Taxation 1 TSN - 2nd Exam

nd
Taxation TSN 2 Exam Coverage

Based on the Lectures of Dean Manuel P. Quibod
REMINDER: Please read the transcription together
f.
with the NIRC. Thanks.
9243- amended of the documentary stamp

tax
g.
July 23, 2013
9294- exemption of the
h. 9337- amending the VAT from 10 to 12%

st
INCOME TAXATION 1 lecture
RVAT
What we will cover is only on Title 1 and Title II. The rest
will in Taxation II.
i.
9361-
j.
9504- 2008 exemption low income earners

from income tax
HISTORY OF THE INTERNAL REVENUE LAW

1.
k.
tax
Internal Revenue law 1904- this law was enacted

under ACT 1189 and was pattern after the internal
l.
2.
Internal revenue law of 1913
3.
4.
5.
NIRC of 1939- 1
ST
m. 10021- exchange of tax exemption

n. 10026- tax exemption to local water district
o.
NICR. No longer in American
regime. We have now under the commonwealth

st
under CA 466 ( 1 NIRC of the Philippines) which was
NIRC of 1977- it took sometimes noh. Enacted under
alcohol (amendments)Dec 2012, increase the

syntax law. Part of the proceeds will be for
the
anti-smokingcampaign
of
the
p. 10378- 2013, section 28 or the tax of

international carriers. We do not tax the
PD 1158
international carriers where we have or doing
7.
NIRC of 1986- EDSA time
8.
NIRC of 1997- most recent. It is now under RA 8424,

the law from where the current NIRC. The 1997 it
went thru several amendments. The law was later
known as tax reform act of 1997. The amendments
that came after RA 8424, the amendments we have
RA 8761- Feb. 15 2000 amending the VAT of
the Professionals. Like lawyers and doctors
exempted from value added tax
b. RA
9010-
feb
2001,
amendment
business of our country.

SEC 1 OF THE NIRC
Section 1. Short Title. - This Act shall be cited as the "Tax
Reform Act of 1997"
STRUCTURE OF THE NIRC
So far as the construction of the BIR, above the BIR we
have the DOF. The collection arm of the government is
VAT
extending the coverage of exemption

c.
10351- Law on excise tax to tobacco and
government
called NIRC of 1939
a.
10010- amendment of taxation of insurance

policy
revenue of US.
6.
9648- exemption from documentary stamp
RA 9224- mobiles
the BIR and the BOC (TAX II). So far as the BIR we have
the NIRC wherein the bureau is under the supervision
and control of the DOF.
d. RA 9234- amendment of excise tax of alcohol

e.
9238- amendment of the VAT subjecting the
The powers and duties? Assessment and collection of the
professional
National internal revenue tax.

Phases and aspect of taxation
nd

1.
Levying legislative aspect
2.
Collection
and
assessment-
The next smaller BIR units are the regional offices. It

executive/
tax
administration
3.
Payment- executive/ tax administration
TITLE I. Section 2. Powers and duties of the Bureau of

Internal Revenue. - The Bureau of Internal Revenue shall
be under the supervision and control of the Department
of Finance and its powers and duties shall comprehend
the assessment and collection of all national internal
revenue taxes, fees, and charges, and the enforcement of
all forfeitures, penalties, and fines connected therewith,
operates also as BIR in national set-up. Smaller unit sya.

Next is the revenue district offices (RDO) so this the
smallest BIR units. They also operate in the assessment
and collection.
Section 4. Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases. - The power to interpret
the provisions of this Code and other tax laws shall be
under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of
Finance.
including the execution of judgments in all cases decided

in its favor by the Court of Tax Appeals and the ordinary
The power to decide disputed assessments, refunds of
courts. The Bureau shall give effect to and administer the
internal revenue taxes, fees or other charges, penalties
supervisory and police powers conferred to it by this Code
imposed in relation thereto, or other matters arising
or other laws.
under this Code or other laws or portions thereof

administered by the Bureau of Internal Revenue is vested
The power of the BIR is sourced in the NIRC. It will define

the extent and scope of the power of the BIR
TITLE I- Section 3. Chief Officials of the Bureau of
Internal Revenue. - The Bureau of Internal Revenue shall
have a chief to be known as Commissioner of Internal
Revenue, hereinafter referred to as the Commissioner and
four (4) assistant chiefs to be known as Deputy
Commissioners.
The deputy commissioners, we have offices like
Offices of Deputy commissions or the offices of the
information group.
in the Commissioner, subject to the exclusive appellate

jurisdiction of the Court of Tax Appeals.
DIPUTED
Disputed
ASSESMENTassessments
Under
means/
second
are
paragraph
finding
of
tax
deficiencies against the taxpayer which is notifies and

demanded to pay the tax and the herein assessment is
disputed kaya tinatawag syag disputed assessment. Since
it is disputed it has to be resolve and it will be the
commissioner who will resolve the assessment. WON the
assessment contrary or against the protest of the tax
payer.
CLAIMS
FOR
REFUND-
Iftaxpayers
overpay
or
erroneously paid their taxes. It will be the commissioner

3 kinds/group of deputy commissioners of BIR
to decide whether the refund is valid or not. Including
1.
Deputy commissioner for information system
penalties and fees.
2.
For operation
ALL OTHER MATTERS- for as long that the enforcement
3.
For legal and inspection; and
of that law is under the scope of BIR then it will be the
4.
For resource management.
commissioner to decide.
nd

From the commissioner subject to the exclusive appellate
specified in the summons and to produce such books,
jurisdiction to the CTA court of tax appeal.
papers, records, or other data, and to give testimony;

d) To take such testimony of the person concerned,
Section 5. Power of the Commissioner to Obtain
under oath, as may be relevant or material to such
Information, and to Summon, Examine, and Take
inquiry; and
Testimony of Persons. - In ascertaining the correctness of
e) To cause revenue officers and employees to make a
any return, or in making a return when none has been
canvass from time to time of any revenue district or
made, or in determining the liability of any person for any
region and inquire after and concerning all persons
internal revenue tax, or in collecting any such liability, or
therein who may be liable to pay any internal revenue
in evaluating tax compliance, the Commissioner is
tax, and all persons owning or having the care,
authorized:
management or possession of any object with respect
a) To examine any book, paper, record, or other data

which may be relevant or material to such inquiry;
b) To Obtain on a regular basis from any person other
than the person whose internal revenue tax liability is
subject to audit or investigation, or from any office or
officer of the national and local governments,
government agencies and instrumentalities, including
to which a tax is imposed.

The
provisions
of
the
foregoing
paragraphs
notwithstanding, nothing in this Section shall be

construed as granting the Commissioner the authority to
inquire into bank deposits other than as provided for in
Section 6(F) of this Code.
Other set of powers
the Bangko Sentral ng Pilipinas and governmentowned or -controlled corporations, any information
such as, but not limited to, costs and volume of
production, receipts or sales and gross incomes of
For purposes to ascertain and finding liability of the tax

return, the commissioner may authorize to do the
following:
taxpayers, and the names, addresses, and financial
The extent of the BIR as revenue examiner (bank deposit)
statements of corporations, mutual fund companies,
- it is not actually the commissioner that will examine.
insurance
companies,
operating
That only his power however, it may be delegated to the
headquarters
of
multinational companies, joint
regional office. For purposes that a taxpayer to be
accounts, associations, joint ventures of consortia and
investigated, the BIR cannot just go to the door of the
registered partnerships, and their members;
taxpayer saying, I have the power and I will investigate
regional
c) To summon the person liable for tax or required to
you. They cannot do that. It must have that LETTER OF
file a return, or any officer or employee of such
AUTHORITY (LOA) - it is the power given by the
person, or any person having possession, custody, or
commissioner for them investigate. It must identify what
care of the books of accounts and other accounting
tax year they are investigating. Hindi sya pwede broad. It
records containing entries relating to the business of
must specify the tax period subject to investigation.
the person liable for tax, or any other person, to

appear
before the Commissioner or his duly
authorized representative at a time and place
To the extent of this power the commissioner is not

allowed to inquire into bank deposit. Broad the power
provided in SEC 5 it can still not inquire into back
nd

accounts as it is provided protection under SECTION 6
incomplete or erroneous, the Commissioner shall assess
(F) of the NIRC.
the proper tax on the best evidence obtainable.
There are only two instances where the commissioner

may examine into bank accounts. That is in section 6.
Section
6. Power
of
the
Commissioner
to
In case a person fails to file a required return or

other document at the time prescribed by law, or
Make
assessments and Prescribe additional Requirements for Tax
willfully or otherwise files a false or fraudulent

return or other document, the Commissioner
shall make or amend the return from his own
Administration and Enforcement. -
knowledge and from such information as he can

(A) Examination of Returns and Determination of Tax
obtain through testimony or otherwise, which
Due. - After a return has been filed as required under the
shall be prima facie correct and sufficient for all
provisions of this Code, the Commissioner or his duly
legal purposes.
authorized representative may authorize the examination
(C) Authority to Conduct Inventory-taking, surveillance
of any taxpayer and the assessment of the correct amount
and to Prescribe Presumptive Gross Sales and Receipts. -
of tax: Provided, however; That failure to file a return
The Commissioner may, at any time during the taxable
shall not prevent the Commissioner from authorizing the
year, order inventory-taking of goods of any taxpayer as a
examination of any taxpayer.
basis for determining his internal revenue tax liabilities,

or may place the business operations of any person,
The tax or any deficiency tax so assessed shall be
natural or juridical, under observation or surveillance if
paid
the
there is reason to believe that such person is not declaring
Commissioner or from his duly authorized
his correct income, sales or receipts for internal revenue
representative.
tax purposes. The findings may be used as the basis for
Any return, statement of declaration filed in any
assessing the taxes for the other months or quarters of the
office authorized to receive the same shall not be
same or different taxable years and such assessment shall
withdrawn: Provided, That within three (3) years
be deemed prima facie correct.
upon
notice
and
demand
from
from the date of such filing , the same may be

modified,
changed,
or
amended:
Provided,
When it is found that a person has failed to issue
further, That no notice for audit or investigation
receipts
and
invoices
in
violation
of
the
of such return, statement or declaration has in
requirements of Sections 113 and 237 of this Code,
the meantime been actually served upon the
or when there is reason to believe that the books
taxpayer.
of accounts or other records do not correctly
(B) Failure to Submit Required Returns, Statements,
reflect the declarations made or to be made in a
Reports and other Documents. - When a report required
return required to be filed under the provisions
by law as a basis for the assessment of any national
of this Code, the Commissioner, after taking into
internal revenue tax shall not be forthcoming within the
account the sales, receipts, income or other
time fixed by laws or rules and regulations or when there
taxable base of other persons engaged in similar
is reason to believe that any such report is false,
businesses
under
similar
situations
or
circumstances or after considering other relevant
nd

information may prescribe a minimum amount of
(2) the fair market value as shown in the
such gross receipts, sales and taxable base, and
schedule of values of the Provincial and
such amount so prescribed shall be prima facie
City Assessors.
correct for purposes of determining the internal
(F) Authority of the Commissioner to inquire into Bank
revenue tax liabilities of such person.
Deposit Accounts. - Notwithstanding any contrary
(D) Authority to Terminate Taxable Period. _ When it
provision of Republic Act No. 1405 and other general or
shall come to the knowledge of the Commissioner that a
special laws, the Commissioner is hereby authorized to
taxpayer is retiring from business subject to tax, or is
inquire into the bank deposits of:
intending to leave the Philippines or to remove his

property therefrom or to hide or conceal his property, or
(1) a decedent to determine his gross
is performing any act tending to obstruct the proceedings
estate; and
for the collection of the tax for the past or current quarter
(2) any taxpayer who has filed an
or year or to render the same totally or partly ineffective
application for compromise of his tax
unless such proceedings are begun immediately, the
liability under Sec. 204 (A) (2) of this
Commissioner shall declare the tax period of such
Code by reason of financial incapacity to
taxpayer terminated at any time and shall send the
pay his tax liability.
taxpayer a notice of such decision, together with a request
In case a taxpayer files an application to
for the immediate payment of the tax for the period so
compromise the payment of his tax liabilities on
declared terminated and the tax for the preceding year or
his claim that his financial position demonstrates
quarter, or such portion thereof as may be unpaid, and
a clear inability to pay the tax assessed, his
said taxes shall be due and payable immediately and shall
application shall not be considered unless and
be subject to all the penalties hereafter prescribed, unless
until he waives in writing his privilege under
paid within the time fixed in the demand made by the
Republic act NO. 1405 or under other general or
Commissioner.
special laws, and such waiver shall constitute the

authority of the Commissioner to inquire into the
(E) Authority of the Commissioner to Prescribe Real

Property
Values.
The
Commissioner
is
bank deposits of the taxpayer.
hereby
(G) Authority to Accredit and Register Tax Agents. - The
authorized to divide the Philippines into different zones
Commissioner shall accredit and register, based on their
or areas and shall, upon consultation with competent
professional competence, integrity and moral fitness,
appraisers both from the private and public sectors,
individuals and general professional partnerships and
determine the fair market value of real properties located
their representatives who prepare and file tax returns,
in each zone or area. For purposes of computing any
statements, reports, protests, and other papers with or
internal revenue tax, the value of the property shall be,
who appear before, the Bureau for taxpayers. Within one
whichever is the higher of;
hundred twenty (120) days from January 1, 1998, the

Commissioner
shall
create
national
and
regional
(1) the fair market value as determined
accreditation boards, the members of which shall serve
by the Commissioner, or
for three (3) years, and shall designate from among the
senior officials of the Bureau, one (1) chairman and two
nd

(2) members for each board, subject to such rules and
The inquiry will not limited to the records of the
regulations as the Secretary of Finance shall promulgate
taxpayers but they can inquire into the suppliers. I
upon the recommendation of the Commissioner.
veverify nila DoonKung ito ba ang pinurchase nila. If it

will no jive, then there will be a variance. May kulang,
Individuals and general professional partnerships
then it will be a suspicion or indication of erroneous
and
returns.
their
representatives
who
are
denied
accreditation by the Commissioner and/or the

national and regional accreditation boards may
appeal such denial to the Secretary of Finance,
who shall rule on the appeal within sixty (60)
days from receipt of such appeal. Failure of the
Secretary of Finance to rule on the Appeal within
the prescribed period shall be deemed as
approval of the application for accreditation of
the appellant.
(H)
Authority
of
the
Commissioner
to Prescribe
Additional Procedural or Documentary Requirements. The Commissioner may prescribe the manner of
compliance
with
any
documentary
or
procedural
requirement in connection with the submission or
Under SECTION 6 A(A) Examination of Returns and Determination of Tax

