerial, RR 3-98 says that the free housing is exempt provided it is for the
convenience of the management, and the free housing must be within 50 meters
perimeter from the place of the management.
There are two methods of multiplication in the revenue regulations; first, to
multiply 100% of the benefits, and, second, to multiply 50% of the benefits.
Q. The deduction must be within the same taxable year. If that individual
incurred expenses on February 2006, can he claim deduction for the said
expense?
A. No, because that was incurred outside the taxable period. It must be
incurred in any month of 2005.
However, that expense may be allowed as deduction fro the taxable year of 2006.
Q. What about corporation? Supposed the corporation using the fiscal year
which ends on March 31, the deadline here is July 15. Will be allowed to
claim the expense on February 2006 as deduction?
A. Yes, because that is within the taxable period which ends on March 31, 2006.
For ordinary and necessary expenses, the taxpayer must prove that the expense is
incurred within the taxable period.
We go on Section 34A1ai, there are three items here: 1) reasonable allowance for
salaries and wages; 2) other forms of compensation; and 3) monetary gross up
value of the fringe benefits provided the FIT has been paid already.
_________________ the list,reasonable wages and salaries, did it ___________
much? No.
Q. ____________ a representative of San Miguel and now in the office of the
BIR. He is claiming deduction of ___________ of Danny Siegle amounting to
P600,000.00 a __________. Is the salary of Danny Siegle a reasonable one to
be claimed as deduction?
A. ____. The average salary of employee nowadays is P20,000.00 to P30,000.00.
P600,000.00 is way above the table.
___________forms of compensation,the requirement is of course, by virtue of BIRruling, it must be also reasonable. The one mentioned under Tax Code says “for
personal services actually rendered.” Underscore the word “actually.”
AIC was manufacturing fish nets. The management acquired a parcel of land. But
the sale of parcel of land was through a real estate broker. The management
earned income on the said transaction and give special bonus on its employees.
The special bonus is being claimed the management as business expense ___
deduction.
The SC ruled that the special bonus cannot be claimed as business expensededuction. The worker did not render actual service because it was proven that the
sale was course through estate broker. The SC merely invokes Section 34A1ai.
The special bonus was disallowed as deduction.
Let us go to themonetary grossed up value of fringe benefits provided the FIT
has been paid already. What is the fringe benefit here? It is the one received by
the managerial employee. Otherwise, the law will not say the payment of FIT.
Let us go totravelling expenses away from home in the pursuit of trade or
business.
Q. Supposed the management will provide travelling allowance to the
employee because he is living in a far away place maybe Farview or
Faranaque. Is this the travelling expense referred to Section 34A1aii?
A. No.
The one mentioned here are those travel in the pursuit of business away from
home here and abroad, for example in Baguio or Davao or Singapore.
Q. Is the travelling expense in a foreign travel a deduction although it has
nothing to do with trade or business?
A. Yes. We have Section 33B7, the travelling expense for foreign travel. Under
RR 3-98, travelling expenses for foreign travel by the managerial worker is only a
fringe benefit if it is not in the pursuit of trade or business.
If that is the case, it is a fringe benefit it can be claimed as deduction not under
Section 34A1aii but under Section 34A1aii last phrase, the monetary gross up
value of fringe benefits provided the FIT has been paid already.
We go toreasonable rentalsfor the continued maintenance and development of
the management.
Examples are payment to PLDT, NAWASA, MERALCO and other utilities. These
are reasonable rentals for the continued maintenance, development and existence
Lastly,entertainment expenseprovided it is not contrary to public morals.
It is limited by RR 10-2002. If the taxpayer is selling goods or commodity, the
entertainment expense should not exceed 0.01% of the gross receipt. If the
management is selling services, the entertainment expense should not exceed 1%
of gross receipt.
Here it requires that the entertainment should not be contrary to public morals,
public policy or public order. Hence, if the management present receipts from
Pegasus, the BIR most probably deny, without thinking, the claim for deduction.
We go tokickbacks. Even assuming there are no statements here in the Tax Code
regarding kickbacks, it is still not possible because of the requirement that it
should be ordinary and necessary.
We go to Section 34B2;private educational institution. We will notice that fromall the taxpayer; it is only this one which mentioned under paragraph A of Section
34. But at this time we have to correlate this to another provision, the one
mentioned under Section 27 referring to private educational institution. But it
should have been referred to Section 36A2 and A3. These are the so-calledcapital
outlays.
Ordinarily, capital outlays cannot be claimed as deductions except private
educational institution.
Q. What are capital outlays?
A. Expenses for the construction of the new buildings or expenses for
improvement and restoration to enhance or improve equipment.
For example, during the typhoon, the equipment was destroyed. So the
management will incur expense to improve or restore the facility. The expenses
incurred there are also known as capital outlays.
Ordinarily, this cannot be claimed as deduction by the taxpayer except private
educational institution paying the net income tax. It could be claimed as adeduction as business expense under Section 34A or itemized deduction of
depreciation.
Q. What is the rationale to the option to be exercised by the school?
A. If the capital outlays are substantial, e.g. the gross income is 50 million pesos
and the capital outlay is 80 million, and it will be allowed as business expense, the
Q. Considering the taxpayer pay the interest of one hundred thousand, is he
authorized to claim the interest of the entire one hundred thousand?
A. No. First we multiply the 42% with the 50 thousand bank interest so the
result will be 21 thousand. This 21 thousand should be deducted to the one
hundred thousand so that the taxpayer will be allowed to claim an interest of loan
of only 79 thousand pesos.
What are thee “other interests”? Interest on rediscounting of papers, meaning, the
taxpayer will borrow money and the interest will be paid in advance.
For example, in January 2005, a taxpayer borrowed money by way of rediscounting
of papers. Upon the grant of the loan, instead of receiving one million, the interest
of one hundred thousand shall be automatically deducted so he will receive not one
million but nine hundred thousand. That is rediscounting.
Q. Can he claim the interest as a deduction on April 2006?
A. Section 34B provides for a qualification. If the taxpayer is an individual and
using a cash basis method, he may or may not be allowed depending on whether
the principal obligation has been paid already. If the principal obligation has not
been paid, the interest on loan by virtue of rediscounting should not be allowed as
deduction although it was incurred with the taxable year.
However, if the principal obligation was already paid, the taxpayer may be allowed
to claim the interest as deduction. If he pays the obligation by way of instalment,for example, only ½ of the obligation, then only ½ of the interest will be allowed as
a deduction.
Q. What are the interests which are not allowed?
A. Interest on related parties which is enumerated under Section 36B.
What is important in related parties is Section 36B1.
Q. Who are the relatives under the Tax Code?
A. The related parties under the Tax Code include corporations and those related
by consanguinity.
For example Section 36B1, the related parties here are brother, sisters, whether full
blood or half blood, lineal descendants and ascendant.
Here we have thenet-operation loss carry over rule (NOLCO) under Section
34D3. This was discussed under Section 39D on net capital carry over rule.
The ordinary loss may be claimed in the capital gain or ordinary gain, why is it
that there is a carry over? Meaning, in particular year, the taxpayer will not be
allowed to carry over. For example in 2000, the taxpayer will not be allowed to
claim the ordinary loss because the loss is more than the gross income, e.g. grossincome is ten million and the ordinary loss is twenty five million. Hence, there is a
difference of fifteen million. Under the carry over rule, it may be claimed in the
succeeding three years. Hence, if that is incurred in 2000, in 2001, the taxpayer
will be all0wod if there is a profit or gain. If there is none, the taxpayer may claim
it on 2002. Still, if there is none, he will be allowed in 2003. If there is no gain in
2003, he will not be allowed to claim that in 2004. That is beyond the three-year
period with the exception of oil drilling corporation and mining operations. It can
be claimed within five years.
Bad Debts
This was asked in 2003 and 2005 bar.
2003 BQ
Q. What is the tax-benefit rule?
A. The tax-benefit rule is Section 34E first paragraph.
2005 BQ
Q. What do you mean by “up to the extent that the taxpayer had benefited”?
For instance, the taxpayer is the creditor, so he has many account receivables. He
failed to recover those account receivables. The BIR might allow him to claim the
itemized deduction of bad debts.
