TAXATION NOTES GROUP 2

II. NATIONAL TAXATION

A. Taxing Authority
1. Jurisdiction, Power, and Functions of the Commissioner of Internal Revenue
a.) Interpreting Tax Laws and Deciding Tax Cases
1. The BIR shall be under the supervision and control of the DOF and its powers and
duties shall comprehend
a) the assessment and collection of all national internal revenue taxes, fees, and charges,
and
b) the enforcement of all forfeitures, penalties, and fines connective therewith,
c) including the execution of judgments in all cases decided in its favor by the CTA and
the ordinary courts.
d.) To give effect to and administer the supervisory and police powers conferred upon it
by the Tax Code or other special laws.

Powers of the CIR include:

a) to interpret the provisions of the NIRC and other tax laws, subject to review by the
SOF; (Sec 4)
A ruling of the CIR that interprets provisions of the NIRC and other tax laws shall be
presumed to be valid unless modified, reversed, or superseded by the SOF. A taxpayer
receives an adverse ruling from the CIR may, within 30 days from the date of receipt of
such ruling, seek its review by the SOF. The SOF may also review, the rulings motu
propio under DOF Order No. 0707-0, May 7, 2002.
The power to decide disputed assessments, refunds of internal revenue taxes, fees charges
and penalties, or other matters arising under the NIRC or other matters arising under the
NIRC or other laws administered by the BIR is vested in the CIR subject to the exclusive
appellate jurisdiction of the CTA.
b) to obtain information, and to summon, examine, and take testimony of persons; (Sec 5)
i) Examine any document which may be relevant or material to an inquiry;
ii) Obtain information from a third party in relation to an investigation or audit of a
taxpayer;
iii) Summon the taxpayer or any person holding records of the taxpayer to appear
and produce the documents;
Correlate with Sec 266 for Failure to Obey Summons which is penal in nature, subject to
the following requisites:
1. A person is duly summoned to appear to testify, or to appear and produce books of
accounts, records, memoranda or other papers, or to furnish information; and
2. The person neglected to do so.

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c) to make assessments and prescribe additional requirements for tax administration and
enforcement; (Sec 6)
d) to examine bank deposits, in the following cases
i) A decedent, to determine his gross estate;
ii) Any taxpayer who has filed an application for compromise based on
financial
Incapacity; or
iii) Pursuant to an international convention or tax agreement.
e) To delegate power, except
i) to recommend the promulgation of rules and regulations by the SOF;
ii) to issue rulings of the first impression or to reverse, revoke or modify any
existing
ruling of the BIR,
iii) To compromise or abate any tax liability, except

1) For tax liabilities P500K or less and

2) Minor criminal violations which may be compromised by ta Regional
Evaluation Board.
iv.) To assign or reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept

b. Non-retroactivity of Rulings
Any revocation, modification or reversal of any of the rules and regulations promulgated
of any of the rulings or circulars promulgated by the CIR shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the taxpayers,
except to the following cases,
a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the BIR;
b Where the facts subsequently gathered by the BIR are materially different from the
facts on which the ruling is based;
c) Where the taxpayer acted in bad faith.
Under Sec. 246, taxpayers may rely upon a rule or ruling issued by the CIR from the time
the rule or ruling is issued up to its reversal by the CIR or this Court The reversal is not
given retroactive effect. There must, however, be a rule or ruling issued by the
Commissioner that is relied upon by the taxpayer in good faith. A mere administrative
practice, not formalized into a rule or ruling will not suffice because such a mere
administrative practice may not be uniformly and consistently applied.
CIR v. San Roque Power Corp
ISSUE:  WON San Roque is entitled to tax refund? 

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FACTS:  On October 11, 1997, San Roque entered into a Power Purchase Agreement
(PPA)  with the National Power Corporation (NPC) by building the San Roque Multi-
Purpose Project in San Manuel, Pangasinan. The San Roque Multi-Purpose Project 
allegedly incurred, excess input VAT in the amount of P559,709,337.54 for  taxable year
2001 which it declared in its Quarterly VAT Returns filed for the same  year. San Roque
duly filed with the BIR separate claims for refund, amounting to  P559,709,337.54,
representing unutilized input taxes as declared in its VAT returns  for taxable year 2001.
However, on March 28, 2003, San Roque filed amended Quarterly  VAT Returns for the
year2001 since it increased its unutilized input VAT To the  amount of P560,200,283.14.
SanRoque filed with the BIR on the same date, separate  amended claims for refund in
the aggregate amount of P560,200,283.14.  On April 10, 2003, a mere 13 days after it
filed its amended administrative claim  with the CIR on March 28, 2003, San Roque filed
a Petition for Review with the  CTA. CIR alleged that the claim by San Roque was
prematurely file with the CTA. 

DECISION:  No. SC granted the petition of CIR to deny the tax  refund or credit claim
of San Roque. 

RATIO DECIDENDI:  San Roque is not entitled to a tax refund because it failed to

comply with the mandatory and  jurisdictional requirement of waiting 120 days before
filing its judicial claim. On April 10, 2003,  a mere 13 days after it filed its amended
administrative claim with the CIR on March 28, 2003,  San Roque filed a Petition for
Review with the CTA, which showed that San Roque did not wait for the 120-day period
to lapse before filing its judicial claim. Compliance with the 120-day waiting  period is
mandatory and jurisdictional, under RA8424 or the Tax Reform Act of 1997. Failure to 
comply renders the petition void.  Article 5 of the Civil Code provides, "Acts executed
against provisions of mandatory or prohibitory laws shall be void, except when the law
itself authorizes their validity." Section 112(D) of the 1997 Tax Code is clear,
unequivocal, and categorical that the CIR has 120  days to act on an administrative claim.
The taxpayer can file the judicial claim(1) Only within 30  days after the CIR partially or
fully denies the claim within the 120-day period, or(2) only within  30 days from the
expiration of the 120- day period if the CIR does not act within the 120-day period.

2. Rule-Making Authority of the Secretary of Finance

Directory provisions — those designed merely for the information or direction of officers
or to secure methodical and systematic modes of proceedings, e.g. Revenue
memorandum circulars issued by BIR to guide personnel on matters of regulations.
Mandatory provisions- those intended for the security of the citizens or which are
designed to ensure equality of taxation or certainty as to the nature and amount of each
person’s tax like remedies under the tax code (security), tax rate (equality)
The determination of the validity of these issuances falls within the exclusive appellate
jurisdiction of the CTA under Section 7(1) of RA 1125, as amended, subject to prior
review of the SOF, as required under the NIRC. (Steel Corporation of the Philippines v
BOC and BIR, 2018)
Revenue Regulations are general interpretations of the BIR issued by the CIR or by its
delegate except when it tramples novel issues or is intended to revoke or amend or
modify a previous ruling.
Requisites for the Validity and Effectivity of Regulations

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a. It must be issued under authority of law;
b. It must be within the scope and purview of the law; not contrary to law and the
Constitution;
c. It must be published in the OG or newspapers of general circulations;
Interpretative rules or those merely internal in nature may simply be posted in
conspicuous places in the agency itself.’
d. Where the regulations impose penal sanctions, the law itself must declare as
punishable the violations of the administrative rule or regulation and should fix or define
the penalty thereof.

Kinds of Administrative Issuances

1. Legislative rules- rules in the nature of subordinate legislation designed to
implement a primary legislation by providing the details thereof. Before it is adopted,
there must be a hearing under the Administrative Code of 1987;
2. Interpretative rules-are rules and regulations construing or interpreting the
provisions of a statute to be enforced and are binding on all concerned until they are
changed. Designed to provide guidelines to the law, which the administrative agency is
in charge of enforcing. They have the effect of law and are entitled to great respect and
have the favor of presumption of legality.