Due. - After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination
of any taxpayer and the assessment of the correct amount
of tax: Provided, however; That failure to file a return shall
not prevent the Commissioner from authorizing the
examination of any taxpayer.
The tax or any deficiency tax so assessed shall be paid upon
notice and demand from the Commissioner or from his
duly authorized representative.
preparation of financial statements accompanying the tax

returns.
Any return, statement of declaration filed in any office

authorized to receive the same shall not be withdrawn:
To appreciate this provisions, most of our taxes are selfassessing. By reason of this, taxpayers are required to file
tax returns to the BIR. Since the BIR will determine the
truthfulness and accuracy of the tax returns, after the
filling and payments, the tax return shall be subject to
Provided, That within three (3) years from the date of such
filing , the same may be modified, changed, or amended:
Provided, further, That no notice for audit or investigation
of such return, statement or declaration has in the
meantime been actually served upon the taxpayer.
assessments. This assessments is the process within

which the BIR is going to examine the tax returns.
WHAT IS THERE IN THE TAX RETURN? HOW IS THE
BIR DETERMINE NA TAMA UN? Then that is supported
by the power granted to the BIR in section 5 and 6.
Armed with the LOA didto magstart ang investigation.
The BIR now will ask for the tax payers to pass the
necessary records, books, business records etc.
6A- if you have filed a tax return, Hindi muna pwede

bagohin nya. What if i-amend mo? You are allowed to
make amendment of the return from the date of such
filling. The same shall be modified. If you are now under
examination HindiMona pwde maamendahan ung return.
So for as long that you are under investigation, Hindi mo
Na pwede amendahin ang return mo. If wala, then you
can amend any time within 3 years. The period within
nd

which the BIR can examine you is within 3 years after the
exact, pwede sya estimate LNG. There is there a
deadline of filling of the return.
PRESUMPTION OF CORRECTNESS. When that finding
Ex. April 15 2013 that is the deadline for the filling of the
tax return for calendar year of 2012. You have 3 years from
April 15 2013 to be subjected to examination of the BIR so
is serve upon the taxpayer, the assessment is presume

correct. So the burden now is in the taxpayer to prove the
otherwise.
April 2016. Any time pwede mo iamend and returns
WHAT IS THE BASIS OF ALL OF THIS? It is because
moh,after that period, HindiNa pwede kasi magexpire Na
taxes are the lifeblood. We do not put so much restriction
kasi. Hindi kana pwede rin habulin ng BIR. The BIR is
given to the commissioner.
given only 3 years. But when the BIR send you a notice
after 3 years pasok din yan (we will dicuss that later in tax
C) Authority to Conduct Inventory-taking, surveillance and
II, arasso!)
to Prescribe Presumptive Gross Sales and Receipts. - The

Commissioner may, at any time during the taxable year,
(B) Failure to Submit Required Returns, Statements,
order inventory-taking of goods of any taxpayer as a basis
Reports and other Documents. - When a report required
for determining his internal revenue tax liabilities, or may
by law as a basis for the assessment of any national
place the business operations of any person, natural or
internal revenue tax shall not be forthcoming within the
juridical, under observation or surveillance if there is
time fixed by laws or rules and regulations or when there
reason to believe that such person is not declaring his
is reason to believe that any such report is false,
correct income, sales or receipts for internal revenue tax
incomplete or erroneous, the Commissioner shall assess
purposes. The findings may be used as the basis for
the proper tax on the best evidence obtainable.
assessing the taxes for the other months or quarters of the

same or different taxable years and such assessment shall
In case a person fails to file a required return or other
be deemed prima facie correct.
document at the time prescribed by law, or willfully or

otherwise files a false or fraudulent return or other
When it is found that a person has failed to issue receipts
document, the Commissioner shall make or amend the
and invoices in violation of the requirements of Sections
return from his own knowledge and from such
113 and 237 of this Code, or when there is reason to believe
information as he can obtain through testimony or
that the books of accounts or other records do not
otherwise, which shall be prima facie correct and
correctly reflect the declarations made or to be made in a
sufficient for all legal purposes.
return required to be filed under the provisions of this

Code, the Commissioner, after taking into account the
6B-take note of the scope of the power, the BIR can still
sales, receipts, income or other taxable base of other
made an assessment on the basis of other evidence. In a
persons engaged in similar businesses under similar
case, SC disallowed the use of making Xerox copy as a
situations or circumstances or after considering other
basis of evidence. Evidence can be obtain to other
relevant information may prescribe a minimum amount
sources.
of such gross receipts, sales and taxable base, and such
In
finding
deficiency
of
the
taxpayer
under
investigation, it is not necessary that the tax findings is
amount so prescribed shall be prima facie correct for
nd

purposes of determining the internal revenue tax
country or to remove his property therefrom
liabilities of such person.
(provisions)
6C- Authority to conduct inventory-taking, surveillance

and to prescribe presumptive gross sales and receipt. In
the conduct of this surveillance the BIR may notice the
vat returns of this taxpayer had been decreasing and they
may observe the activities or conduct inventory taking of
the business. Of course they should be armed of an
authority in conducting this processes.
6-c2nd.
Under thesecircumstances the

E) Authority of the Commissioner to Prescribe Real
Property
Values.
The
Commissioner
is
hereby
authorized to divide the Philippines into different zones

or areas and shall, upon consultation with competent
appraisers both from the private and public sectors,
determine the fair market value of real properties located
in each zone or area. For purposes of computing any
internal revenue tax, the value of the property shall be,
(D) Authority to Terminate Taxable Period. _ When it shall
whichever is the higher of;
come to the knowledge of the Commissioner that a

taxpayer is retiring from business subject to tax, or is
(1) the fair market value as determined
intending to leave the Philippines or to remove his property
by the Commissioner, or
therefrom or to hide or conceal his property, or is
(2) the fair market value as shown in the
performing any act tending to obstruct the proceedings for
schedule of values of the Provincial and
the collection of the tax for the past or current quarter or
City Assessors.
year or to render the same totally or partly ineffective

unless such proceedings are begun immediately, the
Commissioner shall declare the tax period of such taxpayer
terminated at any time and shall send the taxpayer a notice
of such decision, together with a request for the immediate
payment of the tax for the period so declared terminated
and the tax for the preceding year or quarter, or such
portion thereof as may be unpaid, and said taxes shall be
due and payable immediately and shall be subject to all the
penalties hereafter prescribed, unless paid within the time
fixed in the demand made by the Commissioner.
E. ito ung tinatawag natin determining zonal values. Real

properties here in the Philippines are valued based on the
local fair value determine by your assessor. Each LGU
through the local assessor will have local fair market
value of every real property within their territory. The BIR
also makes its own assessment/ valuation. Kaya meron
kang fair market value ng BIR meron Karin fair market
value Na Local assessor. For the purposes of capital gain
tax, donor/estate and income tax, when real property will
be subject to taxed, it will be the higher between the fair
market value of the BIR as against the fair market value of
D authority to terminate taxable period.
the local assessor whichever is higher. When we go to

Capital gain tax, there would be 3 contenting value, to
Now in this case, it will happen on certain cases. When it

shall come to the knowledge of the commissioner that the
wit: selling price, fair market value of BIR and fair market
value of the assessor.
taxpayer is retiree on business, then there would be

termination of taxable period. Or intended to leave the
If you want to reduce the selling price (in which it is case

of tax evasion) the lowest you can go is the zonal value.
nd

You cannot always go lower than the zonal. It is because,
1.
Tax if you declare that these are the accounts
even if you underprice youll still have to pay the zonal
of the decedent (estate tax) the commission may
value. So if the zonal is higher than all the valuation, then
look into the account to determine Kung tama
it will be the basis of the tax. If the selling price is the
bah o Hindi.
highest among the valuation, then it will be the tax based.

For purposes of taxation, it will always be the highest
valuation.
2.
Tax compromise- the taxpayer would ask for tax

comprise by reason of financial incapacity.
Sharing of tax information- here this is the 3
(F) Authority of the Commissioner to inquire into Bank

Deposit Accounts. - Notwithstanding any contrary
provision of Republic Act No. 1405 and other general or
special laws, the Commissioner is hereby authorized to
inquire into the bank deposits of:
rd
case
wherein you can inquire to the bank account of the

taxpayer in the country. For as long that there is a tax
treaty on the basis of reciprocity wherein the Philippines
can inquire the bank account of a Filipino in the foreign
country.
(1) a decedent to determine his gross
(G) Authority to Accredit and Register Tax Agents. - The
estate; and
Commissioner shall accredit and register, based on their
(2) any taxpayer who has filed an
professional competence, integrity and moral fitness,
application for compromise of his tax
individuals and general professional partnerships and
liability under Sec. 204 (A) (2) of this
their representatives who prepare and file tax returns,
Code by reason of financial incapacity to
statements, reports, protests, and other papers with or
pay his tax liability.
who appear before, the Bureau for taxpayers. Within one
In case a taxpayer files an application to compromise the
hundred twenty (120) days from January 1, 1998, the
payment of his tax liabilities on his claim that his
Commissioner
financial position demonstrates a clear inability to pay the
accreditation boards, the members of which shall serve
tax assessed, his application shall not be considered
for three (3) years, and shall designate from among the
unless and until he waives in writing his privilege under
senior officials of the Bureau, one (1) chairman and two
Republic act NO. 1405 or under other general or special
(2) members for each board, subject to such rules and
laws, and such waiver shall constitute the authority of the
regulations as the Secretary of Finance shall promulgate
Commissioner to inquire into the bank deposits of the
upon the recommendation of the Commissioner.
taxpayer.
shall
create
national
and
regional
Individuals and general professional partnerships and
F. ito ung inquiry of bank accounts. The secrecy of the
their representatives who are denied accreditation by the
bank accounts covers not only your peso account but also
Commissioner
you foreign account. RA 6046,
accreditation boards may appeal such denial to the
and/or
the
national
and
regional
Secretary of Finance, who shall rule on the appeal within

There are two cases in which the BIR can look into your
account. Only these two cases
sixty (60) days from receipt of such appeal. Failure of the

Secretary of Finance to rule on the Appeal within the
nd

10
prescribed period shall be deemed as approval of the
taxes of Five hundred thousand pesos (P500,000)
application for accreditation of the appellant.
or less, and minor criminal violations, as may be

determined by rules and regulations to be
G. Authority to accredit and register tax agents- these are
promulgated by the Secretary of finance, upon
those practitioners who are doing the follow-up etc.
recommendation
papers in the BIR.
discovered by regional and district officials, may
In case of lawyers, you do not have to be accredited. So no
of
the
Commissioner,
be compromised by a regional evaluation board

which shall be composed of the Regional Director
need for that ha.
as Chairman, the Assistant Regional Director, the

to Prescribe
heads of the Legal, Assessment and Collection
Additional Procedural or Documentary Requirements. -
Divisions and the Revenue District Officer having
The Commissioner may prescribe the manner of
jurisdiction over the taxpayer, as members; and
compliance
procedural
(d) The power to assign or reassign internal
requirement in connection with the submission or
revenue officers to establishments where articles
preparation of financial statements accompanying the tax
subject to excise tax are produced or kept.
(H)
Authority
of
with
the
any
Commissioner
documentary
or
Section 8. Duty of the Commissioner to Ensure the
returns.
Provision
and
Distribution
of
forms,
Receipts,
Section 7. Authority of the Commissioner to Delegate
Certificates, and Appliances, and the Acknowledgment of
Power. - The Commissioner may delegate the powers
Payment of Taxes.-
vested in him under the pertinent provisions of this Code

to any or such subordinate officials with the rank
(A)
Provision
equivalent to a division chief or higher, subject to such
Officials.
limitations and restrictions as may be imposed under
Commissioner, among other things, to prescribe,
rules and regulations to be promulgated by the Secretary
provide, and distribute to the proper officials the
of finance, upon recommendation of the Commissioner:
requisite licenses internal revenue stamps, labels
Provided, However, That the following powers of the
all other forms, certificates, bonds, records,
Commissioner shall not be delegated:
invoices, books, receipts, instruments, appliances
and
It shall
Distribution
be
the
to
duty
Proper
of
the
and apparatus used in administering the laws

(a) The power to recommend the promulgation
falling within the jurisdiction of the Bureau. For
of rules and regulations by the Secretary of
this purpose, internal revenue stamps, strip
Finance;
stamps and labels shall be caused by the
(b) The power to issue rulings of first impression
Commissioner to be printed with adequate
or to reverse, revoke or modify any existing ruling
security features.
of the Bureau;
Internal revenue stamps, whether of a bar code or
(c) The power to compromise or abate, under
fuson design, shall be firmly and conspicuously
Sec. 204 (A) and (B) of this Code, any tax liability:
affixed on each pack of cigars and cigarettes
Provided, however, That assessments issued by
subject to excise tax in the manner and form as
the regional offices involving basic deficiency
nd

11
prescribed by the Commissioner, upon approval
supervision and police power conferred to it the Code or
of the Secretary of Finance.
other tax laws.
(B) Receipts for Payment Made. - It shall be the

duty of the Commissioner or his duly authorized
representative or an authorized agent bank to
Now when you go to Section 4, you have the powers of

the Commissioner to interpret tax laws and decide tax
cases.
whom any payment of any tax is made under the

provision of this Code to acknowledge the
Then when you go to Section 5, again it is another power
payment of such tax, expressing the amount paid
of the Commissioner to obtain information, and to
and the particular account for which such
summon/examine and take testimony.
payment was made in a form and manner

prescribed therefor by the Commissioner.
When you go to Section 6, another power of the

Commissioner to make assessments and prescribe
additional requirements for tax administration and
July 24, 2013- QUIZ FOR TAXATION I
enforcement.
July 30, 2013
Then Section 7, the authority of the Commissioner to
ST
First Part: Discussion of Answers for the 1 EXAM
delegate power.
Second Part: Discussion of NIRC
So those are the powers of the Commissioner.
Now remember that there is a distinction of the powers in
Then you have Section 15, the authority of Internal
Section 2 and the powers in Section 4, 5, 6, 7, 8 and the
Revenue Officers to make arrests and seizures.
other provisions.
Then Section16, assignment of Internal Revenue Officers
What does section tell us? Now Section 2 refers to the
involve in excise tax functions to establishments where
powers and duties of BIR. So if you will be asked, are the
articles subject to excise tax are produced or kept. Now
duties and powers of BIR the same with the power of the
what was referred to in Section 16 are the places of
Commissioner of the Internal Revenue, so the head of BIR
manufacture or production on articles subject to excise
is the Commissioner so if you will be asked, are the
tax like the distilleries or breweries where the articles are
powers of the bureau same as the power of the
alcohol products where articles are produced subject to
Commissioner? THEY ARE NOT.
excise tax. Internal Revenue Officers are assigned in this
Section 2 provides the powers and the duties of the

bureau or BIR as the office. But when you go Section 4,
these are the powers of the Commissioner, the power to
interpret the provisions of NIRC and other tax laws as
well as decide tax cases. In Section 2, the power of the
bureau is supervision will cover assessment and collection
of taxes, fees, and charges, the enforcement of all
forfeitures, penalties and fines including the execution of
judgments
in
all
cases
then
the
administration,
production or manufacturing premises. In Section 16, the

Commissioner shall employ, assign, or reassign internal
revenue officers involved in excise tax functions to
establishments or places where articles subject to excise
tax are produced or kept. How long is there assignment?
They shall be there shall in no case stay in his assignment
for more than 2 years. So di puwedeng madagdagan kasi
there might be conflict kasi baka yung Officer will be
conspiring with the manufacturer or producer.
nd

