Tax Slides 2016

5/27/16
B. NRA-ETB
B. NRA-ETB
How is an NRA-ETB taxed?
Nonresident alien individual whose residence is not within the

Philippines and is not a citizen thereof ( 22(G)) see Rev. Regs. 2 5
Not physically present in the Philippines, but derives Philippine
source income
While physically present in the Philippines, merely a transient or
sojourner
Transient status determined by subjective standard, i.e., intent as
regards length and nature of stay
Same manner as an individual citizen and a resident alien, on

taxable income derived from Philippine sources ( 25(A)(1))
Meaning of ETB
One who comes to the Philippines for a definite purpose which in its
nature may be promptly accomplished considered a transient; if
extended stay necessary to accomplish purpose not a transient
Deemed doing business NRA who comes to the Philippines and

stay therein for an aggregate period of more than 180 days during
the calendar year
Must NRA be physically present in the Philippines for more than 180
days to be considered as ETB?
No. Rule merely establishes a presumption. If NRA is clearly
engaged in trade or business, he will be considered as such even
if his stay is 180 days or less
Atty. Terence Conrad H. Bello
B. NRA-ETB
B. NRA-ETB
Higgins v. CIR, 312 U.S. 212 (1941)
TP was a French resident

TP devoted a considerable portion of his time to the oversight of
his interests and hired others to assist him in a NY office rented
for that purpose
TPs financial affairs were conducted through his NY office
pursuant to his personal detailed instructions
By cable, telephone and mail from France, TP kept a watchful eye
over his securities
TP did not participate directly or indirectly in the management of
the corporations in which he held stock or bonds
TP claimed as deductions the salaries and expenses incident to
looking after his investments
CIR disallowed the deductions
Higgins v. CIR, 312 U.S. 212 (1941)

Contentions:
TP - the elements of continuity, constant repetition,
regularity and extent differentiate his activities
from the occasional like actions of the small investor
CIR mere personal investment activities never
constitute carrying on a trade or business, no
matter how much of ones time or of ones
employees time they may occupy
5/27/16
B. NRA-ETB
B. NRA-ETB
Higgins v. CIR, 312 U.S. 212 (1941)

Held: TP was not carrying on a business to be
entitled to the claimed deductions
No amount of personal investment management
would turn those activities into a business
Mere investing, including the active management of
ones own investments, however extensive, does not
constitute a trade or business
Higgins v. CIR, 312 U.S. 212 (1941)

What is at stake here?
Whether the TP, a nonresident alien, gets to claim

deductions incident to carrying on a business and be
taxed on net income (i.e., taxable income)
Whether the TP is subject to a flat tax of 30% (25%
under NIRC 25(B)) on gross income (i.e., without the
benefit of deductions)
B. NRA-ETB
B. NRA-ETB
Weliner v. CIR, CTA Case No. 3170 (May 23, 1986)

Aussie employed by Envirotech Corp., an NRFC
TP was Area Manager for Southeast Asia and Middle
East
Salary as area manager paid directly to his bank
account in the U.S.
During period of employment, TP traveled to the
Philippines and stayed therein for 191 days in 1975
His various visits to PH was BIRs basis to classify TP as
NRA-ETB
TP defense: no taxable PH source income since his
salary as area manager was paid in the US
Two types of NRA-ETB (Weliner)

Non-resident alien engaged in a trade or business
in the Philippines
Non-resident alien deemed doing business in the
Philippines (180-day rule)
5/27/16
B. NRA-ETB
B. NRA-ETB
10
Meaning of ETB
The classic examples of a trade or business are situations in
which the TP is engaged in the marketing of goods and
services
Thus the manufacture and sale of automobiles is a trade or
business
But the ownership of shares of a company that
manufactures and sells automobiles is generally not a trade
or business (unless the TP is a dealer in securities)
As applied to NRAs, a Philippine trade or business will be
found to exist if there are REGULAR, CONTINUOUS and
CONSIDERABLE business activities
Therefore, isolated or sporadic transactions will not usually
be construed as the conduct of a trade or business
Meaning of engaged in trade or business

Whether an NRA is ETB involves examining Philippine
activities carried on directly by the NRA or Philippine
activities carried on by employees, agents or other
representatives of the NRA
Engaging in trade or business in the Philippines involves the
process of producing or seeking to produce income from
actively engaging in business activities, as distinguished from
merely owning income-producing property (NB: Higgins
involved passive investments, although the TP actively
managed his passive investments)
B. NRA-ETB
B. NRA-ETB
11
12
(B) Income Phil. source passive income subject to final tax

1. Interest from currency bank deposit, yield/monetary benefit from
deposit substitutes/trust funds 20% final tax
Interest received from FCDU - exempt

Exempt if interest is from long term deposit or investment (5%/12%/
20% if pre-terminated before the 5th year)

4. Gross income from cinematographic films 25% final tax
5. Cash and/or property dividends from a domestic
corporation 10% final tax
2. Royalties 20% final tax (10% final tax if royalty arises from
books, literary works and musical compositions)
If royalty is active (instead of passive) income considered Category

(A) business income
3. Prizes and other winnings 20% final tax (Category (A) income,
if P10,000 or less; exempt if PCSO and lotto winnings)
5/27/16
B. NRA-ETB
B. NRA-ETB
13
14
(A) Income Income subject to the graduated rates of 5% - 32%
(C) and (D) Income capital gains from sale of domestic shares
and realty located in the PH held as capital assets subject
to final tax: same as citizens and resident aliens
v Since subsection (B), (C) and (D) income are already subject
to final tax, they will no longer be included in the annual
income tax return filed on April 15
v Only subsection (A) income is included in the annual income
tax return
1. Compensation income
2. Business and professional income
3. Capital gains not subject to final tax (i.e., non-category (C)
and (D) capital gains)
4. Passive income not subject to final tax, and other income (i.e.,
non-category (B) passive income)
v Subsection (A) income is aggregated and reported in the
annual income tax return
v Tax due computed as follows: Gross income (Category A)
deductions personal and addl exemptions = taxable income
(which is then subjected to the 5% - 32% graduated rate
under 24(A))
B. NRA-Not ETB
15
B. NRA-Not ETB
16
How are NRAs not ETB taxed?

They are subject to a 25% flat tax on the entire income
received from Philippine sources (i.e., no deductions or
personal/additional exemptions allowed)
Includes interest, cash and/or property dividends, rents,
salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed, determinable
annual or periodic or casual gains, profits, and income,
and capital gains (commonly referred to as FDAP
income)
Capital gains from the sale of shares of stock (C income)
and realty (D income) are taxed in the same manner as
citizens and resident aliens
The NIRC defines FDAP income subject to the 25% flat tax by
specifically listing a series of income forms that are usually of
a recurring nature, such as interest, dividends, rents and
royalties
The statutory definition adds the encompassing (but not
defined) phrase and other fixed or determinable annual or
periodical income
Question: if the income payment is not annual or periodical,
does it prevent the income payment from being classified as
FDAP income subject to the 25% flat tax?
5/27/16
B. NRA-Not ETB
17
B. NRA-Not ETB
18
CIR v. Wodehouse
The words annual and periodical are merely
generally descriptive of the character of the gains,
profits and income, as distinguished from gains,
profits and income derived from the outright sale of
property
CIR v. Wodehouse
TP, the popular author who created the Jeeves series,
received a lump sum payment from a U.S. publisher for an
exclusive serial or book right throughout the U.S. in relation
to a specified original story . . . ready to be copyrighted.
TP argued that (i) the payment received was not a royalty

but rather the proceeds of a sale of property interest in a
copyright and (ii) the payment was made in a lump sum and,
therefore, was not fixed or determinable annual or
periodical gains, profits, and income . . .
B. NRA-Not ETB
19
B. NRA-Not ETB
20
CIR v. Wodehouse
Held: payment was a royalty; payment was FDAP income

Once it has been determined that [the transaction was not a
sale and that] the receipt of the [TP] would have been
required to be included in his gross income for federal income
tax purposes if they had been received in annual payments, or
from time to time, during the life of the respective copyrights, it
becomes clear that the receipt of those same sums by him in a
single lump sum as payments in full, in advance, for the same
rights to be enjoyed throughout the entire life of the respective
copyrights cannot, solely by reason of the consolidation of the
payment into one sum, render it tax exempt
What are the special classes of aliens?

Alien individual employed by an ROHQ/RHQ
Alien individual employed by an OBU
Alien individual employed by a petroleum service
contractor or subcontractor
How are they taxed?
15% on gross compensation income
Any other Philippine source income subject to the
pertinent income tax
Who else are entitled to the 15% preferential tax?
Filipinos employed and occupying the same position as
the special alien
5/27/16
A. Definition
22
The term corporation

Includes
VIII. INCOME TAX ON

DOMESTIC
CORPORATIONS
Partnerships, no matter how created or organized, etc.
Does not include

GPPs
JV or consortium formed for the purpose of (i) undertaking
construction projects; engaging in (ii) petroleum, (iii) coal,
(iv) geothermal, and (v) other energy operations, pursuant
to an operating or consortium agreement under a service
contract with the government
A. Definition
A. Definition
23
24
What is a GPP?
Partnerships formed by persons
For the sole purpose of exercising their common
profession
No part of income is derived from engaging in any
trade or business
Place of incorporation/creation rule determines
whether a corporation is domestic or foreign
AFISCO Ins. Corp. v. CIR
Pursuant to reinsurance treaties, a number of local insurance

firms formed themselves into a pool in order to facilitate the
handling of business contracted with a nonresident foreign
reinsurance company.
May the clearing house or insurance pool so formed be
deemed a partnership (PRS) or an association that is taxable
as a corporation under NIRC?
Should the pools remittances to the member companies and to
the said foreign firm be taxable as dividends?
5/27/16
A. Definition
A. Definition
25
26
AFISCO Ins. Corp. v. CIR