B. Income Tax
1. Definition, Nature and General Principles
INCOME TAX is a direct tax on all yearly profits arising from property, professions,
trades or offices or a tax on a person's income, emoluments, profits, and the like. It is:
1.National;
2.Direct;
3.Excise; and
4. General.
General principles of income taxation
a) A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines;

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

c) An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income derived from sources
within the Philippines:

Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas contract worker;

d) An alien individual, whether a resident or not of the

Philippines, is taxable only on income derived from sources within the Philippines;

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

f) A foreign corporation, whether engaged or not in trade or business in the Philippines,

is taxable only on income derived from sources within the Philippines. (Sec 23)

a.) Criteria in Imposing Philippine Income Tax

I. Citizenship Principle
A citizen of the Philippines therein is taxable on all income derived from whatever
sources whether within or without the Philippines, while citizens of the Philippines not
residing therein is taxable only on income derived from sources within the Philippines.
Individual taxpayers are divided into:
Resident citizens -those citizens whose residence is within the Philippines.
Non-resident citizens- those citizens whose residence is not with the Philippines.
Note: A citizen of the Philippines is subject to Philippine income tax:
a) On his worldwide income, if he resides in the Philippines; or
b) Only on his income from sources within the Philippines, if he qualifies as a non-resident
citizen.

Resident aliens - those individuals whose residence is within the Philippines and are
not citizens thereof.
Non-resident aliens - those individuals whose residence is not within the Philippines but
are temporarily in the country and are not citizens thereof. They are those engaged in
trade or business within the Philippines, and those who are not so engaged.

II. Residence Principle

All income derived from sources within the Philippines by persons residing in the
Philippines whether citizen or not, domestic or foreign corporation, are subject to income
tax

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 Ex. A resident alien is liable to pay Philippine income tax only on his income from
sources within the Philippines but is exempt from tax on his income from sources outside
the Philippines.
III. Source Principle
All income derived from sources within the Philippines are subject to income tax.
Ex. Where an alien is subject to Philippine income tax because he derives income from
sources within the Philippines.

b.) Types of Philippine Income Tax

There are several types of income tax under the NIRC, namely:
i. Graduated Income Tax on Individuals (Sec. 24 (A));
ii. Optional Eight Percent (8%) Income Tax on Individuals (Sec. 24 (A) (b) and (c));
iii. Regular/Normal Corporate Income Tax on Corporations (Sec. 27 (A))
iv. Minimum Corporate Income Tax (MCIT) on Corporations (Sec. 27 (E));
v. Gross Income Tax (Sec. 27 (A));
vi. Special Income Tax on Certain Corporations;
Ex: private educational institutions international carriers foreign currency deposit units

vii. Capital Gains Tax (CGT) on sale or exchange of unlisted shares of stock of a domestic
corporation classified as capital assets (Sec. 24 (C));
viii. CGT on sale or exchange of real property located in the Philippines classified as a capital
asset (Sec. 24 (D));
ix. Final Withholding Tax (FWT) on certain passive investment income (Sec. 28 (B)(5)(b));
x. Fringe Benefits Tax (Sec. 33)

Fringe benefits – any goods, services, or other benefit furnished or granted in cash or in
kind, in addition to basic salaries, to an individual employee, except a rank and file
employee.
Fringe benefits given to a rank-and-file employee are treated as part of his compensation
income subject to normal tax rate and withholding tax on compensation income, except
de minimis benefits and benefits provided for the convenience of the employer.

xi. Branch profit remittance tax (BRPT) (Sec. 28); and

xii. Improperly Accumulated Earnings Tax (IAET) (Sec. 29).

c.) Taxable Period

a. Taxable year

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 It means the calendar year, or the fiscal year ending during such a calendar year,
upon the basis of which the net income is computed.
b. For Corporations
In the case of corporations adopting the fiscal-year accounting period, the taxable income
shall be computed without regard to the specific date when specific sales, purchases and
other transactions occur. Their income and expenses for the fiscal year shall be deemed to
have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by multiplying
the number of months covered by the new rate within the fiscal year by the taxable
income of the corporation for the period, divided by twelve.

d.) Kinds of Taxpayers

Resident Citizen
a. Those who are citizens of the Philippines at the time of the adoption of the 1987
Constitution
b. Those whose fathers or mothers are citizens of the Philippines.
c. Those born before January 17, 1973, of Filipino mothers, who elect Philippine
citizenship upon reaching the age of majority; and
d. Those who are naturalized in accordance with law.
A resident citizen is a Filipino citizen who stayed permanently in the Philippines or
stayed outside the Philippines for less than 183 days during the calendar year.

Non-Resident Citizen
a. A citizen of the Philippines who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite intention to reside therein.
b. A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
c. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year.

● At least 183 days

● Temporary employment

d. A citizen who has been previously considered as non-resident citizen and who
arrives in the Philippines at any time during the taxable year to reside permanently in
the Philippines shall likewise be treated as a non-resident citizen for the taxable year in
which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.

● Hybrid

e. Receives compensation for services rendered abroad as a seaman.

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 ● He is a member of the complement vessel

● The vessel is engaged exclusively in international trade.

Resident Alien
A resident alien is one who has a residence in Philippines although he is not
a Filipino Citizen. He has no definite period of stay in the Philippines.
He is not mere transient or sojourner. His definite purpose for staying requires
an extended stay and to that end, he makes his home temporarily in the Philippines.

Non-Resident Alien
The test to classify NRA is the length of stay in the Philippines, whether he says for more
than 180 days or, 180 days or less.

NRA-ETB

● More than 180 days

● 0-35% tax on net income

NRA-NETB

● 180 days or less

● 25% final tax on gross income

Special Employees
Special employees are alien individuals or Filipino citizens who are subject to 15% tax
based on their gross compensation income when:
1. They are employed occupying managerial and/or technical positions with regional or
area headquarters of

● multinational corporations,

● petroleum service contractors and subcontractors, or

● offshore banking units.

2. If the special taxpayer is an alien, all of his gross compensation income received is subject
to 15% final tax.

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3. If the taxpayer is a Filipino citizen, he has the option to be taxed at 15% final tax based on
his gross compensation income received or at a regular income tax rate (0%-35%) based
on the net taxable compensation income if his gross annual taxable compensation is at
least P975,000 (whether or not actually received).
Present and future qualified employees of existing ROHQ, RAHQ, OBU, and Petroleum
service contractors and subcontractors as of December 31, 2017 shall enjoy preferential
tax treatment.

It shall not apply for employees of ROI-IQ, RAHQ, OBU and Petroleum service
contractors and subcontractors which registered with the SEC beginning January l, 2018.
Tests for Filipinos to avail of the option (prior to 1 Jan 2018)

● Position and function test- employees must be occupying managerial or technical

positions..

● Compensation Test- employees must be paid in their contract (whether actual or

not as long as stipulated in the contract) the amount of P975,000 per annum which
is the minimum amount.

● Exclusivity Test- one employer at a time.

Alien Individuals Employed by an Offshore Gaming Licensee and Service Providers

-Shall pay a final withholding tax of 25% of their gross income.
-The minimum FWT due for any taxable month from said person shall not be
lower than PHP 12,500.00.

Gross income shall include whether in cash or in kind.

● basic salary/wages

● annuities

● compensation

● remuneration and

● other emoluments, such as honoraria, and allowances, received from such service
provider or offshore gaming licenses.

Estates and Trusts

An ESTATE is composed of all properties, rights and obligations including those
properties, earnings or obligations that have accrued thereto since the opening of the

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 succession. The estate is to be transferred from the decedent to his successors. Its status is
the same as that of the decedent prior to his death.
It will only be taxable when it is under administration or settlement.
GR: An estate under judicial settlement is subject to income tax.
EXC: The distribution to the heirs during the taxable year of estate income is deductible
from the taxable income of the estate. Such will form part of the taxable income of the
heirs.

A TRUST is an obligation imposed or a right to administer over property given to a

person for the benefit of another.

● Where the income is accumulated or held for future distribution by the trustee;

● Where it is up to the fiduciary whether there will be distribution or not:

● Where the income is collected by a guardian of an infant which is to be held or

distributed as the court may direct.

Corporations
The term ‘corporation shall include’

● one-person corporation,

● partnerships, no matter how created or organized,

● joint-stock companies,

● joint accounts (cuentas en participacion),

● association, or

● insurance companies,

but does not include

● general professional partnerships, and

● a joint venture or consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the Government.
‘General professional partnerships’ are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income which is derived
from engaging in any trade or business.