Supposed the bad debts were allowed and later on he was paid by the debtor, so
the taxpayer was able to recover the amount. What happen now tot he deduction
of the bad debts, will it be cancelled? No more. It remained to be a deduction.Otherwise, the computation of income tax will be affected. The amount so
recovered, the bad debts, is subject to income taxup to the extent that the
taxpayer had benefited.
Example, before the bad debts, the taxpayer paid ten thousand pesos tax due, but
because the bad debt is allowed, the taxpayer was able to claim the tax due of zero.
Hence, he did not pay any tax. Subsequently, he was able to recover the bad
debts, so it remains to a deduction. But the amount so recovered is subject to
income tax up to the extent that the taxpayer has been benefited. Meaning, the tax
payer is only subject to income tax of ten thousand. The amount of ten thousand
pesos is the one included in the computation of the ITR subject to income tax
because that is the amount he has been benefited.
It must be claimed not in the year the deduction was incurred. In a contract ofloan, the taxpayer is the creditor, was entered into in 2003. The deduction must
be claimed on the year it was written off or charged off, so that when the loan was
entered into in 2003 but was only written off or charged off in 2006, meaning to
say, in the book of account. It was now cancelled; it is also in the year 2006 that
the deduction may be claimed. It should not be in year entered into but in the
year it was cancelled after a certain effort to recover the same but he failed to
recover.
So under this deduction, although he incurred the bad debts in 2003 but he
cannot claim that in the year it was written off or charged off, or finally determined worthless or cancelled.
Depreciation and Depletion
When we say depreciation, this is a deduction which refers to ordinary wear and
tear of the facilities, machine equipment, real properties but does not include
parcel of land, which is used to the trade and business of the taxpayer. For
example, delivery van, in factories, the machine; these are subject to depreciation.
Among the deduction, this is unique because the taxpayer can claim this, unlike in
any other deduction, in succeeding years. For example, business expense, the
expense can only be claimed in the year it was incurred. Unlike in depreciation, it
can be claimed into several years depending upon the method and the estimated
life span of the property. That is why in capital outlays in private educational
institution, it can be claimed also in depreciation.
Let us compare it with depletion. If depreciation is about the machine or properties
to be used in the trade or business, depletion in Section 34G refers to natural
resources it self like mineral deposits, deposits of coal and deposits of silver.
Q. Do we use depreciation in the mining business and oil drilling operation?
A. The equipment being used in the drilling and mining operation is subject to
depreciation.
Q. Can we use depletion in other business other than mining corporations
For corporations, take note that it is only 5% of the net income.
1994 BQ
Q. A philanthropist, donated one million pesos to young lady suffering from
a unique disease. Can the donor claim deduction for the contribution or the
donation?
A.No, because in the enumerations, whether for partial or total deductions, there
is no done under Section 34H who is an individual; all of them are entities,
partnerships, corporations or associations. There is no done under Section 34H
which is an individual.
Therefore, the donor can only claim deduction under the income tax if the done is
one of those enumerated under Section 34H. If the done is not there or the donor
is not a corporation, the donor cannot claim this deduction.
The first paragraph of Section 34H, notwithstanding, the long enumeration after it
can be divided into two: first, the done is the government, and, second, DC. For
the government, the requirement is that the done is the Republic of the Philippines
or any of its political subdivision, agencies and instrumentalities of the government
exclusively for public purpose. The second group, the requirement is that no part
of its net income shall inure to the benefit of any private stockholder or individual.
These are the social welfare, education, charitable, religious youth, sports
development and rehabilitation of the veterans.
We have to take note if the requirement was complied with because even if theentity is one among those enumerated, nonetheless, if the requirement was not
complied with, the donor cannot claim deduction.
Total deductions is under the last paragraph; donation to the government or
other entities in accordance with the priority plan of the National Economic
Development Authority. If the purpose of the donation is under the priority plan of
the NEDA, the deduction here is total.
We will notice that some of the donees under partial are also mentioned in total
deduction. Is there a conflict? None, because if the government is the done andthe purpose of the donation is under the priority plan of the NEDA, then the
deduction is total. If the purpose is only for public purpose, then the deduction is
only partial.
DC can also claim total deduction if they are accredited nongovernmental
Among the deductions, this is the one which does not appear under the old law.
This was introduced only in 1998. Formerly, taxpayers claimed this as business
expense. But normally, the BIR deny this claim because of the requirement that it
is ordinary and necessary. Hence, when it was amended, the authors of the
amendment deemed it necessary to provide a separate paragraph. Nevertheless,
there are expenses for the research and development which are not deductible evenif it is for trade or business of the taxpayer under the last portion of Section 341;
expenses to locate a parcel of land. The expenses are not deductible. Also,
expenses to locate mineral deposits are also not deductible.
Pension or Retirement Pay
Q. Who is the one allowed to claim this deduction?
A. The management or the employer for contributing in the private retirement
plan. The management only has to prove that it was incurred in a taxable period.
Optional Standard Deduction
Q. Is this in addition to the other deduction?
A. No. This is in lieu of other deduction and the taxpayer here must be an
individual except NRA.
This is first time that the law does not say if it is a NRAE or NRANE. However, this
refers to NRANE because they are not allowed to pay by way of the net.
Q. What is this deduction?
A. It is 40% of the gross income (para ‘to sa mga tamad!).
Do not confuse this under standard deduction under Section 86A5. This one
under Section 34, it isoptional standard deduction; the one under Section 86
Q. Does it mean that the NRAE is not mentioned in Section 24A he is not
allowed to claim personal exemption?
A. Not really. They can claim personal exemption not because of Section 35A but
because of Section 35D.
Q. Why is it that he has to be separated from the rest?
A. Because they are not allowed to claim additional exemption. They are only
allowed to claim personal exemption.
Q. What are the personal exemptions?
A. Section 35A provided for three personal exemptions.
First, single including legally married but judicially decreed as legally separated withno qualified dependent.For those legally separated, under the civil code,
they are still legally married. But under the tax code, those legally separated with
no qualified dependent is considered single. If hey have qualified dependent,
Section 35B, second in the enumeration, they are classified as head of the family.
Hence, they are not considered as legally married under the tax code. They can
only be either head of the family or single.
Q. Who are the qualified dependents?
A. Section 35B last paragraph says it is the legitimate, illegitimate and adopted
children of the taxpayer.
Second group is the head of the family.
There are so many kinds of head of the family. They are provided for in the last
paragraph of Section35A and RR 2-98 and also in Section 35B, second in the
enumeration.
First, we have the head of the family because we have a dependent father, mother
or both. Second, the taxpayer is the head of the family because he has dependent
brother or sister; third, because of the dependent children, not exceeding four;fourth, under RR 2-98, because of the dependent senior citizen, whether a relative
or not; and fifth, because the taxpayer is legally married but judicially decreed
with qualified dependent referring to the children.
The third group is the legally married with the deduction of P________________ for
each married individual, meaning the wife and the husband. Underscore the word
First, erase the last portion of Section 36B3 because we do not have personal
holding companies nowadays. The personal holding companies were abolished in
1987. EO No. 37 issued by Pres. Aquino has rendered the income tax quite easy
because the income tax on personal holding companies was abolished. However,
the law was not properly amended because Section 36B3 last portion still speaks of
personal holding companies. Consequently, cross out the last portion which
provides for the personal holding company.
We go to Section 36B1.
Take note that here, on related parties, it does not include relatives by
consanguinity within the fourth civil degree. Therefore, uncles and aunties are
not included. Those included under this subsection are brothers and sisters,
whether full blood or half blood, spouses, ascendants and lineal descendants.
In other words, when the taxpayer sold properties to his brother and he incurred
the loss, that loss is not deductible.
Supposed instead of loss he derived profit or gain; that is subject to income tax.Hence, there is unwritten law written under this subsection: if there is a profit, it
is subject to income tax; if there is a loss it is not subject to deduction.
We have to correlate this to Section 99B on donor’s tax. There, relatives shall
include by consanguinity within the fourth degree of relationship.
Q. The taxpayer sold personal property to his nephew. On that transaction
he incurred a loss. Will he be allowed to claim the loss as deduction?
A. Yes. A nephew is not a relative in view of the above section. It is only limitedto brother, sister, spouse, ascendants and descendants.
We go to Section36B2.
