General Principles of Income Taxation

NVC Tax Notes | 1
Module 1 consumption or for any other disposition and to

General Principles (Sections 21-23, 42, NIRC) things imported (2) Donor’s Tax; (3) Estate Tax;
DIMAAMPAO | INGLES | MAMALATEO | LIM | LITONJUA | DE VERA
SAN BEDA MEMORY AID 2019 | ASSIGNED CASES | DY RECIT ANS | TABAG (4) Documentary Stamp Tax; (5) Income Tax.1
- use at your own risk -
Q: Which among those enumerated in Sec. 21

A. Sources of Revenue are: (a) direct taxes; (b) indirect taxes?
A:
The following taxes, fees, and charges are
a. Direct taxes are:
deemed to be national internal revenue taxes: 1. Income tax
a. Income tax – a tax on yearly profits arising 2. Documentary stamp tax
from property, profession, trade, and office; 3. Estate Tax
b. Estate tax – a tax levied upon the transfer of 4. Donor’s Tax
the net estate of a decedent to his heirs; 5. Percentage Tax
c. Donor’s Tax – an excise tax imposed on the b. Indirect taxes are:
1. Value-added tax
transfer of property by way of gift inter vivos; 2. Excise tax
d. Value-added tax – a tax on consumption
imposed on each sale, barter, or lease of B. Income Tax Systems
goods, properties, or services in the course of
There are three kinds of income tax systems:
trade or business as they pass along the
distribution chain, culminating with the sale  Global (unitary) tax systems
to the final consumer, and on every Here all items of gross income and
importation of goods, whether in the course deductions2 are reported in one income tax
of trade or business or not; return and a single tax is imposed on all
e. Other percentage taxes – a tax imposed on a income received or earned regardless of the
activity which produced the income.
fixed ratio between the gross sales or receipt
and the burden imposed upon the taxpayer; It taxes all categories of income except
f. Excise taxes – taxes imposed on specified certain passive incomes and capital gains
goods manufactured or produced in the (Tan vs. Del Rosario).
Philippines for domestic sale or consumption
or for any other disposition and to things We follow the global tax system insofar as
compensation income, business and
imported;
professional income, capital gains, passive
g. Documentary stamp taxes – an excise tax incomes, and other income not subject to
upon the privilege, opportunity or facility final tax.
offered at exchanges for transaction of
business. It is an excise tax upon facilities
used in the transaction of business; and 1
The proffered definition of an excise tax as "a tax upon
h. Such other taxes as are or hereafter may be the performance, carrying on, or exercise of some right,
imposed and collected by the BIR (Sec. 21, privilege, activity, calling or occupation (CIR vs. Pilipinas
NIRC). Shell).
2
TRAIN has repealed Sec. 35, NIRC, which previously
granted personal exemptions for taxpayers and additional
Q: In the following enumeration mentioned in
exemptions for their dependents. Said exemptions of
Sec. 21, which are considered excise taxes? individual taxpayers were replaced with the first Php
A: The following are excise taxes: (1) those 250,000 of taxable income which is now subject to 0%
imposed on specified goods manufactured or income tax, practically exempting the first Php 250,000
produced in the Philippines for domestic sale or from income tax (RMC 50-2018).
SAN BEDA UNIVERSITY – COLLEGE OF LAW | MENDIOLA

NVC Tax Notes | 2
 Schedular tax system  Final withholding tax – Php
Here, different types of activities are 200
subjected to different types of tax rates. The Example #1:
tax rates depend on the classification of the  Gross dividend income from
taxable income and the activities which domestic corp. received by
produced the income. resident citizen – Php 50,000
Multiplied by: 10%
There are three general categories of income  Final withholding tax – Php
subject to the scheduler tax system: 5,000
a. Tax base is consideration or fair
Global Income Taxation Schedular Income Taxation
market value at the time of the
The total allowable Separate returns are filed by
sale, whichever is higher. deductions are deducted the recipient of the income
Note: No deduction for cost and from the gross income. except for passive income.
expenses are allowed. The taxpayer is required to The taxpayer is required to
report all income earned file separate tax return for
during a taxable period in each type of income and the
Example: one income tax return tax is computed on per
 Sale of real property which income shall be taxed return or per schedule basis.
classified as capital asset – under same rule of income It provides for different tax
Php 900,000 taxation. treatment of different types
 Fair market value of real of income.
It is based on the aggregate The income from different
property – Php 800,000 income from all sources that sources are not globalized,
 Income tax due: are not subject to final they are treated separately
Php 900,000 x 6% = Php income tax. and are subject to different
54,000 sets of graduated or flat
income tax rates.
Corporate taxpayers adopt Individual taxpayers follow
b. Tax base is net capital gain (i.e., this system. All their income this system. Their income
gross selling price less cost or are globalized and taxed by from different sources are
adjusted basis) the corresponding rate classified and treated
provided under the TRAIN differently.
Act.
Example:
No need to classify taxable There is need to categorize
 Sale of unlisted shares of income. income from different
stock of ABC Corp. – Php sources. The applicable rates
10,000 will depend on the
 Cost – Php 5,000 classification of the taxable
income.
 Income tax due: The globalized income of It itemizes the different
Php 10,000 the taxpayer is subject to a incomes and provides for
less Php 5,000 unitary but progressive and varied rate of taxes are
Gain: Php 5,000 graduated rate of 0% to applied thereto. It has
32%. different rates.
Multiplied by: 15%
 Capital gains tax: Php 750
 Semi-global/semi-schedular system3
c. Tax base is gross income Certain passive income and capital gains are
(without any deduction)
subject to final taxes, while other incomes
are added to arrive at the gross income
Example #1:
(where deductions are used to arrive at the
 Gross interest income on
taxable income).
bank peso deposit – Php
1,000 3
Effective January 1, 2008, the semi-schedular or semi-
Multiplied by: 20% global tax system was adopted under R.A. 8224.

NVC Tax Notes | 3
We follow the semi-global/semi-schedular income after such income has become
system in the Philippines. capital. Susana Paterno has no absolute right
to one-half the income of the conjugal
Schedular tax system can also mean that tax partnership. Not being seized of a separate
rates will differ based on the tax base. estate, Susana Paterno cannot make a
separate return in order to receive the
For instance, global tax system is usually benefit of the exemption which would arise
applied to corporations, as corporations are by reason of the additional tax. As she has no
taxed at a single rate, regardless of the tax estate and income, actually and legally
base; while the scheduler system is applied vested in her and entirely distinct from her
to individuals as they are subjected to husband's property, the income cannot
different tax rates based on their tax bracket. properly be considered the separate income
of the wife for the purposes of the additional
C. Income, In General tax (Madrigal vs. Rafferty).
Income
BAR QUESTION (2009)
In the broad sense, it means all wealth that Q: Raffy and Wena, husband and wife, are
flows into the taxpayer other than as a mere both employed by XXX Corp. After office
return of capital. It includes forms of income hours, they jointly manage a coffee shop at
specifically described as gains and profits, the ground floor of their house. The coffee
including gains derived from the sale or other shop is registered in the name of both
dispositions of capital assets. spouses. What is the correct way to prepare
their income tax return?
Income means cash received or its
Suggested Ans: Raffy will declare his own
equivalent. It is the amount of money coming
compensation income and Wena will declare
to a person within a specific time. It means
hers. The income from the coffee shop shall
something distinct from principal or capital;
be equally divided between them. Each
for while capital is a fund, income is a flow.
spouse shall be taxed separately on their
As used in our income tax law, income refers
corresponding taxable income to be covered
to the flow of wealth (CIR vs. Japan Airlines).
by one consolidated return for the spouse
(Bar Q and A for the Past 10 years,
Income means profit or gains (Madrigal vs.
Dimaampao (2020)).
Rafferty).
A mere advance in the value of property of a
Income includes earnings, lawfully or
person or a corporation in no sense
unlawfully acquired.
constitutes the “income” specified in the law.
Q: should an inchoate right of the wife in Such advance constitutes and can be treated
the conjugal partnership be considered as merely as capital.
her separate income and, thus, should be
Income Capital
reported in a return to be filed by her
Denotes a flow of Fund or property existing at
husband? wealth during a definite one distinct point of time,
period of time. All which can be used in
A: Susana Paterno, wife of Vicente Madrigal, wealth other than as a producing goods or services.
has an inchoate right in the property of her mere return of capital.
husband Vicente Madrigal during the life of Service of wealth Wealth
the conjugal partnership. She has an interest “Fruit” “Tree”
in the ultimate property rights and in the
ultimate ownership of property acquired as

NVC Tax Notes | 4
Hence, cash dividends are taxed as income implies that not all economic gains
because they have been realized/received, constitute taxable income; and
while stock dividends are not taxed as
income because they are merely inchoate as BAR QUESTION (1991)
they are mere anticipation of income. Q: ABC Corp. purchased some years
ago Membership Certificate No. 7 from
Cash dividends are actual receipt of profits; the Calabar Golf Club for Php 300,000.
stock dividends are the receipt of a In September 1985, it transferred the
representation of the increased value of same to Mr. Johnson, its American
assets of a corporation (Fisher vs. Trinidad). computer consultant, to enable him to
avail of the facilities of the club during
Q: Are stock dividends considered income? his stay here in the Philippines. The
A: No, stock dividends are not taxed as consultancy agreement expired two
income. When a corporation or company years later in the meantime, the value
issues "stock dividends" it shows that the of the Club share appreciated and
company's accumulated profits have been what was purchased by the
capitalized, instead of distributed to the corporation at Php 300,000,
stockholders or retained as surplus available commanded a market value of Php
for distribution, in money or in kind, should 800,000 in 1987. Before he returned
opportunity offer. Far from being a home a few days after his tenure
realization of profits of the stockholder, it ended, Mr. Johnson transferred the
tends rather to postpone said realization, in subject share to Mr. James, the new
that the fund represented by the new stock consultant of the firm and the newly
has been transferred from surplus to assets, designated playing representative,
and no longer is available for actual under a Deed of Trust and Assignment
distribution. The stockholder who receives a of Shares, wherein the former
stock dividend has received nothing but a acknowledged the absolute ownership
representation of his increased interest in of ABC Corp. over the share, that the
the capital of the corporation. There has assignment was without any
been no separation or segregation of his consideration and that the share was
interest. All the property or capital of the placed in his name because the Club
corporation still belongs to the corporation required it to be done. Is the
(Fisher vs. Trinidad, CIR, G.R. No. 17518, 30 assignment/transfer of the share from
Oct. 1922). Johnson to James subject to income
tax?
When dealing with money or property, the
questions you should ask are:
SUGGESTED ANS: The assignment or
1. Is this capital or income? transfer of shares from Johnson to
2. Has it been realized/received or is it James is not subject to income tax.
merely inchoate? There has been no real change of
ownership that took place. There
Requisites for Taxability of Income: having been no actual sale or
exchange, no income tax incidence can
1. There must be a gain or profit, be said to have been occurred. In
whether in cash or its equivalent; addition, there was really no income
2. The gain must be realized or received – realized or received considering that in
when income is actually or physically the Deed of Declaration of Trust and
transferred to a person, or Assignment of Shares, the absolute
constructively received by him. This ownership of ABC Computer

NVC Tax Notes | 5
Corporation was explicitly recognized regardless of its source (Limpan Investment
(Mamalateo (2019), p. 165-166). vs. CIR).
Test of Realization Increase in the Value of the Property is NOT

Actual vis-à-vis Constructive Receipt considered as Income
Actual Receipt – When income is actually It is merely unrealized increase in capital.
reduced to possession. The realization of Increase or appreciation in the value of the
gains may take the form of actual receipt property is not even an accrual of income to
of cash. the taxpayer prior to the realization of such
appreciation through the sale or conversion
Constructive Receipt – When income is of the property. No income is derived nor a
credited to the account of or set apart loss incurred by the owner until after the
for a taxpayer and which may be drawn actual sale or other disposition of the
upon by him at any time is subject to tax property in excess of its cost.
for the year during which so credited or
set apart, although not then actually Examples of Income Constructively
reduced to possession. To constitute Received:
receipt in such sense, the income mist be a. Matured interest coupons, due
credited to the taxpayer without any and payable, not yet collected by
substantial limitation or restriction as to the taxpayer;
the time or manner of payment or b. Interest credited on savings bank
condition upon which is to be made (R.R. deposit;
No. 2-40, Sec. 52). c. Dividends applied by the
corporation against the
Income is received not only when it is indebtedness of a stockholder;
actually handed to a person but also when it d. Intended payment deposited in
is merely constructively received by him court (e.g., rental payments
(Limpan Investment Corp. vs. CIR). refused by the lessor, when the
lessee tendered payment and the
Q: Are rental payments deposited with the latter made a judicial deposit of
court due to the refusal of the petitioner to the rental due); and
accept the same deemed constructively e. Distributive share of the profits
received by the latter and should be of a partner in a general co-
reported as rental income? partnership.
A: Yes, petitioner is deemed to have 3. The gain must not be excluded by law or
constructively received such rentals. The treaty.
withdrawal in 1958 of the deposits in court
pertaining to the 1957 rental income is no “Income from whatever source
sufficient justification for the non-declaration derived,” defined
of said income in 1957, since the deposit was All income not expressly excluded or
resorted to due to the refusal of petitioner to exempted from the class of taxable
accept the same, and was not the fault of its income, irrespective of the voluntary or
tenants; hence, petitioner is deemed to have involuntary action of the taxpayer in
constructively received such rentals in 1957. producing the said income, and
The payment by the sub-tenant in 1957 regardless of the source of the income, is
should have been reported as rental income taxable (Gutierrez vs. Collector).
in said year, since it is income just the same

