December 11, 1997 REPUBLIC ACT NO. 8424 Effective !"#!

r$ 1, 1998
AN ACT A%ENDIN& T'E NATIONAL INTERNAL RE(ENUE CODE,A) A%ENDED, AND *OR
OT'ER PURPO)E)
)ECTION 1 )+,rt Tit-e . T+i/ Act /+!-- be cite0 !/ t+e 1T!2 Ref,rm Act ,f 19971
)ECTION 2 )t!te P,-ic$ . It i/ +ereb$ 0ec-!re0 t+e 3,-ic$ ,f t+e )t!te t,
3r,m,te /#/t!i"!b-e ec,",mic 4r,5t+ t+r,#4+ t+e r!ti,"!-i6!ti," ,f t+e P+i-i33i"e
i"ter"!- reve"#e t!2 /$/tem, i"c-#0i"4 t!2 !0mi"i/tr!ti,"7 t, 3r,vi0e, !/ m#c+ !/
3,//ib-e, !" e8#it!b-e re-ief t, ! 4re!ter "#mber ,f t!23!$er/ i" ,r0er t, im3r,ve
-eve-/ ,f 0i/3,/!b-e i"c,me !"0 i"cre!/e ec,",mic !ctivit$7 !"0 t, cre!te ! r,b#/t
e"vir,"me"t f,r b#/i"e// t, e"!b-e firm/ t, c,m3ete better i" t+e re4i,"!- !/ 5e--
!/ t+e 4-,b!- m!r9et, !t t+e /!me time t+!t t+e )t!te e"/#re/ t+!t &,ver"me"t i/
!b-e t, 3r,vi0e f,r t+e "ee0/ ,f t+,/e #"0er it/ :#ri/0icti," !"0 c!re.
)ECTION ; Pre/i0e"ti!- Decree N,. 11<8, !/ !me"0e0 b$, !m,"4 ,t+er/,
Pre/i0e"ti!- Decree N,. 1994 !"0 E2ec#tive Or0er N,. 27;, ,t+er5i/e 9",5" !/
t+e N!ti,"!- I"ter"!- Reve"#e C,0e, i/ +ereb$ f#rt+er !me"0e0 t, re!0 !/ f,--,5/=
TITLE I Or4!"i6!ti," !"0 *#"cti," ,f t+e B#re!# ,f I"ter"!- Reve"#e
)ECTION 1. Tit-e ,f t+e C,0e . T+i/ C,0e /+!-- be 9",5" !/ t+e N!ti,"!-
I"ter"!- Reve"#e C,0e ,f 1997.
)ECTION 2. P,5er/ !"0 D#tie/ ,f t+e B#re!# ,f I"ter"!- Reve"#e . T+e
B#re!# ,f I"ter"!- Reve"#e /+!-- be #"0er t+e /#3ervi/i," !"0 c,"tr,- ,f t+e
De3!rtme"t ,f *i"!"ce !"0 it/ 3,5er/ !"0 0#tie/ /+!-- c,m3re+e"0 t+e !//e//me"t
!"0 c,--ecti," ,f !-- "!ti,"!- i"ter"!- reve"#e t!2e/, fee/, !"0 c+!r4e/, !"0 t+e
e"f,rceme"t ,f !-- f,rfeit#re/, 3e"!-tie/, !"0 fi"e/ c,""ecte0 t+ere5it+, i"c-#0i"4
t+e e2ec#ti," ,f :#04me"t/ i" !-- c!/e/ 0eci0e0 i" it/ f!v,r b$ t+e C,#rt ,f T!2
A33e!-/ !"0 t+e ,r0i"!r$ c,#rt/. T+e B#re!# /+!-- 4ive effect t, !"0 !0mi"i/ter t+e
/#3ervi/,r$ !"0 3,-ice 3,5er/ c,"ferre0 t, it b$ t+i/ C,0e ,r ,t+er -!5/.
)ECTION ;. C+ief Offici!-/ ,f t+e B#re!# ,f I"ter"!- Reve"#e . T+e B#re!# ,f
I"ter"!- Reve"#e /+!-- +!ve ! c+ief t, be 9",5" !/ C,mmi//i,"er ,f I"ter"!-
Reve"#e, +erei"!fter referre0 t, !/ t+e C,mmi//i,"er !"0 f,#r >4? !//i/t!"t c+ief/
t, be 9",5" !/ De3#t$ C,mmi//i,"er/.
)ECTION 4 P,5er ,f t+e C,mmi//i,"er t, I"ter3ret T!2 L!5/ !"0 t, Deci0e T!2
C!/e/ . T+e 3,5er t, i"ter3ret t+e 3r,vi/i,"/ ,f t+i/ C,0e !"0 ,t+er t!2 -!5/
/+!-- be #"0er t+e e2c-#/ive !"0 ,ri4i"!- :#ri/0icti," ,f t+e C,mmi//i,"er, /#b:ect
t, revie5 b$ t+e )ecret!r$ ,f *i"!"ce.
CASES DIGEST
The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals
!nli"e the Commissioner of Internal Revenue who has been given the express power to
interpret the Tax Code and other national tax laws, no such power is given to the B#$%
&'ART(s dependence on B#$%(s interpretation was thus misplaced
City of Iloilo, et al vs &mart Communications, Inc,
$R )o *+,-+., %ebruary -,, -../
0eriod for filing an appeal with the Court of Tax Appeals
The jurisdiction of the Court of Tax Appeals has been expanded to include not only
decisions or rulings but inaction as well of the Commissioner of Internal Revenue The
decisions, rulings or inaction of the Commissioner are necessary in order to vest the
Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within
1. days after the receipt of such decision or ruling, or within 1. days after the expiration
of the *2.3day period fixed by law for the Commissioner to act on the disputed
assessments This 1.3day period within which to file an appeal is jurisdictional and
failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of
its jurisdiction to entertain and determine the correctness of the assessments &uch period
is not merely directory but mandatory and it is beyond the power of the courts to extend
the same
RCBC vs CIR, $R )o *+24/2, April -4, -..,
Conclusions and opinions of the Court of Tax Appeals are extended due consideration
It has been a long standing policy and practice of the &upreme Court to respect the
conclusions of 5uasi3judicial agencies such as the Court of Tax Appeals, a highly
speciali6ed body specifically created for the purpose of reviewing tax cases The CTA, by
the nature of its functions, is dedicated exclusively to the study and consideration of tax
problems It has necessarily developed an expertise on the subject 7ue consideration is
extended to its opinion unless there is an abuse or improvident exercise of authority
Commissioner of Internal Revenue vs $eneral %oods 80hils9, Inc,
$R )o *41+,-, April -4, -..1
The Commissioner of Internal Revenue is not bound by the ruling of his
predecessorsThat the previous Commissioners considered copra as an :agricultural
food product:, is not reason for holding that the present interpretation is wrong The
Commissioner of Internal Revenue is not bound by the ruling of his predecessors To the
contrary, the overruling of decisions is inherent in the interpretation of laws
'isamis ;riental Association of Coco Traders, Inc vs 7ept of %inance &ecretary, et al,
$R )o *.2<-4, )ovember *., *//4
)ECTION <. P,5er ,f t+e C,mmi//i,"er t, Obt!i" I"f,rm!ti,", !"0 t, )#mm,",
E2!mi"e, !"0 T!9e Te/tim,"$ ,f Per/,"/ @ I" !/cert!i"i"4 t+e c,rrect"e// ,f !"$
ret#r", ,r i" m!9i"4 ! ret#r" 5+e" ","e +!/ bee" m!0e, ,r i" 0etermi"i"4 t+e
-i!bi-it$ ,f !"$ 3er/," f,r !"$ i"ter"!- reve"#e t!2, ,r i" c,--ecti"4 !"$ /#c+
-i!bi-it$, ,r i" ev!-#!ti"4 t!2 c,m3-i!"ce, t+e C,mmi//i,"er i/ !#t+,ri6e0=
>A? T, e2!mi"e !"$ b,,9, 3!3er, rec,r0, ,r ,t+er 0!t! 5+ic+ m!$ be re-ev!"t ,r
m!teri!- t, /#c+ i"8#ir$7
>B? T, ,bt!i" ," ! re4#-!r b!/i/ fr,m !"$ 3er/," ,t+er t+!" t+e 3er/," 5+,/e
i"ter"!- reve"#e t!2 -i!bi-it$ i/ /#b:ect t, !#0it ,r i"ve/ti4!ti,", ,r fr,m !"$ ,ffice
,r ,fficer ,f t+e "!ti,"!- !"0 -,c!- 4,ver"me"t/, 4,ver"me"t !4e"cie/ !"0
i"/tr#me"t!-itie/, i"c-#0i"4 t+e B!"49,)e"tr!-"4Pi-i3i"!/ !"0 4,ver"me"t@,5"e0
,r @c,"tr,--e0 c,r3,r!ti,"/, !"$ i"f,rm!ti," /#c+ !/, b#t ",t -imite0 t,, c,/t/ !"0
v,-#me ,f 3r,0#cti,", recei3t/ ,r /!-e/ !"0 4r,// i"c,me/ ,f t!23!$er/, !"0 t+e
"!me/, !00re//e/, !"0 fi"!"ci!- /t!teme"t/ ,f c,r3,r!ti,"/, m#t#!- f#"0
c,m3!"ie/, i"/#r!"ce c,m3!"ie/, re4i,"!- ,3er!ti"4 +e!08#!rter/ ,f m#-ti"!ti,"!-
c,m3!"ie/, :,i"t !cc,#"t/, !//,ci!ti,"/, :,i"t ve"t#re/ ,r c,"/,rti! !"0 re4i/tere0
3!rt"er/+i3/, !"0 t+eir member/7
>C? T, /#mm," t+e 3er/," -i!b-e f,r t!2 ,r re8#ire0 t, fi-e ! ret#r", ,r !"$ ,fficer
,r em3-,$ee ,f /#c+ 3er/,", ,r !"$ 3er/," +!vi"4 3,//e//i,", c#/t,0$, ,r c!re ,f
t+e b,,9/ ,f !cc,#"t/ !"0 ,t+er !cc,#"ti"4 rec,r0/ c,"t!i"i"4 e"trie/ re-!ti"4 t,
t+e b#/i"e// ,f t+e 3er/," -i!b-e f,r t!2, ,r !"$ ,t+er 3er/,", t, !33e!r bef,re t+e
C,mmi//i,"er ,r +i/ 0#-$ !#t+,ri6e0 re3re/e"t!tive !t ! time !"0 3-!ce /3ecifie0 i"
t+e /#mm,"/ !"0 t, 3r,0#ce /#c+ b,,9/, 3!3er/, rec,r0/, ,r ,t+er 0!t!, !"0 t, 4ive
te/tim,"$7
>D? T, t!9e /#c+ te/tim,"$ ,f t+e 3er/," c,"cer"e0, #"0er ,!t+, !/ m!$ be re-ev!"t
,r m!teri!- t, /#c+ i"8#ir$7 !"0
>E? T, c!#/e reve"#e ,fficer/ !"0 em3-,$ee/ t, m!9e ! c!"v!// fr,m time t, time
,f !"$ reve"#e 0i/trict ,r re4i," !"0 i"8#ire !fter !"0 c,"cer"i"4 !-- 3er/,"/
t+erei" 5+, m!$ be -i!b-e t, 3!$ !"$ i"ter"!- reve"#e t!2, !"0 !-- 3er/,"/ ,5"i"4
,r +!vi"4 t+e c!re, m!"!4eme"t ,r 3,//e//i," ,f !"$ ,b:ect 5it+ re/3ect t, 5+ic+ !
t!2 i/ im3,/e0.
T+e 3r,vi/i,"/ ,f t+e f,re4,i"4 3!r!4r!3+/ ",t5it+/t!"0i"4, ",t+i"4 i" t+i/
)ecti," /+!-- be c,"/tr#e0 !/ 4r!"ti"4 t+e C,mmi//i,"er t+e !#t+,rit$ t, i"8#ire
i"t, b!"9 0e3,/it/ ,t+er t+!" !/ 3r,vi0e0 f,r i" )ecti," A>*? ,f t+i/ C,0e.
BIR ISSUANCES
R=>=)!= '=';RA)7!' ;R7=R ); .223*. 7ecember --, -.*.
$uidelines and 0rocedures in the Issuance and =nforcement of &ubpoena 7uces Tecum?
and the 0rosecution of Cases for :%ailure to ;bey &ummons:
The powers of the Bureau of Internal Revenue to examine and inspect boo"s of accounts
and other accounting records and conduct investigations relating to internal revenue tax
liabilities of taxpayers include the legal process of issuing :&ummons: or :&ubpoena
7ucesTecum: 8&7T9 to persons enumerated under &ection < 8c9 of the )ational Internal
Revenue Code of *//, 8)IRC9 The BIR may invo"e the authority of the courts in case of
non3compliance with the aforesaid legal processes by filing a criminal case against the
taxpayer for violation of &ection <, in relation to &ections *4 and -++ of the )IRC
R=>=)!= '=';RA)7!' CIRC!#AR ); -13.. )ovember -,, -...
0rocedures on the Assessment of 7eficiency Internal Revenue Taxes Based on the :Best
=vidence ;btainable::@hen a report re5uired by law as a basis for the assessment of
any national internal revenue tax shall not be forthcoming within the time fixed by laws
or rules and regulations or when there is reason to believe that any such report is false,
incomplete or erroneous, the Commissioner shall assess the proper tax on the best
evidence obtainable:An Assessment Based on =stimates is >alid in the absence of proof
of any irregularities in the performance of official duties, an assessment will not be
disturbed =ven an assessment based on estimates is prima facie valid and lawful where
it does not appear to have been arrived at arbitrarily or capriciously The burden of
proof is upon the complaining party to show clearly that the assessment is erroneous
%ailure to present proof of error in the assessment will justify the judicial affirmance of
said assessment
R=>=)!= '=';RA)7!' ;R7=R ); .43.+ Aanuary -1, -..+
$uidelines and 0rocedures in the Conduct of Benchmar"ing and AdaptingBImplementing
the 0erformance Benchmar"ing 'ethod in the Revenue 7istrict ;ffices
The downward trend in revenue collections due to numerous incidents of registered
taxpayers not filing their tax returns and paying their taxes correctly brought about the
necessity of instituting a systematic program that would level the playing field among
taxpayers engaged in similar line of industry, in accordance with &ection <8=9 of the
)ational Internal Revenue Code, as amended, in relation to &ection + 8C9 of the same
Code The performance benchmar"ing of taxpayers by line of industry where the best
performers, among taxpayers within the same line of industry or business, will be
identified using profit margin rate, )et >AT 7ue and Income Tax 7ue in relation to gross
salesBreceipts, could be an excellent tool in increasing taxpayers( voluntary compliance
'onitoring and evaluation of tax payments through the use of performance
benchmar"ing will determineBidentify taxpayers within industry groups who are paying
below the minimum amount or set benchmar"s for tax compliance purposes
R=>=)!= R=$!#ATI;)& ); .*.3*. ;ctober +, -.*.
&!BA=CT C =xchange of Information Regulations
Implementing the necessary guidelines to enable the Bureau of Internal Revenue 8BIR9 to
respond to a re5uest for exchange of information pursuant to an existing international
convention or agreement on tax matters and to implement Republic Act )o *..-*
entitled :An Act to Allow the =xchange of Information by the Bureau of Internal Revenue
on Tax 'atters 0ursuant to Internationally3Agreed Tax &tandards, Amending &ections +
8%9, ,* and -,. of the )ational Internal Revenue Code of *//,, as Amended
R=>=)!= '=';RA)7!' ;R7=R ); ./3.+ 7ecember **, -..<
0rescribing the $uidelines and 0rocedures in the Conduct of Tax Compliance
>erification 7rive 8TC>79 in line with the Bureau(s effort to expand its tax base, enhance
tax compliance and conse5uently boost its tax collection effort, the Commissioner
spearheaded actual tax mapping activities under the Tax Compliance >erification 7rive
8TC>79 project pursuant to R'; 1*3-..1 This is aimed at establishing cordial
relationship with taxpayer by giving assistance thru tax information drive and
verification of taxpayer(s compliance re5uirements during the actual visitation of
taxpayer(s establishment and its branches
)ECTION A.P,5er ,f t+e C,mmi//i,"er t, %!9e A//e//me"t/ !"0 Pre/cribe
A00iti,"!- Re8#ireme"t/ f,r T!2 A0mi"i/tr!ti," !"0 E"f,rceme"t
>A? E2!mi"!ti," ,f Ret#r"/ !"0 Determi"!ti," ,f T!2 D#e . After ! ret#r" +!/
bee" fi-e0 !/ re8#ire0 #"0er t+e 3r,vi/i,"/ ,f t+i/ C,0e, t+e C,mmi//i,"er ,r +i/
0#-$ !#t+,ri6e0 re3re/e"t!tive m!$ !#t+,ri6e t+e e2!mi"!ti," ,f !"$ t!23!$er !"0
t+e !//e//me"t ,f t+e c,rrect !m,#"t ,f t!2= Pr,vi0e0, +,5ever, T+!t f!i-#re t, fi-e
! ret#r" /+!-- ",t 3reve"t t+e C,mmi//i,"er fr,m !#t+,ri6i"4 t+e e2!mi"!ti," ,f
!"$ t!23!$er.
T+e t!2 ,r !"$ 0eficie"c$ t!2 /, !//e//e0 /+!-- be 3!i0 #3," ",tice !"0 0em!"0
fr,m t+e C,mmi//i,"er ,r fr,m +i/ 0#-$ !#t+,ri6e0 re3re/e"t!tive.
A"$ ret#r", /t!teme"t ,r 0ec-!r!ti," fi-e0 i" !"$ ,ffice !#t+,ri6e0 t, receive t+e
/!me /+!-- ",t be 5it+0r!5"= Pr,vi0e0, T+!t 5it+i" t+ree >;? $e!r/ fr,m t+e 0!te ,f
/#c+ fi-i"4, t+e /!me m!$ be m,0ifie0, c+!"4e0, ,r !me"0e0= Pr,vi0e0, f#rt+er,
T+!t ", ",tice f,r !#0it ,r i"ve/ti4!ti," ,f /#c+ ret#r", /t!teme"t ,r 0ec-!r!ti,"
+!/, i" t+e me!"time, bee" !ct#!--$ /erve0 #3," t+e t!23!$er.
CASES DIGEST
Remedies of a taxpayer in case the Commissioner fails to act on a disputed assessment
In case the Commissioner failed to act on the disputed assessment within the *2.3day
period from date of submission of documents, a taxpayer can eitherC *9 file a petition for
review with the Court of Tax Appeals within 1. days after the expiration of the *2.3day
period? or -9 await the final decision of the Commissioner on the disputed assessments
and appeal such final decision to the Court of Tax Appeals within 1. days after receipt of
a copy of such decision Dowever, these options are mutually exclusive, and resort to one
bars the application of the other
RCBC vs CIR, $R )o *+24/2, April -4, -..,
The power to collect forest charges rests with BIR, not with Bureau of %orestry
%orest charges are internal revenue taxes and the sole power and duty to collect the same
is lodged with the Bureau of Internal Revenue and not with the Bureau of %orestry The
computation andBor assessment of forest charges made by the Bureau of %orestry may or
may not be adopted by the Commissioner of Internal Revenue and such computation
made by the Bureau of %orestry is not appealable to the Court of Tax Appeals
'ambulao #umber Company vs Republic of the 0hil, $R
)o #31,.+*, &eptember <, */24
'andamus may not lie against the Commissioner to compel him to impose a tax
assessment
&ince the office of the Commissioner of Internal Revenue is charged with the
administration of revenue laws, which is the primary responsibility of the executive
branch of the government, mandamus may not lie against the Commissioner to compel
him to impose a tax assessment not found by him to be due or proper for that would be
tantamount to a usurpation of executive functions &uch discretionary power vested in the
proper executive official, in the absence of arbitrariness or grave abuse so as to go
beyond the statutory authority, is not subject to the contrary judgment or control of
others
'eralco &ecurities Corp vs >ictorino&avellano, et al, $R )o #3
1+*2*, ;ctober -1, */2-
BIR ISSUANCES
R=>=)!= '=';RA)7!' CIRC!#AR ); 4.3.1 Auly 1, -..1=ffect of the Issuance
and Receipt of #etter )otice 8#)9 to the Taxpayer(s Right to Amend its Tax Returns as
0rovided under &ection + of the )ational Internal Revenue Code.: An #) being served by
the Bureau upon taxpayers who were found to have under3declared their sales or
overdeclared purchases through the Third 0arty Information 0rogram can be considered
a notice of audit or investigation which would in effect dis5ualify the taxpayers
concerned from amending any return which is the subject of such audit or investigation:
)ecti," A>B?*!i-#re t, )#bmit Re8#ire0 Ret#r"/, )t!teme"t/, Re3,rt/ !"0 ,t+er
D,c#me"t/ . B+e" ! re3,rt re8#ire0 b$ -!5 !/ ! b!/i/ f,r t+e !//e//me"t ,f !"$
"!ti,"!- i"ter"!- reve"#e t!2 /+!-- ",t be f,rt+c,mi"4 5it+i" t+e time fi2e0 b$ -!5/
,r r#-e/ !"0 re4#-!ti,"/ ,r 5+e" t+ere i/ re!/," t, be-ieve t+!t !"$ /#c+ re3,rt i/
f!-/e, i"c,m3-ete ,r err,"e,#/, t+e C,mmi//i,"er /+!-- !//e// t+e 3r,3er t!2 ," t+e
be/t evi0e"ce ,bt!i"!b-e.
I" c!/e ! 3er/," f!i-/ t, fi-e ! re8#ire0 ret#r" ,r ,t+er 0,c#me"t !t t+e time
3re/cribe0 b$ -!5, ,r 5i--f#--$ ,r ,t+er5i/e fi-e/ ! f!-/e ,r fr!#0#-e"t ret#r" ,r
,t+er 0,c#me"t, t+e C,mmi//i,"er /+!-- m!9e ,r !me"0 t+e ret#r" fr,m +i/ ,5"
9",5-e04e !"0 fr,m /#c+ i"f,rm!ti," !/ +e c!" ,bt!i" t+r,#4+ te/tim,"$ ,r
,t+er5i/e, 5+ic+ /+!-- be 3rim! f!cie c,rrect !"0 /#fficie"t f,r !-- -e4!- 3#r3,/e/.
CASES DIGEST
@hen the rule on :best evidence obtainable: applies
The law is specific and clear The rule on the :best evidence obtainable: applies when a
tax report re5uired by law for the purpose of assessment is not available or when the tax
report is incomplete or fraudulent Thus, the persistent failure of the decedent and the
taxpayer to present their boo"s of accounts for examination for the taxable years
involved left the Commissioner of Internal Revenue no other legal option except to report
to the power conferred upon him under &ection *+ of the Tax Code
Bonifacia&y 0o vs Court of Tax Appeals, et al, $R )o #32*44+, August *2, */22
BIR ISSUANCES
R=>=)!= '=';RA)7!' ;R7=R ); .*/3*. 'arch /, -.*.
&!BA=CT C Taxpayers( #ifestyle Chec" &ystem
I ;bjectives
It has been observed that there are several individual taxpayers with substantial
investments, and assets andBor conspicuous lifestyles but have a relatively small income
declared, and conse5uently, reduced income tax payments
#i"ewise, it has been noted that individuals attempting to evade or minimi6e tax
payments rarely report their income and would often not provide their boo"s and records
for scrutiny This ;rder is being issued to help address the difficulty encountered by
revenue officers in examining a taxpayer(s tax compliance when there is no direct
evidence of income or the boo"s and records are inade5uate, not available or inaccurate,
yet, it is palpably clear that the taxpayer is earning income as evidenced by an increase
in or substantial assets they own andBor the lavish lifestyles they maintain
II 0olicies and $uidelines
* 0olicies
** It is the policy of the Bureau to exhaust all means and methodology of determining
the individuals( income This ;rder is being issued to prescribe the policies and
guidelines in the conduct of investigations on the lifestyle and assets of individuals in
order to properly determine their tax compliance
*- An individual(s taxable income may be established by using direct evidence,
whenever available
*1 Indirect methods can be used, however, when one or more of the following
conditions, among others, prevailC
a The taxpayer maintains no boo"s and records
b The taxpayer(s boo"s and records are not available
c The taxpayer(s boo"s and records are inade5uate
d The taxpayer withholds boo"s and records from investigationBverification by
authori6ed revenue officers
The fact that the taxpayer(s boo"s and records reflect the figures on the income
and business tax returns, however, does not prevent the use of the indirect method of
proof The revenue officer can still loo" beyond the :self3serving declaration: in the
taxpayer(s boo"s and records and use any evidence available to contravene their
accuracy In this connection, the provisions of RA'; )o *3-... shall be followed The
BIR shall rely on R'C )o -13-... in ma"ing deficiency tax assessments based on the
:Best =vidence ;btainable: &ection + 8c9 of the )ational Internal Revenue Code allows
the BIR to prescribe the minimum taxable base for which internal revenue taxes shall be
determined
R=>=)!= '=';RA)7!' CIRC!#AR ); -13.. )ovember -,, -...
Revenue 0rocedures on the Assessment of 7eficiency Internal Revenue Taxes Based on
the :Best =vidence ;btainable:
&cope E It has been observed that a very significant number of taxpayers either refuse or
fail to present their respective accounting records when demanded for tax audit purposes,
thereby resulting to the delay in the submission of the Revenue ;fficer(s report of
investigation as re5uired by the existing Audit 0rogram and inconsistency in the
determination of the deficiency internal revenue tax that may properly be assessed and
demanded from the taxpayer, to the damage and prejudice against the revenue
In the absence of accounting records or other documents necessary for the proper
determination of the taxpayer(s internal revenue tax liability, &ection + 8B9 of the
)ational Internal Revenue Code of *//, re5uires that the assessment of the tax be
determined based on the :Best =vidence ;btainable,: as followsC
:@hen a report re5uired by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by laws or rules and
regulations or when there is reason to believe that any such report is false, incomplete or
erroneous, the Commissioner shall assess the proper tax on the best evidence
obtainable:
>C? A#t+,rit$ t, C,"0#ct I"ve"t,r$@t!9i"4, )#rvei--!"ce !"0 t, Pre/cribe
Pre/#m3tive &r,// )!-e/ !"0 Recei3t/ . T+e C,mmi//i,"er m!$, !t !"$ time
0#ri"4 t+e t!2!b-e $e!r, ,r0er i"ve"t,r$@t!9i"4 ,f 4,,0/ ,f !"$ t!23!$er !/ ! b!/i/
f,r 0etermi"i"4 +i/ i"ter"!- reve"#e t!2 -i!bi-itie/, ,r m!$ 3-!ce t+e b#/i"e//
,3er!ti,"/ ,f !"$ 3er/,", "!t#r!- ,r :#ri0ic!-, #"0er ,b/erv!ti," ,r /#rvei--!"ce if
t+ere i/ re!/," t, be-ieve t+!t /#c+ 3er/," i/ ",t 0ec-!ri"4 +i/ c,rrect i"c,me, /!-e/
,r recei3t/ f,r i"ter"!- reve"#e t!2 3#r3,/e/. T+e fi"0i"4/ m!$ be #/e0 !/ t+e b!/i/
f,r !//e//i"4 t+e t!2e/ f,r t+e ,t+er m,"t+/ ,r 8#!rter/ ,f t+e /!me ,r 0iffere"t
t!2!b-e $e!r/ !"0 /#c+ !//e//me"t /+!-- be 0eeme0 3rim! f!cie c,rrect.
B+e" it i/ f,#"0 t+!t ! 3er/," +!/ f!i-e0 t, i//#e recei3t/ !"0 i"v,ice/ i" vi,-!ti,"
,f t+e re8#ireme"t/ ,f )ecti,"/ 11; !"0 2;7 ,f t+i/ C,0e, ,r 5+e" t+ere i/ re!/,"
t, be-ieve t+!t t+e b,,9/ ,f !cc,#"t/ ,r ,t+er rec,r0/ 0, ",t c,rrect-$ ref-ect t+e
0ec-!r!ti,"/ m!0e ,r t, be m!0e i" ! ret#r" re8#ire0 t, be fi-e0 #"0er t+e
3r,vi/i,"/ ,f t+i/ C,0e, t+e C,mmi//i,"er, !fter t!9i"4 i"t, !cc,#"t t+e /!-e/,
recei3t/, i"c,me ,r ,t+er t!2!b-e b!/e ,f ,t+er 3er/,"/ e"4!4e0 i" /imi-!r
b#/i"e//e/ #"0er /imi-!r /it#!ti,"/ ,r circ#m/t!"ce/ ,r !fter c,"/i0eri"4 ,t+er
re-ev!"t i"f,rm!ti,", m!$ 3re/cribe ! mi"im#m !m,#"t ,f /#c+ 4r,// recei3t/,
/!-e/ !"0 t!2!b-e b!/e, !"0 /#c+ !m,#"t /, 3re/cribe0 /+!-- be 3rim! f!cie c,rrect
f,r 3#r3,/e/ ,f 0etermi"i"4 t+e i"ter"!- reve"#e t!2 -i!bi-itie/ ,f /#c+ 3er/,".
BIR ISSUANCES
R=>=)!= '=';RA)7!' ;R7=R ); ..13./ Aanuary *<, -../
$uidelines in the Conduct of &urveillance and &toc"3Ta"ing Activities, and the
Implementation of the Administrative &anction of &uspension and Temporary Closure of
Business
'andatory Re5uirement for the Conduct of &urveillance and Apprehension of Business
=stablishments for )on3Compliance with the 0rovisions of &ection **1, **4, -1+, -1,
and -12 of the )IRC, as amended )o surveillance activities shall be conducted nor
apprehension effected unless the same has been authori6ed by a mission order issued in
accordance with the provisions of this ;rder
>D? A#t+,rit$ t, Termi"!te T!2!b-e Peri,0 . B+e" it /+!-- c,me t, t+e 9",5-e04e
,f t+e C,mmi//i,"er t+!t ! t!23!$er i/ retiri"4 fr,m b#/i"e// /#b:ect t, t!2, ,r i/
i"te"0i"4 t, -e!ve t+e P+i-i33i"e/ ,r t, rem,ve +i/ 3r,3ert$ t+erefr,m ,r t, +i0e ,r
c,"ce!- +i/ 3r,3ert$, ,r i/ 3erf,rmi"4 !"$ !ct te"0i"4 t, ,b/tr#ct t+e 3r,cee0i"4/
f,r t+e c,--ecti," ,f t+e t!2 f,r t+e 3!/t ,r c#rre"t 8#!rter ,r $e!r ,r t, re"0er t+e
/!me t,t!--$ ,r 3!rt-$ i"effective #"-e// /#c+ 3r,cee0i"4/ !re be4#" imme0i!te-$,
t+e C,mmi//i,"er /+!-- 0ec-!re t+e t!2 3eri,0 ,f /#c+ t!23!$er termi"!te0 !t !"$
time !"0 /+!-- /e"0 t+e t!23!$er ! ",tice ,f /#c+ 0eci/i,", t,4et+er 5it+ ! re8#e/t
f,r t+e imme0i!te 3!$me"t ,f t+e t!2 f,r t+e 3eri,0 /, 0ec-!re0 termi"!te0 !"0 t+e
t!2 f,r t+e 3rece0i"4 $e!r ,r 8#!rter, ,r /#c+ 3,rti," t+ere,f !/ m!$ be #"3!i0, !"0
/!i0 t!2e/ /+!-- be 0#e !"0 3!$!b-e imme0i!te-$ !"0 /+!-- be /#b:ect t, !-- t+e
3e"!-tie/ +ere!fter 3re/cribe0, #"-e// 3!i0 5it+i" t+e time fi2e0 i" t+e 0em!"0
m!0e b$ t+e C,mmi//i,"er.
>E? A#t+,rit$ ,f t+e C,mmi//i,"er t, Pre/cribe Re!- Pr,3ert$ (!-#e/ . T+e
C,mmi//i,"er i/ +ereb$ !#t+,ri6e0 t, 0ivi0e t+e P+i-i33i"e/ i"t, 0iffere"t 6,"e/ ,r
!re!/ !"0 /+!--, #3," c,"/#-t!ti," 5it+ c,m3ete"t !33r!i/er/ b,t+ fr,m t+e 3riv!te
!"0 3#b-ic /ect,r/, 0etermi"e t+e f!ir m!r9et v!-#e ,f re!- 3r,3ertie/ -,c!te0 i"
e!c+ 6,"e ,r !re!. *,r 3#r3,/e/ ,f c,m3#ti"4 !"$ i"ter"!- reve"#e t!2, t+e v!-#e ,f
t+e 3r,3ert$ /+!-- be, 5+ic+ever i/ t+e +i4+er ,f=
>1?t+e f!ir m!r9et v!-#e !/ 0etermi"e0 b$ t+e C,mmi//i,"er7 ,r
>2?t+e f!ir m!r9et v!-#e !/ /+,5" i" t+e /c+e0#-e ,f v!-#e/ ,f t+e Pr,vi"ci!- !"0
Cit$ A//e//,r/.
CASES DIGEST
Clearly, while the law grants to the Commissioner of Internal Revenue the power to
determine 6onal values, including the authority to delegate to the Assistant
Commissioner of the Assessment &ervice the authority to approve and sign TCR0>
resolutions involving re5uests for revaluation of established 6onal values of real
properties, the same is for the purpose of computing internal revenue taxes
Capitol &teel Corp vs 0hividec Industrial Authority,
$R )o *+/4<1, 7ecember +, -..+
>*? A#t+,rit$ ,f t+e C,mmi//i,"er t, I"8#ire i"t, B!"9 De3,/it Acc,#"t/ !"0
Ot+er Re-!te0 I"f,rm!ti," 'e-0 b$ *i"!"ci!- I"/tit#ti,"/ . N,t5it+/t!"0i"4 !"$
c,"tr!r$ 3r,vi/i," ,f Re3#b-ic Act N,. 14C<, Re3#b-ic Act N,. A42A, ,t+er5i/e
9",5" !/ t+e *,rei4" C#rre"c$ De3,/it Act ,f t+e P+i-i33i"e/, !"0 ,t+er 4e"er!-
!"0 /3eci!- -!5/, t+e C,mmi//i,"er i/ +ereb$ !#t+,ri6e0 t, i"8#ire i"t, t+e b!"9
0e3,/it/ !"0 ,t+er re-!te0 i"f,rm!ti," +e-0 b$ fi"!"ci!- i"/tit#ti,"/ ,f=
>1? ! 0ece0e"t t, 0etermi"e +i/ 4r,// e/t!te7 !"0
>2? !"$ t!23!$er 5+, +!/ fi-e0 !" !33-ic!ti," f,r c,m3r,mi/e ,f +i/ t!2 -i!bi-it$
#"0er )ec. 2C4>A?>2? ,f t+i/ C,0e b$ re!/," ,f fi"!"ci!- i"c!3!cit$ t, 3!$ +i/ t!2
-i!bi-it$.
I" c!/e ! t!23!$er fi-e/ !" !33-ic!ti," t, c,m3r,mi/e t+e 3!$me"t ,f +i/ t!2
-i!bi-itie/ ," +i/ c-!im t+!t +i/ fi"!"ci!- 3,/iti," 0em,"/tr!te/ ! c-e!r i"!bi-it$ t,
3!$ t+e t!2 !//e//e0, +i/ !33-ic!ti," /+!-- ",t be c,"/i0ere0 #"-e// !"0 #"ti- +e
5!ive/ i" 5riti"4 +i/ 3rivi-e4e #"0er Re3#b-ic Act N,. 14C< ,r #"0er ,t+er 4e"er!-
,r /3eci!- -!5/, !"0 /#c+ 5!iver /+!-- c,"/tit#te t+e !#t+,rit$ ,f t+e C,mmi//i,"er
t, i"8#ire i"t, t+e b!"9 0e3,/it/ ,f t+e t!23!$er.
>&? A#t+,rit$ t, Accre0it !"0 Re4i/ter T!2 A4e"t/ . T+e C,mmi//i,"er /+!--
!ccre0it !"0 re4i/ter, b!/e0 ," t+eir 3r,fe//i,"!- c,m3ete"ce, i"te4rit$, !"0 m,r!-
fit"e//, i"0ivi0#!-/ !"0 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3/ !"0 t+eir re3re/e"t!tive/
5+, 3re3!re !"0 fi-e t!2 ret#r"/, /t!teme"t/, re3,rt/, 3r,te/t/, !"0 ,t+er 3!3er/
5it+, ,r 5+, !33e!r bef,re, t+e B#re!# f,r t!23!$er/. Bit+i" ,"e +#"0re0 t5e"t$
>12C? 0!$/ fr,m !"#!r$ 1, 1998, t+e C,mmi//i,"er /+!-- cre!te "!ti,"!- !"0
re4i,"!- !ccre0it!ti," b,!r0/, t+e member/ ,f 5+ic+ /+!-- /erve f,r t+ree >;? $e!r/,
!"0 /+!-- 0e/i4"!te fr,m !m,"4 t+e /e"i,r ,ffici!-/ ,f t+e B#re!#, ,"e >1?
c+!irm!" !"0 t5, >2? member/ f,r e!c+ b,!r0, /#b:ect t, /#c+ r#-e/ !"0
re4#-!ti,"/ !/ t+e )ecret!r$ ,f *i"!"ce /+!-- 3r,m#-4!te, #3," t+e rec,mme"0!ti,"
,f t+e C,mmi//i,"er.
I"0ivi0#!-/ !"0 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3/ !"0 t+eir re3re/e"t!tive/ 5+, !re
0e"ie0 !ccre0it!ti," b$ t+e C,mmi//i,"er !"0D,r t+e "!ti,"!- !"0 re4i,"!-
!ccre0it!ti," b,!r0/ m!$ !33e!- /#c+ 0e"i!- t, t+e )ecret!r$ ,f *i"!"ce, 5+, /+!--
r#-e ," t+e !33e!- 5it+i" /i2t$ >AC? 0!$/ fr,m recei3t ,f /#c+ !33e!-. *!i-#re ,f t+e
)ecret!r$ ,f *i"!"ce t, r#-e ," t+e !33e!- 5it+i" t+e 3re/cribe0 3eri,0 /+!-- be
0eeme0 !/ !33r,v!- ,f t+e !33-ic!ti," f,r !ccre0it!ti," ,f t+e !33e--!"t.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..43*. %ebruary -4, -.*.
R=>=)!= R=$!#ATI;)& ); .*43*. )ovember -<, -.*.
Accreditation of Tax 0ractitionersBAgents as a 0rere5uisite to Their 0ractice and
Representation of Taxpayers before the Bureau of Internal Revenue
;bjectives E These Regulations are being issued to 8*9 prescribe additional guidelines
in the accreditation of tax agents and practitioners 8TA0s9 to shorten the processing
time? 8-9 ensure the continuing professional education and training of TA0s from duly
accredited service providers? 819 implement a transparent and accessible database of
accredited, suspended and delisted TA0s? 849 re5uire the annual submission of schedule
of services provided by the TA0s? 8<9 specify specific penalties and sanctions for
violation of the provisions of these Regulations? and, 8+9 prescribe the payment of the
annual registration fee for each TA0
>'? A#t+,rit$ ,f t+e C,mmi//i,"er t, Pre/cribe A00iti,"!- Pr,ce0#r!- ,r
D,c#me"t!r$ Re8#ireme"t/ . T+e C,mmi//i,"er m!$ 3re/cribe t+e m!""er ,f
c,m3-i!"ce 5it+ !"$ 0,c#me"t!r$ ,r 3r,ce0#r!- re8#ireme"t i" c,""ecti," 5it+
t+e /#bmi//i," ,r 3re3!r!ti," ,f fi"!"ci!- /t!teme"t/ !cc,m3!"$i"4 t+e t!2
ret#r"/.
)ECTION 7 A#t+,rit$ ,f t+e C,mmi//i,"er t, De-e4!te P,5er . T+e
C,mmi//i,"er m!$ 0e-e4!te t+e 3,5er/ ve/te0 i" +im #"0er t+e 3erti"e"t
3r,vi/i,"/ ,f t+i/ C,0e t, !"$ ,r /#c+ /#b,r0i"!te ,ffici!-/ 5it+ t+e r!"9
e8#iv!-e"t t, ! 0ivi/i," c+ief ,r +i4+er, /#b:ect t, /#c+ -imit!ti,"/ !"0 re/tricti,"/
!/ m!$ be im3,/e0 #"0er r#-e/ !"0 re4#-!ti,"/ t, be 3r,m#-4!te0 b$ t+e )ecret!r$
,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er= Pr,vi0e0, +,5ever, T+!t
t+e f,--,5i"4 3,5er/ ,f t+e C,mmi//i,"er /+!-- ",t be 0e-e4!te0=
>!? T+e 3,5er t, rec,mme"0 t+e 3r,m#-4!ti," ,f r#-e/ !"0 re4#-!ti,"/ b$ t+e
)ecret!r$ ,f *i"!"ce7
>b? T+e 3,5er t, i//#e r#-i"4/ ,f fir/t im3re//i," ,r t, rever/e, rev,9e ,r m,0if$
!"$ e2i/ti"4 r#-i"4 ,f t+e B#re!#7
>c? T+e 3,5er t, c,m3r,mi/e ,r !b!te, #"0er )ec. 2C4>A? !"0 >B? ,f t+i/ C,0e,
!"$ t!2 -i!bi-it$= Pr,vi0e0, +,5ever, T+!t !//e//me"t/ i//#e0 b$ t+e re4i,"!-
,ffice/ i"v,-vi"4 b!/ic 0eficie"c$ t!2e/ ,f *ive +#"0re0 t+,#/!"0 3e/,/
>P<CC,CCC? ,r -e//, !"0 mi",r crimi"!- vi,-!ti,"/, !/ m!$ be 0etermi"e0 b$ r#-e/
!"0 re4#-!ti,"/ t, be 3r,m#-4!te0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, 0i/c,vere0 b$ re4i,"!- !"0 0i/trict ,ffici!-/,
m!$ be c,m3r,mi/e0 b$ ! re4i,"!- ev!-#!ti," b,!r0 5+ic+ /+!-- be c,m3,/e0 ,f
t+e Re4i,"!- Direct,r !/ C+!irm!", t+e A//i/t!"t Re4i,"!- Direct,r, t+e +e!0/ ,f
t+e Le4!-, A//e//me"t !"0 C,--ecti," Divi/i,"/ !"0 t+e Reve"#e Di/trict Officer
+!vi"4 :#ri/0icti," ,ver t+e t!23!$er, !/ member/7 !"0
>0? T+e 3,5er t, !//i4" ,r re!//i4" i"ter"!- reve"#e ,fficer/ t, e/t!b-i/+me"t/
5+ere !rtic-e/ /#b:ect t, e2ci/e t!2 !re 3r,0#ce0 ,r 9e3t.
CASES DIGEST
!nder &ection , of the )IRC, the Commissioner is authori6ed to delegate to his
subordinates the powers vested in him except, among others, the power to issue rulings of
first impression
&ecretary of %inance, et al vs #a &uerte Cigar and Cigarette %actory, et al,
$R )o *++4/2, Aune **, -../
C;''I&&I;)=R ;% I)T=R)A# R=>=)!= CA));T 7=#=$AT= 0;@=R T;
'AF= %I)A# A&&=&&'=)T E The Commissioner of Internal Revenue cannot delegate
the power to ma"e a final assessment to his subordinate, and conse5uently despite an
order of said Commissioner granting Regional 7irectors authority to close tax cases,
said order8'emorandum ;rder )o >3+14 dated Auly 1, */<+9 is applicable to his
subordinate officers only and could not bind the Commissioner himself, who has been
entrusted by law to ma"e final assessments7elegatus non potestdelegare? the person to
whom an office or duty is delegated cannot lawfully devolve the duty on another
TD= CITG #!'B=R, I)C vs TD= D;) '=#=CI; R 7;'I)$;, Commissioner of
Internal Revenue and TD= D;) C;!RT ;% TAH A00=A#&
$R )o #3*2+** Aanuary 1., */+4
)ECTION 8. D#t$ ,f t+e C,mmi//i,"er t, E"/#re t+e Pr,vi/i," !"0
Di/trib#ti," ,f *,rm/, Recei3t/, Certific!te/, !"0 A33-i!"ce/, !"0 t+e
Ac9",5-e04me"t ,f P!$me"t ,f T!2e/ .