Held: Pool considered a taxable PRS subject to tax as a corporation;
remittances by the pool to the member companies and the nonresident reinsurer taxable dividends
Factors cited by the court in concluding that the pool was a taxable
corporation:
The pool has a common fund, consisting of money and other valuables that
are deposited in the name and credit of the pool. This common fund pays
for the administration and operation expenses of the pool
The pool functions through an executive board, which resembles the board
of directors of a corporation, composed of one representative for each of
the ceding companies
Work of the pool is indispensable, beneficial and economically useful to the
business of the ceding companies and the nonresident reinsurer, because
without it they would not have received their premiums; profit motive or
business is, therefore, the primordial reason for the pools formation
Pascual v. CIR
TPs bought 5 parcels of land in 1966
TPs sold 2 parcels in 1968; sold the 3 remaining in
1970
TPs realized profit on the sales; paid CGT individually
on the income realized from the sales
CIR assessed the TPs for having formed a taxable PRS
Held: TPs did not form an unregistered PRS subject to
tax as a corporation
A. Definition
A. Definition
27
28
Pascual v. CIR
No evidence that TPs entered into an agreement to
contribute money, property or industry to a common
fund, and that they intended to divide the profits
among themselves
The sales of the parcels of land were merely
isolated transactions
The sharing of returns does not in itself establish a
PRS W/N the persons sharing therein have a joint
or common right or interest in the property
Obillos v. CIR
TPs, 4 brothers and sisters, acquired 2 lots from their
father
After having held the 2 lots for more than a year, the
TPs resold them to third parties
TPs derived from the sale a total profit of P134k or
P33k for each of them; they treated the profit as a
capital gain and paid an income tax on one-half
thereof
CIR assessed the TPs corporate income tax on the
P134k profit, and dividend tax on the P33k distributive
shares of the TPs on the P134k profit
5/27/16
A. Definition
A. Definition
29
30
Obillos v. CIR
CIR acted on the theory that the TPs had formed an
unregistered PRS or JV taxable as a corporation
Held: it is error to consider the petitioners as having formed
a PRS under art. 1767 of the Civil Code simply because
they allegedly contributed P178k to buy the 2 lots, resold
the same and divided the profit among themselves
TPs had no intention to form PRS; they were co-owners pure
and simple. To consider them as partners would obliterate
the distinction between a co-ownership and a PRS; TPs were
not engaged in any JV by reason of that isolated
transaction
Obillos v. CIR
TPs original purpose was to divide the lots for residential
purposes. If later on they found it not feasible to build
their residences on the lots because of the high cost of
construction, then they had no choice but to resell the
same to dissolve the co-ownership
The division of the profit was merely incidental to the

dissolution of the co-ownership which was in the nature of
things a temporary state; it had to be terminated sooner
or later
A. Definition
A. Definition
31
32
Ona v. CIR
TPs, a father and his 5 children, inherited property from
decedent wife consisting of 10 parcels of land and 6 houses
While court approved the partition of the properties, no
attempt was made to actually subdivide the properties
Instead, from 1944 to 1955, the properties remained under
the management of the father who invested and re-invested
the properties and the income derived therefrom (father
invested/re-invested in real property and securities)
As a result the properties and the investments gradually
increased
CIR assessed TPs for deficiency income on the theory that
they formed an unregistered PRS
Ona v. CIR
Held: TPs formed a taxable PRS
TPs did not, contrary to their contention, merely limit themselves
to holding the properties inherited by them
From the moment TPs allowed not only the incomes from their
respective shares of the inheritance but even the inherited
properties themselves to be used by the father as a common
fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them
proportionally, such act was tantamount to actually contributing
such incomes to a common fund and, in effect, they thereby
formed an unregistered PRS
5/27/16
B. Income Tax Rate and Base
33
34

1. Interest from currency bank deposit, yield/monetary benefit from
deposit substitutes/trust funds 20% final tax
Interest received from FCDU 7.5%
30% income tax on taxable income

Other than (B), (C) and (D) income subject to final tax
From sources within and without the Philippines
Gross income (excluding (B) , (C) and (D)

income subject to final tax)
Less: itemized deductions or OSD
Equals: taxable income
Multiplied by: normal income tax rate
Income tax due:
2. Royalties 20% final tax

If royalty is active (instead of passive) income considered (A)
business income subject to 30% normal income tax
3. Cash and/or property dividends received by a domestic
corporation from another domestic corporation exempt (if
received from a foreign corporation, considered ordinary (A)
income)
P xxx
(P xxx)
P xxx
30%
P xxx

35

36
(C) Income capital gains from sale of domestic

shares not listed and traded in PSE subject to final
tax; same as citizens and resident aliens (5%/10%
CGT)
(D) Income capital gains presumed to have been
realized from the sale of realty located in the
Philippines and held as a capital asset; same as
citizens and residents (i.e., 6% CGT on gross selling
price or current FMV under Sec. 6(E))
(A) Income Income subject to the normal income tax of 30%
1. Business income
2. Capital gains not subject to final tax (i.e., non-category
(C) capital gains)
3. Passive income not subject to final tax, and other income
(i.e., non-category (B) passive income)
v (A) income is aggregated and reported in the annual
income tax return
v
Beginning on the 4th year of operations, however, the tax

is 30% normal tax or 2% MCIT, whichever is higher
5/27/16
C. MCIT
C. MCIT
37
38
When does 2% MCIT commence to be imposable?
What is the tax base for purposes of imposing the

2% MCIT?
Gross income (see definition depending on the
business concern)
Who are exempt from MCIT?
Those not subject to the 30% normal income tax
rate (e.g., international carriers, OBUs, ROHQs,
petroleum service contractors, PEZA and SMBA
enterprises, etc.)
Beginning on the 4th taxable year following the year

in which such corporation commenced its business
operations
Bank that re-opened after cessation of business is entitled to

4-year leeway (The Manila Banking Corp. v. CIR)
What triggers the imposition of the 2% MCIT?
When MCIT is greater than the normal corporate income
tax imposed under 27(A)
Excess MCIT can be carried-over and credited against
normal income tax for the 3 immediately succeeding
taxable years
D. Gross Income Tax

39
D. Gross Income Tax

40
The President, upon recommendation of the Sec. of Finance, may, effective

2000, allow domestic corporations the option to be taxed on gross income,
as follows:
The tax is 15%

Certain economic conditions are satisfied (tax and VAT effort ratio
relative to GNP [20% and 4%], income tax ratio to total revenues of
40%, and 0.9% ratio of Consolidated Public Sector Financial Position to
GNP)
Gross income, for purposes of the GIT is:

For trading or manufacturing concerns, gross profit
from sales; and
For service concerns, gross receipts less sales
allowances and discounts
Available only to firms whose ratio of cost of sales to gross sales or

receipts from all sources does not exceed 55%
Shall be irrevocable for 3 consecutive years during which the
corporation is qualified under the scheme
10
5/27/16
41
E. Proprietary Educational Institutions

and Hospitals
F. GOCCs
42
Proprietary educational institutions and non-profit

hospitals entitled to 10% preferential tax on taxable
income, except those covered by 27(D) (i.e., passive
income, CGT, income from FCDUs)
However, if gross income from unrelated trade,
business or other activity exceeds 50% of the total
gross income derived by such educational institutions
or hospitals from all sources, 30% regular income tax
General rule subject to corporate income tax

Exception the following GOCCs are exempt from
corporate income tax:
GSIS
SSS
PHIC
PCSO
rate applies on entire income

A. Definition
44
IX. INCOME TAX ON RESIDENT

FOREIGN CORPORATIONS
When is a corporation considered foreign?

When it is not domestic ( 22(D), in relation to
subsection (C))
When is a foreign corporation considered to be a
resident?
When it is engaged in trade or business within the
Philippines ( 22(H))
11
5/27/16
B. Engaged in Trade or Business

45
B. Engaged in Trade or Business

46
When is a foreign corporation considered as engaged

in a Philippine trade or business?
See Sec. 3(d), FIA 1991, as implemented by Sec.
1(f), FIA 91 IRR
Island Power Corp. v. CIR

A foreign corporation that enters into an isolated
transaction is not engaged in a Philippine trade or
business
C. Income Tax Rate and Base

47

48
How are resident foreign corporations taxed, in

general?
Taxable on Philippine source income only; taxable
on a net basis (i.e., entitled to deductions)

1. Interest from currency bank deposit, yield/monetary benefit
from deposit substitutes/trust funds 20% final tax
Interest received from FCDU 7.5%
2. Royalties 20% final tax
If royalty is active (instead of passive) income
considered Category A business income
3. Cash and/or property dividends received by a resident
foreign corporation from a domestic corporation exempt
(if received from a foreign corporation, generally exempt
foreign source income)
12
5/27/16

49

50

4. Income derived by an FCDU (i) from foreign currency
transactions with local commercial banks and branches of
foreign banks, (ii) income from other depository banks
under the FCDS and (iii) interest income from foreign
currency loans with residents ( 28(B)(7)(b), as amended
by RA 9337)
10% final tax
Exempt if interest income on foreign currency loan is
obtained from OBUs and FCDUs
(C) Income Capital gains subject to final tax; same

as domestic corporations

51
D. Special Resident Foreign Corp.

52
(A) Income Income subject to the normal income tax of 30%
1. Business income
2. Capital gains not subject to final tax (i.e., non-category C
capital gains)
3. Passive income not subject to final tax, and other income
(i.e., non-category B passive income)
v Category A income is aggregated and reported in the
annual income tax return
v
International carriers
What is the rate and base applicable to
international carriers doing business in the
Philippines?
2% of gross Philippine billings (sec. 28(A)(3))
Beginning on the 4th year of operations, however, the tax

is 30% normal tax or 2% MCIT, whichever is higher
13
5/27/16

53

54
In the case of international airlines, how is GPB
defined?
In the case of international airlines, how is GPB
defined?
Gross revenue from carriage of persons, excess

baggage, cargo and mail
Originating from the Philippines
Continuous and uninterrupted flight
Irrespective of the place of sale or issue and place of
payment of passage document

55
Tickets revalidated, exchanged and/or indorsed to another

international airline shall form part of GPB if the passenger
boards a plane in a port or point in the Philippines
If a flight originates from the Philippines, but transshipment
takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the
point of transshipment shall form part of GPB ( 28(A)(3)
(a))

56
Examples
Are international carriers entitled to deductions? (No)
In the case of international vessels, how is GPB defined?
Gross revenues from passenger, cargo and mail
Originating from the Philippines up to final destination
Regardless of the place of sale or payments of the
passage or freight documents ( 28(A)(3)(b))
OBUs
How are OBUs taxed?
Income from foreign currency transactions with

nonresidents, other OBUs, local commercial banks,
branches of foreign banks authorized by the BSP
exempt
Interest income derived from foreign currency loans
granted to residents (others than OBUs, local
commercial banks, branches of foreign banks
authorized by the BSP) 10% final tax
14
5/27/16

57

58
RHQs and ROHQs

What is an RHQ?
RHQs and ROHQs

What is an ROHQ?
A branch established in the Philippines by MNCs

Do not derive or earn income from the Philippines (thus,
exempt from income taxation)
Acts as supervisory, communications and coordinating
center for affiliates, subsidiaries or branches in the
APAC Region and other foreign markets
A branch established in the Philippines by MNCs

Derive income from the performance of certain
qualifying services
Subject to 10% preferential income tax on taxable
income (thus entitled to deductions)
E. BPRT
59
Effectively connected
Passive (FDAP) income, generally not effectively
connected
To be effectively connected it is not necessary that
the income be derived from the actual operation of
TP-corporations trade or business; sufficient that the
income arises from primary business
X. INCOME TAX ON
NONRESIDENT FOREIGN
CORPORATIONS
15
5/27/16
A. Income Tax Rate and Base

61

62
When is a foreign corporation not considered to be a

resident?
When it is not engaged in a Philippine trade or
business
How are NRFCs taxed, in general?
30% flat tax on FDAP income
Marubeni Corp. v. CIR

Marubeni both an RFC and an NRFC at the same
time

63
B. Special Nonresident Foreign Corp.

64
N.V. Reederij Amsterdam and Royal Interocean Lines v. CIR

In order that a foreign corporation may be considered
engaged in trade or business, its business transactions must
be continuous. A casual business activity in the Philippines by
a foreign corporation, as in the present case, does not
amount to engaging in trade or business in the Philippines
for income tax purposes
Touching port in the Philippines 2x (in 1963 and 1964,
lasting for a month each stop) to load cargo mere
isolated transactions
Non-Resident Cinematographic Film Owner, Lessor or

Distributor
How are they taxed?
25% on gross income from Philippine sources
Non-Resident Owner or Lessor of Vessels Chartered by
Philippine Nationals
How are they taxed?
4.5% of gross rentals, lease or charter fees from leases
or charters to Filipino citizens or corporations, as
approved by MARINA
16
5/27/16
B. Special Nonresident Foreign Corp.