NVC Tax Notes | 6
Examples: amended. These elements must be
a. Income from illegal gambling, theft, present to be subjected to the
embezzlement, drug trafficking and imposition of capital gains tax
smuggling; (Capitol Steel vs. CIR).
b. Income or gain from expropriation of
property;
BAR QUESTION (1991)
Expropriation Q: X owns a half hectare property in
It is deemed complete only upon full Bacoor, Cavite which in 1980 was
payment of just compensation to expropriated by the National
petitioner and ownership over the
Government, through the DPWH.
expropriated land property shall pass
from the owner. The expropriation of After 10 years, X was paid Php
land consists of two stages: 2,000,000 as just compensation plus
(1) Determination of the authority of 6% annual interest by the DPWH but
the government to exercise the minus the withholding tax. Is the
power of eminent domain and action of the DPWH proper?
the propriety of its exercise in Reasons.
the context of the facts involved
in the suit; and
(2) Determination by the court of SUGGESTED ANS: No, the action of
the just compensation for the DPWH is not proper. In the case of
property sought to be taken with Province of Tayabas vs. Perez, ‘just
the assistance of not more than 3 compensation’ was defined as the
commissioners. ‘just and complete equivalent of the
It is only upon the completion of loss which the owner of a thing
these two stages that expropriation expropriated has to suffer by reason
is said to have been completed of the expropriation.’
(Philippines vs. Salem).
Further, in BIR Ruling No. 61-91, ‘just
The transfer of property through
expropriation proceedings and the compensation’ as that which is paid
payment of just compensation4 are by the government equivalent to the
necessary elements of “sale” or value of property at the time of its
“exchange” for purposes of Sec. 24 taking. It is the fair and full
(D) and 56 (A)(3) of the NIRC, as equivalent for the indemnity.
4
The payment of provisional value as a prerequisite to the
issuance of a writ of possession differs from the payment Based on the foregoing it is clear,
of just compensation for the expropriated property. While therefore, that the amount received
the provisional value is based on current relevant zonal after 10 years as just compensation is
valuation, just compensation is based on the prevailing fair
not in any way a profit, gain, or
market value of the property. Provisional value refers to
the preliminary or provisional determination of the value income on the part of X, in the same
of the property. It serves a double-purpose of pre- vein, the 6% annual interest paid by
payment if the property is fully expropriated, and of an DPWH is not an income. The same
indemnity for damages if the proceedings are dismissed. It
partakes of the nature of a penalty or
is not a final determination of just compensation and may
not necessarily be equivalent to the prevailing fair market indemnity due and accruing to X for
value of the property (Capitol Steel vs. Phividec Industrial).

NVC Tax Notes | 7
having been deprived of the use and As to recognition of income (and expenses)
benefit by not being paid of the fair Income is realized upon Income is earned
market value of the property since its receipt of cash or its regardless of whether
taking 10 years ago. Hence, the equivalent including it has been received or
those constructively not.
DPWH should not have withheld
received but not
taxes. including gifts and Note: Expenses are
donations. accounted for in the
c. Compensation for damages period they are
representing loss of expected profits; Note: Only expenses incurred and not in the
d. Bad debts previously written-off but actually paid for shall period they are paid.
subsequently paid; be claimed as
e. Taxes previously deducted as deductions during the
expenses and subsequently year.
refunded5. As to users
Generally used by Generally used by
Recognition of Income taxpayers who do not taxpayers whose nature
Income is recognized when the income has keep regular books of of business uses
been received, either actually or accounts, such as inventories since this
constructively. Revenue from services individuals engaged in method of accounting
rendered is recognized when services are business and practice will correctly reflect
both performed and are billable. It is of profession. income by matching
purchases and
recorded at the amount received or expected
expenses against sales,
to be received (Ericsson Telecommunications such as medium and
vs. City of Pasig). large corporations.
Increase in the Inventory

Kinds of Test in Determining whether Income is
Increase in the inventory at the end of year
Earned for Tax Purposes:
of a taxpayer is considered income to him,
because it is a realization of gain derived 1. Flow of Wealth Test – the test of taxability is
from capital for the use, benefit or disposal the “source” (i.e., the property, activity or
of the property. service that produced the income determines
whether any gain was derived from the
Cash Method vis-à-vis Accrual Method
transaction6).
Cash Method Accrual Method
As to definition 2. Realization/Severance Test – Also known as
A method of A method of the Macomber test. There is no taxable
accounting whereby all accounting for income income until there is a separation of Capital
items of gross income in the period it is of something of exchangeable value, thereby
received during the earned regardless of supplying the realization or transmutation
year shall be accounted whether it has been
6
for such taxable year. received or not. Illustration: (1) If the income is derived from labor or
service – the source of the income is the place where the
labor or service is performed; (2) If the income is derived
5
Taxes are allowed to be deducted from gross income but from capital – the source of income is the place where the
subsequently refunded are taxable; whereas, those that capital is employed or used; (3) If income is derived from
are not allowed to be deducted from gross income and the sale of real property – the source of the income is the
subsequently refunded are exempt from income tax. place where the real property is located.

NVC Tax Notes | 8
which would result in the receipt of income. absolutely known only that the taxpayer has
The essence of the test is that in order for information necessary to compute the
income to be taxed, it is to be severed from amount with reasonable accuracy. The test is
the property from which it was derived.
satisfied where computation remains
3. Claim of Right Doctrine – A taxable gain is uncertain if its basis is unchangeable. The
conditioned upon the presence of a claim of amount of liability does not have to be
right to the alleged gain and the absence of a determined exactly, it must be determined
definite unconditional obligation to return or with reasonable accuracy (CIR vs. Isabela
repay that which would otherwise constitute Corp).
a gain. This is also called the Doctrine of
Ownership, Command or Control (CIR vs.
5. Economic Benefit Test or Doctrine of
Wilcox).
Proprietary Interest – any economic benefit
to the employee that increases his net worth,
In the claim of right doctrine, if a taxpayer whatever may have been the mode by which
receives money or other property and treats it is effected is taxable.
it as its own under the claim of right that the
payments are made absolutely and not 6. Control Test – the power to dispose of
contingently, such amounts are included in income is the equivalent of ownership of it.
the taxpayer’s income, even though the right The exercise of that power to procure the
to the income has not been perfected at the payment of income to another is the
time. It does not matter that the taxpayer’s enjoyment, and hence the realization, of the
title to the property is in dispute and the income by him who exercises it (Helvering vs.
property may later be recovered from the Horst).
taxpayer. If the taxpayer who has included
amounts in income pursuant to the claim of
7. Substantial Alteration Test Theory – There
right doctrine subsequently repays those
must be an exchange of something received
amounts, the taxpayer may be entitled to a
which is essentially different from that which
deduction in the year of repayment (CIR vs.
was parted to the extent of benefit received
Manila Electric Co.).
(i.e., land to cash. Shares of stock to cash,
etc).
4. All-Events Test – For income or expense to
accrue, this test requires: Q: What is the Doctrine of Involuntary
a. The fixing of a right to income or Conversion of Property?
liability to pay; and
A: If the property is involuntarily converted into
b. The availability of the reasonable
accurate determination of such cash and the money is used for buying another
income or liability (CIR vs. Isabela land, the ownership of the other land is a
Cultural). continuity of the ownership of the first lot. The
involuntary disposition of the property and the
Q: What are the requirements that must be
acquisition of a like kind do not make the money
met in order for the All-Events Test to
a “realized property”. But, such money must be
apply?
used for the acquisition of a like kind of property.
A: The test requires that: 1) fixing of a right
to income or liability to pay and 2) the
Q: What is the Equivalent of Cash Doctrine?
availability of the reasonable accurate
A: Payment in the form of services, land, or “in
determination of such income or liability. It
kind” is considered as realized income. The
does not require that the amount be

NVC Tax Notes | 9
amount is the cash equivalent of the thing gift may, however, be subject to donor’s tax
received in kind. since Mr. Francisco and Mr. Gutierrez are not
family members.
Reminders:
 Taxpayer who received by mistake an  An insolvent debtor does not realize taxable
amount in excess of the amount agreed upon income from the condonation of debt. Thus,
– not taxable to him. the amount condoned is not subject to
 If the duty to return by the recipient is not income tax.
clear or is disputed – taxable to him subject
to deduction later. BAR QUESTION (1997)
 Money paid to taxpayer under mistake of fact Q: An insolvent company had an outstanding
or under solution indebiti – not taxable to obligation of Php 100,000 from a creditor.
taxpayer. Since it could not pay the debt, the creditor
 Money found (unknown owner) – under the agreed to accept payment through dacion en
law, must be deposited with the authorities if pago7 a property which had a market value of
nobody claims a portion is returned to the Php 30,000. In the dacion en pago document,
founder. His share is then taxable to him. the balance of the debt was condoned. What
 In condonation of debt, who is benefited is is the tax effect on the discharge of the
not subject to income tax. unpaid balance of the obligation on the
debtor company?
BAR QUESTION (1995)
Q: Mr. Francisco borrowed Php 10,000 from SUGGESTED ANS: The condonation of the
his friend, Mr. Gutierrez, payable in one year unpaid balance of the obligation has the
without interest. When the loan became due, effect of donation made on the part of the
Mr. Francisco told Mr. Gutierrez that he was creditor. It is obvious that the creditor merely
unable to pay because of business reverses. desires to benefit the debtor and without any
Mr. Gutierrez took pity on Mr. Francisco and consideration therefore cancels the debt, the
condoned the loan. Mr. Francisco was amount of the debt cancelled is a gift from
solvent at the time he borrowed the Php the creditor to the debtor and need not be
10,000 and at the time the loan was included in the latter’s gross income (Sec. 50,
condoned. Did Mr. Francisco derive any Rev. Reg. No. 2).
income from the cancellation or condonation
of his indebtedness? Explain 7
‘Dacion en pago’ is defined as the transmission of the
ownership of the thing by the debtor to the creditor as an
SUGGESTED ANS: No, Mr. Francisco did not accepted equivalent of the performance of the obligation.
derive any income from the cancellation or According the the modern doctrine, in dacion en pago
condonation of his indebtedness. Since it is there is in reality an objective novation of the previous
obligation effected by a change of the object thereof.
obvious that the creditor merely desired to Hence, once there is an agreement between the debtor
benefit the debtor in view of the absence of and the creditor with regard to the thing which must be
consideration for the cancellation, the delivered by the former to the latter as the equivalent of
amount of the debt is considered as a gift the performance of the obligation, the law on sales shall
govern, with the credit as the price of the thing
from the creditor to the debtor and need not (Comments and Jurisprudence on Obligations and
be included in the latter’s gross income. The Contracts, Jurado (2010), p. 246).

NVC Tax Notes | 10
 The value of scholarship packages granted to It is due on or before the 15th day of the 4th
an employee where is required to render month following the close of the taxpayer’s
mandatory number of years in service in taxable year and is generally regarded as an
excise tax, levied upon the right of a person
exchange thereto is taxable to him.
or entity to receive income or profits (Mobil
 Monetized credit leaves or vacation leave of Phil. vs. City Treasurer of Makati).
employees in the private sector exceeding 10
days is taxable. It is a kind of tax levied upon the privilege of
 Indemnity received from patent infringement receiving income or profit. It is an excise tax
suits are profits actualized and they are and not a tax on property.
taxable. Basis of the Right of the Government to Tax
 Damages (Nominal, Actual, Moral, Income: Partnership Theory
Exemplary) awarded by the court to litigants
including attorney’s fees are not taxable. The right of the government to tax income
emanates from its partnership in the
 Deposit of property that does not increase
production of income by providing the
the net worth of taxpayer is not an income; protection, resources, incentive, and proper
 Security deposit paid to a lessor until it is climate for such production (CIR vs.
applied in payment of accrued rent is not an Lednicky).
income.
Features of Philippine Income Tax
D. Income Tax 1. Direct tax – Tax burden is borne by the
income recipient upon whom the tax is
Definition imposed. It is a tax demanded from the
Income tax is defined as a tax on all yearly very person who is intended or desired,
profits arising from property, profession, should pay it. Here, the impact and
trades, or offices, or as a tax on a person’s incidence of taxation remain with the
income, emoluments, profits, and the like.8 person upon whom the tax was
imposed10;
It is a direct tax on actual or presumed 2. Progressive Tax – tax rate increases as
income (gross or net) of a taxpayer received, the tax base increases. It is founded on
accrued, or realized during the taxable year9, the ability to pay principle and is
which the law does not expressly exempt consistent with Sec. 28(1), Art. VI, 1987
from taxation. Constitution11;
3. Comprehensive System – adopts the
citizenship principle, residence principle,
8
The basis for computing income tax shall be the and the source principle. Any one of the
taxpayer’s annual accounting period (calendar year or three principles is enough to justify the
fiscal year) in accordance with the method of accounting imposition of income tax on the income
regularly employed in keeping the books of the taxpayer
(Sec. 43, NIRC).
9 10
The term ‘taxable year’ means the calendar year, or the As opposed to “indirect tax” which is a tax demanded in
fiscal year ending during such calendar year, upon the the first instance from one person in the expectation and
basis of which the net income is computed under this Title. intention that he can shift the burden to someone else
‘Taxable year’ includes, in the case of a return made for a (CIR vs. Tours Specialists). In this case, the impact of
fractional part of a year under the provisions of this Title taxation is with the taxable seller of goods or services,
or under rules and regulations prescribed by the Secretary while the incidence of taxation rests with the final
of Finance, upon recommendation of the Commissioner, consumer.
11
the period for which such return is made (Sec. 22 (P), The rule of taxation shall be uniform and equitable. The
NIRC). Congress shall evolve a progressive system of taxation.