>A? Pr,vi/i," !"0 Di/trib#ti," t, Pr,3er Offici!-/. . It /+!-- be t+e 0#t$ ,f t+e
C,mmi//i,"er, !m,"4 ,t+er t+i"4/, t, 3re/cribe, 3r,vi0e, !"0 0i/trib#te t, t+e
3r,3er ,ffici!-/ t+e re8#i/ite -ice"/e/, i"ter"!- reve"#e /t!m3/, -!be-/, !-- ,t+er
f,rm/, certific!te/, b,"0/, rec,r0/, i"v,ice/, b,,9/, recei3t/, i"/tr#me"t/,
!33-i!"ce/ !"0 !33!r!t#/ #/e0 i" !0mi"i/teri"4 t+e -!5/ f!--i"4 5it+i" t+e
:#ri/0icti," ,f t+e B#re!#. *,r t+i/ 3#r3,/e, i"ter"!- reve"#e /t!m3/, /tri3 /t!m3/
!"0 -!be-/ /+!-- be c!#/e0 b$ t+e C,mmi//i,"er t, be 3ri"te0 5it+ !0e8#!te
/ec#rit$ fe!t#re/.
I"ter"!- reve"#e /t!m3/, 5+et+er ,f ! b!r c,0e ,r f#/," 0e/i4", /+!-- be firm-$ !"0
c,"/3ic#,#/-$ !ffi2e0 ," e!c+ 3!c9 ,f ci4!r/ !"0 ci4!rette/ /#b:ect t, e2ci/e t!2 i"
t+e m!""er !"0 f,rm !/ 3re/cribe0 b$ t+e C,mmi//i,"er, #3," !33r,v!- ,f t+e
)ecret!r$ ,f *i"!"ce.
>B? Recei3t/ f,r P!$me"t %!0e. . It /+!-- be t+e 0#t$ ,f t+e C,mmi//i,"er ,r +i/
0#-$ !#t+,ri6e0 re3re/e"t!tive ,r !" !#t+,ri6e0 !4e"t b!"9 t, 5+,m !"$ 3!$me"t
,f !"$ t!2 i/ m!0e #"0er t+e 3r,vi/i,"/ ,f t+i/ C,0e t, !c9",5-e04e t+e 3!$me"t
,f /#c+ t!2, e23re//i"4 t+e !m,#"t 3!i0 !"0 t+e 3!rtic#-!r !cc,#"t f,r 5+ic+ /#c+
3!$me"t 5!/ m!0e i" ! f,rm !"0 m!""er 3re/cribe0 t+eref,r b$ t+e C,mmi//i,"er.
)ECTION 9 I"ter"!- Reve"#e Di/trict/ . Bit+ t+e !33r,v!- ,f t+e )ecret!r$ ,f
*i"!"ce, t+e C,mmi//i,"er /+!-- 0ivi0e t+e P+i-i33i"e/ i"t, /#c+ "#mber ,f
reve"#e 0i/trict/ !/ m!$ fr,m time t, time be re8#ire0 f,r !0mi"i/tr!tive 3#r3,/e/.
E!c+ ,f t+e/e 0i/trict/ /+!-- be #"0er t+e /#3ervi/i," ,f ! Reve"#e Di/trict Officer.
)ECTION 1C Reve"#e Re4i,"!- Direct,r . U"0er r#-e/ !"0 re4#-!ti,"/, 3,-icie/
!"0 /t!"0!r0/ f,rm#-!te0 b$ t+e C,mmi//i,"er, 5it+ t+e !33r,v!- ,f t+e )ecret!r$
,f *i"!"ce, t+e Reve"#e Re4i,"!- Direct,r /+!--, 5it+i" t+e re4i," !"0 0i/trict
,ffice/ #"0er +i/ :#ri/0icti,", !m,"4 ,t+er/=
>!? Im3-eme"t -!5/, 3,-icie/, 3-!"/, 3r,4r!m/, r#-e/ !"0 re4#-!ti,"/ ,f t+e
0e3!rtme"t ,r !4e"cie/ i" t+e re4i,"!- !re!7
>b? A0mi"i/ter !"0 e"f,rce i"ter"!- reve"#e -!5/, !"0 r#-e/ !"0 re4#-!ti,"/,
i"c-#0i"4 t+e !//e//me"t !"0 c,--ecti," ,f !-- i"ter"!- reve"#e t!2e/, c+!r4e/ !"0
fee/7
>c? I//#e Letter/ ,f A#t+,rit$ f,r t+e e2!mi"!ti," ,f t!23!$er/ 5it+i" t+e re4i,"7
>0? Pr,vi0e ec,",mic!-, efficie"t !"0 effective /ervice t, t+e 3e,3-e i" t+e !re!7
>e? C,,r0i"!te 5it+ re4i,"!- ,ffice/ ,r ,t+er 0e3!rtme"t/, b#re!#/ !"0 !4e"cie/ i"
t+e !re!7
>f? C,,r0i"!te 5it+ -,c!- 4,ver"me"t #"it/ i" t+e !re!7
>4? E2erci/e c,"tr,- !"0 /#3ervi/i," ,ver t+e ,fficer/ !"0 em3-,$ee/ 5it+i" t+e
re4i,"7 !"0
>+? Perf,rm /#c+ ,t+er f#"cti,"/ !/ m!$ be 3r,vi0e0 b$ -!5 !"0 !/ m!$ be
0e-e4!te0 b$ t+e C,mmi//i,"er.
)ECTION 11. D#tie/ ,f Reve"#e Di/trict Officer/ !"0 Ot+er I"ter"!- Reve"#e
Officer/ . It /+!-- be t+e 0#t$ ,f ever$ Reve"#e Di/trict Officer ,r ,t+er i"ter"!-
reve"#e ,fficer/ !"0 em3-,$ee/ t, e"/#re t+!t !-- -!5/ !"0 r#-e/ !"0 re4#-!ti,"/
!ffecti"4 "!ti,"!- i"ter"!- reve"#e !re f!it+f#--$ e2ec#te0 !"0 c,m3-ie0 5it+, !"0
t, !i0 i" t+e 3reve"ti,", 0etecti," !"0 3#"i/+me"t ,f fr!#0/ ,r 0e-i"8#e"cie/ i"
c,""ecti," t+ere5it+.
It /+!-- be t+e 0#t$ ,f ever$ Reve"#e Di/trict Officer t, e2!mi"e t+e efficie"c$ ,f
!-- ,fficer/ !"0 em3-,$ee/ ,f t+e B#re!# ,f I"ter"!- Reve"#e #"0er +i/
/#3ervi/i,", !"0 t, re3,rt i" 5riti"4 t, t+e C,mmi//i,"er, t+r,#4+ t+e Re4i,"!-
Direct,r, !"$ "e4-ect ,f 0#t$, i"c,m3ete"c$, 0e-i"8#e"c$, ,r m!-fe!/!"ce i" ,ffice
,f !"$ i"ter"!- reve"#e ,fficer ,f 5+ic+ +e m!$ ,bt!i" 9",5-e04e, 5it+ !
/t!teme"t ,f !-- t+e f!ct/ !"0 !"$ evi0e"ce /#/t!i"i"4 e!c+ c!/e.
)ECTION 12. A4e"t/ !"0 De3#tie/ f,r C,--ecti," ,f N!ti,"!- I"ter"!-
Reve"#e T!2e/ . T+e f,--,5i"4 !re +ereb$ c,"/tit#te0 !4e"t/ ,f t+e
C,mmi//i,"er=
>!? T+e C,mmi//i,"er ,f C#/t,m/ !"0 +i/ /#b,r0i"!te/ 5it+ re/3ect t, t+e
c,--ecti," ,f "!ti,"!- i"ter"!- reve"#e t!2e/ ," im3,rte0 4,,0/7
>b? T+e +e!0 ,f t+e !33r,3ri!te 4,ver"me"t ,ffice !"0 +i/ /#b,r0i"!te/ 5it+
re/3ect t, t+e c,--ecti," ,f e"er4$ t!27 !"0
>c? B!"9/ 0#-$ !ccre0ite0 b$ t+e C,mmi//i,"er 5it+ re/3ect t, recei3t ,f 3!$me"t/
,f i"ter"!- reve"#e t!2e/ !#t+,ri6e0 t, be m!0e t+r# b!"9/.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .43/, 'arch *, *//,
Revenue Regulations 0rescribing the Acceptable 'odes of 0ayment of Internal Revenue
Taxes Through Accredited Ban"s and their &ubsidiaries and the =nrollment of Taxpayers
Re5uired Thereunderto ensure that tax payments are made only to authori6ed collection
agents of the BIR, properly credited to the accounts of the taxpayer concerned, and duly
remitted to the government, any person liable to any internal revenue tax shall pay the
same only through 8a9 an over3the3counter cash transaction? 8b9 the ban" debit system, or
8c9 a credit facility with a ban", a credit company or similar institution
A"$ ,fficer ,r em3-,$ee ,f !" !#t+,ri6e0 !4e"t b!"9 !//i4"e0 t, receive i"ter"!-
reve"#e t!2 3!$me"t/ !"0 tr!"/mit t!2 ret#r"/ ,r 0,c#me"t/ t, t+e B#re!# ,f
I"ter"!- Reve"#e /+!-- be /#b:ect t, t+e /!me /!"cti,"/ !"0 3e"!-tie/ 3re/cribe0 i"
)ecti,"/ 2A9 !"0 27C ,f t+i/ C,0e.
)ECTION 1;. A#t+,rit$ ,f ! Reve"#e Officer . )#b:ect t, t+e r#-e/ !"0
re4#-!ti,"/ t, be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f
t+e C,mmi//i,"er, ! Reve"#e Officer !//i4"e0 t, 3erf,rm !//e//me"t f#"cti,"/ i"
!"$ 0i/trict m!$, 3#r/#!"t t, ! Letter ,f A#t+,rit$ i//#e0 b$ t+e Reve"#e Re4i,"!-
Direct,r, e2!mi"e t!23!$er/ 5it+i" t+e :#ri/0icti," ,f t+e 0i/trict i" ,r0er t, c,--ect
t+e c,rrect !m,#"t ,f t!2, ,r t, rec,mme"0 t+e !//e//me"t ,f !"$ 0eficie"c$ t!2
0#e i" t+e /!me m!""er t+!t t+e /!i0 !ct/ c,#-0 +!ve bee" 3erf,rme0 b$ t+e
Reve"#e Re4i,"!- Direct,r +im/e-f.
CASES DIGEST
Role and significance of a #etter of Authority
Based on &ection *1 of the Tax Code, a #etter of Authority or #;A is the authority given
to the appropriate revenue officer assigned to perform assessment functions It empowers
or enables said revenue officer to examine the boo"s of account and other accounting
records of a taxpayer for the purpose of collecting the correct amount of tax Clearly,
there must be a grant of authority before any revenue officer can conduct an examination
or assessment =5ually important is that the revenue officer so authori6ed must not go
beyond the authority given In the absence of such an authority, the assessment or
examination is a nullity
Commissioner of Internal Revenue vs &ony 0hil, Inc,
$R )o *,2+/,, )ovember *,, -.*.
)ECTION 14.A#t+,rit$ ,f Officer/ t, A0mi"i/ter O!t+/ !"0 T!9e Te/tim,"$ .
T+e C,mmi//i,"er, De3#t$ C,mmi//i,"er/, )ervice C+ief/, A//i/t!"t )ervice
C+ief/, Reve"#e Re4i,"!- Direct,r/, A//i/t!"t Reve"#e Re4i,"!- Direct,r/, C+ief/
!"0 A//i/t!"t C+ief/ ,f Divi/i,"/, Reve"#e Di/trict Officer/, /3eci!- 0e3#tie/ ,f
t+e C,mmi//i,"er, i"ter"!- reve"#e ,fficer/ !"0 !"$ ,t+er em3-,$ee ,f t+e B#re!#
t+ere#"t, e/3eci!--$ 0e3#ti6e0 b$ t+e C,mmi//i,"er /+!-- +!ve t+e 3,5er t,
!0mi"i/ter ,!t+/ !"0 t, t!9e te/tim,"$ i" !"$ ,ffici!- m!tter ,r i"ve/ti4!ti,"
c,"0#cte0 b$ t+em re4!r0i"4 m!tter/ 5it+i" t+e :#ri/0icti," ,f t+e B#re!#.
)ECTION 1<. A#t+,rit$ ,f I"ter"!- Reve"#e Officer/ t, %!9e Arre/t/ !"0
)ei6#re/ . T+e C,mmi//i,"er, t+e De3#t$ C,mmi//i,"er/, t+e Reve"#e Re4i,"!-
Direct,r/, t+e Reve"#e Di/trict Officer/ !"0 ,t+er i"ter"!- reve"#e ,fficer/ /+!--
+!ve !#t+,rit$ t, m!9e !rre/t/ !"0 /ei6#re/ f,r t+e vi,-!ti," ,f !"$ 3e"!- -!5, r#-e
,r re4#-!ti," !0mi"i/tere0 b$ t+e B#re!# ,f I"ter"!- Reve"#e. A"$ 3er/," /,
!rre/te0 /+!-- be f,rt+5it+ br,#4+t bef,re ! c,#rt, t+ere t, be 0e!-t 5it+ !cc,r0i"4
t, -!5.
)ECTION 1A. A//i4"me"t ,f I"ter"!- Reve"#e Officer/ I"v,-ve0 i" E2ci/e
T!2 *#"cti,"/ t, E/t!b-i/+me"t/ B+ere Artic-e/ )#b:ect t, E2ci/e T!2 !re
Pr,0#ce0 ,r Ee3t . T+e C,mmi//i,"er /+!-- em3-,$, !//i4", ,r re!//i4" i"ter"!-
reve"#e ,fficer/ i"v,-ve0 i" e2ci/e t!2 f#"cti,"/, !/ ,fte" !/ t+e e2i4e"cie/ ,f t+e
reve"#e /ervice m!$ re8#ire, t, e/t!b-i/+me"t/ ,r 3-!ce/ 5+ere !rtic-e/ /#b:ect t,
e2ci/e t!2 !re 3r,0#ce0 ,r 9e3t= Pr,vi0e0, T+!t !" i"ter"!- reve"#e ,fficer !//i4"e0
t, !"$ /#c+ e/t!b-i/+me"t /+!-- i" ", c!/e /t!$ i" +i/ !//i4"me"t f,r m,re t+!" t5,
>2? $e!r/, /#b:ect t, r#-e/ !"0 re4#-!ti,"/ t, be 3re/cribe0 b$ t+e )ecret!r$ ,f
*i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er.
)ECTION 17. A//i4"me"t ,f I"ter"!- Reve"#e Officer/ !"0 Ot+er Em3-,$ee/
t, Ot+er D#tie/ . T+e C,mmi//i,"er m!$, /#b:ect t, t+e 3r,vi/i,"/ ,f )ecti," 1A
!"0 t+e -!5/ ," civi- /ervice, !/ 5e--, !/ t+e r#-e/ !"0 re4#-!ti,"/ t, be 3re/cribe0
b$ t+e )ecret!r$ ,f *i"!"ce, #3," t+e rec,mme"0!ti," ,f t+e C,mmi//i,"er,
!//i4" ,r re!//i4" i"ter"!- reve"#e ,fficer/ !"0 em3-,$ee/ ,f t+e B#re!# ,f
I"ter"!- Reve"#e, 5it+,#t c+!"4e i" t+eir ,ffici!- r!"9 !"0 /!-!r$, t, ,t+er ,r
/3eci!- 0#tie/ c,""ecte0 5it+ t+e e"f,rceme"t ,r !0mi"i/tr!ti," ,f t+e reve"#e
-!5/ !/ t+e e2i4e"cie/ ,f t+e /ervice m!$ re8#ire= Pr,vi0e0, T+!t i"ter"!- reve"#e
,fficer/ !//i4"e0 t, 3erf,rm !//e//me"t ,r c,--ecti," f#"cti,"/ /+!-- ",t rem!i" i"
t+e /!me !//i4"me"t f,r m,re t+!" t+ree >;? $e!r/= Pr,vi0e0, f#rt+er, T+!t
!//i4"me"t ,f i"ter"!- reve"#e ,fficer/ !"0 em3-,$ee/ ,f t+e B#re!# t, /3eci!-
0#tie/ /+!-- ",t e2cee0 ,"e >1? $e!r.
CASES DIGEST
Re3assignments of 0ersonnel
%ACT&C The CIR filed with the C;'=#=C a re5uest for exemption from the ban on the
transfer, promotion, reassignment, and recruitment of public sector employees during the
election period for the 'ay *4, -..* elections The C;'=#=C granted the re5uest ;n
'ay -4, -..*, or during the election period for the 'ay *4, -..* elections, petitioner
issued a Revenue Travel Assignment ;rder 8RTA;9 reassigning private respondents as
Technical Assistants in the Taxpayer Assistance &ervice at its )ational ;ffice in Iue6on
City The RTA; was issued pursuant to &ection *, of the Tax Reform Act of *//,
8Republic Act )o 24-49 authori6ing the BIR Commissioner to assign and reassign
personnel in the exigencies of the service ;n 'ay -<, -..*, petitioner submitted to the
C;'=#=C the names and positions of the said personnel detailed to other posts who
were exempted from the ban on transfer during the election period
;n Aune *, -..*, private respondents filed with the RTC a Complaint for Injunction with
0rayer for a Temporary Restraining ;rder 8TR;9 andBor 0reliminary Injunction They
sought to enjoin petitioner from implementing the RTA;, as well as the 'emorandum
ordering them to comply therewith The complaint alleged that their
transferBreassignment pursuant to the RTA; was tantamount to a removal without cause,
hence, illegal? that while there was no diminution in salaries, however, they suffered a
demotion in terms of ran" or status? and that the RTA; is void as it does not bear the
imprimatur of the &ecretary of %inance ;n Aune <, -..*, respondent judge issued a TR;
enjoining petitioner from implementing the RTA; Thereafter, she conducted hearings on
private respondents( application for the issuance of a writ of preliminary injunction ;n
Aune -<, -..*, respondent judge issued an ;rder declaring the reassignment under the
RTA; neither a demotion nor a removal without cause 'oreover, that the RTA; is in
accordance with law &till, respondent judge issued a preliminary injunction on the
ground that petitioner had not :obtained any exemption from the election ban:
I&&!=C @hether respondent judge committed grave abuse of discretion amounting to
lac" or excess of jurisdiction in holding that petitioner violated the election ban on the
transfer of BIR personnel during election period
D=#7C Ges &ection -+*8h9 of the ;mnibus =lection Code prohibits the transfer or
detail of any public officer or employee, such as private respondents herein, during an
election period, except upon prior approval of the C;'=#=C It is on record that
petitioner, thru the &ecretary of %inance, filed a re5uest with the C;'=#=C for
exemption from the election ban on the transfer, assignment, promotion, and recruitment
of its officers and employees The C;'=#=C granted the re5uest on Aanuary -4, -..*,
subject to the submission by petitioner of certain supporting documents ;n 'arch -,,
-..*, petitioner complied with the C;'=#=C(s re5uirement by submitting copies of
=xecutive ;rder )o *,< and the BIR ;rgani6ational &tructure as of 'arch -,, -..* ;n
'ay -<, -..*, petitioner furnished the C;'=#=C with the names and positions of the
BIR officers and employees transferred or reassigned to other places of wor" pursuant to
RTA; )o 43-..* But respondent judge ruled that a subse5uent approval by the
C;'=#=C of petitioner(s compliance is still re5uired This is untenable and
unnecessary
Resolution )o 14// of the C;'=#=C is clear and categorical It granted petitioner(s
re5uest for exemption from the election ban on the transfer of personnel subject only to
submission of certain documents Clearly, the C;'=#=C(s further approval of these
re5uirements is no longer necessary ;therwise, the C;'=#=C should have withdrawn
its favorable action had it found that petitioner(s compliance was not in order Therefore,
in issuing the assailed ;rder granting private respondents( application for preliminary
injunction, respondent judge gravely abused her discretion $rave abuse of discretion
exists where an act of a court or tribunal is performed with a capricious or whimsical
exercise of judgment e5uivalent to lac" of jurisdiction, as in this caseC I R vs Rose
'arie Alon6o3#egasto, et al, $R )o *42441, April -4, -..+
Re3assignment of 0ersonnel
%actsC ;n -+ ;ctober *//1, 0resident %idel > Ramos 8:0resident Ramos:9 issued
=xecutive ;rder )o *1-, entitled :Approving the &treamlining of the Bureau of Internal
Revenue: ;n -2 Auly *//,, 0resident Ramos issued =xecutive ;rder )o 41. 8:=;
41.:9 entitled :%urther &treamlining the Bureau of Internal Revenue in line with its
Computeri6ed Integrated Tax &ystem:
0itargue sued as a taxpayer fearing possible misappropriation of public funds >as5ue6,
who received an Revenue Travel Assignment ;rder reassigning him, raised violation of
his constitutional rights to security of tenure and to due process 0ere6 sued as a BIR
employee fearing a violation of her constitutional rights to security of tenure and to due
process by a probable inclusion in the RTA;s
The central 5uestion for resolution is whether 0itargue, 0ere6 and >as5ue6 are entitled to
the writ of preliminary injunction granted by the trial court
The trial court(s ruling was a reversal of the rule on the burden of proof since it assumed
the proposition which the respondents here were bound to prove 'oreover, the trial
court(s grant of the writ of preliminary injunction in favor of respondents despite the lac"
of a clear and unmista"able right on their part constitutes grave abuse of discretion
amounting to lac" of jurisdiction,therefore the corresponding writ of preliminary
mandatory injunction dated , April *//2, both issued by Branch ,, of the Regional Trial
Court of Iue6on City in Civil Case )o I3/,31-/-2, are declared >;I7B==TD;>=)
# R!A#; vs =#I&=; 0 0ITAR$!=, );B#= BA'BI)A B 0=R=J and =7'!)7
>A&I!=J $R )o *4.-24 Aanuary -*, -..<
)ECTION 18. Re3,rt/ ,f (i,-!ti," ,f L!5/ . B+e" !" i"ter"!- reve"#e ,fficer
0i/c,ver/ evi0e"ce ,f ! vi,-!ti," ,f t+i/ C,0e ,r ,f !"$ -!5, r#-e ,r re4#-!ti,"
!0mi"i/tere0 b$ t+e B#re!# ,f I"ter"!- Reve"#e, ,f /#c+ c+!r!cter !/ t, 5!rr!"t
t+e i"/tit#ti," ,f crimi"!- 3r,cee0i"4/, +e /+!-- imme0i!te-$ re3,rt t+e f!ct/ t, t+e
C,mmi//i,"er, t+r,#4+ +i/ imme0i!te /#3eri,r, 4ivi"4 t+e "!me !"0 !00re// ,f t+e
,ffe"0er !"0 t+e "!me/ ,f t+e 5it"e//e/, if 3,//ib-e= Pr,vi0e0, T+!t i" #r4e"t
c!/e/, t+e Reve"#e Re4i,"!- Direct,r ,r Reve"#e Di/trict Officer, !/ t+e c!/e m!$
be, m!$ /e"0 t+e re3,rt t, t+e c,rre/3,"0i"4 3r,/ec#ti"4 ,fficer. I" t+e -!tter c!/e,
! c,3$ ,f +i/ re3,rt /+!-- be /e"t t, t+e C,mmi//i,"er.
)ECTION 19. C,"te"t/ ,f C,mmi//i,"erF/ A""#!- Re3,rt . T+e A""#!-
Re3,rt ,f t+e C,mmi//i,"er /+!-- c,"t!i" 0et!i-e0 /t!teme"t/ ,f t+e c,--ecti,"/ ,f
t+e B#re!# 5it+ /3ecific!ti,"/ ,f t+e /,#rce/ ,f reve"#e b$ t$3e ,f t!2, b$ m!""er
,f 3!$me"t, b$ reve"#e re4i," !"0 b$ i"0#/tr$ 4r,#3 !"0 it/ 0i/b#r/eme"t/ b$
c-!//e/ ,f e23e"0it#re/.
I" c!/e t+e !ct#!- c,--ecti," e2cee0/ ,r f!--/ /+,rt ,f t!r4et !/ /et i" t+e !""#!-
"!ti,"!- b#04et b$ fiftee" 3erce"t >1<G? ,r m,re, t+e C,mmi//i,"er /+!-- e23-!i"
t+e re!/,"/ f,r /#c+ e2ce// ,r /+,rtf!--.
)ECTION 2C)#bmi//i," ,f Re3,rt !"0 Perti"e"t I"f,rm!ti," b$ t+e
C,mmi//i,"er .
>A? )#bmi//i," ,f Perti"e"t I"f,rm!ti," t, C,"4re// . T+e 3r,vi/i," ,f )ecti,"
27C ,f t+i/ C,0e t, t+e c,"tr!r$ ",t5it+/t!"0i"4, t+e C,mmi//i,"er /+!--, #3,"
re8#e/t ,f C,"4re// !"0 i" !i0 ,f -e4i/-!ti,", f#r"i/+ it/ !33r,3ri!te C,mmittee
3erti"e"t i"f,rm!ti," i"c-#0i"4 b#t ",t -imite0 t,= i"0#/tr$ !#0it/, c,--ecti,"
3erf,rm!"ce 0!t!, /t!t#/ re3,rt/ i" crimi"!- !cti,"/ i"iti!te0 !4!i"/t 3er/,"/ !"0
t!23!$erF/ ret#r"/= Pr,vi0e0, +,5ever, T+!t !"$ ret#r" ,r ret#r" i"f,rm!ti," 5+ic+
c!" be !//,ci!te0 5it+, ,r ,t+er5i/e i0e"tif$, 0irect-$ ,r i"0irect-$, ! 3!rtic#-!r
t!23!$er /+!-- be f#r"i/+e0 t+e !33r,3ri!te C,mmittee ,f C,"4re// ,"-$ 5+e"
/itti"4 i" E2ec#tive )e//i," #"-e// /#c+ t!23!$er ,t+er5i/e c,"/e"t/ i" 5riti"4 t,
/#c+ 0i/c-,/#re.
>B? Re3,rt t, Over/i4+t C,mmittee . T+e C,mmi//i,"er /+!--, 5it+ refere"ce t,
)ecti," 2C4 ,f t+i/ C,0e, /#bmit t, t+e Over/i4+t C,mmittee referre0 t, i" )ecti,"
29C +ere,f, t+r,#4+ t+e C+!irme" ,f t+e C,mmittee ," B!$/ !"0 %e!"/ ,f t+e
)e"!te !"0 ',#/e ,f Re3re/e"t!tive/, ! re3,rt ," t+e e2erci/e ,f +i/ 3,5er/
3#r/#!"t t, t+e /!i0 )ecti,", ever$ /i2 >A? m,"t+/ ,f e!c+ c!-e"0!r $e!r.
)ECTION 21 ),#rce/ ,f Reve"#e . T+e f,--,5i"4 t!2e/, fee/ !"0 c+!r4e/ !re
0eeme0 t, be "!ti,"!- i"ter"!- reve"#e t!2e/=
>!? I"c,me t!27
>b? E/t!te !"0 0,",rF/ t!2e/7
>c? (!-#e@!00e0 t!27
>0? Ot+er 3erce"t!4e t!2e/7
>e? E2ci/e t!2e/7
>f? D,c#me"t!r$ /t!m3 t!2e/7 !"0
>4? )#c+ ,t+er t!2e/ !/ !re ,r +ere!fter m!$ be im3,/e0 !"0 c,--ecte0 b$ t+e
B#re!# ,f I"ter"!- Reve"#e.
TITLE II T!2 ," I"c,me
C'APTER I Defi"iti,"/
)ECTION 22 Defi"iti,"/ . B+e" #/e0 i" t+i/ Tit-e=
>A? T+e term F3er/,"F me!"/ !" i"0ivi0#!-, ! tr#/t, e/t!te, ,r c,r3,r!ti,".
>B? T+e term Fc,r3,r!ti,"F /+!-- i"c-#0e 3!rt"er/+i3/, ", m!tter +,5 cre!te0 ,r
,r4!"i6e0, :,i"t@/t,c9 c,m3!"ie/, :,i"t !cc,#"t/ >c#e"t!/ e" 3!rtici3!ci,"?,
!//,ci!ti,"/, ,r i"/#r!"ce c,m3!"ie/, b#t 0,e/ ",t i"c-#0e 4e"er!- 3r,fe//i,"!-
3!rt"er/+i3/ !"0 ! :,i"t ve"t#re ,r c,"/,rti#m f,rme0 f,r t+e 3#r3,/e ,f
#"0ert!9i"4 c,"/tr#cti," 3r,:ect/ ,r e"4!4i"4 i" 3etr,-e#m, c,!-, 4e,t+erm!- !"0
,t+er e"er4$ ,3er!ti,"/ 3#r/#!"t t, !" ,3er!ti"4 ,r c,"/,rti#m !4reeme"t #"0er !
/ervice c,"tr!ct 5it+ t+e &,ver"me"t. F&e"er!- 3r,fe//i,"!- 3!rt"er/+i3/F !re
3!rt"er/+i3/ f,rme0 b$ 3er/,"/ f,r t+e /,-e 3#r3,/e ,f e2erci/i"4 t+eir c,mm,"
3r,fe//i,", ", 3!rt ,f t+e i"c,me ,f 5+ic+ i/ 0erive0 fr,m e"4!4i"4 i" !"$ tr!0e ,r
b#/i"e//.
CASES DIGEST
Taxability of 0artnerships
@ith respect to the tax on corporations, the issue hinges on the meaning of the terms
:corporation: and :partnership:, as used in sections -48 )ow &ec -,9 and 248 )ow &ec
--B9 of said Code, the pertinent parts of which readC
:&=C -4 Rate of tax on corporationsE There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year from
all sources by every corporation organi6ed in, or existing under the laws of the
0hilippines, no matter how created or organi6ed but not including duly registered
general co3partnerships 8compaKiascolectivas9, a tax upon such income e5ual to the sum
of the followingC :
:&ec 248b9 The term (corporation( includes partnerships, no matter how created or
organi6ed, joint3stoc" companies, joint accounts 8cuentas en participacion9, associations
or insurance companies, but does not include duly registered general copartnerships
8compaKiascolectivas9:
Article *,+, of the Civil Code of the 0hilippines providesC
:By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits
among themselves:
0ursuant to this article, the essential elements of a partnership are two, namelyC 8a9 an
agreement to contribute money, property or industry to a common fund? and 8b9 intent to
divide the profits among the contracting parties The first element is undoubtedly present
in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money
and property to a common fund Dence, the issue narrows down to their intent in acting
as they did !pon consideration of all the facts and circumstances surrounding the case,
we are fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, becauseC
* &aid common fund was not something they found already in existence It was not a
property inherited by them pro indiviso They created it purposely @hat is more they
jointly borrowed a substantial portion thereof in order to establish said common fund
- They invested the same, not merely in one transaction, but in a series of
transactions ;n %ebruary -, */41, they bought a lot for 0*..,..... ;n April 1, */44,
they purchased -* lots for 0*2,...... This was soon followed, on April -1, */44, by
the ac5uisition of another real estate for 0*.2,2-<.. %ive 8<9 days later 8April -2,
*/449, they got a fourth lot for 0-1,,-14*4 The number of lots 8-49 ac5uired and
transactions underta"en, as well as the brief interregnum between each, particularly the
last three purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned common fund or even
of the property ac5uired by petitioners in %ebruary, */41 In other words, one cannot but
perceive a character of habituality peculiar to business transactions engaged in for
purposes of gain
%or purposes of the tax on corporations, our )ational Internal Revenue Code, includes
these partnerships E with the exception only of duly registered general co3partnerships
E within the purview of the term :corporation: It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations
=!%='IA =>A)$=#I&TA, 'A)!=#A =>A)$=#I&TA and %RA)CI&CA
=>A)$=#I&TA vs TD= C;##=CT;R ;% I)T=R)A# R=>=)!= and TD= C;!RT
;% TAH A00=A#& $R )o #3///+ ;ctober *<, */<,
To be taxed, a joint venture need not be constituted in accordance with usual legal
re5uirements
The 5ualifying expressionC :the term corporation includes partnerships, no matter how
created or organi6ed: clearly indicates that a joint venture need not be underta"en in any
of the standard forms, or in conformity with the usual re5uirements of the law on
partnerships, in order that one could be deemed constituted for purposes of the tax on
corporations
=ufemia =vangelista vs Collector of Internal Revenue, et al, $R )o #3///+, ;ctober
*<, */<,
%or tax purposes, the co3ownership of inherited properties is automatically converted
into an unregistered partnership the moment the said common properties andBor the
incomes derived therefrom are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a
project partition either duly executed in an extrajudicial settlement or approved by the
court in the corresponding testate or intestate proceeding The reason for this is simple
%rom the moment of such partition, the heirs are entitled already to their respective
definite shares of the estate and the income thereof, for each of them to manage and
dispose of an exclusively his own without the intervention of the other heirs, and,
accordingly, he becomes liable individually for all taxes in connection therewith If after
such partition, he allows his share to be held in common with his co3heirs under a single
management to be used with the intent of ma"ing profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were executed for
the purpose, for tax purposes, at least, an unregistered partnership is formed
;na vs Commissioner, $R )o #3*/14-, 'ay -<, */,-
@hat constitutes a :partnership: under American law
!nder American law, the term (partnership( includes a syndicate, group, pool, joint
venture or other unincorporated organi6ation, through or by means of which any
business, financial operation, or venture is carried on %or purposes of the tax on
corporations, our )ational Internal Revenue Code, includes these partnerships with the
exception only of duly registered general copartnershipswithin the purview of the term
:corporation:
=ufemia =vangelista vs Collector of Internal Revenue, et al, $R )o #3///+, ;ctober
*<, */<,
Tax on income of insurance pool is different from tax on dividends received by individual
corporate entities
An insurance pool is a taxable entity distinct from the individual corporate entities of the
ceding companies The tax on its income is obviously different from the tax on the
dividends received by the said companies Clearly, there is no double taxation here
Afisco Insurance Corp, et al vs Court of Appeals, et al, $R )o **-+,<, Aanuary -<,
*///
!nregistered partnerships and associations are included in the concept of
:corporations:
The 0hilippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations 0arenthetically, the
)#RC(s inclusion of such entities in the tax on corporations was made even clearer by
the Tax Reform Act of *//,
Afisco Insurance Corp, et al vs Court of Appeals, et al, $R )o **-+,<, Aanuary -<,
*///
0ersonality is not a condition precedent to the existence of partnerships
The term (corporation( includes among others, joint accounts 8cuentas en participacion9
and associations, none of which has a legal personality of its own, independent of that of
its members The lawma"ers could not have regarded personality as a condition
precedent to the existence of partnerships referred to therein
%lorencio Reyes, et al vs Commissioner of Internal Revenue, et al, $R )o #3-4.-.3
-*, Auly -/, */+2
Taxes enforced against a corporate taxpayer cannot be imposed on its officers and
stoc"holders
Taxes being personal to the taxpayer, it can only be enforced against petitioner because
the payment of unpaid customs duties and taxes are the personal obligation of the
petitioner as a corporate taxpayer, thus, it cannot be imposed on its corporate officers,
much so on its individual stoc"holders, for this will violate the principle that a
corporation has personality separate and distinct from the persons constituting it
0roton 0ilipinas Corp vs Republic of the 0hil, $R )o *+<.-,, ;ctober *+, -..+
>C? T+e term F0,me/tic,F 5+e" !33-ie0 t, ! c,r3,r!ti,", me!"/ cre!te0 ,r ,r4!"i6e0
i" t+e P+i-i33i"e/ ,r #"0er it/ -!5/.
>D? T+e term Ff,rei4",F 5+e" !33-ie0 t, ! c,r3,r!ti,", me!"/ ! c,r3,r!ti," 5+ic+ i/
",t 0,me/tic.
>E? T+e term F","re/i0e"tciti6e"F me!"/=
>1? A citi6e" ,f t+e P+i-i33i"e/ 5+, e/t!b-i/+e/ t, t+e /!ti/f!cti," ,f t+e
C,mmi//i,"er t+e f!ct ,f +i/ 3+$/ic!- 3re/e"ce !br,!0 5it+ ! 0efi"ite i"te"ti," t,
re/i0e t+erei".
>2? A citi6e" ,f t+e P+i-i33i"e/ 5+, -e!ve/ t+e P+i-i33i"e/ 0#ri"4 t+e t!2!b-e $e!r
t, re/i0e !br,!0, eit+er !/ !" immi4r!"t ,r f,r em3-,$me"t ," ! 3erm!"e"t b!/i/.
>;? A citi6e" ,f t+e P+i-i33i"e/ 5+, 5,r9/ !"0 0erive/ i"c,me fr,m !br,!0 !"0
5+,/e em3-,$me"t t+ere!t re8#ire/ +im t, be 3+$/ic!--$ 3re/e"t !br,!0 m,/t ,f
t+e time 0#ri"4 t+e t!2!b-e $e!r.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .<3.* Auly 1*, -..* Revo"ing the Re5uirement for
)on3Resident Citi6ens, ;verseas Contract @or"ers 8;C@s9 and &eamen to %ile
Information Returns on Income 7erived from &ources ;utside the 0hilippines )on3
resident citi6ens who are exempt from tax with respect to income derived from sources
outside the 0hilippines in accordance with &ection -18B9 and 8C9, in relation to &ection
-- 8=9 and &ection <* 8A98-98d9 and 8A9819 of the Tax Code of *//,, but who are
nevertheless mandated to file information returns 8BIR %orm *,.*C or the new
computeri6ed BIR %orm *,.19 pursuant to R'; 1.3// and RR /3//, shall no longer be
re5uired to file the same on their income derived from sources outside the 0hilippines
beginning taxable year -..*
>4? A citi6e" 5+, +!/ bee" 3revi,#/-$ c,"/i0ere0 !/ ","re/i0e"t citi6e" !"0 5+,
!rrive/ i" t+e P+i-i33i"e/ !t !"$ time 0#ri"4 t+e t!2!b-e $e!r t, re/i0e 3erm!"e"t-$
i" t+e P+i-i33i"e/ /+!-- -i9e5i/e be tre!te0 !/ ! ","re/i0e"t citi6e" f,r t+e t!2!b-e
$e!r i" 5+ic+ +e !rrive/ i" t+e P+i-i33i"e/ 5it+ re/3ect t, +i/ i"c,me 0erive0 fr,m
/,#rce/ !br,!0 #"ti- t+e 0!te ,f +i/ !rriv!- i" t+e P+i-i33i"e/.
><? T+e t!23!$er /+!-- /#bmit 3r,,f t, t+e C,mmi//i,"er t, /+,5 +i/ i"te"ti," ,f
-e!vi"4 t+e P+i-i33i"e/ t, re/i0e 3erm!"e"t-$ !br,!0 ,r t, ret#r" t, !"0 re/i0e i"
t+e P+i-i33i"e/ !/ t+e c!/e m!$ be f,r 3#r3,/e/ ,f t+i/ )ecti,".
>*? T+e term Fre/i0e"t !-ie"F me!"/ !" i"0ivi0#!- 5+,/e re/i0e"ce i/ 5it+i" t+e
P+i-i33i"e/ !"0 5+, i/ ",t ! citi6e" t+ere,f.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& )o - B &ection < 7efinition3 A :non3resident alien
individual: means an individual E
8a9 @hose residence is not within the 0hilippines? and
8b9 @ho is not a citi6en of the 0hilippines
An alien actually present in the 0hilippines who is not a mere transient or sojourner is a
resident of the 0hilippines for purposes of the income tax @hether he is a transient or
not is determined by his intentions with regard to the length and nature of his stay A
mere floating intention indefinite as to time, to return to another country is not sufficient
to constitute him a transient If he lives in the 0hilippines and has no definite intention as
to his stay, he is a resident ;ne who comes to the 0hilippines for a definite purpose
which in its nature may be promptly accomplished is a transient But if his purpose is of
such a nature that an extended stay may be necessary for its accomplishment, and to that
end the alien ma"es his home temporarily in the 0hilippines, he becomes a resident,
though it may be his intention at all times to return to his domicile abroad when the
purpose for which he came has been consummated or abandoned
>&? T+e term F","re/i0e"t !-ie"F me!"/ !" i"0ivi0#!- 5+,/e re/i0e"ce i/ ",t 5it+i"
t+e P+i-i33i"e/ !"0 5+, i/ ",t ! citi6e" t+ere,f.
>'? T+e term Fre/i0e"t f,rei4" c,r3,r!ti,"F !33-ie/ t, ! f,rei4" c,r3,r!ti," e"4!4e0
i" tr!0e ,r b#/i"e// 5it+i" t+e P+i-i33i"e/.
>I?T+e term F","re/i0e"t f,rei4" c,r3,r!ti,"F !33-ie/ t, ! f,rei4" c,r3,r!ti," ",t
e"4!4e0 i" tr!0e ,r b#/i"e// 5it+i" t+e P+i-i33i"e/.
>? T+e term Ffi0#ci!r$F me!"/ ! 4#!r0i!", tr#/tee, e2ec#t,r, !0mi"i/tr!t,r, receiver,
c,"/erv!t,r ,r !"$ 3er/," !cti"4 i" !"$ fi0#ci!r$ c!3!cit$ f,r !"$ 3er/,".
>E? T+e term F5it++,-0i"4 !4e"tF me!"/ !"$ 3er/," re8#ire0 t, 0e0#ct !"0
5it++,-0 !"$ t!2 #"0er t+e 3r,vi/i,"/ ,f )ecti," <7
>L? T+e term F/+!re/ ,f /t,c9F /+!-- i"c-#0e /+!re/ ,f /t,c9 ,f ! c,r3,r!ti,",
5!rr!"t/ !"0D,r ,3ti,"/ t, 3#rc+!/e /+!re/ ,f /t,c9, !/ 5e-- !/ #"it/ ,f
3!rtici3!ti," i" ! 3!rt"er/+i3 >e2ce3t 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3/?, :,i"t /t,c9
c,m3!"ie/, :,i"t !cc,#"t/, :,i"t ve"t#re/ t!2!b-e !/ c,r3,r!ti,"/, !//,ci!ti,"/, !"0
recre!ti," ,r !m#/eme"t c-#b/ >/#c+ !/ 4,-f, 3,-, ,r /imi-!r c-#b/?, !"0 m#t#!-
f#"0 certific!te/.
>%? T+e term F/+!re+,-0erF /+!-- i"c-#0e +,-0er/ ,f ! /+!reD/ ,f /t,c9, 5!rr!"tD/
!"0D,r ,3ti,"D/ t, 3#rc+!/e /+!re/ ,f /t,c9 ,f ! c,r3,r!ti,", !/ 5e-- !/ ! +,-0er ,f !
#"it ,f 3!rtici3!ti," i" ! 3!rt"er/+i3 >e2ce3t 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3/? i" !
:,i"t /t,c9 c,m3!"$, ! :,i"t !cc,#"t, ! t!2!b-e :,i"t ve"t#re, ! member ,f !"
!//,ci!ti,", recre!ti," ,r !m#/eme"t c-#b >/#c+ !/ 4,-f, 3,-,, ,r /imi-!r c-#b/? !"0
! +,-0er ,f ! m#t#!- f#"0 certific!te, ! member i" !" !//,ci!ti,", :,i"t@/t,c9
c,m3!"$, ,r i"/#r!"ce c,m3!"$.
>N? T+e term Ft!23!$erF me!"/ !"$ 3er/," /#b:ect t, t!2 im3,/e0 b$ t+i/ Tit-e
>O? T+e term/ Fi"c-#0i"4F !"0 Fi"c-#0e/F, 5+e" #/e0 i" ! 0efi"iti," c,"t!i"e0 i" t+i/
Tit-e, /+!-- ",t be 0eeme0 t, e2c-#0e ,t+er t+i"4/ ,t+er5i/e 5it+i" t+e me!"i"4 ,f
t+e term 0efi"e0
>P? T+e term Ft!2!b-e $e!rF me!"/ t+e c!-e"0!r $e!r, ,r t+e fi/c!- $e!r e"0i"4
0#ri"4 /#c+ c!-e"0!r $e!r, #3," t+e b!/i/ ,f 5+ic+ t+e "et i"c,me i/ c,m3#te0
#"0er t+i/ Tit-e. FT!2!b-e $e!rF i"c-#0e/, i" t+e c!/e ,f ! ret#r" m!0e f,r ! fr!cti,"!-
3!rt ,f ! $e!r #"0er t+e 3r,vi/i,"/ ,f t+i/ Tit-e ,r #"0er r#-e/ !"0 re4#-!ti,"/
3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er, t+e 3eri,0 f,r 5+ic+ /#c+ ret#r" i/ m!0e.