65
C. Tax on Certain Incomes of NRFCs

66
Non-Resident Owner or Lessor of Aircraft, Machinery

and Other Equipment
How are they taxed?
7.5% of gross rentals or fees
General rule: 30% flat tax ( 28(B)(1))

Exception: 15% final tax under the tax-sparing
provision

67
Interest on foreign loans 20% final tax

Intercorporate dividends

68
What is the tax sparing provision?

Dividends received by an NRFC from a domestic
corporation is entitled to the reduced rate of 15%,
subject to the following conditions:
Domiciliary allows a tax credit of deemed-paid
taxes
The tax credit allowable by the domiciliary country is
at least 15% (which represents the difference between
the 30% flat tax and the 15% reduced tax)
What is the rationale of the tax sparing provision?

To encourage investments in the Philippines
Illustration:
USCo owns 100% of PhilCo; PhilCo declares P100 cash
dividend to USCo
No tax-sparing provision: P100 dividend taxed at 30%,
or P30
With tax sparing: Philippines willing to tax dividends at
15%, leaving net dividends of P85
If US taxing the full P85, no reason why Philippines
should reduce tax
17
5/27/16

69

70
Illustration:
If US still taxing the full P85, the Philippines might as well
collect the full P30 tax, to prevent the tax from being
effectively turned over from RP to US
However, if US shall allow a credit against the tax due on
the dividends of at least P15 (which is equal to the P15
tax actually paid in RP), US investors given incentive to
invest in RP
Why should US investors invest here? Because tax rate is
reduced from 30% to 15% and at the same time they are
credited against their US tax an amount equal to taxes
paid in the Philippines
Sale of shares in a domestic corp. 0.5% STT or

5%/10% CGT
Income covered by tax treaties special rates apply
IAET
72
What is the purpose of the IAET?

To compel distribution of taxable dividends by
imposing a penalty in case of unreasonable
accumulations of earnings and profits
Typical holding company set up
XI. IAET
18
5/27/16
IAET
IAET
73
74
What are indicators of improper accumulation?

That the corporation is a holding or investment
company shall be prima facie evidence of
improperly accumulating earnings
Allowing earnings to accumulate beyond the
reasonable needs (including the reasonably
anticipated needs) of the business is determinative
of the purpose to improperly accumulate tax unless
the contrary is proven by a preponderance of
evidence
When will a corporation be liable for IAET?

When the corporation is formed or availed for the
purpose of avoiding the dividend tax
By permitting earnings to accumulate unreasonably
instead of being distributed to avoid dividend tax
Who are not covered by IAET?
Publicly held corporations, banks and other non-bank
financial intermediaries, and insurance companies
IAET
IAET
75
76
When is there accumulation of earnings beyond the

reasonable needs of the business?
No hard and fast rules (facts and circumstances); TPs and
BIR often disagree
Under RR 2, an accumulation of profits (including
undistributed profits of prior years) is unreasonable if it is
not required for legitimate business purposes
Examples of legitimate business purposes: (i) additional
working capital; (ii) expansion, improvement and repairs;
(iii) debt retirement; (iv) acquisition of related business; (v)
anticipated losses or reverses in business
When is there accumulation of earnings beyond the

reasonable needs of the business?
Where retention of profits is for legitimate business
needs, the immediacy test applies, i.e., that the profits
are applied not too long from the time of retention of
profits
Consistent with Corp. Code, retention of profits not
exceeding 100% of paid-in capital is not improper
accumulation
19
5/27/16
IAET
IAET
77
78
The Manila Wine Merchants, Inc. v. CIR

Failure to pay 60% of its surplus as dividends was considered as
improperly accumulating earnings. That the surplus was used for
the purchase of US Treasury bonds allegedly to finance
importation and to answer for future expansion plans did not
exempt TP from IAET
Under the immediacy test, the investment of profits in unrelated
businesses is usually indicative of accumulation beyond the
reasonable needs
Also, the TP was unable to show a concrete plan for future
expansion that would have justified its investing the surplus in
bonds a definite plan and steps taken towards the achievement
of the plan are essential
When is IAET due?

IAET not a self-assessed tax, meaning it is not
computed and applied by corp. itself in its ITR for the
taxable year
BIR assesses the IAET on the basis of its findings that
there has been improper accumulation
IAET
IAET
79
80
CIR v. Tuason
Tuason Inc. was held to be liable for improperly
accumulating its earnings of over P3M. Its defense was
that it needed the surplus for future investment.
However, out of that 3M, only P700K was actually used
for the purpose
There was a presumption that Tuason Inc. was only a
holding company because it merely subdivided large
lots and sold them at a profit and most of its income
was derived passively. Tuason failed to rebut this
presumption thus making it liable
Cyanamid Phil., Inc. v. CA

Current assets to liabilities ratio used to resolve question
of whether accumulation of profits to fund increase in
working capital is reasonable
20
5/27/16
IAET
81
BIR Rul. 25-02

Individual shareholders of USCo own proportionately
shares in RPCo (wholly-owned sub of USCo)
Ownership of a domestic corporation to determine
whether it is a closely held corporation or a publicly held
corporation is ultimately traced to the individual
shareholders of the parent company
Where at least 50% of outstanding capital stock or at
least 50% of the total combined voting power in a
corporation is owned directly or indirectly by at least
21 or more individuals, the corporation is considered
publicly-held
XII. EXEMPT CORPORATIONS
Tax Exempt Corporations

83

84
What types of corporations/organizations are exempt from income tax?

a) Labor, agri or horticultural organization
b) Mutual savings bank and coop bank
c) Fraternal organization or mutual aid association, employee cooperative
d) Cemetery company
e) Non-stock, non-profit entities organized for certain purposes (religious,
charitable, scientific, athletic, cultural, rehab of veterans)
f) Business league or chamber of commerce
g) Civic league
h) Non-stock, non-profit educational institution
i) Government education institution
j) Farmers or other coop
k) Farmers or fruit growers association
What is the scope of their exemption?

30 organizations are exempt from income tax
only in respect to income received by them as
such (e.g., tuition fees received by a non-stock,
non-profit educational institution)
21
5/27/16

85

86
Collector v. V.G. Sinco
Payment by a non-profit educational institution for services

rendered (e.g., payment to teachers and service providers)
is not distribution of profit
Charging of tuition does not make school profit-making
enterprise
While acquisition of additional facilities, such as buildings
and equipment, may redound to the benefit of the
institution, it does not necessarily follow that the same will
redound to the benefit of its shareholder (on the ground that
assets will be distributed to shareholders upon dissolution)

87
When does a 30 organization become liable to

income tax?
When it derives income from real or personal
properties
When it derives income from activities
conducted for profit (regardless of the
disposition of such income)

88
CIR v. YMCA
YMCA derived rentals from the lease of a portion of its real

property to small shops
Derived also income from parking fees assessed collected
from non-members
CIR assessed YMCA deficiency income tax
Contention of TP: income from properties must arise from
activities conducted for profit before it may be considered
taxable
Issue: W/N rental income of YMCA from real estate subject
to income tax
CIR v. YMCA
Held: Yes
The phrase any of their activities conducted from
profit does not qualify the word properties
This makes income from property of the
organization taxable, regardless of how that
income is used whether for profit or for lofty nonprofit purposes
22
5/27/16

89
CIR v. St. Lukes Medical Center

Imposition of 10% income tax on proprietary, nonprofit hospitals did not remove exemption of nonstock corporation organized and operated
exclusively for charitable or social welfare purposes
(i) non-stock; (ii) organized exclusively; (iii)
operated exclusively; (iv) non-inurement
Revenues from paying patients are income received
from activities conducted for profit subject to 10%
income tax
XIII.FRINGE BENEFITS TAX
Fringe Benefits Tax

91
Fringe Benefits Tax

92
What are taxable fringe benefits?
Goods, services or other benefits granted by an

employer in cash or in kind to an individual employee
(except rank and file), such as, but not limited to the ff.:
(a) housing; (b) expense account; (c) vehicle; (d)
household personnel (such as maid, driver, etc.); (e)
below market interest rate on loans; (f) country club
membership fees, dues, and other expenses; (g)
expenses for foreign travel; (h) holiday and vacation
expenses; (i) educational assistance; (j) insurance
premiums
What are non-taxable fringe benefits?
(a) Exempt benefits; (b) employer contributions to

retirement and hospitalization benefit plans; (c)
benefits given to rank and file; (d) de minimis benefits;
(e) fringe benefits required by the nature of, or
necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the
convenience or advantage of the employer
What is the tax base for purposes of the FBT
Grossed-up monetary value of the taxable fringe

benefit
23
5/27/16
Fringe Benefits Tax

93
Fringe Benefits Tax

94
What is the coverage of FBT?
Does it mean that fringe benefits are exempt if granted to

rank and file employees?
Covers only fringe benefits furnished to supervisory and managerial

employees (not rank and file)
No, fringe benefits granted to rank and file employees are

considered taxable compensation income subject to the graduated
rates of 5 32%
What if fringe benefits are granted to a board director, who

is not an employee of the company, is this subject to FBT?
No, employer-employee relationship must exists for FBT to apply.