Section 36B2 refers to exchange or sale between individual and corporation where
the individual owns at least majority of the outstanding shares. Take note of the
exemption, it says “except in cases of liquidation,” meaning if a case of liquidation,
it must be done within the period, selling the same or substantially similar share of
stocks.
Why is that he is not allowed to claim the deduction if he incurred a loss? Who
knows if he is telling the truth or not? Nonetheless, gain in wash sale is subject to
income tax.
There is one exception. Losses in wash sale, even assuming it is a wash sale, it is
deductible, the loss, and this about dealers or brokers of shares of stocks. They
are allowed because normally they are telling the truth; they have complete record,
i.e. book of accounts and deed of sale. Therefore, normally, he is telling the
truth.
CHAPTER XVII
DETERMINATION OF GAIN AND LOSS
Section 40 was already asked in 1986, 1987 and 1994 bar.
1987 BQ
Q. Juan de la Cruz, a RC, sold the jewelry for three hundred thousand. Is
there a gain or is there a loss? Will your answer be the same if the subject
matter of the sale is a parcel of land?
A. There is a gain if the amount realized is in excess over the basis or adjusted
basis. There is a loss if the amount realized is not in excess over the basis of the
adjusted basis.
This could be best illustrated by a contract of sale. In a contract of sale, the mount
realized is the selling price. If the selling price is more than the basis, thoseenumerated in Section 40B, there is a gain. We have to determine on how the
seller or transferor acquired the property.
In Section 40B, if the property is acquired by virtue of purchase, the basis shall be
the cost. It is the purchase price when the seller purchased the property, maybe
many years ago plus expense if any. So selling price plus expenses shall be the
Supposed in our example, if the seller purchased the jewelry for one hundred fifty
thousand plus expenses of two thousand many years ago, the one hundred fifty
two thousand shall be the cost. Since the amount realized is three hundred
thousand pesos, which is more than the cost, there is an income of one hundred
forty eight thousand pesos. That is how to determine gain.
Section 40 applies only if the applicable income tax is the net income tax. We do
not use this method if the applicable tax is the GIT or the FIT except in the sale of
shares.
Therefore, to NRANE and NRFC, Section 40 is totally irrelevant to them. This only
applicable if the taxpayer is liable by way of income tax.
Q. Is the entire one hundred forty eight thousand subject to income tax?
A. It depends. Assuming it is an ordinary asset, therefore, the gain is ordinarygain. 100% of the gain is subject to income tax. If it is a capital gain, assuming
the property is a capital asset, it all depends on whether the long-term or the
short-term holding period will be applicable. If for long-term, 100% of the profit is
subject to income tax; if short-term, 50% shall be subject to income tax, the
remaining half will be exempt.
Q. What about in the sale of realty? Do we apply cost in the sale of realty?
A. If the property is subject to FIT, we do not apply cost as a basis of determining
as to whether there is a gain or profit. If the sale of realty is subject to NIT, cost isapplicable.
Q. What if the property was obtained through crimes such as estafa, robbery
etc., is there a gain? For example, the amount obtained is two hundred
thousand.
A. There is a principle that an income from illegal resource is still subject to
income tax. Under an old CTA ruling, the entire amount of two hundred thousand
pesos is deemed a profit. Unlike if it is acquired by purchase, we have to
determine how much the profit is.
We go to Section 40B2.
For property acquired by virtue of inheritance, the basis shall be the fair market
value at the time of acquisition.
So if the taxpayer had sold a property by which he acquired that property by way of
inheritance, and he sold that for two hundred thousand, the basis of the cost is the
fair market value of the property at the time he had acquired the same. Let us say,
if the fair market value of the property is only one hundred twenty thousand, and
he sold that for two thousand, then he obtained gain of eighty thousand.
In Section 40B1, the rules we have stated on whether the whole amount is subject
to income tax depending if it is an ordinary or capital gain and whether it is on the
long-term or short-term, if it is areal property whether it is subject to FIT or NIT, isalso applicable here.
We go to Section 40B3. This is about the property acquired by virtue of donation.
To illustrate, a lady received a donation, perhaps jewelry in February 14, 2006,
from her papa. Suppose she sold the jewelry, how much is the profit there? The
basis is under Section 40B3, the basis shall be the same as if it would be in the
hands of the donor who did not acquire that by virtue of donation.
Ordinarily, we have to ask the donor on how he acquired the jewelry. Supposed heacquired that by virtue of purchase; the cost shall be the basis. If he acquired
that by virtue of inheritance, the basis shall be the fair market value at the time of
the acquisition of inheritance.
If he acquired that by virtue of donation, there comes now the trouble because the
codal says “who did not acquire by virtue of donation.” Supposed her papa
acquired the jewelry from his SM, sugar mommy, by way of donation, we have to
determine how the sugar mommy did acquire the jewelry. If the purchase ____ the
basis shall be the cost; if by inheritance, the fair market value. IF the sugar
mommy acquired the jewelry from her DOM, delicious old man, wala ng
katapusang procedure ito! So this codal provision has to be amended.
We go to Section 40B4.
Property which was acquired by virtue of adequate consideration, it will be the
amount given by the transferee. The property will be disposed for one hundred
thousand. What is the amount given by the transferee? Sixty five thousand, for
example. What will be the basis? It will be the sixty five thousand pesos. Using
that as a basis, the profit there is thirty five thousand. Whatever we had said
under Section 40B1, depending if the asset is capital or ordinary and whether the
property is real property, is applicable.
The next is Section 40B5.
The trouble of Section 40B5, we must first understand Section 40C1-6.
C – 1. The rule is gains are recognized; losses are recognized. When we say gains
are recognized, gains are subject to income tax. When losses are recognized,
C – 2. It says here the exception; gains are not recognized. Meaning, gains are
not subject to income tax or exempt from income tax. Losses are not recognized,
losses are not deductible.
Q. What are the elements of this?
A. The elements are the following:
1.The contract is limited to contract of exchange;
2.The parties are members of merger or consolidation; and
3.The subject matter of exchange is only limited or confined to the one
provided for in the law. This is the one enumerated in Section 40C2abc.
There is number four but there is no letter d, the last paragraph of Section
40C2.
We have to determine who among them are the transferors and who among themare the transferees. Why? In the event that the subject matter of the exchange is
not solely in kind, meaning, the subject matter of the exchange is different than
that provided for the law, we have to determine if he is the transferor. If he is the
transferor, the governing rule is Section 40C3b. If it is the transferee, the
governing statute is Section 40C3a.
Under Section 40C2abc, gains and losses are not recognized. But who among
them now are the transferor? If we are facing the book, all entities on the right
side, those are the transferors and all of them are corporations under Section
40C2abc and the last paragraph. Who are the transferees? All those on the left
side are the transferees.
Under Section 40C2a, both of the parties are corporations. Which is the
transferor, the one on the right side, it will transfer the shares of stock. The
transferee is on the left side which will transfer property.
For example, if the transfer of shares of stock worth one million will be given to the
transferee, the latter will transfer a property worth one million and five hundred
thousand. So between the two, apparently, the income earner is the transferor
because it received 1.5M while it only gives 1Mj only. Here, the law says the gain
is not recognized assuming the elements above are present. Meaning, it is exemptfrom income tax, provided, it is a contract of exchange, the parties are members or
merger or consolidation, and the subject matter is limited to shares and property.
Who has the loss here? The transferee. Can it be claimed as deduction? No,
because the elements are present. That is the meaning of non-recognition of the
Let us say, the subject matter is not the one mentioned in the law. Now we have
Section 40C3 entitle exchange not solely in kind. Underscore the word “not”.
Going back to Section 40C2a, we have to take note of the elements above.
Assuming if the third element was not complied with, for instance, the transferee
instead of receiving shares of stock only, in addition it received other kind ofproperty or cash money. Assuming the transferee earned income, is it still covered
by Section 40C2? No. It is covered by Section 40C3. It is a transferee, so it is
covered by Section 40C3a, the gain is now recognized, meaning, the gain is now
subject to the NIT.
Supposed the transferor corporation will only receive property but in addition it
will receive cash money and share of stocks and assuming it earns income, Section
40C3b applies. It all depends if it is pursuant to the plan of merger or
consolidation. The gain is still not recognized.
All those pattern applies to Section 40C2bc and the last paragraph.