>H? T+e term Ffi/c!- $e!rF me!"/ !" !cc,#"ti"4 3eri,0 ,f t5e-ve >12? m,"t+/
e"0i"4 ," t+e -!/t 0!$ ,f !"$ m,"t+ ,t+er t+!" December.
>R? T+e term/ F3!i0 ,r i"c#rre0F !"0 F3!i0 ,r !ccr#e0F /+!-- be c,"/tr#e0 !cc,r0i"4
t, t+e met+,0 ,f !cc,#"ti"4 #3," t+e b!/i/ ,f 5+ic+ t+e "et i"c,me i/ c,m3#te0
#"0er t+i/ Tit-e.
>)? T+e term Ftr!0e ,r b#/i"e//F i"c-#0e/ t+e 3erf,rm!"ce ,f t+e f#"cti,"/ ,f !
3#b-ic ,ffice.
>T? T+e term F/ec#ritie/F me!"/ /+!re/ ,f /t,c9 i" ! c,r3,r!ti," !"0 ri4+t/ t,
/#b/cribe f,r ,r t, receive /#c+ /+!re/. T+e term i"c-#0e/ b,"0/, 0ebe"t#re/, ",te/,
,r certific!te/, ,r ,t+er evi0e"ce ,f i"0ebte0"e//, i//#e0 b$ !"$ c,r3,r!ti,",
i"c-#0i"4 t+,/e i//#e0 b$ ! 4,ver"me"t ,r 3,-itic!- /#b0ivi/i," t+ere,f, 5it+
i"tere/t c,#3,"/ ,r i" re4i/tere0 f,rm.
CASES DIGEST
&hares of stoc" are ordinary assets only to a dealer in securities
&hares of stoc", li"e the other securities defined in the )IRC, would be ordinary assets
only to a dealer in securities or a person engaged in the purchase and sale of, or an
active trader 8for his own account9 in, securities In the hands, however, of another who
holds the shares of stoc" by way of an investment, the shares to him would be capital
assets @hen the shares held by such investor become worthless, the loss is deemed to be
a loss from the sale or exchange of capital assets
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..*3.2 %ebruary *, -..2
&!BA=CT C Amending Certain 0rovisions of Revenue Regulations )o *.3-..+
0rescribing the $uidelines and Conditions for the Tax Treatment of &ecurities Borrowing
and #ending Transactions Involving &hares of &toc" or &ecurities #isted in the 0hilippine
&toc" =xchange
Concept of &ecurities Borrowing and #ending 8&B#9 E &ecurities Borrowing and
#ending 8&B#9 is an important element in securities trading and capital mar"et
development among emerging mar"ets It is a vital facility behind the efficient trading
settlements and growth of derivatives and options mar"et &B# exists for both e5uity and
debt securities %or purposes of these Regulations, however, &B# shall be limited to
borrowing and lending of shares of stoc" or securities listed in the 0&= unless declared
by the &ecurities and =xchange Commission to be ineligible for borrowing and lending
under an &B# 0rogram &B# 0rogram for other securities listed and traded in other
=xchanges shall be covered by a separate Regulation
&B# involves the lending of shares of stoc"s or securities by the #ender, who owns or
controls them, to the Borrower who needs the shares of stoc"sBsecurities borrowed to
support trading strategies or settlement obligations, in exchange for a collateral and the
promise to return the e5uivalent shares of stoc"sBsecurities at the end of the borrowing
period The borrowing period in any agreement cannot be more than two 8-9 years
Typically, the Borrower will use or dispose of the shares of stoc"sBsecurities borrowed
strictly in connection with a particular purpose or purposes as herein mentioned Being
fungible in nature, the borrowed shares of stoc"sBsecurities are transferred from the
#ender to the Borrower %or the duration of the borrowing and lending period under the
agreement, the #ender temporarily loses ownership of the shares of stoc"Bsecurities lent
but ac5uires a contractual right to receive all benefits accruing to the shares of
stoc"Bsecurities The objective is to put the #ender into the same economic position as the
#ender would have been had the securities not been lent This means that in case of
corporate actions li"e stoc" rights, dividend declarations, and other benefits accruing to
the shares of stoc", the Borrower would have to :manufacture: the corresponding
benefits thereon and return the same to the #ender as if the shares of stoc"Bsecurities
:never left his hands:
!pon demand of the #ender or at the end of the stipulated borrowing period, the
Borrower is then obligated to return the e5uivalent shares of stoc"Bsecurities and the
#ender, in turn, returns the collateral put up by the Borrower If the borrower fails to
return the shares of stoc"Bsecurities or the e5uivalent &hares of &toc"B&ecurities, the
#enderB#ending Agent, as part of the &B# transactions, may purchase shares of
stoc"Bsecurities from the stoc" exchange In effect, &B# is similar to a simple
collaterali6ed cash loan transaction Dowever, instead of cash, what is borrowed are
listed shares of stoc"Bsecurities and what is provided as collateral is either cash,
government or e5uity securities, or standby letter of credit issued by a ban":
>U? T+e term F0e!-er i" /ec#ritie/F me!"/ ! merc+!"t ,f /t,c9/ ,r /ec#ritie/,
5+et+er !" i"0ivi0#!-, 3!rt"er/+i3 ,r c,r3,r!ti,", 5it+ !" e/t!b-i/+e0 3-!ce ,f
b#/i"e//, re4#-!r-$ e"4!4e0 i" t+e 3#rc+!/e ,f /ec#ritie/ !"0 t+e re/!-e t+ere,f t,
c#/t,mer/7 t+!t i/, ,"e 5+,, !/ ! merc+!"t, b#$/ /ec#ritie/ !"0 re@/e--/ t+em t,
c#/t,mer/ 5it+ ! vie5 t, t+e 4!i"/ !"0 3r,fit/ t+!t m!$ be 0erive0 t+erefr,m.
CASES DIGEST
=5uity investment is capital, not ordinary, asset
An e5uity investment is a capital, not ordinary, asset of the investor the sale or exchange
of which results in either a capital gain or a capital loss The gain or the loss is ordinary
when the property sold or exchanged is not a capital asset Thus, shares of stoc", li"e the
other securities defined in &ection -.8t9 4 of the )IRC, would be ordinary assets only to a
dealer in securities or a person engaged in the purchase and sale of, or an active trader
8for his own account9 in, securities
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
>(? T+e term Fb!"9F me!"/ ever$ b!"9i"4 i"/tit#ti,", !/ 0efi"e0 i" )ecti," 2 ,f
Re3#b-ic Act N,. ;;7, !/ !me"0e0, ,t+er5i/e 9",5" !/ t+e &e"er!- B!"9i"4 Act.
A b!"9 m!$ eit+er be ! c,mmerci!- b!"9, ! t+rift b!"9, ! 0eve-,3me"t b!"9, !
r#r!- b!"9 ,r ! /3eci!-i6e0 4,ver"me"t b!"9.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..43** 'arch *<, -.**
0roper Allocation of Costs and =xpenses Amongst Income =arnings of Ban"s and ;ther
%inancial Institutions for Income Tax Reporting 0urposes
R=>=)!= R=$!#ATI;)& ); ./3.4 Aune -*, -..4
Implementing Certain 0rovisions of Republic Act )o /-12, Re3Imposing the $ross
Receipts Tax on Ban"s and )on3Ban" %inancial Intermediaries 0erforming Iuasi3
Ban"ing %unctions and ;ther )on3Ban" %inancial Intermediaries Beginning Aanuary *,
-..4
7efinition of Terms E %or purposes of these Regulations, the terms enumerated
hereunder shall have the following meaningC
-* %inancial Institution E shall refer to ban"s, non3ban" financial intermediaries
performing 5uasi3ban"ing functions, and other non3ban" financial intermediaries
including finance companies This does not, however, include insurance companies
-- Ban"s or Ban"ing Institutions E shall refer to those entities as defined in &ection
1 of Republic Act )o 2,/*, as amended, otherwise "nown as the $eneral Ban"ing #aw
of -... The term :ban"s: or :ban"ing institutions: are synonymous and interchangeable
and specifically include universal ban"s, commercial ban"s, thrift ban"s 8savings and
mortgage ban"s, stoc" savings and loan associations, and private development ban"s9,
cooperative ban"s, rural ban"s, Islamic ban"s and other classifications of ban"s as may
be determined by the 'onetary Board of the Bang"o&entralng0ilipinas
-1 )on3ban" %inancial Intermediaries E shall refer to persons or entities whose
principal functions include the lending, investing or placement of funds or evidences of
indebtedness or e5uity deposited with them, ac5uired by them or otherwise coursed
through them, either for their own account or for the account of others This includes all
entities regularly engaged in the lending of funds or purchasing of receivables or other
obligations with funds obtained from the public through the issuance, endorsement or
acceptance of debt instruments of any "ind for their own account, or through the
issuance of certificates of assignment or similar instruments with recourse, trust
certificates, or of repurchase agreements, whether any of these means of obtaining funds
from the public is done on a regular basis or only occasionally
-4 IuasiLban"ing Activities E shall refer to the borrowing of funds from twenty 8-.9
or more personal or corporate lenders at any one time, through the issuance,
endorsement or acceptance of debt instruments of any "ind other than deposits for the
borrowerMs own account, or through the issuance of certificates of assignment or similar
instruments, with recourse, or of repurchase agreements for purposes of relending or
purchasing receivables and other similar obligations 0rovided, however, that
commercial, industrial and other non3financial companies, which borrows funds through
any of these means for the limited purpose of financing their own needs or the needs of
their agents or dealers, shall not be considered as performing 5uasi3ban"ing functions
-< 7eposit &ubstitutes E shall refer to an alternative form of obtaining funds from
the public 8the term NpublicM means borrowing from twenty O-.P or more individual or
corporate lenders at any one time9, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrowerMs own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer These instruments may include, but
need not be limited to, ban"ersM acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between the
Bang"o&entralng0ilipinas 8B&09 and any authori6ed agent ban", certificates of
assignment or participation and similar instruments with recourseC 0rovided, however,
That debt instruments issued for inter3ban" call loans with maturity of not more than five
8<9 days to cover deficiency in reserves against deposit liabilities including those between
or among ban"s and 5uasi3ban"s shall not be considered as deposit substitute debt
instruments
-+ Insurance Companies E shall refer to entities that underta"es for a consideration
to indemnify another 8insured9 against loss, damage or liability arising from an un"nown
or contingent event
-, %inancing Companies E shall refer to corporations except ban"s, investments
houses, savings and loan associations, insurance companies, cooperatives, and other
financial institutions organi6ed or operating under other special laws, which are
primarily organi6ed for the purpose of extending credit facilities to consumers and to
industrial, commercial, or agricultural enterprises, by direct lending or by discounting or
factoring commercial papers or accounts receivables, or by buying and selling contracts,
leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of
movable as well as immovable properties 8RA )o </2. as amended by RA )o 2<<+9
-2 %inancial #easing E shall refer to the mode of extending credit through a non3
cancellable lease contract under which the lessor purchases or ac5uires, at the instance
of the lessee, machinery, e5uipment, motor vehicles, appliances, business and office
machines, and other movable or immovable property in consideration of the periodic
payment by the lessee of a fixed amount of money sufficient to amorti6e at least seventy
percent 8,.Q9 of the purchase price or ac5uisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two 8-9 years
during which the lessee has the right to hold and use the leased property with the right to
expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance,
insurance and preservation thereof, but with no obligation or option on his part to
purchase the leased property from the owner3lessor at the end of the lease contract 8RA
)o </2. as amended by RA )o 2<<+9 A finance lease is a lease that transfers
substantially all the ris"s and rewards incident to ownership of an asset Title may or
may not eventually be transferred
-/ ;perating #ease E shall refer to a lease other than a finance lease of a finance
company
-*. Interest Income E the term shall include interest and discounts earned on loans
and investment transactions
-** &ecurities E shall include shares of stoc" in a corporation and rights to subscribe
for or to receive such shares? and bonds, debentures, notes or certificates, or other
evidence of indebtedness issued by any corporation, including those issued by the
government or political subdivision thereof, with interest coupons or in registered form
-*- $overnment &ecurities E shall refer to securities issued by the Republic of the
0hilippines or any of its agencies, instrumentalities, and political subdivisions
-*1 0rivate &ecurities E shall refer to securities not covered by &ubsection -*-
hereof
>B? T+e term F","@b!"9 fi"!"ci!- i"terme0i!r$F me!"/ ! fi"!"ci!- i"terme0i!r$, !/
0efi"e0 i" )ecti," 2>D?>c? ,f Re3#b-ic Act N,. ;;7, !/ !me"0e0, ,t+er5i/e 9",5"
!/ t+e &e"er!- B!"9i"4 Act, !#t+,ri6e0 b$ t+e B!"49,)e"tr!-"4Pi-i3i"!/ >B)P? t,
3erf,rm 8#!/i@b!"9i"4 !ctivitie/.
>I? T+e term F8#!/i@b!"9i"4 !ctivitie/F me!"/ b,rr,5i"4 f#"0/ fr,m t5e"t$ >2C? ,r
m,re 3er/,"!- ,r c,r3,r!te -e"0er/ !t !"$ ,"e time, t+r,#4+ t+e i//#!"ce,
e"0,r/eme"t, ,r !cce3t!"ce ,f 0ebt i"/tr#me"t/ ,f !"$ 9i"0 ,t+er t+!" 0e3,/it/ f,r
t+e b,rr,5erF/ ,5" !cc,#"t, ,r t+r,#4+ t+e i//#!"ce ,f certific!te/ ,f !//i4"me"t
,r /imi-!r i"/tr#me"t/, 5it+ rec,#r/e, ,r ,f re3#rc+!/e !4reeme"t/ f,r 3#r3,/e/ ,f
re-e"0i"4 ,r 3#rc+!/i"4 receiv!b-e/ !"0 ,t+er /imi-!r ,b-i4!ti,"/= Pr,vi0e0,
+,5ever, T+!t c,mmerci!-, i"0#/tri!- !"0 ,t+er ","@fi"!"ci!- c,m3!"ie/, 5+ic+
b,rr,5 f#"0/ t+r,#4+ !"$ ,f t+e/e me!"/ f,r t+e -imite0 3#r3,/e ,f fi"!"ci"4 t+eir
,5" "ee0/ ,r t+e "ee0/ ,f t+eir !4e"t/ ,r 0e!-er/, /+!-- ",t be c,"/i0ere0 !/
3erf,rmi"4 8#!/i@b!"9i"4 f#"cti,"/.
R=>=)!= R=$!#ATI;)& ); ./3.4 Aune -*, -..4
Implementing Certain 0rovisions of Republic Act )o /-12, Re3Imposing the $ross
Receipts Tax on Ban"s and )on3Ban" %inancial Intermediaries 0erforming Iuasi3
Ban"ing %unctions and ;ther )on3Ban" %inancial Intermediaries Beginning Aanuary *,
-..4
>J? T+e term F0e3,/it /#b/tit#te/F /+!-- me!" !" !-ter"!tive f,rm ,f ,bt!i"i"4 f#"0/
fr,m t+e 3#b-ic >t+e term F3#b-icF me!"/ b,rr,5i"4 fr,m t5e"t$ >2C? ,r m,re
i"0ivi0#!- ,r c,r3,r!te -e"0er/ !t !"$ ,"e time?, ,t+er t+!" 0e3,/it/, t+r,#4+ t+e
i//#!"ce, e"0,r/eme"t, ,r !cce3t!"ce ,f 0ebt i"/tr#me"t/ f,r t+e b,rr,5erF/ ,5"
!cc,#"t, f,r t+e 3#r3,/e ,f re-e"0i"4 ,r 3#rc+!/i"4 ,f receiv!b-e/ !"0 ,t+er
,b-i4!ti,"/, ,r fi"!"ci"4 t+eir ,5" "ee0/ ,r t+e "ee0/ ,f t+eir !4e"t ,r 0e!-er.
T+e/e i"/tr#me"t/ m!$ i"c-#0e, b#t "ee0 ",t be -imite0 t, b!"9er/F !cce3t!"ce/,
3r,mi//,r$ ",te/, re3#rc+!/e !4reeme"t/, i"c-#0i"4 rever/e re3#rc+!/e !4reeme"t/
e"tere0 i"t, b$ !"0 bet5ee" t+e B!"49,)e"tr!-"4Pi-i3i"!/ >B)P? !"0 !"$
!#t+,ri6e0 !4e"t b!"9, certific!te/ ,f !//i4"me"t ,r 3!rtici3!ti," !"0 /imi-!r
i"/tr#me"t/ 5it+ rec,#r/e= Pr,vi0e0, +,5ever, T+!t 0ebt i"/tr#me"t/ i//#e0 f,r
i"terb!"9 c!-- -,!"/ 5it+ m!t#rit$ ,f ",t m,re t+!" five ><? 0!$/ t, c,ver
0eficie"c$ i" re/erve/ !4!i"/t 0e3,/it -i!bi-itie/, i"c-#0i"4 t+,/e bet5ee" ,r !m,"4
b!"9/ !"0 8#!/i@b!"9/, /+!-- ",t be c,"/i0ere0 !/ 0e3,/it /#b/tit#te 0ebt
i"/tr#me"t/.
>K? T+e term F,r0i"!r$ i"c,meF i"c-#0e/ !"$ 4!i" fr,m t+e /!-e ,r e2c+!"4e ,f
3r,3ert$ 5+ic+ i/ ",t ! c!3it!- !//et ,r 3r,3ert$ 0e/cribe0 i" )ecti," ;9>A?>1?. A"$
4!i" fr,m t+e /!-e ,r e2c+!"4e ,f 3r,3ert$ 5+ic+ i/ tre!te0 ,r c,"/i0ere0, #"0er
,t+er 3r,vi/i,"/ ,f t+i/ Tit-e, !/ F,r0i"!r$ i"c,meF /+!-- be tre!te0 !/ 4!i" fr,m t+e
/!-e ,r e2c+!"4e ,f 3r,3ert$ 5+ic+ i/ ",t ! c!3it!- !//et !/ 0efi"e0 i" )ecti,"
;9>A?>1?. T+e term F,r0i"!r$ -,//F i"c-#0e/ !"$ -,// fr,m t+e /!-e ,r e2c+!"4e ,f
3r,3ert$ 5+ic+ i/ ",t ! c!3it!- !//et. A"$ -,// fr,m t+e /!-e ,r e2c+!"4e ,f
3r,3ert$ 5+ic+ i/ tre!te0 ,r c,"/i0ere0, #"0er ,t+er 3r,vi/i,"/ ,f t+i/ Tit-e, !/
F,r0i"!r$ -,//F /+!-- be tre!te0 !/ -,// fr,m t+e /!-e ,r e2c+!"4e ,f 3r,3ert$ 5+ic+
i/ ",t ! c!3it!- !//et.
CASES DIGEST
An e5uity investment is a capital, not ordinary, asset of the investor the sale or exchange
of which results in either a capital gain or a capital loss The gain or the loss is ordinary
when the property sold or exchanged is not a capital asset
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
>AA? T+e term Fr!"9 !"0 fi-e em3-,$ee/F /+!-- me!" !-- em3-,$ee/ 5+, !re
+,-0i"4 "eit+er m!"!4eri!- ",r /#3ervi/,r$ 3,/iti," !/ 0efi"e0 #"0er e2i/ti"4
3r,vi/i,"/ ,f t+e L!b,r C,0e ,f t+e P+i-i33i"e/, !/ !me"0e0.
>BB? T+e term Fm#t#!- f#"0 c,m3!"$F /+!-- me!" !" ,3e"@e"0 !"0 c-,/e@e"0
i"ve/tme"t c,m3!"$ !/ 0efi"e0 #"0er t+e I"ve/tme"t C,m3!"$ Act.
>CC? T+e term Ftr!0e, b#/i"e// ,r 3r,fe//i,"F /+!-- ",t i"c-#0e 3erf,rm!"ce ,f
/ervice/ b$ t+e t!23!$er !/ !" em3-,$ee.
>DD? T+e term Fre4i,"!- ,r !re! +e!08#!rter/F /+!-- me!" ! br!"c+ e/t!b-i/+e0 i"
t+e P+i-i33i"e/ b$ m#-ti"!ti,"!- c,m3!"ie/ !"0 5+ic+ +e!08#!rter/ 0, ",t e!r" ,r
0erive i"c,me fr,m t+e P+i-i33i"e/ !"0 5+ic+ !ct !/ /#3ervi/,r$, c,mm#"ic!ti,"/
!"0 c,,r0i"!ti"4 ce"ter f,r t+eir !ffi-i!te/, /#b/i0i!rie/, ,r br!"c+e/ i" t+e A/i!@
P!cific Re4i," !"0 ,t+er f,rei4" m!r9et/.
>EE? T+e term Fre4i,"!- ,3er!ti"4 +e!08#!rter/F /+!-- me!" ! br!"c+ e/t!b-i/+e0 i"
t+e P+i-i33i"e/ b$ m#-ti"!ti,"!- c,m3!"ie/ 5+ic+ !re e"4!4e0 i" !"$ ,f t+e
f,--,5i"4 /ervice/= 4e"er!- !0mi"i/tr!ti," !"0 3-!""i"47 b#/i"e// 3-!""i"4 !"0
c,,r0i"!ti,"7 /,#rci"4 !"0 3r,c#reme"t ,f r!5 m!teri!-/ !"0 c,m3,"e"t/7
c,r3,r!te fi"!"ce !0vi/,r$ /ervice/7 m!r9eti"4 c,"tr,- !"0 /!-e/ 3r,m,ti,"7
tr!i"i"4 !"0 3er/,""e- m!"!4eme"t7 -,4i/tic /ervice/7 re/e!rc+ !"0 0eve-,3me"t
/ervice/ !"0 3r,0#ct 0eve-,3me"t7 tec+"ic!- /#33,rt !"0 m!i"te"!"ce7 0!t!
3r,ce//i"4 !"0 c,mm#"ic!ti,"7 !"0 b#/i"e// 0eve-,3me"t.
>**? T+e term F-,"4@term 0e3,/it ,r i"ve/tme"t certific!teF /+!-- refer t, certific!te
,f time 0e3,/it ,r i"ve/tme"t i" t+e f,rm ,f /!vi"4/, c,mm," ,r i"0ivi0#!- tr#/t
f#"0/, 0e3,/it /#b/tit#te/, i"ve/tme"t m!"!4eme"t !cc,#"t/ !"0 ,t+er i"ve/tme"t/
5it+ ! m!t#rit$ 3eri,0 ,f ",t -e// t+!" five ><? $e!r/, t+e f,rm ,f 5+ic+ /+!-- be
3re/cribe0 b$ t+e B!"49,)e"tr!-"4Pi-i3i"!/ >B)P? !"0 i//#e0 b$ b!"9/ ,"-$ >",t
b$ ","b!"9 fi"!"ci!- i"terme0i!rie/ !"0 fi"!"ce c,m3!"ie/? t, i"0ivi0#!-/ i"
0e",mi"!ti,"/ ,f Te" t+,#/!"0 3e/,/ >P1C,CCC? !"0 ,t+er 0e",mi"!ti,"/ !/ m!$
be 3re/cribe0 b$ t+e B)P.
>&&? T+e term F/t!t#t,r$ mi"im#m 5!4eF /+!-- refer t, t+e r!te fi2e0 b$ t+e
Re4i,"!- Tri3!rtite B!4e !"0 Pr,0#ctivit$ B,!r0, !/ 0efi"e0 b$ t+e B#re!# ,f
L!b,r !"0 Em3-,$me"t )t!ti/tic/ >BLE)? ,f t+e De3!rtme"t ,f L!b,r!"0
Em3-,$me"t >DOLE?.
>''?T+e term Fmi"im#m 5!4e e!r"erF /+!-- refer t, ! 5,r9er i" t+e 3riv!te /ect,r
3!i0 t+e /t!t#t,r$ mi"im#m 5!4e, ,r t, !" em3-,$ee i" t+e 3#b-ic /ect,r 5it+
c,m3e"/!ti," i"c,me ,f ",t m,re t+!" t+e /t!t#t,r$ mi"im#m 5!4e i" t+e ","@
!4ric#-t#r!- /ect,r 5+ere +eD/+e i/ !//i4"e0.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .*.3.2 Auly 2, -..2
Implementing 0ertinent 0rovisions of Republic Act )o /<.4, :An Act Amending &ections
--, -4, 14, 1<, <*, and ,/ of Republic Act )o 24-4, as Amended, ;therwise Fnown as
The )ational Internal Revenue Code: Relative to the @ithholding of Income Tax on
Compensation and ;ther Concerns
=xemptions from @ithholding Tax on Compensation E The following income payments
are exempted from the re5uirements of withholding tax on compensationC
xxxxxxxxx
Compensation income of 'inimum @age =arnerss who wor" in the 0rivate sector and
being paid the &tatutory 'inimum @age 8&'@9, as fixed by Regional Tripartite @age
and 0roductivity Board 8RT@0B9B)ational @ages and 0roductivity Commission
8)@0C9, applicable to the place where heBshe is assigned
The aforesaid income shall li"ewise be exempted from income tax
(&tatutory 'inimum @age( 8&'@9 shall refer to the rate fixed by the Regional Tripartite
@age and 0roductivity Board 8RT@0B9, as defined by the Bureau of #abor and
=mployment &tatistics 8B#=&9 of the 7epartment of #abor and =mployment 87;#=9 The
RT@0B of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose
Doliday pay, overtime pay, night shift differential pay and ha6ard pay earned by the
aforementioned '@= shall li"ewise be covered by the above exemption 0rovided,
however, that an employee who receivesBearns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of 01.,....., taxable allowances and other taxable income other than the
&'@, holiday pay, overtime pay, ha6ard pay and night shift differential pay shall not
enjoy the privilege of being a '@= and, therefore, hisBher entire earnings are not exempt
form income tax, and conse5uently, from withholding tax
'@=s receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year This rule, notwithstanding, the &'@, Doliday pay, overtime pay, night shift
differential pay and ha6ard pay shall still be exempt from withholding tax
%or purposes of these regulations, ha6ard pay shall mean the amount paid by the
employer to '@=s who were actually assigned to danger or strife3torn areas, disease3
infested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life Any ha6ard pay paid to '@=s which does not
satisfy the above criteria is deemed subject to income tax and conse5uently, to
withholding tax
C'APTER II &e"er!- Pri"ci3-e/
)ECTION 2;. &e"er!- Pri"ci3-e/ ,f I"c,me T!2!ti," i" t+e P+i-i33i"e/
E2ce3t 5+e" ,t+er5i/e 3r,vi0e0 i" t+i/ C,0e=
>A? A citi6e" ,f t+e P+i-i33i"e/ re/i0i"4 t+erei" i/ t!2!b-e ," !-- i"c,me 0erive0
fr,m /,#rce/ 5it+i" !"0 5it+,#t t+e P+i-i33i"e/7
>B? A ","re/i0e"t citi6e" i/ t!2!b-e ,"-$ ," i"c,me 0erive0 fr,m /,#rce/ 5it+i"
t+e P+i-i33i"e/7
>C? A" i"0ivi0#!- citi6e" ,f t+e P+i-i33i"e/ 5+, i/ 5,r9i"4 !"0 0erivi"4 i"c,me
fr,m !br,!0 !/ !" ,ver/e!/ c,"tr!ct 5,r9er i/ t!2!b-e ,"-$ ," i"c,me fr,m /,#rce/
5it+i" t+e P+i-i33i"e/= Pr,vi0e0, T+!t ! /e!m!" 5+, i/ ! citi6e" ,f t+e P+i-i33i"e/
!"0 5+, receive/ c,m3e"/!ti," f,r /ervice/ re"0ere0 !br,!0 !/ ! member ,f t+e
c,m3-eme"t ,f ! ve//e- e"4!4e0 e2c-#/ive-$ i" i"ter"!ti,"!- tr!0e /+!-- be tre!te0
!/ !" ,ver/e!/ c,"tr!ct 5,r9er7
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..*3** %ebruary -4, -.**
Tax Treatment of Income =arnings and 'oney Remittances of an ;verseas Contract
@or"er 8;C@9 or ;verseas %ilipino @or"er 8;%@9
;C@ refer to %ilipino citi6ens employed in foreign countries, commonly referred to as
;%@s, who are physically present in a foreign country as a conse5uence of their
employment thereat Their salaries and wages are paid by an employer abroad and is not
borne by any entity or person in the 0hilippines To be considered as an ;C@ or ;%@,
they must be duly registered as such with the 0hilippine ;verseas =mployment
Administration 80;=A9 with a valid ;verseas =mployment Certificate 8;=C9
&eafarers or seamen are %ilipino citi6ens who receive compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade To be considered as an ;C@ or ;%@ they must be duly registered as
such with the 0hilippine ;verseas =mployment Administration 80;=A9 with a valid
;verseas =mployment Certificate 8;=C9 with a valid &eafarers Identification Record
Boo" 8&IRB9 or &eaman(s Boo" issued by the 'aritime Industry Authority 8'ARI)A9
>D? A" !-ie" i"0ivi0#!-, 5+et+er ! re/i0e"t ,r ",t ,f t+e P+i-i33i"e/, i/ t!2!b-e ,"-$
," i"c,me 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/7
>E? A 0,me/tic c,r3,r!ti," i/ t!2!b-e ," !-- i"c,me 0erive0 fr,m /,#rce/ 5it+i"
!"0 5it+,#t t+e P+i-i33i"e/7 !"0
>*? A f,rei4" c,r3,r!ti,", 5+et+er e"4!4e0 ,r ",t i" tr!0e ,r b#/i"e// i" t+e
P+i-i33i"e/, i/ t!2!b-e ,"-$ ," i"c,me 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/.
CASES DIGEST
Taxes are the lifeblood of the government
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance ;n the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself It is therefore
necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common
good, may be achieved
Commissioner of Internal Revenue, et al vs Court of Appeals, et al, $R )o **/1--,
Aune 4, *//+
Taxation is a destructive power which interferes with the personal and property rights of
the people and ta"es from them a portion of their property for the support of the
government And, since taxes are what we pay for civili6ed society, or are the lifeblood of
the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimijuris against the taxpayer and liberally in favor
of the taxing authority A claim of refund or exemption from tax payments must be clearly
shown and be based on language in the law too plain to be mista"en =lsewise stated,
taxation is the rule, exemption therefrom is the exception
Atlas Consolidated 'ining and 7ev(t Corp vs Commissioner of Internal Revenue, $R
)o *</4,*, Aanuary -+, -.**
&ymbiotic relationship between government and people is the rationale of taxation
It is said that taxes are what we pay for civili6ed society @ithout taxes, the government
would be paraly6ed for the lac" of the motive power to activate and operate it Dence,
despite the natural reluctance to surrender part of one(s hard3earned income to taxing
authorities, every person who is able to must contribute his share in the running of the
government The government for its part is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their
moral and material values This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in
the seat of power
Commissioner of Internal Revenue vs Algue, Inc, et al, $R )o #3-22/+, %ebruary *,,
*/22
;bligation to pay taxes rests upon the necessity of money for the support of the state
The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection
afforded to, a citi6en by the government, but upon the necessity of money for the support
of the state %or this reason, no one is allowed to object to or resist the payment of taxes
solely because no personal benefit to him can be pointed out @hile courts will not
enlarge, by construction, the government(s power of taxation, they also will not place
upon tax laws so loose a construction as to permit evasions on merely fanciful and
insubstantial distinctions @hen proper, a tax statute should be construed to avoid the
possibilities of tax evasion Construed this way, the statute, without resulting in injustice
to the taxpayer, becomes fair to the government
0ablo #oren6o vs Auan 0osadas, Ar, $R )o 41.2-, Aune *2, */1,
The power to tax is an attribute of sovereignty
The power to tax is an attribute of sovereignty It is a power emanating from necessity It
is a necessary burden to preserve the &tate(s sovereignty and a means to give the citi6enry
an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil
servants to serve, public improvements designed for the enjoyment of the citi6enry and
those which come within the &tate(s territory, and facilities and protection which a
government is supposed to provide
0hilippine $uaranty Co, Inc vs Commissioner of Internal Revenue, et al, $R )o #3
--.,4, April 1., */+<
=very person who is able to must contribute his share in the running of the government
It is said that taxes are what we pay for civili6ed society @ithout taxes, the government
would be paraly6ed for lac" of the motive power to activate and operate it Dence,
despite the natural reluctance to surrender part of one(s hard3earned income to the
taxing authorities, every person who is able to must contribute his share in the running of
the government The government for its part, is expected to respond in the form of
tangible and intangible benefits intended to improve the lives of the people and enhance
their moral and material values This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power
Commissioner of Internal Revenue vs Algue, Inc, et al, $R )o #3-22/+, %ebruary *,,
*/22
0ower of taxation must be exercised reasonably and in accordance with prescribed
procedure
a9 But even as the inevitability and indispensability of taxation is conceded, it is a
re5uirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor %or all the awesome power of the tax collector, he
may still be stopped in his trac"s if the taxpayer can demonstrate that the law has not
been observed Thus while :taxes are the lifeblood of the government,: the power to tax
has its limits, inspite of all its plenitude
Commissioner of Internal Revenue, et al vs Court of Appeals, et al, $R )o **/1--,
Aune 4, *//+
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance ;n the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself It is therefore
necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common
good, may be achieved
Commissioner of Internal Revenue vs Algue, Inc, et al, $R )o #3-22/+, %ebruary *,,
*/22
The power to tax is not the power to destroy
Taxation is said to be e5uitable when its burden falls on those better able to pay Taxation
is progressive when its rate goes up depending on the resources of the person affected
The power to tax :is an attribute of sovereignty: In fact, it is the strongest of all the
powers of government But for all its plenitude, the power to tax is not unconfined as
there are restrictions Adversely effecting as it does property rights, both the due process
and e5ual protection clauses of the Constitution may properly be invo"ed to invalidate in
appropriate cases a revenue measure If it were otherwise, there would be truth to the
*/.1 dictum of Chief Austice 'arshall that :the power to tax involves the power to
destroy: The web or unreality spun from 'arshall(s famous dictum was brushed away by
one stro"e of 'r Austice Dolmes( pen, thusC :The power to tax is not the power to destroy
while this Court sits: :&o it is in the 0hilippines:
Antero ' &ison, Ar vs Ruben B Ancheta, et al, $R )o #3</41*, Auly -<, */24
Tax laws must operate e5ually and uniformly on all persons under similar circumstances
The taxing power has the authority to ma"e a reasonable and natural classification for
purposes of taxation but the government(s act must not be prompted by a spirit of
hostility, or at the very least discrimination that finds no support in reason It suffices
then that the laws operate e5ually and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions not
being different both in the privileges conferred and the liabilities imposed
Aose B# Reyes vs 0edro Alman6or, et al, $R )os #34/21/34+, April -+, *//*
#aws granting tax exemption are construed strictissimijuris
a9 The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimijuris against the taxpayer and liberally in favor of the taxing power
Taxation is the rule and exemption is the exception The effect of an exemption is
e5uivalent to an appropriation Dence, a claim for exemption from tax payments must be
clearly shown and based on language in the law too plain to be mista"en
#ung Center of the 0hil vs Iue6on City, et al, $R )o *44*.4, Aune -/, -..4
The Court has laid down the rule that :as the power of taxation is a high prerogative of
sovereignty, the relin5uishment is never presumed and any reduction or dimnution
thereof with respect to its mode or its rate, must be strictly construed, and the same must
be couched in clear and unmista"able terms in order that it may be applied: 'ore
specifically stated, the general rule is that any claim for exemption from the tax statute
should be strictly construed against the taxpayer
#u6on &tevedoring Corp vs Court of Tax Appeals, et al, $R )o #31.-1-, Auly -/,
*/22
Along with police power and eminent domain, taxation is one of the three basic and
necessary attributes of sovereignty Thus, the &tate cannot be deprived of this most
essential power and attribute of sovereignty by vague implications of law Rather, being
derogatory of sovereignty, the governing principle is that tax exemptions are to be
construed in strictissimijuris against the taxpayer and liberally in favor of the taxing
authority? and he who claims an exemption must be able to justify his claim by the
clearest grant of statute
Compagnie%inanciere&ucres=t7enrees vs Commissioner of Internal Revenue, $R )o
*11214, August -2, -..+
Tax amnesty is construed strictly against the taxpayer
A tax amnesty, much li"e a tax exemption, is never favored nor presumed in law and if
granted by statute, the terms of the amnesty li"e that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority
Bibiano > BaKas, Ar vs Court of Appeals, et al, $R )o *.-/+,, %ebruary *., -...
Tax exemptions are not violative of the e5ual protection clause
A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found !niformity means that all property belonging to the same class
shall be taxed ali"e The #egislature has the inherent power not only to select the
subjects of taxation but to grant exemptions Tax exemptions have never been deemed
violative of the e5ual protection clause
Commissioner of Internal Revenue vs #ingayen $ulf =lectric 0ower Co, Inc, $R )o
#3-1,,*, August 4, */22
$rant of tax exemption to )ational 0ower Corp is not a case of tax evasion
This tax exemption is intended not only to insure that the )0C shall continue to generate
electricity for the country but more importantly, to assure cheaper rates to be paid by the
consumers The allegation that this is in effect allowing tax evasion by oil companies is
not 5uite correct There are various arrangements in the payment of crude oil purchased
by )0C from oil companies $enerally, the customs duties paid by the oil companies are
added to the selling price paid by )0C As to the specific and ad valorem taxes, they are
added as part of the seller(s price, but )0C pays the price net of tax, on condition that
)0C would see" a tax refund to the oil companies )o tax component on fuel had been
charged or recovered by )0C from the consumers through its power rates Thus, this is
not a case of tax evasion of the oil companies but of tax relief for the )0C
=rnesto ' 'aceda vs Catalino'acaraig, Ar, et al, $R )o 22-/*, 'ay 1*, *//*
Tax exemption provision in a treaty should be construed in favor of the party for whose
benefit the stipulation was inserted
@here two meanings of a stipulation are admissible, that which is least to the advantage
of the party for whose benefit the stipulation was inserted in the treaty should be
preferred Thus, an ambiguity in the tax exemption provision in the 'ilitary Bases
Agreement and in the :Aide 'emoire: in accordance with which a contract was entered
into, cannot be interpreted in favor of the American $overnment or for that matter a
party claiming under it, li"e a taxpayer, especially when it is considered that for the
0hilippine $overnment :the exception contained in tax statutes must be strictly construed
against the one claiming exemption and that he who would see" to be thus privileged
must justify it by words too plain to be mista"en and too categorical to be
misinterpreted:
Commissioner of Internal Revenue vs 0 A Fiener Co, #td, et al, $R )o #3-4,<4,
Auly *2, */,<
Re5uisites for availment of tax exemption under R03!& 'ilitary Bases Agreement
In order to avail oneself of the tax exemption under the R03!& 'ilitary Bases
AgreementC he must be a national of the !nited &tates employed in connection with the
construction, maintenance, operation or defense of the bases, residing in the 0hilippines
by reason of such employment, and the income derived is from the !& $overnment
Commissioner of Internal Revenue vs %ran" Robertson, et al, $R )os #3,.**+3*/,
August *-, */2+
=mployees( claims prevail over government(s claims only in case of ban"ruptcy or
judicial li5uidation of the employer
There is no merit in the contention of the )#RC that taxes are absolutely preferred claims
only with respect to movable or immovable properties on which they are due and that
since the taxes sought to be collected in the case are not due on the barges in 5uestion,
the government(s claim cannot prevail over the claims of employees of the 'aritime
Company of the 0hilippines which, pursuant to Art **. of the #aborCode, :enjoy first
preference: Art **. of the #abor Code on wor"er preference in case of ban"ruptcy
applies only in case of ban"ruptcy or judicial li5uidation of the employer This is clear
from the text of the law This case does not involve the li5uidation of the employer(s
business
Commissioner of Internal Revenue vs )#RC, et al, $R )o ,4/+<, )ovember /, *//4
&tate(s underta"ing to guarantee promissory notes does not diminish its taxing power
An underta"ing of the Republic of the 0hilippines signed by the &ecretary of %inance in
each of the promissory notes merely guaranteed the obligations of the )7C but without
diminution of its taxing power under existing laws
)ational 7evelopment Company vs Commissioner of Internal Revenue, $R )o #3
<1/+*, Aune 1., */2,
'ere filing of tax amnesty does not ipso facto shield taxpayer from immunity against
prosecution
The mere filing of tax amnesty return under 07 *,4. and *24. does not ipso facto
shield taxpayer from immunity against prosecution Tax amnesty is a general pardon to
taxpayers who want to start a clean tax slate It also gives the government a chance to
collect uncollected tax from tax evaders without having to go through the tedious process
of a tax case To avail of a tax amnesty granted by the government, and to be immune
from suit on its delin5uencies, the taxpayer must have voluntarily disclosed his previously
untaxed income and must have paid the corresponding tax on such previously untaxed
income
Bibiano > BaKas, Ar vs Court of Appeals, et al, $R )o *.-/+,, %ebruary *., -...
0rinciple of estoppel does not operate against the government for neglect or omission of
its officials tas"ed to collect taxes
Taxes are the lifeblood of the $overnment and their prompt and certain availability are
imperious need !pon taxation depends the $overnment(s ability to serve the people for
whose benefit taxes are collected To safeguard such interest, neglect or omission of
government officials entrusted with the collection of taxes should not be allowed to bring
harm or detriment to the people, in the same manner as private persons may be made to
suffer individually on account of his own negligence, the presumption being that they
ta"e good care of their personal affair This should not hold true to government officials
with respect to matters not of their own personal concern This is the philosophy behind
the government(s exception, as a general rule, from the operation of the principle of
estoppel
'isael 0 >era, et al vs Aose % %ernande6, et al, $R )o #31*1+4, 'arch 1., */,/
The &tate can never be in estoppel, and this is particularly true in matters involving
taxation The errors of certain administrative officers should never be allowed to
jeopardi6e the government(s financial position
Commissioner of Internal Revenue vs 'anila Ban"ers( #ife Insurance Corp, $R )o
*+/*.1, 'arch *+, -.**
The power to tax is an attribute of sovereignty
Re5uisites for availment of tax exemption under R03!& 'ilitary Bases AgreementIn
order to avail oneself of the tax exemption under the R03!& 'ilitary Bases AgreementC
he must be a national of the !nited &tates employed in connection with the construction,
maintenance, operation or defense of the bases, residing in the 0hilippines by reason of
such employment, and the income derived is from the !& $overnment
Commissioner of Internal Revenue vs %ran" Robertson, et al,
$R )os #3,.**+3*/, August *-, */2+
=mployees( claims prevail over government(s claims only in case of ban"ruptcy or
judicial li5uidation of the employer
There is no merit in the contention of the )#RC that taxes are absolutely preferred claims
only with respect to movable or immovable properties on which they are due and that
since the taxes sought to be collected in the case are not due on the barges in 5uestion,
the government(s claim cannot prevail over the claims of employees of the 'aritime
Company of the 0hilippines which, pursuant to Art **. of the #aborCode, :enjoy first
preference: Art **. of the #abor Code on wor"er preference in case of ban"ruptcy
applies only in case of ban"ruptcy or judicial li5uidation of the employer This is clear
from the text of the law This case does not involve the li5uidation of the employer(s
business
Commissioner of Internal Revenue vs )#RC, et al,
$R )o ,4/+<, )ovember /, *//4
&tate(s underta"ing to guarantee promissory notes does not diminish its taxing power
An underta"ing of the Republic of the 0hilippines signed by the &ecretary of %inance in
each of the promissory notes merely guaranteed the obligations of the )7C but without
diminution of its taxing power under existing laws
)ational 7evelopment Company vs Commissioner of Internal Revenue,
$R )o #3<1/+*, Aune 1., */2,
Atlas Consolidated 'ining R 7evelopment Corp vs Commissioner of Internal Revenue,
$R )o #3-+/**, Aanuary -,, */2*
C'APTER III T!2 ," I"0ivi0#!-/
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..,3*. Auly -., -.*.
Implementing the Tax 0rivileges 0rovisions of Republic Act )o ///4, ;therwise Fnown
as the :=xpanded &enior Citi6ens Act of -.*.:, and 0rescribing the $uidelines for the
Availment Thereof in order for the ffC
* The availment of the income tax exemption of &enior Citi6ens?