12
Then you have Section 17, assignment of Internal
would lend money to the borrower so you have a
Revenue Officers and other employees to other duties. So
principal loan P 10,000.00 with interest at 12% per
the Internal Revenue Officers assigned to perform
annum so in end of the year the borrower paid P 11,
assessment or collection shall not remain in the same
200.00 if you are the lender, did the lender make income?
assignment for more than 3 years: Provided, further, that
Yes the lender made income but the question is how
assignment of internal revenue Officers and employees of
much income did the lender raise?
the Bureau to special duties shall not exceed 1 year. So
income of P11, 200.00 or did he make that of P10, 000.00
theres a law which will limit their stay on a particular
or he made an income of P1, 200.00. So for purposes of
work in BIR for internal revenue service.
determining income, the income refers to the flow of
Then you have Section 20, so this is a report, a statutory

requirement imposed upon the Commissioner to report
to Congress, report to oversight committee any loopholes
or any proposals or any tax reforms. So submit pertinent
information to Congress so when they would, the
Commissioner would notice any loophole in our tax laws,
he should report this to Congress to make a necessary
Did he make an
wealth which goes in to the hands of the tax payer so

theres a wealth which goes to the lender. We know that
the lender was paid for P11, 200.00 which is P10, 000.00
for the principal and P1, 200.00 for the interest but that
wealth which goes to the hands of the taxpayers for
purposes that their income has been recognized we want
therefor to exclude capital so when it comes to P 11,
200.00, the capital here is the principal which is P10,
actions for such loophole.
000.00 the difference of that represents the income of P1,

Then you have Section 21, the sources of revenue. So the
200.00 which we call income. While everything, the P11,
sources of the national internal revenue taxes are income
200.00 is the flow of wealth but not all of that is income
tax, estate and donors taxes, value-added tax, other
because part of that is the capital so there is the other one
percentage tax, excise taxes, documentary stamp taxes;
which you need to exclude thats why in the definition
and such other taxes as are or hereafter may imposed and
other than the return of capital so only the P1, 200.00
collected by the BIR.
which is the interest will be the income.
Then we have Title 2: TAX ON INCOME. So in Title 2
Now income is also construed the gains or profits for
you have Sections 22 to 83 this will be our last section to
exchanges or disposition of property so when you dispose
cover for Tax I until Section 83 of the NIRC before we go
property and there is a gain or profit then income is
to the provisions of the Income tax. Lets discuss first the
realized so when you have a piece of property which you
GENERAL TAX PRINCIPLES.
acquired for 1 million pesos then you sold that at 2 million
Now income is defined as the flow of wealth which goes

in to the hands of the tax payer other than the return of
capital. In other words, anything in excess of capital
would be considered as income.
So even in case of
jurisprudence income has been defined as the flow of

wealth which goes in to the hands of the tax payer other
than the return of capital. For purposes of construing
income we therefor exclude capital so when the lender
pesos then did you make a gain? So the gain there is the
difference from the selling price and the cost of that
property so you made a gain or profit of 1 million pesos so
it also refers to the excess of the capital as a result of a
sale or exchange of goods so a gain or profit may be
realized. Now in our case, what we are more interested is
not only at the determination of income but we are more
interested in what we call the taxability of income so we
nd

know that for purposes of tax income there must be gain
2.
13
The second requirement, the gain or profit must
or profit. Now for purposes of taxability we are only to
be earned or realized. This is what we call the
remember 3 requisites for the taxability of income:
recognition of realization of income. So there is
1.
There must be gain or profit Now mere

expectation of profit is not income. Now there
must be a transaction that will give rise to the
income.
transaction
where
no
known
expectable value given or received does not give

rise to income. What are we talking about? Now
the first requirement for the purposes of
taxability, one, there must be a gain or profit
thats the first requirement in other words there
must be income. So how would you know that
there is income? Principles of tax tell us that
income
taxation,
income
tax
that
now an income, a gain or profit but where you

able to make, was the gain or profit or was the
income earned or realized? Now in this part of
the requisite, this involves now the point in time
within which the income or gain/profit is earned
or realized in other words this is the recognition
of the realization of income. Now for the
purposes of accounting the income for one point
in time, income is recognized there are basically 2
methods within which income is recognized,
a.
You have income recognized by actual
mere
receipt- In the case of actual receipt this tells
expectation or profit is not income so you are
us that you recognized the income through
holding a piece of real property which you
actual receipt.
acquired 10 years ago lets say you have acquired

that for P500,000.00 that property now is worth 5
b. Or constructive receipt-The constructive

receipt income is recognized even though the
million pesos did you make an income? THERES
actual receipt will take place later.
NO INCOME THERE because mere appreciation

or mere increase of the value of a property does
Example of this would be X Corporation declared
not give rise to income. Yes your property is
dividends:
appreciated in value but the appreciation does

not give rise to an income so what must there be
to give or for the purposes that an income will be
there, there must be a transaction that will give
rise to the income and a transaction where no
exchange of value is given or received does not
give rise to an income. So for the purposes that
Dividend declaration was made on November 6, 2012

Dividend distribution was made on January 25, 2013
Y is the stockholder of X Corporation. As a stockholder he
received dividends in the amount of P10, 000.00 on
January 25, 2013.
there must be a
The question is when did Y make income of the
transaction, there must be a disposition of the
dividends? Now the Corporation declared the dividends
property so that income will be made so thats
on November 6, 2012 and the distribution was made on
the first requirement there must be gain or profit.
January 25, 2013. And Y as a stockholder received such
Mere expectation, mere appreciation, mere
dividends on January 25, 2013. The question is when did Y
increase of the value of the property is not
make an income? Did he make the income of November
income.
6, 2012 or he makes the income on January 25, 2013? That
there must be income
nd

14
is the second requisite when did the dividends or the
his income or what would be the basis to account his
gains or profits, when was it earned or realized?
income whether actual receipt or constructive receipt for
There are two ways or methods to recognize the income,

the gain or profit. You may recognize the income on the
basis of actual receipt or you may recognize income of the
basis of constructive receipt for purposes of accounting
the actual receipt method is what we call the cash basis of
recognizing an income while the constructive receipt is
what we call the accrual basis. Now the taxpayer is given
the option in what way he would recognize the income,
he is given the option to use the actual receipt or cash
basis or he may use the constructive receipt or the accrual
basis. Now if Y is an actual receipt tax payer then income
is recognized on January 25, 2013 because it is the actual
receipt but if Y is a constructive receipt tax payer then
income was recognized as early as November 6, 2012 even
though the actual receipt will take place later. So you
have that mode or method of recognizing the income,
how are they earned or realized, you may realize or
recognize them as income on the basis of actual receipt or
on the basis of constructive receipt this means that
income is already recognized at the time it was earned
when theres actual receipt or it will take place later. In
other words, our income tax for tax purposes there must
be a method within which the tax payer is made to
account and recognized their income because for the
purposes of taxation we pay taxes and there is a period
within which the income tax is paid so if you are a cash
basis or an actual receipt taxpayer then these dividends
accounting purposes. The taxpayer is not allowed to make

a combination of the said methods. In other words if you
are a cash basis tax payer in the way you recognize your
income for purposes of deductions your actual receipts
will be used for purposes of recognition. If you are also a
constructive tax payer or accrual basis tax payer then your
recognized income for the basis of constructive receipt
and you claim deductions on the basis of accrual, you are
not allowed to make a combination like sa income mo
actual ka pero sa deductions mo accrual ka that would be
a violation of a tax law as well as a violation of public
principle on the basis of CONSISTENCY so for the
purposes yung may mga business background yung
Principle of Consistency meaning that if you are using a
certain method of account on an income or a method to
recognize tax deduction you must be consistent with the
method that you are going to use. Because what will
happen there is that if your income is understated then
your deductions will be overstated so the result would be
inaccuracy or there would be misrepresentations of the
taxable income which would not be realistic. So for the
purposes of accuracy you must use only 1 method of
accounting recognized income. In the same also that the
tax year that the tax payer will be used will be either the
calendar year or the fiscal year. So that is the second
requirement the gain or profit must be earned or realized.
3.
Now the third is that the gain must not be
will be an income in 2013 but if you are constructive
excluded by law or treaty of income taxation. So
receipt tax payer or an accrual basis tax payer that income
the third requirement is the gain or profit is not
was made that other year pa. So if you are an actual
excluded by law or treaty of income taxation
receipt tax payer that dividend income will be taxed in

2013 but if you are constructive tax payer or an accrual
basis taxpayer then such dividend was taxable in 2012.
But what is more important is that taxpayer is given the
option to choose what method would be used to account
So you only have 3 requisites that there must gain or

profit, that the gain of profit is earned or realized and the
gain or profit is not excluded from taxation.
July 31, 2013-NO CLASS
nd

August 6, 2013
The state has a leeway or discretion to what kind of
system it will set up.
Tan vs. Del Rosario 237 SCRA 324, sc discuss the two
principle of approaches of taxation of income namely:
1.
Global approach ;
2.
Schedular approach.
GLOBAL SYSTEM
15
Our present tax system is scheduler. Other authors will

say it is semi Schedular and semi global. But the
predominant feature of our system is Schedular.
4 CATEGORIES OF INCOME UNDER SCHEDULAR
APPROACH.
1.
Compensation
2.
Business/ trade/professional
3.
Passive
4.
Capital gain
All income are one and the same. This principle tells us
Since we follow the Schedular and the various types of
that regardless of the nature of the income, all these types
income is segregated, we have this classification of
are consider one and the same. Under this system, the tax
income.
treatment viewed indifferently the tax based and

generally treats all common the tax income. You just
Compensation income.- these are the income derived

from the payment of salaries wages and commissions
lump and gather all these income with no distinction. The

tax based here will be an assorted of all types of income.
Professional/business
All this income is added up and less the deductions and
exercise of ones professions
that would be the tax based, treating in common all the

categories of income.
Global approach is a known as aggregated or totality
system.
SCHEDULAR SYSTEM
income-derived
form
the
Passive income- the taxpayers merely waits. Like

royalties. Like interest income in the money in the bank.
Capital gains- they are derived from the sale of assets
not used in business. Like your family car. When you sell
a personal properties, jewelries, not used in business. It is
different from ordinary gain. Ordinary gains are those
The opposite of the global. There is a distinction from
gains from properties used in the exercise of business.
various types of taxes. Prior to scheduler, our tax system
Kaya sila ordinary.
is global. From global our income tax system is now

Schedular. This is the system to employ where the income
Withholding of taxes
tax treatment varies and made to depend on the kind of
Withholding tax follows the principle, pay as you go.
category of the taxable income of the taxpayer. Unlike the
When the income is earned the tax is __ so when you go
global, this time, there are now different types or
bayad na ung tax. When aliens would come to the
segregation of the different types of income.
Philippines collects the income then takes the flight out
It is also known as the segregated or differentiated

approach.
immediately, paano hahabulin ang tax dba? As you collect

income binabawasan na yung amount na natanggap mo.
Bawas sa income ung withholding tax from the salaries.
Because under global there is no withholding system
because all the taxes here are the same. So under global
nd

16
approach, they are many who escape. We you receive
In determination as to sources, different type of income
your salaries bawas na ung tax.
matters. Here where not talking about taxability but the
In case of dividends, when you received the checks from

the dividend declaration it is already deducted of tax. The
source of the income.
corporation declaring the dividends already deducted it.
not the place of payment or where the income is

earned. When you were engaged to do concert in
In capital gains tax, in this case you have to pay 30% of
US and you are paid your Talent Fees in the
the selling price and you have to pay it within 30 days
Philippines. The source of the income is the place
from the sale. So the taxes now is collected in advance.
of the performance of the service. So even if paid
Unlike noon, you commingle it with the rest of the
of the Philippines but the performance of service
income and then pay the taxes one time. Unlike the
Schedular system now, these different types of income
will be subjected to different income rates and your
withholding system will provide that there are income
which will be called final withholding tax. Just like in the
case of interest income and bank deposit. When you pay
the tax, the tax is already final. When you say final that
means that the income is no longer reported back for
is in US, the source of income is in US.
client for professional income, the withholding there

would be applied as a tax credit.
Rentals the source of the income is the location

of the property.
Royalties the source where there were used
Gains of sale on real property- the source is the

location of the property.
Gain of sale on personal property- When you

make a gain of personal property, the source of
taxation purposes. Unlike in the compensation business

where this would be adjusted pah. When you bill you
Compensation/ income of services- the source is
the income is the place of the sale.
Interest income- the source of the income is the

residence of the debtor ( ung pala-utang)
Dividends- the income earned from shares of
The same in the case of salaries, it will be creditable. Ibig
stocks. The source of the income is the residence
sabihi, in filing for tax returns, iconsolidate mo ang lahat
or the principal office of the corporations.
ng income, determine the tax credit and I deduct only
what has been given the pay whatever balance due. In this
case you pay your taxes on advance. As your income goes
higher the rate also goes higher ( progressive).
Mining income- the source of the income is the

place where the place where mine is located.
Farming income- the source is the place of the

farm or plantation is located.
FORMS OF INCOME
WHAT ARE THE FORMS OF INCOME? HOW THE
WHY IS IT IMPORTANT TO KNOW THE SOURCE OF
INCOME IS PAID?
THE INCOME? Taxpayers are taxed from where the
GR: In a form of money/ cash
income was earned. If the income was earned abroad and

you are a resident alien residing in the Philippines, that
EXC: it can also be paid in terms of properties and
income abroad will not be taxed but you are tax as to the
services.
income earned in the country.

SOURCE OF INCOME
Classification of taxpayers
nd

It varies because of the different tax treatments
separate from the personality of the grantor. When

the grantor makes an income, it will be taxable to
Individuals
himself. If the trust make the income even though
a. Citizen
made from the grantor, it will be tax as a taxable
Resident citizen (RC)- they are taxable to all
personality itself. Separate kasi sila.
source of income. the rest taxable lng sila for

the income earned in the Philippines.
17
ii. Non-resident citizen (NRC)
Lets continue next meeting.