In Section 40C2b, the transferee is a shareholder and the transferor is a
corporation. In both cases, the subject matter of the exchange is shares of stocks;
if the elements are present, whatever gains are not recognized, whatever loss, the
loss is not recognized.
In Section 40C2c, the transferee is security holder and the transferor is a
corporation. The transferor will gain share of stock or security, the security
holder will transfer security. We have the same pattern with Section 40C2a.
We go to the most important, the last paragraph of Section 40C2.
Why is there is no letter d? Because the parties here are not members of merger
or consolidation. Who is the transferor her? Still a corporation. The transferee
is the individual. What will the transferor corporation transfer? Shares of stock.
What will the individual give? Property. After the exchange, what happen to the
relationship between the corporation and the individual? This is a simple case of
individual becoming a stockholder of a corporation.
Instead of purchasing stocks by money to become stockholder, the individual wantsto pay in kind, may be kamote, banana, talong or a parcel of land.
For instance, the parcel of land is only worth one million, but the shares given to
him is worth one million seven hundred thousand. What happen now who earned
an income? Is the income of seven hundred thousand subject to income tax?
The law provides for a qualification in Section 40C2 last paragraph.
Section 56A3, this is being referred to when the taxpayer is claiming exemption
because he is going to use the proceeds of the sale of real property for residential;
the one mentioned under Section 24D2. Here the taxpayer is not yet ready to
comply with the requirements. To avoid payment of interest and penalty, he has to
pay now the FIT of 6%. If his documents are now complete, and, therefore, his
income is exempt, but he paid it already, the law says, he is given 6 months to
claim for a refund. If the taxpayer is using installment of method of reportingincome, within 30 days from the receipt of the installment, the taxpayer has to pay
the tax.
In Section 56b, here we hit three birds in one stone. This is also similar under the
estate tax under Section 93 and donor’s tax under Section 104 last portion. Here,
the rules are practically the same.
It would seem that there were only two paragraphs but there are three instances
there:
1.The taxpayer filed a return, he paid the tax but the tax is not enough. Thetaxpayer might receive notice of deficiency assessment;
2.The taxpayer filed the return but he did not pay the tax; and
3.The taxpayer filed the return, and, therefore, he did not pay the tax.
Section 57A refers to the enumeration of codal provisions subject to FIT. There are
two provisions here which are not subject to FIT but to GIT like Section 25B, but it
is justified because the last portion of this Section is about the FIT in the sales of
shares and realty. Nonetheless, most of the provision under Section 25B is about
the GIT. The other one is Section 28B1; this refers to the gross income tax to be
paid by NRFC. Why is it included here? Because the withholding tax system
under gross income tax is almost similar to the withholding system under the FIT.
The minimum of the withholding is 1%; the maximum is 35% as amended by RA
9337.
Q. What is the maximum under the NIT?
A. 15%. Most of them are 10%.
For FIT and GIT, there is the rate of 35% but for creditable withholding under the
net, the highest withholding is 15%. It is written in the law that the maximum withholding is 35% because the maximum GIT is 35%. This is not true in the NIT
because of the deductions. Remember that in FIT and GIT, the amount of
withholding is totally equal with the rate of the income tax. That is
not the case in NIT.
Take note that Section 57B was already amended to 35%.
Again, do not have the concept that the maximum withholding in NIT is 35%; as
stated, the maximum is 15% because of the deductions.
Section 57C refers to tax-free covenant bonds.
In a contract between an obligor and obligee, or maybe creditor or debtor, it is the
creditor or the obligor who is liable to pay the income tax. The tax liability maybeagreed upon that it is now the debtor or the obligor who will shoulder the tax.
That is why it is called covenant, meaning, by virtue of agreement the debtor might
shoulder the income tax and if the tax has been paid by the creditor, he might
reimburse it.
It is tax free because it is the creditor who is normally liable to pay the income tax
is now tax-free by virtue of the agreement.
Section 58 refers to the filing of the FIT and the creditable withholding tax return,
and, also, the register of deeds might allow the taxpayer to transfer the property but upon payment of income tax.
5.Shares or right in any partnership, industry established in the Philippines.
These are deemed located in the Philippines, and if the taxpayer under estate tax is
NRA, and under donor’s tax, the taxpayer is NRA and FC, they are liable because
their liability shall only be on properties deemed located in the Philippines.
We have to remember that with regard to NRA under estate tax and NRA and FCunder donor’s tax, their liability shall only be on properties deemed located in the
Philippines.
While it is true that the liability of NRA under estate tax and NRA and FC under
donor’s tax is only for those property deemed located in the Philippines, for
purposes of filing the estate tax return, Section 86B says that with regard to NRA,
take note this does not apply to donor’s tax, the admistrator or executor of the NRA
shall include in the return all the properties whether located in the Philippines or
abroad.
Q. What is the purpose?
A. In order to allow deductions.
But in the payment of estate tax, NRA shall only be liable for properties located in
the Philippines. But only for the purpose of filing the return, all the properties
should be included.
Going back to Section 104, there is exception there: the property of a NRA and a
FC s located in the Philippines.
There is an exception that they will be exempt. Normally, a NRA which is a donor
or a decedent (including FC), if that is personal property located in the Philippines,
they are liable. However, Section 104, in the middle portion of the first paragraph,
says that if the country of the NRA or the domicile of the FC do not impose or
provide for exemption on intangible personal property owned by Filipinos whoa re
not residing in that foreign country, the NRA or the FC is not liable to pay estate
tax or donor’s tax as the case may be. Provided, that the foreigner or the alien is a
citizen or national of that foreign country and he must be residing there.
So that if a decedent is a foreigner but a resident alien of the Philippines, this
exemption do not apply. What are the requisites? First, the foreign country of the
alien or the foreign country of the FC do not impose or exempt from transfer tax in
intangible personal properties owned who are not residing there. Second, the
foreigner or the alien must be a resident and at the same time a citizen or national
of that foreign country. If these two elements are present, the property located in
the Philippines, the donor or decedent is exempt from transfer tax.
Q. A German national donated shares of stock in a FC to his Filipina
girlfriend. Is that donation subject to donor’s tax in the Philippines?
A. No. The donor’s tax can only be applied if the shares of stock donated by the
NRA have acquired a business situs in the Philippines or in the alternative, the FC
where the shares of stock came from, at least 85% of the business of that FC is
located in the Philippines. Otherwise, the donor is exempt.
2005 BQ
Q. The decedent is RA. He has properties here in the Philippines, USA and
Europe. To which of the foregoing properties are subject to estate tax?
A. All of the properties are subject to estate tax because the decedent is a RA.
Campos Rueda vs. CIR
42 SCRA 283
The decedent is NRA. The decedent is from Spain who married a national of
Morocco. She has so many properties and all of them are intangible properties but
most of them are shares of stocks in a DC. They are being obliged to pay the tax.
The executor, Campos Rueda claim exemption from payment of estate tax and
inheritance tax claiming the provision of Section 104 that in the country, inMorocco, it provides therein that intangible personal properties owned by Filipinos,
where this Filipinos are not residing in Morocco is exempt from estate tax. The
petitioner is claiming exemption by virtue of this provision. However, the BIR
contends that Morocco is not yet a country because it is a colony of Spain; hence,
the said provision is not applicable.
The SC agreed with Campos Rueda to the issue that Morocco is not yet a country is
immaterial. What matters here is that the foreign laws of Morocco provides for an
exemption. Since the elements are present, Campor Rueda was allowed to claim
exemptions from the payment of inheritance and estate tax.
We have to know the payment of estate tax. The formula is also similar with that of
The estate tax shall be applied to the transfer of property after the death of the
transferor. This is the general rule which is subject to so many exceptions.
Normally, if the property is transferred during the lifetime of the transferor, we
apply the donor’s tax. There are exceptions. Although it was transferred during
the lifetime of the donor, yet we do not apply the donor’s tax but the estate tax.
But when the transfer was made after the death of the transferor, the rules is
absolute; we have to apply estate tax.
Q. What is estate tax?
A. Estate tax is a transfer tax imposed on the transfer of the net estate of thedecedent to the heirs or beneficiaries who are not his heirs.
We go to Section 85A; decedent’s interest.
Included in this paragraph are properties owned by the decedent at the time of his
death. Why is it entitled “property owned by the decedent at the time of his
death”? Instead it says “decedent’s interest.”