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 Domestic corporations are those created or organized in the Philippines or under its laws.
Otherwise, foreign corporations.
The term ‘resident foreign corporations’ applies to a foreign corporation engaged in
trade or business within the Philippines.
The term ‘non-resident foreign corporations’ applies to a foreign corporation not
engaged in trade or business within the Philippines.

2.) Income
a.) Definition and Nature
In the broad sense, INCOME refers to all wealth which flows into the taxpayer other
than those that are mere return of capital. It is return on capital or return above the capital
as opposed to return of capital.
In the strict sense, INCOME refers to the amount of money coming to the taxpayer foe
services performed or an activity which he is engaged in or for an investment which he
has made including those that do not have specific owners but comes in the hands of a
finder.
CAPITAL denotes the original investment or fund used in order to generate earnings
which is called income. It is the fund or property existing at one point in time.
REVENUE refers to the amount received by the business from selling main goods or
services to its customers during the period.

b.) When Income is Taxable

HOW TO TELL IF INCOME IS TAXABLE
1. There is gain or profit;
2. Gain or profit is realized or received (actually or constructively)
Constructive receipt;
a. Matured interest coupons;
b. Interest on savings bank deposit;
c. Dividends applied to indebtness of a shareholder;
d. Share in the profits of a partner in GPP.
3. Such gain or profit is NOT exempted by any treaty or law.

c.) Tests in Determining Whether Income is Earned for Tax Purposes

1. REALIZATION TEST
- Income is recognized when both conditions are met:
a. The earning is complete or virtually complete; and
b. An exchange has taken place.

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 2. ECONOMIC BENEFIT TEST, DOCTRINE OF PROPRIETARY
INTEREST
- Anything that benefits a person materially or economically.
Note, however that there must first be actual realization, such as through
sale disposition.
Mere increase in the value of property is not income.

3. SEVERANCE TEST
- Income is recognized when there is separation of something which is
exchangeable value.

d.) Tax-Free Exchanges

Tax-free exchanges refer to those instances enumerated in Section 40(C)(2) of the NIRC
of 1997, as amended, that are not subject to Income Tax, Capital Gains Tax,
Documentary Stamp Tax and/or Value-added Tax, as the case may be.
Merger or Consolidation
No gain or loss shall be recognized if in pursuance of a plan of merger or
consolidation
a. A corporation, which is a party to a merger or consolidation, exchanges property
solely for stock in a corporation, which is a party to the merger or consolidation; or
b. A shareholder exchanges stock in a corporation, which is a party to the merger
or consolidation, solely for the stock of another corporation also a party to the
merger or consolidation; or
c. A security holder of a corporation, which is a party to the merger or consolidation,
exchanges his securities in such corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.
Both corporations in the aforementioned cases must be parties to a merger or
consolidation. Merger occurs when one corporation acquires all or substantially all the
properties of another corporation. Consolidation occurs when two or more
corporations merge to form one corporation.
Substantially all the properties of another corporation means the acquisition of at
least 80% of the assets, including cash, of another corporation which has the
element of permanence and not merely momentary holding [Banggawan citing
BIR Gen.Circ. V-253 (1957)]

Initial Acquisition of Control

No gain or loss shall be recognized if property is transferred to a corporation by a person,
alone or together with others, not exceeding four (4) persons, in exchange for stock or
unit of participation in such a corporation of which as a result of such exchange the
transferor or transferors, collectively, gains or maintains control of said corporation.

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 e.) Situs of Income Taxation
Meaning: Situs of taxation literally means the place of taxation.

● The state where the subject to be taxed has a situs may rightfully levy and collect the
tax; and

● The situs is necessarily in the state which has jurisdiction or which exercises dominion
over the subject in question. Within the territorial jurisdiction, the taxing authority may
determine the situs.

Factors that Determine Situs:

a. Nature of the tax;
b. Subject matter of the tax (person, property, act or activity)
c. Possible protection and benefit that may accrue both to the government and the
taxpayer;
d. Citizenship of the taxpayer;
e. Residence of the taxpayer;
f. Source of income.

SITUS OF INCOME TAXATION

TAXPAYER SOURCE OF INCOME
Citizenship Residency Within the Outside the
Phil. Phil.
Filipino Resident Taxable Taxable
Filipino Non- Taxable Non-taxable
Resident and
OCW
Alien Resident Taxable Non-taxable
Alien Non- Taxable Non-taxable
Resident
Corporation Domestic Taxable Taxable
Corporation Foreign Taxable Non-taxable

3.) Gross Income

a.) Definition
In a narrow sense, gross income means all income derived from whatever
source, including but not limited to compensation, gross income, gains, interests,

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 rents, royalties, dividends, annuities, prizes, pensions, and partner’s distributive
shares.
In a broad sense, it means all items of income less exclusions. It is the total
income from all sources before deductions, exemptions or other tax reductions.

b.) Concept of Income from Whatever Source Derived

CIR v. Filinvest 2011 En Banc
While it has been held that the phrase "from whatever source derived"
indicates a legislative policy to include all income not expressly exempted within
the class of taxable income under our laws, the term "income" has been
variously interpreted to mean "cash received or its equivalent", "the amount of
money coming to a person within a specific time" or "something distinct from
principal or capital."
Otherwise stated, there must be proof of the actual or, at the very least,
probable receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.

c.) Gross Income vs. Net Income vs. Taxable Income

a) GROSS INCOME TAXATION — this is a system based on gross
income, which doesn‘t allow deductions but allows exclusions.
Applicable to passive income.
𝐺𝑅𝑂𝑆𝑆 𝐼𝑁𝐶𝑂𝑀𝐸 = 𝐼𝑛𝑐𝑜𝑚𝑒 – 𝐸𝑥𝑐𝑙𝑢𝑠𝑖𝑜𝑛s

b) NET INCOME TAXATION — certain deductions are allowed and

subtracted from the aggregate of incomes not subject to final tax, and the
tax computed based on the resulting net income.
NET INCOME = Gross Income – Deductions

c) TAXABLE INCOME
𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 – 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠, 𝐿𝑜𝑠𝑒𝑠, 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛s

d.) Sources of Income Subject to Tax

1. Compensation Income
It refers to all remuneration for services rendered by an employee
for his employer, unless specifically excluded under the Tax Code.

First Lepanto v. CIR 2013

The non-inclusion of the names of some of petitioner’s directors in

the company’s Alpha List does not ipso facto create a presumption that
they are not employees of the corporation, because the imposition of
withholding tax on compensation hinges upon the nature of work
performed by such individuals in the company.

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 In Kind:

a. Stock Options. Stock options are taxable as compensation income

taxed only if there is a benefit to the employee such as when he can buy
the share at a more favorable price than the public. The tax will be on the
amount of the difference between the book value or the FMV of the
stock, whichever is higher, and the exercise price. It is imposed whether
or not the stock option is exercised.
b. Promissory Notes. Equivalent to the face value of the promissory
note, unless it is discounted. For a discounted promissory note, the cash
discounted value.
c. Cancellation of Debt. Considered an income when you render
services and in exchange, your debt is forgiven.
d. Tax Liability. When the employer shoulders your tax on
compensation instead of you getting less than your gross monthly salary.

COURAGE v. CIR 2018 En Banc

Withholding tax on compensation applies to the Government of the

Philippines, including its agencies, instrumentalities, and political
subdivisions.

Withholding shall be made by the officer or employee having control of

the payments or by any officer or employee duly designated for such
purpose.

2. Fringe Benefits
Any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee (except rank and file
employees)

1. Housing
2.Expense Account
3. Vehicle of any kind
4. Household Personnel
5. Interest on loan
6. Membership Fees
7. Expense for Foreign Travel
8. Holiday and Vacation Expense
9. Educational Assistance
10. Life or Health Insurance

TN: This list is NOT exclusive. Conditions for Fringe Benefits to be

taxable

a. Given to managerial or supervisory employees;

b. Good, service furnished or granted in cash or in kind;
c. Must NOT be for the benefit or convenience of the employer.