August 7, 2013
b. Aliens
Resident Alien (RA)
Before we start with section 22, we go first with section
ii. Nonresident aliens (NRA)
32.
NRA-ETB (engaged in trade or business)
NRA-NETB (not engaged in trade or
Section 32 defines what income or gross income is all
business) c. Special Class Individual
about. This section should come first than section 22, you
Employee
would notice in the presentation of the definitions they

started with the classification of taxpayers and then make
Corporations
the tax treatment of the various type of income which a
a. Domestic- organized under Philippine laws.
taxpayer earn. Later you have there the computation of
Taxes in all sources
gross income and you have the items of income under
b. Foreign organized under foreign laws. They
section 32 and those income which are to be excluded but
are taxable only to those sources of income
to properly appreciate the items of what are taxable or
within the country.
not before we go to the respective tax treatment we have
i. Resident foreign corporation (RFC)
to understand what section 32 first is all about.
ii. Non-resident foreign Corporation (NRFC)
Partnerships (considered as corporations under the

NIRC)
Business partnership- taxes like corporations
Professional partnership- ex, law firms etc. it is

not tax like corporations. It will not be tax kasi
ung individual under these partnership will be
tax. so they will be taxed individually.
Estates / Trusts- they will be tax also like individuals.
SEC. 32. Gross Income. (A) General Definition. - Except when otherwise
provided in this Title, gross income means all income
derived from whatever source, including (but not limited
to) the following items:
(1) Compensation for services in whatever form
paid, including, but not limited to fees, salaries,
Prior the distribution among the heirs, the estate will
wages, commissions, and similar items;
be graded as taxable person pero Kung distributed na
(2) Gross income derived from the conduct of
sya, hindi na kasi it was dully deliver to the heirs
trade or business or the exercise of a profession;
which will be taxed individually. Same thing with
(3) Gains derived from dealings in property;
trust. When you have a trust created by the grantor
(4) Interests;
and the trust created income. a taxable trust is
nd

18
(5) Rents;
salaries or wages, it includes commissions, fees, or
(6) Royalties;
services rendered. You have also allowances; employees
(7) Dividends;
will be provided with what you call representation, travel
(8) Annuities;
allowance, board and lodging, living quarters by their
(9) Prizes and winnings;
employers. All these would form part of compensation
(10) Pensions; and
income.
(11) Partner's distributive share from the net

income of the general professional partnership.
As an exception, there is that principle of what we call

the principle of the employers convenience which
means that there are employees where the employer
Gross Income
would provide living quarters to the employee on top of

The law defines income by enumerating them,
the salaries. So to constitute this compensation, this
the different items of income, but makes a caveat that
compensation does not include only the salaries but
these items are not only limited to the following
includes the equivalent value of the board and lodging
because it makes a general statement that all income
and this would be taxable for compensation income but if
derived from whatever source. So in other words, even
the extension or the provision for board and lodging/
if the source of income is unlawful it would still be
living quarters are for the convenience of the employer
taxable. That would now depend on the taxpayer if he
then the board and lodging will not form part of the
would give that or not but for purposes of taxation all
taxable compensation income of the employee. This
income derived from whatever source would be taxable
facility or board and lodging/ living quarter is provided by
and these items of income are the following but not
the employer for his or her convenience.
limited to the said items:

Example: The employer is a doctor and he has to be on
1 Compensation or services rendered in whatever
call for 24 hours, he has to have his driver also on call he
form paid, including, but not limited to fees,
has no choice but to provide for living quarters for his
salaries, wages, commissions, and similar items.
driver. Under that kind of situation, the board and

lodging would not form part of the taxable compensation
So the compensation income therefore pertains to

payment for services rendered or for services in whatever
form paid. The manner of payment is not important but
the rendering of the service which would give rise to the
income which we call compensation income, the mode of
payment as we said may not necessarily be in the form of
cash - it may be in the form of property or to rendering of
income of the driver because this facility is for the

convenience of the employer but if the facility is not
provided for the convenience of the employer then this
additional facility would form part of the taxable
compensation of the employee. So the exception is when
the board and lodging is for the convenience of the
employer
service. In the nature or the mode or modalities of this

compensation may take into a form of payment of fees,
Another exception when your employer provides what
salaries,
items.
you call representation, travel allowance, gasoline
Compensation does not pertain only to the payment of
allowance. The employer employs sales persons or sales
wages,
commissions
and
similar
nd

19
representatives they go around and move and they would
sales less capital (cost of sales), you have to reduce your
incur representation, travel or gasoline allowance. If these
gross sales with the cost of sales to arrive to what you call
allowances would require the employee to account or
as the gross income. So this is what is referred to as the
liquidate for this expenses or allowances and return
gross income derived from the conduct of trade or
whatever is the excess to the employer then this travel,
business.
representation or such forms of allowances would not

form part of the compensation of the employee because
he is made to liquidate or account and substantiate the
receipts on how the allowances were spent and return the
excess. If on the other hand, these allowances will not
require the employee to account, liquidate or substantiate
it with receipts on how they were spent and the employee
is not required to do that then these allowances would be
added to form part of the compensation income of the
employee.
Take note: The scope of the compensation for services
would form part of the taxable income is also so broad. It
would cover anything for as long as it is in payment for
services in whatever form paid and for as long as they are
in for rendering of service or services.
2 Gross income derived from the conduct of trade
or business or the exercise of a profession.
Gross Sales Capital (Cost of Sales) = GROSS

INCOME
In the case of the exercise of a profession, you have also
the professional income regardless of the profession you
are engaged in, the income that you will earn is what you
call professional income or gross professional income and
that would be taxable income.
3 Gains from dealings in property.
Gains from dealings in property this is also taxable and
how do you arrive with a gain so we must start with a
selling price of the property because what is the income
pertains to the gain involving dealings on property - there
must be a transaction that would give rise to the gain or
income. Thats when the property is sold or conveyed.
How do you arrive at the gain? With capital. How is the
capital formed? Through the cost of the property. It will
So income derived from the conduct of trade or business
reduce the cost of the property then you end up with a
is gross income, what is to be taxed from the conduct of
gain but if the SP is lower than capital then you dont
trade or business is gross income.
have a gain, you have a loss. But when you are able to sell
the property over and above the cost of the property then
If you are engaged in business, you will be earning gross
you have the gain.
sales but what is taxed is gross income not the gross sales.
So how do you derive the gross income? The gross
income is derived if you are engaged in the sales of
products but the income is not the gross sales because
this includes the capital. Remember the definition of
income refers to the flow of wealth other than the return
of capital. So the business income which is the taxable
income should include the capital. So its start with gross
Selling Price (over and above the cost)

Capital (cost of the property) = GAIN
So you have gains derived from dealings in property
whether the property is real or personal, the resulting
gain is the profit that you will have from the transaction
so this would form part also of the taxable income under
section 32.
nd

20
10 Pensions. Pensions are payments which will be

made upon your retirement for the services you have
4 Interests. What you call interest income income
rendered or made or life of service which an employee
earned for the use of the money. In the hands of the
have spent with the employer. So when he reaches the
lender, the lender would extend a borrowing to the
retirement age, pension is given or paid they are also
borrower or a loan with interest and the borrower would
taxable income unless the law will give the exclusion or
pay the lender with interest then the amount that is paid
exemption. Why are they taxable as a rule? Pensions are
you have to use that with the capital which represents the
also payment for services rendered.
principal to come out with the interest. You have the

interest income earned from the use or forbearance of
11 Partners distributive share from the net income
money.
of the general professional partnership pertains to

the distribution of profits or income of professional
5 Rents. Rental or lease income pertains to the
partnership. So the distributive share of the net income
consideration for the use of the property or any lease
made by the professional partnership distributed to the
arrangements between the lessor and the lessee, the
individual partners is also taxable income.
lessor would earn income which we call rent.

Again, in section 32(A) - the law only enumerates the
6 Royalties. Royalties is also another source of taxable
sources of income because the sources are not only
income representing compensation or payment for the
limited from items 1 -11 but includes all income derived
use of trade name, trademarks or intellectual property.
from whatever source. So if the source of the income were
7 Dividends pertain to the income that would be

earned by the stockholder from the shares of stock.
Dividends are the distribution of profits by the
corporation to the stockholders of the corporation. So the
corporation would make income and they would share
the income to the stockholders. The income that is
distributed to the stockholders are what we call dividends
or dividend income.
8 Annuities. Annuities also operate similar to interest
income. It involves an investment in money wherein
interest is earned and payments are drawn are made and
paid to the investor. Actually this are payment of interest
from your investment.
9 Prizes and winnings. As a rule, prizes and winnings
are taxable unless you have the provision of the law which
gives the exemption.
made from unlawful or illegal activities as a rule they are

still taxable. You have also what you call recovery of tax
refunds they may be what you call source of taxable
income. Bad debts recovery when receivables would
become uncollectible if you are engaged in business you
will charge your receivables to an account called bad
debts. So kung bad debts yan siya, you are allowed to
claim that as an exemption. What about later on the
debtor surfaced after 20 years and paid the account? Is
that taxable income? That is still taxable income.
Section 32(B) are exclusions meaning these are items of
income which are not taxable or they may have the
perception of an income but technically they are not
income. Remember the criteria or requisites of taxability:
there must be a gain/profit, gain/profit must be earned or
realized and that the gain/profit is not excluded. If you
nd

21
have in par. B the exclusions which are items of income
will constitute your interest income for your taxable
which are not taxable.
income.
(B) Exclusions from Gross Income. - The following
(2) Amount Received by Insured as Return of Premium. -
items shall not be included in gross income and shall be
The amount received by the insured, as a return of
exempt from taxation under this title:
premiums paid by him under life insurance, endowment,

or annuity contracts, either during the term or at the
(1)
Life Insurance. - The proceeds of life
insurance
policies
paid
to
the
heirs
or
maturity of the term mentioned in the contract or upon

surrender of the contract.
beneficiaries upon the death of the insured,

whether in a single sum or otherwise, but if such
Now, there are insurance policies that have cash
amounts are held by the insurer under an
surrender value feature. After lets say 10 years the
agreement to pay interest thereon, the interest
insured would be receiving this much, they are calling it
payments shall be included in gross income.
the cash surrender value. On the 20
th
year of the policy
you would receive another cash surrender value. These

Life Insurance When you contract a policy of life
are payments that the insured will receive during the life
insurance and then that insurable risk occurred and then
of the policy. Are this amounts income? Again under no.
the heirs or the beneficiaries were paid for the proceeds of
2 they are not income because they represent actually
the life insurance is that income? That is not income
return of capital. These are actually the premium
because that represents return of capital. Proceeds or
payments you have made when you contract an insurance
payments of life insurance are forms indemnity you will
you have to pay premiums.
be indemnified for the loss. Ano yung capital? Yung buhay

tapos nung nawala yung buhay. Ano yung pumalit? Yung
The cash surrender value or payments you receive during
cash, naging pera. Actually it is just a return of capital
the life of the policy are actually not income, they are
because these are forms or contracts of indemnity kaya
return of your premiums. So ano ang isinauli being return
nga hindi yan siya taxable they represent the capital. So
of premiums? What is returned is capital so they are not
what is returned is actually the capital. But if such
taxable.
amounts are there by the insurer under the agreement of

interest, the interest payment shall be included in the
(3) Gifts, Bequests, and Devises. The value of property
gross income. May mga insurance company na instead of
acquired by gift, bequest, devise, or descent: Provided,
paying the heirs or beneficiaries in full, babayaran nila
however, That income from such property, as well as gift,
yung installments pero may interest feature. So again you
bequest, devise or descent of income from any property,
go back to that same definition, income refers to the flow
in cases of transfers of divided interest, shall be included
of wealth other than the return of capital. The installment
in gross income.
payment coupled with interest then you extract the

capital portion and the remainder would be the income.
The interest that is built in that payment is the one that
When you receive such property (gifts, bequests/

devises), is that income? That is not income, they are
receipt of capital. When you receive a property, gifts,
bequests or devises, they are not receipt of income but
nd

22
receipt of capital. When does income come in? Once you
return of capital. Loss of profits/ earning capacity? They
own the property now then when income is earned or
are considered taxable income.
fruits are made from that property. Example: You

received an apartment (pamana) or a gift of condo unit
(5) Income Exempt under Treaty. - Income of any kind,
tapos pinarent mo then the rent you received is the one
to the extent required by any treaty obligation binding
that would constitute income but the property you
upon the Government of the Philippines.
received upon such transfer either by gift, bequest or

This is by a treaty arrangement between one country and
devise is a receipt of capital not receipt of income.
another country in which Philippines may enter into. So

(4) Compensation for Injuries or Sickness. - amounts
we exempt the income that will be earned as long as there
received, through Accident or Health Insurance or under
is that agreement.
Workmen's Compensation Acts, as compensation for

personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on
account of such injuries or sickness.
(6) Retirement Benefits, Pensions, Gratuities, etc.(a) Retirement benefits received under Republic Act No.
7641 and those received by officials and employees of
Again they are excluded because they represent return of

capital, they represent forms of indemnity. Like when you
contract an accident insurance or a health insurance, so
you met an accident, you were hospitalized, you were
paid by the insurance company. The amount you received
is not income but you were indemnified so they are not
income, they represent return of capital. Even payments
under the Workmens Compensation act as compensation
for personal injuries or sickness, you were indemnified by
reason of your illness or injury. Such forms of
private firms, whether individual or corporate, in

accordance with a reasonable private benefit plan
maintained by the employer: Provided, That the retiring
official or employee has been in the service of the same
employer for at least ten (10) years and is not less than
fifty (50) years of age at the time of his retirement:
Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or
employee only once. For purposes of this Subsection, the
term 'reasonable private benefit plan' means a pension,
gratuity, stock bonus or profit-sharing plan maintained
compensation are not income but receipt of capital.
by an employer for the benefit of some or all of his

plus the amounts of any damages received, whether by
officials or employees, wherein contributions are made by
suit or agreement, on account of such injuries or
such employer for the officials or employees, or both, for
sickness. Example: In a reckless imprudence case and the
the purpose of distributing to such officials and
driver
be
employees the earnings and principal of the fund thus
indemnified, he was paid for hospitalization, he was paid
accumulated, and wherein its is provided in said plan that
for loss of earnings, he was paid for moral damages. Are
at no time shall any part of the corpus or income of the
these damages income? For the reimbursement of
fund be used for, or be diverted to, any purpose other
hospitalization, this is not income. Payment of moral
than for the exclusive benefit of the said officials and
damages, moral damages are not taxable income but a
employees.
was
convicted,
the
complainant
must
nd

23
There are two (2) types of retirement talked about in
his heirs from the employer as a consequence of
no. 6:
separation of such official or employee from the service of

the employer because of death sickness or other physical
1 RA 7641 (Labor Code) The retirement that is paid
disability or for any cause beyond the control of the said
by the employer under the Labor Code are excluded from
official or employee.
income for as long as you comply with the retirement

requisites.
Yan yung tinatawag natin separation pay. When you

were separated from your employer on account of ones
2 Retirement by officials and employees of private

firms A reasonable private benefit plan. An employer
maintains a private benefit plan/ pension plan for their
employees. Under the NIRC, (a) it is required that the
private benefit plan maintained by the employer for the
benefit of the employees must be one that is registered
or accredited by the BIR. (b) The service requirement
must be at least 10 years in service with the employer.
(c) Age requirement: Not less than 50 years of age
upon retirement. (d)
Availment: The benefits granted
shall be availed of by retiree only once. For purposes
death sickness or other physical disability or for any cause

beyond the control of the said official or employee, the
separation was involuntary and you were paid separation
pay then the separation pay is not taxable but if the
separation is voluntary you resigned and then despite
the resignation pinabaunan ka pa ng employer and gave
you separation pay then that separation pay is taxable
because the exclusion can be availed of when the
separation is on account of death sickness or other
physical disability or for any cause beyond the control of
the said official or employee.
of these exclusions, the 4 requirements must be

present. Absent of one then the retirement would be
There are cases where the employee tendered resignation
taxable because the rule here when you go back to sec32
on account of mergers or acquisitions so like banks they
(A) pensions, retirements are as a rule taxable. They
would merge and new corporation or a surviving
would become excluded when they would conform to the
corporation would be transformed so yung mga executive
requirements of no.6 (a).
ng dating bangko they would resign so that the new

management would be given the leeway to build their
What happens when the employer sets up a higher

standard? The length of service now is 35 years and the
age requirement is 60. Can you retire under the
provisions of the NIRC? If the employer sets up a higher
standard for purposes of retirement that policy has to be
followed. In the absence of any policy then the retirement
plan for purposes of distinction would conform under the
NIRC but if the employer sets up a higher standard than
own so they tender their resignation then despite that

you were paid separation pay. Is the separation pay
taxable by reason that you resign? No. Nagresign nga siya
pero it is involuntary so by reason that the resignation is
involuntary then the separation pay is not taxable only for
voluntary resignation. You separated yourself from the
employer despite that you were paid separation pay then
that would be taxable.
the NIRC then that standard should be followed

otherwise the retirement would be taxable.
(c) The provisions of any existing law to the contrary

notwithstanding, social security benefits, retirement
(b) Any amount received by an official or employee or by
gratuities, pensions and other similar benefits received by
nd

24
resident or nonresident citizens of the Philippines or
corporation, who are the nonresident citizens, resident
aliens who come to reside permanently in the Philippines
alien, taxable year and fiscal year, the rank and file
from foreign government agencies and other institutions,
employee,
private or public.
operating headquarters, long-term deposits then you have
regional
or
area
headquarters,
regional
the minimum wage earners.