The intention of the law is to include all properties, not only at the time owned by
the decedent at the time of his death but also those not owned by the decedent but
he has interest on such property. For example, in a contract of lease, when the
decedent is a lessee, normally, in the absence o agreement upon the death of the
lessee, the contract of lease is terminated.
Supposed the lease is for 5 years, after 2 years, the lessee died. That could be
inherited by the heirs. Hence, the value of the lease shall be included in the gross
estate of the decedent. Is he the owner of that? No. He only has interest over
the property.
With regard to usufruct, normally, a contract of usufruct is terminated upon the
death of either of the parties. If the usufructuary died, then the contract isterminated. Section 87A says the merger of the usufruct to the naked owner is
exempt from estate tax.
Q. Supposed if it is for a fixed period of time, for example five years. After
two years, one of the parties died, will the use of the property be returned to
That is supported by Section 88A where it says that the value of the usufruct shall
be determined because it is subject to estate tax.
Therefore, there is no conflict between Section 87A and 88A. Section 87A provides
for exemption while Section 88A provides for the imposition of the estate taxindirectly. Section 87A presupposes a situation where the contract is terminated
upon the death of usufructor. Hence, the property will be returned to the naked
owner, and under Section 87A, that is exempt.
If the usufruct is fixed in a certain period of time, it will not be returned to the
naked owner if the usufructuary died. It will be inherited by the heirs and we have
to determine the value for the purpose of imposition of estate tax. Supposed the
one who dies is the naked owner, Section 85A applies. That is subject to estate
tax.
Hence, the estate does not only include properties owned by the decedent but also
properties wherein he only has interest as stated under Section 85A.
We go to Section 85B.
There are two kinds of transfer in contemplation of death:
1.The technical transfer in contemplation of death under SC ruling in Vda. De
Roces vs. Posadas 58 Phil 108, Dizon vs. Posadas 57 Phil 465; and
2.The one provided for in the Tax Code is only a technical transfer in
contemplation of death. It is deemed a transfer in contemplation of death
because of the technical provision because t does not refer anything about
death.
The SC ruling speaks about death.
Vda. De Roces vs. Posadas
58 Phil 108
A taxpayer executed a deed of donation. Almost simultaneously with the execution
of the donation, she also executed the last will and testament. When she died, the
done tried to pay only donor’s tax but the government insist the payment of estate
tax and donor’s tax because the government reason out that these two documents
were executed at almost the same time; and second, the donees in the deed of
donation, were also the same persons in the last will. The BIR concludes that it is
The SC agreed with the BIR that it is the transfer in contemplation of death
because the execution of the deed of donation was executed almost simultaneously
with the last will and testament. Also, the instituted heirs were also the same
persons, the donees in the deed of donation.
Dizon vs. Posadas57 Phil 465
The father of the family donated parcels of land to his one and only son. After
several days from the execution of the deed of donation, the father died. When the
father died, the son paid the donor’s tax. The BIR claimed inheritance as well as
estate tax.
The SC, again, agreed with Posadas stating that since the death of the donor is
very near to the execution of the deed of execution. Then that is transfer in
contemplation of death.
In these two cases, it is talking indirectly about death.
Q. What about the one in the tax code under Section 85B?
A. This is only a technical provision about the transfer in contemplation of death.
Take note of the last two enumerations at the bottom of the paragraph: upon
transfer of his property, he still possess or he still receives the fruits or income of
the property. Third, the transferor, he himself alone, or together with otherpersons, designate who will receive the income of the property and who will
possess. Those are the technical rules on transfer in contemplation of death.
We go to Section 85C, revocable transfer.
Take note that the transfer of property, the rule is that it is irrevocable, if the
transfer is silent. If that is irrevocable, it is not subject to estate tax. Meaning,
the transferor upon his death or after his death that will not be included in the
gross estate because it is exempt for the reason that the one included in the gross
estate is the revocable.
Q. Why?
A. That is because of the tremendous power that in any time he can revoke,
For example, the taxpayer made a conditional transfer to his son. Whether or not
the condition was performed, or whether or not there is prior notice, upon the
death of the taxpayer, that will be included in the gross estate.
The remedy is to remove the condition so that it will become irrevocable.
Therefore, exempt from estate tax.
We go to property passing under general power of appointment under Section 85D.
If we read the provision, it is only similar to Section 85B for transfer in
contemplation of death. But we have to understand her that the property here is
under the general power of appointment. This was never asked in the bar because
this is common in United States. We seldom practice here in the Philippines.
Here, we practice the opposite, the fidelcommissary substitution.
The general power of appointment, we can understand it by remembering Article
863 of the Civil Code on the fidelcommissary constitution. There are three parties:the testator, first heirs and the second heir.
According to Section 87D, if the first heir dies, the property now is transferred to
the second heir, the estate of the first heir is exempt from estate tax.
Q. Why is it exempt?
A. It is exempt because the first heir did not choose on who will be the second
heir. It was the privilege of the testator. That is why upon the death of the first
heir, and the property was transferred to the second heir, the estate of the first heir
is exempt from estate tax.
In general power of appointment, there are three parties: testator, first heir and
second heir. If the first heir dies, the property will be transferred to the second
heir. The estate of the first heir under general power of appointment is subject to
estate tax for the property because under American law, the first heir has the
power to choose the second heir. Because of that, it is only logical that his estate
is subject to estate tax. What is subject matter of transaction? The one we had
discussed under Section 85B.
We go to Section 85E. This was asked in 1999, 2000, 2001, 2002, 2003, 2004 and2005 a nagawa din nung 2006, hindi na tinanong; the proceeds of life insurance.
Q. Are proceeds of life insurance subject to income tax? Estate tax under
Section 85E?
A. There are requirements. First, a person who ensured himself, Section 85E will
apply. If the taxpayer ensures the life of another, the rule does not apply.
Second, if the appointed beneficiary is the estate, represented by the executor or
administrator, the proceeds of life insurance, assuming the first requirement is
present, shall be included in the gross estate regardless of whether the
appointment of the estate is revocable or irrevocable.
If the appointed beneficiary is other than the estate, maybe a relative or a friend, it
defends if the appointment of the such beneficiary is revocable or irrevocable. If itis revocable designation of the beneficiary other than the estate, assuming the first
requirement has been complied with, the proceeds shall be included in the gross
estate. Therefore, subject to estate tax. If beneficiary is other than the estate and
it is irrevocable, having the same assumption, it is not subject to estate tax
because it should not be included in the computation of the gross estate.
Q. Why?
A. It is because if the appointment is revocable, insured has tremendous power,
control and influence to modify, change or alter the beneficiary. Because of thattremendous power of control, the law is only logical that when he die, his estate
will be liable to pay estate tax.
When the appointment is irrevocable – where the beneficiary is other than the
estate, because if it is the estate, it does not matter, the estate will be liable
whether it is revocable or irrevocable assuming the first requirement has been
complied with – the insured lossess control to change, modify or alter the
beneficiary. The law is only reasonable that when he died, his estate is not liable to
pay estate tax.
Q. Is it subject to income tax?
A. The governing rule is Section 32B1 and B2.
Section 32B1 speaks of where it is payable upon the death of the insured. Section
32B2 says that it is payable whether the insured is still alive.
When it is payable upon the death of the insured, the only requirement to be
exempt from income tax because that is an exclusion under Section 32B1, it is
payable upon the death of the insured regardless of who is the beneficiary and
regardless of whether the appointment of the beneficiary is revocable or
irrevocable, regardless of whether or not the payment must be lump sum,
amortization or instalment. That does not matter. The only requirement is that it
is payable upon the death.
Q. If it is payable within specific period of time, like ten years, after ten
years the contract matures, the insured will be paid now but he is still alive
and kicking, is the proceed of life insurance exempt?
A. No. The law says the gross value, meaning before deductions, of the estate
exceeds twenty thousand pesos and within two months, we have to inform the BIR.
Q. Supposed the net estate is eleven thousand, do you notify the BIR in
writing?
A. Yes. If the net estate is eleven thousand, if follows necessarily that the gross
value is several millions because of so many deductions; family home, funeral
expense, standard deduction etc.
We go to Section 90.
Q. If you are the executor, do you always file a return? What are the
requirements?
A. The law says the gross value of the estate should exceed two hundred
thousand pesos.