NVC Tax Notes | 11
of a resident citizen and domestic Q: is the revenue derived by an airline
corporation that are taxed on worldwide company from sales of tickets in the
income; Philippines for air transportation, while
having no landing rights here, constitute
Note: Other types of taxpayers income of the said airline company from
(individual or corporation) are taxed only Philippine sources, and, accordingly,
on their income from sources within the taxable?
Philippines beginning January 1, 1998,
following the “territoriality principle.” A: Yes, it is taxable. The absence of flight
operations to and from the Philippines is
4. Semi-Schedular or Semi-Global;
not determinative of the source of
5. American in origin – the authoritative
income or the site of income taxation.
decisions of the U.S. Courts and officials
The test of taxability is the "source"; and
enforcing the U.S. Internal Revenue Code
the source of an income is that activity
have peculiar force and persuasive effect
which produced the income.
for the Philippines (CIR vs. Baler-Nickel);
Unquestionably, the passage
6. It is self-assessing or self-computed;
documentations in these cases were sold
7. It is a national tax;
in the Philippines and the revenue
8. It is an excise tax – it is generally
therefrom was derived from an activity
regarded as an excise tax because it is
regularly pursued within the Philippines.
actually a levy upon the right to earn an
And even if the BOAC tickets sold
income.
covered the "transport of passengers and
9. It is not covered by the Principle of
cargo to and from foreign cities", it
Territoriality;
cannot alter the fact that income from
the sale of tickets was derived from the
Criteria in Imposing Philippine Income Tax Philippines. The word "source" conveys
1. Citizenship or Nationality Principle – The one essential idea that of origin and the
origin of the income herein is the
basis of the imposition of income tax is
Philippines (CIR vs. British Overseas
the taxpayer’s citizenship. Thus, citizens Airways Corporation, 149 SCRA 395).
of the Philippines, whether residents or
non-residents, are subject to our income Types of Philippine Income Tax
tax law; 1. Graduated Income Tax on Individuals –
2. Residence Principle or Domicile Principle Sec. 24 (A);
– The basis of the imposition of income is 2. Regular/Normal Corporate Income Tax
the residence of the taxpayer. All income on Corporations (RCIT) – Sec. 27(A);
derived by persons residing in the 3. Minimum Corporate Income Tax on
Philippines shall be subject to income tax Corporations (MCIT) – Sec. 27(E);
on the income derived from sources 4. Special Income Tax on Certain
within the Philippines; and Corporations (e.i., private educational
3. Source Principle – the basis of the institutions, foreign currency deposit
imposition is the source of the income. units, and international carriers);
All income derived from sources within 5. Capital Gains Tax (CGT) on sale or
the Philippines shall be subject to income exchange of unlisted shares or stock of a
tax.12 Domestic Corporation classified as capital
asset – Sec. 24 (C);
12
Thus, a non-resident alien or a non-resident foreign
corporation is liable to pay the Philippine Income Tax on dividend, interest, rent, or royalty, despite the fact that he
his income from sources within the Philippines, such as has not set foot in the Philippines.

NVC Tax Notes | 12
6. CGT on sale or exchange of real property important element (Brotherhood Labor
located in the Philippines classified as vs. Zamora).
capital asset – Sec. 24 (D);
7. Final Withholding Tax (FWT) on certain
Who is an Employee?
passive Investment Income – Sec. 28
(B)(5)(b); For taxation purposes, a director is
8. FWT on income payments made to non- considered an employee under Section 5
residents – Individual or Corporation; of Rev. Reg. No. 12-86, to wit: “An
9. Fringe Benefit Tax (FBT) – Sec. 33; individual, performing services for a
10. Branch Profit Remittance Tax (BPRT) – corporation, whether as an officer and
Sec. 28; director or merely as a director whose
11. Improperly Accumulated Earnings Tax
duties are confined to attendance at and
(IAET) – Sec. 29;
12. Gross Income Tax (GIT) – Sec. 27 (A) participation in the meetings of the
Board of Directors, is an employee.” A
director who is not an official or
Types of Taxable Income13 employee of a corporation is not an
1. Compensation Income – income derived employee of said corporation.
from the rendering of services under an
employer-employee relationship; The term ‘employee’ refers to any
individual who is the recipient of wages
Compensation and includes:
It means all remuneration for services a. An officer;
performed by an employee for his b. An employee; or
employer under an employer-employee c. Elected official of the government or
relationship, unless specifically excluded any political subdivision, agency or
by the Tax code (Rev. Reg. No. 2-98). instrumentality thereof; or
d. An officer of a corporation15.
In determining the existence of
employer-employee relationship, the
services are performed reserves the right to control not
elements that are generally considered only the end achieved, but also the manner and means
are: (1) the selection and engagement of used to achieve the end (D.O. No. 147-15).
15
employee; (2) the payment of wages; (3) Corporate officers´ are officers who are designated or
specified as such or given that character in the law, the
the power of dismissal; and (4) the Articles of Incorporation and the By-Laws of the
employer’s power to control the corporation. The corporate office must be specifically
employee with respect to the means and indicated in the roster of corporate offices in the by-laws
method by which the work is to be of the corporation. The board of directors has no power to
create other corporate offices without first amending the
accomplished. It is also called the corporate by-laws so as to include therein the newly
“control-test”14 which is the most created corporate office. Thus, two requisites must
concur: (1) the creation of the position is under the
corporation’s character or by-laws; and (2) the election of
13
‘Taxable Income’ means the pertinent items of gross the officer is by the directors or stockholders.
income specified in the Tax Code, less the deductions, if
any, authorized for such types of income by this Code or It is possible for one to have a dual role of officer and
other special laws (Sec. 31, NIRC). employee. For example, corporate secretary may
14
Under the ‘control test’, an employer-employee concurrently act as a managerial employee.
relationship exists where the person for whom the

NVC Tax Notes | 13
Thus, a juridical entity that performs Since the withholding tax is merely a
services to another person is not an method of collection of income tax, the
employee of the latter. To create an exemption from withholding taxes on
employer-employee relationship, the compensation income of foreign
person that performs the service to governments/embassies/ diplomatic
another must be an individual. missions and international organizations
does not equate to the exemption from
Compensation Income of Philippine paying the income tax itself by the
Nationals and Aliens Employed by recipient of said income.
Foreign Governments and International
Organizations in the Philippines Award of Backwages
General Rule: Resident citizens are taxed When an award of backwages is made,
on worldwide income, while resident there is an acceptance that the
aliens are taxed only on their Philippine- employee was illegally or unjustly
source income. dismissed, and the backwages are the
salaries he was supposed to have earned
Exception: International agreements had he not been dismissed. It is as
which grant withholding tax immunity to though he was not separated from
foreign governments/embassies/ employment, and as though he actually
diplomatic missions and international rendered services (Escareal vs. CTA).
organizations also provide exemption to
their officials and employees who are In this connection, RMC 39-2012
foreign nationals and/or non-Philippine provides that the employee should
residents from paying income taxes on report as income and pay the
their salaries and other emoluments. corresponding income taxes by
allocating or spreading his backwages,
If the By-laws did not specify the corporation office, the allowances, and benefits through the
board may still create an appointive position since the years from his separation up to the final
Board is the corporation’s governing body with the power decision of the court awarding the
to exercise its prerogatives in managing the business
backwages. The said backwages,
affairs of the corporation. However, the intent to create an
additional office must be clear. In addition, the allowances, and benefits are subject to
relationship of a person to a corporation, whether as withholding tax on wages.
officer or agent or employee is not determined by the
nature of the services he performs but by the incidents of
However, when the judgment in a labor
his relationship with the corporation as they actually
exists. dispute is enforced through garnishment
of debts due to the employer or other
Office and Employment Distinguished. An ‘office’ is a credits to which the employer is entitled,
creation of the charter of a corporation, while an ‘officer’
is the person elected by the directors or stockholders. On
the person owning such debts or having
the other hand an ‘employee’ occupies no office and is in possession or control of such credits
generally employed not by the action of the directors and (e.g. banks and other financial
stockholders but by the managing officer of the institutions) would normally release and
corporation and who also determines the compensation to
be paid to such employee (Philippine Corporate Law pay the entire garnished amount to the
Compendium, Aquino (2018), p. 285-288). employee. As a result, employers who

NVC Tax Notes | 14
are mandated to the withholding taxes treated as compensation income or
on wages cannot withhold the professional fee. This fact is material for
appropriate tax due thereon. In this purposes of taxation because there is no
deduction allowed against compensation
regard, the ‘employer’ also refers to the
income, whereas allowable deductions
person having control of the payment of may be made from professional income.
the compensation in cases where the
services are or were performed for a Thus, a lawyer may practice his
person who does not exercise such profession as a legal officer or a private
control. corporation, but for income tax
purposes, the compensation income he
receives is subject to the graduated
Thus, the person owning or having
income tax rates without deductions
possession or control of the credit shall because of the existence of employer-
withhold the required tax. employee relationship.
Items Not Included as Compensation 3. Business Income – gains and profits

Income derived from rendering services selling
Compensation shall not include merchandise, manufacturing products,
farming, and long-term construction
remuneration paid:
contracts;
(a) for agricultural labor paid entirely in
products of the farm where the labor is
performed; Q: X Corporation rendered technical
(b) for domestic service in a private services through its “work engineers” to
PNB, DBP, and SSS in the construction of
home;
their buildings. The “work engineers”
(c) for casual labor not in the course of acted as overseers of X Corporation,
the employer’s business; or rendering their professional services as
(d) for services by a citizen or resident of employees of the corporation. Is X
the Philippines for a foreign government corporation a contractor or an employee
or an international organization of the contractees?
Provided that the remuneration A: In this case, X Corporation is a
received for services performed during contractor and not an employee of the
or more than ½ of a payroll period of not contractees. The employer-employee
more than 31 consecutive days do not relationship exists only where the person
constitute wages (Sec. 78 (A), NIRC). rendering employment services is an
individual and not a corporation.
Moreover, the true test in determining
2. Professional Income – fees derived from the relationship between the parties is
engaging in an endeavour requiring that if he renders service in the course of
special training as a professional as a an independent occupation, representing
means of livelihood, which include, but the will og his employer only as to the
are not limited to the fees of CPAs, result of his work and not as to the
doctors, lawyers, engineers and the like; means and methods by which the work is
to be accomplished, he is a contractor
The existence or absence of the (Luzon Stevedoring vs. Trinidad).
employer-employee relationship
determines whether the income shall be

NVC Tax Notes | 15
4. Passive Income – income in which the the loan is subject to income tax. Also, cost
taxpayer merely waits for the amount to of sales of manufacturers and dealers of
come in, which includes, but is not goods or properties, which is not subject to
limited to, interest income, royalty
income tax.
income, dividend income, winnings and
prizes; and
5. Capital Gains – gain from dealings in A taxable transaction shall be subject to
capital assets (R.R. No. 8-2018) only one kind of income tax
For example, sale of real property located in
the Philippines, which is classified as a capital
Significance of Knowing the Type of Income
asset, by a domestic corporation shall only be
It is important to know the type of income
subject to the 6% capital gains tax. Such gain
realized by the taxpayer since the Philippines
from sale shall not be included in the gross
has adopted the semi-schedular/semi-global
income, which is considered in determining
tax system. Thus, some types of income are
the net income subject to the regular or
subjected to graduated tax rates.
minimum corporate income tax.
Income exempt from Income tax:

On the other hand, real property classified as
1. Those income received but enumerated
an ordinary asset is subject only to the
under the term “exclusions”;
ordinary income tax under the global tax
2. Those considered mere return of capital;
system, whether the seller is an individual or
3. Those exempted under laws, special laws
a corporation.
or treaties;
4. Gains realized from the sale, exchange or
The income, gain, or profit is taxable to the
retirement of bonds with maturity of
person who earns the income, who is
more than 5 years is exempt from
generally the recipient thereof
income tax;
In the case of fringe benefits paid to a
5. Those covered by the Employer’s
supervisory or managerial employee, the
Convenience Rule;
person taxed is the employee, but the
6. Those already subjected to the final
employer is required under the law to
withholding tax.
assume the payment of the fringe benefit tax
in behalf of said employee. Such employer is,
Employer’s Convenience Rule, defined
however, allowed to claim as business
This refers to the allowances in kind
expense deduction the grossed up monetary
furnished to the employee for and as a
value, consisting of the value of the fringe
necessary incident to the performance of his
benefits and the FBT paid thereon.
duties which directly benefits the employer
more than it does the employee. The value of
Q: Is every increase in net worth, whether
the benefit is not taxable to the employee.
or not derived from income, should be
taxed as income?
Return or recovery of capital is not subject
to income tax
A: No, The principle underlying the taxability
Thus, payment of loan principal is exempt
of an increase in the net worth of a taxpayer
from income tax. Only the interest earned on
rests on the theory that such an increase in

NVC Tax Notes | 16
net worth, if unreported and not explained residents of the United States. For the 2nd
by the taxpayer, comes from income derived quarter of 1983, these US-based individual and
from a taxable source. In this case, the corporate stockholders received cash dividends
increase in the net worth of petitioner for from the corporation. The corresponding
1950 to the extent of P30,050.00 was not the withholding tax on dividend income – 30% for
result of the receipt by it of taxable income. individuals and 35% for corporate non-resident
It was merely the outcome of the correction stockholders – was deducted at source and
of an error in the entry in its books relating to remitted to the BIR.
its indebtedness to the Manila Insurance
Company. The Income Tax Law imposes a tax On May 15, 1984, ABCD filed with the CIR a
on income; it does not tax any or every formal claim for refund, alleging that under the
increase in net worth whether or not derived RP-US Tax treaty, the deduction withheld at
from income (Fernandez vs. CIR). source as tax on dividends earned was fixed at
25% of said income. Thus, ABCD asserted that it
Q: Is a person assessed for deficiency overpaid the withholding tax due on the cash
withholding tax under Sec. 53 and 54 of the dividends given to its non-resident stockholders
Tax Code being held liable in its capacity as in the US. The CIR denied the claim.
a withholding agent? Does ABCD Corp. have the legal personality to
file the refund on behalf of its non-resident
A: No, the withholding agent is merely a tax stockholders? Why or why not?
collector, not a taxpayer. Under the
withholding system, however, the agent- Suggested Ans: Yes. Well-settled is the rule that
payor becomes a payee by fiction of law. His a withholding agent is not only an agent of the
(agent) liability is direct and independent government but also an agent of the taxpayer in
from the taxpayer, because the income tax is reporting the income. It is properly regarded as
still imposed on and due from the latter. The a “taxpayer” within the meaning of Sec. 22 (N)
agent is not liable for the tax as no wealth of the NIRC, as amended (CIR vs. Procter and
flowed into him — he earned no income. The Gamble).
Tax Code only makes the agent personally
liable for the tax arising from the breach of BAR QUESTION (2017)
its legal duty to withhold as distinguished Q: Upon his retirement, Alfrdo transferred his
from its duty to pay tax since "the savings derived from his salary as a marketing
government’s cause of action against the assistant to a time deposit with AAA Bank. The
withholding agent is not for the collection of bank regularly deducted 20% final withholding
income tax, but for the enforcement of the tax on the interst income from the time deposit.
withholding provision of Section of the Tax Alfredo contends that the 20% final tax on the
Code, compliance with which is imposed on interest income constituted double taxation
the withholding agent and not upon the because his salary had been already subjected to
taxpayer" (CIR vs. CA). withholding tax. Is Alfredo’s contention correct?
Explain.
BAR QUESTION (2009)
Q: ABCD Corp. is a domestic corporation with Suggested Ans: No, Alfredo’s contention is not
individuals and corporate shareholders who are correct. No double taxation exists because the