These are what we call foreign sourced retirements
whether they are from resident or nonresident citizens of
the Philippines or aliens who come to reside permanently
in the Philippines or receiving pensions from abroad so
their social security benefits, retirement gratuities,
pensions and other similar benefits are excluded.
Now going back to Section 23 these are your guidelines,

these are the rules that you have to remember with the
taxability of the different income tax periods. Now there
are two things that you must remember if you are taxable
within and without the Philippines. You have the Section
23 A-The residents of the Philippines residing within are
taxable on all income derived from sources within and
without the Philippines so if you are a resident citizen
you have income here and abroad you will be taxable in
all sources so what will happen with the foreign income?
The foreign income reported in the banks in the
Philippines and subject to Philippine income tax. Now
August 13, 2013

SECTIONS 22, 23, and 24
that foreign income has been subjected to a foreign

income tax so what will we do with the foreign income
tax? So there is the opportunity to avail of the effects of
Please take note of these Revenue Regulations:
multiple situs. Under the Income Tax Law the foreign
1.
Revenue Regulations 02-98
income tax is applies as tax credit. Now the other tax
2.
payer taxable in all sources is Domestic Corporation. So
3.
you only have two taxpayers who are taxable in all
4.
sources: the resident citizen and domestic corporation.
5.
All the rest are only taxable with sources Philippines. So
6.
all the rest who have foreign income they are normally
7.
taxable in the Philippines.
8.
So these are things you just have to remember under
9.
Section 23.
10. Revenue Regulations 2-2010

11. Revenue Regulations 1-2011
So under Section 24, you have the tax treatment on the

items of income for the citizens and individual resident
Here are some related revenue regulations so these are
aliens. So the citizens who are taxable here refer to both
needed for better understanding of the provisions.
resident citizens and the nonresident citizens and the
Now in so far as Section 22 Definitions I leave them up

to you to take care of these definitions. The term
resident aliens in so far as to his taxable income in the

Philippines. So you have in Section 24-A 1. An income tax
nd

is hereby imposed; you have that enumeration of number
minimum
1 A, B and C. The taxable income defined in Section 31 and
government will be income from the wage are now
then the rest, the rate which would be applicable on the
exempted from the income tax. They are no longer
taxable income of an individual would be in accordance
subject to this tax due and it is not only their basic wage
with the following rates- you have rates which range from
which would be covered by the said tax-exempt but
5 to 32 percent so when you are confronted now of a
including the holiday pay, overtime pay, night shift
taxable income subject to the rate in Section 24-A and
differential pay and hazard pay received by such
there is a taxable income of 800,000 so how will you
minimum wage earner shall be exempted from income
compute for the tax due for the 800,000 taxable income
tax.
subject to the rates from 5 to 32 percent? With the

800,000 now you go directly to the bracket where this
800,000 belongs. So if the taxable income is 300,000
where will be the bracket which the 300,000 belongs? So
wage
earners
including
those
25
in
the
Then you have paragraph 24-B, the taxation on passive

income. We have mentioned that the categories of
income under our income tax system have been classified
into 4 Categories of Income:
for the 800,000 it would be the last bracket over 500,000

so the tax due would be 125,000 + 32% of the excess of
1.
Compensation
500,000 so 800,000 -500,000 so you have 300,000. So
2.
Business/ Professional Income
125,000 + 32% (300,000). So 125, 000 + 96,000 so you have
3.
Passive
221,000 that will be your tax due. You dont compute it
4.
Capital Gains Tax
bracket per bracket, you go directly because the rate fixed

there are already built-in, tax dues are already built-in in
that bracket so if your taxable income is only 80,000 then
you will be in the bracket over 70,000 but not over
Now in so far as compensation income as we go to

Section 24 they are subject to tax from 5% to 32%. So the
discussion about this is in your book so just read your
book.
140,000 so you have 8,500 + 20% of the excess of 70,000

so yung 80,000 -70, 000 may 10, 000 multiply by 20% + 8,
In so far as passive income, it is in paragraph B. What are
500 that would be your tax due.
these types of passive income? You have interests,

royalties, prizes and other winnings. Now you have a final
Now what if the involved taxpayers are married tax payers

both husband and wife are subject to this taxable income
then you may compute their tax dues separately so they
are treated as separate tax payers if both spouses are
working or one of the spouses is working and the other is
engaged in business or profession so they will be treated
as separate tax payers.
tax rate of 20% on the interest arising from currency bank

deposit so if you have currency deposit in the bank and it
earns interest the interest income will be subjected to a
20% final tax. So when you will encounter a rate that says
final tax it means that the tax has been paid is no longer
reported back for taxation because there is this
withholding agent who is tasked to do the withholding
Now you have the special treatment of minimum wage
and the remittance of the payment of the tax. So if youre
earners in the last paragraph of 24-A. The minimum wage
the depositor you would notice in your bank passbook
earners are define, shall be exempt from the payment of
during the quarterly computation of the interest by
income tax in their taxable income. So you have now tax-
interest income which is credited and there is also
exempt of minimum wage earners so those who are
deductions on the withdrawal of the income tax due
nd

26
under the interest income then along Section 24-B the
Now the interest income does not cover only cover
rate of tax is 20 percent and the tax stated there is final so
currency bank deposit and yield or any other monetary
if youre a compensation income earner or a business or
benefit from deposit substitutes and trust funds and
professional income earner who has interest income on
similar arrangements.
the bank that interest income is no longer added on your

business income because the tax there is final. Now so if
you are let us say a tax payer under Section 24-A and you
have compensation which is already your, the taxable
income consist of compensation of let us say 60, 000 then
you have business income of which taxable yan siya with
You have also royalties, except on books, as well as other

literary works and musical compositions which shall be
imposed a final tax of 10%. So royalties which are not
literary works, musical compositions are subject to 20%
but if the royalties are for literary works and musical
compositions 10% is the rate.
net of the deduction you have 730,000 so how do you

compute your tax due? Would you compute the 60,000
So prizes, prizes will be subject also to 20% final tax but if
separately at 5-32% as well as you would also compute the
the prizes amount to 10,000 or less then it shall be subject
730,000 separately at 5-32%? So you consolidate add them
to Section 24-A so kung may prizes yung tax payer may
up then total the taxable income so in this case you have
compensation and business income tapos he receives a
790,000 so this is when that income is subject under the
prize, nanalo siya of a prize of 5,000. The 5,000 is not
same tax rate you have to consolidate for the purposes of
taxable as a passive income at 20% because the rate there
the 5-32%. Kung passive income yan siya you dont have
you would go over the provisions except prizes
to include it, you must treat it as a separate item in
amounting to 10,000 or less so if it is between 1-10,000
income tax. Tax it at that rate even though it is separate
then it is added in your regular income so kung may 5,000
from other income items for as long as passive but if the
ito magiging 795, 000 (60,000 compensation + 730, 000
income is subject to 5-32% you consolidate, you add them
business income + 5,000 prize) so yung will now go over
up and subject them to that the same rate of 5-32% so in
the bracket provided under Section 24-A. But if it has
the case of 60,000 and 730,000, you dont compute the tax
been 11,000 then passive income na ito taxable at 20% so
for 60,000 and then magcocompute ka ng over 10 but not
you must identify the figures that would be necessary for
over 30 then pagdating ng 730,000 pupunta ka naman
the computation of tax due. Then except PCSO and Lotto
doon sa maximum bracket. DONT DO THAT. Add them
which are tax free. So prizes and other winnings except if
up and consolidate the total taxable income, so you have
it is amounting to 10,000 or less are subject 20% final tax
a total of 790,000 then apply the bracket covering the
while winnings from PCSO and Lotto are tax free.
790,000 that will be the maximum bracket over 500,000

so you have the tax of 125,000 + 32% on the excess. So in
case of passive income, these are normally income items
that are already subject to income tax so that interest
income is added dito sa regular income of the tax payer.
So that passive income by way of interest is not any more
added and is not subject to 5-32% because it has its own
tax rate. Since it will be subjected to that 20% tax rate.
The interest income received by individual tax payer

except a non resident individual from a depository bank
under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of 7 % of
such interest income. So if you have an interest income of
FCDs (Foreign dollar deposits) you have your dollar
account, euro account and this account will earn interest
the rate is not 20% but the rate now is 7 % of the
nd

27
interest income and whats the exception? Except a
Then you have the treatment of cash or property
nonresident individual. So if a nonresident individual like
dividends. Tax or property dividends, you have a final tax
a nonresident citizen maintains a foreign currency
at 10% ad you have different rates there but the current
deposit, you have a dollar account in which he receives
one was beginning January 1, 2000 up to the present tax
remittances from abroad which is sent to his dollar
on cash or property dividends is 10%. Now what are
account in the Philippines, is the interest of that dollar
dividends? Dividends are distribution of profits from
account taxable under 24-A because it is not subject to
corporations, saan galling yung dividends? Does it come
tax because of the exception from the income tax under
from a foreign corporation or from investment or
the 7 % then provided further the interest income from
whatever? So under number 2, final tax shall be imposed
a long-term investment in the form of savings, common
upon the cash and/or property dividends actually or
or individual trust. Go back to Section 2, ano ba ang ibig
constructively received by an individual- the individual
sabihin ng long-term investment or long-term deposits?
that we are talking here is the citizen referred in the main
So if long-term investment or long-term deposits should
caption of Section 24 referring to citizens and residents
earn interest, then normally, the long-term deposits will
aliens so they received dividends from what, from where?
have the maturity of 5 years or more, if an interest income
The domestic corporation or from a joint stock company,
is earned from that investment, from that long-term
insurance or mutual fund companies and regional
deposit which would mature for 5 years or more the
operating head quarters of multinational companies, or
interest income is tax-free. And you have there other
on the share of an individual in the distributable net
investments shall be exempt from the tax imposed under
income after tax of partnership yung business partnership
this subsection. Now what happens when you pre-
pati nga yung business partnership (except a general
terminate the deposit, hindi mo inantay yung 5 years of
professional partnership) of which he is a partner, or on
rd
maturity, within the 3 year like for example one of your
the share of an individual after tax of an association, a
family members has been hospitalized kailangan ng pera
joint account, or a joint venture or consortium taxable as
so you pre-terminate yung long-term investment, this
a corporation of which he is a member or a co-venturer.
time yung interest income that would accrue from the
Now if the interest income under 24-B number 1 the
time you set-up up to the time you pre-terminate is
royalties, the prizes and other winnings of foreign source,
subject to an income tax. What is the rate? You have
what is your tax treatment? Should you follow the rates
there the final tax rate from the time you pre-terminate,
under 24-B? As I mentioned you could no longer use such
so if you pre-terminate them less than 3 years so it is less
rate because these are passive incomes in the Philippines
20% from the interest income but if you pre-terminate it 3
(24-B). So where a resident citizen earns interest income
years or less than 4 years then it will just be 12% tax of the
from abroad, receives royalties from abroad, receives
interest income. If you pre-terminate it 4 years to less
prizes from abroad, receive winnings from abroad or pre-
than 5 years -5% so the long term investment would
terminates his long-term investment from abroad, these
mature up to 5 years pero kung hindi mo na mahintay
incomes while taxable there, the foreign income is
then from the 4
th
year and up may tax siya pero lesser
brought back here in the Philippines so ng issue ngayon,
lang ang rate. But if you pre-terminate it earlier then you
taxable bay an siya? Because the resident citizen is taxable
will have the maximum bracket.
for all sources within and without Philippines. So the
nd

28
issue now, is ano yung gagamitin mo, is it the rate in 24-B
over 100,000 and 10% in excess of 100,000 so that would
is not applicable so we go back to 5-32% rate, the 5-32%
be our application.
captures all the tax treatment, all other items of income

not subject to any special or other provision so yung 532% will capture lahat ng income so yung foreign source
income in this case, he receives interest income from the
US, let us say for 100,000, meron siyang royalties from
France let us say 500,000 so these two will be added and
consolidated as income then it will fall now under the 532% rate. That goes also to the dividends because here for
Now if the shares of stock are traded in the stock

exchange, it is not found here so these are shares of stock
traded at the Philippine Stock Exchange, the rates there
are not anymore in income tax but it is found in Section
127 of your NIRC that will be taxed as a percentage tax
lalo pa business tax so they are no longer found in income
tax dati incorporated siya but they were transferred on
Section 127 of the NIRC.
the purposes of the 10% rate the dividends from domestic

corporation, what if the resident citizen will receive
Then you have the capital gains on the sale of real
dividends from let us say a US Corporation had that been
property on paragraph D. For the purposes of application
a Philippine Corporation that will be taxed at 10% but
of paragraph D. So when real properties are treated as
since these are dividends from a foreign corporation you
capital assets are sold or disposed by individuals or
could not apply the 10% tax so it will be the 5-32% rate. So
citizens or resident aliens and such property is found in
i-consolidate naman siya doon sa other income sa regular
the Philippines dito papasok ang Paragraph D the capital
income taxed at 5-32%. No issue when you talk about
gains tax on the sale of real property so you have final tax
non-resident citizens and resident aliens since they are
of 6% based on the gross selling price or the current fair
only taxable to sources within paano yung income earned
market value as determined in accordance with Section 6
ng resident citizens because of its taxability of income
E of this Code, whichever is higher in 6E you remember
within and without Philippines.
this refer to the zonal value, so you have the selling value
or the current fair market value of the BIR or the assessor
Then you have the capital gains from sale of shares of

stock not traded in the stock exchange. So let us say
family corporations then the parents would dispose the
shares so the regular private corporation where the
owners are selling and would operate the shares of
somebody else so somebody now would come in and buy
the shares of stocks so you have the tax treatment under
paragraph C so the tax there would be the net capital
gains of 5% if it is not over 100,000 and 10% in excess of
100,000, ano yung application mo dito? So if the net
capital gains of shares is 400,000, what will be your tax
due of capital gains from sale of shares of stock not traded
in the stock exchange? The 5% will be on the first 100,000
and the 10% will be based on the excess of 100,000 so the
tax there would be the net capital gains of 5% if it is not
whichever is higher so if the zonal value is 1 million and

the selling price is 500,00 and the tax base in this case
would be the 1 million which is the fair market value.
Then what if it was payment by dacion, instead of paying
in cash the amount you pay that by a property remember
that is also governed by the law on Sales so that will also
be subject to the rate of the capital gains tax. Take note
that the tax base is not on the gain for purposes of gain
you will determine that by the selling price less the cost of
the property to arrive at the gain so if you sell it lower
than cost you will encounter loss but if you sell it over
and above the cost then you have a gain but in 24-D the
taxation of 6% of capital gains tax there is a gain therefore
there is a presumed gain but the treatment is based on
the selling price or the fair market value. So hereby the
nd