Exceptions (Not taxable):

1. AFP, Navy, Air Force;

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 2. Housing unit inside or within a maximum of 50 meters from
perimeter of business;
3. Temporary housing = 3 months or less;
4. Granted to rank and file.

EXPENSE ACCOUNT

a. In general, expenses incurred by EE (EMPLOYEE) but are paid

by his ER (EMPLOYER) are taxable, except when:

i. They are duly receipted;

ii. In the name of ER; and
iii. Do not partake the nature of a personal expense;

b. Expenses paid for by EE, but reimbursed by ER are taxable,

except when (same as a);

c. Personal expenses of EE paid for or reimbursed by ER are taxable,

regardless if they are receipted or not in the name of ER;

d. RATA are NOT taxable fringe benefits, but are taxable compensation
income:

i. Fixed in amounts;
ii. Regularly received by EE;
iii. Part of Monthly compensation income.

MOTOR VEHICLES

Case Monetary Value

Purchases vehicle in the name of EE Acquisition Cost

Provides EE with cash for purchase Cash received by EE

Shoulders a portion of the purchase price Amount shouldered

Purchases car on installment in the name of EE Acquisition cost (excl interest) / 5 years.

Acquisition cost of all motor vehicles not normally used in business /

Owns a fleet of vehicles for the use of EEs
5 years x 50%

Leases and maintains fleet of vehicles Amount of rent x 50%

HOUSEHOLD EXPENSES

For household personnel, such as salaries of household help,

personal driver of the employee, or other similar personal expenses.

INTEREST ON LOAN at less than Market Rate

Market rate is at 12%.

MEMBERSHIP FEES

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 a. Should not be pursuant to the nature of the business of ER;
b. Should not be necessary for the position.

EXPENSES FOR FOREIGN TRAVEL

a. Reasonable business expenses for the purpose of attending

business meetings or conventions are NOT taxable Fringe Benefits.
- Inland travel expenses must not exceed 300 USD, not including lodging
cost.
b. Economy and business class NOT taxable. 30% of cost of First-
class ticket taxable.
c. There should be documentary evidence proving the travel was in
connection with a meeting or convention. Otherwise, taxable FB.
d. If for the family members of EE, paid by ER, taxable.

HOLIDAY AND VACATION EXPENSES

Everything is considered as fringe benefit since it is not pursuant to

the purpose of the business of the employer.

EDUCATIONAL ASSISTANCE To the EE:

GR: Taxable; EXC:

1. Directly connected with ER’s trade, business or

profession;
2. There is a written contract to the effect that EE is
obliged to remain in the employ of ER for a mutually agreed
period.

To the Dependent of EE:

GR: Taxable;

EXC: Assistance provided through a competitive scheme.

LIFE OR HEALTH INSURANCE

LIFE OR HEALTH INSURANCE

GR: Taxable;

EXC:
a)  Pursuant to existing law, i.e. SSS, GSIS; AND
b)  Cost of premiums borne by ER for the group insurance
of EEs.

Beneficiary

1. Heir — income of EE;

2. If EE managerial or supervisory — FB subject to tax;
3. Company — NOT Fringe Benefit;
4. For Group of EEs — NOT Fringe Benefit.

17
 Exemption from FBT

1)   Authorized and exempted under the NIRC or special laws;

2) For EE’s retirement, insurance and hospitalization (GROUP
INSURANCE);
3)  Given to Rank and File;
4)  Required by the nature of, or necessary to the trade, business or
profession of ER;
5)  For the convenience of ER;
6)  De minimis benefits

DE MINIMIS

Are of relatively small value and are offered or furnished merely as a

means of promoting goodwill, contentment or efficiency of his employees.

Threshold of P90,000

The list of de minimis benefits is exclusive. The threshold now

under the TRAIN Law is P90,000. The amount in excess of P90,000
will be subject to the normal income tax rate or fringe benefit tax, as
the case may be.

3. Professional Income
Professionals. — refer to persons who derive their income from
the practice of their profession.
4. Income from Business
1) Self-employment income 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
by which he is a member. 
2) Business is any activity that entails the time, attention and effort
of an individual or group of individuals for livelihood or profit.
5. Income from Dealings in Property
Types of Gains 
1) CAPITAL GAINS- Gains or income from the sale or exchange
of capital assets, including:
a. Income from dealings in shares of stocks or domestic
corporation Whether or not through the stock exchange;
b. Income from dealings in real property located in PH;
c. Income from dealings in other capital assets. 
2) ORDINARY GAINS- Gains or income from the sale or
exchange of properties which are not capital assets.
a. Business income;
b. Compensation income;

18
 c. Passive income;
d. Others.

CIR v. Ocier 2018, G.R No. 192023, November 21, 2018. 

The taxpayer is liable to pay capital gains taxes for the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation
except if the sale or disposition is through the stock exchange. For this
purpose, the term disposition includes any act of disposing, transferring or
parting with, or alienation of, or giving up of property to another.

Republic v. Sps Bunsay 2019, G.R No. 205473, December 10,

2019. 
CGT, being a tax on passive income, is imposed by the NIRC on
the seller as a consequence of the latter's presumed income from the sale or
exchange of real property. In case of transfer by expropriation, the
expropriating authority shall shoulder the CGT, other taxes and fees as part
of the just compensation due to the affected owner of the property.

6. Passive Investment Income

➔It is an income subject to FWT.
➔The recipient is not required to include the income in his gross
income nor in his taxable income.
➔Taxpayer is not required to file ITR if his income consists solely
of income subject to final tax.
Examples of passive investment income:
a) Interest income from bank deposit;
b) Royalties;
c) Dividend received from DC by an individual or NRFC;
d) Prizes of > Php 10K;
e) Winnings except sweepstakes and lotto;
f) Partner’s share from the net income after tax of business
partnership, joint account, joint venture or consortium.
Interest- amount of compensation paid for the use of money
or forbearance from such use. However, interest income
which are already subject to final tax need not be included in
the computation for a taxpayer’s annual ITR.
Dividend - any distribution made by a corporation to its
shareholders out of its earnings or profits and payable to its
shareholders, whether in money or in other property. (Sec
73)

19
 1) Cash dividend — paid in given sum of money;
2) Property dividend — one paid by a corporation in
securities (not its own stock) or other property;
3) Stock dividend — one paid by a corporation with
its OWN stock.

GENERAL RULE: NOT taxable since they are considered

unrealized gain.
EXCEPTIONS:
a) Change in the stockholder’s equity, right or interest in the
net assets of the corporation;
b) Recipient is other than the shareholder. Stock dividend is
taxable to the usufructuary.
c) Cancellation or redemption of shares of stock;
d) Distribution of treasury stocks;
e) Dividends declared in the guise of treasury stock dividend
to avoid income taxation;
f) Different classes of stocks were issued.
4) Liquidating dividend — one resulting from the
distribution by a corporation of all its property or
assets in complete liquidation or dissolution.
Generally a return of capital, and hence, not income.
However, it is taxable income with respect to the
excess of amount received over cost of the share
surrendered.

Rules on redemption of share of stock 

NOT taxable —
a) Shares are redeemed in the absence of the availability of
unrestricted earnings;
b) Not in the nature of a recurring return on stock;
c) The source of redemption is the original capital subscription
upon establishment of the corporation or initial capital investment
in an existing enterprise
Taxable —
a) The redeemed shares are from stock dividend declarations other
than as initial capital investment.
b) There is redemption or cancellation; the transaction involves
stock dividends; and the “time and manner” of the transaction
makes it essentially equivalent to a distribution of taxable
dividends.

20
 Royalty income
Any payment of any kind received as consideration for the use of or
right to use:
1) Any patent, trademark, design or model;
2) Secret formula or process;
3) Industrial, commercial or scientific equipment;
4) Information concerning industrial, commercial or scientific
experience.
Rental income
Fixed sum either in cash or property equivalent, to be paid at a
definite period for the use or enjoyment of a thing or right. Value of
permanent improvements made by lessee on leased property that
will become the property of the lessor upon the expiration of the
lease. The lessor shall report such an income under any of the
following methods:
1) Outright method — FMV of the completed building or
improvement shall be reported as additional rent income. 
2) Spread out method — Allocate the depreciated value over the
remaining term of the lease contract.
How about advance rentals? 
1) Prepaid rentals — taxable if so received under a claim of right
and without restriction as to use. 
2) Security deposit — not taxable unless lessee violates any
provision of the contract. 
3) Loan — not taxable.