NVC Tax Notes | 17
20% final tax is imposed on the interest income, Q: Who are taxable on income derived from all
while the tax withheld pertains to his salary or sources, whether within or outside the
compensation income. Although they are both Philippines?
income tax, they did not pertain to the same A: (1) Resident Citizens; and (2) Domestic
thing or activity (Bar Q and A for the Past 10 Corporations
years, Dimaampao (2020)).
Note: Other kinds of taxpayers are subject to tax
E. General Principles of Income Taxation only on income derived from Philippine Sources.
Sec. 23. General Principles of Income Taxation in Taxable Income Taxable Income
Citizenship and
the Philippines. - Except when otherwise Inside RP Outside RP
Residency
provided in this Code: Resident Citizen Yes Yes
(A) A citizen of the Philippines residing therein is Non-Resident
Yes No
taxable on all income derived from sources Citizen
Overseas Contract
within and without the Philippines; Yes No
Worker
Resident Alien Yes No
(B) A nonresident citizen is taxable only on Non-Resident
Yes No
income derived from sources within the Alien
Philippines; Domestic Corp. Yes Yes
Foreign Corp. Yes No
(C) An individual citizen of the Philippines who is

F. Classification of Taxpayers
working and deriving income from abroad as an
overseas contract worker is taxable only on Taxpayer
income derived from sources within the Any person subject to tax imposed by Title II of
the NIRC.
Philippines: Provided, That a seaman who is a
citizen of the Philippines and who receives
The term “person” means an individual, a trust,
compensation for services rendered abroad as a
member of the complement of a vessel engaged estate, or corporation.
exclusively in international trade shall be treated
as an overseas contract worker; Q: What is the significance of knowing the
Classification of Taxpayers?
(D) An alien individual, whether a resident or not A: It is important to know the different group of
taxpayers in order to determine what gross
of the Philippines, is taxable only on income
derived from sources within the Philippines; income are to be recognized for tax purposes,
the exclusions from their gross income, the
(E) A domestic corporation is taxable on all exemption, the allowable deductions and the
income derived from sources within and without applicable tax rates.
the Philippines; and
1. Individual Taxpayers
(F) A foreign corporation, whether engaged or
General Classification Rule for Individual
not in trade or business in the Philippines, is
Taxpayers
taxable only on income derived from sources
within the Philippines. a. Intention: The intention of the
taxpayer regarding the nature if his
stay within or outside the Philippines

NVC Tax Notes | 18
shall determine his appropriate pleasure, one intends to return (Saludo
residency classification. Jr. vs. American Express)16.
Note: The taxpayer shall submit to
the CIR proofs indicating such Q: Are resident citizens who work for a
intention; and foreign embassy or for an aid agency of
b. Length of Stay: In default of such foreign governments/international
documentary proof, length of stay of organization in the Philippines subject
an individual taxpayer in a country is to Philippine Income Tax?
considered. A: Yes, they are still subject to Philippine
Income Tax because resident citizens are
Kinds of Individual Taxpayers taxed on worldwide income, unless there
i. Resident Citizen (RC) – a citizen of the is a law that expressly grants such tax
Philippines, residing therein, unless he exemption.
qualifies as a non-resident citizen under
Sec. 22 (E) of the NIRC. Note: In the case of Filipino citizens-
employees of the Asian Development
The following are the Citizens of the Bank (ADB), Sec. 45(b), Art. XII of the
Philippines: Agreement provides that only
1) Those who are citizens of the officers and staff of ADB who are not
Philippines at time of the adoption 1987 Philippine nationals shall be exempt
Philippines Constitution; from Philippine Income Tax.
2) Those whose Fathers or Mothers are Exemption of Philippine Nationals is
citizens of the Philippines; “subject to the power of the
3) Those born before January 17, 1973 Government of the Philippines to
(effectivity of the 1973 Constitution), of tax its nationals” (RMC 31-2013,
Filipino Mothers, who elect Philippine April 12, 2013).
citizenship upon reaching the age of
majority; and Q: Why is it important to determine
4) Those who are naturalized in whether or not a resident citizen is
accordance with the law (Const., Art IV., engaged in trade or business or in the
Sec.1). exercise of profession?
16
Note: Citizens of the Philippines who Residence and Domicile, distinguished: To acquire a new
domicile – a domicile by choice – the following must
marry aliens shall retain their citizenship,
concur: (1) residence or bodily presence in a new locality;
unless by their act or omission, they are (2) an intention to remain there; and (3) an intention to
deemed, under the law to have abandon the old domicile. The intent to remain in or at the
renounced it (Const., Art IV., Sec.4). domicile of choice must be for an indefinite period of time
and the acts of the person must be consistent with this
Residence intent (Mitra vs. Comelec). Residence simply requires
It is the permanent home, the place to bodily presence as an inhabitant in a given place, while
which, whenever absent for business or domicile requires bodily presence in that place and also an
intention to make it one's domicile. No particular length of
time of residence is required though; however, the
residence must be more than temporary (Saludo vs.
American Express).

NVC Tax Notes | 19
A: It is important to determine whether a definite amount of money which came
or not a resident citizen is engaged in to them within a specified period of time
trade or business or in the exercise of of two years as payment for their service;
profession, since he is entitled to deduct and a tax is hereby imposed upon the
certain items of deductions from his taxable net income received during each
business or professional income, capital taxable year from all sources by every
gain, passive income, and other income individual, whether a citizen of the
not subject to final tax. However, no Philippines residing therein or abroad or
deductions are allowed: (a) from his an alien residing in the Philippines (Conwi
gross compensation income; and (b) vs. CTA).
from capital gains and passive incomes
subject to final tax at preferential rates. BAR QUESTION (2010)
Q: In 2009, Caruso, a resident Filipino
If a resident citizen derives nonbusiness citizen, received dividend income from
or professional income, he receives US-based Corporation which owns a
either compensation income (because chain of Filipino restaurants in the West
there is employer-employee relationship Coast, USA. The dividend remitted to
between him and his employer), or he Caruso is subject to US withholding tax
derives passive investment income, or he with respect to a non-resident alien like
realizes capital gain from the sale or Caruso.
transfer of shares of stock of a domestic a. What will be your advice to Caruso in
corporation or from sale of real property. order to lessen the impact of double
taxation on the same income?
Q: A and B are employees of Procter and b. Would your answer in (a) be the
Gamble, Philippine Manufacturing same if Caruso became a US
Corporation. Said corporation is a immigrant in 2008 and had become a
subsidiary of Procter & Gamble, a non-resident Filipino Citizen? Explain
foreign corporation based in Ohio, the difference in treatment for
U.S.A. They are citizens of the Philippine income tax purposes.
Philippines temporarily residing abroad
by virtue of their employment, and Suggested Ans:
during such period of employment they a. Caruso has 2 available options: (a)
received dollars as compensation for claim the amount of income tax paid
services in their foreign assignments. In and withheld in the US as a
their tax returns, they gave their legal deduction from his income in the
residence/address as c/o Procter & Philippines or (b) claim said amount
Gamble PMC, Ayala Ave., Makati, Rizal. as a tax credit (Sec. 34(C)(1)(b),
Are the dollar earnings of A and B NIRC).
subject to income tax? b. No, the answer would not be the
same. Since Caruso is a non-resident
A: The dollar earnings of petitioners are citizen where income from abroad is
the fruits of their labors in the foreign tax-exempt, there exist no
subsidiaries of Procter & Gamble. It was international double taxation (Bar Q

NVC Tax Notes | 20
and A for the Past 10 years, abroad will be subject to Philippine
Dimaampao (2020)). income tax (Sec. 23, NIRC).
BAR QUESTION (2015) BAR QUESTION (2018)

Q: Mr. A, a citizen and resident of the Q: Kim, a Filipino national, worked with
Philippines is a professional boxer. In a K-Square Inc. (KSI), and was seconded to
professional boxing match held in 2013, various KSI-affiliated corporations. These
he won prize money in US dollars corporations are majority-owned in
equivalent to Php 300 Million. Is the prize common by the Koh family and covered
money paid to and received by Mr. A in by a BIR-qualified multi employer-
the US taxable in the Philippines? Why? employee retirement plan (MEERP),
under which the employees may be
Suggested Ans: Yes, the prize money is moved around within the controlled
taxable. Mr. A, a resident citizen, is group without the loss of seniority rights
taxable on his income derived from or break in the tenure. Kim was well-
sources within and without (Sec. 23 (A), loved by his employer and colleagues, so
NIRC). upon retirement, and on his last day in
office, KSI gave him a Mercedes Benz car
BAR QUESTION (2016) worth Php 5 Million as a surprise, with a
Q: Patrick is a successful businessman in streamer that reads: “You’ll be missed.
the US and he is a sole proprietor of a Good luck, Sir Kim.”Which internal
supermarket which has a gross sales of revenue tax, if any, will apply to the grant
10 million dollars and an annual income of the car to Kim by the company?
of 3 million dollars. He went to the
Philippines on a visit and, in a party, he Suggested Ans: The grant of the car to
saw Atty. Agaton who boasts of being a Kim is subject to income tax. The value of
tax expert. Patrick asks Atty. Agaton: if he the Mercedes Benz car is an income to
decides to reacquire his Philippine Kim as it is in recompense for Kim’s past
citizenship under RA 9225, establish services. Compensation for services in
residence in this country, and open a whatever form paid forms part of gross
supermarket in Makati City, will the BIR income (Sec. 32(A)(1), NIRC).
tax him on the income he earns from his
US business? If you were Atty. Agaton, BAR QUESTION (1999)
what advice will you give Patrick? Q: X, a multinational corporation doing
business in the Philippines donated 100
Suggested Ans: I will advice Patrick that shares of stock of said corporation to Mr.
his status for purposes of income tax Y, its resident manager in the Philippines.
would be a resident citizen once he Assuming that the shares of stocks were
reacquires his Philippine citizenship. A given to Mr. Y in consideration of his
resident citizen is taxable on his income services to the corporation what are the
derived from sources within and without tax implications? Explain.
the Philippines. Ergo, Patrick’s income
that may be derived from his business

NVC Tax Notes | 21
SUGGESTED ANS: If the shares of stock resident or non-resident is done
were given to Mr. Y in consideration of in a year to year basis.
his services to the corporation, the same
shall constitute taxable compensation 3) Works and derives income from
income to the recipient because it is a abroad and whose employment
compensation for services rendered thereat requires him to be physically
under an employer-employee present abroad most of the time17
relationship, hence, subject to income during the taxable year; and
tax (Mamalateo (2019), p. 166-167).
Notes:
ii. Non-Resident Citizen (NRC) – a citizen a. To be considered physically
of the Philippines who: present abroad most of the time
1) Establishes to the satisfaction of the during the taxable year, a
CIR the fact of his physical presence contract worker must have been
abroad with a definite intention to outside the Philippines for not
reside therein; less than 183 days during such
2) Leaves the Philippines, during the taxable year (R.R. 1-79, Sec.2).
taxable year to reside abroad, either b. Citizens who work outside the
as an immigrant or for employment Philippines for at least 183 days
on a permanent basis (i.e., Overseas due to a contract of employment
Contract Workers or Overseas Filipino with the Philippines Employer
Workers) (R.R. No. 1-2011, Secs. 2 are not considered non-resident
and 3). citizens because they are not
considered employed abroad.
Notes: `
a. NRC under subsection (B) of Sec. BAR QUESTION (2019)
23, NIRC, shall be considered as Q: JKL-Philippines is a domestic
RC for the taxable year in which corporation affiliated with JKL-Japan,
he departed from the Philippines a Japan-based information
with respect to his income technology company with affiliates
derived from the beginning of across the world. Mr. F is a Filipino
the said taxable year until the engineer employed by JKL-
date of his departure from the Philippines. In 2018, Mr. F was sent
Philippines. to the Tokyo branch of JKL-Japan
b. Taxpayer should only be treated based on a contract entered into
as NRC for the taxable year in between the 2 companies. Under the
which he departed from the said contract, Mr. F would be
Philippines after his departure. compensated by JKL-Philippines for
c. An individual taxpayer may be months spent in Japan. For the
both a resident and a non-
resident in one taxable year and
the determination if one is 17
His presence abroad need not be continuous
(Mamalateo (2019), p.113).