29
tax base is imposed upon the capital gains presumed to
that proceeds to construct such new house or acquire a
have been realized from the sale, exchange let us say two
new house and lot. When that happens there is an
lot owners would like to swap and exchange their real
incentive given of which you will ask for the exemption
properties, how many taxable transactions do you have?
from the payment of the capital gains tax so what are the
There will be 2. Let us say Lot owner A and Lot owner B
conditions? It is found at B-2 the requirements to avail
would exchange their respective real properties A would
the exemptions. Now the provision of paragraph 1 of this
have to pay the capital gains tax on his real property and
Subsection to the contrary notwithstanding, capital gains
B would also pay the capital gains tax for his real property
presumed to have been realized from the sale or
so there will be 2 taxable transactions in that situations.
disposition of their principal residence by natural
So exchange of properties is also taxable or you share
persons,- so it must be natural person who would dispose
your real properties for exchange of stocks that is not a
their principal residence. The proceed of which is fully
taxable transaction later on you have the tax treatment on
utilized in acquiring or constructing a new principal
Section 40 where there is no gain nor loss under the
residence- so that is the purpose why did you dispose
certain provisions that despite the exchange there will be
your principal residence that you want to acquire or
no capital gains tax of now for the purposes of exchange
construct a new house. Within 18 calendar months from
of properties or other dispositions of real property located
the date of sale or disposition, shall be exempt from the
in the Philippines classified as capital assets, including
capital gains tax imposed-so you are going to utilize by
pacto de retro sales and other forms of conditional sales,
acquiring or constructing a new residence within 18
by individuals, including estates and trusts are subject to
calendar months from the date of sale or disposition so
the 6%tax rate. Now if the real property is sold or
that is the first one. Now the second, that the historical
disposed in favor of the government or any of its political
cost or adjusted basis of the real property sold or disposed
subdivisions or agencies or to government-owned or
shall be carried over to the new principal residence built
controlled corporations shall be determined either under
or acquired. Then you notify the BIR within 30 days from
Section 24-A or under this subsection at the option of the
the date of sale or disposition through a prescribed return
taxpayer. Now if the real property is located abroad,
of his intention to avail of the tax exemption herein
theres capital gains then binenta mo then you earned
mentioned. Then you have another requirement that
capital gains, that capital gain would be subjected to tax,
such tax exemption should only be availed only once
now the question what would be the tax treatment of
every 10 years. So now from the 5
such gain? It will not be 6% because it is not found in the
acquire one so you could not avail of such exemption.
Philippines. But the gain will be added now to the regular
Once every 10 years only. The law allows only you avail
income tax subject to the 5-32% tax rate.
that tax exemption only once in 10 years. So those are the
Now there is an exception for the capital gains tax. Now

you have your house and lot, a residential house and lot,
now you decided since the family is growing then you
decided to sell it because you want to buy or construct a
bigger house so you sold that at 3 million then you
acquire and construct a new residential house and use
th
year you want to
requirements. What if not all proceeds were utilized? So

you were able to sell it for 3 million then you found a
residence for only 2 million so you have a saving of 1
million, what will happen to the proceeds? Will it be
subject to capital gains tax or not? In so far as to the 2
million, it will be covered by the tax exemption. Now the
nd

30
unutilized proceed that will be now taxable again under
If a nonresident alien stay in the Philippines for 180 days
to that 6% tax rate. So that is at the last paragraph, finally,
or less then he falls under 25 (b), so the nonresident alien
that if there is no full utilization of the proceeds of sale or
will be considered not engaged in trade or business if he
disposition, the portion of the gain presumed to have
stays in the Philippines 180 days or less. So if he stays
been realized from the sale or disposition shall be subject
more than 180 days then he becomes a nonresident alien
to capital gains tax.
under 25 (a) the nonresident alien engaged in trade or

business.
August 14, 2013

Nonresident Alien is one who has not established his
residence in the Philippines so when he arrives in the
country he would be considered as a nonresident alien.
Now in section 25 (a) you have here a nonresident alien
who is engaged in trade or business taxable only to their
income within the Philippines and you have the
nonresident alien in 25 (b) not engaged in trade or
business. The distinction on these nonresident aliens
whether they are engaged in trade or business or not is on
Take note of that distinction kasi yung status niya of what

kind of nonresident alien siya whether engaged or not
engaged would depend on his length of stay as a rule. So if
he stays 180 days or less, nonresident alien not engaged
siya under sec.25 (b) kasi magmamatter at magvavary
yung taxation of the items of income that would be earned
during the 180 day period or less that he would be staying
and if he stays more than 180 days then yung income that
would be earned over that period will matter also because
of the tax treatment of the items of income that will be
their length of stay in the Philippines.
earned if he stays here more than 180 days nonresident

SEC. 25. Tax on Nonresident Alien Individual.
-
alien engaged in trade or business siya.

So income from trade or business during that more than
(A) Nonresident Alien Engaged in trade or
180 days stay here then he would be taxed under the
Business Within the Philippines. -
applicable rates under 24 (a) from 5-32%.
(1) In General. - A nonresident alien individual

engaged in trade or business in the Philippines
shall be subject to an income tax in the same
manner as an individual citizen and a resident
alien individual, on taxable income received from
all sources within the Philippines. A nonresident
alien
individual
who
shall
come
to
the
Philippines and stay therein for an aggregate

period of more than one hundred eighty (180)
days during any calendar year shall be deemed a
'nonresident
alien
doing
Philippines'. Section 22
notwithstanding.
business
(G)
in
of this
the
Code
(2) Cash and/or Property Dividends from a

Domestic Corporation or Joint Stock Company,
or Insurance or Mutual Fund Company or
nd

31
Regional Operating Headquarter or
investment management accounts and other
Multinational Company, or Share in the
investments evidenced by certificates in such
Distributable Net Income of a Partnership
form prescribed by the Bangko Sentral ng
(Except a General Professional Partnership), Joint
Pilipinas (BSP) shall be exempt from the tax
Account, Joint Venture Taxable as a Corporation
imposed under this Subsection: Provided,
or Association., Interests, Royalties, Prizes, and
finally, that should the holder of the certificate
Other Winnings. - Cash and/or property
pre-terminate the deposit or investment before
dividends from a domestic corporation, or from a
the fifth (5 ) year, a final tax shall be imposed on
joint stock company, or from an insurance or
the entire income and shall be deducted and
mutual fund company or from a regional
withheld by the depository bank from the
operating headquarter of multinational company,
proceeds of the long-term deposit or investment
or the share of a nonresident alien individual in
certificate based on the remaining maturity
the distributable net income after tax of a
thereof:
th
partnership (except a general professional

partnership) of which he is a partner, or the share
Four (4) years to less than five (5) years - 5%;
of a nonresident alien individual in the net
Three (3) years to less than four (4) years - 12%;
income after tax of an association, a joint
and
account, or a joint venture taxable as a
Less than three (3) years - 20%.
corporation of which he is a member or a coventurer; interests; royalties (in any form); and
prizes (except prizes amounting to Ten thousand
pesos (P10,000) or less which shall be subject to
tax under Subsection (B)(1) of Section 24) and
other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be
(3) Capital Gains. - Capital gains realized from

sale, barter or exchange of shares of stock in
domestic corporations not traded through the
local stock exchange, and real properties shall be
subject to the tax prescribed under Subsections
(C) and (D) of Section 24.
subject to an income tax of twenty percent (20%)

on the total amount thereof: Provided, however,
that royalties on books as well as other literary
works, and royalties on musical compositions
shall be subject to a final tax of ten percent (10%)
(B) Nonresident Alien Individual Not Engaged in
on the total amount thereof: Provided, further,
Trade or Business Within the Philippines. - There
That cinematographic films and similar works
shall be levied, collected and paid for each
shall be subject to the tax provided under Section
taxable year upon the entire income received
28 of this Code: Provided, furthermore, That
from all sources within the Philippines by every
interest income from long-term deposit or
nonresident alien individual not engaged in trade
investment in the form of savings, common or
or business within the Philippines as interest,
individual trust funds, deposit substitutes,
cash and/or property dividends, rents, salaries,
nd

wages,
premiums,
annuities,
compensation,
area
headquarters
and
regional
32
operating
remuneration, emoluments, or other fixed or
headquarters established in the Philippines by
determinable annual or periodic or casual gains,
multinational companies as salaries, wages,
profits, and income, and capital gains, a tax equal
annuities,
to twenty-five percent (25%) of such income.
other emoluments, such as honoraria and
Capital gains realized by a nonresident alien
allowances,
individual not engaged in trade or business in the
headquarters
Philippines from the sale of shares of stock in any
headquarters, a tax equal to fifteen percent (15%)
domestic corporation and real property shall be
of such gross income: Provided, however, That
subject to the income tax prescribed under
the same tax treatment shall apply to Filipinos
Subsections (C) and (D) of Section 24.
employed and occupying the same position as
compensation,
from
and
such
remuneration
regional
regional
or
and
area
operating
those of aliens employed by these multinational

So the income would be subject to the tax of 25%,
companies. For purposes of this Chapter, the
whatever income of a nonresident alien individual not
term 'multinational company' means a foreign
engaged in trade or business will earn during his stay 180
firm or entity engaged in international trade with
days or less would be taxable at 25% that is without the
affiliates or subsidiaries or branch offices in the
benefit of deduction. It is taxed on gross income.
Asia-Pacific Region and other foreign markets.
So when it involves now capital gains realized by a
So when there is an expat/ alien employed by
nonresident alien individual not engaged in trade or
multinationals or regional area headquarters, he is
business in the Philippines from the sale of shares of
entitled to a preferential tax rate of 15% in his income.
stock in any domestic corporation and real property then
The Filipino counterpart will be also given a similar
it would be subject to the 5 10% tax on capital gain
preferential
stocks and 6% on real property.
occupying the same position as those of that alien
SPECIAL ALIENS they are called special aliens for its

term for purposes that they do their work here is
treatment.
Filipinos
employed
and
employed by these multinationals are to be given the

same 15% preferential rate.
something peculiar. Those employed by regional area
(D) Alien Individual Employed by Offshore
headquarters or what you call the expats, the expats in
Banking Units. - There shall be levied, collected
the off shore banking units, the expats employed by
and paid for each taxable year upon the gross
petroleum service contractor.
income received by every alien individual
(C) Alien Individual Employed by Regional or

Area Headquarters and Regional Operating
Headquarters of Multinational Companies. There shall be levied, collected and paid for each
taxable year upon the gross income received by
every alien individual employed by regional or
employed by offshore banking units established

in the Philippines as salaries, wages, annuities,
compensation,
remuneration
and
other
emoluments, such as honoraria and allowances,

from such off-shore banking units, a tax equal to
fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment
nd

33
shall apply to Filipinos employed and occupying
If they have other income like meron silang interest
the same positions as those of aliens employed by
income in their bank deposits then the applicable tax rate
these offshore banking units.
would be used kasi if that alien has been here in the

Philippines employed by the multinational for 5 years
(E) Alien Individual Employed by Petroleum
then he will be considered as a resident alien. In the case
Service Contractor and Subcontractor. - An Alien
of his interest income it would be taxed at the same rate
individual who is a permanent resident of a
as the resident aliens will be subject for the interest
foreign country but who is employed and
income. We have the rate of 20%. It is only insofar as to
assigned in the Philippines by a foreign service
their
contractor or by a foreign service subcontractor
remuneration and other emoluments, such as honoraria
engaged
the
and allowances being employed in that multinationals or
Philippines shall be liable to a tax of fifteen
regional area headquarters, off shore banking units,
percent (15%) of the salaries, wages, annuities,
petroleum service contractors for that 15% rate would
compensation,
other
apply. Otherwise if you connect that to the resident alien,
emoluments, such as honoraria and allowances,
5-32% yan kaso they were given the 15% preferential rate.
received from such contractor or subcontractor:
Yun nga lang confusing kasi dun sila sinama sa
Provided, however, That the same tax treatment
nonresident
shall apply to a Filipino employed and occupying
nonresident if they have been here for over one taxable
the same position as an alien employed by
year.
in
petroleum
operations
remuneration
and
in
salaries,
wages,
alien
annuities,
because
they
compensation,
are
not
actually
petroleum service contractor and subcontractor.

A and B are stand alone provisions!
Any income earned from all other sources within
the Philippines by the alien employees referred to
SEC. 26. Tax Liability of Members of General
under Subsections (C), (D) and (E) hereof shall
Professional
be subject to the pertinent income tax, as the
professional partnership as such shall not be
case may be, imposed under this Code.
subject to the income tax imposed under this

Chapter.
Partnerships.
Persons
engaging
in
general
business
as
Any income earned from all other sources within the
partners in a general professional partnership
Philippines by the alien employees referred to under
shall be liable for income tax only in their
Subsections (C), (D) and (E) hereof shall be subject to the
separate and individual capacities.
pertinent income tax, as the case may be, imposed under

this Code. --- kasi itong 15% preferential rate niya that
For purposes of computing the distributive share
will be the tax rate that you will apply for their income
of the partners, the net income of the partnership
that they receive by way of salaries, wages, annuities,
shall be computed in the same manner as a
compensation, remuneration and other emoluments,
corporation.
such as honoraria and allowances being employed in that

multinationals, off shore banking units, petroleum service
Each partner shall report as gross income his
contractors.
distributive share, actually or constructively
nd

received, in the net income of the partnership.
34
Under sec. 22(B), the term 'corporation' shall include

partnerships, no matter how created or organized, joint-
In the case of profession partnership is not a taxable
stock companies, joint accounts, association, or insurance
entity; the taxable persons are the professional partners in
companies, but does not include general professional
that professional partnership. So the one taxable persons
partnerships and a joint venture or consortium formed
are the individual professional partners. When a
for the purpose of undertaking construction projects or
partnership is formed and you have multiple professions
engaging in petroleum, coal, geothermal and other energy
so you have set of medical practitioners, dentists,
operations
engineers, architects, lawyers, accountants and they
agreement under a service contract with the Government.
pursuant
to
an
operating
consortium
grouped themselves and engaged into a professional

partnership then they made income meron silang
So for purposes of the taxability of corporations,
distribution rin. How will you treat that kind of
regardless, no matter how you are created as long as you
partnership? If that kind of partnership would arise it
would group yourselves and engaged in business then you
would be taxed like a corporation. Hindi na siya magiging
will be taxed like a corporation even if you are not
section 26 because the requirement of the exemption is
registered. So kung magcorpo corpo lang kayo then you
common profession. So the partnership is a group of
go build your business then you will be taxed like a
accountants so puro accountants lang, kung engineers
corporation.
puro engineer etc. When it now becomes mixed or

multiple professions in that partnership created, it would
not be treated as under section 26 but that of a
corporation subject to dividends.
Co- ownership. So there are cases when a set of heirs of

the deceased will inherit income producing properties
then they become co-owners of that property. Is a coownership a taxable person? The co-ownership itself is
However, the professional partnership is still required to
not a taxable person so when the co-owners would earn
file a tax return/ income tax return/ annual information
income by reason of that co-ownership kanya kanya sila
return for purposes of checking on whether the
bitbit ng kanilang income and they will be taxed
declarations the individual tax returns filed by the
separately. Kung ano yung kanilang sharing then that
professional partners are also more or less the same and
would be the perspective by which you will tax them.
harmonize with the declaration of the professional
However, in the event now the co-ownership becomes an
partnership.
ongoing concern and is now engaging in business. Okay

lang kung isolated transactions like mine pwede kanya
CHAPTER IV - TAX ON CORPORATIONS
kanya silang paghati hatian sa income and they will be

taxed in that way. When it becomes now an ongoing
Predominantly the domestic corporations will have what

we call the business income. Domestic corporation is
one that is created under the Philippine laws but for
purposes of taxability when we talked about corporations
it does not only pertain to corporations which have been
regularly established, created or organized.
concern like nagmana sila ng set of apartment dwellings

or commercial buildings which are rented from others so
when that happens it now becomes a business coownership then it would be taxed like a corporation.
nd