7. Annuities, Proceeds from Life Insurance or Other Types of Insurance

Annuity
It refers to the periodic instalment payments of income or pension
by insurance companies during the life of a person or for a guaranteed fixed
period of time, whichever is longer, in consideration of capital paid by him.
The portion representing return of premium is not taxable while that
portion that represents interest is taxable.
Proceeds from life insurance
General Rule:
Amounts received under a life insurance, endowments, annuity
contact, whether in a single sum or in instalments paid to the beneficiaries
upon the death of the insured are excluded from the gross income of the
beneficiary.

21
 Exceptions:
1. If such amounts, when added to amounts already
received before the taxable year under such contact,
exceed the aggregate premiums or consideration paid,
the excess shall be included in the gross income.
NOTE: However, in the case of a transfer for valuable
consideration by assignment or otherwise, of a life insurance, endowment
or annuity contract or any interest therein, only the actual value of such
consideration and the amount of the premiums and other sums
subsequently paid by the transferee are exempt from taxation.

2. Interest payments thereon if such amounts are held by

the insurer under an agreement to pay interest shall be
taxable. If paid to a transferee for a valuable
consideration, the proceed are not exempt.

8. Prizes and Awards

Generally, prizes exceeding P10,000.00 and other winnings from
sources within the Philippines shall be subject to 20% final withholding
tax, if received by a citizen, resident alien or non-resident engaged in trade
or business in the Philippines. If the recipient is a non-resident alien not
engaged in trade or business in the Philippines, the prizes and other
winnings shall be subject to 25% final withholding tax. If the recipient is a
corporation’s operating income and the net income is subject to 30%
corporate income tax.

PRIZES AND AWARDS EXEMPT FROM INCOME TAX

1. Prizes and awards made primarily in recognition of religious,

charitable, scientific, educational, artistic, literary, or civic
achievement provided, the following conditions are met:
a. The Recipient was selected without any action on his
part to enter the contest or proceeding; and
b. The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
2. All Prizes and awards granted to athletes in local and
international sport competitions and tournaments whether held
in the Philippines or abroad and sanctioned by their national
sports associations.

NOTE: The national sports association referred to by law that

should sanction said sport activity is the Philippine Olympic Committee.
3. Prizes that winning inventors received from the nationwide
contest for the most innovation New and Renewable Energy

22
 Systems jointly sponsored by the PNOC and other organization
for during the first.

9. Pensions, Retirement Benefit or Separation Pay

It refers to the amount of money received in lump sum or on
staggered basis in consideration of services rendered after an individual
reaches the age of retirement.
Pension being part of gross income is taxable
To the extent of the amount received except if there is a BIR approved
pension plan (NIRC, Sec. 32 B (6).
The amounts that do not qualify as exclusions are considered as part
of income subject to tax.

10. Income from Any Source

Condonation of indebtedness
Cancellation or forgiveness of debt may amount to
a) Payment of income — taxable;
b) Payment of dividends — taxable;
c) Gift — exempt.

Recovery of accounts previously written off

Recovery of bad debts previously allowed as deduction in the preceding
years shall be included as part of the gross income in the year of recovery
to the extent of the income tax benefit of said deduction. (Sec 34[e][1])

Receipt of tax refunds or credit

Taxes which were previously claimed and allowed as deductions but were
subsequently refunded or granted as tax credit should be declared as part of
gross income of that year. Except
a) Estate and donor’s tax;
b) Income, war-profit and excess profit taxes imposed by a foreign country;
c) Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed;
d) Stock transaction tax;
e) Taxes which are not allowable as deductions under the law.

e.) Exclusions
1. Taxpayers Who May Avail
1) Life Insurance. — The proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the insured, whether in a single
sum or otherwise, but if such amounts are held by the insurer under an
agreement to pay interest thereon, the interest payments shall be included
in gross income.
➔ If the company insures its employee and makes the latter’s
estate the beneficiary, THE PREMIUM IS TAXABLE,
while the proceeds are NOT TAXABLE.

23
 ➔ When taxable?
a. Insurer and insured agreed that the amount of the proceeds shall be
withheld by the insurer with the obligation to pay interest in the same – the
interest is the one subject to tax.
b. There is transfer of the insurance policy.

General Rule: NOT taxable regardless of the beneficiaries

Conditions:
1. Paid to heirs;
2. Paid upon death of the insured;
3. Paid in a single sum or in installment.

EXC: (When taxable)

1. Used to secure money obligation;
2. Transfer for valuable consideration

𝐼𝑁𝐶𝑂𝑀𝐸 = 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 – (𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 + 𝑃𝑟𝑒𝑚𝑖𝑢𝑚𝑠 𝑃𝑎𝑖𝑑)

2) Amount Received by Insured as Return of Premium. —

The amount received by the insured, as a return of premiums paid by him
under life insurance, endowment, or annuity contracts, either during the
term or at the maturity of the term mentioned in the contract or upon
surrender of the contract.

𝐼𝑁𝐶𝑂𝑀𝐸 = 𝐸𝑛𝑑𝑜𝑤𝑚𝑒𝑛𝑡 – 𝑃𝑟𝑒𝑚𝑖𝑢𝑚𝑠 𝑃𝑎𝑖𝑑

3) Gifts, Bequests, and Devises. — The value of property acquired by

gift, bequest, devise, or descent:

Provided, however, That income from such property, as well as gift,

bequest, devise or descent of income from any property, in cases of
transfers of divided interest, shall be included in gross income.

4) Compensation for Injuries or Sickness. — amounts received, through

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

EXC (Taxable):
1. Actual damages for loss of anticipated profits;
2. Moral and exemplary damages awarded as a result of breach of contract;
3. Interest for non-taxable damages above;
4. Damages as compensation for unrealized income.

5) Income Exempt under Treaty. — Income of any kind, to the extent

required by any treaty obligation binding upon the Government of the
Philippines.

6) Retirement Benefits, Pensions, Gratuities, etc.

a) Retirement benefits received under RA No. 7641 and those

received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan maintained

24
 by the employer:

REQUISITES:
1. At least 50 years old;
2. At least 10 years of service in same company (aggregate, not
necessarily continuous);
3. Reasonable private benefit plan;
4. In the nature of pension, plan, profit sharing plan, stock bonus or
gratuity;
5. Approved by the BIR;
6. Employer must give contribution and must be established for the
common benefit of ALL.
7. Availed of only ONCE. (except if 2nd employer is Government —
still exempt)

b) Any amount received by an official or employee or by his heirs

from the employer as a consequence of separation of such official
or employee from the service of the employer because of death
sickness or other physical disability or for any cause beyond the
control of the said official or employee.

c) The provisions of any existing law to the contrary

notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to reside
permanently in the Philippines from foreign government agencies
and other institutions,
private or public.

d) Payments of benefits due or to become due to any person

residing in the Philippines under the laws of the United States
administered by the United States Veterans Administration.

e) Benefits received from or enjoyed under the Social Security

System in accordance with the provisions of Republic Act No. 8282.
f) Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by
government officials and employees.

For the retirement benefits to be exempt from the withholding

tax, the taxpayer is burdened to prove the concurrence of the following
elements:
1) a reasonable private benefit plan is maintained by the employer;
2) the retiring official or employee has been in the service of the same
employer for at least ten (10) years;
3) the retiring official or employee is not less than fifty (50) years of age at
the time of his retirement;
4) the benefit had been availed of only once.