Q. If the gross estate is two hundred thousand pesos, is the estate liable for
estate tax?
A. No. Because of so many deductions, most probably, the net estate will be
zero.
If the gross value is less than two hundred thousand pesos, as a rule, we do nothave to file a return except if the property consists of registrable properties like
shares of stock, parcel of lands or motor vehicle. Although it is below two hundred
thousand, of course, as a rule, we do not file a return except if the property
consists of registrable properties.
In addition, if the gross value of the estate exceeds two million, it needs a
certification of the CPA.
We will notice whether it is 20 thousand, 200 thousand or 2 million, it is always
the gross estate, meaning, before deductions.
Q. What about if the gross estate is two million pesos, is the estate liable to
pay estate tax especially if the estate belongs to Section 86A?
A. No. We have the same reason; because of too many deductions. Standard
deductions is already one million, if other deduction will be included, most
Q. Where do we file estate tax return and pay the tax?
A. We pay and file the return to the RDO, if there is none, to the authorized
banks; if there is none, to the city or municipal treasurer.
Q. Supposed the decedent is not staying in the Philippines, where does the
administrator file the return?
A. If it will be to the office of the CIR in Diliman, Quezon City.
We file the return within six months from the death of the decedent.
Q. Can we file an extention for filing the return?
A. Yes. But not more than 30 days.
We go to Section 91.
We follow here the “pay-as-you-file” system, meaning, we file the return and then
pay the tax. We will notice here that the date of the payment of the tax is also
within 6 months. That is the same with Section 90C.
Q. What about the payment of the estate tax, can it b extended?
A. It depends, if the partition is judicial or extrajudicial. For judicial, it should
not exceed 5 years; for extrajudicial, it should not exceed two years.
In the event that the extension is granted to pay the tax, the law requires that the
executor or the administrator should file a bond no more than twice the value of
the estate tax.
The primary liability to pay the tax devolves upon the executor or the
administrator. But please take note that it is not in the personal capacity of the
administrator or executor; it is only in behalf of the estate. Hence, he must be
reimbursed.
The subsidiary liability to pay the tax falls upon the heirs. Take note that the lawis very clear about it, meaning, if the administrator fails to pay, it is now the
liability of the heir.
2001 BQ
Q. Is the liability of the heirs of the decedent joint or solidary?
A. It is joint because Section 91C says the liability of the heir to pay the tax is
only up to the extent of their shares. Because of that, the liability of the heir
should be considered joint.
We go to Section 92; discharge.
If we are an executor or administrator and we want to be relieved from our liabilityto pay the estate tax, the proper procedure is to write the BIR in writing asking him
to determine now the estate tax so that we are going to pay the estate tax because
we want to be relieved from the liability to pay the estate tax as an executor or
administrator. We have to do that in one year from the filing of the return; if there
is no return yet, one year from the application.
We go to Section 93; deficiency assessment. We are through here when we reached
Section 56B.
We go to Section 94. In this section, if the judgment will distribute the propertiesto the heir, the judge holding the settlement of the estate, the requirement is that
the judge should require the presentation of the certificate of payment of the estate
tax. We do not present the receipt only. In addition, we have to present a
certification in the nature of an affidavit signed by the BIR that in reality the estate
tax has been paid already. That is certificate of payment.
Marcos vs. Sandiganbayan
273 SCRA 47
The issue is whether or not the consent of the judge holding the settlement of the
estate necessary.
The SC said the consent of the judge is not necessary for the simple reason the job
of the BIR is different from the job of the judge having jurisdiction on the
settlement of the estate.
This was asked in 1998 bar.
We go to Section 95; persons who are obliged to inform the BIR of certain acts or
execution of the documents which tends to prove the payment of the estate tax.
For instance, we are a notary public who notarized extrajudicial partition, an
attorney who filed a pleading for the settlement of the estate, a cadastral surveyor
who partitioned the property. We have to inform the BIR.
We go to Section 97; it speaks of when the decedent has bank accounts.
15%. For instance, we gave a donation to our relatives and after the deductions it
is below tem million. Take note that if after donation of two or three times and if
the net gift is always above ten million, it does not matter also because the rate will
always 15%. But if in splitting, the net gift is below ten million, the rate will now
differ, depending on the amount of deductions and depending on the amount of net
gift.
Therefore, as to the matter of splitting donation, that is only material to donees
who are relatives. If the donees are a stranger, the rate shall always be 30%
because the rate is flat.
In splitting or cumulative, please take note that it can be applied to a stranger. It
may be applied but that is immaterial because the rate is always 30%. Hence, it
does not matter even if the donor’s donated once, twice or thrice. The rate will
always be 30%.
If the done is a relative and if the method used is cumulative, it is beneficial to thegovernment, because the taxpayer-donor will pay more tax. If done is a relative
and the method used is splitting, it is advantageous to the taxpayer because he
pays less tax.
To illustrate, the donation was made in January 2005, after computing the tax, it
is P7,000.00. The same amount was also donated in May 2006 to a relative. But
in filing of the return, the value of the property shall include not only the one
donated in May but also those made in January where the tax is paid already only
for the purpose of increasing the rte.
For example, the BIR said that the tax is seventeen thousand pesos for donation
made in May, the taxpayer will pay only ten thousand pesos because he has paid
the seven thousand.
If that is the method used, it follows that the rate of the tax will be increased
because it is in a cumulative because the computation is not only the property
made in May but also those made in January where the tax has been paid already.
Supposed using the same example using the splitting, let us say, December 2005,
he pays seven thousand. In January 2006, he again made a donation. This time
it is not cumulative because it is not made in the same calendar year. Using thesame example, the tax to be paid by the taxpayer is only fourteen thousand, seven
thousand for December and seven thousand for January.
1995 BQ
Q. The donor donated a property on December 27, 1993. Second donation
was made in January 6, 1994. The BIR said he should file a return for the
cumulative because the donation is only within several days; hence, those
donated in December should be included. Is the BIR correct?
A. No, because cumulative cannot be applied simply because the donations were
made in different years; one was made in 1993 and the other one is in 1994.
2001 BQ
Q. Same fact as above. But after the filing, the net gift is less than one
hundred thousand because of the deduction. The other one is below one
hundred thousand pesos. This is splitting. Do we say now that the taxpayer
will pay less?
A. No, because he is exempt from donor’s tax because the net gift for each
donation is below one hundred thousand pesos net gift.
Q. The donor donated to the Catholic Church thirty thousand pesos, is it
subject to donor’s tax?
A. No. That net gift which is less than one hundred thousand is exempt from
donor’s tax, with more reason if the gross gift is less than one hundred thousand
pesos.
Q. He donated seventy thousand pesos, is it subject to donor’s tax?
A. No. Same reason.
we go to Section 99C.
2003 BQ
Q. Is the donation to a political party exempt from donor’s tax?
A. Yes. While it is true that Section 99C did not say that whether or not it is
exempt, take note that it is being referred in the election code. In the election code
as amended in 1992, under RA 7166 Section 13 therein, if the done is a candidatefor a coalition of political party, the donation shall be exempt from donor’s tax,
provided, that the donation must be property reported to the COMELEC.
We have a statute that it is exempt provided it is duly reported to COMELEC.
We have to determine whether the donor belongs to Section 101 paragraph A or B.
But first, we have to determine who are the six persons liable for donor’s tax.
It would seem that paragraph A speaks only of one; it says “resident”. But there
are four there, only that number four is debatable and the first three is clear. First,RC, RA and DC because they are resident and the domicile of the corporation is
the Philippines, hence, they are all resident. Number 4 is NRC, he is nonresident.
However, following the pattern in Section 86a, it says that NRC should also be
classified under A because under this section, it speaks of citizens and residents.
Under B, we have two; NRA and FC.
Q. What is the importance of determining whether the taxpayer belongs to A
or B?
A. The requirement of deductibility where the done is classified under Section
101A3, there are five requirements. But if the donor is under B, the requirement
is reduced to only one.
Q. A Chinese, a RA who lives in Manila. He entered into marriage contract,
during the celebration of marriage, the father who is a permanent resident of
Taiwan, donated to the newly wed couple and assuming it is two hundred
thousand pesos. Is a dowry to be deemed a deduction?
A. No. The donor is a NRA because the facts say he is a permanent resident of Taiwan.
Since, the taxpayer belongs to B, dowry is not a deduction.