So it covers and embraces everything as a taxable
(B)
corporation regardless, no matter how they are created or
Hospitals. this is different from non-stock, non-profit
organized.
institutions
SEC.
27.
Rates
of
Income
tax
on
Domestic
Corporations.
Proprietary
Educational
35
Institutions
and
Now this taxpayers are given the preferential tax rate of

10% in their taxable income. This 10% would be given or
availed if it will satisfy what we call the predominance
You have here the tax on domestic corporations. The rate
test. What is this predominance test? The predominance
now is 30% of their taxable income. But for purposes of
test is that the hospital or educational income exceeds
accounting the income, individuals are only allowed to
50% of the total gross income. If more than 50% is
use the calendar year as their tax year in the case of the
education or hospital income then they can avail the 10%
corporation, whether domestic or foreign, they have the
rate but if more than 50% is non-education or non-
option to use either the calendar year or fiscal year. The
hospital then it would be subject to the regular tax rate at
30% tax during the taxable year would be based on the
30%. So only when it satisfies the predominance test.
taxable income of the corporation when you say taxable

income it is with the benefit of deductions.
(C) Government-owned or Controlled-Corporations,

Agencies or Instrumentalities.
In section 27, there is an option for corporations to avail

of the gross income tax, at 15% of gross income. An option
They rule here is that they are taxable because they are
to be taxed for 15% of gross income. But this 15% would
engaged in proprietary activities unless the law or the
come in after the following conditions have been
charter gives them the exemption. The exempted
satisfied:
government entities: GSIS, SSS, Philhealth, local water

districts and the PCSO. The rest are taxable. Dati ang
(1) A tax effort ratio of twenty percent (20%) of
PAGCOR kasama diyan.
Gross National Product (GNP);

(2) A ratio of forty percent (40%) of income tax
(D)
Rates
of
Tax
on
collection to total tax revenues;
Incomes. (Domestic Corporations)
Certain
Passive
(3) A VAT tax effort of four percent (4%) of GNP;

and
Remember that the domestic corporations are taxable on
(4) A 0.9 percent (0.9%) ratio of the Consolidated
all sources, within or without, so if a domestic
Public Sector Financial Position (CPSFP) to GNP.
corporation that has an income within then that would be

taxed at 30% is a business income. If it has a business
Actually we still do not have the revenue regulation of the
income outside then that income would also be taxable in
15% gross income kasi wala pang conditions the BIR has
the Philippines also at the rate of 30% that income is
still difficulty of the collection based on compliance.
added in the Philippine income and subject to the rate of
Parang yung collection ration nila for compliance does not
30%.
have reached maski 50% malabo maachieve.

So you have the rates on passive income of the domestic
corporations.
nd

36
(1) You have the final tax of 20% on interest on
but if this was received by individuals, you have
currency bank deposit and yield or any other
the tax rates of 10, 20, 25% pero kung corporation
monetary benefit from deposit substitutes and
ang nakatanggap ng cash/ property dividends
from trust funds and similar arrangements
then exempted.
received by domestic corporations, and royalties,

derived from sources within the Philippines. The
interest
income
derived
by
(5) Capital Gains Realized from the Sale, Exchange or
domestic
Disposition of Lands and/or Buildings. They are
corporation from a depository bank under the
subject to the 6% capital gains tax.
expanded foreign currency deposit. 7.5% interest

income of the corporation in their foreign
currency deposits in the Philippines. So going
back to section 24, if this interest income from
deposits, royalties, or interest income from their
bank deposits from abroad are not taxable under
paragraph D because this refers to those earned
in the Philippines. So for the foreign sourced
interest income or royalties it would be taxed
subject to the regular income of the corporation
in other words it would be added to the regular
income of the corporation taxed at 30%.
Then you have this MCIT, we will discuss this separately.

Now going back to dividends, take note that when the
domestic corporation receives dividends on another
domestic corporation = EXEMPTED but if the dividends
where coming from a foreign corporation then TAXABLE
na yan siya. Rate would still be rate by the corporation at
30% meaning the dividends are added to the regular
income of the corporation because domestic corporations
are taxable on all sources.
SEC.
28.
Rates
of
Income
Tax
on
Foreign
Corporations.
(2) Capital Gains from the Sale of Shares of Stock
Not Traded in the Stock Exchange with the rate
Now the foreign corporations are those organized or
of:
created under the foreign laws. There are two (2) kinds of
foreign corporation:
Not over P100,000. 5%

Amount in excess of P100,000.. 10%
(1) Resident Foreign Corporation One that is

given the license or authority to engage
(3) Tax on Income Derived under the Expanded
business in the Philippines; it is not based on
Foreign Currency Deposit System refers to the
the length of stay but on their authority to
dealings in nonresidents. As a rule they are not
engage in business.
(2) Nonresident Foreign Corporation If it has
taxable.
no authority or license to do business.

(4) Intercorporate Dividends. Refers to you have the
dividends
are
declared
by
domestic
corporation, the recipients are also domestic

corporations then it is exempted from income tax
Similarly, the foreign corporation, a resident, will be

taxed on the taxable income within also at 30% with the
benefit of claiming deductions against their gross income.
Likewise, all resident foreign corporations is also granted
nd

37
the option of 15% in gross income under the same
same exemption. We do not assess the 2 % tax on the
conditions under sec. 27. Then, this resident foreign is
gross Philippine billings, if the foreign country gives a
also subject or covered by the provisions of the MCIT. We
similar exemption to our Philippine carriers doing
would discuss that separately.
business in that country.
This time the resident foreign corporation is an
The base of the 2 % is the gross revenue derived from
international carrier doing business in the Philippines
carriage of persons, excess baggage, cargo and mail
shall pay a tax of two and one-half percent (2 1/2%) on its
originating from the Philippines. What if it has income
'Gross Philippine Billings. So it may be either by air or by
outside of the carriage of persons, excess baggage, cargo
sea. Do not confuse your international carriers with your
and mail originating from the Philippines? What would
domestic airlines with international flights; domestic
be the tax treatment of these other income? We will not
airlines are subject to the regular domestic corporation
apply anymore the 2 % but we will go back to the 30%
tax at 30% even if they have international flights. So they
rate on the taxable income. So if these international
have a separate taxation under sec. 28 they would be
carriers have other items of income in the Philippines
taxed at 2 1/2% on its gross Philippine billings derived
outside of the items taxable at 2 % then you apply the
from carriage of persons, excess baggage, cargo and mail
30% rate to the taxable income. If these international
originating from the Philippines.
carriers have bank deposits then you apply the same

treatment for their applicable rates insofar as interest
This provision on the tax on international carrier has
income under bank deposits in the Philippines.
been amended by RA 10378 (March 2013). It is still the

same tax rate. Actually pareho pa rin yung provision yung
Now, the offshore banking units (OBUs) are also
no.3 a and b may naidagdag lang na paragraph sa baba.
exempted unless any interest income derived from
What is added actually or the amendment is the
foreign currency loans granted to residents, shall be
reciprocity provision because of the agreements of the
subject to a final income tax at the rate of ten percent
different carriers, the amendment deals principally on
(10%) of such income.
granting reciprocity that international carriers whose own

country grants income tax exemption to Philippine
carriers, we would give a similar exemption to these
international carriers. So if Philippine carriers in that
country are given an exemption then that international
carrier from that country doing business in the
Philippines will be given a similar exemption. Yun lang
yun amendment, wala nagbago ang coverage and other
provisions but the grant of reciprocity. So there is if we
have an international treaty with that country wherein
the international carrier doing business in the Philippines
is given an exemption by that country then our
Philippines carriers in that country can avail also the
As a rule, OBUs are not taxable corporations.

Tax on Branch Profits Remittances.
Foreign corporations established in the Philippines may
operate as a branch office so when it makes income it
makes remittances to its head office abroad. So what
would be the taxability on the branch profit remittance?
You have a tax of 15% on the branch profit remitted
without the benefit of deduction of the tax component
because when you make the branch profit remittance
subject to the 15% tax when you make this remittance to
BSP. So for example:
nd

38
Profit
10,000,000 (100%)
numbers 2 (Minimum Corporate Income Tax on Resident
Rate
Foreign Corporations), 3 (International Carrier) and 4
15%
Remitted 8,500,000 (85%) remitted to the Head
(International Air Carrier), these nonresident foreign
Office
corporations are taxable at 30%. But in the case of section

28 B(2) Nonresident Cinematographic Film Owner, Lessor
Kasi kinuhaan na ng 1.5 million as tax so they complain
or Distributor, it is taxed at 25% gross. The (3)
now the earlier cases na mali yung base ng 15% should not
Nonresident Owner or Lessor of Vessels Chartered by
be on 10 million kasi ang natanggap ng head office is only
Philippine Nationals, is taxed at 4.5% of gross rentals
8.5 million. The SC clarified that that is not the intention
whereas (4) Nonresident Owner or Lessor of Aircraft,
of the law. What is to be taxed here is the total profits
Machineries and Other Equipment, is taxed at 7.5% of
applied or earmarked for remittance without deduction.
gross rentals.
Wala pa yung without deduction sa dating NIRC

provisions. Tax base is the total profits applied or
We have interest on foreign loans by nonresident
earmarked for remittance without deduction.
foreign corporations(NRFC) there tax is at 20%. (section

28 (5a)).
August 20, 2013

We are now on the rates of foreign corporation (section
28). We have the resident foreign corporation and the
nonresident foreign corporation.
Now for intercorporate dividends (sec.28 (5b)), these are

dividends received by nonresident foreign corporation
from the domestic corporation. Now the tax rate is at
30%, unless the nonresident foreign corporation is
As regards to foreign nonresident corporation they are
entitled to a tax sparing treatment equivalent to 15%. So
taxable on gross without the benefit of the tax exemption.
the tax rate of the dividends is only 15%. So in the other
So you have Section 28. Rates of Income Tax on Foreign
words, the tax credit of NRFC dividends received from
Corporations. Section 28 A talks about Resident Foreign
domestic corporations is not subject to a tax sparing
Corporation and Section 28 B is on Non- resident foreign
credit, the rate will be 30% but if it is entitled to a tax
corporation.
sparing credit, tax of the dividend will only be 15% and

the tax creditable is equivalent to 15%. It is because the
In the case of Section 28 A(6), you have there the

Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies.
rate is normally 30% kaso kung may tax sparing credit xa

15 then the rate is the difference which is only 15%.
It is the
operating headquarters which is taxable. It has a
Now, the operation of tax credit is not automatic. There
preferential rate of 10% on its taxable income.
must be a tax agreement or a treaty entered into by the

Philippines and the country where this NRFC holds office.
The Non- resident foreign corporation is taxable at 30%

gross
without
the
benefit
of
deduction.
Foreign
corporations, whether resident or nonresident, are
Let us go back to the treatment of the MCIT or the

Minimum Corporate Income Tax (Sec. 27 E(1) ).
taxable only on sources earned within the Philippines. So

for nonresident foreign corporations, other than
As a rule, the MCIT applies only to taxable corporations

subject to the regular rate of 30% taxable income. So pag-
nd

domestic corporation it is taxed at 30% including the
39
X Corporation
resident foreign corporations which are also taxed at 30%

on their taxable income, then the MCIT is applicable to
Year
NCIT (30%)
MCIT
on
them.
(2%
Tax Paid
Gross
income)
This MCIT is different from the optional 15% tax on gross.
The MCIT applies when the corporate taxpayer computes
2009
P 50,000
P 80,000
P80,000
2010
P 90,000
P 140,000
P140,000
2011
P150,000
P120,000
P150,000
its taxable income or tax due on the basis of the normal

corporate income tax (NCIT) as against the MCIT. If the
MCIT is higher then the tax to be paid is the MCIT. But if
the tax due is computed on the normal corporate income
tax rate (NCIT) and it is higher then it is paid using the
NCIT or the normal corporate income tax rate.
You have the rules on the application of the MCIT that
the minimum corporate income tax of 2% of gross income
- 80,000*
as of the end of the taxable year, hereby imposed on a
P70,000
corporation taxable, beginning on the fourth taxable year

immediately following the year in which such corporation
commenced its business operations, so meaning if the
business is in operation for more than 4years then the
* P80,000 is the creditable excess of P30,000 from year

2009 and P50,000 from year 2010.
MCIT is applied. So if it was applied on 1998 to those

corporations operating for more than 4years then the
Note: The EXCESS MCIT is creditable to the NCIT if the
MCIT applies to them. But for newly organized
computed NCIT tax due/ payable is higher than the
corporations where it has not been operating for more
computed MCIT tax due/payable.
than 4years or mag-begin palang xa sa kanilang ika- third

year then the MCIT is not applied. But again if sa kanilang
X corporation. If in 2009 the tax due computed under the
ika- fourth taxable year immediately following the year
normal corporate income tax was 50,000.00 and the tax
the corporation commenced its business operations
due computed using the MCIT was 80,000.00. thus, the
wherein the minimum corporate income tax is greater
tax payable in 2009 is 80,000.00, which is the MCIT. In
than the amount computed in subsection A (Sec. 27) or of
other words, at the end of the year, corporate taxpayers
this section or on section 28A, in the case of resident
compute their income tax due on 2 ways. 1) on the basis
foreign corporation.
of the normal rate of 30% and 2) on the basis of MCIT at

2% of the gross income. Technically, the corporation
So you have a case here. (please refer to the table)
should only pay income tax on the basis of its actual

income. So technically it should only pay 50,000.00 but
applying MCIT you are now paying higher. It is because if
the MCIT is higher than the NCIT, then the tax that you
nd

40
will pay is the MCIT since it is higher. So in this case, the
You can apply also the 50k since it is still creditable for
tax to be paid is 80,000.00 or the MCIT since it is higher.
the next 3 years, including 2011. So, the 150k tax due
There is recognition of the excess on the MCIT in 2009 is
computed on the NCIT less the creditable excess, which is
30,000.00. It is the difference between 80,000.00 and
30k and 50k a total of 80k, the excess MCIT from 2009
50,000.00. in other words, you paid over 30,000.00. So
and 2010, the amount you gonna pay now is the balance
there is an excess MCIT. So what is the statutory
of 70k.
provision on the excess?