Considered taxable income, however, subject to graduated rates
How is FBT computed?

Step 1: Determine the grossed-up monetary value of the
fringe benefit. This is the monetary value of the benefit
divided by 68%
Step 2: Compute the fringe benefit tax by multiplying the
grossed-up monetary value of the fringe benefit by 32%
Illustration: A the CFO of B Corp. availed of the companys
car plan; A shouldered only 50% of the cost of the car
amounting to P340,000
GMV (P340,000 68%) = P500,000
FBT (P500,000 x 32%) = P160,000
A. Capital Assets
96
Sale or exchange >> gain (or loss)

Capital asset = capital gain (or loss)
Ordinary asset = ordinary gain (or loss)
XIV.CAPITAL GAINS AND

LOSSES
24
5/27/16
A. Capital Assets
97
A. Capital Assets
98
Corn Products Refining Co. v. CIR

Congress intended that profits and losses arising
from the everyday operation of a business be
considered as ordinary income or loss rather than
capital gain or loss
The TPs purchases of corn futures were an integral
part of its manufacturing business
39: a negative definition of capital assets

The term capital assets means property held by the
taxpayer (whether or not connected with his trade or
business) but it does not include:
Stock in trade
Inventoriable property
Property held primarily for sale
Depreciable property
Real property used in trade or business
A. Capital Assets
99
A. Capital Assets
100
Investment purpose vs. business purpose as criterion

for determining classification of asset
Arkansas Best Corp. v. CIR

Issue: W/N the TPs loss from the sale of shares (which were
purchased for a business purpose, i.e., to preserve the
business reputation of the TP) is entitled to ordinary loss
treatment
Held: No, a TPs motivation in purchasing an asset is
irrelevant to the question whether it falls within the broad
definition of capital asset
TPs reading of Corn Products as authorizing ordinary-asset
treatment for any asset acquired and held for business
rather than investment purposes is too expansive
25
5/27/16
A. Capital Assets
101
A. Capital Assets
102
Arkansas Best Corp. v. CIR

Business-motive test is not found in 1221 and is in direct conflict with
the broad definition of capital asset
Corn Products stands for the narrow proposition that hedging
transactions that are an integral part of a business inventorypurchase system fall within 1221's first exception for property . . .
which would properly be included in the TPs inventory
Since TP, which is not a dealer in securities, has never suggested that
its bank stock falls within the inventory exclusion, Corn Products has
no application in the present context
Because TPs bank stock falls within 1221s broad definition of
capital asset and is outside the classes of excluded property, the
loss arising from its sale is a capital loss
Calasanz v. CIR
Where inherited land is subdivided and improved and the lots
are advertised to the public and sold, the gains realized are not
capital gains but ordinary gains subject to regular income tax.
Though the lots were sold merely to dispose or liquidate an
inheritance, the question to be asked in determining whether what
was realized was capital or ordinary income is: Was the
taxpayer engaged in the business? In this case, the CIR correctly
found that she was
Case were property initially classified as capital (upon
inheritance) became ordinary, after TP engaged in certain
activities that converted the land into one held primarily for
sale
B. Capital Gains Tax

103
B. Capital Gains Tax

104
Sale of shares of stock in a domestic corporation not listed and

traded thru the PSE 5%/10% capital gains tax on net
capital gain
Sale of shares of stock in a domestic corporation listed AND
traded thru the PSE STT of 0.5%
Sale of real property located in the Philippines classified as a
capital asset 6% final tax on gross selling price or FMV,
whichever is higher
Sale of capital asset other than foregoing (i.e., Category A
capital gains) ordinary rates of 5% - 32% or 35%
Category C CGT paid on a per transaction basis; being a
final tax, Category C capital gains are no longer included in
the annual ITR
Category A CGT is paid on a year-end basis (e.g., April 15);
thus Category A net capital gain is included in annual ITR
CGT on sale of shares paid by seller on a per

transaction basis; return filed and tax paid within 30
days following each sale; final consolidated return
filed on April 15 (of 15th day of fourth month
following end of fiscal year)
STT is withheld by the broker and remitted to BIR
CGT on sale of realty tax is withheld at source by
the buyer
Tax on other net capital gain net capital gain
included in annual ITR and tax paid on April 15 (or
on 15th day of fourth month)
26
5/27/16
C. Ordinary Income/Loss
105
106
Tuason v. Lingad
Tuason inherited lots which were occupied by
lessees of the decedent. He then sold the lots to the
lessees and his income was claimed as a capital
gain
The CIR correctly assessed his income as an
ordinary gain because of the following:
The term ordinary income includes any gain from the sale or
exchange of property which is not a capital asset or property
described in 39(A)(1)
Any gain from the sale or exchange of property which is
treated or considered as ordinary income shall be treated
as gain from the sale or exchange of property which is not a
capital asset
The term ordinary loss includes any loss from the sale or
exchange of property which is not a capital asset. Any loss
from the sale or exchange of property which is treated or
considered ordinary loss shall be treated as loss from the
sale or exchange of property which is not a capital asset
107
The property fell under the exceptions in 39 it was

real property used in the trade or business. His mother
had been renting the properties out and it was his duty
to respect the contracts
He was himself engaged in the real estate business
D. Net Capital Gains/Losses

108
Tuason v. Lingad
Factors considered by the court in concluding that TP was
engaged in the real estate business:
Parcels of land had in totality a large area and located in the

heart of Manila
Lots subdivided into smaller lots and sold on installment
Substantial improvements introduced to make lots more saleable
Appointment of an agent to manage the landholdings
Sales were frequent and continuous
Annual sales volume significant
TP himself engaged in the real estate business with respect to
other properties
Net capital gain

Means the excess of the gains from such sales or
exchanges of capital assets over the losses from
such sales or exchanges
Net capital loss
Means the excess of the losses from sales or
exchanges of capital assets over the gains from
such sales or exchanges
What the NIRC taxes is the net capital gain
27
5/27/16
D. Net Capital Gains/Losses

109
E. Percentage Taken in Account

110
If net capital gain

Include as part of gross income for the taxable
year (Category A income)
If net capital loss
If TP is a corporation, no tax benefit
If TP is other than a corporation, the net capital loss
shall be treated in the succeeding taxable year as
a short term capital loss (i.e., loss from the sale of
a capital asset held for not more than 12 mos.)
(Sec. 39(D))
This is called a net capital loss carry-over
v
v
100% if the capital asset has been held for not more than 12
months; and
50% if the capital asset has been held for more than 12 months
Thus if the asset was held long-term, the tax benefit is greater
Note: corporations not entitled to the reduced percentage of
gain to be recognized
F. Limitation on Capital Loss

111
In the case of a TP, other than a corporation, only the following

percentages of the gain or loss recognized upon the sale or
exchange of a capital asset shall be taken into account in
computing net capital gain, net capital loss, and net income:
F. Limitation on Capital Loss

112
Losses from sales or exchanges of capital assets shall be

allowed only to the extent of the gains from such sales or
exchanges
If a bank or trust company incorporated under the laws of the
Philippines, a substantial part of whose business is the receipt
of deposits, sells any bond, debenture, note, or certificate or
other evidence of indebtedness issued by any corporation
(including one issued by a government or political subdivision
thereof), with interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the foregoing
limitation and shall not be included in determining the
applicability of such limitation to other losses
China Banking Corp. v. CA

CBC made an equity investment in another company. The
company closed and the shares issued to CBC became worthless.
CBC tried to claim the loss as bad debt in order to deduct it from
gross income
It was held that it was loss from the sale or exchange of capital
assets. Shares of stock are considered ordinary assets only when
they are held by one who is engaged in the business of selling or
trading shares
In the hands of another who holds the shares of stock by way of
an investment, the shares to him would be capital assets. When
the shares held by such an investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital assets
28
5/27/16
G. Summary
113
Summary of rules on capital gains and losses:

The transaction on the capital asset should be a sale or exchange
With the transaction being a sale or exchange:
In the case of a TP, other than a corporation, only the ff. percentages of
the gain or loss shall be taken into account in computing net capital
gain, net capital loss and net income:
n 100% for short-term gains ( 12 mos.)
n 50% for long-term gains (> 12 mos.)
Capital losses shall be allowed only to the extent of capital gains
If any TP, other than a corporation, sustains in any taxable year a net
capital loss, such loss, in an amount not in excess of the taxable income
of such year, shall be treated in the succeeding year as a short-term
capital loss. This is called net capital loss carry-over
XV. SALE OR EXCHANGE OF

PROPERTY
A. Computation of Gain or Loss

115

116
Concept of taxable event (income reported only when realized)

In order to avoid the cumbersome, abrasive, and
unpredictable administrative task of valuing assets annually to
determine whether their value has appreciated or
depreciated, 40(A) defers the tax consequences of a gain
or loss in property until it is realized through the sale or other
disposition of property. Cottage Sav. Assn. v. CIR
Borne by administrative convenience
A taxable event usually involves the -n Sale or conversion of property for cash or
n Exchange of property for other property
Statutory basis: 40(A)

Sale or other disposition conversion of property (to cash or other
property)
Amount realized sum of money received plus the FMV of property
(other than money) received
Crane v. CIR: when the buyer assumes a liability of the seller, the
amount of liability assumed forms part of the amount realized
Basis or adjusted basis measurement of TPs investment in property
Established when TP acquires property
Subject to certain adjustments during period of ownership (CAPEX
added; depreciation, amortization, or depletion deducted)
Historical cost is original basis; original basis +/- adjustments, if
any = adjusted basis
29
5/27/16

117

118
Formula for determining gain (or loss) under Sec. 40(A):
Gain (loss) = AR AB
Steps in the reporting of income from the sale or

other disposition of property
Realization
Recognition or non-recognition
Characterization of gain or loss (capital or ordinary)
Realization and recognition are not synonymous
AR: sum of money received plus the FMV of property

(other than money) received (Sec. 40(A))
AB: see rules prescribed under Sec. 40(B)
v
v

119
Concept of realization general principle/longstanding policy

Concept of recognition statutory basis

120
4 ways by which basis is established (Sec. 40(B)):

Cost most common measurement of basis
FMV in certain instances (e.g., property acquired by

inheritance)
Carry-over basis assign as basis to property in relation to
property that TP used to own (e.g., basis of transferor in shares
received in relation to property transferred in a tax-free
exchange)
Substituted basis assign as basis to property in relation to
property of someone else (e.g., basis of transferee in property
received in exchange for stock in a tax-free exchange)
Basis rules under 40(B):

Property acquired by purchase basis is cost (cash purchase
price plus incidental expenses)
Property acquired by inheritance basis is FMV
Property acquired by gift basis of donee is the same as the
basis of the donor or last preceding owner who did not
acquire the property by gift
If basis in the hands of the donor or last preceding owner is
greater than FMV, basis shall be FMV for purposes of
determining loss
Property acquired for less than an adequate consideration in
money or moneys worth basis is amount paid by the
transferee for the property
Property acquired via a non-recognition transaction under
40(C)(2) carry-over or substituted basis
30
5/27/16
121
122
Crane v. CIR
Crane
Buyer
Mortgage
of 262
Tax Basis/FMV Land =

Tax Basis/FMV Bldg =
Total Tax Basis/FMV =
Crane
Apt. bldg. subject to
mortgage
100% owner
Apt. Bldg.
Diedrich. v. CIR, 457 U.S. 191 (1982)

In Crane the Court concluded that relief from the obligation
of a nonrecourse mortgage . . . constituted income to the
taxpayer. The taxpayer in Crane acquired depreciable
property, an apartment building, subject to an unassumed
mortgage. The taxpayer later sold the apartment building,
which was still subject to the nonrecourse mortgage, for cash
plus the buyers assumption of the mortgage. This Court held
that the amount of the mortgage was properly included in
the amount realized on the sale, noting that if the taxpayer
transfers subject to the mortgage, the benefit to him is as
real and substantial as if the mortgage were discharged, or
as if a personal debt in an equal amount had been assumed
by another.
2.5 cash
Mortgage is non-recourse
with regard to Crane
Bank
55
207
262
Cranes Equity in the Apt. Bldg.