- The value3added tax exemption privileges granted to >AT3registered taxpayers
selling goods and services identified in the Act to &enior Citi6ens?
1 The tax privileges granted to establishments giving discount on their sale of goods
and services to &enior Citi6ens?
4 The tax implication of ta"ing care and supporting senior citi6ens by their
benefactors? and,
< The tax privileges granted to private entities who engage &enior Citi6ens as their
employees
R=>=)!= R=$!#ATI;)& ); ..*3./ 7ecember /, -..2
Regulations Implementing Republic Act )o /44-, entitled :An Act Amending Republic
Act ,-,,, ;therwise Fnown as the 'agna Carta for 0ersons with 7isability:, Relative to
the Tax 0rivileges of 0ersons with 7isability and Tax Incentives for =stablishments
$ranting &ales 7iscount
)ECTION 24 I"c,me T!2 R!te/
>A? R!te/ ,f I"c,me T!2 ," I"0ivi0#!- Citi6e" !"0 I"0ivi0#!- Re/i0e"t A-ie" ,f
t+e P+i-i33i"e/. .
>1? A" i"c,me t!2 i/ +ereb$ im3,/e0=
>!? O" t+e t!2!b-e i"c,me 0efi"e0 i" )ecti," ;1 ,f t+i/ C,0e, ,t+er t+!" i"c,me
/#b:ect t, t!2 #"0er )#b/ecti,"/ >B?, >C? !"0 >D? ,f t+i/ )ecti,", 0erive0 f,r e!c+
t!2!b-e $e!r fr,m !-- /,#rce/ 5it+i" !"0 5it+,#t t+e P+i-i33i"e/ b$ ever$
i"0ivi0#!- citi6e" ,f t+e P+i-i33i"e/ re/i0i"4 t+erei"7
>b? O" t+e t!2!b-e i"c,me 0efi"e0 i" )ecti," ;1 ,f t+i/ C,0e, ,t+er t+!" i"c,me
/#b:ect t, t!2 #"0er )#b/ecti,"/ >B?, >C? !"0 >D? ,f t+i/ )ecti,", 0erive0 f,r e!c+
t!2!b-e $e!r fr,m !-- /,#rce/ 5it+i" t+e P+i-i33i"e/ b$ !" i"0ivi0#!- citi6e" ,f t+e
P+i-i33i"e/ 5+, i/ re/i0i"4 ,#t/i0e ,f t+e P+i-i33i"e/ i"c-#0i"4 ,ver/e!/ c,"tr!ct
5,r9er/ referre0 t, i" )#b/ecti," >C? ,f )ecti," 2; +ere,f7 !"0
>c? O" t+e t!2!b-e i"c,me 0efi"e0 i" )ecti," ;1 ,f t+i/ C,0e, ,t+er t+!" i"c,me
/#b:ect t, t!2 #"0er )#b/ecti,"/ >B?, >C? !"0 >D? ,f t+i/ )ecti,", 0erive0 f,r e!c+
t!2!b-e $e!r fr,m !-- /,#rce/ 5it+i" t+e P+i-i33i"e/ b$ !" i"0ivi0#!- !-ie" 5+, i/ !
re/i0e"t ,f t+e P+i-i33i"e/.
>2? R!te/ ,f T!2 ," T!2!b-e I"c,me ,f I"0ivi0#!-/. . T+e t!2 /+!-- be c,m3#te0
i" !cc,r0!"ce 5it+ !"0 !t t+e r!te/ e/t!b-i/+e0 i" t+e f,--,5i"4 /c+e0#-e=
Not over P10,000 5%
Over P10,000 but not over P30,000 P500 + 10% of the
excess over P10,000
Over P30,000 but not over P70,000 P2,500 + 15% of the
excess over P30,000
Over P70,000 but not over P140,000 P8,500 + 20% of the
excess over P70,000
Over P140,000 but not over P250,000 P22,500 + 25% of the
excess over P140,000
Over 250,000 but not over P500,000 P50,000 + 30% of the
excess over P250,000
Over P500,000 P125,000 + 32% of the
excess over P500,000.
*,r m!rrie0 i"0ivi0#!-/, t+e +#/b!"0 !"0 5ife, /#b:ect t, t+e 3r,vi/i," ,f )ecti,"
<1>D? +ere,f, /+!-- c,m3#te /e3!r!te-$ t+eir i"0ivi0#!- i"c,me t!2 b!/e0 ," t+eir
re/3ective t,t!- t!2!b-e i"c,me= Pr,vi0e0, T+!t if !"$ i"c,me c!"",t be 0efi"ite-$
!ttrib#te0 t, ,r i0e"tifie0 !/ i"c,me e2c-#/ive-$ e!r"e0 ,r re!-i6e0 b$ eit+er ,f t+e
/3,#/e/, t+e /!me /+!-- be 0ivi0e0 e8#!--$ bet5ee" t+e /3,#/e/ f,r t+e 3#r3,/e ,f
0etermi"i"4 t+eir re/3ective t!2!b-e i"c,me.
Pr,vi0e0, T+!t mi"im#m 5!4e e!r"er/ !/ 0efi"e0 i" )ecti," 22 >''? ,f t+i/ C,0e
/+!-- be e2em3t fr,m t+e 3!$me"t ,f i"c,me t!2 ," t+eir t!2!b-e i"c,me=
Pr,vi0e0, f#rt+er, T+!t t+e +,-i0!$ 3!$, ,vertime 3!$, "i4+t /+ift 0iffere"ti!- 3!$
!"0 +!6!r0 3!$ receive0 b$ /#c+ mi"im#m 5!4e e!r"er/ /+!-- -i9e5i/e be e2em3t
fr,m i"c,me t!2.
R=>=)!= R=$!#ATI;)& ); .*.3.2 Auly 2, -..2
Implementing 0ertinent 0rovisions of Republic Act )o /<.4, :An Act Amending &ections
--, -4, 14, 1<, <*, and ,/ of Republic Act )o 24-4, as Amended, ;therwise Fnown as
The )ational Internal Revenue Code: Relative to the @ithholding of Income Tax on
Compensation and ;ther Concerns
>B? R!te ,f T!2 ," Cert!i" P!//ive I"c,me=
>1? I"tere/t/, R,$!-tie/, Pri6e/, !"0 Ot+er Bi""i"4/ . A fi"!- t!2 !t t+e r!te ,f
t5e"t$ 3erce"t >2CG? i/ +ereb$ im3,/e0 #3," t+e !m,#"t ,f i"tere/t fr,m !"$
c#rre"c$ b!"9 0e3,/it !"0 $ie-0 ,r !"$ ,t+er m,"et!r$ be"efit fr,m 0e3,/it
/#b/tit#te/ !"0 fr,m tr#/t f#"0/ !"0 /imi-!r !rr!"4eme"t/7 r,$!-tie/, e2ce3t ,"
b,,9/, !/ 5e-- !/ ,t+er -iter!r$ 5,r9/ !"0 m#/ic!- c,m3,/iti,"/, 5+ic+ /+!-- be
im3,/e0 ! fi"!- t!2 ,f te" 3erce"t >1CG?7 3ri6e/ >e2ce3t 3ri6e/ !m,#"ti"4 t, Te"
t+,#/!"0 3e/,/ >P1C,CCC? ,r -e// 5+ic+ /+!-- be /#b:ect t, t!2 #"0er )#b/ecti,"
>A? ,f )ecti," 247 !"0 ,t+er 5i""i"4/ >e2ce3t P+i-i33i"e C+!rit$ )5ee3/t!9e/ !"0
L,tt, 5i""i"4/?, 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/= Pr,vi0e0, +,5ever,
T+!t i"tere/t i"c,me receive0 b$ !" i"0ivi0#!- t!23!$er >e2ce3t ! ","re/i0e"t
i"0ivi0#!-? fr,m ! 0e3,/it,r$ b!"9 #"0er t+e e23!"0e0 f,rei4" c#rre"c$ 0e3,/it
/$/tem /+!-- be /#b:ect t, ! fi"!- i"c,me t!2 !t t+e r!te ,f /eve" !"0 ,"e@+!-f
3erce"t >7 1D2G? ,f /#c+ i"tere/t i"c,me= Pr,vi0e0, f#rt+er, T+!t i"tere/t i"c,me
fr,m -,"4@term 0e3,/it ,r i"ve/tme"t i" t+e f,rm ,f /!vi"4/, c,mm," ,r i"0ivi0#!-
tr#/t f#"0/, 0e3,/it /#b/tit#te/, i"ve/tme"t m!"!4eme"t !cc,#"t/ !"0 ,t+er
i"ve/tme"t/ evi0e"ce0 b$ certific!te/ i" /#c+ f,rm 3re/cribe0 b$ t+e
B!"49,)e"tr!-"4Pi-i3i"!/ >B)P? /+!-- be e2em3t fr,m t+e t!2 im3,/e0 #"0er t+i/
)#b/ecti,"= Pr,vi0e0, fi"!--$, T+!t /+,#-0 t+e +,-0er ,f t+e certific!te 3re@
termi"!te t+e 0e3,/it ,r i"ve/tme"t bef,re t+e fift+ ><t+? $e!r, ! fi"!- t!2 /+!-- be
im3,/e0 ," t+e e"tire i"c,me !"0 /+!-- be 0e0#cte0 !"0 5it++e-0 b$ t+e 0e3,/it,r$
b!"9 fr,m t+e 3r,cee0/ ,f t+e -,"4@term 0e3,/it ,r i"ve/tme"t certific!te b!/e0 ,"
t+e rem!i"i"4 m!t#rit$ t+ere,f=
*,#r >4? $e!r/ t, -e// t+!" five ><? $e!r/ . <G7
T+ree >;? $e!r/ t, -e// t+!" f,#r >4? $e!r/ . 12G7 !"0
Le// t+!" t+ree >;? $e!r/ . 2CG.
>2? C!/+ !"0D,r Pr,3ert$ Divi0e"0/ . A fi"!- t!2 !t t+e f,--,5i"4 r!te/ /+!-- be
im3,/e0 #3," t+e c!/+ !"0D,r 3r,3ert$ 0ivi0e"0/ !ct#!--$ ,r c,"/tr#ctive-$
receive0 b$ !" i"0ivi0#!- fr,m ! 0,me/tic c,r3,r!ti," ,r fr,m ! :,i"t /t,c9
c,m3!"$, i"/#r!"ce ,r m#t#!- f#"0 c,m3!"ie/ !"0 re4i,"!- ,3er!ti"4 +e!08#!rter/
,f m#-ti"!ti,"!- c,m3!"ie/, ,r ," t+e /+!re ,f !" i"0ivi0#!- i" t+e 0i/trib#t!b-e "et
i"c,me !fter t!2 ,f ! 3!rt"er/+i3 >e2ce3t ! 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3? ,f
5+ic+ +e i/ ! 3!rt"er, ,r ," t+e /+!re ,f !" i"0ivi0#!- i" t+e "et i"c,me !fter t!2 ,f
!" !//,ci!ti,", ! :,i"t !cc,#"t, ,r ! :,i"t ve"t#re ,r c,"/,rti#m t!2!b-e !/ !
c,r3,r!ti," ,f 5+ic+ +e i/ ! member ,r c,@ve"t#rer=
)i2 3erce"t >AG? be4i""i"4 !"#!r$ 1, 19987
Ei4+t 3erce"t >8G? be4i""i"4 !"#!r$ 1, 19997
Te" 3erce"t >1CG? be4i""i"4 !"#!r$ 1, 2CCC.
Pr,vi0e0, +,5ever, T+!t t+e t!2 ," 0ivi0e"0/ /+!-- !33-$ ,"-$ ," i"c,me e!r"e0 ,"
,r !fter !"#!r$ 1, 1998. I"c,me f,rmi"4 3!rt ,f ret!i"e0 e!r"i"4/ !/ ,f December
;1, 1997 /+!-- ",t, eve" if 0ec-!re0 ,r 0i/trib#te0 ," ,r !fter !"#!r$ 1, 1998, be
/#b:ect t, t+i/ t!2.
CASES DIGEST
;rdinary dividends distinguished from li5uidated dividends
The determining element therefore is whether the distribution was in the ordinary course
of business and with intent to maintain the corporation as a going concern, or after
deciding to 5uit with intent to li5uidate the business The distinction between a
distribution in li5uidation and an ordinary dividend is factual? the result in each case
depending on the particular circumstances of the case and the intent of the parties If the
distribution is in the nature of a recurring return on stoc" it is an ordinary dividend
Dowever, if the corporation is really winding up its business or recapitali6ing and
narrowing its activities, the distribution may properly be treated as in complete or partial
li5uidation and as payment by the corporation to the stoc"holder for his stoc" The
corporation is, in the latter instances, wiping out all or part of the stoc"holders( interest
in the company
@ise R Co, Inc vs Bibiano # 'eer, $R )o 42-1*, Aune 1., */4,
7I>I7=)7&
%ACT&C &ometime in the */1.s, 7on Andres &oriano, a citi6en and resident of the !nited
&tates, formed the corporation :A &oriano G Cia:, predecessor of A)&C;R, with a
0*,...,..... capitali6ation divided into *.,... common shares at a par value of
0*..Bshare A)&C;R is wholly owned and controlled by the family of 7on Andres, who
are all non3resident aliens In */1,, 7on Andres subscribed to 4,/+1 shares of the <,...
shares originally issued ;n &eptember *-, */4<, A)&C;R(s authori6ed capital stoc"
was increased to 0-,<..,..... divided into -<,... common shares with the same par
value ;f the additional *<,... shares, only *.,... was issued which were all subscribed
by 7on Andres, after the other stoc"holders waived in favor of the former their pre3
emptive rights to subscribe to the new issues This increased his subscription to *4,/+1
common shares A month later, 7on Andres transferred *,-<. shares each to his two sons,
Aose and Andres, Ar, as their initial investments in A)&C;R Both sons are foreigners
By */4,, A)&C;R declared stoc" dividends ;ther stoc" dividend declarations were
made between */4/ and 7ecember -., */+1 ;n 7ecember 1., */+4 7on Andres died
As of that date, the records revealed that he has a total shareholdings of *2<,*<4 shares
E <.,4/< of which are original issues and the balance of *14,+</ shares as stoc"
dividend declarations Correspondingly, one3half of that shareholdings or /-,<,, shares
were transferred to his wife 7oKa Carmen &oriano, as her conjugal share The other half
formed part of his estate A day after 7on Andres died, A)&C;R increased its capital
stoc" to 0-.' and in */++ further increased it to 01.' In the same year 87ecember
*/++9, stoc" dividends worth 4+,-/. and 4+,-2, shares were respectively received by the
7on Andres estate and 7oKa Carmen from A)&C;R Dence, increasing their
accumulated shareholdings to *12,2+, and *12,2+4 */ common shares each
;n 'arch 1*, */+2 7oKa Carmen exchanged her whole *12,2+4 common shares for
*12,2+. of the newly reclassified preferred shares The estate of 7on Andres in turn,
exchanged **,*4. of its common shares for the remaining **,*4. preferred shares, thus
reducing its 8the estate9 common shares to *-,,,-, ;n Aune 1., */+2, pursuant to a
Board Resolution, A)&C;R redeemed -2,... common shares from the 7on Andres(
estate By )ovember */+2, the Board further increased A)&C;R(s capital stoc" to 0,<'
divided into *<.,... preferred shares and +..,... common shares About a year later,
A)&C;R again redeemed 2.,... common shares from the 7on Andres( estate, further
reducing the latter(s common shareholdings to */,,-, As stated in the Board
Resolutions, A)&C;R(s business purpose for both redemptions of stoc"s is to partially
retire said stoc"s as treasury shares in order to reduce the company(s foreign exchange
remittances in case cash dividends are declared
In */,1, after examining A)&C;R(s boo"s of account and records, Revenue examiners
issued a report proposing that A)&C;R be assessed for deficiency withholding tax3at3
source, pursuant to &ections <1 and <4 of the */1/ Revenue Code, for the year */+2 and
the second 5uarter of */+/ based on the transactions of exchange and redemption of
stoc"s The BIR made the corresponding assessments despite the claim of A)&C;R that
it availed of the tax amnesty under 07 -1 which were amended by 07(s +, and *<,
Dowever, petitioner ruled that the invo"ed decrees do not cover &ections <1 and <4 in
relation to Article 218b9 of the */1/ Revenue Act under which A)&C;R was assessed
A)&C;R(s subse5uent protest on the assessments was denied in */21 by petitioner
I&&!=C @hether A)&C;R(s redemption of stoc"s from its stoc"holder as well as the
exchange of common with preferred shares can be considered as :essentially e5uivalent
to the distribution of taxable dividend,: ma"ing the proceeds thereof taxable under the
provisions of the above35uoted law
D=#7C Ges
$eneral Rule
&ection 218b9 of the */1/ )IRC was ta"en from &ection **<8g98*9 of the !& Revenue
Code of */-2 It laid down the general rule "nown as the (proportionate test( wherein
stoc" dividends once issued form part of the capital and, thus, not subject to income tax
&pecifically, the general rule states thatC
:A stoc" dividend representing the transfer of surplus to capital account shall not be
subject to tax:
Daving been derived from a foreign law, resort to the jurisprudence of its origin may
shed light !nder the !& Revenue Code, this provision originally referred to :stoc"
dividends: only, without any exception &toc" dividends, strictly spea"ing, represent
capital and do not constitute income to its recipient &o that the mere issuance thereof is
not yet subject to income tax as they are nothing but an :enrichment through increase in
value of capital investment: As capital, the stoc" dividends postpone the reali6ation of
profits because the :fund represented by the new stoc" has been transferred from surplus
to capital and no longer available for actual distribution: Income in tax law is :an
amount of money coming to a person within a specified time, whether as payment for
services, interest, or profit from investment: It means cash or its e5uivalent It is gain
derived and severed from capital, from labor or from both combinedE so that to tax a
stoc" dividend would be to tax a capital increase rather than the income In a loose
sense, stoc" dividends issued by the corporation, are considered unreali6ed gain, and
cannot be subjected to income tax until that gain has been reali6ed Before the
reali6ation, stoc" dividends are nothing but a representation of an interest in the
corporate properties As capital, it is not yet subject to income tax It should be noted that
capital and income are different Capital is wealth or fund? whereas income is profit or
gain or the flow of wealth The determining factor for the imposition of income tax is
whether any gain or profit was derived from a transaction
The =xception
Dowever, if a corporation cancels or redeems stoc" issued as a dividend at such time and
in such manner as to ma"e the distribution and cancellation or redemption, in whole or
in part, essentially e5uivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stoc" shall be considered as taxable
income to the extent it represents a distribution of earnings or profits accumulated after
'arch first, nineteen hundred and thirteen
In a response to the ruling of the American &upreme Court in the case of =isner v
'acomber 8that pro rata stoc" dividends are not taxable income9, the exempting clause
above 5uoted was added because corporations found a loophole in the original
provision They resorted to devious means to circumvent the law and evade the tax
Corporate earnings would be distributed under the guise of its initial capitali6ation by
declaring the stoc" dividends previously issued and later redeem said dividends by
paying cash to the stoc"holder This process of issuance3redemption amounts to a
distribution of taxable cash dividends which was just delayed so as to escape the tax It
becomes a convenient technical strategy to avoid the effects of taxation Thus, to plug the
loophole E the exempting clause was added It provides that the redemption or
cancellation of stoc" dividends, depending on the :time: and :manner: it was made, is
:essentially e5uivalent to a distribution of taxable dividends,: ma"ing the proceeds
thereof :taxable income: :to the extent it represents profits: The exception was designed
to prevent the issuance and cancellation or redemption of stoc" dividends, which is
fundamentally not taxable, from being made use of as a device for the actual distribution
of cash dividends, which is taxable
Re5uisitesC
%or the exempting clause of &ection 218b9 to apply, it is indispensable thatC 8a9 there is
redemption or cancellation? 8b9 the transaction involves stoc" dividends and 8c9 the :time
and manner: of the transaction ma"es it :essentially e5uivalent to a distribution of
taxable dividends: ;f these, the most important is the third It is not the stoc" dividends
but the proceeds of its redemption that may be deemed as taxable dividends Dere, it is
undisputed that at the time of the last redemption, the original common shares owned by
the estate were only -<,-4,< This means that from the total of *.2,... shares redeemed
from the estate, the balance of 2-,,<-< 8*.2,... less -<,-4,<9 must have come from
stoc" dividends Besides, in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in part, is made out of
corporate profits, such as stoc" dividends The capital cannot be distributed in the form
of redemption of stoc" dividends without violating the trust fund doctrine E wherein the
capital stoc", property and other assets of the corporation are regarded as e5uity in trust
for the payment of the corporate creditors ;nce capital, it is always capital That
doctrine was intended for the protection of corporate creditors
@ith respect to the third re5uisite, A)&C;R redeemed stoc" dividends issued just - to 1
years earlier The time alone that lapsed from the issuance to the redemption is not a
sufficient indicator to determine taxability It is a must to consider the factual
circumstances as to the manner of both the issuance and the redemption The :time:
element is a factor to show a device to evade tax and the scheme of cancelling or
redeeming the same shares is a method usually adopted to accomplish the end sought
@as this transaction used as a :continuing plan,: :device: or :artifice: to evade payment
of taxS It is necessary to determine the :net effect: of the transaction between the
shareholder3income taxpayer and the ac5uiring 8redeeming9 corporation The :net
effect: test is not evidence or testimony to be considered? it is rather an inference to be
drawn or a conclusion to be reached It is also important to "now whether the issuance of
stoc" dividends was dictated by legitimate business reasons, the presence of which might
negate a tax evasion plan
The issuance of stoc" dividends and its subse5uent redemption must be separate, distinct,
and not related, for the redemption to be considered a legitimate tax scheme Redemption
cannot be used as a cloa" to distribute corporate earnings ;therwise, the apparent
intention to avoid tax becomes doubtful as the intention to evade becomes manifest
7epending on each case, the exempting provision of &ec 218b9 of the */1/ Code may not
be applicable if the redeemed shares were issued with bona fide business purpose, which
is judged after each and every step of the transaction have been considered and the
whole transaction does not amount to a tax evasion scheme As stated above, the test of
taxability under the exempting clause of &ection 218b9 is, whether income was reali6ed
through the redemption of stoc" dividends The redemption converts into money the stoc"
dividends which become a reali6ed profit or gain and conse5uently, the stoc"holder(s
separate property 0rofits derived from the capital invested cannot escape income tax As
reali6ed income, the proceeds of the redeemed stoc" dividends can be reached by income
taxation regardless of the existence of any business purpose for the redemption
;therwise, to rule that the said proceeds are exempt from income tax when the
redemption is supported by legitimate business reasons would defeat the very purpose of
imposing tax on income &uch argument would open the door for income earners not to
pay tax so long as the person from whom the income was derived has legitimate business
reasons In other words, the payment of tax under the exempting clause of &ection 218b9
would be made to depend not on the income of the taxpayer, but on the business purposes
of a third party 8the corporation herein9 from whom the income was earned This is
absurd, illogical and impractical considering that the Bureau of Internal Revenue 8BIR9
would be pestered with instances in determining the legitimacy of business reasons that
every income earner may interpose It is not administratively feasible and cannot
therefore be allowed
=xchange of Common @ith 0referred &hares
A)&C;R reclassified its shares into common and preferred, and that parts of the
common shares of the 7on Andres estate and all of 7oKa Carmen(s shares were
exchanged for the whole *<.,... preferred shares Thereafter, both the 7on Andres
estate and 7oKa Carmen remained as corporate subscribers except that their
subscriptions now include preferred shares There was no change in their proportional
interest after the exchange There was no cash flow Both stoc"s had the same par value
!nder the facts herein, any difference in their mar"et value would be immaterial at the
time of exchange because no income is yet reali6ed E it was a mere corporate paper
transaction It would have been different, if the exchange transaction resulted into a flow
of wealth, in which case income tax may be imposed
Reclassification of shares does not always bring any substantial alteration in the
subscriber(s proportional interest But the exchange is different E there would be a
shifting of the balance of stoc" features, li"e priority in dividend declarations or absence
of voting rights Get neither the reclassification nor exchange per se, yields reali6ed
income for tax purposes A common stoc" represents the residual ownership interest in
the corporation It is a basic class of stoc" ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder to a pro rata division of
profits 0referred stoc"s are those which entitle the shareholder to some priority on
dividends and asset distribution Both shares are part of the corporation(s capital stoc"
Both stoc"holders are no different from ordinary investors who ta"e on the same
investment ris"s 0referred and common shareholders participate in the same venture,
willing to share in the profits and losses of the enterprise 'oreover, under the doctrine
of e5uality of shares E all stoc"s issued by the corporation are presumed e5ual with the
same privileges and liabilities, provided that the Articles of Incorporation is silent on
such differences
In this case, the exchange of shares, without more, produces no reali6ed income to the
subscriber There is only a modification of the subscriber(s rights and privileges E which
is not a flow of wealth for tax purposes The issue of taxable dividend may arise only
once a subscriber disposes of his entire interest and not when there is still maintenance of
proprietary interest
C;''I&&I;)=R ;% I)T=R)A# R=>=)!= vs TD= C;!RT ;% A00=A#&, C;!RT
;% TAH A00=A#& and A &;RIA); C;R0 O$R )o *.2<,+ Aanuary -., *///P
>C? C!3it!- &!i"/ fr,m )!-e ,f )+!re/ ,f )t,c9 ",t Tr!0e0 i" t+e )t,c9 E2c+!"4e.
T+e 3r,vi/i,"/ ,f )ecti," ;9>B? ",t5it+/t!"0i"4, ! fi"!- t!2 !t t+e r!te/ 3re/cribe0
be-,5 i/ +ereb$ im3,/e0 #3," t+e "et c!3it!- 4!i"/ re!-i6e0 0#ri"4 t+e t!2!b-e $e!r
fr,m t+e /!-e, b!rter, e2c+!"4e ,r ,t+er 0i/3,/iti," ,f /+!re/ ,f /t,c9 i" ! 0,me/tic
c,r3,r!ti,", e2ce3t /+!re/ /,-0, ,r 0i/3,/e0 ,f t+r,#4+ t+e /t,c9 e2c+!"4e.
N,t ,ver P1CC,CCC<G
O" !"$ !m,#"t i" e2ce// ,f P1CC,CCC 1CG
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..+3.2 April --, -..2
Consolidated Regulations 0rescribing the Rules on the Taxation of &ale, Barter,
=xchange or ;ther 7isposition of &hares of &toc" Deld as Capital Assets
0ursuant to &ection -44, in relation to &ections -4 8C9, -< 8A9 819, -< 8B9, -, 879 8-9,
-2 8A9 8,9 8c9, -2 8B9 8<9 8c9, 14 879 849 8<9, 12, 4., and &ection *-, 8A9 and 8B9 of
the *//, )ational Internal Revenue Code 8Tax Code9, as amended, these Regulations are
hereby promulgated in order to harmoni6e and consolidate the rules relative to the
imposition of tax for the sale, barter, exchange or other disposition of shares of stoc" of
domestic corporation that are listed and traded through the #ocal &toc" =xchange, or
disposition of shares through Initial 0ublic ;ffering 8I0;9 or disposition of shares not
traded through the #ocal &toc" =xchange
>D? C!3it!- &!i"/ fr,m )!-e ,f Re!- Pr,3ert$
>1? I" &e"er!- . T+e 3r,vi/i,"/ ,f )ecti," ;9>B? ",t5it+/t!"0i"4, ! fi"!- t!2 ,f
/i2 3erce"t >AG? b!/e0 ," t+e 4r,// /e--i"4 3rice ,r c#rre"t f!ir m!r9et v!-#e !/
0etermi"e0 i" !cc,r0!"ce 5it+ )ecti," A>E? ,f t+i/ C,0e, 5+ic+ever i/ +i4+er, i/
+ereb$ im3,/e0 #3," c!3it!- 4!i"/ 3re/#me0 t, +!ve bee" re!-i6e0 fr,m t+e /!-e,
e2c+!"4e, ,r ,t+er 0i/3,/iti," ,f re!- 3r,3ert$ -,c!te0 i" t+e P+i-i33i"e/, c-!//ifie0
!/ c!3it!- !//et/, i"c-#0i"4 3!ct, 0e retr, /!-e/ !"0 ,t+er f,rm/ ,f c,"0iti,"!- /!-e/,
b$ i"0ivi0#!-/, i"c-#0i"4 e/t!te/ !"0 tr#/t/= Pr,vi0e0, T+!t t+e t!2 -i!bi-it$, if !"$,
," 4!i"/ fr,m /!-e/ ,r ,t+er 0i/3,/iti,"/ ,f re!- 3r,3ert$ t, t+e 4,ver"me"t ,r !"$
,f it/ 3,-itic!- /#b0ivi/i,"/ ,r !4e"cie/ ,r t, 4,ver"me"t@,5"e0 ,r @c,"tr,--e0
c,r3,r!ti,"/ /+!-- be 0etermi"e0 eit+er #"0er )ecti," 24>A? ,r #"0er t+i/
)#b/ecti,", !t t+e ,3ti," ,f t+e t!23!$er7
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .,3.1
)UBECT= Pr,vi0i"4 t+e &#i0e-i"e/ i" Determi"i"4 B+et+er ! P!rtic#-!r Re!-
Pr,3ert$ i/ ! C!3it!- A//et ,r !" Or0i"!r$ A//et P#r/#!"t t, )ecti," ;9>A?>1? ,f
t+e N!ti,"!- I"ter"!- Reve"#e C,0e ,f 1997 f,r P#r3,/e/ ,f Im3,/i"4 t+e C!3it!-
&!i"/ T!2 #"0er )ecti,"/ 24>D?, 2<>A?>;?, 2<>B? !"0 27>D?><?, ,r t+e Or0i"!r$
I"c,me T!2 #"0er )ecti,"/ 24>A?, 2<>A? L >B?, 27>A?, 28>A?>1? !"0 28>B?>1?, ,r
t+e %i"im#m C,r3,r!te I"c,me T!2 >%CIT? #"0er )ecti,"/ 27>E? !"0 28>A?>2? ,f
t+e /!me C,0e
CASES DIGESTS
&0;!&=& 'ARI; A)7 =#IJAB=TD T;RC!AT;R vs &0;!&=& R='=$I; A)7
$#;RIA B=R)AB= and &0;!&=& 7I;&7A7; and #;!R7=& &A#>A7;R O$R )o
*14-*/ Aune 2, -..<P
TAHATI;)? CA0ITA# $AI)& TAH? @D=) I'0;&AB#=
The differences between a contract to sell and a contract of sale are well3settled in
jurisprudence As early as */<*, we held that in a contract of sale, title passes to the
buyer upon delivery of the thing sold, while in a contract to sell, ownership is reserved in
the seller and is not to pass until the full payment of the purchase price is made In the
first case, non3payment of the price is a negative resolutory condition? in the second
case, full payment is a positive suspensive condition Being contraries, their effect in law
cannot be identical In the first case, the vendor has lost and cannot recover the
ownership of the land sold until and unless the contract of sale is itself resolved and set
aside In the second case, however, the title remains in the vendor if the vendee does not
comply with the condition precedent of ma"ing payment at the time specified in the
contract In other words, in a contract to sell, ownership is retained by the seller and is
not to pass to the buyer until full payment of the price or the fulfillment of some other
conditions either of which is a future and uncertain event the non3happening of which is
not a breach, casual or serious, but simply an event that prevents the obligation of the
vendor to convey title from ac5uiring binding force Capital gains taxes, after all, are
only imposed on gains presumed to have been reali6ed from sales, exchanges or
dispositions of property The contract to sell in this case was aborted by petitioners(
failure to comply with the twin suspensive conditions of full payment and construction of
a residence, the obligation to pay taxes never arose
BIBIA); > BATA&, AR, petitioner, vs C;!RT ;% A00=A#&, AI!I#I); T #ARI),
R;7;#%; T!AJ;) A)7 0R;C;0I; TA#;), respondents O$R )o *.-/+, %ebruary
*., -...P
&G);0&I&
0etitioner, Bibiano > BaKas Ar, sold to Ayala Investment Corporation 8AGA#A9, *-2,-+<
s5uare meters of land located at Bayanan, 'untinlupa, for two million, three hundred eight
thousand, seven hundred seventy 80-,1.2,,,...9 pesos The 7eed of &ale provided that
upon the signing of the contract AGA#A shall pay four hundred sixty3one thousand, seven
hundred fifty3four 804+*,,<4..9 pesos and the balance of one million, eight hundred forty3
seven thousand and sixteen 80*,24,,.*+..9 pesos to be paid in four e5ual consecutive
annual installments The same day, petitioner discounted the promissory note with AGA#A,
for its face value of 0*,24,,.*+.., evidenced by a 7eed of Assignment signed by the
petitioner and AGA#A AGA#A issued nine 8/9 chec"s to petitioner, all dated %ebruary -.,
*/,+, drawn against Ban" of the 0hilippine Islands with the uniform amount of two hundred
five thousand, two hundred twenty3four 80-.<,--4..9 pesos In the succeeding years, until
*/,/, petitioner reported a uniform income of two hundred thirty thousand, eight hundred
seventy3seven 80-1.,2,,..9 pesos as gain from sale of capital asset In his */2. income tax
amnesty return, petitioner also reported the same amount of 0-1.,2,,.. as the reali6ed
gain on disposition of capital asset for the year ;n April **, */,2 then Revenue 7irector
'auro Calaguio authori6ed their tax examiners, Rodolfo Tua6on and 0rocopio Talon to
examine the boo"s and records of petitioner for the year */,+ They discovered that
petitioner had no outstanding receivable from the */,+ land sale to AGA#A and concluded
that the sale was cash and the entire profit should have been taxable in */,+ since the
income was wholly derived in */,+ 'eantime, respondent A5uilino #arin who succeeded as
Regional 7irector of 'anila, Region I>3A, filed on Aune *,, */2* a criminal complaint for
tax evasion against the petitioner ;n Auly *, */2*, news items appeared in the now defunct
=vening =xpress =vening 0ost and Bulletin Today, which mentioned petitioner(s false income
tax return concerning the sale of land to AGA#A Reacting to the complaint for tax evasion
and the news reports, petitioner filed with the RTC of 'anila an action for damages against
respondents #arin, Tua6on and Talon for extortion and malicious publication of the BIR(s tax
audit report The trial court decided in favor of the respondents and awarded #arin
damages Respondent appellate court affirmed the trial court(s decision Dence, the present
petition
The &upreme Court affirmed the decision of the Court of Appeals The Court ruled that
although the proceeds of a discounted promissory note are not considered part of initial
payment, still it must be included as taxable income for the year it was converted to cash
@hen petitioner had the promissory notes covering the succeeding installment payments of
the land issued by AGA#A, discounted by AGA#A itself, on the same day of the sale, he lost
entitlement to report the sale as a sale on installment, since, a taxable disposition resulted
and petitioner was re5uired by law to report in his returns the income derived from the
discounting According to the Court, what petitioner did is tantamount to an attempt to
circumvent the rule on payment of income taxes gained from the sale of the land to AGA#A
for the year */,+ The Court deleted the award of actual damages to respondent #arin for
lac" of basis because the records of the case contained no statement whatsoever of the
amount of the actual damages sustained by the respondents The Court stressed that actual
damages cannot be allowed unless supported by evidence on the record The Court, however,
agreed that there was sufficient basis for the award of moral and exemplary damages in
favor of respondent #arin 0etitioner(s actions against #arin were found by the Court
:unwarranted and baseless,: bolstered by the fact that the criminal charges filed against him
in the Tanodbayan and City %iscal(s ;ffice were all dismissed
&G##AB!&
* TAHATI;)? TAH A')=&TG? '=R= %I#I)$ ;% TAH A')=&TG R=T!R) !)7=R
07 *,4. A)7 07 *24. 7;=& );T I0&; %ACT; &DI=#7 TAH0AG=R %R;'
I''!)ITG A$AI)&T 0R;&=C!TI;) E 0etitioner did not meet the twin re5uirements of
07 *,4. and *24., declaration of his untaxed income and full payment of tax due thereon
Clearly, the petitioner is not entitled to the benefits of 07 )os *,4. and *24. The mere
filing of tax amnesty return under 07 *,4. and *24. does not ipso facto shield him from
immunity against prosecution Tax amnesty is a general pardon to taxpayers who want to
start a clean tax slate It also gives the government a chance to collect uncollected tax from
tax evaders without having to go through the tedious process of a tax case To avail of a tax
amnesty granted by the government, and to be immune from suit on its delin5uencies, the
taxpayer must have voluntarily disclosed his previously untaxed income and must have paid
the corresponding tax on such previously untaxed income It also bears noting that a tax
amnesty, much li"e a tax exemption, is never favoured nor presumed in law and if granted by
statute, the terms of the amnesty li"e that of a tax exemption must be construed strictly
against the taxpayer and liberally in favor of the taxing authority Dence, on this matter, it is
our view that petitioner(s claim of immunity from prosecution under the shield of availing tax
amnesty is untenable
- I7? )ATI;)A# I)T=R)A# R=>=)!= C;7=? ACC;!)TI)$ 0=RI;7 A)7
'=TD;7& ;% ACC;!)TI)$? I)C;'= C;'0!T=7 ;) I)&TA##'=)T BA&I&?
7I&C;!)TI)$ ;% 0R;'I&&;RG );T=& 7;)= BG TD= &=##=R DI'&=#% @I##
R=&!#T I) A TAHAB#= 7I&0;&ITI;)? I)C;'= 7=RI>=7 %R;' &!CD
7I&C;!)TI)$ '!&T B= R=0;RT=7 I) TD= R=T!R)& E @here an installment
obligation is discounted at a ban" or finance company, a taxable disposition results, even if
the seller guarantees its payment, continues to collect on the installment obligation, or
handles repossession of merchandise in case of default This rule prevails in the !nited
&tates &ince our income tax laws are of American origin, interpretations by American courts
on our parallel tax laws have persuasive effect on the interpretation of these laws Thus, by
analogy, all the more would a taxable disposition result when the discounting of the
promissory note is done by the seller himself Clearly, the indebtedness of the buyer is
discharged, while the seller ac5uires money for the settlement of his receivables #ogically
then, the income should be reported at the time of the actual gain %or income tax purposes,
income is an actual gain or an actual increase of wealth Although the proceeds of a
discounted promissory note is not considered initial payment, still it must be included as
taxable income on the year it was converted to cash @hen petitioner had the promissory
notes covering the succeeding installment payments of the land issued by AGA#A, discounted
by AGA#A itself, on the same day of the sale, he lost entitlement to report the sale as a sale
on installment since, a taxable disposition resulted and petitioner was re5uired by law to
report in his returns the income derived from the discounting @hat petitioner did is
tantamount to an attempt to circumvent the rule on payment of income taxes gained from the
sale of the land to AGA#A for the year */,+
1 CI>I# #A@? 7A'A$=&? ACT!A# ;R C;'0=)&AT;RG? A@AR7 7=#=T=7 %;R
#ACF ;% BA&I& E #astly, petitioner 5uestions the damages awarded to respondent #arin
Any person who see"s to be awarded actual or compensatory damages due to acts of another
has the burden of proving said damages as well as the amount thereof #arin says the
extortion cases filed against him hampered his immediate promotion, caused him strong
anxiety and social humiliation The trial court awarded him two hundred thousand
80-..,.....9 pesos as actual damages Dowever, the appellate court stated that, despite
pendency of this case, #arin was given a promotion at the BIR &aid respondent courtC :@e
find nothing on record, aside from defendant3appellee #arin(s statements 8T&), pp +3,, **
7ecember */2<9, to show that he suffered loss of seniority that allegedly barred his
promotion In fact, he was promoted to his present position despite the pendency of the
instant case 8T&), pp 1<31/, .4 )ovember */2<9: 'oreover, the records of the case contain
no statement whatsoever of the amount of the actual damages sustained by the respondents
Actual damages cannot be allowed unless supported by evidence on the record The court
cannot rely on speculation, conjectures or guesswor" as to the fact and amount of damages
To justify a grant of actual or compensatory damages, it is necessary to prove with a
reasonable degree of certainty, the actual amount of loss &ince we have no basis with which
to assess, with certainty, the actual or compensatory damages counter3claimed by
respondent #arin, the award of such damages should be deleted
4 I7? I7? ';RA# 7A'A$=&? BA&I& %;R A@AR7 =&TAB#I&D=7 E @e agree that
there is sufficient basis for the award of moral and exemplary damages in favor of
respondent #arin The appellate court believed respondent #arin when he said he suffered
anxiety and humiliation because of the unfounded charges against him 0etitioner(s actions
against #arin were found :unwarranted and baseless,: and the criminal charges filed
against him in the Tanodbayan and City %iscal(s ;ffice were all dismissed Dence, there is
ade5uate support for respondent court(s conclusion that moral damages have been proved
< I7? I7? I7? A@AR7I)$ ';RA# 7A'A$=& T; $;>=R)'=)T ;%%ICIA#& I)
C;))=CTI;) @ITD TD=IR ;%%ICIA# %!)CTI;)& '!&T B= =H=RCI&=7 BG TD=
C;!RT& @ITD CA!TI;)? R=A&;) E Considering that here, the award is in favor of a
government official in connection with his official function, it is with caution that we affirm
granting moral damages, for it might open the floodgates for government officials counter3
claiming damages in suits filed against them in connection with their functions 'oreover,
we must be careful lest the amounts awarded ma"e citi6ens hesitate to expose corruption in
the government, for fear of lawsuits from vindictive government officials Thus, conformably
with our declaration that moral damages are not intended to enrich anyone, we hereby
reduce the moral damages award in this case from two hundred thousand 80-..,.....9
pesos to seventy five thousand 80,<,.....9 pesos, while the exemplary damage is set at
0-<,..... only
7 = C I & I ; )
%or review is the 7ecision of the Court of Appeals in CA3$R C> )o *,-<* promulgated
on )ovember -/, *//* It affirmed in toto the judgment of the Regional Trial Court 8RTC9,
Branch 1/, 'anila, in Civil Case )o 2-3*-*., &aid judgment disposed as followsC
:%;R A## TD= %;R=$;I)$ C;)&I7=RATI;)&, this Court hereby renders judgment
7I&'I&&I)$ the complaint against all the defendants and ordering plaintiff Oherein
petitionerP to pay defendant #arin the amount of 0-..,..... 8Two Dundred Thousand
0esos9 as actual and compensatory damages? 0-..,..... as moral damages? and
0<.,..... as exemplary damages and attorneys fees of 0*..,.....:
The facts, which we find supported by the records, have been summari6ed by the Court of
Appeals as followsC
;n %ebruary -., */,+, petitioner, Bibiano > BaKas Ar sold to Ayala Investment Corporation
8AGA#A9, *-2,-+< s5uare meters of land located at Bayanan, 'untinlupa, for two million,
three hundred eight thousand, seven hundred seventy 80-,1.2,,,...9 pesos The 7eed of
&ale provided that upon the signing of the contract AGA#A shall pay four hundred sixty3one
thousand, seven hundred fifty3four 804+*,,<4..9 pesos The balance of one million, eight
hundred forty3seven thousand and sixteen 80*,24,,.*+..9 pesos was to be paid in four
e5ual consecutive annual installments, with twelve 8*-Q9 percent interest per annum on the
outstanding balance AGA#A issued one promissory note covering four e5ual annual
installments =ach periodic payment of 04+*,,<4.. pesos shall be payable starting on
%ebruary -., */,,, and every year thereafter, or until %ebruary -., */2.
The same day, petitioner discounted the promissory note with AGA#A, for its face value of
0*,24,,.*+.., evidenced by a 7eed of Assignment signed by the petitioner and AGA#A
AGA#A issued nine 8/9 chec"s to petitioner, all dated %ebruary -., */,+, drawn against Ban"
of the 0hilippine Islands with the uniform amount of two hundred five thousand, two hundred
twenty3four 80-.<,--4..9 pesos
In his */,+ Income Tax Return, petitioner reported the 04+*,,<4 initial payment as income
from disposition of capital asset
&elling 0rice of #and0-,1.2,,,...
#ess Initial 0ayment 4+*,,<4.. 1
EEEEEE
!nreali6ed $ain 0*,24,,.*+..
*/,+ 7eclaration of Income on 7isposition of Capital Asset subject to TaxC
Initial 0ayment 04+*,,<4..
#essC Cost of #and and other incidental
=xpenses 8,+,<4,/.9
EEEEEE
Income 012<,-.+*.