7) Miscellaneous Items. —
a) Income Derived by Foreign Government. — Income derived from
investments in the Philippines in loans, stocks, bonds or other domestic securities,
or from interest on deposits in banks in the Philippines by

25
 1. foreign governments,
2. Financing institutions owned, controlled, or enjoying refinancing from
foreign governments, and
3. international or regional financial institutions
established by foreign governments.

b) Income Derived by the Government or its Political Subdivisions. — Income

derived from any public utility or from the exercise of any essential governmental
function accruing to the Government of the Philippines or to any political
subdivision thereof. GOCC must be engaged in proprietary activity for it to be
TAXABLE.

c) Prizes and Awards. — Prizes and awards made primarily in recognition of

religious, charitable, scientific, educational, artistic, literary, or civic
achievement but only if:

1. The recipient was selected without any action on his part to enter the
contest or proceeding; and
2. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.

d) Prizes and Awards in Sports Competition. — All prizes and awards granted
to athletes in local and
international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned by their national sports
associations.

e) 13th Month Pay and Other Benefits. — Gross benefits received by officials
and employees of public and private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed Ninety thousand pesos
(P90,000) which shall cover:

1. Benefits received by officials and employees of the national and local

government pursuant to Republic Act No. 6686;
2. Benefits received by employees pursuant to Presidential Decree No. 851,
as amended by Memorandum Order No. 28, dated August 13, 1986;
3. Benefits received by officials and employees not covered by Presidential
Decree No. 851, as amended by Memorandum Order No. 28, dated August
13, 1986
4. Other benefits such as productivity incentives and Christmas bonus.

f) GSIS, SSS, Medicare and Other Contributions. — GSIS, SSS, Medicare and
Pag-IBIG contributions, and union dues of individuals.

g) Gains from the Sale of Bonds, Debentures or other Certificate of

Indebtedness. — Gains realized from the same or exchange or retirement of
bonds, debentures or other certificate of indebtedness with a maturity of more
than five (5) years.

➔ Debentures are used for bonds, backed by general credit of the issuer
rather than a particular asset. They are unsecured liabilities. This is like a bank
letting someone owe money without any collateral.

h) Gains from Redemption of Shares in Mutual Fund.

— Gains realized by the investor upon redemption of shares of stock in a mutual
fund company.

26
 i) Income Derived from the Sale of Gold Pursuant to RA No. 7076. — Income
derived from the following transactions pursuant to the “People‘s Small-scale
Mining
Act of 1991”:
i. The sale of gold to the BSP by registered small-scale miners and accredited
traders and
ii. The sale of gold by registered small-scale
miners to accredited traders for eventual sale
to the BSP (RA 11256)

Rationale:
Generally, they are excluded because they do not fall within the definition of income for
income tax purposes or a provision of the Tax Code or special law exempts them from
income tax.

2. Distinguished from Deductions and Tax Credits

1. Exclusions from gross income refer to a flow of wealth to the taxpayer which
are not treated as part of gross income, for purposes of computing the taxpayer’s
taxable income either because it is exempted by the constitution, by statute, or it
does not come within the definition of income.
2. Deductions from gross income are the amounts which the law allows to be
deducted from gross income in order to arrive at net income.
3. Tax credits are directly deducted from tax liability

4.) Deductions from Gross Income

27
 Deductions – amounts allowed to be subtracted from Gross Income to arrive at
taxable income in the ITR
Taxpayers may choose NOT TO AVAIL of the deduction
If deductions are claimed, the burden of proving the legality and
correctness of the deductions rests upon the taxpayer. The taxpayer has the
obligation to substantiate with receipts and other evidences every item of
deduction when required.

Who are not allowed to avail of the deductions under Sec 34?
Taxpayers earning compensation income arising from personal services
rendered under an employer-employee relationship.
1. Citizens and Resident Aliens whose income is purely
compensation income;
2. NRA-NETB;
3. NRFC.

General Rule — Deductions

1) Expenses;
2) Interest;
3) Taxes;
4) Losses;
5) Bad Debts;
6) Charitable Contributions;
7) Research and Development;
8) Pension;
9) Depreciations;
10) Depletion.

EXPENSES
Kinds [CARTERS]

a) Compensation;
1. Must be reasonable;
2. Payment for actual services rendered.
Additional for Bonuses:
3. Made in good faith;

4. Consider:
a. Nature of Business;

28
 b. Financial capacity of taxpayer; AND
c. Extent of services rendered;
5. General economic condition

b) Advertising and Promotional Expense;

To be deductible outright:
i) Must be reasonable; AND
ii) Incurred to stimulate current sales and not establish
goodwill or future sales.

c) Rent;
i) Required as condition for continued use or possession;
ii) Purpose is for trade, business, profession;
iii) Taxpayer not owner of property leased;
iv) Subject to withholding tax of 5%.

d) Traveling Expense;
i) Reasonable and necessary;
ii) Incurred or paid while away from home - station
assignment or principal place of business;
iii) In the conduct of trade or business.

e) Entertainment, Amusement and Recreational;

i) Paid or incurred during taxable year;
ii) In carrying or which are directly attributable to the development,
management, operation and/or conduct of the trade, business or exercise of
profession;
iii) Supported by adequate invoices or receipts;
iv) Not contrary to law, public policy or moral;
v) Not a bribe;
vi) Properly withheld appropriate tax;
vii) Limitation:

1) Sale of goods = 0.5% of net sales;

2) Service = 1% of net revenue.

f) Repair and Maintenance;

i) Ordinary - cost of repair increases the life of an
asset for a period not more than 1 year;
ii) Extraordinary - > 1 year; Capitalized, subject to
depreciation.
g) Supplies and Materials.
- Must be actually consumed during the taxable year.

h) Litigation Expense

29
- If incurred in the defense or protection of title = capital in nature, NOT
deductible;
- If ordinary and necessary in pursuit of business = deductible.

i) An additional deduction from taxable income of one-half (1/2) of the

value of labor training expenses incurred for skills development of
enterprise-based trainees enrolled in public senior high schools, public
higher education institutions, or public technical and vocational institutions
and duly covered by an apprenticeship agreement.
Such deductions shall not exceed ten percent (10%) of direct labor wage.
Option to Private Educational Institutions:
a) Outright Method; OR
b) Spread-out Method = subject to depreciation.

CIR v. General Foods on Advertising Expense

WON the subject media advertising expense for “Tang” incurred by
respondent corporation was an ordinary and necessary expense fully
deductible under the NIRC. Or was it a capital expenditure, paid in order to
create “goodwill and reputation” for the respondent corporation and/or its
products, which should have been amortized over a reasonable period?

To be deductible from gross income, the subject advertising expense

must comply with the following requisites:

a) the expense must be ordinary and necessary;

b) it must have been paid or incurred during the taxable year;
c) it must have been paid or incurred in carrying on the trade or business of
the taxpayer; and
d) it must be supported by receipts, records or other pertinent papers.

The Commissioner, as upheld by the Court, maintains that the subject

advertising expense was not ordinary on the ground that it failed the two
conditions set by U.S. jurisprudence:
1. first, “reasonableness” of the amount incurred and
2. second, the amount incurred must not be a capital outlay to create
“goodwill” for the product and/or private respondent’s business.

Otherwise, the expense must be considered a capital expenditure to be

spread out over a reasonable time.

There being no hard and fast rule on the reasonableness of an advertising

expense, the right to a deduction depends on a number of factors such as
but not limited to:
1. the type and size of business in which the taxpayer is engaged;
2. the volume and amount of its net earnings;
3. the nature of the expenditure itself;
4. the intention of the taxpayer and the general economic conditions.

30
 It is the interplay of these, among other factors and properly weighed, that
will yield a proper evaluation. The subject media advertising expense for
“Tang” was almost double the amount of respondent corporation’s general
and administrative expenses. We find the subject expense for the
advertisement of a single product to be inordinately large. Therefore, even
if it is necessary, it cannot be considered an ordinary expense deductible
under then Section 29 (a) (1) (A) of the NIRC.

Advertising is generally of two kinds:

1) advertising to stimulate the current sale of merchandise or use of
services and
2) advertising designed to stimulate the future sale of merchandise or use of
services.

The second type involves expenditures incurred, in whole or in part,

to create or maintain some form of goodwill for the taxpayer’s trade
or business or for the industry or profession of which the taxpayer is
a member.