FMV = 262
Debt = 262
Equity = 0
Apt. Bldg.
Mortgage
of 255
Bank
Cranes
Position
Equity
FMV =257.5
Debt =
Equity =
IRS
Position
(IRS wins)
Tax basis land = 55

Tax basis bldg. = 179 (depn of 28 since purchase)
Total tax basis = 234
Amount realized
Net gain = 24.5
Cash =
2.5
Liab. assumed =
255
Total amt. realized = 257.5
255.0
2.5
Cash paid = 0
Cash recvd = 2.5
Net gain =
2.5

123

124
Philadelphia Park Amusement Co. v. U.S.

Original franchise: cost is P50M; useful life of 50 yrs.
Bridge: cost is P20M; useful life of 20 yrs.
Year 10: bridge exchanged for extension of franchise
Year 20: franchise abandoned
Assume that FMV of the extended franchise, FMV and
NBV of the bridge at the end of year 10 are equal

Franchise: P50M 50 years
Exchange: Bridge for Franchise Extension
Do you deduct entire P50M in year incurred?

When do you get to deduct the P50M?
How much is the yearly depreciation/amortization?
At the end of year 10, bridge exchanged for 10-year
extension of franchise
Is the exchange a taxable event?
Should gain/loss be recognized?
What is the formula for determining gain/loss?
How much is AR? How much is AB
31
5/27/16
125
126

Exchange: Bridge for Franchise Extension

Abandonment of Franchise
What is the NBV of the franchise at the end of year 10?

How many years are remaining (w/out extension)?
What is the adjusted remaining life (adding the 10-year
extension)?
How much is the basis of the 10-year extension?
How much is the AB of the original franchise?
How much is the total AB (original + extension)?
How many years remaining?
How much is the the adjusted yearly depreciation/
amortization?
At the end of year 20, franchise is abandoned

What sort of deduction is TP entitled to if he abandons
an asset used in the trade or business?
What is the measurement of the loss?
How much is the loss?
127
128

Abandonment of Franchise (measurement of loss)
Bridge for 10-yr. Franchise Extension

Original acquisition cost of bridge (basis)
Accumulated depreciation (adjustment)
Net book value at end of year 10 (adjusted basis)
Amount realized (FMV of franchise extension)
Less: adjusted basis
P20 million
10 million
P10 million
P10 million
10 million
Gain (loss)
NIL
Original basis of franchise
P50 million
Less: accumulated amortization
10 million
Net book value
P40 million
Add: basis of 10-yr. extension
10 million
Adjusted basis at end of Year 10

New useful life
50 years
New yearly amortization
P1 million/yr.
Amount realized (upon abandonment)

Adjusted basis at end of year 20
Gain (loss)
P50 million
P0
P40 million
(P40 million)
32
5/27/16
B. Exchange of Property
129
130
General rule:
the entire realized gain or loss, as the case may be,

shall be recognized. 40(C)(1)
Exception: non-recognition transactions (tax-free

exchanges). 40(C)(2)
3 types of tax-free exchanges:

n
n
n
Transfer to a controlled corporation

Statutory merger or consolidation
De facto merger
The NIRC provides non-recognition treatment for certain

transactions which are viewed as mere changes in the form
of an investment
Typically, non-recognition provisions ensure that any
realized gain or loss is temporarily deferred rather than
permanently eliminated
Technically, deferral is accomplished by requiring that a
taxpayers basis in property received in a tax-free
exchange be determined either by reference to the basis
of other property formerly held by the same TP or by
reference to the basis of the same property in the hands
of a previous owner
131
132
Example: A Corp. owns a piece of land with AB of P1M and FMV of P5M (i.e.,
P4M B.I.G.).
Step 1: A transfers the land to B Corp. in exchange for B stock with total
par value of P5M in a transaction qualifying as a tax-free exchange
Step 2: A subsequently sells the B stock for P5M cash in a taxable
transaction
Questions:
How much is As realized gain in Step 1?
How much gain should A recognize in Step 1?
How much realized gain, if any, should A recognize in Step 2?

What should be done following Step 1 so that As P4M B.I.G. is
preserved?
Step 1: Land for Shares

Amount realized
(FMV of stock)
Basis
Realized gain
Recognized gain
Step 2: Shares for Cash
P5,000,000
Amount realized
(Amt. of cash)
1,000,000 Basis
P4,000,000 Realized gain
NIL
Recognized gain
P5,000,000
5,000,000?
NIL
NIL
Step 2: Shares for Cash (Carry-Over Basis)

Amount realized
(Amt. of cash)
P5,000,000
Basis
1,000,000
Realized gain
Recognized gain
4,000,000
4,000,000
33
5/27/16
133
C. Transfer of Property to a Controlled

Corp.
134
Requirements to qualify for non-recognition treatment

Non-recognition treatment is available under 40(C)(2) only
if:
n One or more persons (not exceeding a total of 5 persons)
(the transferors) transfer property to a corporation (the
transferee) in exchange for stock or unit of participation
in the corporation and
n As a result of the exchange the transferors viewed as a
group gain control of the corporation
v
See transfer to controlled corp. chart
Rationale for non-recognition treatment: the non-recognition
policy rests on the assumption that a contribution of property
to a corporation represents a continuation in modified form,
rather than a liquidation, of the shareholders investment
Transferor(s)
Property
135

Corp.
Transferor(s)
Transferee

Corp.
Transferee
Transferor(s)
Stock
Transferee
Property
136

Corp.
Requirements:
Property is transferred (excludes cash and services) to a
corporation
In exchange for stock or unit of participation in such
corporation
Transferors (not more than five) gain control of the transferee
(i.e., gain 51% of all classes of stock entitled to vote)
Property
34
5/27/16
137

Corp.
138

Corp.
Delpher Trades Corp. v. IAC
TPs owned a parcel of land which they leased out
Lease K grants the lessee a right of first refusal should TPs sell
the land
In a deed of exchange qualifying as a tax-free exchange, TPs
transferred the land to a corporation in exchange for stock
Lessee sued for reconveyance arguing that it was not given the
first option to buy
Issue: W/N the deed of exchange between the TPs and the
transferee corp. was meant to be a K of sale w/c prejudiced
the lessees right of first refusal over the leased land
Delpher Trades Corp. v. IAC

Held:
there was no transfer of actual ownership over
the land; the transfer of ownership, if anything was
merely in form but not in substance
The deed of exchange bet. the transferors and the
transferee-corp. cannot be considered a contract of
sale
There was no transfer of actual ownership interest by
the TPs to a third party; the TPs merely changed their
ownership from one form to another; the ownership
remained in the same hands
139

Corp.
Busted 40(C)(2): loss of control

Courts have held that the control requirement of Sec.
351 (NIRC Sec. 40(C)(2)) is not satisfied where pursuant
to a binding agreement entered into by the transferor
prior to the transfer of property to the corporation in
exchange for stock, the transferor loses control of the
corporation by a taxable sale of all or part of that
stock to a third party who does not also transfer
property to the corporation in exchange for stock:
Intermountain Lumber v. Commr, 65 T.C. 1025 (1976)
140
C.Transfer of Property to a Controlled

Corp.
Initial structure
Transferor
Purchaser
(Wilson)
(Shook)
Sawmill
Logs to be
processed
Agreement to sell
shares after
corporation was
formed
35
5/27/16
141

Corp.
142
Formation of Newco

Corp.
o
Sale of shares
Promissory Note
Purchaser
Transferor
Transferor
(Wilson)
(Shook)
100% of
transferee shares
Sawmill
50% of transferee
shares
Transferee
Transferee
(S&W Corp.)
(S&W Corp.)
143

Corp.
o
D. Statutory Merger and Consolidation

144
Ending point
Transferor
Purchaser
(Wilson)
(Shook)
50%
Purchaser
(Wilson)
(Shook)
Those that are so defined under the Corp. Code of

the Philippines
Statutory merger - (see chart)

Statutory consolidation - (see chart)
50%
Transferee
(S&W Corp.)
Sawmill
36
5/27/16

145

146
T and A
A Stock
Target
Shareholders
Target
Acquiror
Shareholders
Acquiror
Shareholders
A
Merge
Target
Assets
Target
T Assets

147

148
T1
T2
Shareholders
Shareholders
T1
T1
Shareholders
T2
T2
A Stock
Shareholders
T1
T1 Assets
T2 Assets
T2
37
5/27/16

149

150
T1
T1
Shareholders
Shareholders
CIR v. Rufino
TPs majority owners of A corp.; TPs also majority
owners of B corp.
As the corporate life of A was about to end, it
merged into B (with B surviving) for the purpose of
continuing the business of A
CIR argued that the merger was not undertaken for a
bona fide business purpose but merely to avoid CGT
on the liquidation of A (assessed TPs deficiency CGT)
T1 and T2
Assets

151

152
CIR v. Rufino
Held: that B will continue the business of A is a bona fide
business purpose
The govt is not left entirely w/out recourse; merger merely
deferred taxes, w/c may be asserted by the govt later, when
gains are realized and benefits are distributed to the S/Hs as
a result of the merger
CIR v. Rufino
Rationale for tax-free treatment: the exemption . . .
[is] intended to encourage corporations in pooling,
combining or expanding their resources conducive to
the economic development of the country
In assessing the tax in a subsequent transaction, the basis of

the property transferred in the hands of the transferee shall
be the same as it would be in the hands of the transferor . . .
The only inhibition now is that time has not yet come
38
5/27/16
E. De Facto Merger
153
E. De Facto Merger
154
What is a de facto merger (see chart)?