Income subject to tax 8012<,-.+*. x <.Q9 0*/-,+.1+<
In the succeeding years, until */,/, petitioner reported a uniform income of two hundred
thirty thousand, eight hundred seventy3seven 80-1.,2,,..9 pesos 4 as gain from sale of
capital asset In his */2. income tax amnesty return, petitioner also reported the same
amount of 0-1.,2,,.. as the reali6ed gain on disposition of capital asset for the year
;n April **, */,2, then Revenue 7irector 'auro Calaguio authori6ed tax examiners,
Rodolfo Tua6on and 0rocopio Talon to examine the boo"s and records of petitioner for the
year */,+ They discovered that petitioner had no outstanding receivable from the */,+ land
sale to AGA#A and concluded that the sale was cash and the entire profit should have been
taxable in */,+ since the income was wholly derived in */,+
Tua6on and Talon filed their audit report and declared a discrepancy of two million, ninety3
five thousand, nine hundred fifteen 80-,./<,/*<..9 pesos in petitioner(s */,+ net income
They recommended deficiency tax assessment for two million, four hundred seventy3three
thousand, six hundred seventy3three 80-,4,1,+,1..9 pesos
'eantime, A5uilino #arin succeeded Calaguio as Regional 7irector of 'anila Region I>3A
After reviewing the examiners( report, #arin directed the revision of the audit report, with
instruction to consider the land as capital asset The tax due was only fifty 8<.Q9 percent of
the total gain from sale of the property held by the taxpayer beyond twelve months pursuant
to &ection 14 < of the */,, )ational Internal Revenue Code 8)IRC9 The deficiency tax
assessment was reduced to nine hundred thirty six thousand, five hundred ninety3eight pesos
and fifty centavos 80/1+,</2<.9, inclusive of surcharges and penalties for the year */,+
;n Aune -,, */2., respondent #arin sent a letter to petitioner informing him of the income
tax deficiency that must be settled immediately
;n &eptember -+, */2., petitioner ac"nowledged receipt of the letter but insisted that the
sale of his land to AGA#A was on installment
;n Aune 2, */2*, the matter was endorsed to the Acting Chief of the #egal Branch of the
)ational ;ffice of the BIR The Chief of the Tax %raud !nit recommended the prosecution of
a criminal case for conspiring to file false and fraudulent returns, in violation of &ection <*
of the Tax Code against petitioner and his accountants, Andres 0 Alejandre and Conrado
BaKas
;n Aune *,, */2*, #arin filed a criminal complaint for tax evasion against the petitioner
;n Auly *, */2*, news items appeared in the now defunct =vening =xpress with the headlineC
:BIR Charges Realtor: and another in the defunct =vening 0ost with a news itemC :BIR raps
Realtor, - accountants: Another news item also appeared in the Auly -, */2*, issue of the
Bulletin Today entitledC :13face 0*3' tax evasion raps: All news items mentioned
petitioner(s false income tax return concerning the sale of land to AGA#A
;n Auly -, */2*, petitioner filed an Amnesty Tax Return under 07 *,4. and paid the
amount of forty3one thousand, seven hundred twenty3nine pesos and eighty3one centavos
804*,,-/2*9 ;n )ovember -, */2*, petitioner again filed an Amnesty Tax Return under
07 *24. and paid an additional amount of one thousand, five hundred twenty3five pesos
and sixty3two centavos 80*,<-<+-9 In both, petitioner did not recogni6e that his sale of land
to AGA#A was on cash basis
Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC
of 'anila an action + for damages against respondents #arin, Tua6on and Talon for
extortion and malicious publication of the BIR(s tax audit report De claimed that the filing
of criminal complaints against him for violation of tax laws were improper because he had
already availed of two tax amnesty decrees, 0residential 7ecree )os *,4. and *24.
The trial court decided in favor of the respondents and awarded #arin damages, as already
stated 0etitioner seasonably appealed to the Court of Appeals In its decision of )ovember
-/, *//*, the respondent court affirmed the trial court(s decision, thusC
:The finding of the court a 5uo that plaintiff3appellant(s actions against defendant3appellee
#arin were unwarranted and baseless and as a result thereof, defendant3appellee #arin was
subjected to unnecessary anxiety and humiliation is therefore supported by the evidence on
record
7efendant3appellee #arin acted only in pursuance of the authority granted to him In fact,
the criminal charges filed against him in the Tanodbayan and in the City %iscal(s ;ffice were
all dismissed
@D=R=%;R=, the appealed judgment is hereby A%%IR'=7 in toto:
Dence this petition, wherein petitioner raises before us the following 5ueriesC
I @D=TD=R TD= C;!RT ;% A00=A#& =RR=7 I) IT& I)T=R0R=TATI;) ;%
0=RTI)=)T TAH #A@&, TD!& IT %AI#=7 T; A00R=CIAT= TD= C;RR=CT)=&& A)7
ACC!RACG ;% 0=TITI;)=R(& R=T!R) ;% TD= I)C;'= 7=RI>=7 %R;' TD= &A#=
;% TD= #A)7 T; AGA#A
II @D=TD=R TD= R=&0;)7=)T C;!RT =RR=7 I) );T %I)7I)$ TDAT TD=R=
@A& A) A##=$=7 ATT='0T T; =HT;RT O';)=G %R;'P 0=TITI;)=R BG 0RI>AT=
R=&0;)7=)T&
III @D=TD=R TD= R=&0;)7=)T C;!RT =RR=7 I) IT& I)T=R0R=TATI;) ;%
0R=&I7=)TIA# 7=CR== );& *,4. A)7 *24., A';)$ ;TD=R&, 0=TITI;)=R(&
I''!)ITG %R;' CRI'I)A# 0R;&=C!TI;)
I> @D=TD=R TD= R=&0;)7=)T C;!RT =RR=7 I) IT& I)T=R0R=TATI;) ;%
@=##3=&TAB#I&D=7 7;CTRI)=& ;% TDI& D;);RAB#= C;!RT A& R=$AR7& TD=
A@AR7 ;% ACT!A#, ';RA# A)7 =H='0#ARG 7A'A$=& I) %A>;R ;%
R=&0;)7=)T #ARI)
In essence, petitioner as"s the Court to resolve seriatim the following issuesC
* @hether respondent court erred in ruling that there was no extortion attempt by BIR
officials?
- @hether respondent court erred in holding that 07 *,4. and *24. granting tax
amnesties did not grant immunity from tax suits?
1 @hether respondent court erred in finding that petitioner(s income from the sale of
land in */,+ should be declared as a cash transaction in his tax return for the same year
8because the buyer discounted the promissory note issued to the seller on future installment
payments of the sale, on the same day of the sale9?
4 @hether respondent court erred and committed grave abuse of discretion in awarding
damages to respondent #arin
The first issue, on whether the Court of Appeals erred in finding that there was no extortion,
involves a determination of fact The Court of Appeals observed,
:The only evidence to establish the alleged extortion attempt by defendants3appellees is the
plaintiff3appellant(s self serving declarations
As found by the court a 5uo, :said attempt was "nown to plaintiff3appellant(s son3in3law and
counsel on record, yet, said counsel did not ta"e the witness stand to corroborate the
testimony of plaintiff: 2
As repeatedly held, findings of fact by the Court of Appeals especially if they affirm factual
findings of the trial court will not be disturbed by this Court, unless these findings are not
supported by evidence / &imilarly, neither should we disturb a finding of the trial court and
appellate court that an allegation is not supported by evidence on record Thus, we agree
with the conclusion of respondent court that herein private respondents, on the basis of
evidence, could not be held liable for extortion
;n the second issue of whether 07 )os *,4. and *24. which granted tax amnesties also
granted immunity from criminal prosecution against tax offenses, the pertinent sections of
these laws stateC
07 )o *,4. E C;)7;)I)$ 0=)A#TI=& %;R C=RTAI) >I;#ATI;)& ;% TD=
I)C;'= TAH #A@ !0;) >;#!)TARG 7I&C#;&!R= ;% !)7=C#AR=7 I)C;'=
%;R I)C;'= TAH 0!R0;&=& A)7 R=I!IRI)$ 0=RI;7IC &!B'I&&I;) ;% )=T
@;RTD &TAT='=)T
xxx xxx xxx
&=CTI;) * >oluntary 7isclosure of Correct Taxable Income E Any individual who, for
any or all of the taxable years */,4 to */,/, had failed to file a return is hereby, allowed to
file a return for each of the aforesaid taxable years and accurately declare therein the true
and correct income, deductions and exemptions and pay the income tax due per return
#i"ewise, any individual who filed a false or fraudulent return for any taxable year in the
period mentioned above may amend his return and pay the correct amount of tax due after
deducting the taxes already paid, if any, in the original declaration 8italics ours9
xxx xxx xxx
&=CTI;) < Immunity from 0enalties E Any individual who voluntarily files a return
under this 7ecree and pays the income tax due thereon shall be immune from the penalties,
civil or criminal, under the )ational Internal Revenue Code arising from failure to pay the
correct income tax with respect to the taxable years from which an amended return was filed
or for which an original return was filed in cases where no return has been filed for any of
the taxable years */,4 to */,/C 0rovided, however, That these immunities shall not apply in
cases where the amount of net taxable income declared under this 7ecree is understated to
the extent of -<Q or more of the correct net taxable income 8italics ours9
07 ); *24. E $RA)TI)$ A TAH A')=&TG ;) !)TAH=7 I)C;'= A)7B;R
@=A#TD =AR)=7 ;R ACI!IR=7 7!RI)$ TD= TAHAB#= G=AR& */,4 T; */2. A)7
R=I!IRI)$ TD= %I#I)$ ;% TD= &TAT='=)T ;% A&&=T&, #IABI#ITI=&, A)7 )=T
@;RTD
&=CTI;) * Coverage E In case of voluntary disclosure of previously untaxed income
andBor wealth such as earnings, receipts, gifts, be5uests or any other ac5uisition from any
source whatsoever, reali6ed here or abroad, by any individual taxpayer, which are taxable
under the )ational Internal Revenue Code, as amended, the assessment and collection of all
internal revenue taxes, including the increments or penalties on account of non3payment, as
well as all civil, criminal or administrative liabilities arising from or incident thereto under
the )ational Internal Revenue Code, are hereby condoned provided that the individual
taxpayer shall pay 8italics ours9
&=CTI;) - Conditions for Immunity E The immunity granted under &ection one of this
7ecree shall apply only under the following conditionsC
a9 &uch previously untaxed income andBor wealth must have been earned or reali6ed in
any of the years */,4 to */2.?
b9 The taxpayer must file an amnesty return on or before )ovember 1., */2*, and fully
pay the tax due thereon?
c9 The amnesty tax paid by the taxpayer under this 7ecree shall not be less than
0*,..... per taxable year? and
d9 The taxpayer must file a statement of assets, liabilities and net worth as of 7ecember
1*, */2., as re5uired under &ection + hereof
It will be recalled that petitioner entered into a deed of sale purportedly on installment ;n
the same day, he discounted the promissory note covering the future installments The
discounting seems 5uestionable because ordinarily, when a bill is discounted, the lender
8eg ban"s, financial institution9 charges or deducts a certain percentage from the principal
value as its compensation Dere, the discounting was done by the buyer ;n Auly -, */2*, two
wee"s after the filing of the tax evasion complaint against him by respondent #arin on Aune
*,, */2*, petitioner availed of the tax amnesty under 07 )o *,4. Dis amended tax return
for the years */,4 3 */,/ was filed with the BIR office of >alen6uela, Bulacan, instead of
'anila where the petitioner(s principal office was located De again availed of the tax
amnesty under 07 )o *24. Dis disclosure, however, did not include the income from his
sale of land to AGA#A on cash basis Instead he insisted that such sale was on installment
De did not amend his income tax return De did not pay the tax which was considerably
increased by the income derived from the discounting De did not meet the twin re5uirements
of 07 *,4. and *24., declaration of his untaxed income and full payment of tax due
thereon Clearly, the petitioner is not entitled to the benefits of 07 )os *,4. and *24. The
mere filing of tax amnesty return under 07 *,4. and *24. does not ipso facto shield him
from immunity against prosecution Tax amnesty is a general pardon to taxpayers who want
to start a clean tax slate It also gives the government a chance to collect uncollected tax
from tax evaders without having to go through the tedious process of a tax case To avail of a
tax amnesty granted by the government, and to be immune from suit on its delin5uencies, the
tax payer must have voluntarily disclosed his previously untaxed income and must have paid
the corresponding tax on such previously untaxed income
It also bears noting that a tax amnesty, much li"e a tax exemption, is never favored nor
presumed in law and if granted by statute, the terms of the amnesty li"e that of a tax
exemption must be construed strictly against the taxpayer and liberally in favor of the taxing
authority ** Dence, on this matter, it is our view that petitioner(s claim of immunity from
prosecution under the shield of availing tax amnesty is untenable
;n the third issue, petitioner asserts that his sale of the land to AGA#A was not on cash basis
but on installment as clearly specified in the 7eed of &ale which statesC
:That for and in consideration of the sum of T@; 'I##I;) TDR== D!)7R=7 =I$DT
TD;!&A)7 &=>=) D!)7R=7 &=>=)TG 80-,1.2,,,...9 0=&;& 0hilippine Currency,
to be paid as followsC
* 04+*,,<4.., upon the signing of the 7eed of &ale? and,
- The balance of 0*,24,,.*+.., to be paid in four 849 e5ual, consecutive, annual
installments with interest thereon at the rate of twelve percent 8*-Q9 per annum, beginning
on %ebruary -., */,+, said installments to be evidenced by four 849 negotiable promissory
notes: *-
0etitioner resorts to &ection 41 of the )IRC and &ec *,< of Revenue Regulation )o - to
support his claim
&ection 41 of the */,, )IRC states,
Installment basis E 8a9 7ealers in personal property E
8b9 &ales of realty and casual sales of personalty E In the case 8*9 of a casual sale or
other casual disposition of personal property 8other than property of a "ind which would
properly be included in the inventory of the taxpayer if on hand at the close of the taxable
year9, for a price exceeding one thousand pesos, or 8-9 of a sale or other disposition of real
property if in either case the initial payments do not exceed twenty3five percentum of the
selling price, the income may, under regulations prescribed by the 'inister of %inance, be
returned on the basis and in the manner above prescribed in this section As used in this
section the term :initial payment: means the payments received in cash or property other
than evidences of indebtedness of the purchaser during the taxable period in which the sale
or other disposition is made
Revenue Regulation )o -, &ection *,< provides,
&ale of real property involving deferred payments E !nder &ection 41 deferred3payment
sales of real property include 8*9 agreements of purchase and sale which contemplate that a
conveyance is not to be made at the outset, but only after all or a substantial portion of the
selling price has been paid, and 8b9 sales in which there is an immediate transfer of title, the
vendor being protected by a mortgage or other lien as to deferred payments &uch sales
either under 8a9 or 8b9, fall into two classes when considered with respect to the terms of
sale, as followsC
8*9 &ales of property on the installment plan, that is, sales in which the payments
received in cash or property other than evidences of indebtedness of the purchaser during
the taxable year in which the sale is made do not exceed -< per cent of the selling price?
8-9 7eferred3payment sales not on the installment plan, that is sales in which the
payments received in cash or property other than evidences of indebtedness of the purchaser
during the taxable year in which the sale is made exceed -< per cent of the selling price?
In the sale of mortgaged property the amount of the mortgage, whether the property is
merely ta"en subject to the mortgage or whether the mortgage is assumed by the purchaser,
shall be included as a part of the :selling price: but the amount of the mortgage, to the
extent it does not exceed the basis to the vendor of the property sold, shall not be considered
as a part of the :initial payments: or of the :total contract price,: as those terms are used in
&ection 41 of the Code, in sections *,4 and *,+ of these regulations, and in this section The
term :initial payments: does not include amounts received by the vendor in the year of sale
from the disposition to a third person of notes given by the vendee as part of the purchase
price which are due and payable in subse5uent years Commissions and other selling
expenses paid or incurred by the vendor are not to be deducted or ta"en into account in
determining the amount of the :initial payments,: the :total contract price,: or the :selling
price: The term :initial payments: contemplates at least one other payment in addition to
the initial payment If the entire purchase price is to be paid in a lump sum in a later year,
there being no payment during the year, the income may not be returned on the installment
basis Income may not be returned on the installment basis where no payment in cash or
property, other than evidences of indebtedness of the purchaser, is received during the first
year, the purchaser having promised to ma"e two or more payments, in later years
0etitioner asserts that &ec 41 allows him to return as income in the taxable years involved,
the respective installments as provided by the deed of sale between him and AGA#A
Conse5uently, he religiously reported his yearly income from sale of capital asset, subject to
tax, as followsC
Gear */,, 8<.Q of 04+*,,<49 0 -1.,2,,..
*/,2 -1.,2,,..
*/,/ -1.,2,,..
*/2. -1.,2,,..
0etitioner says that his tax declarations are acceptable modes of payment under &ection *,<
of the Revenue Regulations 8RR9 )o - The term :initial payment:, he argues, does not
include amounts received by the vendor which are part of the complete purchase price, still
due and payable in subse5uent years Thus, the proceeds of the promissory notes, not yet due
which he discounted to AGA#A should not be included as income reali6ed in */,+ 0etitioner
states that the original agreement in the 7eed of &ale should not be affected by the
subse5uent discounting of the bill
;n the other hand, respondents assert that taxation is a matter of substance and not of form
Returns are scrutini6ed to determine if transactions are what they are and not declared to
evade taxes Considering the progressive nature of our income taxation, when income is
spread over several installment payments through the years, the taxable income goes down
and the tax due correspondingly decreases @hen payment is in lump sum the tax for the
year proportionately increases !ltimately, a declaration that a sale is on installment
diminishes government taxes for the year of initial installment as against a declaration of
cash sale where taxes to the government is larger
As a general rule, the whole profit accruing from a sale of property is taxable as income in
the year the sale is made But, if not all of the sale price is received during such year, and a
statute provides that income shall be taxable in the year in which it is :received,: the profit
from an installment sale is to be apportioned between or among the years in which such
installments are paid and received
&ection 41 and &ec *,< says that among the entities who may use the above3mentioned
installment method is a seller of real property who disposes his property on installment,
provided that the initial payment does not exceed -<Q of the selling price They also state
what may be regarded as installment payment and what constitutes initial payment Initial
payment means the payment received in cash or property excluding evidences of
indebtedness due and payable in subse5uent years, li"e promissory notes or mortgages,
given of the purchaser during the taxable year of sale Initial payment does not include
amounts received by the vendor in the year of sale from the disposition to a third person of
notes given by the vendee as part of the purchase price which are due and payable in
subse5uent years &uch disposition or discounting of receivable is material only as to the
computation of the initial payment If the initial payment is within -<Q of total contract
price, exclusive of the proceeds of discounted notes, the sale 5ualifies as an installment sale,
otherwise it is a deferred sale
Although the proceed of a discounted promissory note is not considered part of the initial
payment, it is still taxable income for the year it was converted into cash The subse5uent
payments or li5uidation of certificates of indebtedness is reported using the installment
method in computing the proportionate income to be returned, during the respective year it
was reali6ed )on3dealer sales of real or personal property may be reported as income under
the installment method provided that the obligation is still outstanding at the close of that
year If the seller disposes the entire installment obligation by discounting the bill or the
promissory note, he necessarily must report the balance of the income from the discounting
not only income from the initial installment payment
@here an installment obligation is discounted at a ban" or finance company, a taxable
disposition results, even if the seller guarantees its payment, continues to collect on the
installment obligation, or handles repossession of merchandise in case of default This rule
prevails in the !nited &tates &ince our income tax laws are of American origin,
interpretations by American courts on our parallel tax laws have persuasive effect on the
interpretation of these laws Thus, by analogy, all the more would a taxable disposition
result when the discounting of the promissory note is done by the seller himself Clearly, the
indebtedness of the buyer is discharged, while the seller ac5uires money for the settlement of
his receivables #ogically then, the income should be reported at the time of the actual gain
%or income tax purposes, income is an actual gain or an actual increase of wealth
Although the proceeds of a discounted promissory note is not considered initial payment, still
it must be included as taxable income on the year it was converted to cash @hen petitioner
had the promissory notes covering the succeeding installment payments of the land issued by
AGA#A, discounted by AGA#A itself, on the same day of the sale, he lost entitlement to report
the sale as a sale on installment since, a taxable disposition resulted and petitioner was
re5uired by law to report in his returns the income derived from the discounting @hat
petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes
gained from the sale of the land to AGA#A for the year */,+
#astly, petitioner 5uestions the damages awarded to respondent #arin
Any person who see"s to be awarded actual or compensatory damages due to acts of another
has the burden of proving said damages as well as the amount thereof #arin says the
extortion cases filed against him hampered his immediate promotion, caused him strong
anxiety and social humiliation The trial court awarded him two hundred thousand
80-..,.....9 pesos as actual damages Dowever, the appellate court stated that, despite
pendency of this case, #arin was given a promotion at the BIR &aid respondent courtC
:@e find nothing on record, aside from defendant3appellee #arin(s statements 8T&), pp +3,,
** 7ecember */2<9, to show that he suffered loss of seniority that allegedly barred his
promotion In fact, he was promoted to his present position despite the pendency of the
instant case 8T&), pp 1<31/, .4 )ovember */2<9:
'oreover, the records of the case contain no statement whatsoever of the amount of the
actual damages sustained by the respondents Actual damages cannot be allowed unless
supported by evidence on the record The court cannot rely on speculation, conjectures or
guesswor" as to the fact and amount of damages To justify a grant of actual or
compensatory damages, it is necessary to prove with a reasonable degree of certainty, the
actual amount of loss &ince we have no basis with which to assess, with certainty, the
actual or compensatory damages counter3claimed by respondent #arin, the award of such
damages should be deleted
'oral damages may be recovered in cases involving acts referred to in Article -* of the
Civil Code As a rule, a public official may not recover damages for charges of falsehood
related to his official conduct unless he proves that the statement was made with actual
malice In Babst, et al vs )ational Intelligence Board, et al, *1- &CRA 1*+, 11. 8*/249, we
reiterated the test for actual malice as set forth in the landmar" American case of )ew Gor"
Times vs &ullivan, which we have long adopted, in defamation and libel cases, vi6C
: with "nowledge that it was false or with rec"less disregard of whether it was false or
not:
@e appreciate petitioner(s claim that he filed his */,+ return in good faith and that he had
honestly believed that the law allowed him to declare the sale of the land, in installment @e
can further grant that the pertinent tax laws needed construction, as we have earlier done
That petitioner was offended by the headlines alluding to him as tax evader is also fully
understandable All these, however, do not justify what amounted to a baseless prosecution
of respondent #arin 0etitioner presented no evidence to prove #arin extorted money from
him De even admitted that he never met nor tal"ed to respondent #arin @hen the tax
investigation against the petitioner started, #arin was not yet the Regional 7irector of BIR
Region I>3A, 'anila ;n respondent #arin(s instruction, petitioner(s tax assessment was
considered one involving a sale of capital asset, the income from which was subjected to
only fifty percent 8<.Q9 assessment, thus reducing the original tax assessment by half These
circumstances may be ta"en to show that #arin(s involvement in extortion was not
indubitable Get, petitioner went on to file the extortion cases against #arin in different fora
This is where actual malice could attach on petitioner(s part &ignificantly, the trial court did
not err in dismissing petitioner(s complaints, a ruling affirmed by the Court of Appeals
Feeping all these in mind, we are constrained to agree that there is sufficient basis for the
award of moral and exemplary damages in favor of respondent #arin The appellate court
believed respondent #arin when he said he suffered anxiety and humiliation because of the
unfounded charges against him 0etitioner(s actions against #arin were found :unwarranted
and baseless,: and the criminal charges filed against him in the Tanodbayan and City
%iscal(s ;ffice were all dismissed Dence, there is ade5uate support for respondent court(s
conclusion that moral damages have been proved
)ow, however, what would be a fair amount to be paid as compensation for moral damages
also re5uires determination =ach case must be governed by its own peculiar circumstances
;n this score, 7el Rosario vs Court of Appeals, cites several cases where no actual
damages were adjudicated, and where moral and exemplary damages were reduced for
being :too excessive,: thusC
:In the case of 0)B v CA, O-<+ &CRA 1./ 8*//+9P, this Court 5uoted with approval the
following observation from RC0I v Rodrigue6, vi6C
( )evertheless, we find the award of 0*..,..... as moral damages in favor of
respondent Rodrigue6 excessive and unconscionable In the case of 0rudenciado v Alliance
Transport &ystem, Inc 8*42 &CRA 44. O*/2,P9 we saidC : OIPt is undisputed that the trial
courts are given discretion to determine the amount of moral damages 8Alcantara v &urro,
/1 0hil 4,-9 and that the Court of Appeals can only modify or change the amount awarded
when they are palpably and scandalously excessive (so as to indicate that it was the result of
passion, prejudice or corruption on the part of the trial court( 8$ellada v @arner Barnes R
Co, Inc, <, ;$ O4P ,14,, ,1<2? &adie v Bacharach 'otors Co, Inc, <, ;$ O4P +1+ and
Adone v Bacharach 'otor Co, Inc, <, ;$ +<+9 But in more recent cases where the
awards of moral and exemplary damages are far too excessive compared to the actual loses
sustained by the aggrieved party, this Court ruled that they should be reduced to more
reasonable amounts 8Italics ours9(
(In other words, the moral damages awarded must be commensurate with the loss or injury
suffered(
:In the same case 80)B v CA9, this Court found the amount of exemplary damages re5uired
to be paid 80*,...,.....9 (too excessive( and reduced it to an (e5uitable level(
80-<,.....9:
It will be noted that in above cases, the parties who were awarded moral damages were not
public officials Considering that here, the award is in favor of a government official in
connection with his official function, it is with caution that we affirm granting moral
damages, for it might open the floodgates for government officials counter3claiming
damages in suits filed against them in connection with their functions 'oreover, we must be
careful lest the amounts awarded ma"e citi6ens hesitate to expose corruption in the
government, for fear of lawsuits from vindictive government officials Thus, conformably
with our declaration that moral damages are not intended to enrich anyone, we hereby
reduce the moral damages award in this case from two hundred thousand 80-..,.....9
pesos to seventy five thousand 80,<,.....9 pesos, while the exemplary damage is set at
0-<,..... only cdll
The law allows the award of attorney(s fees when exemplary damages are awarded, and
when the party to a suit was compelled to incur expenses to protect his interest Though
government officers are usually represented by the &olicitor $eneral in cases connected with
the performance of official functions, considering the nature of the charges, herein
respondent #arin was compelled to hire a private lawyer for the conduct of his defense as
well as the successful pursuit of his counterclaims In our view, given the circumstances of
this case, there is ample ground to award in his favor 0<.,..... as reasonable attorney(s
fees
@D=R=%;R=, the assailed decision of the Court of Appeals dated )ovember -/, *//*, is
hereby A%%IR'=7 with ';7I%ICATI;) so that the award of actual damages are deleted?
and that petitioner is hereby ;R7=R=7 to pay to respondent #arin moral damages in the
amount of 0,<,....., exemplary damages in the amount of 0-<,....., and attorney(s fees
in the amount of 0<.,..... only
)o pronouncement as to costs &; ;R7=R=7
>2? E2ce3ti," . T+e 3r,vi/i,"/ ,f 3!r!4r!3+ >1? ,f t+i/ )#b/ecti," t, t+e c,"tr!r$
",t5it+/t!"0i"4, c!3it!- 4!i"/ 3re/#me0 t, +!ve bee" re!-i6e0 fr,m t+e /!-e ,r
0i/3,/iti," ,f t+eir 3ri"ci3!- re/i0e"ce b$ "!t#r!- 3er/,"/, t+e 3r,cee0/ ,f 5+ic+ i/
f#--$ #ti-i6e0 i" !c8#iri"4 ,r c,"/tr#cti"4 ! "e5 3ri"ci3!- re/i0e"ce 5it+i" ei4+tee"
>18? c!-e"0!r m,"t+/ fr,m t+e 0!te ,f /!-e ,r 0i/3,/iti,", /+!-- be e2em3t fr,m t+e
c!3it!- 4!i"/ t!2 im3,/e0 #"0er t+i/ )#b/ecti,"= Pr,vi0e0, T+!t t+e +i/t,ric!- c,/t
,r !0:#/te0 b!/i/ ,f t+e re!- 3r,3ert$ /,-0 ,r 0i/3,/e0 /+!-- be c!rrie0 ,ver t, t+e
"e5 3ri"ci3!- re/i0e"ce b#i-t ,r !c8#ire0= Pr,vi0e0, f#rt+er, T+!t t+e
C,mmi//i,"er /+!-- +!ve bee" 0#-$ ",tifie0 b$ t+e t!23!$er 5it+i" t+irt$ >;C? 0!$/
fr,m t+e 0!te ,f /!-e ,r 0i/3,/iti," t+r,#4+ ! 3re/cribe0 ret#r" ,f +i/ i"te"ti," t,
!v!i- ,f t+e t!2 e2em3ti," +erei" me"ti,"e0= Pr,vi0e0, /ti-- f#rt+er, T+!t t+e /!i0
t!2 e2em3ti," c!" ,"-$ be !v!i-e0 ,f ,"ce ever$ te" >1C? $e!r/= Pr,vi0e0, fi"!--$,
T+!t if t+ere i/ ", f#-- #ti-i6!ti," ,f t+e 3r,cee0/ ,f /!-e ,r 0i/3,/iti,", t+e 3,rti,"
,f t+e 4!i" 3re/#me0 t, +!ve bee" re!-i6e0 fr,m t+e /!-e ,r 0i/3,/iti," /+!-- be
/#b:ect t, c!3it!- 4!i"/ t!2. *,r t+i/ 3#r3,/e, t+e 4r,// /e--i"4 3rice ,r f!ir m!r9et
v!-#e !t t+e time ,f /!-e, 5+ic+ever i/ +i4+er, /+!-- be m#-ti3-ie0 b$ ! fr!cti,"
5+ic+ t+e #"#ti-i6e0 !m,#"t be!r/ t, t+e 4r,// /e--i"4 3rice i" ,r0er t, 0etermi"e
t+e t!2!b-e 3,rti," !"0 t+e t!2 3re/cribe0 #"0er 3!r!4r!3+ >1? ,f t+i/ )#b/ecti,"
/+!-- be im3,/e0 t+ere,".
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); *43.. )ovember -., -...
&ale, =xchange or 7isposition, by a )atural 0erson, of Dis :0rincipal Residence:
These regulations are hereby promulgated in order to streamline and ma"e more efficient
the collection of the capital gains tax, if any, presumed to have been reali6ed from the
sale, exchange or disposition, by a natural person, of his :0rincipal Residence:
R=>=)!= '=';RA)7!' CIRC!#AR ); 4<3.- ;ctober *4, -..-
0rocedural Re5uirements for the Tax =xemption of &ale of 0rincipal ResidenceThe
concerned Revenue 7istrict ;fficer shall see to it that if upon the lapse of thirty 81.9 days
following the end of the eighteen3month constructionBac5uisition period, there is no
showing that the seller has utili6ed the proceeds of sale, exchange or disposition of his
old principal residence to ac5uire or construct his new principal residence, said R7;
shall forthwith initiate the assessment of the deficiency capital gains tax and, thereafter,
apply the escrowed ban" deposit account against the deficiency tax liability
)ECTION 2< T!2 ," N,"re/i0e"t A-ie" I"0ivi0#!-
>A?N,"re/i0e"t A-ie" E"4!4e0 i" Tr!0e ,r B#/i"e// Bit+i" t+e P+i-i33i"e/. .
>1? I" &e"er!-. . A ","re/i0e"t !-ie" i"0ivi0#!- e"4!4e0 i" tr!0e ,r b#/i"e// i"
t+e P+i-i33i"e/ /+!-- be /#b:ect t, !" i"c,me t!2 i" t+e /!me m!""er !/ !"
i"0ivi0#!- citi6e" !"0 ! re/i0e"t !-ie" i"0ivi0#!-, ," t!2!b-e i"c,me receive0 fr,m
!-- /,#rce/ 5it+i" t+e P+i-i33i"e/. A ","re/i0e"t !-ie" i"0ivi0#!- 5+, /+!-- c,me t,
t+e P+i-i33i"e/ !"0 /t!$ t+erei" f,r !" !44re4!te 3eri,0 ,f m,re t+!" ,"e +#"0re0
ei4+t$ >18C? 0!$/ 0#ri"4 !"$ c!-e"0!r $e!r /+!-- be 0eeme0 ! F","re/i0e"t !-ie"
0,i"4 b#/i"e// i" t+e P+i-i33i"e/F, )ecti," 22>&? ,f t+i/ C,0e ",t5it+/t!"0i"4.
CASES DIGEST
The important factor which determines the sources of income of personal services is the
place where the services were actually rendered
)on3resident aliens, whether or not engaged in trade or business, are subject to
0hilippine income taxation on their income received from all sources within the
0hilippines Thus, the "eyword in determining the taxability of non3resident aliens is the
income(s :source: The important factor therefore which determines the source of income
of personal services is not the residence of the payor, or the place where the contract for
service is entered into, or the place of payment, but the place where the services were
actually rendered
Commissioner of Internal Revenue vs AulianeBaier3)ic"el,
$R )o *<1,/1, August -/, -..+
The important factor which determines the sources of income of personal services is the
place where the services were actually rendered
%ACT&C Respondent AulianeBaier3)ic"el, a non3resident $erman citi6en, is the
0resident of A!BA)IT=H, Inc, a domestic corporation engaged in :manufacturing,
mar"eting on wholesale only, buying or otherwise ac5uiring, holding, importing and
exporting, selling and disposing embroidered textile products: Through A!BA)IT=H(s
$eneral 'anager, 'arina I $u6man, the corporation appointed and engaged the
services of respondent as commission agent It was agreed that respondent will receive
*.Q sales commission on all sales actually concluded and collected through her efforts
In *//<, respondent received the amount of 0*,,.,,,,-+4, representing her sales
commission income from which A!BA)IT=H withheld the corresponding *.Q
withholding tax amounting to 0*,.,,,,-+, and remitted the same to the BIR ;n
;ctober *,, *//,, respondent filed her *//< income tax return reporting a taxable
income of 0*,,.,,,,-+4 and a tax due of 0*,.,,,,-+ ;n April *4, *//2, respondent
filed a claim to refund the amount of 0*,.,,,,-+ alleged to have been mista"enly
withheld and remitted by A!BA)IT=H to the BIR
Respondent contended that her sales commission income is not taxable in the 0hilippines
because the same was a compensation for her services rendered in $ermany and
therefore considered as income from sources outside the 0hilippines Both the CTA and
the CIR contended that the commissions received by respondent were actually her
remuneration in the performance of her duties as 0resident of A!BA)IT=H and not as a
mere sales agent thereof The income derived by respondent is therefore an income
taxable in the 0hilippines because A!BA)IT=H is a domestic corporation
I&&!=C @hether respondent(s sales commission income is taxable in the 0hilippines
D=#7C 0ursuant to &ection -< of the )IRC, non3resident aliens, whether or not engaged
in trade or business, are subject to 0hilippine income taxation on their income received
from all sources within the 0hilippines Thus, the "eyword in determining the taxability of
non3resident aliens is the income(s :source: In construing the meaning of :source: in
&ection -< of the )IRC, resort must be had on the origin of the provision Both the
petitioner and respondent cited the case of Commissioner of Internal Revenue v British
;verseas Airways Corporation in support of their arguments, but the correct
interpretation of the said case favors the theory of respondent that it is the situs of the
activity that determines whether such income is taxable in the 0hilippines The conflict
between the majority and the dissenting opinion in the said case has nothing to do with
the underlying principle of the law on sourcing of income In fact, both applied the case
of Alexander Dowden R Co, #td v Collector of Internal Revenue The divergence in
opinion centered on whether the sale of tic"ets in the 0hilippines is to be construed as the
:activity: that produced the income, as viewed by the majority, or merely the physical
source of the income, as ratiocinated by Austice %lorentino 0 %eliciano in his dissent
The majority, through Austice Ameurfina'elencio3Derrera, as ponente, interpreted the
sale of tic"ets as a business activity that gave rise to the income of B;AC 0etitioner
cannot therefore invo"e said case to support its view that source of income is the physical
source of the money earned If such was the interpretation of the majority, the Court
would have simply stated that source of income is not the business activity of B;AC but
the place where the person or entity disbursing the income is located or where B;AC
physically received the same But such was not the import of the ruling of the Court It
even explained in detail the business activity underta"en by B;AC in the 0hilippines to
pinpoint the taxable activity and to justify its conclusion that B;AC is subject to
0hilippine income taxation
Daving disposed of the doctrine applicable in this case, we will now determine whether
respondent was able to establish the factual circumstances showing that her income is
exempt from 0hilippine income taxation The decisive factual consideration here is not
the capacity in which respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in $ermany Though not raised as
an issue, the Court is clothed with authority to address the same because the resolution
thereof will settle the vital 5uestion posed in this controversy
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimijuris against the taxpayer To those therefore, who claim a refund
rest the burden of proving that the transaction subjected to tax is actually exempt from
taxation
In the instant case, the appointment letter of respondent as agent of A!BA)IT=H
stipulated that the activity or the service which would entitle her to *.Q commission
income, are :sales actually concluded and collected through OherP efforts: @hat she
presented as evidence to prove that she performed income producing activities abroad,
were copies of documents she allegedly faxed to A!BA)IT=H and bearing instructions as
to the si6es of, or designs and fabrics to be used in the finished products as well as
samples of sales orders purportedly relayed to her by clients Dowever, these documents
do not show whether the instructions or orders faxed ripened into concluded or collected
sales in $ermany At the very least, these pieces of evidence show that while respondent
was in $ermany, she sent instructionsBorders to A!BA)IT=H As to whether these
instructionsBorders gave rise to consummated sales and whether these sales were truly
concluded in $ermany, respondent presented no such evidence )either did she establish
reasonable connection between the ordersBinstructions faxed and the reported monthly
sales purported to have transpired in $ermany
In sum, the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as ade5uate to
support the conclusion that it was in $ermany where she performed the income
producing service which gave rise to the reported monthly sales in the months of 'arch
and 'ay to &eptember of *//< &he thus failed to discharge the burden of proving that
her income was from sources outside the 0hilippines and exempt from the application of
our income tax law Dence, the claim for tax refund should be denied Commissioner of
Internal Revenue vs AulianeBaier3)ic"el, $R )o *<1,/1,
August -/, -..+
>2? C!/+ !"0D,r Pr,3ert$ Divi0e"0/ fr,m ! D,me/tic C,r3,r!ti," ,r ,i"t )t,c9
C,m3!"$, ,r I"/#r!"ce ,r %#t#!- *#"0 C,m3!"$ ,r Re4i,"!- O3er!ti"4
'e!08#!rter ,f %#-ti"!ti,"!- C,m3!"$, ,r )+!re i" t+e Di/trib#t!b-e Net I"c,me
,f ! P!rt"er/+i3 >E2ce3t ! &e"er!- Pr,fe//i,"!- P!rt"er/+i3?, ,i"t Acc,#"t, ,i"t
(e"t#re T!2!b-e !/ ! C,r3,r!ti," ,r A//,ci!ti,", I"tere/t/, R,$!-tie/, Pri6e/, !"0
Ot+er Bi""i"4/ . C!/+ !"0D,r 3r,3ert$ 0ivi0e"0/ fr,m ! 0,me/tic c,r3,r!ti,", ,r
fr,m ! :,i"t /t,c9 c,m3!"$, ,r fr,m !" i"/#r!"ce ,r m#t#!- f#"0 c,m3!"$ ,r fr,m
! re4i,"!- ,3er!ti"4 +e!08#!rter ,f m#-ti"!ti,"!- c,m3!"$, ,r t+e /+!re ,f !
","re/i0e"t !-ie" i"0ivi0#!- i" t+e 0i/trib#t!b-e "et i"c,me !fter t!2 ,f !
3!rt"er/+i3 >e2ce3t ! 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3? ,f 5+ic+ +e i/ ! 3!rt"er, ,r
t+e /+!re ,f ! ","re/i0e"t !-ie" i"0ivi0#!- i" t+e "et i"c,me !fter t!2 ,f !"
!//,ci!ti,", ! :,i"t !cc,#"t, ,r ! :,i"t ve"t#re t!2!b-e !/ ! c,r3,r!ti," ,f 5+ic+ +e
i/ ! member ,r ! c,@ve"t#rer7 i"tere/t/7 r,$!-tie/ >i" !"$ f,rm?7 !"0 3ri6e/ >e2ce3t
3ri6e/ !m,#"ti"4 t, Te" t+,#/!"0 3e/,/ >P1C,CCC? ,r -e// 5+ic+ /+!-- be /#b:ect t,
t!2 #"0er )#b/ecti," >B?>1? ,f )ecti," 24?7 !"0 ,t+er 5i""i"4/ >e2ce3t P+i-i33i"e
C+!rit$ )5ee3/t!9e/ !"0 L,tt, 5i""i"4/?, /+!-- be /#b:ect t, !" i"c,me t!2 ,f
t5e"t$ 3erce"t >2CG? ," t+e t,t!- !m,#"t t+ere,f= Pr,vi0e0, +,5ever, T+!t
r,$!-tie/ ," b,,9/ !/ 5e-- !/ ,t+er -iter!r$ 5,r9/, !"0 r,$!-tie/ ," m#/ic!-
c,m3,/iti,"/ /+!-- be /#b:ect t, ! fi"!- t!2 ,f te" 3erce"t >1CG? ," t+e t,t!-
!m,#"t t+ere,f= Pr,vi0e0, f#rt+er, T+!t ci"em!t,4r!3+ic fi-m/ !"0 /imi-!r 5,r9/
/+!-- be /#b:ect t, t+e t!2 3r,vi0e0 #"0er )ecti," 28 ,f t+i/ C,0e= Pr,vi0e0,
f#rt+erm,re, T+!t i"tere/t i"c,me fr,m -,"4@term 0e3,/it ,r i"ve/tme"t i" t+e f,rm
,f /!vi"4/, c,mm," ,r i"0ivi0#!- tr#/t f#"0/, 0e3,/it /#b/tit#te/, i"ve/tme"t
m!"!4eme"t !cc,#"t/ !"0 ,t+er i"ve/tme"t/ evi0e"ce0 b$ certific!te/ i" /#c+ f,rm
3re/cribe0 b$ t+e B!"49,)e"tr!-"4Pi-i3i"!/ >B)P? /+!-- be e2em3t fr,m t+e t!2
im3,/e0 #"0er t+i/ )#b/ecti,"= Pr,vi0e0, fi"!--$, T+!t /+,#-0 t+e +,-0er ,f t+e
certific!te 3re@termi"!te t+e 0e3,/it ,r i"ve/tme"t bef,re t+e fift+ ><t+? $e!r, ! fi"!-
t!2 /+!-- be im3,/e0 ," t+e e"tire i"c,me !"0 /+!-- be 0e0#cte0 !"0 5it++e-0 b$
t+e 0e3,/it,r$ b!"9 fr,m t+e 3r,cee0/ ,f t+e -,"4@term 0e3,/it ,r i"ve/tme"t
certific!te b!/e0 ," t+e rem!i"i"4 m!t#rit$ t+ere,f=
*,#r >4? $e!r/ t, -e// t+!" five ><? $e!r/ . <G7
T+ree >;? $e!r/ t, -e// t+!" f,#r >4? $e!r/ . 12G7 !"0
Le// t+!" t+ree >;? $e!r/ . 2CG.
>;? C!3it!- &!i"/ . C!3it!- 4!i"/ re!-i6e0 fr,m /!-e, b!rter ,r e2c+!"4e ,f /+!re/
,f /t,c9 i" 0,me/tic c,r3,r!ti,"/ ",t tr!0e0 t+r,#4+ t+e -,c!- /t,c9 e2c+!"4e, !"0
re!- 3r,3ertie/ /+!-- be /#b:ect t, t+e t!2 3re/cribe0 #"0er )#b/ecti,"/ >C? !"0 >D?
,f )ecti," 24.