If the expenditures are for the advertising of the first kind, then,
except as to the question of the reasonableness of the amount, there
is no doubt such expenditures are deductible as business expenses.
If, however, the expenditures are for advertising of the second kind,
then normally they should be spread out over a reasonable period of
time.

INTEREST

Arbitrage rule
The taxpayer’s allowable deduction for interest expense shall be reduced by an
amount equal to 33% of the interest income earned by him which has been subjected to
final tax.

Theoretical interest
An interest computed for the purposes of determining the opportunity cost of
investing in a business. This is not paid or incurred. Theoretical interest income and
theoretical interest expense is no longer applicable in our jurisdiction since the interest
must be stipulated in writing to be demandable.

Non-deductible interest expense

1. Interest expense on preferred stock;
2. When there is no agreement in writing to pay interest;
3. On loan entered into between related taxpayers;
a. Members of family
i. Spouses;
ii. Siblings;
iii. Descendants and ascendants.
b. Between 2 corporations owned and controlled by 1 individual;
c. Between a corporation and its majority shareholder;
d. Parties to a trust
i. Grant or Fiduciary;
ii. One grantor, different fiduciaries;
iii. Beneficiary and Fiduciary.
4. Interest paid or calculated for cost-keeping purposes;
5. Paid in advance through discount;
6. On obligation to finance petroleum exploration;
7. On unclaimed salaries of employees;

31
8. 33% of the interest income subject to final tax.

TAXES
Exceptions
1) Special Assessment;
2) Income Tax;
3) Not connected with trade, business, profession;
4) Estate, Donor’s;
5) VAT;
6) Final Taxes;
7) Excess electric consumption tax;
8) Foreign income tax, war profits and excess profits tax - if used as tax credit;
9) Paid for commodities not connected with business.

Who may claim tax credit for taxes of foreign countries

1) Resident Citizens;
2) Domestic Corporations;
3) Members of GPPS;
4) Beneficiaries of estates and trusts.

Options of Taxpayer qualified for a credit

1) Deducting the foreign income tax from gross income; or
2) Claiming tax credit.

Limitations on Credit
a) Per Country;
b) Global.

LOSSES
NET OPERATING LOSS CARRY OVER (NOLCO).

The net operating loss of the business or enterprise for any taxable year
immediately preceding the current taxable year, which had not been previously
offset as deduction from gross income shall be carried over as a deduction from
gross income for the next three (3) consecutive years immediately following the
year of such loss.

When NOLCO is not deductible

1. Incurred during tax holiday;
2. Tax is based on gross income or receipts;
3. OSD is claimed;
4. MCIT is imposed;
5. Substantial change in ownership (75%).

32
LOSSES ARISING FROM SECURITIES.

When the securities which can be in the form of shares of

stocks or loan receivables be considered as worthless, the losses can
be deducted. It will be worthless when the company loses
operations in which the shares belong.

China Banking Corp. v. CA on Worthless Securities

An equity investment is a capital, not ordinary, asset of the investor the sale
or exchange of which results in either a capital gain or a capital loss. The gain or
the loss is ordinary when the property sold or exchanged is not a capital asset.
When the shares held by such investor become worthless, the loss is deemed to be
a loss from the sale or exchange of capital assets.

A capital gain or a capital loss normally requires the concurrence of two

conditions for it to result:
1) There is a sale or exchange; and
2) The thing sold or exchanged is a capital asset.

When securities become worthless, there is strictly no sale or exchange but

the law deems the loss anyway to be "a loss from the sale or exchange of capital
assets.” Capital losses are allowed to be deducted only to the extent of capital
gains, i.e., gains derived from the sale or exchange of capital assets, and not from
any other income of the taxpayer.

In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation,
is a subsidiary corporation of petitioner bank whose shares in said investee
corporation are not intended for purchase or sale but as an investment.
Unquestionably then, any loss therefrom would be a capital loss, not an ordinary
loss, to the investor.

The exclusionary clause found in the text of the law does not include all
forms of securities but specifically covers only bonds, debentures, notes,
certificates or other evidence of indebtedness, with interest coupons or in
registered form, which are the instruments of credit normally dealt with in the
usual lending operations of a financial institution. Equity holdings cannot come
close to being, within the purview of "evidence of indebtedness".

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 Verily, it is for a like thesis that the loss of petitioner bank in its equity
investment
in the Hongkong subsidiary cannot also be deductible as a bad debt. The shares of
stock in question do not constitute a loan extended by it to its subsidiary (First
CBC Capital) or a debt subject to obligatory repayment by the latter, essential
elements to constitute a bad debt, but a long term investment made by CBC.

In sum —
a) The equity investment in shares of stock held by CBC of approximately 53% in
its Hong Kong subsidiary, the First CBC Capital (Asia), Ltd., is not an
indebtedness, and it is a capital, not an ordinary, asset.
b) Assuming that the equity investment of CBC has indeed become "worthless,"
the loss sustained is a capital, not an ordinary, loss.
c) The capital loss sustained by CBC can only be deducted from capital gains if
any derived by it during the same taxable year that the securities have become
"worthless."

LOSSES FROM SHARE TRANSACTIONS.

Losses from share transactions can be claimed as deduction upon realization of the
loss. Shrinkage in value of shares of stocks cannot be used to claim for the deduction as
loss because you haven't realized it yet. Only if you sold it then if there is any loss, you
can claim it as a
deduction.

LOSSES FROM WASH SALES.

A wash sale is the buying or selling of the same type of stock or security at a loss
within
30 days before the date of sale or 30 days after date of sale. It cannot be claimed as
allowable deduction. A wash sale is a price manipulation activity prohibited under the
SRC. It is a practice where a person or entity who is not a dealer of securities disposes of
such securities. It occurs when the taxpayer disposes shares of stock or securities and
within 30 days before or after such disposition acquires substantially identical stocks or
securities. That‘s why it is termed as a 61-day sale.

WAGERING LOSSES.
Losses from wagering transactions shall be allowed only to the extent of the gains
from such transactions.

CASUALTY LOSSES.
The loss is caused by fortuitous event or force majeure. Requisites for deductibility
a. Report to taxing authorities within 45 days from occurrence of the loss;
b. Related to trade and business;
c. Evidenced by a closed and completed transaction (perfected sale);
d. Actually sustained during the taxable year;
e. Must not be compensated by insurance or other forms of indemnity.

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 ABANDONMENT LOSSES.
In the event a contract area where petroleum operations are undertaken is partially
or wholly abandoned, all accumulated exploration and development expenditures
shall be allowed as a deduction.

BAD DEBTS
When are bad debts ascertained to be worthless? A court order is necessary and the
regular procedure is as follows:
1. Creditor sends a statement of Account to the debtor which states the maturity
date and amount due;
2. If no payment is made, then the creditor sends a collection letter to the debtor;
3. Still no payment is made, then the creditor‘s lawyer will send a formal demand
letter to the debtor;
4. Still failed to pay, then an action is led in court for collection;
5. No payment despite the order of court, then the account will be considered as
bad debt.

CHARITABLE CONTRIBUTIONS

Kinds of Charitable Contributions

1. Ordinary – those subject to limitations as to the amount deductible from gross income
a. 5% for Corporations;
b. 10% for Individuals.
2. Special – deductible in full from gross income

Conditions if Recipient is an NGO

a. Organized and operated exclusively for the aforementioned purposes or a
combination thereof, no part of the net income of which inures to the benefit of
any private individual;
b. The donation must be utilized not later than the 15th day of the 3rd month
following the close of its taxable year.(taxable year of the NGO concerned not the
taxpayer);
c. The administrative expense must not exceed 30% of total expenses;
d. Upon dissolution, assets would be distributed to another nonprofit domestic
corporation organized for similar purpose or purposes, or to the state for public
purpose ,or would be
distributed by a court to another organization to be used in such manner as in the
judgment of said court shall best accomplish the general purpose for which the
dissolved organization was organized.