The acquisition by one corporation of all or substantially all
the properties of another corporation solely for stock. 40(C)
(6)(b)
What constitutes substantially all properties of the transferor?
The acquisition by one corporation of at least 80% of the
assets, including cash, of another corporation. RMR 01-02
II(1)
What is the difference between a de facto merger and a
statutory merger?
In a de facto merger, the transferor is not automatically
dissolved unlike a statutory merger
Also, unlike a statutory merger, there is no automatic transfer
of assets and assumption of liabilities in a de facto merger
Transferor
Property
Sub All
Transferor
Stock
Transferee
Property
Sub all
E. De Facto Merger
155
Transferee
E. De Facto Merger
156
Transferor
Transferee
Property
Sub all
What is the difference between a de facto merger and

a transfer of property to a controlled corporation?
The transferor in a de facto merger is a corporation,
while the transferor in a transfer of property to a
controlled corporation can either be individuals or
corporations
In a de factor merger, there is no requirement that
the transferor gains control of the transferee (what is
essential is the all or sub all requirement)
Boot, assumption of liabilities, and basis rules same as
transfer of property to a controlled corporation
39
5/27/16
158
A. Gross Income from Sources Within

& Without the Philippines
Why are the sources rules important?
XVI.SITUS OF TAXATION
For resident citizens and domestic corporations, the

foreign tax credit for income taxes paid to foreign
countries is available to offset Philippine income taxes
only if the foreign taxes are paid with respect to
foreign source income
For nonresident citizens, aliens, and foreign
corporations, the source rules are important because
they are taxable only on Philippine source income
For NRA-NETB and NRFCs, the 25%/30% flat tax on
Philippine source FDAP income
Interest
Dividends
159
160
What is the source rule for interest?

Sourced by reference to the residence of the payor.
42(A)(1) and C(1)
Accordingly, interest paid by a domestic corporation,
non-corporate resident of the Phil., the National
Government or any of its political subdivisions, agencies
or instrumentalities is Philippine source income
Interest on foreign loans is subject to 20% final
withholding tax. See 28(B)(5)(a)
If not paid by a resident, foreign source interest
What is the source rule for dividends?

Within:
From a domestic corporation

From a foreign corporation, if:
n
At least 50% of the foreign corporations gross income

for a 3-year base period is derived from Philippine
sources
Phil. source dividends = dividends x GI Phil./GI world
Without:
From a foreign corporation

40
5/27/16
Personal Services
161
Personal Services
162
CIR v. BOAC
What is the source rule for personal services?

Determined by the place of performance rule
Services performed in the Philippines within
Services performed outside the Philippines without
CIR v. Marubeni Corp.
The projects were completed on a turnkey basis (a job in which the
contractor agrees to complete the work of building and installation to
the point of readiness or occupancy; in other words, the products are
brought to the client complete and ready for use).
The two contracts were divided into two parts the offshore portion and
the onshore portion. All materials and equipment in the contract under
the offshore portion were manufactured and completed in Japan. After
manufacture, these were transported to Leyte and installed to the pier
with the use of bolts. Marubeni correctly claimed that the income
derived from the offshore portion should be exempt from tax since it
was derived outside of the Philippine jurisdiction
Personal Services
163
TP is an offline international carrier

Has a GSA in the Philippines selling passage documents for offline flights
Issue: W/N income from offline flights considered Philippine source income
Held: Yes
TP is a resident foreign corporation because it is doing business in the
Philippines through a GSA
The source of an income is the property, activity, or service that produced
the income
The sale of tickets in the Philippines is the activity that produced the income
The absence of flight operations to and from the Philippines is not
determinative of the source of income
The test of taxability is the source, and the source of an income is that
activity which produced the income (i.e., sale of passage documents in the
Philippines)
Personal Services
164
CIR v. BOAC
Feliciano, J. dissenting
For purposes of income taxation, the source of income
relates not to the physical sourcing of a flow of money
or the physical situs of payment but rather to the
property, activity or service which produced the
income
Applicable source rule is performance of service
(contract of carriage) not sale of personal property
(sale of airline tickets)
Since services were performed outside the Philippines,
compensation derived therefrom foreign source
Howden v. Commissioner of Internal Revenue
Portions of premiums earned from insurance locally underwritten by domestic corporations,

ceded to and received by non-resident foreign reinsurance companies, through a non-resident
foreign insurance broker, pursuant to reinsurance contracts signed by the reinsurers abroad but
signed by the domestic corporation in the Philippines, are subject to income tax locally
The source of an income is the property, activity or service that produced the income. The
reinsurance premiums remitted to Howden by virtue of the contracts had for their source the
undertaking to indemnify the domestic corp. against liability. Said undertaking is the activity
that produced the reinsurance premiums, and the same took place in the Phil.
Enumeration in Sec. 42 not exclusive
Income may be earned by a corporation in the Phil. although such corporation conducts all its
business abroad. The Tax Code does not require a foreign corporation to be engaged in
business in the Phil. in order for its income form sources within the Philippines to be taxable. It
subjects foreign corps. not doing business in the Phil. to tax for income from sources within the
Phil
41
5/27/16
Personal Services
165
Personal Services
166
Stemkowski v. CIR
TP professional hockey player in NHL; Canadian citizen who played for the
New York Rangers
NHL players year divided into four periods: (1) training camp, including
exhibition games; (2) regular season; (3) play-offs; and (4) off-season
For taxable year 1971, TP lived in Canada during all of the off-season
and most of training camp. Played in Canada 15 days out of 179 during
regular season and five out of 28 days in the play-offs
TP return position: total no. of days for which TP was compensated was 234
days (all but off-season)
IRS and Tax Court position: TP compensation covers only 179 days (regular
season); therefore TP could not use days spent in Canada during training
camp, play-offs and off-season in calculating foreign-source exclusion
Korfund Co., Inc. v. CIR
The case required the determination of the source of payments from a U.S. company to
a German company (Zorn) and a nonresident German citizen (Stoessel) under contracts
in which, among other things, they had agreed not to compete in the U.S. and Canada
TP contention: income was paid for agreements to refrain from doing specific things
negative acts. Negative performance is based on continuous exercise of will, a mental
exertion that occurred in Germany (hence foreign source income)
Held: the rights of Stoessel and Zorn to do business in the U.S. in competition with the TP,
were interests in property in the U.S. They might have received amounts here for
services or information, but were willing to forego that right and possibility for a limited
period for a consideration
What they received was in lieu of what they might have received
The situs of the right was in the U.S., not elsewhere, and the income that flowed from the
privileges was necessarily earned and produced here
Personal Services
167
Rentals & Royalties

168
Stemkowski v. CIR
Held: where services performed partly within and partly without

U.S., but compensation is not separately allocated, U.S. source
income allocated on time basis
Compensation does not cover off-season, but covers training camp
and play-offs
Off-season not covered because contract imposes no specific
obligations on a player.
TP argues that obligation to appear at training camp in good
condition makes off-season conditioning a contractual condition.
Court, however, held that fitness is not a service, but a condition of
employment
The source of rental and royalty income is determined by the place

where the property is located or used
Tangible property - accordingly, rentals or royalties for the lease of
tangible property are sourced where the property is physically
located
n Ex.: if a Forco leases computer hardware to another Forco which
uses the hardware in the Philippines, rental payments are
Philippine source income, notwithstanding the residence of the
licensor, licensee, or where payments take place
Intangible property the source of royalty income from the LICENSE
(as distinguished from an outright sale) of intangible property
including patents, copyrights, goodwill or other intellectual property,
depends on where the rights are used, which is generally the place
where the intangible property derives its legal protection
42
5/27/16
Rentals & Royalties

169
Rentals & Royalties

170
Sometimes it is difficult to determine whether the payment is for the provision of

services -- which is characterized as compensation for personal services
rendered
Or payment for the supply of know-how -- which is characterized as royalties
There is a need to distinguish between the two because the situs rules are
different
Situs rule for compensation for services is the place of performance rule
Situs rule for royalties is the place where the right or privilege is exercised
The need to distinguish between the two sometimes gives rise to practical
difficulties
Under the terms of the employment contract, the TP received a

percentage of the proceeds of the sale within the U.S. of synthetic
vitamins produced with his inventions
Court held that payments to the TP constituted foreign-source
compensation income even though they were measured by proceeds of
sales in the U.S. because the employees right to such payments derives
from his services to his employer and not from any rights in inventions
owned by the employee
Rentals & Royalties

171
In Karrer v. U.S., 152 F. Supp. 66 (1957), the TP was a Swiss national

who was employed as a scientist by a foreign corporation to perform
research services in Switzerland
Rentals & Royalties

172
Boulez v. CIR, 83 T.C. 584 (1987)

Boulez, a French citizen residing in Germany, is a world-renowned musical
director and orchestra conductor
Boulez concluded a contract with CBS Records under which recordings
would be made by the New York Philharmonic Orchestra and several other
orchestras under his direction
The contract provided that royalties would be paid to Boulez based upon
a percentage of the proceeds derived by CBS from the sale of the records
Under the contract CBS retained the property rights to the master
recordings, matrices and phonograph records produced under the
agreement
The recordings were made in the U.S., and the IRS took the position that the
payments, although characterized as royalties in the contract, were in
substance compensation payments measured by record sales
Issue: By the contract entered into between Boulez and CBS, did the parties
agree that Boulez was licensing or conveying to CBS a property interest in
the recordings which he was retained to make, and in return for which he
was to receive royalties?
Held: No. Boulez derived U.S. source compensation from services income
Before a person can derive income from royalties, it is fundamental that he
must have an ownership interest in the property whose licensing or sale
gives rise to the income
Royalty defined as a share of the product or profit reserved by the
owner for permitting another to use the property
Also, for a payment to constitute a royalty, the payee must have an
ownership interest in the property whose use generates the payment
43
5/27/16
Rentals & Royalties

173
Rentals & Royalties

174
Thus, the existence of a property right in the payee

is fundamental for the purpose of determining
whether royalty income exists
Did Boulez have any property rights in the
recordings which he made for CBS Records, which
he could either license or sell and which would give
rise to royalty income here? We think not [because
CBS retained the property rights to the master
recordings, matrices and phonograph records
produced]
Rentals & Royalties