P 150,000.000---- TAX PAYABLE in 2011
Sec. 27.xxx
-
P 80,000.00 ---- excess MCIT from 2009 and 2010
(2) Carry Froward of Excess Minimum Tax. Any excess of
____________
the minimum corporate income tax over the normal
P 70,000.00 ----- TO BE PAID FOR 2011
income tax as computed under Subsection (A) of this

Section shall be carried forward and credited against the
That is how you apply the MCIT. That was done annually.
normal income tax for the three (3) immediately
Now, in your revenue regulations you have in the
succeeding taxable years.
readings assigned the application is now on a quarterly

basis. So, yung record mas expanded yun. Im just
In other words, this excess MCIT is creditable to the NCIT
presenting to you the annual version but the manner of
if higher than MCIT for the next 3 years. So your 30k is
applying it now is QUARTERLY na because the
creditable if the NCIT for the next 3years is higher than
corporations are required to file their income tax
the MCIT. so the 30k is creditable on 2010, 2011, 2012.
quarterly. So usually 3 quarterly then yung ika- 4 is the
However, on 2009, the MCIT is higher, then you pay the
consolidated or the annual. This is now the application of
80k. if sa 2010 the NCIT is 90,000.00 and the MCIT is
MCIT.
th
140,000.00 then the tax payable in 2010 is the MCIT which

140,000.00. now, in 2010, can you now apply the excess sa
Now, what happens if that there be in the next 3years the
30? NO, since the MCIT is higher. So di mo magamit ang
MCIT is still higher? So at the end of 2012, hindi magamit
excess na 30k sa 2010 but you still have 2 more years. so,
yung 30k, mabahaw na yan xa. It will lapse. So maiwan
in 2010 since you are now paying the MCIT which is
nalang is yung 50k. if pagka- 2013 higher pa rin ang MCIT
higher, then there is a recognition of the excess MCIT
then mabahaw na rin yung 50k, maglapse yung creditable
between 140k and 90k, then there is an excess of 50k,
sana na 50k. So, as long as during the next 3 years of the
yung difference niya. This 50k will be creditable to the
excess higher yung NCIT kaysa MCIT then magagamit
MCIT in the next 3 years if during the 3 subsequent years
yung excess.
the NCIT would be higher than the MCIT. So the 50k is

creditable on 2011, 2012 and 2013. Now, if in 2011 the tax
due on the NCIT is 150,000.00 and the tax due on the
MCIT is 120,000.00 then the tax payable in 2011 is
P150,000.00. Now, can you apply the excess MCIT now?
YES, you can apply the 30k because pasok pa xa sa 2011.
Can you suspend
the effects of the application of the
MCIT? In the NIRC, you can ask for the suspension of the
MCIT under Sec. 27 (3).
Sec. 27 (3) Relief from the Minimum Corporate Income Tax
Under Certain Conditions. The Secretary of Finance is
nd

41
hereby authorized to suspend the imposition of the
money or issue bonds so that people will buy bonds and
minimum corporate income tax on any corporation which
you are to receive the cash proceeds and make interest so
suffers losses on account of prolonged labor dispute, or
you have menu of funds to be use for your business,
because of force majeure, or because of legitimate business
whether you source it through accumulation or from
reverses.
external sources.
The Secretary of Finance is hereby authorized to
Now if you are going to accumulate from your own
promulgate, upon recommendation of the Commissioner,
earnings and as you will now be accumulating there is
the necessary rules and regulation that shall define the
now sufficient funds for its purpose then you need not
terms and conditions under which he may suspend the
accumulate further. Otherwise, the further accumulation
imposition of the minimum corporate income tax in a
will be subject to this improperly accumulated earnings
meritorious case.
tax. Or if you accumulate and there is no business needs,

then you will also be subject to improperly accumulated
Kasi dito, lugi talaga yung tax payer. Bakit ka magbabayad
earnings tax.
ng sobra kung ang tax due mo yun lang, if computed on

the basis of a normal tax rate. You have here the
What is the reason for this? You also have to pay your
application of the MCIT. it applies also the same ways as
investors. You have to pay your stockholders and share
to those resident foreign corporation.
the profits to other co- owners of the corporations.

Remember, in the distribution of profits, for earnings by
Now, another is Sec. 29. Sec. 29 is the application of
way of dividends, these are taxable distribution unless the
improperly accumulated earning tax. This is an example
stockholder of the corporation or stocks treat. Now in
of what we call the penalty tax or sur tax. What is a sur
section 29, this is an addition to other taxes imposed,
tax? It is a penalty tax, example is Section 29. These are
there is hereby imposed for each taxable year whereby the
penalties imposed on corporations who are accumulating
improperly accumulated tax income on its corporation
earnings is beyond the reasonable needs of the business.
described
Tax payers are allowed to accumulate earnings but there

must be a reasonable need for such accumulation. So if
there is a reasonable business need, then you are allowed
in
subsection
hereof,
an improperly
accumulated earnings tax equal to ten percent (10%) of

the improperly accumulated taxable income. (Subsection
A)
to accumulate earning. But if the accumulation is already
Now the improperly accumulated earning tax shall apply
done and you have already set aside for example, you
to every corporation formed or availed for the purpose of
need working capital purpose, for expansion, for asset or
avoiding the income tax with respect to its shareholders
property acquisition because you want to expand your
or the shareholders of any other corporation, by
business or you want to construct or make improvements,
permitting earnings and profits to accumulate instead of
so you are allowed to accumulate. It is because one way of
being divided or distributed. (Subsection B)
sourcing funds to be use in the business is internal

sources or external sources. Internal sources is from your
By way of exemption, there are corporations which are
own earnings and profits. External, you may borrow
allowed to accumulate. (Subsection B 2a), whether there
nd

is a business need or not, they are exempted from this
42
Section 30, you have here exempted corporations:
penalty tax such as:

Section 30. Exemptions from Tax on Corporations. The
(a) Publicly-held corporations;
following organizations shall not be taxed under this Title

in respect to income received by them as such:
(b) Banks and other nonbank financial intermediaries;

and
(A) Labor, agricultural or horticultural organization not

organized principally for profit;
(c) Insurance companies.

(B) Mutual savings bank not having a capital stock
Others which are added to the three, you will find then in
represented by shares, and cooperative bank without
the revenue regulation in section 29.
capital stock organized and operated for mutual purposes
The fact that the corporation is a mere holding, kasi yung
and without profit;
iba will set up a holding corporation which is the tax
(C) A beneficiary society, order or association, operating
shield to the investments of a person in a corporation. So
fort he exclusive benefit of the members such as a fraternal
there is a flagship corporation but the individual owners
organization operating under the lodge system, or mutual
there cannot be seen because there is a holding
aid association or a nonstock corporation organized by
corporation, the one that holding the shares of stocks of
employees providing for the payment of life, sickness,
that corporation. So the fact that a corporation is a mere
accident, or other benefits exclusively to the members of
holding company or an investment company, then it is a
such
prima facie evidence of a purpose to avoid the tax upon
corporation or their dependents;
society,
order,
or
association,
or
nonstock
its shareholders or members. (Subsection C) So, siya na

yung tataman ng improperly accumulated earnings tax.
(D) Cemetery company owned and operated exclusively for

the benefit of its members;
The fact that the earnings or profits of a corporation are

permitted to accumulate beyond the reasonable needs of
(E) Nonstock corporation or association organized and
the business shall be determinative of the purpose to
operated exclusively for religious, charitable, scientific,
avoid the tax upon its shareholders or members unless
athletic, or cultural purposes, or for the rehabilitation of
the corporation, by the clear preponderance of evidence,
veterans, no part of its net income or asset shall belong to
shall prove to the contrary. (Subsection C(2)). So the
or inures to the benefit of any member, organizer, officer or
burden of proof kay nasa tax payer.
any specific person;
The scope what reasonable business needs means
(F) Business league chamber of commerce, or board of
includes the reasonably anticipated needs of the business.
trade, not organized for profit and no part of the net
(section 29,E) so that would be too broad. So the tax
income of which inures to the benefit of any private stock-
payer has a leeway as to what to consider as reasonable
holder, or individual;
business needs.
nd

43
(G) Civic league or organization not organized for profit
the building, they have it rented, subject to lease. They
but operated exclusively for the promotion of social
have parking lots which are for their members. Now, they
welfare;
allowed non- members to use their parking lots but they

have to pay a parking fee. So they were able to generate
(H) A nonstock and nonprofit educational institution;
parking lots of those members not using the parking lots
(I) Government educational institution;
and collected rentals. Now these proceeds were used to
(J) Farmers or other mutual typhoon or fire insurance

company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a
purely local character, the income of which consists solely
of assessments, dues, and fees collected from members for
the sole purpose of meeting its expenses; and
and operated as a sales agent for the purpose of marketing

the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the
provisions
in
then for income taxes. They claim that they are exempted.
Are they exempted?
Held: NO. It is because although it may have been a tax
exempt purpose, they made income of whatever kind of
the
personal, all or any of their activities conducted for profit,

regardless of the disposition made of such income, even if
the income was used for tax exempt purpose of the
corporation then, it will not be material. The income now
will be subject to tax.
basis of the quantity of produce finished by them;

the
the tax exempt purpose of the YMCA. BIR now ran after
the organization from any of their properties, real or
(K) Farmers, fruit growers, or like association organized
Notwithstanding
parking fees from non- members who are using the
preceding
paragraphs, the income of whatever kind and character of

the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
The last paragraph of section 30 is important. Remember
corporations enumerated under this section are exempted
from income tax.
Is this the same to those nonstock nonprofit? While

nonstock nonprofit here is mentioned in letter H,
education institution, the grant of their tax exemption is
not the NIRC but the Constitution. Constitution prevails
not the tax code.
So for nonstock nonprofit, even if they generate
income as long as it will be use for educational purposes,
they will be not be subject to tax.
All the corporations mentioned in Section 30 are tax
So meaning, if even the income was flown back to the

charitable or to any purposes it was exempted, it is not
material. It will be subject to income tax.
exempt as to their principal purpose. If it is on the last

paragraph of Section 30, then it will be taxable.
Then we have the application of Section 33. The Special
Treatment of Fringe Benefit Tax. What is the fringe
CIR v YMCA, October 19, 1998:
benefit tax?
Facts:
YMCA
was
organized
as
tax-
exempt
organization. They have a building wherein portions of
nd

44
(B) Fringe Benefit defined. For purposes of this Section,
like in the case of the board and lodging or the living
the term fringe benefit means any good, service or other
quarters or it is in the pursuit of the Ers business like
benefit furnished or granted in cash or in kind by an
yung gasoline allowance, travel representation, which are
employer to an individual employee (except rank and file
spent for the business of the EE and the ER and the is
employees as defined herein) such as, but not limited to,
made to spent to that, it is made to account and liquidate,
the following:
then it will not be taxable. But if he is not made to

account or liquidate then it will be added to his is
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
compensation income and subject to income tax. And

UNLESS de minis or benefits of small value it is tax free.
As to Managerial and Supervisory: the FB is part of the
compensation income, it is subject to tax but the
employer pays the tax. So this is what you call the Fringe
Benefit Tax (FBT). However, the FBT is determined from
(5) Interest on loan at less than market rate to the extent
the gross up monetary value of the FB times 32% (FBT=
of the difference between the market rate and actual rate
GMU x 32%). Take note that what is added up to his
granted;
taxable value is the FB but it is not the actual value which

is the taxable base but the gross up monetary value of the
(6) Membership fees, dues and other expenses borne by
FB. How is it determined? GMU= Actual Value / 68%.
the employer for the employee in social and athletic clubs

or other similar organizations;
So when the ER now provides a car to the manager, for

them to be loyal, in the hands of the employer the value is
(7) Expenses for foreign travel;
more than the EE. So if ang amount is 1M, mahal yun sa

ER. So yung gross up monetary value is yung actual value
(8)Holidayand vacation expenses;

(9) Educational assistance to the employee or his
divided by 68%.
So the FBT will be based on the GMU x 32%.
dependents; and
Examples of this benefits to the managers are houses or
(10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
Fringe benefit is given to the Rank and file and to the
Managerial and Supervisory EE.
As to the Rank and File: FB is added to compensation
income subject to Income Tax which the employees pay
the tax, unless the FB is for the convenience of the ER,
pent house, expense account, household personnel, car,

or social clubs like golf club, educational assistance and
etc, all expense paid of the employer. So i-gross up yan
Pero sa rank and file, iba yun. The employee is liable for
the tax.
FBT and GMU are deductable to the gross income.
nd

FBT = GMV x 32%
GMV = Actual Value (AV)

68%
Legend:
FBT Fringe Benefit Tax
GMV Gross up Monetary Value
EXAM COVERAGE IS SECTION 22- 33
45

Taxation 1 TSN - 2nd Exam

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nd

Taxation TSN 2 Exam Coverage

with the NIRC. Thanks.

9243- amended of the documentary stamp

July 23, 2013

9294- exemption of the

h. 9337- amending the VAT from 10 to 12%

INCOME TAXATION 1 lecture

9504- 2008 exemption low income earners

HISTORY OF THE INTERNAL REVENUE LAW

Internal Revenue law 1904- this law was enacted

Internal revenue law of 1913

Internal revenue law of 1916

Internal revenue law of 1917

m. 10021- exchange of tax exemption

NICR. No longer in American

regime. We have now under the commonwealth

under CA 466 ( 1 NIRC of the Philippines) which was

NIRC of 1977- it took sometimes noh. Enacted under

alcohol (amendments)Dec 2012, increase the

p. 10378- 2013, section 28 or the tax of

international carriers where we have or doing

NIRC of 1986- EDSA time

NIRC of 1997- most recent. It is now under RA 8424,

business of our country.

extending the coverage of exemption

10351- Law on excise tax to tobacco and

called NIRC of 1939

10010- amendment of taxation of insurance

9648- exemption from documentary stamp

d. RA 9234- amendment of excise tax of alcohol

9238- amendment of the VAT subjecting the

The powers and duties? Assessment and collection of the

National internal revenue tax.

Taxation TSN 2 Exam Coverage

Levying legislative aspect

The next smaller BIR units are the regional offices. It

Payment- executive/ tax administration

TITLE I. Section 2. Powers and duties of the Bureau of

operates also as BIR in national set-up. Smaller unit sya.

including the execution of judgments in all cases decided

The power to decide disputed assessments, refunds of

courts. The Bureau shall give effect to and administer the

internal revenue taxes, fees or other charges, penalties

supervisory and police powers conferred to it by this Code

imposed in relation thereto, or other matters arising

under this Code or other laws or portions thereof

The power of the BIR is sourced in the NIRC. It will define

in the Commissioner, subject to the exclusive appellate

deficiencies against the taxpayer which is notifies and

erroneously paid their taxes. It will be the commissioner

to decide whether the refund is valid or not. Including

Deputy commissioner for information system

penalties and fees.

ALL OTHER MATTERS- for as long that the enforcement

For legal and inspection; and

of that law is under the scope of BIR then it will be the

For resource management.