>B?N,"re/i0e"t A-ie" I"0ivi0#!- N,t E"4!4e0 i" Tr!0e ,r B#/i"e// Bit+i" t+e
P+i-i33i"e/ . T+ere /+!-- be -evie0, c,--ecte0 !"0 3!i0 f,r e!c+ t!2!b-e $e!r #3,"
t+e e"tire i"c,me receive0 fr,m !-- /,#rce/ 5it+i" t+e P+i-i33i"e/ b$ ever$
","re/i0e"t !-ie" i"0ivi0#!- ",t e"4!4e0 i" tr!0e ,r b#/i"e// 5it+i" t+e P+i-i33i"e/
!/ i"tere/t, c!/+ !"0D,r 3r,3ert$ 0ivi0e"0/, re"t/, /!-!rie/, 5!4e/, 3remi#m/,
!""#itie/, c,m3e"/!ti,", rem#"er!ti,", em,-#me"t/, ,r ,t+er fi2e0 ,r 0etermi"!b-e
!""#!- ,r 3eri,0ic ,r c!/#!- 4!i"/, 3r,fit/, !"0 i"c,me, !"0 c!3it!- 4!i"/, ! t!2
e8#!- t, t5e"t$@five 3erce"t >2<G? ,f /#c+ i"c,me. C!3it!- 4!i"/ re!-i6e0 b$ !
","re/i0e"t !-ie" i"0ivi0#!- ",t e"4!4e0 i" tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/
fr,m t+e /!-e ,f /+!re/ ,f /t,c9 i" !"$ 0,me/tic c,r3,r!ti," !"0 re!- 3r,3ert$ /+!--
be /#b:ect t, t+e i"c,me t!2 3re/cribe0 #"0er )#b/ecti,"/ >C? !"0 >D? ,f )ecti,"
24.
>C? A-ie" I"0ivi0#!- Em3-,$e0 b$ Re4i,"!- ,r Are! 'e!08#!rter/ !"0 Re4i,"!-
O3er!ti"4 'e!08#!rter/ ,f %#-ti"!ti,"!- C,m3!"ie/ . T+ere /+!-- be -evie0,
c,--ecte0 !"0 3!i0 f,r e!c+ t!2!b-e $e!r #3," t+e 4r,// i"c,me receive0 b$ ever$
!-ie" i"0ivi0#!- em3-,$e0 b$ re4i,"!- ,r !re! +e!08#!rter/ !"0 re4i,"!- ,3er!ti"4
+e!08#!rter/ e/t!b-i/+e0 i" t+e P+i-i33i"e/ b$ m#-ti"!ti,"!- c,m3!"ie/ !/ /!-!rie/,
5!4e/, !""#itie/, c,m3e"/!ti,", rem#"er!ti," !"0 ,t+er em,-#me"t/, /#c+ !/
+,",r!ri! !"0 !--,5!"ce/, fr,m /#c+ re4i,"!- ,r !re! +e!08#!rter/ !"0 re4i,"!-
,3er!ti"4 +e!08#!rter/, ! t!2 e8#!- t, fiftee" 3erce"t >1<G? ,f /#c+ 4r,// i"c,me=
Pr,vi0e0, +,5ever, T+!t t+e /!me t!2 tre!tme"t /+!-- !33-$ t, *i-i3i",/ em3-,$e0
!"0 ,cc#3$i"4 t+e /!me 3,/iti," !/ t+,/e ,f !-ie"/ em3-,$e0 b$ t+e/e
m#-ti"!ti,"!- c,m3!"ie/. *,r 3#r3,/e/ ,f t+i/ C+!3ter, t+e term Fm#-ti"!ti,"!-
c,m3!"$F me!"/ ! f,rei4" firm ,r e"tit$ e"4!4e0 i" i"ter"!ti,"!- tr!0e 5it+
!ffi-i!te/ ,r /#b/i0i!rie/ ,r br!"c+ ,ffice/ i" t+e A/i!@P!cific Re4i," !"0 ,t+er
f,rei4" m!r9et/.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .**3*. ;ctober -+, -.*.
Clarifying the Term :'anagerial and Technical 0ositions: Including $uidelines on
Availment of the %ifteen 0ercent 8*<Q9 0referential Income Tax Rate for Iualified
%ilipino 0ersonnel =mployed by Regional or Area Dead5uarters 8RDIs9 and Regional
;perating Dead5uarters 8R;DIs9 of 'ultinational Companies
Revenue 'emorandum Circular 4*3./ Auly -1, -../
In the case of 0hilippine Appliance Corporation vs #aguesma, --+ &CRA ,1. 8*//19,
the &upreme Court held that a :managerial employee: is one who is vested with powers
or prerogatives to lay down and execute management policies andBor to hire, execute
management policies andBor to hire, transfer, suspend, lay3off, recall, discharge, assign
or discipline employees The test of :managerial status: depends on whether a person
possesses authority to act in the interest of his employer and whether such authority is
not merely routinary or clerical in nature, but re5uires the use of independent judgment
@here such recommendatory powers are subject to evaluation, review and final action by
the department heads and other higher executives of the company, the person having
such recommendatory powers is not a managerial employee The fact that his wor"
description is either manager or supervisor is of no moment considering that it is the
nature of his functions and not the said nomenclature of title which determines his status
To be a managerial employee, the following elements must concurC 8*9 his primary duty
consists of performance of wor" directly related to management policies? 8-9 he
customarily and regularly exercises discretion and independent judgment in the
performance of his functions? 819 he regularly and directly assists in the management of
the establishment? and 849 he does not devote -.Q of his time to wor" other than those
above prescribed The test is whether the position re5uires use of independent judgment
The employees are not managerial employees if they only execute approved and
established policies, leaving little or no discretion at all whether to implement said
policies or not 8>illuga vs )#RC, --< &CRA <1, 9
;n the other hand, the term :technical position: is limited only to positions which are
highly technical in nature or where there are no %ilipinos who are competent, able and
willing to perform the services for which the aliens are desired
In view thereof, only %ilipinos employed and occupying managerial and highly technical
positions as defined above similar to the positions of the aliens employed by regional or
area head5uarters and regional operating head5uarters of multinational companies shall
be entitled to the option to be taxed at either *<Q of gross income or at the regular
income tax rate on their taxable income in accordance with &ection -< 8C9 of the Tax
Code of *//,, as amended, if the employer, ie, Regional ;perating Dead5uarters,
Regional or Area Dead5uarters, is governed by Boo" III of =; --+, as amended by RA
2,<+
>D? A-ie" I"0ivi0#!- Em3-,$e0 b$ Off/+,re B!"9i"4 U"it/ . T+ere /+!-- be
-evie0, c,--ecte0 !"0 3!i0 f,r e!c+ t!2!b-e $e!r #3," t+e 4r,// i"c,me receive0 b$
ever$ !-ie" i"0ivi0#!- em3-,$e0 b$ ,ff/+,re b!"9i"4 #"it/ e/t!b-i/+e0 i" t+e
P+i-i33i"e/ !/ /!-!rie/, 5!4e/, !""#itie/, c,m3e"/!ti,", rem#"er!ti," !"0 ,t+er
em,-#me"t/, /#c+ !/ +,",r!ri! !"0 !--,5!"ce/, fr,m /#c+ ,ff/+,re b!"9i"4 #"it/,
! t!2 e8#!- t, fiftee" 3erce"t >1<G? ,f /#c+ 4r,// i"c,me= Pr,vi0e0, +,5ever, T+!t
t+e /!me t!2 tre!tme"t /+!-- !33-$ t, *i-i3i",/ em3-,$e0 !"0 ,cc#3$i"4 t+e /!me
3,/iti," !/ t+,/e ,f !-ie"/ em3-,$e0 b$ t+e/e ,ff/+,re b!"9i"4 #"it/.
>E? A-ie" I"0ivi0#!- Em3-,$e0 b$ Petr,-e#m )ervice C,"tr!ct,r !"0 )#bc,"tr!ct,r
. A" !-ie" i"0ivi0#!- 5+, i/ ! 3erm!"e"t re/i0e"t ,f ! f,rei4" c,#"tr$ b#t 5+, i/
em3-,$e0 !"0 !//i4"e0 i" t+e P+i-i33i"e/ b$ ! f,rei4" /ervice c,"tr!ct,r ,r b$ !
f,rei4" /ervice /#bc,"tr!ct,r e"4!4e0 i" 3etr,-e#m ,3er!ti,"/ i" t+e P+i-i33i"e/
/+!-- be -i!b-e t, ! t!2 ,f fiftee" 3erce"t >1<G? ,f t+e /!-!rie/, 5!4e/, !""#itie/,
c,m3e"/!ti,", rem#"er!ti," !"0 ,t+er em,-#me"t/, /#c+ !/ +,",r!ri! !"0
!--,5!"ce/, receive0 fr,m /#c+ c,"tr!ct,r ,r /#bc,"tr!ct,r= Pr,vi0e0, +,5ever,
T+!t t+e /!me t!2 tre!tme"t /+!-- !33-$ t, ! *i-i3i", em3-,$e0 !"0 ,cc#3$i"4 t+e
/!me 3,/iti," !/ !" !-ie" em3-,$e0 b$ 3etr,-e#m /ervice c,"tr!ct,r !"0
/#bc,"tr!ct,r.
A"$ i"c,me e!r"e0 fr,m !-- ,t+er /,#rce/ 5it+i" t+e P+i-i33i"e/ b$ t+e !-ie"
em3-,$ee/ referre0 t, #"0er )#b/ecti,"/ >C?, >D? !"0 >E? +ere,f /+!-- be /#b:ect t,
t+e 3erti"e"t i"c,me t!2, !/ t+e c!/e m!$ be, im3,/e0 #"0er t+i/ C,0e.
)ECTION 2A T!2 Li!bi-it$ ,f %ember/ ,f &e"er!- Pr,fe//i,"!-
P!rt"er/+i3/A 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3 !/ /#c+ /+!-- ",t be /#b:ect t, t+e
i"c,me t!2 im3,/e0 #"0er t+i/ C+!3ter. Per/,"/ e"4!4i"4 i" b#/i"e// !/ 3!rt"er/ i"
! 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3 /+!-- be -i!b-e f,r i"c,me t!2 ,"-$ i" t+eir
/e3!r!te !"0 i"0ivi0#!- c!3!citie/.
*,r 3#r3,/e/ ,f c,m3#ti"4 t+e 0i/trib#tive /+!re ,f t+e 3!rt"er/, t+e "et i"c,me ,f
t+e 3!rt"er/+i3 /+!-- be c,m3#te0 i" t+e /!me m!""er !/ ! c,r3,r!ti,".
E!c+ 3!rt"er /+!-- re3,rt !/ 4r,// i"c,me +i/ 0i/trib#tive /+!re, !ct#!--$ ,r
c,"/tr#ctive-$ receive0, i" t+e "et i"c,me ,f t+e 3!rt"er/+i3.
CASES DIGEST
Tax #iability of 'embers of $eneral 0rofessional 0artnerships
Income tax is imposed on the partners, not on the professional partnership
A general professional partnership, unli"e an ordinary business partnership 8which is
treated as a corporation for income tax purposes and so subject to the corporate income
tax9, is not itself an income taxpayer The income tax is imposed not on the professional
partnership, which is tax exempt, but on the partners themselves in their individual
capacity computed on their distributive shares of partnership profits The general
professional partnership is deemed to be no more than a mere mechanism or a flow3
through entity in the generation of income by, and the ultimate distribution of such
income to, respectively, each of the individual partners
Rufino R Tan vs Ramon R del Rosario, Ar, et al,
$R )o *./-2/, ;ctober 1, *//4
C'APTER I( T!2 ," C,r3,r!ti,"/
)ECTION 27 R!te/ ,f I"c,me T!2 ," D,me/tic C,r3,r!ti,"/ .
>A? I" &e"er!- . E2ce3t !/ ,t+er5i/e 3r,vi0e0 i" t+i/ C,0e, !" i"c,me t!2 ,f
t+irt$@five 3erce"t >;<G? i/ +ereb$ im3,/e0 #3," t+e t!2!b-e i"c,me 0erive0
0#ri"4 e!c+ t!2!b-e $e!r fr,m !-- /,#rce/ 5it+i" !"0 5it+,#t t+e P+i-i33i"e/ b$
ever$ c,r3,r!ti,", !/ 0efi"e0 i" )ecti," 22>B? ,f t+i/ C,0e !"0 t!2!b-e #"0er t+i/
Tit-e !/ ! c,r3,r!ti,", ,r4!"i6e0 i", ,r e2i/ti"4 #"0er t+e -!5/ ,f t+e P+i-i33i"e/=
Pr,vi0e0, T+!t effective !"#!r$ 1, 2CC9, t+e r!te ,f i"c,me t!2 /+!-- be t+irt$
3erce"t >;CG?.
I" t+e c!/e ,f c,r3,r!ti,"/ !0,3ti"4 t+e fi/c!-@$e!r !cc,#"ti"4 3eri,0, t+e t!2!b-e
i"c,me /+!-- be c,m3#te0 5it+,#t re4!r0 t, t+e /3ecific 0!te 5+e" /3ecific /!-e/,
3#rc+!/e/ !"0 ,t+er tr!"/!cti,"/ ,cc#r. T+eir i"c,me !"0 e23e"/e/ f,r t+e fi/c!-
$e!r /+!-- be 0eeme0 t, +!ve bee" e!r"e0 !"0 /3e"t e8#!--$ f,r e!c+ m,"t+ ,f t+e
3eri,0.
T+e c,r3,r!te i"c,me t!2 r!te /+!-- be !33-ie0 ," t+e !m,#"t c,m3#te0 b$
m#-ti3-$i"4 t+e "#mber ,f m,"t+/ c,vere0 b$ t+e "e5 r!te 5it+i" t+e fi/c!- $e!r
b$ t+e t!2!b-e i"c,me ,f t+e c,r3,r!ti," f,r t+e 3eri,0, 0ivi0e0 b$ t5e-ve.
Pr,vi0e0, f#rt+er, T+!t t+e Pre/i0e"t, #3," t+e rec,mme"0!ti," ,f t+e )ecret!r$ ,f
*i"!"ce, m!$, effective !"#!r$ 1, 2CCC, !--,5 c,r3,r!ti,"/ t+e ,3ti," t, be t!2e0
!t fiftee" 3erce"t >1<G? ,f 4r,// i"c,me !/ 0efi"e0 +erei", !fter t+e f,--,5i"4
c,"0iti,"/ +!ve bee" /!ti/fie0=
>1? A t!2 eff,rt r!ti, ,f t5e"t$ 3erce"t >2CG? ,f &r,// N!ti,"!- Pr,0#ct >&NP?7
>2? A r!ti, ,f f,rt$ 3erce"t >4CG? ,f i"c,me t!2 c,--ecti," t, t,t!- t!2 reve"#e/7
>;? A (AT t!2 eff,rt ,f f,#r 3erce"t >4G? ,f &NP7 !"0
>4? A C.9 3erce"t >C.9G? r!ti, ,f t+e C,"/,-i0!te0 P#b-ic )ect,r *i"!"ci!-
P,/iti," >CP)*P? t, &NP.
T+e ,3ti," t, be t!2e0 b!/e0 ," 4r,// i"c,me /+!-- be !v!i-!b-e ,"-$ t, firm/
5+,/e r!ti, ,f c,/t ,f /!-e/ t, 4r,// /!-e/ ,r recei3t/ fr,m !-- /,#rce/ 0,e/ ",t
e2cee0 fift$@five 3erce"t ><<G?.
T+e e-ecti," ,f t+e 4r,// i"c,me t!2 ,3ti," b$ t+e c,r3,r!ti," /+!-- be irrev,c!b-e
f,r t+ree >;? c,"/ec#tive t!2!b-e $e!r/ 0#ri"4 5+ic+ t+e c,r3,r!ti," i/ 8#!-ifie0
#"0er t+e /c+eme.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .,3.1 7ecember -,, -..-
$uidelines in 7etermining @hether a 0articular Real 0roperty is a Capital Asset or an
;rdinary Asset 0ursuant to &ection 1/8A98*9 of the )ational Internal Revenue Code of
*//, for 0urposes of Imposing the Capital $ains Tax or the 'inimum Corporate Income
Tax 8'CIT9
The following terms shall be defined as followsC
a Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under &ec 1/8A98*9 of the Code
b ;rdinary assets shall refer to all real properties specifically excluded from the
definition of capital assets under &ec 1/8A98*9 of the Code, namelyC
* &toc" in trade of a taxpayer or other real property of a "ind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year? or
- Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business? or
1 Real property used in trade or business 8ie, buildings andBor improvements9 of a
character which is subject to the allowance for depreciation provided for under &ec
148%9 of the Code? or
4 Real property used in trade or business of the taxpayer
Real properties ac5uired by ban"s through foreclosure sales are considered as their
ordinary assets Dowever, ban"s shall not be considered as habitually engaged in the real
estate business for purposes of determining the applicable rate of withholding tax
imposed under &ec -<,-8A9 of Revenue Regulations )o -3/2 , as amended
Income Tax on 7omestic Corporations
Income tax on domestic corporations is covered by &ection -, of the )IRC of *//,,
Dence, a domestic corporation must pay whichever is higher ofC 8*9 the income tax under
&ection -, 8A9 of the )IRC of *//,, computed by applying the tax rate therein to the
taxable income of the corporation? or 8-9 the 'CIT under &ection -, 8=9, also of the
)IRC of *//,, e5uivalent to -Q of the gross income of the corporation Although this
may be the general rule in determining the income tax due from a domestic corporation
under the )IRC of *//,, it can only be applied to 0A# to the extent allowed by the
provisions in the franchise of 0A# specifically governing its taxation
Commissioner of Internal Revenue vs 0A#, Inc, $R )o *2..++, Auly ,, -../
Income tax on 7omestic Corporations
!nder the Tax Code, the term (gross income( derived from business shall be e5uivalent to
gross sales less sales returns, discounts and allowances and cost of goods sold (Cost of
goods sold( shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use
%or a trading or merchandising concern, (cost of goods sold( shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold, including insurance while the goods are in transit
%or a manufacturing concern, (cost of goods manufactured and sold( shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse
In the case of taxpayers engaged in the sale of service, (gross income( means gross
receipts less sales returns, allowances and discounts
0ursuant to the )IRC of *//,, the taxable income of a domestic corporation may be
arrived at by subtracting from gross income deductions authori6ed, not just by the )IRC
of *//,, but also by special laws 0residential 7ecree )o *</. may be considered as
one of such special laws authori6ing 0A#, in computing its annual net taxable income, on
which its basic corporate income tax shall be based, to deduct from its gross income the
followingC 8*9 depreciation of assets at twice the normal rate? and 8-9 net loss carry3over
up to five years following the year of such loss In comparison, the -Q 'CIT under
&ection -, 8=9 of the )IRC of *//, shall be based on the gross income of the domestic
corporation The Court notes that gross income, as the basis for 'CIT, is given a special
definition under &ection -, 8=9 849 of the )IRC of *//,, different from the general one
under &ection 14 of the same Code
According to the last paragraph of &ection -, 8=9 849 of the )IRC of *//,, gross income
of a domestic corporation engaged in the sale of service means gross receipts, less sales
returns, allowances, discounts and cost of services :Cost of services: refers to all direct
costs and expenses necessarily incurred to provide the services re5uired by the customers
and clients including 8a9 salaries and employee benefits of personnel, consultants, and
specialists directly rendering the service? and 8b9 cost of facilities directly utili6ed in
providing the service, such as depreciation or rental of e5uipment used and cost of
supplies )oticeably, inclusions in and exclusionsBdeductions from gross income for
'CIT purposes are limited to those directly arising from the conduct of the taxpayer(s
business It is, thus, more limited than the gross income used in the computation of basic
corporate income tax
In light of the foregoing, there is an apparent distinction under the )IRC of *//, between
taxable income, which is the basis for basic corporate income tax under &ection -, 8A9?
and gross income, which is the basis for the 'CIT under &ection -, 8=9 The two terms
have their respective technical meanings, and cannot be used interchangeably The same
reasons prevent this Court from declaring that the basic corporate income tax, for which
0A# is liable under &ection *1 8a9 of 0residential 7ecree )o *</., also covers 'CIT
under &ection -, 8=9 of the )IRC of *//,, since the basis for the first is the annual net
taxable income, while the basis for the second is gross income
Third, even if the basic corporate income tax and the 'CIT are both income taxes under
&ection -, of the )IRC of *//,, and one is paid in place of the other, the two are distinct
and separate taxes
The Court again cites Commissioner of Internal Revenue v 0hilippine Airlines, Inc,
wherein it held that income tax on the passive income -* of a domestic corporation,
under &ection -, 879 of the )IRC of *//,, is different from the basic corporate income
tax on the taxable income of a domestic corporation, imposed by &ection -, 8A9, also of
the )IRC of *//, &ection *1 of 0residential 7ecree )o *</. gives 0A# the option to
pay basic corporate income tax or franchise tax, whichever is lower? and the tax so paid
shall be in lieu of all other taxes, except real property tax The income tax on the passive
income of 0A# falls within the category of :all other taxes: from which 0A# is exempted,
and which, if already collected, should be refunded to 0A#
Commissioner of Internal Revenue vs 0A#, Inc, $R )o *2..++, Auly ,, -../
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..43** 'arch *<, -.**
0roper Allocation of Costs and =xpenses Amongst Income =arnings of Ban"s and ;ther
%inancial Institutions for Income Tax Reporting 0urposes
R=>=)!= R=$!#ATI;)& ); **3.< April -<, -..<Regulations 7efining :$ross
Income =arned: to Implement the Tax Incentive 0rovision in &ection -4 of Republic Act
)o ,/*+, "nown as :The &pecial =conomic Jone Act of *//<:
$ross Income =arned E shall refer to gross sales or gross revenues derived from
business activity within the =C;J;)=, net of sales discounts, sales returns and
allowances and minus costs of sales or direct costs but before any deduction is made for
administrative, mar"eting, selling andBor operating expenses or incidental losses during
a given taxable period
%or purposes of computing the total five percent 8<Q9 tax rate imposed, the following
direct costs are included in the allowable deductions to arrive at gross income earned for
specific types of enterprisesC
* =C;J;)= =xport =nterprises, %ree Trade =nterprises and 7omestic 'ar"et
=nterprisesC
E 7irect salaries, wages or labor expenses
E 0roduction supervision salaries
E Raw materials used in the manufacture of products
E 7ecrease in $oods in 0rocess Account 8Intermediate goods9
E 7ecrease in %inished $oods Account
E &upplies and fuels used in production
E 7epreciation of machinery and e5uipment used in production, and of that portion
of the building owned or constructed that is used exclusively in the production of goods
E Rent and utility charges associated with building, e5uipment and warehouses used
in production
E %inancing charges associated with fixed assets used in production the amount of
which were not previously capitali6ed
- =C;J;)= 7eveloperB;perator, %acilities, !tilities and Tourism =nterprisesC
E 7irect salaries, wages or labor expense
E &ervice supervision salaries
E 7irect materials, supplies used
E 7epreciation of machineries and e5uipment used in the rendition of registered
services, and of that portion of the building owned or constructed that is used exclusively
in the rendition of registered service
E Rent and utility charges for buildings and capital e5uipment used in the rendition
of registered services
E %inancing charges associated with fixed assets used in the registered service
business the amount of which were not previously capitali6ed
>B?Pr,3riet!r$ E0#c!ti,"!- I"/tit#ti,"/ !"0 ',/3it!-/. . Pr,3riet!r$ e0#c!ti,"!-
i"/tit#ti,"/ !"0 +,/3it!-/ 5+ic+ !re ","3r,fit /+!-- 3!$ ! t!2 ,f te" 3erce"t >1CG?
," t+eir t!2!b-e i"c,me e2ce3t t+,/e c,vere0 b$ )#b/ecti," >D? +ere,f= Pr,vi0e0,
T+!t if t+e 4r,// i"c,me fr,m #"re-!te0 tr!0e, b#/i"e// ,r ,t+er !ctivit$ e2cee0/
fift$ 3erce"t ><CG? ,f t+e t,t!- 4r,// i"c,me 0erive0 b$ /#c+ e0#c!ti,"!-
i"/tit#ti,"/ ,r +,/3it!-/ fr,m !-- /,#rce/, t+e t!2 3re/cribe0 i" )#b/ecti," >A?
+ere,f /+!-- be im3,/e0 ," t+e e"tire t!2!b-e i"c,me. *,r 3#r3,/e/ ,f t+i/
)#b/ecti,", t+e term F#"re-!te0 tr!0e, b#/i"e// ,r ,t+er !ctivit$F me!"/ !"$ tr!0e,
b#/i"e// ,r ,t+er !ctivit$, t+e c,"0#ct ,f 5+ic+ i/ ",t /#b/t!"ti!--$ re-!te0 t, t+e
e2erci/e ,r 3erf,rm!"ce b$ /#c+ e0#c!ti,"!- i"/tit#ti," ,r +,/3it!- ,f it/ 3rim!r$
3#r3,/e ,r f#"cti,". A F3r,3riet!r$ e0#c!ti,"!- i"/tit#ti,"F i/ !"$ 3riv!te /c+,,-
m!i"t!i"e0 !"0 !0mi"i/tere0 b$ 3riv!te i"0ivi0#!-/ ,r 4r,#3/ 5it+ !" i//#e0 3ermit
t, ,3er!te fr,m t+e De3!rtme"t ,f E0#c!ti,", C#-t#re !"0 )3,rt/ >DEC)?, ,r t+e
C,mmi//i," ," 'i4+er E0#c!ti," >C'ED?, ,r t+e Tec+"ic!- E0#c!ti," !"0 )9i--/
Deve-,3me"t A#t+,rit$ >TE)DA?, !/ t+e c!/e m!$ be, i" !cc,r0!"ce 5it+ e2i/ti"4
-!5/ !"0 re4#-!ti,"/.
CASES DIGEST
'edical, dental, hospital and veterinary services, except those rendered by professionals,
are exempt from value3added tax 8&ection *./ 8l9, )IRC of *//,, as amended9 The
maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and
essential service or facility rendered by any hospital for its patients Thus, the facility of
ma"ing drugs and medicines available to in3patients of the hospital, whether for reasons
of life3threatening urgency or mere convenience, cannot but be viewed as a hospital
service that is covered by the broad and general exemption provided in &ection *./ 8l9 of
the )IRC of *//,, as amended, for :hospital services: CTA CA&= ); ,1.4
7ecember *, -.*.
0=R0=T!A# &!CC;!R D;&0ITA#, I)C and TD= &I&T=R& ;% &T 0A!# 7=
CDART=R& vs C;''I&&I;)=R ;% I)T=R)A# R=>=)!=
CDAR$I)$ '=7ICA# A)7 D;&0ITA# %==& E The mere charging of medical and
hospital fees from those who can afford to pay does not ma"e the institution one
established for profit or gain The fact that a hospital charges fees for paying beds does
not ma"e it lose its character as a charitable institution if the same were used to partly
finance the expenses of the free wards maintained by the hospital
A corporation organi6ed for (charitable, educational and religious purposes? that no part
of its net income inures to the benefit of any private individual is exempted from paying
income tax? that it operates a hospital in which medical assistance is given to destitute
persons free of charge? that it maintains a pharmacy department within the premises of
said hospital, to supply drugs and medicines only to charity and paying patients confined
therein? and that only the paying patients are re5uired to pay the medicines supplied to
them, for which they are charged the cost of medicines, plus an additional *.Q thereof,
to partly offset the cost of medicines supplied free of charge to charity patients !nder
these facts, we are of the opinion, and so hold, that the Dospital may not be regarded as
engaged in (business( by reason of said sale of medicines to its paying patients
It has been held that the mere charging of medical and hospital fees from those who
could afford to pay, did not ma"e the institution one established for profit or gain
D;&0ITA# 7= &A) A!A) 7= 7I;&, I)C vs 0A&AG CITG, 0AB#; C!)=TA City
'ayor$R )o #3*/1,* %ebruary -2, */++
BIR wins vs &t #u"es hospital ordered to pay 0+1/' tax deficiency ;ct -<, -.*-
The &upreme Court has ordered &t #u"eMs 'edical Center Inc to pay the Bureau of
Internal Revenue 0+1/ million in deficiency income tax, value added tax and
withholding tax on compensation for *//2, based on the *.3percent preferential income
tax as stipulated in the *//, Tax Code
According to BIR head revenue executive assistant Claro ;rti6, this means that all
hospitals that claim to be non3profit but are proprietary will now have to pay income tax
In -..-, &t #u"e(s disputed the BIRMs assessment that it should be paying income taxes,
saying that it is a non3profit hospital The case eventually reached the &upreme Court In
a decision penned by Associate Austice Antonio Carpio on &ept -+ and received by the
BIR on ;ct *,, the &C reversed an earlier decision by the Court of Tax Appeals, which
dismissed the BIRMs assessment The appellate court had argued that &t #u"eMs was not
subject to income tax because non3stoc" corporations are exempt from paying income
tax
Dowever, the &C ruled that &t #u"eMs services that patients pay for are subject to income
tax
U&t #u"eMs 'edical Center is ordered to pay the deficiency income tax in *//2 based on
the *. percent preferential income tax rate under &ection -,8B9 of the )ational Internal
Revenue Code O)IRCP Dowever, it is not liable for surcharges and interest on such
deficiency income tax under &ections -42 and -4/ of the )IRC,V the decision stated The
BIR claimed that &t #u"eMs had total revenues of 0*,1 billion in *//2 alone &t #u"eMs
refuted the assessment, saying that its free services to patients amounted to 0-*2 million
in *//2
The &upreme Court ruled that while there is no dispute that &t #u"eMs is organi6ed as a
non3stoc" and non3profit charitable institution, this does not automatically exempt it from
paying taxes %or a charitable institution to be exempt from income taxes, U&ection 1.8=9
of the )IRC re5uires that OitP must be organi6ed and operated exclusively for charitable
purposes,V the &C said in its decision
Taxation of non3stoc", non3profit hospitals
*, ;ctober -.*- by Atty Anthony $ 0resto6a B Tax #aw for Business
TAHATI;) of non3stoc", non3profit organi6ations had always been a controversy There
are a number of types or classes of organi6ations or associations exempted from income
taxes by the Tax Code &o these types of organi6ations are the usual channel through
which activities are pursued if the intention is not for profit But despite the clear
exemption from income taxes, the number of cases pursued administratively and litigated
in the courts would indicate that the taxation of these class of organi6ations is not that
clear after all
Among the types of organi6ations exempted from income taxes are non3stoc"
corporations organi6ed for charitable purposes and not for profit, but operated
exclusively for the promotion of the general welfare %or one to invo"e exemption from
income tax, it must be organi6ed as non3stoc" and operated for the purposes in which it
was organi6ed That classification itself had been an issue in the area of income taxation
The Court had repeatedly defined what a non3stoc" organi6ation is but its relevance
crops up every time a tax3related issue is involved &o what really constitutes a non3stoc"
corporationS ;nce again, the &upreme Court, in $R */</./ and */</+., &eptember -+,
-.*-, referred to the definition in the Corporation Code of a Unon3stoc" corporationV as
Uone where no part of its income is distributable as dividends to its members, trustees, or
officers and that any profit obtained as an incident to its operations shall whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organi6edV
That case involves the income taxation of a non3stoc" and non3profit hospital organi6ed
for charitable and for social welfare purposes The institution claims that it is exempt
from income taxation under &ection 1. of the Tax Code, which exempts this "ind of
institution from income taxation The tax authority, on the other hand, claims that it
should be subject to income tax under &ection -,8B9 of the Tax Code, which imposes *.3
percent income tax on proprietary and nonprofit hospitals As decided by the Court, a
non3stoc", non3profit corporation is indeed exempt from income taxation That
exemption, however, is intended solely for the activities of a non3stoc", non3profit entity
which are Uoperated exclusivelyV for charitable or social welfare purposes Any other
income that may be generated by these entities shall be subject to the *.3percent
preferential tax rate the tax imposed on proprietary non3profit hospitals
Apparently, according to the Court, UproprietaryV means Uprivate,V and when applied to
a hospital means private hospital ;n the other hand, Unon3profitV means no net income
or asset accrues to or benefits any member or person, with all net income or asset
devoted to the institutionMs purposes and all its activities conducted not for profit
Thus, if a hospital not organi6ed for profit, generates income not in relation to its
charitable or social welfare purposes, it shall be taxed at the preferential rate of *.
percent &imply put, even if a hospital does not distribute income to its members or
trustees and uses the income proceeds from non3related activities in furtherance of its
purposes, the same shall still be taxable at a rate of *. percent
The implication of this is that a non3stoc", non3profit organi6ation, including a hospital,
organi6ed for charitable andBor for purposes of promoting the general welfare is not
subject to income tax The exemption, however, extends only to the activities pursued
exclusively for such purposes, that is, not3for3profit activities That exemption is not lost
even if said entity involves itself in activities conducted for profit But these revenues
derived from profit3 generating activities will be subject to income tax @ith respect to
hospitals, that income tax shall not be the regular income tax rate of 1. percent but the
special income tax rate of *. percent imposed on proprietary and nonprofit hospitals
TAH =H='0TI;) ;% 0R;0=RTI=& ACT!A##G, 7IR=CT#G A)7 W
=HC#!&I>=#G !&=7 %;R R=#I$I;!&, CDARITAB#= A)7 =7!CATI;)A#
0!R0;&=&
%ACT&C The petitioner #ung Center of the 0hilippines is a non3stoc" and non3profit
entity established on Aanuary *+, */2* by virtue of 0residential 7ecree )o *2-1 It is
the registered owner of a parcel of land located at Iue6on Avenue, Iue6on City =rected
in the middle of the aforesaid lot is a hospital "nown as the #ung Center of the
0hilippines A big space at the ground floor is being leased to private parties, for canteen
and small store spaces, and to medical or professional practitioners who use the same as
their private clinics for their patients whom they charge for their professional services
Almost one3half of the entire area on the left side of the building along Iue6on Avenue is
vacant and idle, while a big portion on the right side, at the corner of Iue6on Avenue
and =lliptical Road, is being leased for commercial purposes to a private enterprise
"nown as the =lliptical ;rchids and $arden Center
The petitioner accepts paying and non3paying patients It also renders medical services
to out3patients, both paying and non3paying Aside from its income from paying patients,
the petitioner receives annual subsidies from the government ;n Aune ,, *//1, both the
land and the hospital building of the petitioner were assessed for real property taxes by
the City Assessor of Iue6on City
0etitioner filed a Claim for =xemption from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution 0etitioner contends that under
&ection -2, paragraph 1 of the */2, Constitution, the property is exempt from real
property taxes It averred that a minimum of +.Q of its hospital beds are exclusively used
for charity patients and that the major thrust of its hospital operation is to serve charity
patients It argues that it is a charitable institution and, as such, exempt from real
property taxes
I&&!=&C
* @hether the petitioner is a charitable institution within the context of 0residential
7ecree )o *2-1 and the */,1 and */2, Constitutions and &ection -148b9 of Republic
Act )o ,*+.
- @hether the real properties of petitioner are exempt from real property taxes
D=#7C
* Ges
To determine whether an enterprise is a charitable institutionBentity or not, the elements
which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by3laws, the methods of administration, the nature of the
actual wor" performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties
!nder 07 )o *2-1, the petitioner is a non3profit and non3stoc" corporation which,
subject to the provisions of the decree, is to be administered by the ;ffice of the 0resident
of the 0hilippines with the 'inistry of Dealth and the 'inistry of Duman &ettlements It
was organi6ed for the welfare and benefit of the %ilipino people principally to help
combat the high incidence of lung and pulmonary diseases in the 0hilippines
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out3patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it
is intended to achieve? and no money inures to the private benefit of the persons
managing or operating the institution 8Congregational &unday &chool, etc v Board of
Review? #utheran Dospital Association of &outh 7a"ota v Ba"er9
!nder 07 )o *2-1, the petitioner is entitled to receive donations The petitioner does
not lose its character as a charitable institution simply because the gift or donation is in
the form of subsidies granted by the government 8Gorgason v County Board of
=5uali6ation of &alt #a"e County9
In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for *//* and *//- for its patients and for
the operation of the hospital It even incurred a net loss in *//* and *//- from its
operations
- )otwithstanding the finding that petitioner is a charitable institution, those
portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for charitable
purposes
The settled rule is that laws granting exemption from tax are construed strictissimijuris
against the taxpayer and liberally in favor of the taxing power Taxation is the rule and
exemption is the exception The effect of an exemption is e5uivalent to an appropriation
Dence, a claim for exemption from tax payments must be clearly shown and based on
language in the law too plain to be mista"en 8&alvation Army v Doehn9
&ection - of 0residential 7ecree )o *2-1, relied upon by the petitioner, specifically
provides that petitioner shall enjoy tax exemptions and privileges Dowever, it is plain as
day that under the decree, petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon If the
intentions were otherwise, the same should have been among the enumeration of tax
exempt privileges under &ection -
It is a settled rule of statutory construction that the express mention of one person, thing,
or conse5uence implies the exclusion of all others The rule is expressed in the familiar
maxim, expressiouniusestexclusioalterius
The tax exemption under &ection -2819, Article >I of the */2, 0hilippine Constitution
covers property taxes only As Chief Austice Dilario $ 7avide, Ar, then a member of the
*/2+ Constitutional Commission, explainedC : what is exempted is not the institution
itself ? those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes:
Conse5uently, the constitutional provision is implemented by &ection -148b9 of Republic
Act )o ,*+. 8otherwise "nown as the #ocal $overnment Code of *//*9 as followsC
8)ote the following substantial changes in the ConstitutionC !nder the */1< Constitution,
: all lands, buildings, and improvements used (exclusively( for X charitable
purposes shall be exempt from taxation: Dowever, under the */,1 and the present
Constitutions, for :lands, buildings, and improvements: of the charitable institution to be
considered exempt, the same should not only be :exclusively: used for charitable
purposes? it is re5uired that such property be used :actually: and :directly: for such
purposes9
!nder the */,1 and */2, Constitutions and Rep Act )o ,*+. in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and une5uivocal proof, that
8a9 it is a charitable institution? and 8b9 its real properties are ACT!A##G, 7IR=CT#G
and =HC#!&I>=#G used for charitable purposes :=xclusive: is defined as possessed
and enjoyed to the exclusion of others? debarred from participation or enjoyment? and
:exclusively: is defined, :in a manner to exclude? as enjoying a privilege exclusively: If
real property is used for one or more commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation The words :dominant use: or :principal
use: cannot be substituted for the words :used exclusively: without doing violence to the
Constitutions and the law &olely is synonymous with exclusively
@hat is meant by actual, direct and exclusive use of the property for charitable purposes
is the direct and immediate and actual application of the property itself to the purposes
for which the charitable institution is organi6ed It is not the use of the income from the
real property that is determinative of whether the property is used for tax3exempt
purposes
The petitioner failed to discharge its burden to prove that the entirety of its real property
is actually, directly and exclusively used for charitable purposes @hile portions of the
hospital are used for the treatment of patients and the dispensation of medical services to
them, whether paying or non3paying, other portions thereof are being leased to private
individuals for their clinics and a canteen %urther, a portion of the land is being leased
to a private individual for her business enterprise under the business name :=lliptical
;rchids and $arden Center: Indeed, the petitioner(s evidence shows that it collected
0*,*1+,4214< as rentals in *//* and 0*,+,/,///-2 for *//- from the said lessees
Accordingly, the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes ;n the other
hand, the portions of the land occupied by the hospital and portions of the hospital used
for its patients, whether paying or non3paying, are exempt from real property taxes
#!)$ C=)T=R ;% TD= 0DI#I00I)=& vs I!=J;) CITG and C;)&TA)TI); 0
R;&A&, as City Assessor of Iue6on City O$R )o *44*.4 Aune -/, -..4P
>C? &,ver"me"t@,5"e0 ,r C,"tr,--e0 C,r3,r!ti,"/, A4e"cie/ ,r
I"/tr#me"t!-itie/T+e 3r,vi/i,"/ ,f e2i/ti"4 /3eci!- ,r 4e"er!- -!5/ t, t+e c,"tr!r$
",t5it+/t!"0i"4, !-- c,r3,r!ti,"/, !4e"cie/, ,r i"/tr#me"t!-itie/ ,5"e0 ,r
c,"tr,--e0 b$ t+e &,ver"me"t, e2ce3t t+e &,ver"me"t )ervice !"0 I"/#r!"ce
)$/tem >&)I)?, t+e ),ci!- )ec#rit$ )$/tem >)))?, t+e P+i-i33i"e 'e!-t+
I"/#r!"ce C,r3,r!ti," >P'IC?, t+e -,c!- 5!ter 0i/trict/ >LBD? !"0 t+e P+i-i33i"e
C+!rit$ )5ee3/t!9e/ Office >PC)O?, /+!-- 3!$ /#c+ r!te ,f t!2 #3," t+eir t!2!b-e
i"c,me !/ !re im3,/e0 b$ t+i/ )ecti," #3," c,r3,r!ti,"/ ,r !//,ci!ti,"/ e"4!4e0
i" ! /imi-!r b#/i"e//, i"0#/tr$, ,r !ctivit$.
0DI#I00I)= A'!&='=)T A)7 $A'I)$ C;R0;RATI;) 80A$C;R9, petitioner, vs
TD= B!R=A! ;% I)T=R)A# R=>=)!= 8BIR9, represented herein by D;) A;&= 'ARI;
B!TA$, in his official capacity as C;''I&&I;)=R ;% I)T=R)A# R=>=)!=, public
respondent, O$R )o *,-.2, 'arch *<, -.**P
7=CI&I;)
%or resolution of this Court is the 0etition for Certiorari and 0rohibition with prayer for the
issuance of a Temporary Restraining ;rder andBor 0reliminary Injunction, dated April *,,
-..+, of petitioner 0hilippine Amusement and $aming Corporation 80A$C;R9, see"ing the
declaration of nullity of &ection * of Republic Act 8RA9 )o /11, insofar as it amends
&ection -, 8c9 of the )ational Internal Revenue Code of *//,, by excluding petitioner from
exemption from corporate income tax for being repugnant to &ections * and *. of Article III
of the Constitution 0etitioner further see"s to prohibit the implementation of Bureau of
Internal Revenue 8BIR9 Revenue Regulations )o *+3-..< for being contrary to law
The undisputed facts follow
0A$C;R was created pursuant to 0residential 7ecree 8079 )o *.+,3A on Aanuary *,
*/,, &imultaneous to its creation, 07 )o *.+,3B 8supplementing 07 )o *.+,3A9 was
issued exempting 0A$C;R from the payment of any type of tax, except a franchise tax of five
percent 8<Q9 of the gross revenue Thereafter, on Aune -, */,2, 07 )o *1// was issued
expanding the scope of 0A$C;R(s exemption
To consolidate the laws pertaining to the franchise and powers of 0A$C;R, 07 )o *2+/
was issued &ection *1 thereof reads as followsC
&ec *1 =xemptions E
8*9 Customs 7uties, taxes and other imposts on importations E All importations of
e5uipment, vehicles, automobiles, boats, ships, barges, aircraft and such other gambling
paraphernalia, including accessories or related facilities, for the sole and exclusive use of
the casinos, the proper and efficient management and administration thereof and such other
clubs, recreation or amusement places to be established under and by virtue of this
%ranchise shall be exempt from the payment of duties, taxes and other imposts, including all
"inds of fees, levies, or charges of any "ind or nature
>essels andBor accessory ferry boats imported or to be imported by any corporation having
existing contractual arrangements with the Corporation, for the sole and exclusive use of the
casino or to be used to service the operations and re5uirements of the casino, shall li"ewise
be totally exempt from the payment of all customs duties, taxes and other imposts, including
all "inds of fees, levies, assessments or charges of any "ind or nature, whether )ational or
#ocal
8-9 Income and other taxes E 8a9 %ranchise DolderC )o tax of any "ind or form, income
or otherwise, as well as fees, charges, or levies of whatever nature, whether )ational or
#ocal, shall be assessed and collected under this %ranchise from the Corporation? nor shall
any form of tax or charge attach in any way to the earnings of the Corporation, except a
%ranchise Tax of five percent 8<Q9 of the gross revenue or earnings derived by the
Corporation from its operation under this %ranchise &uch tax shall be due and payable
5uarterly to the )ational $overnment and shall be in lieu of all "inds of taxes, levies, fees or
assessments of any "ind, nature or description, levied, established, or collected by any
municipal, provincial or national government authority
8b9 ;thersC The exemption herein granted for earnings derived from the operations
conducted under the franchise, specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and
extend to corporation8s9, association8s9, agency8ies9, or individual8s9 with whom the
Corporation or operator has any contractual relationship in connection with the operations
of the casino8s9 authori6ed to be conducted under this %ranchise and to those receiving
compensation or other remuneration from the Corporation as a result of essential facilities
furnished andBor technical services rendered to the Corporation or operator
The fee or remuneration of foreign entertainers contracted by the Corporation or operator in
pursuance of this provision shall be free of any tax
819 7ividend Income E )otwithstanding any provision of law to the contrary, in the
event the Corporation should declare a cash dividend income corresponding to the
participation of the private sector shall, as an incentive to the beneficiaries, be subject only
to a final flat income rate of ten percent 8*.Q9 of the regular income tax rates The dividend
income shall not in such case be considered as part of the beneficiaries( taxable income?
provided, however, that such dividend income shall be totally exempted from income or other
form of taxes if invested within six 8+9 months from the date the dividend income is received
in the followingC
8a9 operation of the casino8s9 or investments in any affiliate activity that will ultimately
redound to the benefit of the Corporation? or any other corporation with whom the
Corporation has any existing arrangements in connection with or related to the operations
of the casino8s9?