175
Whats the bottom line?

To be considered as royalties, the licensor must have an
ownership/proprietary interest in the property whose use
by the licensee himself generates royalties
Sale of Real Property

176
Contracts for the supply of know-how concern information

that already exists or concern the supply of that type of
information after its development or creation and include
specific provisions concerning the confidentiality of that
information
In the case of contracts for the provision of services, the
supplier undertakes to perform services which may
require the use, by that supplier, of special knowledge,
skill and expertise but not the transfer of such special
knowledge, skill or expertise to the other party
Gain from sale of real property sourced where the

property is located
Accordingly, the sale of land and buildings located in
the Philippines will generate Philippine-source income
Gain realized from the disposition of land and
buildings located elsewhere will be treated as
foreign-source income
44
5/27/16
Sale of Personal Property

177

178
Sale by producer or manufacturer of personal

property
Situs is either (i) entirely within or entirely without; or (ii) partly

within and partly without
Treatment (i) or (ii) depends on (a) place of sale and (b) place
of manufacture/production
Entirely within or entirely without
If (a) AND (b) within the Philippines source is entirely within
If (a) AND (b) without the Philippines source is entirely
without
Partly within and partly without
If (a) within and (b) without, or vice-versa source is partly
within and partly without
Purchase and sale of personal property (e.g.,

trading)
180
Sale of shares of stock in a domestic corporation

Derived entirely from sources within the Philippines
regardless of where the shares are sold
Outright sale or assignment of intangibles
Same rule as purchase and sale of personal
property (i.e., place of sale determines source)
Distinguish from licensing of intangibles which gives
rise to royalty income
B. Taxable Sources from Within or

Without
Taxable income from sources within

From gross income within, deduct the following, if
applicable:
n Expenses, losses and other deductions properly
allocable thereto
n Ratable part of expenses, interests, losses and other
deductions effectively connected with the business or
trade conducted exclusively within the Philippines
which cannot definitely be allocated to some items or
class of gross income
Taxable income from sources without
Same rule as item 1
Under CIF Manila terms, the buyer of the goods accepts delivery at the ships rail at
the port of shipment, and a negotiable bill of lading deliverable to the order of the
buyer evidencing possession and control of the goods is given to him
Example: SGCo sells computer hardware to Philco CIF

Manila, gain from sale is foreign-source
n
179
The source of income realized from the purchase and

sale of personal property will generally be
determined by the situs of the property at the time of
the passage of title
The passage of title test derives from law on sales
and generally allows the parties to arrange title
passage wherever they choose
45
5/27/16
General Rule
182
Taxable income shall be computed upon the basis

of TPs annual accounting period (fiscal or
calendar year method) in accordance with method
of accounting regularly employed in keeping
books
No uniform method of accounting prescribed for
all TPs and any method may be adopted,
provided the method chosen clearly reflects
income, unless specifically provided for by law
(e.g., accounting for long-term contracts)
XVII. ACCOUNTING METHODS

AND PERIODS
General Rule
Year of Income Inclusion
183
184
Most common methods:

Cash method -- all items of gross income received during the
year shall be accounted for in the year of such receipt and
expenses shall be claimed as a deduction in the year of payment
n
Receipt is actual or constructive receipt -- there is actual
receipt when money or its equivalent is placed at the control
of the person who rendered the service without restrictions by
the payor
Accrual method -- income is accounted for in the year in which
earned, regardless of whether it has been received or not.
Expenses are claimed as a deduction in the year in which
incurred
Under accrual method, taxable income comes into

existence when all events have occurred which fix the
right to receive the income and the amount can be
determined with reasonable accuracy
Thus TP on accrual basis was deemed to have

derived income for taxable year from goods sold
and shipped in said year to a foreign buyer,
notwithstanding that TP had not received the price
in full
46
5/27/16
Year in Which Deduction Taken

185
Percentage of Completion
186
Year in which deduction taken: paid or incurred

during the taxable year
Isabela Cultural Corp. v. CIR (G.R. No. 172231, Feb.
12, 2007)
TP may not claim as a deduction in 1986 the cost of
legal and auditing services rendered in 1984 and
1985, although billed only and paid in 1986
All events test: expense must be claimed as a
deduction when liability is (1) fixed and (2) the
amount can be determined with reasonable accuracy
Installment Method
187
Long-term contract -- building, installation or

construction contracts covering a period in excess of
one year
Gross income shall be reported on the basis of
percentage of completion
Deductions claimed for all expenditures made during
the taxable year
Return shall be accompanied by certification from
architect or engineer showing percentage of
completion
Installment Method
188
Considered appropriate when collections of the

proceeds of sales and income extend over relatively
long periods of time and where there is a possibility
that full collection might not be made
As customers make installment payments, the seller
recognizes gross profit on sale in proportion to the
cash collected during the year
Available to sales of dealers in personal property

who regularly sells on installment plan
Sale of realty and casual sale of personal property:
Price exceeds P1,000
If realty, initial payments received during the
taxable year do not exceed 25% of the selling
price
47
5/27/16
A. Individuals
190
XVIII.RETURNS AND
PAYMENT OF TAXES
Who are required to file ITRs:
Resident citizens
Non-resident citizens, with respect to Philippine-source income
Resident aliens, with respect to Philippine-source income
NRA-ETB. 51(A)(1)
Who are not required to file ITRs?
Individual whose G/I does not exceed total personal and additional exemptions
However, citizens and aliens engaged in a Philippine trade or business or
exercising a profession shall file an ITR, irrespective of G/I
Individuals earning purely Philippine-source compensation income, the income tax of

which had been correctly withheld
Exception: individuals with 2 or more concurrent employers
Individuals whose sole income has been subjected to FWT
Individuals exempt from income tax (e.g., minimum wage earners) . 51(A)(2)
A. Individuals
A. Individuals
191
192
Where should the ITR be filed?

AAB/RDO/Collection Agent/authorized treasurer of city or municipality
in which TP has legal residence or principal place of business
Office of the Commissioner, if TP has no legal residence or place of
business in the Philippines. 51(B)
When should the individual ITR be filed? In general, on April 15. 51(C)
(1)
What is the rule for husband and wife?
Married individuals, whether citizens, resident or nonresident aliens, who
do not derive income purely from compensation, shall file a return for the
taxable year to include the income of both spouses
But, where it is impracticable for the spouses to file one return, each
spouse may file a separate return which shall be consolidated by the
Bureau for purposes of verification. 51(D)
What is the rule for parents and children?
The income of unmarried minors derived from property received from a

living parent shall be included in the return of the parent
Except:
n
When the donors tax has been paid on such property; or
When the transfer of such property is exempt from donors tax. 51(E)
When and where should income taxes be paid?
Pay-as-you-file
Thus, the last day for the payment of income tax coincides with the last day
for the filing of the return
The tax is paid at the place where the return is filed. 56(A)(1)
48
5/27/16
A. Individuals
A. Individuals
193
194
Who can pay income tax in installments?

Only individuals can pay income taxes in installments
When can individuals pay income tax in installments?
If the tax due exceeds P2,000, the TP may opt to pay the tax
in 2 equal installments
The first installment shall be paid at the time the return is filed
and the second installment on or before July 15 following the
close of the calendar year. If any installment is not paid on
time, the whole amount of the tax unpaid becomes due and
payable together with surcharge and interest.
If the tax withheld from salaries is more than of the tax
due, the taxpayer pay nothing in his first installment (he pays
nothing at the time of filing). The second installment is the
total tax due less the excess withholding tax. 56(A)(2)
When should the capital gains tax return on sale of shares

(not listed or traded in PSE) and sale of realty be filed?
Sale of shares: within 30 days after each transaction and
a final consolidated return on or before April 15 of each
year covering all stock transactions of the preceding
taxable year
Sale of realty classified as a capital asset: within 30
days following each sale or other disposition
n In case the TP elects and is qualified to report the gain
by installments under 49, the tax due from each
installment shall be paid within 30 days from receipt
of the installments. 56(A)(3)
A. Individuals
A. Individuals
195
196
Who are required to file a declaration of estimated income

for the current taxable year?
Every individual subject to income tax who receive selfemployment income
When should the declaration be filed?
On or before April 15 of the same taxable year
What is self-employment income?
In general, it consists of the earnings derived by the
individual from the practice of profession or conduct of
trade or business carried on by him as a sole proprietor or
by a partnership of which he is a member. 74
When is the estimated income tax paid?

The estimated income tax is paid in 4
installments
st
n 1 installment at the time of the declaration
nd installment August 15
n 2
rd
n 3 installment Nov. 15
th
n 4 installment - on or before April 15 of the
following calendar year when the final
adjusted income tax return is due to be filed
49
5/27/16
B. Corporations
197
B. Corporations
198
Who are required to file ITRs?

Every corporation subject to income tax, except NRFCs. 52(A)
What ITRs are required to be filed by corporations?
Quarterly ITR
Final or adjustment return (FAR)
CGT returns (stock and realty)
When are the ITRs required to be filed?
Quarterly ITR:
n Within 60 days from close of the taxable quarter (1st to 3rd quarters
only). 75 & 77(B)
FAR:
n Calendar year basis April 15
n Fiscal year basis 15th day of the 4th month following close of fiscal
year. 77(B)
B. Corporations
199
When are the ITRs required to be filed?

Return of corporation contemplating dissolution or reorganization:
n Within 30 days from adoption by the corporation of a resolution
or plan for its dissolution, or for liquidation, or for its
reorganization. 52(C)
n Note: a dissolution or reorganization triggers a statutory tax
audit or investigation (before a certificate of tax clearance is
issued by the BIR for submission to the SEC)
n Case: BPI v. CIR
n In the case of a merger, the absorbed/dissolving corporation
is required to file its ITR within 30 days from the cessation of
business or approval by the SEC of the merger
CGT returns (stock and realty) same rule as individuals
B. Corporations
200
Where should the ITRs be filed?