Going back to Section 101A1 we have a bar question in 1989.
1989 BQ
Q. The father of the family died. The surviving spouse entered into a
marriage contract after several years because she could no longer endure thecold mornings of November (not included in the bar question). During the
celebration of marriage, one of the children donated a property to the mother
and stepfather during the celebration of marriage. Is it a dowry which is a
Q. What is a normal or ordinary assessment and collection?
A. Normal assessment and collection is governed by Section 203. Under normal,
there is a return filed but the return is not fraudulent and it is not false.
Q. How about abnormal assessment and collection?
A. It is found under Section 222. There was no return filed, or maybe there was
a failure or omission to file a return, or there is a return, but the return is
fraudulent or false as proven by the BIR.
Q. Why is it we have to determine whether it is under normal or abnormal?
A. Because the prescriptive period for assessment and collection differ or vary,
and, also the procedures are different.
The burden of proof on whether it is a fraudulent return or false return lies on the
part of the BIR. Therefore, if the return is erroneous in itself, it is not fraudulent
or false because the burden of proof lies on the part of the BIR.
We will notice that if the return is fraudulent or false, just the same, it is under
abnormal. The matter of whether the return is fraudulent or false does not matter
as far as prescriptive period for assessment and collection whether it is fraudulent
or it is false, just the same, it is under abnormal.
Q. What is the relevance of saying false return and fraudulent return?
A. Because in fraudulent return there is a surcharge of 50%. That does not
apply to false return.
So let us see now the prescriptive period under normal for assessment under
Section 203. The prescriptive period isthree years to be counted on the day the
return has been filed, take note, it is not counted from the day of payment but on
the date the return has been filed.
But under Section 203, there arethree ways of filing the return. First, when the
return has been filed before the deadline, for example, those using calendar year,maybe April 2. Second, if the return was filed on the deadline, meaning April 15.
Lastly, the return was made after the deadline, maybe April 27.
Q. Under these three modes of filing the return, there are how many ways of
A. There are two ways of counting the period. First, when the return has been
filed before of during the deadline. It should be counted on the date of the
deadline. So if the taxpayer filed the return on April 2, we count the deadline not
on April 2 but April 15. With more reason if the taxpayer filed the return on April
15. We have to count the three years on April 15, on the deadline.
But in counting the period, please take note of leap year. There are 366 days in aleap year. So if there is a leap year, the expiration is not on April 15 but on April
14.
The second mode of counting the period is when the return has been filed after the
deadline, in the example, April 27. The reckoning period is the filing of the return.
Q. A taxpayer filed a return in April 2, 2000 for the taxable year 1998 not
1999. How do you count now the prescriptive period for assessment under
normal condition?
A. On April 2, 2000 because the return was filed beyond April 15, 1999.
We do not say the prescriptive period is April 15, 2000 because the return is not
filed before the deadline; the return was filed after the deadline. Section 203 says
that if the return is filed beyond the deadline, it will be reckoned on the day the
return has been filed which is after the deadline.
We go to abnormal assessment under Section 222.
There are two options if it is under abnormal, but, take note, that these options donot apply under normal; first option, assess and then later on collect under
Section 222 first paragraph; and second, collect without assessment but only
through judicial actions.
Q. What are the periods here?
A. Let us go to the first option. The prescriptive period here is ten years to be
reckoned on the day of the discovery of the non-filing of the return, falsity or fraud.
Q. What is the prescriptive period for collection under abnormal pursuantunder the first option?
A. Section 222 paragraph C says five years from the date of final assessment.
Let us go to the second option, without assessment, there shall be collection but
only through judicial action. Since there is no assessment in this option, we
cannot discuss prescriptive period for assessment because there is none.
Prescriptive period for collection here shall be ten years from the date of the
discovery for the non-filing, fraudulent return or false return.
We go back to Section 203, the prescriptive period for collection. Unfortunately, the
Code is totally silent about it. Under the 1939, 1977 and 1985 Code, these laws
are always explicit about the prescriptive period for collection and its provisions
always provides for the prescriptive period under normal. In 1939 Tax Code, it was provided for in Section 318, in 1977 Tax Code, Section 201, in 1985 Tax Code
in Section 202. In all these Codes, the law always provides for prescriptive period
under normal which is five years from the date of the final assessment.
Therefore, it is safe to assume that the prescriptive period for collection under
normal is also five years. Also, the intent of the author shows the same
prescriptive period.
Lastly, if we are going to say that there is prescriptive period for collection under
abnormal and there is no prescriptive period under normal, it is too abnormal! It
would have been normal if it were the other way around.
So, if this will be asked in the bar, feel free to answer five years from the date of
final assessment.
Q. Under normal conditions, if the return was filed on April 15, 2000, can it
be collected in 2007?
A. We have to determine the date of final assessment. Take note that there can
only be collection under normal if there is final assessment. However, in abnormal
circumstance, there can be collection even without final assessment but onlythrough judicial action.
Q. If the final assessment is on February 2, 2001, can it be collected on
2007?
A. No. The period is way beyond five years.
Q. If the final assessment is made on 2003, can it now be collected>
A. Yes, because it is within the five year period.
Going back to NIRC, if the taxpayer is going to file a protest, from the day of the
filing, we have to count 60 days. This rule does not appear under the old law.
This is a standard operating procedure that the protestant should file the
necessary documents in support of his protest. Failure to file the necessary
documents within the 60-day period means that the final assessment becomes
final and executor.
For example, on the 41st day, the taxpayer filed the necessary documents. On that
same day, the 41st day, where the taxpayer had filed the necessary documents, we
have to count 180 days.
Q. What is the purpose of the 180 days?
A. The purpose is for the BIR to decide the protest.
Q. Supposed the 180-days period lapsed and the BIR failed to decide the
protest. What is the implication of the failure to decide the protest by the
BIR?
A. After the lapse of the 180 days period, Section 228 says that the taxpayer has
a remedy of filing an appeal to the CTA in relation with RA 9282.
However, Section 228 does not state the filing period after the BIR failed to decide
the protest within 180-day period of time. Nonetheless, RR 12-99 states that after
the expiration of the 180 day period, within a30 days, the taxpayer must file an
appeal to the CTA.
So whether within the period of 180 days, BIR will decide or will not decide theprotest, just the same, an appeal should be made with the CTA sitting the division
as stated in RA 8292. From the ruling of the CTA sitting in division and when the
decision is against the protestant, the remedy is to file a motion for reconsideration
from the receipt of the decision with the same division which rendered the decision.
From the ruling of the division under motion for reconsideration, an appeal, within
15 days from the receipt of the decision, shall be filed to the CTA sitting en banc.
From the ruling of the CTA sitting en banc, within 15 days from the receipt of the
decision, beginning April 23, 204, the appeal shall be made in the Supreme Court.
Prior that date, the appeal should be filed in CA.
Under Section 195 of LGC, we have the procedure for protest for local taxation.
Q. What is the procedure for protest under this action?
A. Upon receipt of the notice of assessment issued by the provincial, municipal or
city treasurer, the remedy of the taxpayer is to file a protest within 60 days from the
receipt of the assessment with the same treasurer who issued the assessment.
If the treasurer will not decide within the 60-day period, Section 195 says that the
taxpayer has the right to go to the court of competent jurisdiction and that is no
other than the RTC. Or maybe if the treasurer decides the protest within the 60-
days period, the remedy of the taxpayer is file an appeal within 30 days from the
receipt of the decision to the court of competent jurisdiction and that is no other
than the RTC.
From the decision of the RTC involving local tax cases in its appellate jurisdiction
shall be appealed in CTA sitting en banc. Take note, the CTA in this case, is
sitting in en banc. The general rule is that an appeal made in CTA, it sits indivision. There are only two cases where the CTA automatically sits en banc:
first, decision from RTC involving local tax in its appellate jurisdiction and, second,
decision of Central Board of Assessment Appeal in its appellate jurisdiction. To all
other appeals, it follows the general rule that the CTA sits in division where the
ruling of the division is not yet appealable because the taxpayer still have to file a
motion for reconsideration and the ruling therein under the said MR is not yet
appealable in the SC because the taxpayer has to file an appeal to the CTA sitting
Under Section 252 of LGC, if the taxpayer received a notice of assessment from the
provincial, or the city treasurer, the remedy of the taxpayer under real estate tax isto pay the tax under protest. Meaning, at the time of the payment, it must be
annotated that it is a payment under protest.