8b9 $overnment bonds, securities, treasury notes, or government debentures? or
8c9 B;I3registered or export3oriented corporation8s9
0A$C;R(s tax exemption was removed in Aune */24 through 07 )o */1*, but it was later
restored by #etter of Instruction )o *41., which was issued in &eptember */24
;n Aanuary *, *//2, RA )o 24-4, otherwise "nown as the )ational Internal Revenue Code
of *//,, too" effect &ection -, 8c9 of RA )o 24-4 provides that government3owned and
controlled corporations 8$;CCs9 shall pay corporate income tax, except petitioner
0A$C;R, the $overnment &ervice and Insurance Corporation, the &ocial &ecurity &ystem,
the 0hilippine Dealth Insurance Corporation, and the 0hilippine Charity &weepsta"es
;ffice, thusC
8c9 $overnment3owned or Controlled Corporations, Agencies or Instrumentalities E
The provisions of existing special general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and controlled by the $overnment, except
the $overnment &ervice and Insurance Corporation 8$&I&9, the &ocial &ecurity &ystem
8&&&9, the 0hilippine Dealth Insurance Corporation 80DIC9, the 0hilippine Charity
&weepsta"es ;ffice 80C&;9, and the 0hilippine Amusement and $aming Corporation
80A$C;R9, shall pay such rate of tax upon their taxable income as are imposed by this
&ection upon corporations or associations engaged in similar business, industry, or activity
@ith the enactment of RA )o /11, on 'ay -4, -..<, certain sections of the )ational
Internal Revenue Code of *//, were amended The particular amendment that is at issue in
this case is &ection * of RA )o /11,, which amended &ection -, 8c9 of the )ational
Internal Revenue Code of *//, by excluding 0A$C;R from the enumeration of $;CCs that
are exempt from payment of corporate income tax, thusC
8c9 $overnment3owned or Controlled Corporations, Agencies or Instrumentalities E
The provisions of existing special general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned and controlled by the $overnment,
except the $overnment &ervice and Insurance Corporation 8$&I&9, the &ocial &ecurity
&ystem 8&&&9, the 0hilippine Dealth Insurance Corporation 80DIC9, and the 0hilippine
Charity &weepsta"es ;ffice 80C&;9, shall pay such rate of tax upon their taxable income as
are imposed by this &ection upon corporations or associations engaged in similar business,
industry, or activity
7ifferent groups came to this Court via petitions for certiorari and prohibition assailing the
validity and constitutionality of RA )o /11,, in particularC
*9 &ection 4, which imposes a *.Q >alue Added Tax 8>AT9 on sale of goods and
properties? &ection <, which imposes a *.Q >AT on importation of goods? and &ection +,
which imposes a *.Q >AT on sale of services and use or lease of properties, all contain a
uniform proviso authori6ing the 0resident, upon the recommendation of the &ecretary of
%inance, to raise the >AT rate to *-Q The said provisions were alleged to be violative of
&ection -2 8-9, Article >I of the Constitution, which section vests in Congress the exclusive
authority to fix the rate of taxes, and of &ection *, Article III of the Constitution on due
process, as well as of &ection -+ 8-9, Article >I of the Constitution, which section provides
for the :no amendment rule: upon the last reading of a bill?
-9 &ections 2 and *- were alleged to be violative of &ection *, Article III of the
Constitution, or the guarantee of e5ual protection of the laws, and &ection -2 8*9, Article >I
of the Constitution? and
19 other technical aspects of the passage of the law, 5uestioning the manner it was
passed
;n &eptember *, -..<, the Court dismissed all the petitions and upheld the constitutionality
of RA )o /11, ;n the same date, respondent BIR issued Revenue Regulations 8RR9 )o
*+-..<, specifically identifying 0A$C;R as one of the franchisees subject to *.Q >AT
imposed under &ection *.2 of the )ational Internal Revenue Code of *//,, as amended by
RA )o /11, The said revenue regulation, in part, readsC
&ec 4 *.231 7efinitions and &pecific Rules on &elected &ervices E
xxx xxx xxx
8h9
$ross Receipts of all other franchisees, other than those covered by &ec **/ of the Tax
Code, regardless of how their franchisees may have been granted, shall be subject to the
*.Q >AT imposed under &ec *.2 of the Tax Code This includes, among others, the
0hilippine Amusement and $aming Corporation 80A$C;R9, and its licensees or
franchisees
Dence, the present petition for certiorari
0A$C;R raises the following issuesC
I
@D=TD=R ;R );T RA /11,, &=CTI;) * 8C9 I& )!## A)7 >;I7 AB I)ITI; %;R
B=I)$ R=0!$)A)T T; TD= =I!A# 0R;T=CTI;) OC#A!&=P ='B;7I=7 I)
&=CTI;) *, ARTIC#= III ;% TD= */2, C;)&TIT!TI;)
II
@D=TD=R ;R );T RA /11,, &=CTI;) * 8C9 I& )!## A)7 >;I7 AB I)ITI; %;R
B=I)$ R=0!$)A)T T; TD= );)3I'0AIR'=)T OC#A!&=P ='B;7I=7 I) &=CTI;)
*., ARTIC#= III ;% TD= */2, C;)&TIT!TI;)
III
@D=TD=R ;R );T RR *+3-..<, &=CTI;) 4*.231, 0ARA$RA0D 8D9 I& )!## A)7
>;I7 AB I)ITI; %;R B=I)$ B=G;)7 TD= &C;0= ;% TD= BA&IC #A@, RA 24-4,
&=CTI;) *.2, I)&;%AR A& TD= &AI7 R=$!#ATI;) I'0;&=7 >AT ;) TD=
&=R>IC=& ;% TD= 0=TITI;)=R A& @=## A& 0=TITI;)=R(& #IC=)&==& ;R
%RA)CDI&==& @D=) TD= BA&IC #A@, A& I)T=R0R=T=7 BG A00#ICAB#=
A!RI&0R!7=)C=, 7;=& );T I'0;&= >AT ;) 0=TITI;)=R ;R ;) 0=TITI;)=R(&
#IC=)&==& ;R %RA)CDI&==&
The BIR, in its Comment dated 7ecember -/, -..+, countersC
I
&=CTI;) * ;% RA ); /11, A)7 &=CTI;) *1 8-9 ;% 07 *2+/ AR= B;TD >A#I7
A)7 C;)&TIT!TI;)A# 0R;>I&I;)& ;% #A@& TDAT &D;!#7 B= DAR';)I;!&#G
C;)&TR!=7 T;$=TD=R &; A& T; $I>= =%%=CT T; A## ;% TD=IR 0R;>I&I;)&
@D=)=>=R 0;&&IB#=
II
&=CTI;) * ;% RA ); /11, I& );T >I;#ATI>= ;% &=CTI;) * A)7 &=CTI;) *.,
ARTIC#= III ;% TD= */2, C;)&TIT!TI;)
III
BIR R=>=)!= R=$!#ATI;)& AR= 0R=&!'=7 >A#I7 A)7 C;)&TIT!TI;)A# !)TI#
&TRICF=) 7;@) BG #A@%!# A!TD;RITI=&
The ;ffice of the &olicitor $eneral 8;&$9, by way of 'anifestation in #ieu of Comment,
concurred with the arguments of the petitioner It added that although the &tate is free to
select the subjects of taxation and that the ine5uity resulting from singling out a particular
class for taxation or exemption is not an infringement of the constitutional limitation, a tax
law must operate with the same force and effect to all persons, firms and corporations
placed in a similar situation %urthermore, according to the ;&$, public respondent BIR
exceeded its statutory authority when it enacted RR )o *+3-..<, because the latter(s
provisions are contrary to the mandates of 07 )o *2+/ in relation to RA )o /11,
The main issue is whether or not 0A$C;R is still exempt from corporate income tax and
>AT with the enactment of RA )o /11,
After a careful study of the positions presented by the parties, this Court finds the petition
partly meritorious
!nder &ection * of RA )o /11,, amending &ection -, 8c9 of the )ational Internal Revenue
Code of */,,, petitioner is no longer exempt from corporate income tax as it has been
effectively omitted from the list of $;CCs that are exempt from it 0etitioner argues that
such omission is unconstitutional, as it is violative of its right to e5ual protection of the laws
under &ection *, Article III of the ConstitutionC
&ec * )o person shall be deprived of life, liberty, or property without due process of law,
nor shall any person be denied the e5ual protection of the laws
In City of 'anila v #aguio, Ar, this Court expounded the meaning and scope of e5ual
protection, thusC
=5ual protection re5uires that all persons or things similarly situated should be treated
ali"e, both as to rights conferred and responsibilities imposed &imilar subjects, in other
words, should not be treated differently, so as to give undue favor to some and unjustly
discriminate against others The guarantee means that no person or class of persons shall be
denied the same protection of laws which is enjoyed by other persons or other classes in li"e
circumstances The :e5ual protection of the laws is a pledge of the protection of e5ual laws:
It limits governmental discrimination The e5ual protection clause extends to artificial
persons but only insofar as their property is concerned
xxx xxx xxx
#egislative bodies are allowed to classify the subjects of legislation If the classification is
reasonable, the law may operate only on some and not all of the people without violating the
e5ual protection clause The classification must, as an indispensable re5uisite, not be
arbitrary To be valid, it must conform to the following re5uirementsC
*9 It must be based on substantial distinctions
-9 It must be germane to the purposes of the law
19 It must not be limited to existing conditions only
49 It must apply e5ually to all members of the class
It is not contested that before the enactment of RA )o /11,, petitioner was one of the five
$;CCs exempted from payment of corporate income tax as shown in RA )o 24-4, &ection
-, 8c9 of which, readsC
8c9 $overnment3owned or Controlled Corporations, Agencies or Instrumentalities E
The provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and controlled by the $overnment, except
the $overnment &ervice and Insurance Corporation 8$&I&9, the &ocial &ecurity &ystem
8&&&9, the 0hilippine Dealth Insurance Corporation 80DIC9, the 0hilippine Charity
&weepsta"es ;ffice 80C&;9, and the 0hilippine Amusement and $aming Corporation
80A$C;R9, shall pay such rate of tax upon their taxable income as are imposed by this
&ection upon corporations or associations engaged in similar business, industry, or activity
7I=TcD
A perusal of the legislative records of the Bicameral Conference 'eeting of the Committee
on @ays on 'eans dated ;ctober -,, *//, would show that the exemption of 0A$C;R from
the payment of corporate income tax was due to the ac5uiescence of the Committee on @ays
on 'eans to the re5uest of 0A$C;R that it be exempt from such tax The records of the
Bicameral Conference 'eeting revealC
D;) R 7IAJ
The other thing, sir, is we E I noticed we imposed a tax on lotto winnings
CDAIR'A) =)RI#=
@ala na, tinanggal na namin yon
D;) R 7IAJ
Tinanggal na ba natin yonS
CDAIR'A) =)RI#=
;o
D;) R 7IAJ
Because I was wondering whether we covered the tax on E @hether on a universal
basis, we included a tax on coc"fighting winnings
CDAIR'A) =)RI#=
)o, we removed the E
D;) R 7IAJ
I 8inaudible9 natin yong lottoS
CDAIR'A) =)RI#=
0ati 0A$C;R tinanggal upon re5uest
CDAIR'A) AA>I=R
Geah, 0hilippine Insurance Commission
CDAIR'A) =)RI#=
0hilippine Insurance E Dealth, health ba Gon ang re5uest ng Chairman, I will
accept 8laughter9 0ag30ag3ibig yon, maliliit na sa tao yon
D;) R;HA&
'r Chairman, I wonder if in the revenue gainers if we factored in an amount that
would reflect the >AT and other sales taxes E
CDAIR'A) =)RI#=
)o, we(re tal"ing of this measure only @e will not E 8discontinued9
D;) R;HA&
)o, no, no, no, from the E arising from the exemption Assuming that when we
release the money into the hands of the public, they will not use that to E for wallpaper
They will spend that eh, 'r Chairman &o when they spend that E
CDAIR'A) =)RI#=
There(s a >AT
D;) R;HA&
There will be a >AT and there will be other sales taxes no Is there a 5uantificationS
Is there an approximationS
CDAIR'A) AA>I=R
)ot anything
D;) R;HA&
&o, in effect, we have sterili6ed that entire seven billion In effect, it is not circulating
in the economy which is unrealistic
CDAIR'A) =)RI#=
It does, it does, because this is ta"en and spent by government, somebody receives it
in the form of wages and supplies and other services and other goods They are not being
ta"en from the public and stored in a vault
CDAIR'A) AA>I=R
That ,, loss because of tax exemption That will be extra income for the taxpayers
D;) R;HA&
0recisely, so they will be spending it
The discussion above bears out that under RA )o 24-4, the exemption of 0A$C;R from
paying corporate income tax was not based on a classification showing substantial
distinctions which ma"e for real differences, but to reiterate, the exemption was granted
upon the re5uest of 0A$C;R that it be exempt from the payment of corporate income tax
@ith the subse5uent enactment of RA )o /11,, amending RA )o 24-4, 0A$C;R has
been excluded from the enumeration of $;CCs that are exempt from paying corporate
income tax The records of the Bicameral Conference 'eeting dated April *2, -..<, of the
Committee on the 7isagreeing 0rovisions of &enate Bill )o */<. and Douse Bill )o 1<<<,
show that it is the legislative intent that 0A$C;R be subject to the payment of corporate
income tax, thusC
TD= CDAIR'A) 8&=) R=CT;9
Ges, ;smeKa, the proponent of the amendment
&=) ;&'=TA
Geah 'r Chairman, one of the reasons why we(re even considering this >AT bill is
we want to show the world who our creditors, that we are increasing official revenues that
go to the national budget !nfortunately today, 0agcor is unofficial
)ow, in -..1, I too" a 5uic" loo" this morning, 0agcor had a net income of /,
billion after paying some small taxes that they are subjected to ;f the /, billion, they claim
they remitted to national government seven billion 0ag"atapos, there are other specific
remittances li"e to the 0hilippine &ports Commission, etc, as mandated by various laws, and
then about 4.. million to the 0resident(s &ocial %und But all in all, their net profit today
should be about *- billion That(s why I am 5uestioning this two billion Because while
essentially they claim that the money goes to government, and I will accept that just for the
sa"e of argument It does not pass through the appropriation process And I thin" that at
least if we can capture 1< percent or 1- percent through the budgetary process, first, it is
reflected in our official income of government which is applied to the national budget, and
secondly, it goes through what is constitutionally mandated as Congress appropriating and
defining where the money is spent and not through a board of directors that has absolutely
no accountability
R=0 0!=)T=B=##A
@ell, with all due respect, 'r Chairman, follow up lang
There is wisdom in the comments of my good friend from Cebu, &enator ;smeKa
&=) ;&'=TA
And )egros
R=0 0!=)T=B=##A
And )egros at the same time ay Fasimanwa But I would not want to put my friends
from the 7epartment of %inance in a difficult position, but may we "now your comments on
this "nowing that as &enator ;smeKa just mentioned, he said, :I accept that that a lot of it is
going to spending for basic services,: you "now, going to most, I thin", supposedly a lot or
most of it should go to government spending, social services and the li"e @hat is your
comment on thisS This is going to affect a lot of services on the government side
TD= CDAIR'A) 8R=0 #A0!&9
'r Chair, 'r Chair
&=) ;&'=TA
It goes from poc"et to the other, 'onico
R=0 0!=)T=B=##A
I "now that But I wanted to as" them, 'r &enator, because you may have your own
pre3judgment on this and I don(t blame you I don(t blame you And I "now you have your
own research But will this not affect a lot, the disbursements on social services and otherS
R=0 #;C&I)
'r Chairman 'r Chairman, if I can add to that 5uestion also @ouldn(t it be easier
for you to explain to, say, foreign creditors, how do you explain to them that if there is a
fiscal gap some of our richest corporations has ObeenP spared OfromP taxation by the
government which is one rich source of revenues )ow, why do you save, why do you spare
certain government corporations on that, li"e 0agcorS &o, would it be easier for you to ma"e
an argument if everything was exposed to taxationS
R=0 T=>=&
'r Chair, please
TD= CDAIR'A) 8R=0 #A0!&9
Can we as" the 7;% to respond to those before we call Congressman TevesS
'R 0!RI&I'A
Than" you, 'r Chair
Ges, from definitely improving the collection, it will help us because it will then enter
as an official revenue although when dividends declare it also goes in as other income
xxx xxx xxx
R=0 T=>=&
'r Chairman 7CcIa=
xxx xxx xxx
TD= CDAIR'A) 8R=0 #A0!&9
Congressman Teves
R=0 T=>=&
Geah 0agcor is controlled under &ection -,, that is on income tax )ow, we are
tal"ing here on value3added tax 7o you mean to say we are going to amend it from income
tax to value3added tax, as far as 0agcor is concernedS
TD= CDAIR'A) 8&=) R=CT;9
)o @e are just amending that section with regard to the exemption from income tax
of 0agcor
xxx xxx xxx
R=0 );$RA#=&
'r Chairman, 'r Chairman 'r Chairman
TD= CDAIR'A) 8R=0 #A0!&9
Congressman )ograles
R=0 );$RA#=&
Aust a point of in5uiry from the Chair @hat exactly are the functions of 0agcor that
are >ATableS @hat will we >AT in 0agcorS
TD= CDAIR'A) 8R=0 #A0!&9
This is on own income tax This is 0agcor income tax
R=0 );$RA#=&
)o, that(s why Anong i3va3>at natin sa "anya &ale of whatS
xxx xxx xxx
R=0 >I##A%!=RT=
'r Chairman, my 5uestion is, what are we >ATing 0agcor with, is it the
R=0 );$RA#=&
'r Chairman, this is a secret agreement or the way they craft their contract, which
basisS
TD= CDAIR'A) 8&=) R=CT;9
Congressman )ograles, the &enate version does not discuss a >AT on 0agcor but it
just ta"es away their exemption from non3payment of income tax
Taxation is the rule and exemption is the exception The burden of proof rests upon the party
claiming exemption to prove that it is, in fact, covered by the exemption so claimed As a
rule, tax exemptions are construed strongly against the claimant =xemptions must be shown
to exist clearly and categorically, and supported by clear legal provision
In this case, 0A$C;R failed to prove that it is still exempt from the payment of corporate
income tax, considering that &ection * of RA )o /11, amended &ection -, 8c9 of the
)ational Internal Revenue Code of *//, by omitting 0A$C;R from the exemption The
legislative intent, as shown by the discussions in the Bicameral Conference 'eeting, is to
re5uire 0A$C;R to pay corporate income tax? hence, the omission or removal of 0A$C;R
from exemption from the payment of corporate income tax It is a basic precept of statutory
construction that the express mention of one person, thing, act, or conse5uence excludes all
others as expressed in the familiar maxim expressio unius est exclusio alterius Thus, the
express mention of the $;CCs exempted from payment of corporate income tax excludes all
others )ot being excepted, petitioner 0A$C;R must be regarded as coming within the
purview of the general rule that $;CCs shall pay corporate income tax, expressed in the
maximC exceptio firmat regulam in casibus non exceptis
0A$C;R cannot find support in the e5ual protection clause of the Constitution, as the
legislative records of the Bicameral Conference 'eeting dated ;ctober -,, *//,, of the
Committee on @ays and 'eans, show that 0A$C;R(s exemption from payment of corporate
income tax, as provided in &ection -, 8c9 of RA )o 24-4, or the )ational Internal Revenue
Code of *//,, was not made pursuant to a valid classification based on substantial
distinctions and the other re5uirements of a reasonable classification by legislative bodies,
so that the law may operate only on some, and not all, without violating the e5ual protection
clause The legislative records show that the basis of the grant of exemption to 0A$C;R
from corporate income tax was 0A$C;R(s own re5uest to be exempted
0etitioner further contends that &ection * 8c9 of RA )o /11, is null and void ab initio for
violating the non3impairment clause of the Constitution 0etitioner avers that laws form part
of, and is read into, the contract even without the parties expressly saying so 0etitioner
states that the private partiesBinvestors transacting with it considered the tax exemptions,
which inure to their benefit, as the main consideration and inducement for their decision to
transactBinvest with it 0etitioner argues that the withdrawal of its exemption from corporate
income tax by RA )o /11, has the effect of changing the main consideration and
inducement for the transactions of private parties with it? thus, the amendatory provision is
violative of the non3impairment clause of the Constitution
0etitioner(s contention lac"s merit
The non3impairment clause is contained in &ection *., Article III of the Constitution, which
provides that no law impairing the obligation of contracts shall be passed The non3
impairment clause is limited in application to laws that derogate from prior acts or contracts
by enlarging, abridging or in any manner changing the intention of the parties There is
impairment if a subse5uent law changes the terms of a contract between the parties, imposes
new conditions, dispenses with those agreed upon or withdraws remedies for the
enforcement of the rights of the parties
As regards franchises, &ection **, Article HII of the Constitution provides that no franchise
or right shall be granted except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so re5uires
In 'anila =lectric Company v 0rovince of #aguna, the Court held that a franchise parta"es
the nature of a grant, which is beyond the purview of the non3impairment clause of the
Constitution The pertinent portion of the case statesC
@hile the Court has, not too infre5uently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying on
the franchise, these exemptions, nevertheless, are far from being strictly contractual in
nature Contractual tax exemptions, in the real sense of the term and where the non3
impairment clause of the Constitution can rightly be invo"ed, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the government, acting in its
private capacity, sheds its cloa" of authority and waives its governmental immunity Truly,
tax exemptions of this "ind may not be revo"ed without impairing the obligations of
contracts These contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises A franchise parta"es the nature of a grant which is
beyond the purview of the non3impairment clause of the Constitution Indeed, Article HII,
&ection **, of the */2, Constitution, li"e its precursor provisions in the */1< and the */,1
Constitutions, is explicit that no franchise for the operation of a public utility shall be
granted except under the condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so re5uires
In this case, 0A$C;R was granted a franchise to operate and maintain gambling casinos,
clubs and other recreation or amusement places, sports, gaming pools, ie, bas"etball,
football, lotteries, etc, whether on land or sea, within the territorial jurisdiction of the
Republic of the 0hilippines !nder &ection **, Article HII of the Constitution, 0A$C;R(s
franchise is subject to amendment, alteration or repeal by Congress such as the amendment
under &ection * of RA )o /1,, Dence, the provision in &ection * of RA )o /11,,
amending &ection -, 8c9 of RA )o 24-4 by withdrawing the exemption of 0A$C;R from
corporate income tax, which may affect any benefits to 0A$C;R(s transactions with private
parties, is not violative of the non3impairment clause of the Constitution
Anent the validity of RR )o *+3-..<, the Court holds that the provision subjecting 0A$C;R
to *.Q >AT is invalid for being contrary to RA )o /11, )owhere in RA )o /11, is it
provided that petitioner can be subjected to >AT RA )o /11, is clear only as to the
removal of petitioner(s exemption from the payment of corporate income tax, which was
already addressed above by this Court
As pointed out by the ;&$, RA )o /11, itself exempts petitioner from >AT pursuant to
&ection , 8"9 thereof, which readsC
&ec , &ection *./ of the same Code, as amended, is hereby further amended to read as
followsC
&ection *./ =xempt Transactions E 8*9 &ubject to the provisions of &ubsection 8-9 hereof,
the following transactions shall be exempt from the value3added taxC
xxx xxx xxx
8"9 Transactions which are exempt under international agreements to which the
0hilippines is a signatory or under special laws, except 0residential 7ecree )o <-/
0etitioner is exempt from the payment of >AT, because 0A$C;R(s charter, 07 )o *2+/, is
a special law that grants petitioner exemption from taxes
'oreover, the exemption of 0A$C;R from >AT is supported by &ection + of RA )o /11,,
which retained &ection *.2 8B9 819 of RA )o 24-4, thusC
ORA )o /11,P, &=C + &ection *.2 of the same Code 8RA )o 24-49, as amended, is
hereby further amended to read as followsC
&=C *.2 >alue3Added Tax on &ale of &ervices and !se or #ease of 0roperties E
8A9 Rate and Base of Tax E There shall be levied, assessed and collected, a value3added
tax e5uivalent to ten percent 8*.Q9 of gross receipts derived from the sale or exchange of
services, including the use or lease of propertiesC
xxx xxx xxx
8B9 Transactions &ubject to Jero 0ercent 8.Q9 Rate E The following services performed
in the 0hilippines by >AT3registered persons shall be subject to 6ero percent 8.Q9 rate?
xxx xxx xxx
819 &ervices rendered to persons or entities whose exemption under special laws or
international agreements to which the 0hilippines is a signatory effectively subjects the
supply of such services to 6ero percent 8.Q9 rate?
xxx xxx xxx 12
As pointed out by petitioner, although RA )o /11, introduced amendments to &ection *.2
of RA )o 24-4 by imposing >AT on other services not previously covered, it did not amend
the portion of &ection *.2 8B9 819 that subjects to 6ero percent rate services performed by
>AT3registered persons to persons or entities whose exemption under special laws or
international agreements to which the 0hilippines is a signatory effectively subjects the
supply of such services to .Q rate
0etitioner(s exemption from >AT under &ection *.2 8B9 819 of RA )o 24-4 has been
thoroughly and extensively discussed in Commissioner of Internal Revenue v Acesite
80hilippines9 Dotel Corporation Acesite was the owner and operator of the Doliday Inn
'anila 0avilion Dotel It leased a portion of the hotel(s premises to 0A$C;R It incurred
>AT amounting to 01.,*<-,2/-.- from its rental income and sale of food and beverages to
0A$C;R from Aanuary *//+ to April *//, Acesite tried to shift the said taxes to 0A$C;R
by incorporating it in the amount assessed to 0A$C;R Dowever, 0A$C;R refused to pay
the taxes because of its tax3exempt status 0A$C;R paid only the amount due to Acesite
minus >AT in the sum of 01.,*<-,2/-.- Acesite paid >AT in the amount of 01.,*<-,2/-.-
to the Commissioner of Internal Revenue, fearing the legal conse5uences of its non3payment
In 'ay *//2, Acesite sought the refund of the amount it paid as >AT on the ground that its
transaction with 0A$C;R was subject to 6ero rate as it was rendered to a tax3exempt entity
The Court ruled that 0A$C;R and Acesite were both exempt from paying >AT, thusC
xxx xxx xxx
0A$C;R is exempt from payment of indirect taxes
It is undisputed that 07 *2+/, the charter creating 0A$C;R, grants the latter an exemption
from the payment of taxes &ection *1 of 07 *2+/ pertinently providesC
&ec *1 =xemptions E
xxx xxx xxx
8-9 Income and other taxes E 8a9 %ranchise DolderC )o tax of any "ind or form, income
or otherwise, as well as fees, charges or levies of whatever nature, whether )ational or
#ocal, shall be assessed and collected under this %ranchise from the Corporation? nor shall
any form of tax or charge attach in any way to the earnings of the Corporation, except a
%ranchise Tax of five 8<Q9 percent of the gross revenue or earnings derived by the
Corporation from its operation under this %ranchise &uch tax shall be due and payable
5uarterly to the )ational $overnment and shall be in lieu of all "inds of taxes, levies, fees or
assessments of any "ind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority
8b9 ;thersC The exemptions herein granted for earnings derived from the operations
conducted under the franchise specifically from the payment of any tax, income or otherwise,
as well as any form of charges, fees or levies, shall inure to the benefit of and extend to
corporation8s9, association8s9, agency8ies9, or individual8s9 with whom the Corporation or
operator has any contractual relationship in connection with the operations of the casino8s9
authori6ed to be conducted under this %ranchise and to those receiving compensation or
other remuneration from the Corporation or operator as a result of essential facilities
furnished andBor technical services rendered to the Corporation or operator
0etitioner contends that the above tax exemption refers only to 0A$C;R(s direct tax liability
and not to indirect taxes, li"e the >AT
@e disagree
A close scrutiny of the above provisos clearly gives 0A$C;R a blan"et exemption to taxes
with no distinction on whether the taxes are direct or indirect @e are one with the CA ruling
that 0A$C;R is also exempt from indirect taxes, li"e >AT, as followsC
!nder the above provision O&ection *1 8-9 8b9 of 07 *2+/P, the term :Corporation: or
operator refers to 0A$C;R Although the law does not specifically mention 0A$C;R(s
exemption from indirect taxes, 0A$C;R is undoubtedly exempt from such taxes because the
law exempts from taxes persons or entities contracting with 0A$C;R in casino operations
Although, differently worded, the provision clearly exempts 0A$C;R from indirect taxes In
fact, it goes one step further by granting tax exempt status to persons dealing with 0A$C;R
in casino operations The unmista"able conclusion is that 0A$C;R is not liable for the
01.,*<-,2/-.- >AT and neither is Acesite as the latter is effectively subject to 6ero percent
rate under &ec *.2 B 819, RA 24-4 8=mphasis supplied9
Indeed, by extending the exemption to entities or individuals dealing with 0A$C;R, the
legislature clearly granted exemption also from indirect taxes It must be noted that the
indirect tax of >AT, as in the instant case, can be shifted or passed to the buyer, transferee, or
lessee of the goods, properties, or services subject to >AT Thus, by extending the tax
exemption to entities or individuals dealing with 0A$C;R in casino operations, it is
exempting 0A$C;R from being liable to indirect taxes
The manner of charging >AT does not ma"e 0A$C;R liable to said tax
It is true that >AT can either be incorporated in the value of the goods, properties, or
services sold or leased, in which case it is computed as *B** of such value, or charged as an
additional *.Q to the value >erily, the seller or lessor has the option to follow either way in
charging its clients and customer In the instant case, Acesite followed the latter method, that
is, charging an additional *.Q of the gross sales and rentals Be that as it may, the use of
either method, and in particular, the first method, does not denigrate the fact that 0A$C;R
is exempt from an indirect tax, li"e >AT
>AT exemption extends to Acesite
Thus, while it was proper for 0A$C;R not to pay the *.Q >AT charged by Acesite, the latter
is not liable for the payment of it as it is exempt in this particular transaction by operation of
law to pay the indirect tax &uch exemption falls within the former &ection *.- 8b9 819 of the
*/,, Tax Code, as amended 8now &ec *.2 ObP O1P of RA 24-49, which providesC
&ection *.- >alue3added tax on sale of services E 8a9 Rate and base of tax E There shall
be levied, assessed and collected, a value3added tax e5uivalent to *.Q of gross receipts
derived by any person engaged in the sale of services ? 0rovided, that the following
services performed in the 0hilippines by >ATregistered persons shall be subject to .Q
xxx xxx xxx
819 &ervices rendered to persons or entities whose exemption under special laws or
international agreements to which the 0hilippines is a signatory effectively subjects the
supply of such services to 6ero 8.Q9 rate 8emphasis supplied9
The rationale for the exemption from indirect taxes provided for in 07 *2+/ and the
extension of such exemption to entities or individuals dealing with 0A$C;R in casino
operations are best elucidated from the */2, case of Commissioner of Internal Revenue v
Aohn $otamco R &ons, Inc, where the absolute tax exemption of the @orld Dealth
;rgani6ation 8@D;9 upon an international agreement was upheld @e held in said case that
the exemption of contractee @D; should be implemented to mean that the entity or person
exempt is the contractor itself who constructed the building owned by contractee @D;, and
such does not violate the rule that tax exemptions are personal because the manifest
intention of the agreement is to exempt the contractor so that no contractor(s tax may be
shifted to the contractee @D; Thus, the proviso in 07 *2+/, extending the exemption to
entities or individuals dealing with 0A$C;R in casino operations, is clearly to proscribe
any indirect tax, li"e >AT, that may be shifted to 0A$C;R
Although the basis of the exemption of 0A$C;R and Acesite from >AT in the case of The
Commissioner of Internal Revenue v Acesite 80hilippines9 Dotel Corporation was &ection
*.- 8b9 of the */,, Tax Code, as amended, which section was retained as &ection *.2 8B9 819
in RA )o 24-4, it is still applicable to this case, since the provision relied upon has been
retained in RA )o /11,
It is settled rule that in case of discrepancy between the basic law and a rule or regulation
issued to implement said law, the basic law prevails, because the said rule or regulation
cannot go beyond the terms and provisions of the basic law 41 RR )o *+3-..<, therefore,
cannot go beyond the provisions of RA )o /11, &ince 0A$C;R is exempt from >AT under
RA )o /11,, the BIR exceeded its authority in subjecting 0A$C;R to *.Q >AT under RR
)o *+3-..<? hence, the said regulatory provision is hereby nullified
@D=R=%;R=, the petition is 0ART#G $RA)T=7 &ection * of Republic Act )o /11,,
amending &ection -, 8c9 of the )ational Internal Revenue Code of *//,, by excluding
petitioner 0hilippine Amusement and $aming Corporation from the enumeration of
government3owned and controlled corporations exempted from corporate income tax is valid
and constitutional, while BIR Revenue Regulations )o *+3-..< insofar as it subjects
0A$C;R to *.Q >AT is null and void for being contrary to the )ational Internal Revenue
Code of *//,, as amended by Republic Act )o /11,
)o costs &; ;R7=R=7
%ootnotes
CR=ATI)$ TD= 0DI#I00I)= A'!&='=)T& A)7 $A'I)$ C;R0;RATI;),
7=%I)I)$ IT& 0;@=R& A)7 %!)CTI;)&, 0R;>I7I)$ %!)7& TD=R=%;R, A)7
%;R ;TD=R 0!R0;&=&
$RA)TI)$ TD= 0A$C;R A %RA)CDI&= T; =&TAB#I&D, ;0=RAT= A)7 'AI)TAI)
$A'B#I)$ CA&I);& ;) #A)7 ;R @AT=R @ITDI) TD= T=RRIT;RIA#
A!RI&7ICTI;) ;% TD= R=0!B#IC ;% TD=
&ection 4 =xemptions E
8*9 7uties, taxes and other imposts on importation E
8-9 Income and other taxes E
8a9 %ranchise DolderC )o tax of any "ind or form, income or otherwise, as
well as fees, charges, or levies of whatever nature, shall be assessed and collected under this
%ranchise from the %ranchise Dolder? nor shall any form of tax or charge attach in any way
to the earnings of the %ranchise Dolder, except a %ranchise Tax of five percent 8<Q9 of the
gross revenue or earnings derived by the %ranchise Dolder form its operation under this
%ranchise &uch tax shall be due and payable to the )ational $overnment and shall be in
lieu of all taxes, levies, fees or assessments of any "ind, nature or description, levied,
established, or collected by any municipal, provincial or national authority
8b9 ;thersC The exemption herein granted for earnings derived from the
operations conducted under the franchise, specifically from the payment of any tax, income
or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and
extend to corporationBs, associationBs, agencyBies, or individualBs with whom the %ranchise
has any contractual relationship in connection with the operations of the casinoBs authori6ed
to be conducted under the franchise and to those receiving compensation or other
remuneration from the %ranchise Dolder as a result of essential facilities furnished andBor
technical services rendered to the %ranchise Dolder 8=mphasis supplied9
The Constitution, Art HII, &ec ** )o franchise, certificate, or any other form of
authori6ation for the operation of a public utility shall be granted except to citi6ens of the
0hilippines or to corporations or associations organi6ed under the laws of the 0hilippines at
least sixty per centum of whose capital is owned by such citi6ens, nor shall such franchise,
certificate or authori6ation be exclusive in character or for a longer period than fifty years
)either shall any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the Congress when the common good so
re5uires The &tate shall encourage e5uity participation in public utilities by the general
public The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive
and managing officers of such corporation or association must be citi6ens of the 0hilippines
8=mphasis supplied9
BIR ISSUANCES
R=0!B#IC ACT ); *..-+ 'arch **, -.*.
A) ACT $RA)TI)$ I)C;'= TAH =H='0TI;) T; #;CA# @AT=R 7I&TRICT& BG
A'=)7I)$ &=CTI;) -, 8C9 ;% TD= )ATI;)A# I)T=R)A# R=>=)!= C;7=
8)IRC9 ;% *//,, A& A'=)7=7
&=C -, Rates of Income Tax on 7omestic Corporations E
8C9 $overnment3owned or Controlled Corporations, Agencies or Instrumentalities E
The provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the $overnment,
except the $overnment &ervice and Insurance &ystem 8$&I&9, the &ocial &ecurity &ystem
8&&&9, the 0hilippine Dealth Insurance Corporation 80DIC9, the local water districts
8#@79 and the 0hilippine Charity &weepsta"es ;ffice 80C&;9, shall pay such rate of tax
upon their taxable income as are imposed by this &ection upon corporations or
associations engaged in a similar business, industry, or activity
R=>=)!= R=$!#ATI;)& ); ..+3*. Aune -/, -.*.
Regulations 0roviding for the 0olicies, $uidelines and 0rocedures in the Implementation
of the Tax &ubsidy $ranted !nder &ection *, 8c9 of Republic Act )o 1</* 80hilippine
7eposit Insurance Corporation O07ICP Charter9, as Amended by Republic Act )o /<,+
promulgated to implementC
8*9 the tax expenditure subsidy provided for under &ection *, 8c9 of Republic Act
8RA9 )o 1</* 80hilippine 7eposit Insurance Corporation O07ICP Charter9, as
amended by RA )o /<,+, in favor of 07IC charging all of its tax obligations to the
Tax =xpenditure %und 8T=%9 in the annual $eneral Appropriation Act pursuant to the
provisions of =xecutive ;rder )o /1, series of */2+ for a period of five 8<9 years
rec"oned from the date of effectivity of RA /<,+?
8-9 the tax exemption of 07IC starting on the +th year and thereafter, from income
tax, final withholding tax, and value3added tax on assessments collected from member
ban"s
CASES DIGEST
Tax exemptions should be strictly construed against those claiming to be 5ualified
thereto
The 0hilippine Casino ;perators Corporation 80C;C9 is not exempt from the payment
of duties, taxes and other imposts on importations despite its concessionaire(s contract
with the 0hilippine Amusement and $aming Corporation 80A$C;R9 !nder B0 Blg
*.+,3B, as amended, full exemption from the payment of importation3related taxes is
granted to 0A$C;R and no other irrespective of the type of article imported @hile it
grants exemption not only to 0A$C;R but also to :any corporation having existing
contractual arrangements with it,: the exemption covers only the importation of vessels
andBor accessory ferry boats It is settled that tax exemptions should be strictly construed
against those claiming to be 5ualified thereto
Commissioner of Customs vs Court of Tax Appeals, et al,
$R )o *1-/-/, 'arch -,, -...
>D? R!te/ ,f T!2 ," Cert!i" P!//ive I"c,me/ .
>1? I"tere/t fr,m De3,/it/ !"0 Jie-0 ,r A"$ Ot+er %,"et!r$ Be"efit fr,m
De3,/it )#b/tit#te/ !"0 fr,m Tr#/t *#"0/ !"0 )imi-!r Arr!"4eme"t/, !"0 R,$!-tie/
. A fi"!- t!2 !t t+e r!te ,f t5e"t$ 3erce"t >2CG? i/ +ereb$ im3,/e0 #3," t+e
!m,#"t ,f i"tere/t ," c#rre"c$ b!"9 0e3,/it !"0 $ie-0 ,r !"$ ,t+er m,"et!r$
be"efit fr,m 0e3,/it /#b/tit#te/ !"0 fr,m tr#/t f#"0/ !"0 /imi-!r !rr!"4eme"t/
receive0 b$ 0,me/tic c,r3,r!ti,"/, !"0 r,$!-tie/, 0erive0 fr,m /,#rce/ 5it+i" t+e
P+i-i33i"e/= Pr,vi0e0, +,5ever, T+!t i"tere/t i"c,me 0erive0 b$ ! 0,me/tic
c,r3,r!ti," fr,m ! 0e3,/it,r$ b!"9 #"0er t+e e23!"0e0 f,rei4" c#rre"c$ 0e3,/it
/$/tem /+!-- be /#b:ect t, ! fi"!- i"c,me t!2 !t t+e r!te ,f /eve" !"0 ,"e@+!-f
3erce"t >7 1D2G? ,f /#c+ i"tere/t i"c,me.