NVC Tax Notes | 22
entirety of 2018, Mr. F spent 10 temporarily assigned abroad and
months in the Tokyo Branch. who do not have the intention to
reside at the places where they are
In 2019, the BIR assessed JKL- delegated to, either as immigrants or
Philippines for deficiency withholding on a permanent basis, cannot be
tax for Mr. F for the year 2018 considered as non-resident citizens.
arguing that Mr. F is a resident Hence, their compensation during
citizen; hence, his income tax should their period of assignment cannot be
be based on his worldwide income. Is considered as income derived abroad
the BIR correct? Explain since they are not rendering services
for another corporation, but
Suggested Ans: No, Mr. F is compensation derived from services
considered as a non-resident citizen under the ER-EE relationship with the
for the taxable period 2018. Having DC. (BIR Ruling 517-2011, December
stayed in Tokyo for 10 months (more 22, 2011).
than 183 days) and rendered services
therein pursuant to an employment Overseas Contract Worker (as NRC)
contract requiring him to be present A Filipino citizen employed in a foreign
abroad most of the time. Mr. F country, who is physically present in a foreign
should be taxed as a non-resident country as a consequence of his employment
citizen. A such, he is subject to tax thereat (R.R. No. 2011, Sec. 2).
only for the income realized from
Philippine sources and his income To be considered as an OCW:
“without” pertaining to his a. He must be physically present in a
compensation for services rendered foreign country as a consequence of his
in Tokyo, is not subject to Philippine employment;
income tax. (Sec. 23, NIRC; R.R. No. b. He must be duly registered as such with
1-79). the Philippine Overseas Employment
Administration (POEA) and issued with a
4) Has been previously considered as a valid Overseas Employment Certificate
non-resident citizen and who arrives (OEC); and
in the Philippines at any time during c. His salaries and wages must be paid by
the taxable year to reside employer abroad and not borne by any
permanently in the Philippines shall entity or person in the Philippines (R.R.
be considered non-resident for the No. 1-2011, Sec. 2 (1)).
taxable year in which he arrives in
the Philippines with respect to his Note: An OCW or OFW’s income arising
income derived from sources abroad out of his overseas employment is
until the date of his arrival in the exempt from income tax. However, if an
Philippines (Sec. 22 ((E), NIRC). OCW or OFW has income earnings from
business activities or properties within
Note: The listed personnel of a the Philippines, such income earnings are
domestic corporation, who are

NVC Tax Notes | 23
subject to income tax (R.R. No. 1-2011, the end of the taxable year, is a resident
Sec. 3). alien.
A seaman is considered as an OCW 3) His purpose is of such a nature that an

provided the following requirements are extended stay may be necessary for its
met: accomplishment and to that end, the
1) A citizen of the Philippines; alien makes his home temporarily in the
2) Receives compensation for services Philippines (BIR Ruling No. 153-06)
rendered abroad as a member of the
complement of a vessel; Mere Intention to Change his Residence is
3) Such vessel is engaged exclusively in not enough to Change Residency of an Alien
International Trade (Sec. 23 (C), An alien who has acquired residence in the
NIRC); Philippines retains his status as resident alien
4) He must be duly registered as such until he abandons the same and actually
with the POEA; departs from the Philippines (R.R. No. 2-40,
5) He has a valid Overseas Employment Sec. 6).
Certificated (OEC) and a Seafarers
Identification Record Book or Intention to Stay in the Philippines
Seaman’s book issued by the Presumed
Maritime Industry Authority There is an intention on the part of the alien
(MARINA) (R.R. No. 01-2011, Sec.2). to stay in the Philippines indefinitely given
the fact:
Note: Non-resident citizens who are exempt a. He invested in the Philippines
from tax with respect to income derived from and served as the President of
sources outside the Philippines shall no the company;
longer be required to file information returns b. He acquired real property and is
from sources outside the Philippines actually present most of the time
beginning 2001 (R.R. No. 5-2001). in the Philippines; and
c. He registered as a taxpayer with
iii. Resident Alien (RA) – an individual whose the BIR (BIR Ruling No. 401-
residence is within the Philippines and who is 2016).
not a citizen thereof (Sec. 22 (F)).
BAR QUESTION (2018)
An Alien is considered a resident of the Q: KKI Inc., is a Philippine corporation
Philippines for income tax purposes if: engaged in architectural design, engineering,
1) He is not a mere transient or sojourner and construction work. Its principal office is
(R.R. No. 2-40, Sec. 5); located in Makati City, but it has various
2) He has no definite intention as to his stay infrastructure projects in the country and
in the Philippines; or abroad. Thus, KKI employs both local and
foreign workers. The company has adopted a
Note: An alien, who stayed in the policy that the employees’ salaries are paid in
Philippines for more than 1 year as of the currency of the country where they are
assigned or detailed.

NVC Tax Notes | 24
Below are some of the employees of KKI. the compensation income from KKI is his
Determine whether the compensation they only returnable income and the
received from KKI in 2017 is taxable under withholding tax thereon was correctly
Philippine laws and whether they are withheld by his employer (Secs. 23, 24,
required to file tax returns with the BIR. 51 (A)(2)(b), NIRC).
a. Kris, a Filipino accountant in KKI’s Tax c. The compensation for his services abroad
Department in the Makati Office, and from the date of his actual assignment
married to a Filipino engineer also thereat up to the time of the completion
working in KKI; of the project is tax-exempt as it is an
b. Klaus, a German national who heads income from sources without earned by
KKI’s Design Department in its Makati a non-resident citizen (Sec. 23 and 24,
office; NIRC). He is not required to file a return
c. Krisanto, a Filipino engineer in KKI’s for this income derived from sources
Design Department who was hired to without, because said income is not
work at the principal office last January subject to income tax in the Philippines
2017. In April 2017, he was assigned and (Sec. 23, NIRC).
detailed in the company’s project in d. Not taxable and no need to file income
Jakarta, Indonesia, which project is tax return. Kamilo is a non-resident
expected to be completed in April 2019; citizen who is taxable only on income
d. Kamilo, Krisanto’s brother, also an from sources within. Compensation for
engineer assigned to KKI’s project in services rendered outside the Philippines
Taipei, Taiwan. Since KKI provides for is an income from without, which is not
housing and other basic needs, Kamilo subject to Philippine income tax (Secs. 23
requested that all his salaries, paid in and 42, NIRC).
Taiwanese dollars, be paid to his wife in e. Compensation from January 1 up to the
Manila its Phillippine Peso equivalent; time of her return in June 17 is not
and taxable as it is an income from sources
e. Karen, a Filipino architect of KKI’s Design without (Secs. 23 and 42, NIRC).However,
Department who reported back to KKI’s compensation from June to December
Makati office in June 2017 after KKI’s 2017 is taxable to Karen as it is an
project in Kuala Lumpur, Malaysia was income from sources within. Karen
completed. regained the status of a resident citizen
and accordingly, must file income tax
Suggested Ans: return to pay for the tax, unless she is a
a. As a resident citizen, Kris must file purely compensation income earner for
income tax return with BIR, unless she which the withholding taxes on wages
qualifies under the substituted filing of was correctly withheld by KKI (Sec. 51
income tax return as the was correctly 51(A)(2)(b), NIRC).
withheld by the employer (Secs. 23,
24(A), 51(A)(2)(b), NIRC). iv. Non-Resident Alien Engaged in Trade or
b. Taxable. As a resident alien who derived Business (NRA-ETB) – an individual whose
income from Philippine sources, Klaus is residence is not within the Philippines and
required to file income tax return, unless

NVC Tax Notes | 25
who is not a citizen thereof but doing stay for an aggregate period of 180 days or
business in the Philippines (Sec. 22 (G)). less during any calendar year (R.R. No. 8-
2018, Sec. 2(i)).
A NRA who shall come to the Philippines and
stay for an aggregate period of more than As such, his compensation income, business
180 days during any taxable year shall be or professional income, capital gain, passive
deemed a NRA-ETB (Sec. 25 (A)(1)). investment income, and other income from
sources within the Philippines is taxed at the
The aggregate period of more than 180 days flat rate of 25%, but capital gains from sale of
provided under Sec. 25 (A)(1) of the NIRC exchange of shares of stock in a domestic
must be within the same taxable year for an corporation and from real property located in
alien to be considered engaged in trade or the Philippines shall be subject to capital
business.18 gains tax or stock transaction tax, as the case
may be (Sec.25 (B), NIRC).
BAR QUESTION (2000)
Q: Mr. Cortez is a non-resident alien NRA-NETB also has no legal duty to file an
individual based in Hong Kong. During the income tax return under the NIRC.
calendar year 1999, he came to the
Philippines several times and stayed in the BAR QUESTION (2019)
country for an aggregate period of more than Q: JKL-Philippines is a domestic corporation
180 days. How will Mr. Cortez be taxed on his affiliated with JKL-Japan, a Japan-based
income derived from sources within the information technology company with
Philippines? affiliates across the world. Mr. J, a Japanese
engineer employed by JKL-Japan, was sent to
SUGGESTED ANS: Mr. Cortez, being a non- Manila to work with JKL-Philippines as a
resident alien individual who has stayed for technical consultant. Based on the contract
an aggregate period of more than 180 days between the 2 companies, Mr. J’s annual
during the calendar year 1999, shall for that compensation would still be paid by JKL-
taxable year be deemed to be a non-resident Japan. However, he would be paid additional
alien doing business in the Philippines. compensation by JKL-Philippines for the
Considering the above, Mr. Cortez shall be months spent working as a consultant. For
subject to an income tax in the same manner 2018, Mr. J stayed in the Philippines for 5
as a resident citizen on taxable income months. In 2019, the BIR assessed
received from all sources within the JKLPhilippines for deficiency withholding tax
Philippines (Sec. 25 (A)(1), NIRC). for Mr. J for the year 2018 arguing that Mr. J
is a resident alien; hence, his income tax
v. Non-Resident Alien Not Engaged in Trade should be based on his income from sources
or Business (NRA-NETB) – a non-resident within the Philippines at the schedular rate
alien who shall come to the Philippines and under Sec. 24 (A)(2). Is the BIR correct?
Explain
18
The term ‘trade or business’ includes the performance of
the functions of a public office (Sec. 22 (S), NIRC) but
excludes performance of services by the taxpayer as an SUGGESTED ANS: No. Mr. J’s income derived
employee (Sec. 22 (CC), NIRC). within the Philippines is subject to a final tax

NVC Tax Notes | 26
of 25% as a nonresident alien individual not within the Philippines are now subject to
engaged in trade or business in the regular income tax rate 19. These employees
Philippines (Sec. 25(B), NIRC). His stay in the are:
Philippines in calendar year 2018 was only a. Regional or area headquarters
for an aggregate period of 5 months or less and regional operating
than the requirement of “more than 180 headquarters of multinational
days” in order to qualify him as having companies in the Philippines
engaged in a trade or business in the (Sec. 25 (C), NIRC);
Philippines (Sec. 25(A)(1), NIRC). b. Offshore banking units
established in the Philippines
BAR QUESTION (1994) (Sec. 25 (D), NIRC); and
Q: Four Catholic parishes hired the services c. Foreign service-contractor or
of Frank Binatra, a foreign non-resident subcontractor engaged in
entertainer, to perform for four nights at the petroleum operations in the
Folk Arts Theatre. Binatra was paid Php Philippines (Sec. 25 (E), NIRC).
200,000 a night. The parishes earned Php
1,000,000, which they used for the support Note: The same preferential tax treatment
of the orphans in the city. Who are liable to granted to alien individuals shall apply to
pay taxes? Filipinos employed and occupying the same
position as those of aliens employed by the
SUGGESTED ANS: entities mentioned above, regardless of
The following are liable to pay income taxes: whether or not there is an alien executive
a. The four catholic parishes because the occupying the same position (Rev. Reg. No. 2-
income received by them, not being 98). This rule have been modified by Rev.
income earned as such in the Reg. No. 11-2010 stating that these Filipinos
performance of their religious functions shall have the option to be taxed at either
and duties, is taxable income. In 15% of their gross income or at the regular
promoting and operating the Binatra income tax rate on taxable compensation
Show, they engaged in an activity income.
conducted for profit;
b. The income of Frank Binatra, a non- However, the President exercised his veto
resident alien under our law, is taxable at power under Sec. 27(2), Art. VI of the 1987
the rate of 25% final withholding tax Philippine Constitution20 relative to the
based on the gross income from the entitlement by Filipino employees occupying
show. Mr. Binatra is not engaged in any the same position as aliens employed by
trade or business in the Philippines
19
(Mamalateo (2019), p. 111). The BIR has stated that the preferential income tax rate
for these special aliens is no longer applicable, without
prejudice to preferential rates under existing tax treaties.
Employees entitled to preferential tax rates These special aliens are now subject to the regular income
Certain alien individuals employed in the tax rate (R.R. No. 8-2018).
20
Philippines who are previously entitled to the The President shall have the power to veto any
particular item or items in an appropriation, revenue, or
15% preferential income tax rate on their tariff bill, but the veto shall not affect the item or items to
gross compensation income from sources which he does not object.