RESEARCH AND DEVELOPMENT

The deduction shall not apply

1. Any expenditure or the acquisition or improvement of land, or for the
improvement of property to be used in connection with research and development
of a character which is subject to depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of ore or other mineral, including oil or
gas.

TYPES OF R&D

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 1. Not chargeable to capital account — deducted outright,
Ex. Project feasibility study;
2. Chargeable to a capital account — spread out or amortized over a period
of 60 months.

PENSION
Current Service Cost is the cost of the services rendered from the time the
pension trust is set up until its retirement.Past Service Cost is the cost of the
services relating to those prior to the setting up of the pension trust.

DEPRECIATION

Depreciable amount or cost is the cost of an asset or other amount

substituted for cost, less its residual value. Salvage value is the estimated net
amount currently obtainable if the asset is at the end of the useful life. It is the
value of the asset at the end of its useful life.
Useful life is either the period over which an asset is expected to be
available for use by the entity, or the number of production or similar units
expected to be obtained from the asset by the entity.

METHODS OF DEPRECIATION
1. Straight line method
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒 𝑈𝑠𝑒𝑓𝑢𝑙
𝐿𝑖𝑓𝑒
2. Declining balance method;
3. Sum of the years digit method.

DEPLETION

The exhaustion of natural resources like mines and oil and gas as well as
the result of production or severance from such mines or wells. These are non-
replaceable assets. This is applicable to wasting asset entities.

Cost Depletion Method

The method allowed under the tax code is the cost depletion
method. This is similar to the unit of production method. The depletable
amount of the wasting asset is divided by the units estimated to be
extracted to obtain a depletion
rate per unit. The depletion rate per unit is then multiplied by the units
extracted during the year to arrive at the depletion for the period. The
depletable amount is equivalent to the cost of the asset less salvage value, if
any.

Essential Factors
1. Basis of the property;
2. Estimated total recoverable units; AND
3. Number of units recovered during the taxable year.

Requisites for Deductibility

Expenses
a. Ordinary and necessary;
b. Paid or incurred during the taxable year;
c. Paid or incurred in carrying on or which are directly attributable
to the development, management, operation and/or conduct of

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the trade, business or exercise of profession;
d. Supported by adequate invoices or receipts;
e. Not contrary to law, public policy or moral;
f. Tax required to be withheld on the expense paid or payable is
shown to have been remitted to the BIR.

Interest
a. There must be an indebtedness;
b. Paid or incurred upon such indebtedness;
c. Must be that of the taxpayer;
d. Connected with the trade, business or profession;
e. Paid or incurred during taxable year;
f. Interest must have been stipulated in writing;
g. Legally due;
h. Not between related taxpayers;
i. Not incurred to finance petroleum operations;
j. Not treated as capital expenditure.

Taxes
a. Paid or incurred during taxable year;
b. In connection with trade, business, profession.

Losses
a. Must be incurred in the trade, business, or profession of the taxpayer;
b. Actually sustained and charged o within the taxable year and not mere
anticipated losses;
c. Evidenced by a closed and completed transaction;
d. Not be compensated by insurance or other forms of indemnity;
e. If partly compensated, only the amount not compensated by insurance is
deductible;
f. In the case of casualty loss, taxpayer must file a sworn declaration of loss
within 45 days after the date of discovery of the casualty or robbery, theft
or embezzlement.

Bad Debt
a. Arise from a valid and subsisting obligation;
b. Ascertained to be worthless;
c. Charged o and uncollectible within the taxable year;
d. Uncollectible in the near future;
e. Arise from trade or business or profession of taxpayer.

Charitable Contributions
a. Contribution or gift must actually be paid;
b. Given to organizations specified in the tax code;
c. Net income of the institution must not inure to the benefit of any private
stockholder or individual;
d. Made within the taxable year;
e. Evidenced by adequate records or receipts;
f. Not exceed 10% in the case of individuals and 5% in the case of a
corporation, of the taxpayer‘s taxable income (except where the
donation is deductible in full) to be determined without the
benefit of the contribution.

Research and Development

a. Incurred during taxable year;
b. In connection with trade or business.

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 Pension
a. Employer must have established a pension or retirement plan to
provide for the payments of reasonable pensions to his employees;
b. Pension plan is reasonable and actuarially sound;
c. Contribution must be made by the employer to the pension
fund;
d. Funded by the employer;
e. Amount contributed must no longer be subject to the control
and disposition of the employer;
f. Payment has not yet been allowed as deduction;
g. Deduction is apportioned in equal parts over a period of 10
consecutive years beginning with the year in which the transfer
or payment is made.

Depreciation
a. Property must be used in trade, business or profession of the taxpayer;
b. There must be depreciable properties;
c. Allowance for depreciation must be reasonable;
d. Depreciation must be charged o during the taxable year;
e. Statement of the allowance must be attached to the return;
f. Method for computing the allowance for depreciation must be
in accordance with the method prescribed by the SOF upon the
recommendation of the CIR.

Depletion
a. Depletable asset — natural resources, i.e. mines, gas and oil wells;
b. Charged o within taxable year;
c. Allowance for depletion is computed in accordance with cost
depletion method.

a.) Concept as Return of Capital

Costs of goods purchased for resale, with proper adjustment for opening and
closing inventories, is deducted from gross sales in computing gross income.

Payment of principal by a debtor to a creditor is deducted from the total amount

received by the latter in order to determine his interest income.

1) Sale of inventory of goods by manufacturers and dealers of properties — That

portion of the receipt representing return of capital is not subject to income tax.
Thus, cost of goods manufactured and sold or cost of sales is deducted from gross
sales and is reflected above the gross income line in profit and loss statement.
2) Sale of stock in trade by a real estate dealer and dealer in securities.
3) Sale of services — Generally, the entire gross receipts of sellers of services are
treated as part of income. However, some have cost of services that must be
deducted from their gross receipt in order to arrive at their gross income.

b.) Itemized Deductions vs. Optional Standard Deduction

1. Optional Standard Deduction or OSD is a standard deduction of an amount not
exceeding 40% of gross sales or receipts (for individuals), or gross income (for
corporations), as the case may be, in lieu of the itemized deductions.
2. It may be availed of by:
a. A citizen;
b. Resident alien;

38
 c. Domestic corporation;
d. Resident foreign corporation;
e. Partnership; and
f. Taxable estate and trust.

In other words, NRAs and NRFCs cannot claim OSD.

3. With the election of OSD, there is no more need to substantiate with receipts.
4. Those not allowed to use OSD are
a. those that are exempt, with no other taxable income; or
b. those with income subject to a special or preferential tax rate.
c. those earning purely compensation income.
5. The taxpayer must signify in his return his intention to elect the OSD. Such election
shall be irrevocable for the taxable year for which the return is made.
6. A general professional partnership and the partners comprising such partnership may
avail of the OSD only once, either by the GPP or the partners comprising the partnership

c.) Items Not Deductible

In computing net income, no deduction shall in any case be allowed in respect to —
1) Personal, living or family expenses;
2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
Does not apply to intangible drilling and development costs incurred in petroleum
operations which are deductible under Sec 34(g)(1).
3) Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made; or
4) Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on by
the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.

Losses from Sales or Exchanges of Property. — In computing net income, no

deductions shall in any case be allowed in respect of losses from sales or exchanges of
property directly or indirectly —

1) Between members of a family. For purposes of this paragraph, the family of an

individual shall include only his brothers and sisters, spouse, ancestors, and lineal
descendants;or
2) Except in the case of distributions in liquidation, between an individual and
corporation more than fifty percent (50%) in value of the outstanding stock of which is
owned, directly or
indirectly, by or for such individual; or
3) Except in the case of distributions in liquidation, between two corporations more than
fifty percent (50%) in value of the outstanding stock of which is owned, directly or
indirectly, by
or for the same individual if either one of such corporations, with respect to the taxable
year of the corporation preceding the date of the sale of exchange was under the law
applicable to
such taxable year, a personal holding company or a foreign personal holding company;
4) Between the grantor and a fiduciary of any trust; or
5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust

39
if the same person is a grantor with respect to each trust; or
6) Between a fiduciary of a trust and beneficiary of such trust.
(Sec 36)

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