AAB/RDO/collecting agent/treasurer where
the principal office is located; or
Place where corporations main books of
accounts and other data from which the return is
prepared are kept. 77(A)
When should the income tax be paid?
Pay-as-you-file. 77(C)
What options are available to the corporation in case the sum of the
quarterly tax payments/withholding tax credits during the year exceeds
the income tax due for the entire taxable income of that year?
Carry-over the excess credit (to be credited against est. quarterly
income tax liabilities for the taxable quarters of the succeeding taxable
years)
Be credited or refunded with the excess amount paid (cash refund or
TCC). 76
n These 2 options are alternative in nature; choice of one precludes
the other
What is the irrevocability rule?
Once the carry-over option is exercised, such option shall be
irrevocable for that taxable period and no application for cash refund
or issuance of a TCC shall be allowed. 76
50
5/27/16
B. Corporations
201
B. Corporations
202
How is an option exercised?
By marking the appropriate box in Item 31 of the FAR

(Annual Income Tax Return)
What if the TP does not mark/tick the appropriate box

in Item 31 of the ITR, how will revenue authorities
determine which option was chosen by the TP?
Through subsequent acts of the TP (constructive election)

E.g., (i) filing a claim for refund; or (ii) reflecting the excess
credits as prior years excess credits in the succeeding
quarterly/annual ITR
Case
Philam Asset Mgt., Inc. v. CIR
For taxable year 1997, TP unable to utilize its P522k CWT due to net
loss position; TP filed a written refund claim with the BIR in Sept. 1998
For taxable year 1998, TP similarly was unable to utilize its P459k
CWT due to net loss position; in April 2000, TP filed its 1999 ITR
showing an income tax due of P80k; in its 1999 ITR, TP reflected the
1998 CWT of P459k as prior years excess credit; in Nov. 2000, TP
filed a refund claim for the P459k excess CWT
In its ITRs for both 1997 and 1998, TP did not indicate its option to
have the excess CWT either refunded or carried-over and applied to
the succeeding year
Both CTA and CA denied the TPs 1997 and 1998 refund claims
B. Corporations
203
B. Corporations
204
Case
Held: 1997 claim granted; 1998 claim denied
TP has 2 options in case the sum of tax credits/payments during the
year exceeds the income tax due: (i) tax refund or (ii) carry-over excess
credits
2 options are alternative in nature; choice of one precludes the other
TP exercises the option by marking the appropriate option box in the

ITR
Failure to signify ones intention in the FAR does not mean outright
barring of a valid request for refund, should the TP choose this option
later on
Case
For the 1997 claim, despite the TPs failure to make the
appropriate marking in the ITR, the filing of its written claim
effectively serves an expression of its choice to request a
tax refund, instead of a carry-over credit
Although the TP did not mark the refund box in its 1997
FAR, neither did it perform any act indicating that it chose a
carry-over credit; on the contrary it filed on Sept. 11, 1998
an administrative refund claim of its 1997 excess tax
credits; in none of its quarterly returns in 1998 did it apply
the excess CWTs
51
5/27/16
B. Corporations
205
Case
For the 1998 claim, the subsequent acts of the TP
reveal that it has effectively chosen the carry-over
option (TP reflected in its 1999 FAR the 1998 excess
credits as prior years excess credits)
Once the carry-over option is taken, actually or
constructively, it becomes irrevocable
XIX. WITHHOLDING TAX

Withholding Tax
207
Withholding Tax
208
What is the nature of withholding tax?

The principle of a withholding tax is that it is withheld (retained) by
the payor from an income payment (e.g., salaries, dividends,
royalties, etc.) and remitted directly to revenue authorities
The payee is given only the balance of the income payment
The primary motivation is to ensure collection of taxes by mandating
the withholding of taxes at source
The tax withheld is either (i) full and final payment of the income tax
due or (ii) merely an advance payment of eventual income taxes
due, depending on the type of income payment involved
What is the nature of the final withholding tax

system?
Under the final withholding tax system the amount of

income tax withheld by the withholding agent is
constituted as a full and final payment of the income
tax due from the payee on the said income
Being a final tax, the payee is no longer required to
file an income tax return for the particular income (or
include the income subject to FWT in the income tax
return)
52
5/27/16
Withholding Tax
209
Withholding Tax
210
Gross income
What is the nature of the creditable withholding tax

system?
Under the creditable withholding tax system, taxes

withheld on certain income payments are intended to
equal or at least approximate the tax due of the
payee on said income
The income recipient is still required to file an income
tax return to report the income and/or pay the
difference between the tax withheld and the tax due
on the income
A CWT is considered a prepayment or an advance
payment of eventual income taxes due at the end of
the taxable year
2,000,000
Taxable income
3,000,000
Income tax due (30%)
900,000
Less: tax credits

Prior years excess credit
P50,000
Excess MCIT
Quarterly income tax payments

Creditable Withholding tax
1,000,000
500,000
Foreign tax credits
Income tax still due (refundable)
(1,550,000)
(650,000)
Withholding Tax
211
P5,000,000
Less: Itemized deductions (or OSD)
Withholding Tax
212
What are the consequences of failure to withhold?

The deficiency tax shall be collected from the payor/
withholding agent, plus surcharge, penalties and
interest
n Rationale: (i) to compel withholding and remittance
of taxes withheld to the government and (ii) for
administrative convenience/facilitate enforcement
The income payment which is otherwise deductible from
the gross income of the payor shall not be allowed as a
deduction. 34(K)
In the case of failure to withhold, but the income

recipient reported the income payment and paid taxes
due thereon, does that fact relieve the withholding
agent from liability for deficiency withholding tax?
Yes.
However, the payor is still liable for applicable
surcharges, penalties and interest arising from the failure to
withhold
What are income payments subject to FWT?
What are income payments subject to CWT?
See enumeration in Rev. Regs. 2-98 2.57.1, as amended

See enumeration in Rev. Regs. 2-98 2.57.2, as amended
53
5/27/16
Withholding Tax
213
Withholding Tax
214
Cases --
CIR v. Wander Phil., Inc.

Payor of dividends to an NRFC, as the withholding agent, has standing
to file refund claim
n Issue raised by the BIR for the first time on appeal
n Withholding agent may be assessed for deficiency withholding tax
at source, plus surcharge and interest
CIR v. P&G Phil. Mfg. Corp.
Standing of withholding agent to file refund claim for overpaid tax on

dividends denied
The real party in interest is the recipient of the dividends, therefore
should have been the claimant
Cases -CIR v. P&G Phil. Mfg. Corp.

Note: 1988 P&G decision reversed on reconsideration in 1991
Incapacity of claimant cannot raised for the first time on appeal
P&G is considered a taxpayer, which is defined as any person

subject to tax imposed by the Title [on Tax on Income]
The withholding agent who is required to deduct and withhold any tax
is made personally liable for such tax
Being a wholly-owned subsidiary of the income recipient, P&G Phil. has
implied authority to file the refund claim
Withholding Tax
215
Cases -Filipinas Synthetic Fiber Corporation v. CA
Where the withholding agent adopts the accrual

method of accounting in its regular bookkeeping, the
same method must be used in determining its
withholding tax liability
Filsyn cannot use the accrual method to its advantage
in computing deductions and then turn around and
disown it in computing withholding tax liability
XX. ESTATES AND TRUSTS
54
5/27/16
Estates and Trusts: Taxable Person

217

218
In general, estates and trusts taxed in the same

manner as individuals
Person, for tax purposes, includes estates
and trusts (Sec. 22(A), NIRC)

219
Includes the following:

Income accumulated in trust for benefit of unborn children
or unascertained persons with contingent interests, and
income accumulated or held for future distribution under the
terms of a will or trust
Income distributed currently by the fiduciary to beneficiaries
and income collected by the guardian of an infant which is
to be held or distributed as the court may direct
Income received by estates during settlement or
administration
Income which, in discretion of fiduciary, may either be
distributed to beneficiaries or accumulated

220
Income of a reasonable private benefit plan is

exempt from the tax imposed under Title VI (income
tax)
General rule on taxability:

In general, income of trust for the taxable year
which is to be distributed to beneficiaries shall
be taxed in the hands of the beneficiaries
However, income of a trust whic h is
accumulated or held for future distribution shall
be taxed in the hands of the trustee
Taxable trusts exclude reasonable private benefit

plans employees trust which forms part of a
pension, stock bonus or profit-sharing plan of an
employer for the benefit of employees
55
5/27/16

221
Exceptions:
Revocable trusts -- income taxed to grantor
Trusts where the income may be held or
distributed for the benefit of the grantor -income taxed to grantor
Trust administered in a foreign country income
undiminished by any amounts distributed to
beneficiaries will be taxed to the trustee/s
56

Tax Slides 2016

Uploaded by

Copyright:

Available Formats

Tax Slides 2016

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tax Slides 2016

Uploaded by

Copyright:

Available Formats

5/27/16

How is an NRA-ETB taxed?

Nonresident alien individual whose residence is not within the

Same manner as an individual citizen and a resident alien, on

Deemed doing business NRA who comes to the Philippines and

Atty. Terence Conrad H. Bello

Atty. Terence Conrad H. Bello

Higgins v. CIR, 312 U.S. 212 (1941)

TP was a French resident

Higgins v. CIR, 312 U.S. 212 (1941)

Atty. Terence Conrad H. Bello

Higgins v. CIR, 312 U.S. 212 (1941)

Higgins v. CIR, 312 U.S. 212 (1941)

Whether the TP, a nonresident alien, gets to claim

Atty. Terence Conrad H. Bello

Atty. Terence Conrad H. Bello

Weliner v. CIR, CTA Case No. 3170 (May 23, 1986)

Two types of NRA-ETB (Weliner)

Atty. Terence Conrad H. Bello

Meaning of engaged in trade or business

Atty. Terence Conrad H. Bello

(B) Income Phil. source passive income subject to final tax

Interest received from FCDU - exempt

(B) Income Phil. source passive income subject to final tax

If royalty is active (instead of passive) income considered Category

Atty. Terence Conrad H. Bello

(A) Income Income subject to the graduated rates of 5% - 32%

Atty. Terence Conrad H. Bello

Atty. Terence Conrad H. Bello

How are NRAs not ETB taxed?

Atty. Terence Conrad H. Bello

TP argued that (i) the payment received was not a royalty

Atty. Terence Conrad H. Bello

Held: payment was a royalty; payment was FDAP income

What are the special classes of aliens?

The term corporation

VIII. INCOME TAX ON

Partnerships, no matter how created or organized, etc.

Does not include

AFISCO Ins. Corp. v. CIR

Pursuant to reinsurance treaties, a number of local insurance

AFISCO Ins. Corp. v. CIR

Atty. Terence Conrad H. Bello

Atty. Terence Conrad H. Bello

The division of the profit was merely incidental to the

Atty. Terence Conrad H. Bello

Atty. Terence Conrad H. Bello

B. Income Tax Rate and Base

B. Income Tax Rate and Base

(B) Income Phil. source passive income subject to final tax

30% income tax on taxable income

Gross income (excluding (B) , (C) and (D)

2. Royalties 20% final tax

Atty. Terence Conrad H. Bello

Atty. Terence Conrad H. Bello

B. Income Tax Rate and Base

B. Income Tax Rate and Base

(C) Income capital gains from sale of domestic