NVC Tax Notes | 27
RHQ, ROHQ to the same tax treatment on laws of the Phil. and owned by the Sy Family
the gross income received by such aliens of Makati City, set up in 2010 a branch office
employed by these multinational companies in Shanghai City, China, to take advantage of
under R.A. No. 10963 (TRAIN).21 the presence of many Filipino workers in that
area and its booming economy. During the
2. Corporations year, the bank, management decided not to
Kinds of Corporate Taxpayers include the Php 20 Million net income of the
a. Domestic Corporation (DC) – a corporation Shanghai Branch in the annual Philippine
created or organized in the Philippines or income tax return filed with the BIR, which
under its laws (Sec. 22 (C), NIRC). showed a net taxable income of Php 30
Million, because Shanghai Branch is treated
Note: The branches of a domestic as a foreign corporation and is taxed only on
corporation, whether located in the income from sources within the Philippines,
Philippines or abroad, are merely extensions and since the load and other business
of the local head office transactions were done in Shanghai, these
incomes are not taxable in the Philippines. Is
Accordingly, their incomes in the Philippines the bank correct in excluding the net income
and abroad of the head office and foreign of its Shanghai branch in the computation of
branches are to be reported by the Philippine its annual corporate income tax for 2010?
head office in its corporate income tax Explain.
return, and the branch profits remitted by its
foreign branches to the Philippine head office Suggested Ans: No. Anchor Bank, a domestic
shall no longer be subject to the branch corporation, is taxable on income derived
profit remittance tax because: from sources within and without the
(a) The income of the foreign branch Philippines. Under the “single entity”
had already been subjected to concept, the income of the home office and
Philippine Income tax; and foreign branch office in Shanghai City must
(b) The branch profit remittance tax be summed up and included in the gross
applies only to Philippine income of ABC in the corporate income tax
branches of foreign corporations return (Sec. 23 and 27, NIRC).
operating in the Philippines
operating in the customs b. Resident Foreign Corporation (RFC) – a
territory and exempts from the corporation which is not domestic and
tax profits remitted by the engaged in trade or business in the
Philippine branch operating in Philippines (Sec. 22 (H), NIRC)
special economic zones to their Philippine branch of a foreign corporation is
head offices abroad. merely an extension of the foreign head
office
BAR QUESTION (2012) Hence, it does not have nor issue Philippine
Q: Anchor Banking Corporation, which was shares of stock, unlike that of a domestic
organized in 2000 and existing under the corporation. There is only one foreign single
entity. The foreign head office and the
21
R. R. No. 8-2018

NVC Tax Notes | 28
Philippine branch are one and the same the status or residence of corporations, for
entity. income tax purposes.
However, for income tax purposes, only the The term ‘doing business’ includes:
income of the Philippine Branch from sources a. Soliciting orders, service contracts, opening
within the Philippines is subject to income offices, whether called “liaison” offices or
tax and the income of the Philippine branch branches;
as well as that of the foreign head office from b. Appointing representatives or distributors
sources outside the Philippines is exempt domiciled in the Philippines or who, in any
from the Philippine income tax. calendar year, stay in the country for a
period or periods totalling 180 days or more;
Corollary, the gross income from sources c. Participating in the management, supervision
within the Philippines of the foreign head or control of any domestic business, firm,
office is subject to the final income tax that entity or corporation in the Philippines; and
must be withheld and remitted to the BIR by d. Any other act or acts that imply a continuity
the Philippine payor, unless such income of of commercial dealings or arrangements, and
the foreign head office is attributed and thus contemplate to that extent the performance
taxed to the Philippine Branch. of acts or works, or the exercise of some of
the functions normally incident to, and in
Test in Determining Status of Corporations progressive prosecution of, commercial gain
The Philippines adopted the law on or of the purpose and object of the business
incorporation test under which a corporation is organization (R.A No. 7042, Foreign
considered (a) as a domestic corporation, if it is Investment Act of 1991, Sec. 39 (d)).
organized or created in accordance with or under
the laws of the Philippines; or (b) as a foreign In order that a foreign corporation may be
corporation, if it is organized or created in regarded as doing business within a State, there
accordance with or under the laws of a foreign must be a continuity of conduct and intention to
country. establish a continuous business, such as the
appointment of a local agent, and not one of a
Corollary, a domestic corporation may be formed temporary character (CIR vs. British Overseas
or organized by foreigners under the Revised Airways).
Philippine Corporation Code, provided that it is
organized under the laws of the Philippines. An Offline International Air Carrier Selling
Passage Tickets in the Philippines, through a
On the other hand, a corporation established by General Sales Agent, is considered as a Resident
Filipino citizens under the laws of a foreign Foreign Corporation
country will be treated as a foreign corporation, An offline carrier has appointed an agent in the
and the branch that such foreign corporation sets Philippines, through whom, it sells or offers for
up in the Philippines is a resident foreign sale any air transportation is undoubtedly ‘doing
corporation. business’ or ‘engaged in trade or business in the
Philippines,’ therefore considered resident
In other words, the nationality of the owners of foreign corporation (Air Canada vs. CIR).
the corporation has no nearing in ascertaining

NVC Tax Notes | 29
BAR QUESTION (1999) Php 2,968,156.00. The CIR assessed KIA
Q: HK. Co., is a Hong Kong Company, which has a deficiency income taxes at the rate of 35% on its
duly licensed Philippine Branch engaged in taxable income, finding that KIA’s airline ticket
trading activities in the Philippines. HK Co. also sales constituted income derived from sources
invested directly in 40% of the shares of stock of within the Philippines.
A Co., a Philippine Corporation. These shares are
booked in the Head Office of HK Co. and are not KIA filed a protest on the ground that the Php
reflected as assets of the Philippine Branch. In 2,968,156.00 should be considered as income
1998, A Co. declared dividends to its derived exclusively from sources outside the
stockholders. Before remitting the dividends to Philippines since KIA only serviced passengers
HK Co., A Co. seeks your advice as to whether it outside Philippine territory. Is the position of KIA
will subject the remittance to withholding tax. tenable? Reason.
SUGGESTED ANS: I will advice A Co. to withhold Suggested Ans: KIA’s position is not tenable. It is
and remit the withholding tax on the dividends. doctrinal that selling airplane tickets through the
While the general rule is that a foreign local agent of a foreign airline is considered doing
corporation is the same juridical entity as its or transacting business in the Philippines.
branch office in the Philippines, when, however, Considering that KIA sold airplane tickets through
the corporation transacts business in the its general agent, PAL, it is taxed as resident
Philippines directly and independently of its foreign corporation subject to regular corporate
branch, the taxpayer would be the foreign rate. It must be stressed that the sale of airplane
corporation itself and subject to the dividend tax tickets in the Philippines is the activity that
similarly imposed on non-resident foreign produced the income. Having enjoyed the
corporation. The dividends attributable to the protection of the Philippine government, the
Home Office would not qualify as dividends income is taxable (CIR vs. BOAC).
earned by a resident foreign corporation, which
is exempt from tax (Marubeni vs. CIR). BAR QUESTION (2012)
Q: Foster Corporation (FC), is a Singapore-based
BAR QUESTION (2009) foreign corporation engaged in construction and
Q: Kenya International Airlines (KIA) is a foreign installation projects. In 2010, Global Oil
corporation, organized under the laws of Kenya. Corporation (GOC), a domestic corporation
It is not licensed to do business in the Philippines. engaged in the refinery of petroleum products,
Its commercial airplanes do not operate within awarded an anti-pollution project to FC, whereby
Philippine Territory, or service passengers FC shall design, supply machinery and
embarking from Philippine airports. The firm is equipment, and install an anti-pollution device
represented in the Philippines by its general for GOC’s refinery in the Philippines, provided
agent, Philippine Airlines (PAL), a Philippine that the installation part of the project may be
corporation. sub-contracted to a local construction company.
Pursuant to the contract, the design and supply
KIA sells airplane tickets through PAL, and these contracts were done in Singapore by FC, while
tickets are serviced by KIA airplanes outside the the installation works were sub-contracted by
Philippines. The total sales of airline tickets the FC with the Philippine Construction
transacted by PAL for KIA in 1997 amounted to Corporation (PCC), a domestic corporation. The

NVC Tax Notes | 30
project with a total cost of Php 100 Million was Philippines. The income tax situs of income
completed in 2011. Assume that the project was derived from labor or service is the place of
40% complete in 2010 and 100% complete in performance thereof. Given that aas required by
2011, based o the certificates issued by the the contract, all the services must be performed
architects and engineers working on the project. in Hongkong, the entire income is considered
GOC paid FC. Is FC liable to Philippine Income income form services without (Sec. 42(A)(3) and
Tax, and if so, how much revenue shall be Sec. 42(C)(3), NIRC).
reported by it in 2010 and in 2011? Explain your
answer. Corporation Includes:
a. Partnership, no matter how created or
Suggested Ans: No. FC is not liable to organized even if the partnership was
Philippine income tax. It is a foreign created pursuant to law or not. Whether
corporation whose incomes from sources stock and profit, it is still deemed a
without are not taxable. The revenues from
corporation because of the possibility of
the design and supply contracts which were
all done in Singapore are not taxable. As earning profits from sources within the
regards the installation works sub-contracted Philippines;
to PCC, a domestic corporation, the business b. Joint-stock companies;
profits earned therefrom are tax-exempt c. Joint accounts;
pursuant to our tax treaty with Singapore d. Associations; and
(Bar Q and A for the Past 10 years, e. Insurance Companies (Sec. 22 (B), NIRC)
Dimaampao (2020)).
Corporation excludes:
c. Non-Resident Foreign Corporation (NFRC) – i. General Profession Partnerships22; and
a corporation which is not domestic and not ii. Joint Venture (JV) or consortium23
engaged in trade or business in the formed for the purpose of:
Philippines (Sec. 22 (I), NIRC). a. Undertaking construction projects; or
b. Engaging in petroleum, coal,
BAR QUESTION (2014) geothermal and other energy
Q: Triple Star, a domestic corporation, entered operations pursuant to an operating
consortium agreement under a
into a management service contract with Single
service contract with the government
Star, a non-resident foreign corporation with no (Sec. 22 (B), NIRC).
property in the Philippines. Under the contract,
Single Star shall provide managerial services for 22
‘General Professional Partnership’ are partnerships
Triple Star’s Hongkong branch. All said services formed by persons for the sole purpose of exercising their
shall be performed in Hongkong. Is the common profession, no part of the income of which is
compensation for the services of Single Star derived from engaging in any trade or business (Sec. 22
taxable as income from sources within the (B), NIRC).
23
Joint Venture and Consortium is generally understood
Philippines? Explain. to mean an organization formed for the execution of a
single transaction and is thus if a temporary nature. While
Suggested Ans: No, the compensation for a corporation cannot generally enter into a contract of
partnership unless authorized by law or its chapter, it has
services rendered by Single Star is considered an
been held that it may enter into a joint venture which is
income derived from sources without the akin to a particular partnership (Philex Mining Corp vs.
CIR).

NVC Tax Notes | 31
Factors to Constitute a Joint Venture 3. Leasing by father and son of lot and building
The following are the essential factors to to tenants under administration by a building
constitute a joint venture: administrator (Reyes vs. CIR);
a) Each party making a contribution, not 4. Insurance pool or clearing house, composed
necessarily of capital but by way of services, of 41 non-life insurance corporations, for the
skill, knowledge, material or money; purpose of allocating and distributing the risk
b) Profits must be shared among the parties; (AFISCO Insurance vs. Court of Appeals).
c) Profits mist be a joint proprietary interest;
d) Right of mutual control over the subject Note: to be tax-exempt JV, the following
matter of the enterprise; and requirements must be satisfied:
e) Usually, there is a single business transaction. i) For the undertaking of a construction project;
ii) Should involve joining or pooling of resources
Taxable Joint Ventures by licensed local contractors that is licensed as
There are two instances when a joint venture a general contractor by the Philippine
becomes a taxable entity: Contractors Accreditation Board (PCAB) of the
1. A domestic corporation jointly owned by Department of Trade and Industry (DTI);
individuals and by two or more existing iii) The Local contractors are engaged in
domestic corporations and/or foreign construction business; and
corporations that is incorporated under the iv) The JV itself must likewise be duly licensed as
laws of the Philippines (e.g., D.M. Consunji such by the PCAB of the DTI (BIR Ruling No.
Inc.) or duly registered with or licensed by the 475-2014).
SEC is a taxable corporation, even if it is
engaged in the business of construction or Each of the co-venturers to the JV agreement is
energy-related activity; separately liable for the payment of the
2. If the unincorporated joint venture or corporate income tax on the profits distributed to
consortium (or unregistered partnership) is them by the joint venture. Other joint ventures,
engaged in any other line of business than although not formally incorporated, are taxable as
construction or energy-related acitivity with ordinary corporations.
operating contract with the government, the
same will also be treated as a taxable Note: Tax-exempt joint venture shall not include
corporation. those who are mere suppliers of goods, services,
The income and expenses of the taxable joint or capital to a construction project.
venture must be reported by it during the taxable Joint Venture involving Foreign Contractors may
year. be treated as non-taxable corporation if:
1. Member foreign contractor is covered by a
Examples of Taxable Partnership special license as contractor by PCAB; and
1. Joint emergency operations of two bus 2. Construction project is certified by the
companies (Collector vs. Batangas appropriate Tendering Agency (government
Transportation); office) that the project is a foreign-
2. Leasing of 24 properties by three sisters to financed/internationally-funded project and
various tenants under common management that international bidding is allowed under
for 15 years (Evangelista vs. Collector); the Bilateral Agreement entered into by and
between the Philippine government and the

NVC Tax Notes | 32
foreign/international financing institution, Sale of developed floor, unit, or lot is subject to
pursuant to the rules and regulations of R.A. income tax
No. 4566 (Contractor License Law). Should the corporate landowner or developer sell
any of the floors or portions of the floors
Each member of joint venture not taxable as allocated to them to third parties, the gain that
corporation shall report and pay taxes on their may be realized by them from such sale will be
respective shares to the joint venture profit. subject to the regular corporate income tax and to
the expanded withholding tax under Rev. Reg. No.
Foreign Joint Venture or Consortium that does 2-98, as amended (BIR Ruling No. 274-92).
not sell goods nor perform services in the
Philippines This rule applies even if the sale takes place
A joint venture or consortium formed among non- before or during the construction period.
resident foreign corporations in connection with a
local project in the Philippines is not subject to 3. Estates and Trusts
Philippine Income Tax, where said foreign joint Estate – refers to the mass of properties left by a
venture or consortium does not sell goods nor deceased person.
perform any service in the Philippines. This rule is
anchored on the fact that a foreign corporation is Note: The status of the estate is determined by
taxable only on income from sources within the the status of the decedent at the time of his
Philippines (BIR Ruling No. 23-95). death. So, an estate, as an income taxpayer, can
be a citizen or an alien.
Accordingly, no withholding tax is required to be
deducted and withheld by the Philippine payor Classification of Estates
from income payments from foreign sources a. Estate under judicial administration –
made to the foreign joint venture or consortium. settlement of which is the object of judicial
testamentary or intestate proceedings; and
Exempt joint venture or consortium may become
taxable partnership Note: Income of the estate under judicial
An exempt joint venture or consortium administration is taxable under Sec. 60 (A)(3)
undertaking a construction of office tower project of the NIRC to the fiduciary or trustee.
may subsequently become subject to income tax
as a separate joint venture or consortium, where b. Estate not under judicial administration –
after the construction period, the joint venture settlement of which is not the object of
partners engaged in the business of leasing the judicial testamentary or intestate
building floors or portions thereof separately proceedings (R.R. No. 2 Secs. 209 and 210).
owned by them (BIR Ruling No. 317-92).
The tax exemption of the joint venture granted Note: Income of the estate not under judicial
under the law is valid only up to the completion of administration, since no executor or
the construction project and does not extend to administrator, is taxable to the heirs and
the subsequent sale or lease of the developed beneficiaries. Each heir and beneficiary shall
condominium floors or units to customers. include said income (as distributive share of
the net income of the estate) on his or her
income tax return.