If the payment under protest will be denied by the treasurer, the remedy of the
taxpayer is to file an appeal within 120 days with the Local Board of Assessment
Appeal.
Q. Why?
A. Under Section 252 of LGC says that the remedy is the one under Chapter 3,Book II, Title if which is the one mentioned in Section 226 and 229.
From the decision of the Local Board of Assessment Appeal, within 30 days, an
appeal must be filed in Central Board of Assessment Appeal. From its ruling, the
decision is appealable in CTA sitting en banc within 30 days.
The remedy of protest under Section 252, if the assessment received by the
taxpayer under real estate tax is the one issued by the Provincial or City Assessor’s
Office, we have Section 226 again. The remedy of the taxpayer is to file an appeal
with the Local Board, then from the Local Board, same procedure with that of
Section 252.
Ramie Textile vs. McKay
The taxpayer paid a real property tax. But at the time of payment, he failed to pay
the real property tax under protest. He later on discovered that under special
statute, he is exempt from real estate tax. He filed a protest to recover the money.
The office of the treasurer denied the protest because he did not paid the tax under
protest.
Issue: Whether or not the taxpayer will be allowed to file a protest considering
that the taxpayer did not pay the tax under protest?
The SC begins by saying that we do not deny and acknowledge the requirement ofpayment under protest. But in the case at bar, this rule do not apply here
because at the time of the payment of the tax, the taxpayer believed in good faith
that he was liable and he was able to prove the same.
If a taxpayer paid the tax and he believed that he is liable, how can he pay under
protest? Basically, the taxpayer will not do that. So the requirement of payment
under protest is not absolute.
Outline
Notice of Assessment
Payment under Protest
to Treasurer City or
Provincial Assessor
Appeal to Local
Board
Appeal to Central
Board
Appeal to CTA en
Banc
Appeal to SC
Protest under Tariff and Custom Code
Section 2313 as amended by RA 7631 (there is a typing error in RA 7661 in stating
that it amend Section 2315) provides for the remedy of the taxpayers in cases of
protest.
The old Tariff and Custom Code says if the importer loses the protest, before the
office of the collector, the remedy of the importer is to file a protest before the office
of the same collector. The taxpayer must submit pleading tying to convince him
that the rate of the custom duties to be paid is what the taxpayer believed so,
based on legal grounds.
Suppose the collector denied the protest, the remedy of the importer or the
taxpayer under the Tariff and Custom Code is to file an appeal within 15 days from
the receipt of the decision of the collector denying the protest in the Office of the
Commissioner. For that manner, the decision of the Commissioner, within 30days, the taxpayer should file an appeal to the CTA sitting in division. Then we
have the same procedure: division, MR, CTA en banc then to SC.
Q. Suppose the importer wins the case to the office of the collector, of
course, the importer will no longer file an appeal because he already wins the
case, what is the proper remedy for the government?
A. The old Tariff and Custom Code provides for an automatic appeal to be filed
before the Office of the Commissioner.
In cases of forfeiture, the remedy of the importer is the same: appeal to the office
of the collector, appeal to the Commissioner, appeal to CTA sitting in Division, MR,
CTA en banc, then to SC.
Q. What is forfeiture?
A. The commodity of the importers will be confiscated if he violated the Tariff and
Custom Code and its rules and regulation. For example, the commodities are
ingredients for making illegal drugs. These commodities can be confiscated by
Custom.
If the importer does not agree with the forfeiture and says that although it is used
for manufacturing illegal drugs but it is regulated drug which is not illegal.
Suppose he loses the case in office of collector, we have the same procedure as
mentioned above.
But under the old code, aside for the remedy for forfeiture and protest, where the
government loses the case, there is only one automatic review; and automatic
review for protest. There is no automatic review for forfeiture. In 1987, former
Commissioner Padilla, he issued a memorandum circular requiring an automaticreview. In 1993, Congress enacted RA 7651. It amends Section 2313, the
requiring automatic appeal not only apply to protest but also in forfeiture. When
the government loses the case, the importer wins the case; we have an automatic
appeal under protest and forfeiture. The Congress realized the importance of
When the court made a hearing, the taxpayer filed an injunction arguing that two
similar causes of action is pending on two different courts. The SC was
convinced by the taxpayer so the SC issued an injunction ordering the CFI to stop
conducting the hearing and turnover the case to CTA because the remedy availed
by the taxpayer of filing an appeal to the CTA is the proper remedy because he did
not receive the decision over his protest instead he received a notice of collection.
The SC adds that this appeal is filed on time because the counting of period on
which to file an appeal was reckoned on the day the BIR filed an ordinary civil
action in the regular court because on that day, the protest was deemed denied
when they filed an ordinary civil action for the collection of tax with the CFI.
Union Shipping Lines vs. CIR
185 SCRA 547
The taxpayer was waiting for the decision of his protest; however, he did notreceive the same. Instead, he received a notice of collection. He files a motion for
reconsideration or clarification to the BIR asking the BIR of whether or not it has
deemed denied his protest. The BIR did not reply on his motion for
reconsideration.
When he received the notice of summons, instead of answering an answer to the
complaint, he filed an appeal to the CTA stating that the tax is now being collected
in the regular court, his protest has been deemed denied.
Issue:Is the filing of an appeal to the CTA the correct remedy? Was it filed on
time?
Ruling: The SC ruled that filing of an appeal to the CTA is the correct remedy and
it is filed on the time but this time the SC did not ruled that the counting of the
period within which to file an appeal from the day the BIR filed a collection suit the
civil action for collection because if we are going to count the period on that day,
filing of the appeal will be beyond that period. To justify that the appeal was filed
on time, the SC ruled that we have to count it from the day the taxpayer received
the notice of summons.
Q. While the case is pending on appeal in CTA, can the BIR amend the final
assessment?
A. There are two schools of thought because under the Tax Code it is totally
silent. First is the case of Guerrero vs. CIR 19 SCRA 25 and also the case of
A. No, unless it is approved by the Valuation Board.
Q. What is the Valuation Board?
A. It consists of the Commissioner of the BIR including the four deputy
commissioners.
When the taxpayer claim for a refund, nowadays, it is a new rule to eradicate the
syndicate in the BIR, he has to present a proof, a receipt, that he had paid the tax
because it may happen that by virtue of technical provision, the taxpayer is entitled
to tax refund. Now, the taxpayer may only be allowed a tax refund if he had
proven that he, indeed, paid the tax.
Remedies for Collection
We go to Section 205, if the assessment is already final and executor, the taxpayer
will be notified stating among others that “xxx your final assessment is final and
executor, so please pay the tax before November 5, 2006. Xxx”. If the taxpayer
failed to pay the tax notwithstanding the notice of finality of the assessment, the
government will now collect the tax.
The remedy of the government to collect the tax is judicial and administrative
remedy. For judicial, we have civil case and criminal case; for administrative we
have levy, distraint and tax penalty under Section 280.
Q. Is there an order or a sequence for the government to avail of these
remedies?
A. None. The government can proceed on any of these remedies, judicial or
administrative, simultaneously.
Distraint of Property
When we say distraint, it is the personal property which is being compensated. We
have three kinds of distraint: constructive distraint under Section 206, distraint ofthe intangibles under Section 208 and lastly, actual distraint under Section 209.
Q. What is constructive distraint?
A. Constructive distraint involves only the listing to be made by the distraining
officer of the personal property to be distraint with a notice that the taxpayer or
now confiscating your personal property. I have with me the truck, but i am going
to take the property that will suffice the tax delinquency.”
Upon service of warrant of distraint under Section 207A, the distraining office shall
make a written report within 10 days with the BIR. So the property now will be
sold in public auction. Notice to the public shall be made by way of posting.
Publication is not required in this case. It requires posting in two conspicuousplaces stating the amount of the tax liability, penalty, interest, the place of sale and
the date and time of the sale.
In the auction sale of personal property, take note that even under statute, there is
no right of redemption. The rule is absolute, whether it is under the rules of court,
the local government code or the NIRC. There is no right of redemption if the
property being sold is a personal one.
However, the Tax Code speaks ofright of pre-emption. Section 210 says, before