NVC Tax Notes | 33
BAR QUESTION (2012) Trust – a right of property, real or personal held
Q: Spouses Pablo Gonzales and Teresita by one party for the benefit of another; that
Gonzales, both resident citizens acquired there is a fiduciary relation between a trustee
during their marriage a residential house and and a cestui que trust as regards certain
lot located in Makati City, which is being property, real or personal, money or choses in
leased to a tenant for a monthly rental of action (PNB vs. CA)24
Php 100,000. Mr. Pablo is the President of PG
Corporation and he receives Php 50,000 Classification of Trust
salary per month. The spouses have only 1 a. Ordinary Trust – the income and corpus of
minor child. In late June 2010, he was the trust do not revert to the grantor. It is
immediately brought to the hospital because any of the following trust:
of heart attack and he was pronounced dead i. A trust where the income accumulated
on June 30, 2010. With no liabilities, the in trust for the benefit of unborn or
estate of the late Pablo was settled unascertained person or persons with
extrajudicially in early 2011. Is the estate of contingent interests;
the late Pablo required to file income tax ii. A trust where the income accumulated
return for 2010? Explain your answer. or held for future distribution under the
terms of the will or trust;
Suggested Ans: no, given that the estate of iii. A trust where the income which is to
Pablo Gonzales was not under judicial distributed currently by the fiduciary to
settlement, the income of the properties the beneficiaries;
would be taxable to the heirs in their
iv. A trust where the income collected by a
individual capacity in accordance with their
respective interest in the estate (Bar Q and A guardian of an infant which is to be held
for the Past 10 years, Dimaampao (2020)). or distributed as the court may direct;
and
v. A trust where the income which, in the
Taxes Payable upon Death of a Person
discretion of the fiduciary, may be either
When a person who owns property dies, the
distributed to the beneficiaries or
following taxes are payable under the provisions
accumulated (Sec. 60 (A)(1), (A) (2), and
of the income tax law:
(A)(4)).
a. Income tax for individuals (to cover the
period beginning January to the time of 24
There are at least three people involved in an express
death) (Secs. 24 and 25, NIRC); trust: (1) Trustor (creator/ settler/ grantor) or the person
b. Estate income tax if the estate is under who intentionally creates or established the trust. He
administration or judicial settlement (Sec. transfers legal ownership of property or assets to a person
for the benefit of a third party, who owns the equitable
60(A)(3), NIRC). title; (2) Trustee or the person who takes and holds the
property in trust and manages it solely for the benefit of
Note: Estate income tax under section 60 of the another, with certain powers and subject to certain duties.
NIRC is different from the imposition of the The Trustee may be a natural or juridical person; and (3)
Beneficiary or cestui que trust or the person who has the
estate tax. While the first is in the nature of equitable title or interest in the property and enjoys the
income tax, the latter is a transfer tax imposed benefit of the administration of the trust by the trustee.
on the privilege to transfer the properties of the He is the recipient of the trust. The beneficiary may also be
deceased to his heirs a natural or juridical person or a legal entity (Comments on
Partnership, Agency, and Trust, De Leon (2019), p. 642).

NVC Tax Notes | 34
b. Revocable Trust – a trust in which the power Further, the DBP, as the trustor, vested in the
to revest in the grantor title to any part of trustees of the Fund legal title over the fund
the corpus of the trust is vested in the as well as control over the investment of the
grantor himself or any person not having any money and assets of the Fund. The powers
substantial adverse interest in the trust and duties granted to the trustees of the
corpus or in its income; and Fund under the Agreement were plainly
more than just administrative. The principal
Note: The income of revocable trust revested and income of the Fund will not revert to
to the grantor shall be included in DBP even if the trust is subsequently
computing taxable income of the grantor modified or terminated. The beneficiaries or
(Sec. 63, NIRC). cestui que trust of the Fund are the DBP
officials and employees who will reture
Q: Against whom the income of a trust shall under CA 186, as amended by RA 1616
be taxable in case of: (a) revocable trust; (b)
irrevocable trust? Income of Estate and Trust is tax like an
A: The income of a trust will be taxed to the Individual Taxpayer
trustor, where the trust executed by him is The taxable income of the estate or trust, shall be
revocable (Sec. 63, NIRC), and the income of computed in the same manner and on the same
the trust is taxable to the trustee, where the basis as in the case of an individual (Sec. 60, NIRC).
trust is irrevocable (Sec. 60-61, NIRC).
BAR QUESTION (2009)
c. Employee’s Trust – trust which forms part of Q: Johnny transferred a valuable 10-door
a pension, stock bonus or profit – sharing commercial apartment to a designated trustee,
plan of an employer for the benefit of some Miriam, naming in the trust instrument Santino,
or all of his employees. Johnny’s 10-year old son, as the sole beneficiary.
The trustee is instructed to distribute the yearly
Note: Income tax shall not apply to rentals amounting to Php 720,000. The trustee
employee’s trust (Sec.60 (B), NIRC). consults you if she has to pay the annual income
tax on the rentals received from the commercial
Where legal title over the fund is apartment.
transferred to the trustee, the income of the a. What advice will you give the trustee? Explain.
Fund shall accrue to the trustee, not the b. Will your advice be the same if the trustee is
trustor. directed to accumulate the rental income and
The DBP Board of Directors executed distribute the same only when the beneficiary
Resolution No. 794 creating an employee’s reaches the age of majority? Why or why not?
trust. Res. No. 794 shows that DBP intended
to establish a trust fund to cover the Suggested Ans:
retirement benefits of certain employees a. I will advise the trustee that inasmuch as the
under RA 1616. Here, the principal and amount of income to be distributed annually
income of the fund would be separate and to the beneficiary is a deduction from gross
distinct from the funds of the DBP. income of the trust, he need not pay annual
income taxes (Sec. 61, NIRC).

NVC Tax Notes | 35
b. No, once a taxable trust is established, its net ABC Law Firm received earnings and paid
income is either taxable to the trust, expenses, among which are as follows:
represented by the trustee, or to the Earnings:
beneficiary. Thus, the trustee has to pay the
1. Professional/legal fees from various
income tax on the trust’s net income annually
accumulated (Bar Q and A for the Past 10 clients;
years, Dimaampao (2020)). 2. Cash prize received from a religious
society in recognition of the exemplary
service of ABC Law Firm;
4. Partnership
3. Gains derived from sales of excess
a. General Professional Partnership (GPP)
computers and laptop.
– formed by persons for the “sole
Payments:
purpose” or exercising common
1. Salaries of office staff;
profession and no part of the income of
2. Rentals for office space;
which is derived from engaging in any
3. Representation expenses incurred in
trade or business (Sec. 22(B), NIRC).
meetings with clients.
a. What are the items in the above mentioned
Tax Implication of the Income of GPP:
earnings which should be included in the
i. A GPP is not considered a taxable
computation of ABC Law Firm’s gross income?
entity for income tax purposes since
Explain.
it is only acting as a “pass-through”
b. What are the items in the above-mentioned
entity (R.R. No. 9-2018, Sec. 8).
payments which may be considered as deductions
ii. It is the individual partners who shall
from the gross income of ABC Law Firm? Explain.
be shall be subject to income tax in
c. If ABC Law firm earns net income in 2012, what,
their separate and individual
if any, is the tax consequence on the part of ABC
capacities (R.R. No. 9-2018, Sec. 8).
Law Firm insofar as the payment of income tax is
iii. For the purpose of computing the
concerned? What, if any, is the tax consequence
distributive shares of the partners,
on the part of A, B, C as individual partners,
the net income of the GPP shall be
insofar as the payment of income tax is
computed in the same manner as a
concerned?
corporation (R.R. No. 9-2018, Sec. 8
and 26).
Suggested Ans:
iv. The GPP is still obligated to file a
a. Items 1, 2, and 3 should be included in the ABC
return for administrative purposes,
Law Firm’s gross income.
but the partners are liable for the
1) Professional/legal fees from various client is a
payment of income tax in their
compensation for services rendered;
individual capacity (Tan vs. Del
2) Cash prize received from religious society is
Rosario)
received not in recognition of the achievement
enumerated under Sec. 32(B)(7)(C), NIRC;
BAR QUESTION (2014)
3) Gains derived from sale of excess computers
Q: A, B, and C, all lawyers, formed a partnership
and laptops are gains derived from dealings in
called ABC Law Firm so that they can practice
property.
their profession as lawyers. For the year 2012,

NVC Tax Notes | 36
b. Items 1, 2, and 3 are deductible from the gross As defined in the NIRC “the term corporation
income of ABC Law Firm. They are considered includes partnership, no matter how created or
ordinary and necessary expenses. organized.” This qualifying expression, clearly
indicates that a joint venture need not be
c. ABC Law Firm’s net income in 2012 is not undertaken in any of the standards, form, or
subject to tax because it is a general professional conformity with the usual requirements of the law
partnership, declared exempt from income tax on partnerships in order that one could be
(Sec. 22(B), NIRC). deemed constituted for the purposes of the tax
on corporations (Evangelista vs. CIR)
However, professional partners A, B, and C are
required to report their distributive shares from c. Co-ownership
the net income of ABC Law Firm as part of their There is co-ownership whenever the
gross income (Sec. 26, NIRC). ownership of an undivided thing or right
belongs to different persons (Art. 484,
b. Taxable Business Partnership – All other NCC)
partnership, no matter how created or
organized, which include unregistered For income tax purposes, the individual co-
joint venture (except tax-exempt JV or owners in a co-ownership report their share
consortiums) and business partnerships, of the income from the property owned in
are subject to the corporate income tax. common by them in their individual tax
returns for the year, and the co-ownership is
Tax Liability of a Taxable Business Partnership not considered as a separate taxable entity
They are taxable as an entity subject to normal or a corporation as defined in Sec. 22(B) of
corporate income tax the Tax Code.
The partnership itself is subject to corporate In a co-ownership arising from the death of a
taxation while individual partners are considered decedent, the court clearly establish that
stockholders, and therefore, profits distributed to such co-ownership is automatically
them by the partnership are taxable as dividends terminated upon the partition25 and
distribution of the properties of the estate
The taxable income for a taxable year, after and an unregistered partnership is created
deducting the corporate income tax imposed when the heirs invested the common
therein, shall be deemed to have been actually or properties and income and placed them
constructively received by the partners in the under a single management.
same taxable year and shall be taxed to them in
their individual capacity whether actually
distributed or not (Sec. 73 (D), NIRC).
25
It must be noted that before partition and distribution of
Note: When the NIRC includes “partnership’ the estate of the deceased, all the income thereof belongs
among the entities subject to the tax on commonly to the heirs. Also, the income of a co-ownership
“corporations”, it must allude to organizations arising from the death of a decedent is not subject to
income tax, if the activities of the co-owners are limited to
which are not necessarily “partnerships” in the the preservation of the property and the collection of the
technical sense of the term. income therefrom (Mamalateo (2019), p. 124).

NVC Tax Notes | 37
However, the co-ownership is not converted profit. They treated the profit as capital gain
into a partnership where the transactions of and paid income tax on ½ thereof. Is there a
the co-owners intended to liquidate the co- taxable partnership?
ownership are few or isolated, and the
element of habituality is not present. The A: There was no partnership. To regard them
intention of the co-owners to establish a as having a taxable partnership would result
partnership should also be considered. in oppressive taxation and obliterate the
distinction between a co-ownership and a
Q: A, B, and C bought two parcels of land in partnership. The transaction was isolated.
1956. They did not sell the same nor make Their original purpose was to dive the lots for
any improvements thereon. In 1966, they residential purposes. The division of the
bought three more parcels of land from one profit was merely incidental to the
seller. In 1968, they sold the two parcels at a dissolution of the co-ownership (Obillos Jr. vs.
profit after which they did not make any CIR).
additional or new purchase. In 1970, they
sold the remaining parcels also at a profit. In Note: The mere sharing of gross returns
the instant case, did they form an alone does not indicate a partnership,
unregistered partnership? since in a partnership, the partners share
the net profits after satisfying all the
A: No, there is no adequate basis to support partnership liabilities (Arts. 1812 and
the proposition that they formed an 1839, NCC).
unregistered partnership. The character of
habituality peculiar to business transaction General Rule: Co-ownership is a tax-exempt
for the purpose of gain must be present to entity
consider them so. Where the transaction is
isolated, in the absence of other Exception: Co-ownership is considered as a
circumstances showing a contrary intention, separate taxable entity if co-ownership is
the case can only give rise to co-ownership. converted into an unregistered partnership
The sharing of profits in a common property (Ona vs. CIR). Like when the income of co-
does not of itself establish a partnership that ownership is invested by the owners in
is but a consequence of a joint or common business or other income-producing
right or interest in the property. There must properties or when a co-ownership if formed
be a clear intent to form a partnership, the or established voluntarily, or upon
existence of juridical personality different agreement of the parties.
from individual partners, and the freedom of
each party to transfer or assign the whole Note: In the exception, co-ownership
property (Pascual vs. CIR). should be subject to income tax as a
corporation (Ona vs. CIR).
Q: After completing payments on two lots,
the father transferred his rights to his four The Division of Property upon Dissolution of
children to enable them to build their Co-ownership by Agreement is NOT subject
residences. After having held the two lots to Capital Gains Tax
for more than a year, they sold them at a

NVC Tax Notes | 38
The transfer of title to co-owners is not a or activity' of non-resident corporations in
sale, barter, exchange or other disposition the Philippines, or place where the contract
contemplated by law subject to the is signed.
imposition of the tax (BIR Ruling No. 145-98).
The act of partitioning a commonly owned The residence of the obligor who pays the
property to each co-owner should not be interest rather than the physical location of
treated as a taxable event as it is nothing the securities, bonds or notes or the place of
more than terminating the co-ownership by payment, is the determining factor of the
making each co-owner owner of specific source of interest income.
identifiable portion or unit of the property
(BIR Ruling No. 153-99). Accordingly, if the obligor is a resident of the
Philippines the interest payment paid by him
G. Situs of Taxation can have no other source than within the
It is the place or authority that has the right Philippines. The interest is paid not by the
to impose and collect taxes (CIR vs. bond, note or other interest-bearing
Marubeni). It is also called ‘place of taxation. obligations, but by the obligor (National
Development Company vs. CIR).
Income from Sources Within the Philippines
1. Interest derived from sources within the 2. Dividends received from a:
Philippines and interest on bonds, notes, or a. Domestic Corporation; and
other interest-bearing obligations of b. Foreign corporation, provided that at
residents, corporate, or otherwise (Sec. 42 least 50% of its gross income for the 3-
(A)(1), NIRC); year period ending with the close of its
taxable year preceding the declaration
Here, it does not matter whether the loan of such dividends or for such part of
agreement is signed in the Philippines or period as the corporation has been in
abroad or the loan proceeds will be used in a existence was derived from sources
project inside or outside the country. within the Philippines (Sec. 42 (A)(2),
NIRC).
Note: The Government's right to levy and
collect income tax on interest received by For example, We Make Kaiju, Inc., a
foreign corporations not engaged in trade or Japanese corporation, derives more
business within the Philippines is not than 50% of its gross income in the
planted upon the condition that 'the activity Philippines from the sale of Kaiju action
or labor — and the sale from which the figures for the past 3 years. If it declares
(interest) income flowed had its situs' in the dividends to a non-resident Filipino, the
Philippines. dividend income will be considered
sourced within the Philippines.
The law specifies: 'Interest derived from
sources within the Philippines, and interest Note: It is limited only in an amount
on bonds, notes, or other interest-bearing which bears the same ratio to such
obligations of residents, corporate or dividends as the gross income of the
otherwise.' Nothing there speaks of the 'act corporation for such period derived

NVC Tax Notes | 39
from sources within the Philippines outside the Philippines (Sec. 36(c)(3) and
bears to its gross income from all Sec. 25(b)(1), NIRC).
sources [Income Partly Within and
Partly Without] (Sec. 42 (A)(2)(b), NIRC). 4. Rentals and royalties26 from property
located in the Philippines or from any
3. Compensation for labor or personal services interest in such property for:
performed in the Philippines (Sec. 42 (A)(3), a. The use of or the right or privilege to use
NIRC). in the Philippines any copyright, patent,
design or model, plan, secret formula or
Note: Income from sale of services is process, goodwill, trademark, trade
taxable to the person who renders the brand or other like property or right;
services.
BAR QUESTION (2010)
Residence of the payor, of the place in Q: ABC, a domestic corporation, entered
which the contract for service was into a software license agreement with
made, or of the place of payment is XYZ, a non-resident foreign corporation
immaterial. The determining factor is based in the US. Under the agreement
the place where the services were which the parties forged in the US, XYZ
actually rendered (CIR vs. Baier-Nickel). granted ABC the right to use a computer
system program and to avail of technical
BAR QUESTION (1994) know-how relative to such program. In
Q: Bates Advertising Company is a non- consideration for such rights, ABC
resident corporation duly organized and agreed to pay 5% of the revenues it
existing under the laws of Singapore. It is receives from customers who will use
not doing business and has no office in and apply the program in the
the Philippines. Pilipinas Garment, Inc., a Philippines. Discuss the tax implication
domestic corporation, retained the of the transaction.
services of Bates to do all the advertising
of its products abroad. For said services, Suggested Ans: The agreement between
Bates’ fees are paid through outward XYZ and ABC involves the use of
remittances. Are the fees received by software, an intellectual property. As
Bates subject to any withholding tax? such, the payment made by ABC
amounting to 5% of its revenue it
Suggested Ans: The fees paid to Bates receives from customers is subject to
Advertising Company, a non-resident 30% final withholding tax as the
foreign corporation, are not subject to recipient is a non-resident foreign
withholding tax, since they are not corporation, XYZ (Sec. 28(B), NIRC).
subject to Philippine income tax. They
are exempt because they do not 26
‘Rental income’ on the lease of personal property
constitute income from Philippine located in the Philippines; ‘Royalty’ is a valuable property
sources, the same being compensation that can be developed and sold on a regular basis for a
consideration, in which case, any gain derived therefrom is
for labor or personal services performed considered as an active business income subject to the
normal corporate income tax (BIR Ruling No. 57-2000).

NVC Tax Notes | 40
b. The use of, or the right to use in the i. Produced, in whole or in part within
Philippines any industrial, commercial or and sold without the Philippines; or
scientific equipment; ii. Produced, in whole or in part without
c. The supply of scientific, technical, and sold within the Philippines (Sec. 42
industrial or commercial knowledge or (E)(1), NIRC).
information;
d. The supply of any assistance that is Note: Income from the sale of goods or
ancillary and subsidiary to, and is properties is taxable to the owner-seller
furnished as a means of enabling the of the goods or properties, including
application or enjoyment of, any such rights thereto.
property or right as is mentioned in
paragraph (a), any such equipment as is Q: Ms. C, a resident citizen, bought
mentioned in paragraph (b) or any such ready-to-wear goods from Ms. B, a
knowledge or information as is nonresident citizen.
mentioned in paragraph (c); a) If the goods were produced from
e. The supply of services by a nonresident Ms. B’s factory in the Philippines, is
person or his employee in connection Ms. B’s income from the sale to Ms.
with the use of property or rights C taxable in the Philippines?
belonging to, or the installation or b) If Ms. B is an alien individual and
operation of any brand, machinery or the goods were produced in her
other apparatus purchased from such factory in China, is Ms. B’s income
nonresident person; from the sale of the goods to Ms. C
f. Technical advice, assistance or services taxable in the Philippines?
rendered in connection with technical A: Whether the goods are produced in a
management or administration of any factory in the Philippines or in China is
scientific, industrial or commercial immaterial because it is the place of the
undertaking, venture, project or sale which determines the situs for the
scheme; and sale of personal property. If we were to
g. The use of or the right to use motion assume that the goods were sold in the
picture films, films or video tapes for use place where the factory was located
in connection with television, and tapes then (a) Ms. B’s income from the sale is
for use in connection with radio taxable in the Philippines because a non-
broadcasting (Sec. 42 (A)(4), NIRC). resident citizen is taxed on sources of
income within the Philippines. As to (b)
5. Gains, profits and income from the sale of Ms. B’s income from the sale is not
real property located in the Philippines taxable because nonresident citizens are
(Sec. 42 (A)(5), NIRC). not taxed on sources outside the
6. Gains, profits and income from the sale of Philippines.
personal property, subject to the following
rules: b. Income is treated as derived entirely
a. Income is treated as partly from sources from sources within the country where
within and partly from sources without the property is sold if:
the Philippines if:

NVC Tax Notes | 41
i. Purchased within and sold without the
Philippines; or Note: The foreign insurer’s place of business
ii. Purchased without and sold within the should not be confused with their place of
Philippines (Sec. 42 (E)(2), NIRC). activity. Business implies continuity and
progression of transactions while Activity
The exception is gain from the sale of shares may consist of only a single transaction. An
of stock in a domestic corporation, wherein activity may occur outside the place of
the income is treated as derived entirely business. Section 24 of the Tax Code does not
from sources within the Philippines, require a foreign corporation to engage in
regardless of the place where the shares business in the Philippines in subjecting its
were sold (Sec. 42 (E), NIRC). income tax. It suffices that the activity
creating the income is performed or done in
Place of Signing of a Contract the Philippines. What is controlling is not the
The place of the signing of a contract is never place of business but the place of activity
an issue or a factor for determining the that created the income (Philippine Guaranty
source of income. Co. vs. CIR).
The source of income is the property, Income from Sources without the
activity, or service that produced the income. Philippines
1. Interest other than derived from sources
Q: Are reinsurance premiums ceded to within the Philippines;
foreign reinsurers considered income from 2. Dividends other than those derived from
Philippine sources? sources within the Philippines;
A: Yes. The source of an income is the
property, activity or service that produced Examples:
the income. The reinsurance premiums a. Dividends received from a foreign
remitted to foreign reinsurer by virtue of the corporation less than 50% of its
reinsurance contracts27, accordingly, had for gross income for the 3 year period
their source the undertaking to indemnify an ending with the close of its taxable
insurance entity against liability. Said year preceding the declaration of
undertaking is the activity that produced the such dividends or such part of such
reinsurance premiums, and the same took period as the corporation has been
place in the Philippines (Howden vs. CIR). in existence is from sources within
the Philippines; and
27
A contract of reinsurance is one by which an insurer b. Dividends received from a non-
procures a third person to insure him against loss or resident foreign corporation.
liability by reason of such original insurance (Sec. 97,
Insurance Code). It is an agreement between two parties,
called the reinsured (ceding company) and reinsurer,
3. Compensation for labor or personal
respectively, whereby the reinsurer agrees to accept a services performed without the
certain fixed share of the reinsured’s risk upon terms set Philippines;
out in the agreement. The original insurer, who, having
issued a policy to an insured to cover certain risk, desires
to relieve itself of part thereof (Essentials of Insurance
Law, Aquino (2018), p. 287).

NVC Tax Notes | 42
BAR QUESTION (2011) Income from Sources Partly Within and
Q: Alain Descartes, a French citizen Partly Without the Philippines
permanently residing in the Philippines, Items of gross income not allocated to
received several items of income during sources from within and without the
the taxable year, such as consultancy Philippines shall, unless unmistakably from a
fees received for designing a computer source within or source without the
program and installing the same in the Philippines, be treated as derived from
Shanghai facility of a Chinese Firm; sources partly within and partly without the
interests from deposits in a local bank of Philippines (R. R. No. 02-40. Sec. 162).
foreign currency earned abroad
converted to Philippines pesos; dividends Personal Property Produced/Purchased and
received from an American corporation Sold
which derived 60% of its annual gross 1. Gross income derived from the sale of
receipts from Philippine sources for the personal property produced (in whole or
past seven years; and gains derived from in part) by the taxpayer within the
the sale of his condominium unit located Philippines and sold within a foreign
in Taguig city to another resident alien. country, or produced (in whole or in part)
Which item of income is not subject to by the taxpayer within a foreign country
Philippine Income Tax? and sold within the Philippines – partly
within and partly without (R. R. No. 02-
SUGGESTED ANS: 40. Sec. 162).
The consultancy fees are not subject to
Philippine Income tax. Being an alien, he The word “produced” includes created,
is subject to income tax only on income fabricated, manufactured, extracted,
from sources within the Philippines. processed, cured, or aged (R. R. No. 02-
Since the consultancy fees received by 40. Sec. 162).
him for designing a computer program
and installing the same in Chine, the 2. Gross income derived from the purchase
same shall be treated as income from of personal property within and its sale
sources outside the Philippines (Sec. 23 without the Philippines or from the
in relation to Sec. 42(C)(3), NIRC). purchase of personal property without
and its sale within the Philippines –
4. Rentals or royalties from property derived entirely from sources within the
located without the Philippines or country in which it is sold aged (Sec. 42
royalties for the use of or for the (E); R. R. No. 02-40. Sec. 162).
privilege of using without the Philippines,
patents, copyrights, secret processes and Type of Income Factor Considered
Salaries, wages, and other Where services are
formulas, goodwill, trademarks, trade compensation performed
brands, franchises, and other like
properties; Income from service
business
5. Gains, profits and income from sale of
real property located without the Sale of Personal Property – Where it is sold
purchased
Philippines (Sec. 42(C), NIRC).

NVC Tax Notes | 43
Labor performed Abroad
The important factor which determines the
Sale of Personal Property – Where it is produced
produced without, sold
source of income of personal services is not
within the resident of the payor, or the place where
Sale of Personal Property – Where it is produced the contract for service is entered into, or
produced without, sold
without
the place of payment, but the place where
Interest Income Residence of the Debtor the services were actually rendered (CIR vs.
Dividend Income: Baler-Nickel).
1. From Domestic Income Within
Corporation
2. From Foreign Income Within, if 50% or Income of Seaman
Corporation more of the gross income of In case of income of Filipino seamen working
the foreign company for the
on board foreign vessels that touch
past 3 years was derived
from sources within the Philippine ports to load and unload cargoes,
Philippines their services are considered rendered
Income Without, if less than partly within and partly without the
50% of the gross income of Philippines (BIR Ruling No. 03-76).
the foreign company for the
past 3 years was derived
from sources within the Thus, the situs of the income of seamen is
Philippines not determined based on the citizenship of
Rents Location of the Property
the vessel in which they are on board.
Royalties Where property is used
Income is considered earned in the place
Sale of real property Location of the property
where the service was actually rendered
Sale of Shares of Stock:
1. Of Domestic Income Within where the vessel is docked for the purpose
Corporation of rendering services (BIR Ruling No. 01-61).
2. Of Foreign Income Without
Corporation
- End of Module 1 -
Note: For the gross income items allocated to
sources partly within and partly without the
Philippines:
 There shall be deducted the expenses,
losses and other deductions properly
apportioned; and
 A ratable part of other expenses, losses
and deductions which cannot properly
be allocated to some item of gross
income
If there is any remainder, it shall be included
in full as taxable income from sources within
the Philippines.

General Principles of Income Taxation

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NVC Tax Notes | 1

Module 1 consumption or for any other disposition and to

Q: Which among those enumerated in Sec. 21

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Test of Realization Increase in the Value of the Property is NOT

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Increase in the Inventory

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Items Not Included as Compensation 3. Business Income – gains and profits

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Income exempt from Income tax:

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(C) An individual citizen of the Philippines who is

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BAR QUESTION (2015) BAR QUESTION (2018)

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A seaman is considered as an OCW 3) His purpose is of such a nature that an

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