CASES DIGEST
Interest income, whether actually received or merely accrued, form part of a ban"(s
taxable gross receipts
There is an implied repeal of &ection 48e9 of Revenue Regulations )o *-32. as there
exists a disparity between &ection 48e9 which imposes the $RT only on all items of
income actually received 8as opposed to their mere accrual9 and &ection ,8c9 of Revenue
Regulations )o *,324 which includes all interest income 8whether actual or accrued9 in
computing the $RT The exception having been eliminated, the clear intent is that the
later RR )o *,324 includes the exception within the scope of the general rule Clearly,
then, the current Revenue Regulations re5uire interest income, whether actually received
or merely accrued, to form part of the ban"(s taxable gross receipts
Commissioner of Internal Revenue v &olidban" Corporation,
$R )o *42*/*, )ovember -<, -..1
The imposition of the -.Q %@T and <Q $RT does not constitute double taxation
7ouble taxation means taxing for the same tax period the same thing or activity twice,
when it should be taxed but once, for the same purpose and with the same "ind of
character of tax This is not the situation in the case at bar The $RT is a percentage tax
under Title > of the Tax Code 8O&ection *-*P, ;ther 0ercentage Taxes9, while the %@T is
an income tax under Title II of the Code 8Tax on Income9 The two concepts are different
from each other In &olidban" Corporation, this Court defined that a percentage tax is a
national tax measured by a certain percentage of the gross selling price or gross value in
money of goods sold, bartered or imported? or of the gross receipts or earnings derived
by any person engaged in the sale of services It is not subject to withholding An income
tax, on the other hand, is a national tax imposed on the net or the gross income reali6ed
in a taxable year It is subject to withholding Thus, there can be no double taxation here
as the Tax Code imposes two different "inds of taxes
Commissioner of Internal Revenue vs Citytrust Investment 0hils, Inc,
$R )os *1/,2+3*4.2<,, &eptember -,, -..+
=xemption of Cooperatives
$iven that petitioner is a credit cooperative duly registered with the Cooperative
7evelopment Authority 8C7A9, the provision of &ection -4 8B9 8*9 of the )IRC must be
read together with RA +/12, as amended by RA /<-. on the exemptions given to these
entities
%ACT&C 7umaguete Cathedral Credit Cooperative received 0re3Assessment )otices for
deficiency withholding taxes for taxable years */// and -... It then availed of BIRMs
>oluntary Assessment and Abatement 0rogram and paid withholding taxes on the
payments for the compensation, honorarium of the Board of 7irectors, security and
janitorial services, and legal and professional services After receiving #etters of
7emand to pay the deficiency withholding taxes, inclusive of penalties, petitioner filed a
protest before the Commissioner of Internal Revenue @hen the protest remained unacted
upon, it filed a petition for review before the CTA The CTA %irst 7ivision ruled against
petitioner, ordering it to pay deficiency withholding taxes on interests from savings and
time deposits of its members and -.Q delin5uency interest Through a 0etition for
Review, the case reached the CTA =n Banc
The CTA =n Banc affirmed the CTA %irst 7ivisionMs ruling, holding that &ection <, of the
)IRC re5uires the withholding of tax at source and that Revenue Regulations )o -3/2
enumerated the income payments subject to final withholding tax, among which is
:interest from any peso ban" deposit and yield, or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements : According to the
CTA =n Banc, petitioner(s business falls under the phrase :similar arrangements?: as
such, it should have withheld the corresponding -.Q final tax on the interest from the
deposits of its members Through a 0etition for Review on Certiorari with the &upreme
Court, petitioner sought to set aside the CTA decision
I&&!=C @hether petitioner is liable to pay the deficiency withholding taxes on interest
from savings and time deposits of its members for the taxable years */// and -..., as
well as the delin5uency interest of -.Q per annum
R!#I)$C 0etitioner is not liable to pay the assessed deficiency withholding taxes on
interest from the savings and time deposits of its members, as well as the delin5uency
interest of -.Q per annum
BIR Ruling )o <<*322 clearly states, without any 5ualification, that since interest from
any 0hilippine currency ban" deposit and yield or any other monetary benefit from
deposit substitutes are paid by ban"s, cooperatives are not re5uired to withhold the
corresponding tax on the interest from savings and time deposits of their members The
legislative intent to give cooperatives a preferential tax treatment is apparent in Articles
+* and +- of RA +/12 This exemption extends to members of cooperatives It must be
emphasi6ed that cooperatives exist for the benefit of their members In fact, the primary
objective of every cooperative is to provide goods and services to its members to enable
them to attain increased income, savings, investments, and productivity Therefore,
limiting the application of the tax exemption to cooperatives would go against the very
purpose of a credit cooperative =xtending the exemption to members of cooperatives, on
the other hand, would be consistent with the intent of the legislature Thus, although the
tax exemption only mentions cooperatives, this should be construed to include the
members, pursuant to Article *-+ of RA +/12
The amendment in Article +* of RA /<-., specifically providing that members of
cooperatives are not subject to final taxes on their deposits, affirms the interpretation of
the BIR that &ection -4 8B9 8*9 of the )IRC does not apply to cooperatives and confirms
that such ruling carries out the legislative intent
7!'A$!=T= CATD=7RA# CR=7IT C;;0=RATI>= vs C;''I&&I;)=R ;%
I)T=R)A# R=>=)!= O$R )o *2-,--, Aanuary --, -.*.P
>2? C!3it!- &!i"/ fr,m t+e )!-e ,f )+!re/ ,f )t,c9 N,t Tr!0e0 i" t+e )t,c9
E2c+!"4e . A fi"!- t!2 !t t+e r!te/ 3re/cribe0 be-,5 /+!-- be im3,/e0 ," "et
c!3it!- 4!i"/ re!-i6e0 0#ri"4 t+e t!2!b-e $e!r fr,m t+e /!-e, e2c+!"4e ,r ,t+er
0i/3,/iti," ,f /+!re/ ,f /t,c9 i" ! 0,me/tic c,r3,r!ti," e2ce3t /+!re/ /,-0 ,r
0i/3,/e0 ,f t+r,#4+ t+e /t,c9 e2c+!"4e=
N,t ,ver P1CC,CCC<G
Am,#"t i" e2ce// ,f P1CC,CCC 1CG
C;'0A$)I= %I)A)CI=R= &!CR=& =T 7=)R==&, petitioner, vs C;''I&&I;)=R ;%
I)T=R)A# R=>=)!=, respondent O$R )o *11214 August -2, -..+P
7 = C I & I ; )
%or our resolution is the instant 0etition for Review on Certiorari assailing the 7ecision of
the Court of Appeals dated ;ctober -,, *//, in CA3$R &0 )o 1/<.*
Compagnie %inanciere &ucres et 7enrees, petitioner, is a non3resident private corporation
duly organi6ed and existing under the laws of the Republic of %rance
;n ;ctober -*, *//*, petitioner transferred its eight percent 82Q9 e5uity interest in the
'a"ati &hangri3#a Dotel and Resort, Incorporated to Ferry Doldings #td 8formerly &ligo
Doldings #td9, as shown by a 7eed of &ale and Assignment of &ubscription and Right of
&ubscription of the same date Transferred were 8a9 *.,,/-/ issued shares of stoc" valued at
0*.... per share with a total par value of 0*.,,/-,/....? 8b9 *<-,.1* with a par value of
0*.... per share with a total par value of 0*<,-.1,*....? 8c9 deposits on stoc"
subscriptions amounting to 041,*4,,+1.-2? and 8d9 petitioner(s right of subscription
;n )ovember -/, *//*, petitioner paid the documentary stamps tax and capital gains tax on
the transfer under protest
;n ;ctober -*, *//1, petitioner filed with the Commissioner of Internal Revenue, herein
respondent, a claim for refund of overpaid capital gains tax in the amount of 0*.,,2+/..
and overpaid documentary stamps taxes in the sum of 0/<*,21... or a total of
0*,.</,+//.. 0etitioner alleged that the transfer of deposits on stoc" subscriptions is not a
saleBassignment of shares of stoc" subject to documentary stamps tax and capital gains tax
Dowever, respondent did not act on petitioner(s claim for refund Thus, on )ovember */,
*//1, petitioner filed with the Court of Tax Appeals 8CTA9 a petition for review, doc"eted as
CTA Case )o <.4-
In its 7ecision dated ;ctober +, *//<, the CTA denied petitioner(s claim for refund The
CTA held that it is clear from &ection *,+ of the Tax Code that sales :to secure the future
payment of money or for the future transfer of any bond, due3bill, certificates of obligation
or stoc": are taxable %urthermore, petitioner admitted that it profited from the sale of
shares of stoc"s &uch profit is subject to capital gains tax
0etitioner filed a motion for reconsideration, but in a Resolution dated 7ecember -+, *//<,
the CTA denied the same This prompted petitioner to file with the Court of Appeals a
petition for review, doc"eted as CA3$R &0 )o 1/<.*
;n ;ctober -,, *//,, the Court of Appeals denied the petition and affirmed the 7ecision of
the CTA The appellate court ruled that a taxpayer has the onus probandi of proving
entitlement to a refund or deduction, following the rule that tax exemptions are strictly
construed against the taxpayer and liberally in favor of the &tate 0etitioner failed to meet
the re5uisite burden of proof to support its claim
Dence, petitioner(s recourse to this Court by way of a 0etition for Review on Certiorari
The sole issue for our resolution is whether the Court of Appeals erred in holding that the
assignment of deposits on stoc" subscriptions is subject to documentary stamps tax and
capital gains tax
Along with police power and eminent domain, taxation is one of the three basic and
necessary attributes of sovereignty Thus, the &tate cannot be deprived of this most essential
power and attribute of sovereignty by vague implications of law Rather, being derogatory of
sovereignty, the governing principle is that tax exemptions are to be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority? and he who claims
an exemption must be able to justify his claim by the clearest grant of statute
In the instant case, petitioner see"s a refund Tax refunds are a derogation of the &tate(s
taxing power Dence, li"e tax exemptions, they are construed strictly against the taxpayer
and liberally in favor of the &tate Conse5uently, he who claims a refund or exemption from
taxes has the burden of justifying the exemption by words too plain to be mista"en and too
categorical to be misinterpreted &ignificantly, petitioner cannot point to any specific
provision of the )ational Internal Revenue Code authori6ing its claim for an exemption or
refund Rather, &ection *,+ of the )ational Internal Revenue Code applicable to the issue
provides that the future transfer of shares of stoc"s is subject to documentary stamp tax,
thusC
&=C *,+ &tamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer
of due3bills, certificates of obligation, or shares or certificates of stoc" E ;n all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer of due3bills, certificates
of obligation, or shares or certificates of stoc" in any association, company, or corporation,
or transfer of such securities by assignment in blan", or by delivery, or by any paper or
agreement, or memorandum or other evidences of transfer or sale whether entitling the
holder in any manner to the benefit of such due bills, certificates of obligation or stoc", or to
secure the future payment of money, or for the future transfer of any due3bill, certificates of
obligation or stoc", there shall be collected a documentary stamp tax of fifty centavos
80*<.9 on each two hundred pesos80-....9, or fractional part thereof, of the par value of
such due3bill, certificates of obligation or stoc"C 0rovided, That only one tax shall be
collected on each sale or transfer of stoc" or securities from one person to another,
regardless of whether or not a certificate of stoc" or obligation is issued, indorsed, or
delivered in pursuance of such sale or transfer? and 0rovided, further, That in case of stoc"
without par value the amount of the documentary stamp tax herein prescribed shall be
e5uivalent to twenty3five percentum 8-<Q9 of the documentary stamp tax paid upon the
original issue of the said stoc" 8=mphasis supplied9
Clearly, under the above provision, sales to secure :the future transfer of due3bills,
certificates of obligation or certificates of stoc": are liable for documentary stamp tax )o
exemption from such payment of documentary stamp tax is specified therein
0etitioner contends that the assignment of its :deposits on stoc" subscription: is not subject
to capital gains tax because there is no gain to spea" of In the Capital $ains Tax Return on
&toc" Transaction, which petitioner filed with the Bureau of Internal Revenue, the
ac5uisition cost of the shares it sold, including the stoc" subscription is 0+/,*41,+1.-2 The
transfer price to Ferry Doldings, #td is 0,.,11-,2+//- ;bviously, petitioner has a net
gain in the amount of 0*,*2/,-1/+4 As the CTA aptly ruled, :a tax on the profit of sale on
net capital gain is the very essence of the net capital gains tax law To hold otherwise will
ineluctably deprive the government of its due and unduly set free from tax liability persons
who profited from said transactions:
>erily, the Court of Appeals committed no error in affirming the CTA 7ecision
@e reiterate the well3established doctrine that as a matter of practice and principle, this
Court will not set aside the conclusion reached by an agency, li"e the CTA, especially if
affirmed by the Court of Appeals By the very nature of its function, it has dedicated itself to
the study and consideration of tax problems and has necessarily developed an expertise on
the subject, unless there has been an abuse or improvident exercise of authority on its part,
which is not present here
@D=R=%;R=, we 7=)G the petition The 7ecision of the Court of Appeals in CA3$R &0
)o 1/<.* is A%%IR'=7 I) T;T; Costs against petitioner &; ;R7=R=7
>;? T!2 ," I"c,me Derive0 #"0er t+e E23!"0e0 *,rei4" C#rre"c$ De3,/it )$/tem.
I"c,me 0erive0 b$ ! 0e3,/it,r$ b!"9 #"0er t+e e23!"0e0 f,rei4" c#rre"c$ 0e3,/it
/$/tem fr,m f,rei4" c#rre"c$ tr!"/!cti,"/ 5it+ ","re/i0e"t/, ,ff/+,re b!"9i"4
#"it/ i" t+e P+i-i33i"e/, -,c!- c,mmerci!- b!"9/ i"c-#0i"4 br!"c+e/ ,f f,rei4"
b!"9/ t+!t m!$ be !#t+,ri6e0 b$ t+e B!"49,)e"tr!-"4Pi-i3i"!/ >B)P? t, tr!"/!ct
b#/i"e// 5it+ f,rei4" c#rre"c$ 0e3,/it /$/tem #"it/ !"0 ,t+er 0e3,/it,r$ b!"9/
#"0er t+e e23!"0e0 f,rei4" c#rre"c$ 0e3,/it /$/tem /+!-- be e2em3t fr,m !-- t!2e/,
e2ce3t "et i"c,me fr,m /#c+ tr!"/!cti,"/ !/ m!$ be /3ecifie0 b$ t+e )ecret!r$ ,f
*i"!"ce, #3," rec,mme"0!ti," b$ t+e %,"et!r$ B,!r0 t, be /#b:ect t, t+e re4#-!r
i"c,me t!2 3!$!b-e b$ b!"9/= Pr,vi0e0, +,5ever, T+!t i"tere/t i"c,me fr,m
f,rei4" c#rre"c$ -,!"/ 4r!"te0 b$ /#c+ 0e3,/it,r$ b!"9/ #"0er /!i0 e23!"0e0
/$/tem t, re/i0e"t/ ,t+er t+!" ,ff/+,re b!"9i"4 #"it/ i" t+e P+i-i33i"e/ ,r ,t+er
0e3,/it,r$ b!"9/ #"0er t+e e23!"0e0 /$/tem /+!-- be /#b:ect t, ! fi"!- t!2 !t t+e
r!te ,f te" 3erce"t >1CG?.
A"$ i"c,me ,f ","re/i0e"t/, 5+et+er i"0ivi0#!-/ ,r c,r3,r!ti,"/, fr,m
tr!"/!cti,"/ 5it+ 0e3,/it,r$ b!"9/ #"0er t+e e23!"0e0 /$/tem /+!-- be e2em3t
fr,m i"c,me t!2.
BIR ISSUANCES
R=>=)!= '=';RA)7!' CIRC!#AR ); *43.- April *., -..-0rescribing the
0rocedures for the 'anner of %iling of Tax Returns for Income derived by %oreign
Currency 7eposit !nits from %oreign Currency and other Transactions and the 'anner
of Reporting Their Income for Income Tax 0urposes pursuant to &ection -,879819 and
-28A98,98b9 of the Tax Code
>4?I"terc,r3,r!te Divi0e"0/ . Divi0e"0/ receive0 b$ ! 0,me/tic c,r3,r!ti," fr,m
!",t+er 0,me/tic c,r3,r!ti," /+!-- ",t be /#b:ect t, t!2.
><? C!3it!- &!i"/ Re!-i6e0 fr,m t+e )!-e, E2c+!"4e ,r Di/3,/iti," ,f L!"0/
!"0D,r B#i-0i"4/ . A fi"!- t!2 ,f /i2 3erce"t >AG? i/ +ereb$ im3,/e0 ," t+e 4!i"
3re/#me0 t, +!ve bee" re!-i6e0 ," t+e /!-e, e2c+!"4e ,r 0i/3,/iti," ,f -!"0/ !"0D,r
b#i-0i"4/ 5+ic+ !re ",t !ct#!--$ #/e0 i" t+e b#/i"e// ,f ! c,r3,r!ti," !"0 !re
tre!te0 !/ c!3it!- !//et/, b!/e0 ," t+e 4r,// /e--i"4 3rice ,r f!ir m!r9et v!-#e !/
0etermi"e0 i" !cc,r0!"ce 5it+ )ecti," A>E? ,f t+i/ C,0e, 5+ic+ever i/ +i4+er, ,f
/#c+ -!"0/ !"0D,r b#i-0i"4/.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..<3./ 'arch *+, -../
Reverting the >enue for the %iling of Returns and 0ayment of Capital $ains Tax,
Creditable @ithholding Tax and 7ocumentary &tamp Tax 7ue on &ale, Transfer or
=xchange of Real 0roperty of #arge Taxpayers to the 0lace @here the 0roperty is
#ocated
R=>=)!= R=$!#ATI;)& ); .,3.1 7ecember -,, -..-
$uidelines in 7etermining @hether a 0articular Real 0roperty is a Capital Asset or an
;rdinary Asset 0ursuant to &ection 1/8A98*9 of the )ational Internal Revenue Code of
*//, for 0urposes of Imposing the Capital $ains Tax or the 'inimum Corporate Income
Tax 8'CIT9
The following terms shall be defined as followsC
a Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under &ec 1/8A98*9 of the Code
b ;rdinary assets shall refer to all real properties specifically excluded from the
definition of capital assets under &ec 1/8A98*9 of the Code, namelyC
* &toc" in trade of a taxpayer or other real property of a "ind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year? or
- Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business? or
1 Real property used in trade or business 8ie, buildings andBor improvements9 of a
character which is subject to the allowance for depreciation provided for under &ec
148%9 of the Code? or
4 Real property used in trade or business of the taxpayer
Real properties ac5uired by ban"s through foreclosure sales are considered as their
ordinary assets Dowever, ban"s shall not be considered as habitually engaged in the real
estate business for purposes of determining the applicable rate of withholding tax
imposed under &ec -<,-8A9 of Revenue Regulations )o -3/2 , as amended
CASES DIGEST7isposition of #ands andBor Buildings
RevReg -3/2 imposes a graduated Creditable @ithholding Tax on income based on the
$ross &elling 0rice or %air 'ar"et >alue of the real property categori6ed as ordinary
assets ;n the other hand, &ection -, 879 8<9 of RA 24-4 imposes a final tax and flat rate
of +Q on the gain presumed to be reali6ed from the sale of a capital asset based on its
$&0 or %'> This final tax is also withheld at source
Chamber of Real =state and Builders( Associations, Inc vs Alberto Romulo, et al, $R
)o *+.,<+, 'arch /, -.*.
>E? %i"im#m C,r3,r!te I"c,me T!2 ," D,me/tic C,r3,r!ti,"/
>1? Im3,/iti," ,f T!2 . A mi"im#m c,r3,r!te i"c,me t!2 ,f t5, 3erce"t >2G?
,f t+e 4r,// i"c,me !/ ,f t+e e"0 ,f t+e t!2!b-e $e!r, !/ 0efi"e0 +erei", i/ +ereb$
im3,/e0 ," ! c,r3,r!ti," t!2!b-e #"0er t+i/ Tit-e, be4i""i"4 ," t+e f,#rt+ t!2!b-e
$e!r imme0i!te-$ f,--,5i"4 t+e $e!r i" 5+ic+ /#c+ c,r3,r!ti," c,mme"ce0 it/
b#/i"e// ,3er!ti,"/, 5+e" t+e mi"im#m i"c,me t!2 i/ 4re!ter t+!" t+e t!2
c,m3#te0 #"0er )#b/ecti," >A? ,f t+i/ )ecti," f,r t+e t!2!b-e $e!r.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ./3/2 August -<, *//2
The Imposition of the 'inimum Corporate Income Tax 8'CIT9 of Two 8-Q9 percent on
7omestic Corporations and Resident %oreign Corporations
'I)I'!' C;R0;RAT= I)C;'= TAH 8'CIT9 ;) 7;'=&TIC C;R0;RATI;)& E
8*9 Imposition of the Tax E A minimum corporate income tax 8'CIT9 of two percent
8-Q9 of the gross income as of the end of the taxable year 8whether calendar or fiscal
year, depending on the accounting period employed9 is hereby imposed upon any
domestic corporation beginning the fourth 84th9 taxable year immediately following the
taxable year in which such corporation commenced its business operations The 'CIT
shall be imposed whenever such corporation has 6ero or negative taxable income or
whenever the amount of minimum3corporate income tax is greater than the normal
income tax due from such corporation
Accordingly, the minimum corporate income tax shall not be imposed upon any of the
followingC
8a9 7omestic corporations operating as proprietary educational institutions subject to
tax at ten percent 8*.Q9 on their taxable income? or
8b9 7omestic corporations engaged in hospital operations which are non3profit subject to
tax at ten percent 8*.Q9 on their taxable income? and
8c9 7omestic corporations engaged in business as depository ban"s under the expanded
foreign currency deposit system, otherwise "nown as %oreign Currency 7eposit !nits
8%C7!s9, on their income from foreign currency transactions with local commercial
ban"s, including branches of foreign ban"s, authori6ed by the Bang"o&entralng0ilipinas
8B&09 to transact business with foreign currency deposit system units and other
depository ban"s under the foreign currency deposit system, including their interest
income from foreign currency loans granted to residents of the 0hilippines under the
expanded foreign currency deposit system, subject to final income tax at ten percent
8*.Q9 of such income
8d9 %irms that are taxed under a special income tax regime such as those in
accordance with RA ,/*+ and ,--, 8the 0=JA law and the Bases Conversion
7evelopment Act, respectively9
R=>=)!= '=';RA)7!' CIRC!#AR ); .43.1 7ecember 1*, -..-
Clarifying Items that would Constitute $ross Receipts and Costs in 7etermining :$ross
Income: on &ervices for the 0urpose of Computing the 'inimum Corporate Income Tax
8'CIT9 0ursuant to &ections -,8=9 and -28A98-9 of the )ational Internal Revenue Code
of *//,of the followingC Ban"s and non3ban" financial intermediaries performing 5uasi3
ban"ing activities?Insurance and pension funding companies?%inance companies and
other financial intermediaries not performing 5uasi3ban"ing activities;Bro"ers of
securities 8excluding ban"s9?Customs, insurance, real estate, immigration and
commercial bro"ers?$eneral engineering andBor building contractors?Common carriers
or transportation contractors?Dotel, motel, restBpensionBlodging house and resort
operators?%ood service establishments;#essors of property;Telephone and telegraph,
electric, gas, and water utilities?andRadio andBor television broadcasting
CASES DIGEST
'inimum Corporate Income Tax on 7omesticCorporations
%ACT&C Chamber of Real =state and Builders( Associations, an association of real estate
developers and builders, challenges the validity of the imposition of minimum corporate
income tax 8'CIT9 on corporations Arguing that 'CIT violates the due process clause
because it levies income tax even if there is no reali6ed gain, petitioner explains that
gross income as defined under &ection -, 8=9 of RA 24-4 only considers the cost of
goods sold and other direct expenses and does not ta"e into account administrative and
interest expenses which are also necessary to produce gross income 0egging the tax
base of the 'CIT to a corporation(s gross income is tantamount to a confiscation of
capital because gross income, unli"e net income, is not :reali6ed gain:
0etitioner further alleges that RR /3/2 is a deprivation of property without due process
of law because the 'CIT is being imposed and collected even when there is actually a
loss, or a 6ero or negative taxable income
I&&!=&C * @hether or not the imposition of the 'CIT on domestic corporations is
unconstitutional
- @hether or not the imposition of C@T on income from sales of real properties
classified as ordinary assets is unconstitutional
R!#I)$C
* The 'CIT is not a tax on capital It is imposed on gross income which is arrived at
by deducting the capital spent by a corporation in the sale of its goods, ie, the cost of
goods and other direct expenses from gross sales In addition, the 'CIT is not an
additional tax imposition It is imposed in lieu of the normal net income tax, and only if
the normal income tax is suspiciously low The 'CIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at only -Q and uses as the base
the corporation(s gross income Besides, there is no legal objection to a broader tax base
or taxable income by eliminating all deductible items and at the same time reducing the
applicable tax rate Thus, the assignment of gross income, instead of net income, as the
tax base of the 'CIT, ta"en with the reduced rate of -Q, is not constitutionally
objectionable
- The C@T is creditable against the tax due from the seller of the property at the end of
the taxable year The seller will be able to claim a tax refund if its net income is less than
the taxes withheld )othing is ta"en that is not due so there is no confiscation of property
repugnant to the constitutional guarantee of due process 'ore importantly, the due
process re5uirement applies to the power to tax The C@T does not impose new taxes nor
does it increase taxes It relates entirely to the method and time of payment The practical
problems encountered in claiming a tax refund do not affect the constitutionality and
validity of the C@T as a method of collecting the tax
The real estate industry cannot be treated similarly as manufacturing enterprises because
what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the C@T, is not their production processes but the prices of
their goods sold and the number of transactions involved The income from the sale of a
real property is bigger and its fre5uency of transaction limited, ma"ing it less
cumbersome for the parties to comply with the withholding tax schemeCDA'B=R ;%
R=A# =&TAT= A)7 B!I#7=R&( A&&;CIATI;)&, I)C vs A#B=RT; R;'!#;, =T
A# O$R )o *+.,<+, 'arch /, -.*.P
#egislative intent relative to the minimum corporate income tax
%ACT&C 0etitioner, 'anila Ban"ing Corporation, was incorporated in */+* and since
then had engaged in the commercial ban"ing industry until */2, when the 'onetary
Board of the Bang"o&entralng0ilipinas 8B&09 issued Resolution )o <.<, pursuant to
&ection -/ of Republic Act 8RA9 )o -+< 8the Central Ban" Act9, prohibiting petitioner
from engaging in business by reason of insolvency Thus, petitioner ceased operations
that year and its assets and liabilities were placed under the charge of a government3
appointed receiver 'eanwhile, RA )o 24-4, otherwise "nown as the Comprehensive
Tax Reform Act of *//,, became effective on Aanuary *, *//2 ;ne of the changes
introduced by this law is the imposition of the minimum corporate income tax on
domestic and resident foreign corporations Implementing this law is Revenue
Regulations )o /3/2 stating that the law allows a four 849 year period from the time the
corporations were registered with the Bureau of Internal Revenue 8BIR9 during which the
minimum corporate income tax should not be imposed ;n Aune -1, *///, after *- years
since petitioner stopped its business operations, the B&0 authori6ed it to operate as a
thrift ban" The following year, specifically on April ,, -..., it filed with the BIR its
annual corporate income tax return and paid 011,2*+,*+4.. for taxable year *///
0rior to the filing of its income tax return, petitioner sent a letter to the BIR re5uesting a
ruling on whether it is entitled to the four 8493year grace period rec"oned from */// In
other words, petitioner(s position is that since it resumed operations in *///, it will pay
its minimum corporate income tax only after four 849 years thereafter ;n %ebruary --,
-..*, the BIR issued BIR Ruling )o ..,3-..* stating that petitioner is entitled to the
four 8493year grace period &ince it reopened in *///, the minimum corporate income tax
may be imposed :not earlier than -..-, ie the fourth taxable year beginning *///:
0ursuant to the above Ruling, petitioner filed with the BIR a claim for refund of the sum
of 011,2*+,*+4.. erroneously paid as minimum corporate income tax for taxable year
*///
I&&!=C @hether petitioner is entitled to a refund of its minimum corporate income tax
paid to the BIR for taxable year *///
D=#7C Ges, under RR 43/< 8but );T under RR /3/2 implementing RA 24-49
&ection -,8=9 of the Tax Code providesC
&ec -, Rates of Income Tax on 7omestic Corporations E
8=9 'inimum Corporate Income Tax on 7omestic Corporations E
8*9 Imposition of Tax E A minimum corporate income tax of two percent 8-Q9 of the
gross income as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations, when
the minimum corporate income tax is greater than the tax computed under &ubsection 8A9
of this &ection for the taxable year
8-9 Carry %orward of =xcess 'inimum Tax E Any excess of the minimum corporate
income tax over the normal income tax as computed under &ubsection 8A9 of this &ection
shall be carried forward and credited against the normal income tax for the three 819
immediately succeeding taxable years
xxxxxxxxx
;n the other hand, Revenue Regulation )o /3/2 specifies the period when a corporation
becomes subject to the minimum corporate income tax, thusC
8<9 &pecific Rules for 7etermining the 0eriod @hen a Corporation Becomes &ubject
to the 'CIT 8minimum corporate income tax9 E
%or purposes of the 'CIT, the taxable year in which business operations commenced
shall be the year in which the domestic corporation registered with the Bureau of
Internal Revenue 8BIR9
%irms which were registered with BIR in *//4 and earlier years shall be covered by the
'CIT beginning Aanuary *, *//2
The intent of Congress relative to the minimum corporate income tax is to grant a four
8493year suspension of tax payment to newly formed corporations Corporations still
starting their business operations have to stabili6e their venture in order to obtain a
stronghold in the industry It does not come as a surprise then when many companies
reported losses in their initial years of operations Thus, in order to allow new
corporations to grow and develop at the initial stages of their operations, the lawma"ing
body saw the need to provide a grace period of four years from their registration before
they pay their minimum corporate income tax
&ignificantly, on %ebruary -1, *//<, Congress enacted RA )o ,/.+, otherwise "nown
as the :Thrift Ban"s Act of *//<: It too" effect on 'arch *2, *//< This law provides for
the regulation of the organi6ation and operations of thrift ban"s !nder &ection 1, thrift
ban"s include savings and mortgage ban"s, private development ban"s, and stoc"
savings and loans associations organi6ed under existing laws ;n Aune *<, *///, the BIR
issued Revenue Regulation )o 43/< implementing certain provisions of the said RA )o
,/.+ &ection + providesC
&ec + 0eriod of exemption E All thrift ban"s created and organi6ed under the
provisions of the Act shall be exempt from the payment of all taxes, fees, and charges of
whatever nature and description, except the corporate income tax imposed under Title II
of the )IRC and as specified in &ection -8A9 of these regulations, for a period of five 8<9
years from the date of commencement of operations? while for thrift ban"s which are
already existing and operating as of the date of effectivity of the Act 8'arch *2, *//<9,
the tax exemption shall be for a period of five 8<9 years rec"oned from the date of such
effectivity
%or purposes of these regulations, :date of commencement of operations: shall be
understood to mean the date when the thrift ban" was registered with the &ecurities and
=xchange Commission or the date when the Certificate of Authority to ;perate was
issued by the 'onetary Board of the Bang"o&entralng0ilipinas, whichever comes later
0etitioner ban" was registered with the BIR in */+* Dowever, in */2,, it was found
insolvent by the 'onetary Board of the B&0 and was placed under receivership After
twelve 8*-9 years, or on Aune -1, *///, the B&0 issued to it a Certificate of Authority to
;perate as a thrift ban" =arlier, or on Aanuary -*, *///, it registered with the BIR Then
it filed with the &=C its Articles of Incorporation which was approved on Aune --, *///
It is clear from the above35uoted provision of Revenue Regulations )o 43/< that the date
of commencement of operations of a thrift ban" is the date it was registered with the &=C
or the date when the Certificate of Authority to ;perate was issued to it by the 'onetary
Board of the B&0, whichever comes later Revenue Regulations )o /3/2, implementing
RA )o 24-4 imposing the minimum corporate income tax on corporations, provides
that for purposes of this tax, the date when business operations commence is the year in
which the domestic corporation registered with the BIR Dowever, under Revenue
Regulations )o 43/<, the date of commencement of operations of thrift ban"s, such as
herein petitioner, is the date the particular thrift ban" was registered with the &=C or the
date when the Certificate of Authority to ;perate was issued to it by the 'onetary Board
of the B&0, whichever comes later
Clearly then, Revenue Regulations )o 43/<, not Revenue Regulations )o /3/2, applies
to petitioner, being a thrift ban" It is, therefore, entitled to a grace period of four 849
years counted from Aune -1, */// when it was authori6ed by the B&0 to operate as a
thrift ban" Conse5uently, it should only pay its minimum corporate income tax after four
849 years from *///
The intent of Congress relative to the minimum corporate income tax is to grant a four
8493year suspension of tax payment to newly formed corporations Corporations still
starting their business operations have to stabili6e their venture in order to obtain a
stronghold in the industry It does not come as a surprise then when many companies
reported losses in their initial years of operations
'anila Ban"ing Corp vs Commissioner of Internal Revenue,
$R )o *+2**2, August -2, -..+
A thrift ban" is entitled to a grace period of four years from the time it is authori6ed by
the B&0 to operate as a thrift ban"
Revenue Regulations )o /3/2, implementing RA )o 24-4 imposing the minimum
corporate income tax on corporations, provides that for purposes of this tax, the date
when business operations commence is the year in which the domestic corporation
registered with the BIR Dowever, under Revenue Regulations )o 43/<, the date of
commencement of operations of thrift ban"s is the date the particular thrift ban" was
registered with the &=C or the date when the Certificate of Authority to ;perate was
issued to it by the 'onetary Board of the B&0, whichever comes later Clearly then,
Revenue Regulations )o 43/<, not Revenue Regulations )o /3/2, applies to petitioner,
being a thrift ban" It is, therefore, entitled to a grace period of four 849 years counted
from Aune -1, */// when it was authori6ed by the B&0 to operate as a thrift ban"
Conse5uently, it should only pay its minimum corporate income tax after four 849 years
from *///
'anila Ban"ing Corp vs Commissioner of Internal Revenue,
$R )o *+2**2, August -2, -..+
'inimum Corporate Income Tax
It is clear from the provision of Revenue Regulations )o 43/< that the date of
commencement of operations of a thrift ban" is the date it was registered with the &=C or
the date when the Certificate of Authority to ;perate was issued to it by the 'onetary
Board of the B&0, whichever comes later
#et it be stressed that Revenue Regulations )o /3/2, implementing RA )o 24-4
imposing the minimum corporate income tax on corporations, provides that for purposes
of this tax, the date when business operations commence is the year in which the
domestic corporation registered with the BIR Dowever, under Revenue Regulations )o
43/<, the date of commencement of operations of thrift ban"s, such as herein petitioner, is
the date the particular thrift ban" was registered with the &=C or the date when the
Certificate of Authority to ;perate was issued to it by the 'onetary Board of the B&0,
whichever comes later
Clearly then, Revenue Regulations )o 43/<, not Revenue Regulations )o /3/2, applies
to petitioner, being a thrift ban" It is, therefore, entitled to a grace period of four 849
years counted from Aune -1, */// when it was authori6ed by the B&0 to operate as a
thrift ban" Conse5uently, it should only pay its minimum corporate income tax after four
849 years from *///
TD= 'A)I#A BA)FI)$ C;R0;RATI;) vs C;''I&&I;)=R ;% I)T=R)A#
R=>=)!= $R )o *+2**2 August -2, -..+
#egislative intent relative to the minimum corporate income tax
%ACT&C %or fiscal year -...3-..*, 0A# allegedly incurred 6ero taxable income, which
left it with unapplied creditable withholding tax It did not pay any 'CIT for the period
and re5uested for the refund of its unapplied creditable withholding tax for %G -...3
-..* BIR denied the claim for refund and assessed 0A# for deficiency 'CIT 0A#
protested !pon 0etition for Review, the CTA &econd 7ivision ruled in favor of 0A#, a
decision affirmed by the CTA en banc Dence, this 0etition for Review on Certiorari
I&&!=C @hether 0A# is liable for deficiency 'CIT for %G -...3-..*
R!#I)$C 0A# cannot be subjected to 'CIT for %G -...3-..*
%irst, &ec *1 8a9 of 07 )o *</., the franchise of 0A#, refers to :basic corporate
income tax: It is already settled that the :basic corporate income tax:, under this
provision relates to the general rate of 1<Q 8reduced to 1-Q by the year -...9 as
stipulated in &ec -, 8A9 of the )IRC of *//,
&econd, &ec *1 8a9 of 07 )o *</. further provides that the basic corporate income tax
of 0A# shall be based on its annual net taxable income This is consistent with &ec -,
8A9 of the )IRC of *//,, which provides that the rate of basic corporate income tax,
which is 1-Q beginning * Aanuary -..., shall be imposed on the taxable income of the
domestic corporation There is an apparent distinction under the )IRC of *//, between
taxable income, which is the basis for basic corporate income tax under &ec -, 8A9? and
gross income, which is the basis for the 'CIT under &ection -, 8=9 The two terms have
their respective technical meanings, and cannot be used interchangeably
Third, even if the basic corporate income tax and the 'CIT are both income taxes under
&ection -, of the )IRC of *//,, and one is paid in place of the other, the two are distinct
and separate taxes The 'CIT is different from the basic corporate income tax, not just in
the rates, but also in the bases for their computation )ot being covered by &ec *1 8a9 of
07 )o *</., which ma"es 0A# liable only for basic corporate income tax, then 'CIT
is included in :all other taxes: from which 0A# is exempted That, under general
circumstances, the 'CIT is paid in place of the basic corporate income tax, when the
former is higher than the latter, does not mean that these two income taxes are one and
the same The said taxes are merely paid in the alternative, giving the $overnment the
opportunity to collect the higher amount between the two
%ourth, the evident intent of &ec *1 of 07 )o *<-. is to extend to 0A# tax concessions
not ordinarily available to other domestic corporations It permits 0A# to pay whichever
is lower of the basic corporate income tax or the franchise tax? and the tax so paid shall
be in lieu of all other taxes, except only real property tax Dence, under its franchise, 0A#
is to pay the least amount of tax possible
%ifth, as ruled in Commissioner of Internal Revenue v 0A#, $R )o *+.<-2, ;ctober /,
-..+C UA careful reading of &ection *1 rebuts the argument of the CIR that the :in lieu of
all other taxes: proviso is a mere incentive that applies only when 0A# actually pays
something It is clear that 07 *</. intended to give respondent the option to avail itself
of &ubsection 8a9 or 8b9 as consideration for its franchise =ither option excludes the
payment of other taxes and dues imposed or collected by the national or the local
government 0A# has the option to choose the alternative that results in lower taxes It is
not the fact of tax payment that exempts it, but the exercise of its
optionVC;''I&&I;)=R ;% I)T=R)A# R=>=)!= vs 0A#
O$R )o *2..++Auly ,, -../P
>2? C!rr$ *,r5!r0 ,f E2ce// %i"im#m T!2 . A"$ e2ce// ,f t+e mi"im#m
c,r3,r!te i"c,me t!2 ,ver t+e ",rm!- i"c,me t!2 !/ c,m3#te0 #"0er )#b/ecti,"
>A? ,f t+i/ )ecti," /+!-- be c!rrie0 f,r5!r0 !"0 cre0ite0 !4!i"/t t+e ",rm!- i"c,me
t!2 f,r t+e t+ree >;? imme0i!te-$ /#ccee0i"4 t!2!b-e $e!r/.
>;? Re-ief fr,m t+e %i"im#m C,r3,r!te I"c,me T!2 U"0er Cert!i"
C,"0iti,"/T+e )ecret!r$ ,f *i"!"ce i/ +ereb$ !#t+,ri6e0 t, /#/3e"0 t+e im3,/iti,"
,f t+e mi"im#m c,r3,r!te i"c,me t!2 ," !"$ c,r3,r!ti," 5+ic+ /#ffer/ -,//e/ ,"
!cc,#"t ,f 3r,-,"4e0 -!b,r 0i/3#te, ,r bec!#/e ,f f,rce m!:e#re, ,r bec!#/e ,f
-e4itim!te b#/i"e// rever/e/.
T+e )ecret!r$ ,f *i"!"ce i/ +ereb$ !#t+,ri6e0 t, 3r,m#-4!te, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, t+e "ece//!r$ r#-e/ !"0 re4#-!ti,"/ t+!t
/+!-- 0efi"e t+e term/ !"0 c,"0iti,"/ #"0er 5+ic+ +e m!$ /#/3e"0 t+e im3,/iti,"
,f t+e mi"im#m c,r3,r!te i"c,me t!2 i" ! merit,ri,#/ c!/e.
>4?&r,// I"c,me Defi"e0 . *,r 3#r3,/e/ ,f !33-$i"4 t+e mi"im#m c,r3,r!te
i"c,me t!2 3r,vi0e0 #"0er )#b/ecti," >E? +ere,f, t+e term F4r,// i"c,meF /+!--
me!" 4r,// /!-e/ -e// /!-e/ ret#r"/, 0i/c,#"t/ !"0 !--,5!"ce/ !"0 c,/t ,f 4,,0/
/,-0. FC,/t ,f 4,,0/ /,-0F /+!-- i"c-#0e !-- b#/i"e// e23e"/e/ 0irect-$ i"c#rre0 t,
3r,0#ce t+e merc+!"0i/e t, bri"4 t+em t, t+eir 3re/e"t -,c!ti," !"0 #/e.
*,r ! tr!0i"4 ,r merc+!"0i/i"4 c,"cer", Fc,/t ,f 4,,0/ /,-0F /+!-- i"c-#0e t+e
i"v,ice c,/t ,f t+e 4,,0/ /,-0, 3-#/ im3,rt 0#tie/, frei4+t i" tr!"/3,rti"4 t+e 4,,0/
t, t+e 3-!ce 5+ere t+e 4,,0/ !re !ct#!--$ /,-0 i"c-#0i"4 i"/#r!"ce 5+i-e t+e 4,,0/
!re i" tr!"/it.
*,r ! m!"#f!ct#ri"4 c,"cer", Fc,/t ,f 4,,0/ m!"#f!ct#re0 !"0 /,-0F /+!-- i"c-#0e
!-- c,/t/ ,f 3r,0#cti," ,f fi"i/+e0 4,,0/, /#c+ !/ r!5 m!teri!-/ #/e0, 0irect -!b,r
!"0 m!"#f!ct#ri"4 ,ver+e!0, frei4+t c,/t, i"/#r!"ce 3remi#m/ !"0 ,t+er c,/t/
i"c#rre0 t, bri"4 t+e r!5 m!teri!-/ t, t+e f!ct,r$ ,r 5!re+,#/e.
I" t+e c!/e ,f t!23!$er/ e"4!4e0 i" t+e /!-e ,f /ervice, F4r,// i"c,meF me!"/ 4r,//
recei3t/ -e// /!-e/ ret#r"/, !--,5!"ce/, 0i/c,#"t/ !"0 c,/t ,f /ervice/. FC,/t
,f/ervice/F /+!-- me!" !-- 0irect c,/t/ !"0 e23e"/e/ "ece//!ri-$ i"c#rre0 t, 3r,vi0e
t+e /ervice/ re8#ire0 b$ t+e c#/t,mer/ !"0 c-ie"t/ i"c-#0i"4 >A? /!-!rie/ !"0
em3-,$ee be"efit/ ,f 3er/,""e-, c,"/#-t!"t/ !"0 /3eci!-i/t/ 0irect-$ re"0eri"4 t+e
/ervice !"0 >B? c,/t ,f f!ci-itie/ 0irect-$ #ti-i6e0 i" 3r,vi0i"4 t+e /ervice /#c+ !/
0e3reci!ti," ,r re"t!- ,f e8#i3me"t #/e0 !"0 c,/t ,f /#33-ie/= Pr,vi0e0, +,5ever,
T+!t i" t+e c!/e ,f b!"9/, Fc,/t ,f /ervice/F /+!-- i"c-#0e i"tere/t e23e"/e.
CASES DIGEST
0roper computation of senior citi6ens( discount as deduction from gross income
%or purposes of reimbursement, the law states that the cost of the discount shall be
deducted from gross income, the amount of income derived from all sources before
deducting allowable expenses, which will result in net income Dere, petitioners tried to
show a loss on a per transaction basis, which should not be the case An income
statement, showing an accounting of petitioners( sales, expenses, and net profit 8or loss9
for a given period could have accurately reflected the effect of the discount on their
income Absent any financial statement, petitioners cannot substantiate their claim that
they will be operating at a loss should they give the discount In addition, the
computation was erroneously based on the assumption that their customers consisted
wholly of senior citi6ens #astly, the 1-Q tax rate is to be imposed on income, not on the
amount of the discount
Carlos &uperdrug Corp vs 7&@7, et al, $R )o *++4/4, Aune -/, -..,
)ECTION 28 R!te/ ,f I"c,me T!2 ," *,rei4" C,r3,r!ti,"/
>A? T!2 ," Re/i0e"t *,rei4" C,r3,r!ti,"/ .
>1? I" &e"er!- . E2ce3t !/ ,t+er5i/e 3r,vi0e0 i" t+i/ C,0e, ! c,r3,r!ti,"
,r4!"i6e0, !#t+,ri6e0, ,r e2i/ti"4 #"0er t+e -!5/ ,f !"$ f,rei4" c,#"tr$, e"4!4e0
i" tr!0e ,r b#/i"e// 5it+i" t+e P+i-i33i"e/, /+!-- be /#b:ect t, !" i"c,me t!2
e8#iv!-e"t t, t+irt$@five 3erce"t >;<G? ,f t+e t!2!b-e i"c,me 0erive0 i" t+e
3rece0i"4 t!2!b-e $e!r fr,m !-- /,#rce/ 5it+i" t+e P+i-i33i"e/= Pr,vi0e0, T+!t
effective !"#!r$ 1, 2CC9, t+e r!te ,f i"c,me t!2 /+!-- be t+irt$ 3erce"t >;CG?.
I" t+e c!/e ,f c,r3,r!ti,"/ !0,3ti"4 t+e fi/c!-@$e!r !cc,#"ti"4 3eri,0, t+e t!2!b-e
i"c,me /+!-- be c,m3#te0 5it+,#t re4!r0 t, t+e /3ecific 0!te 5+e" /!-e/, 3#rc+!/e/
!"0 ,t+er tr!"/!cti,"/ ,cc#r. T+eir i"c,me !"0 e23e"/e/ f,r t+e fi/c!- $e!r /+!-- be
0eeme0 t, +!ve bee" e!r"e0 !"0 /3e"t e8#!--$ f,r e!c+ m,"t+ ,f t+e 3eri,0.
T+e c,r3,r!te i"c,me t!2 r!te /+!-- be !33-ie0 ," t+e !m,#"t c,m3#te0 b$
m#-ti3-$i"4 t+e "#mber ,f m,"t+/ c,vere0 b$ t+e "e5 r!te 5it+i" t+e fi/c!- $e!r
b$ t+e t!2!b-e i"c,me ,f t+e c,r3,r!ti," f,r t+e 3eri,0, 0ivi0e0 b$ t5e-ve.
Pr,vi0e0, +,5ever, T+!t ! re/i0e"t f,rei4" c,r3,r!ti," /+!-- be 4r!"te0 t+e ,3ti,"
t, be t!2e0 !t fiftee" 3erce"t >1<G? ," 4r,// i"c,me #"0er t+e /!me c,"0iti,"/, !/
3r,vi0e0 i" )ecti," 27, >A?.
CASES DIGEST
@hat constitutes :residence: of a corporation
The same principle is recogni6ed in American lawC that the :residence of a corporation,
if it can be said to have a residence, is necessarily where it exercises corporate
functions ?: that it is considered as dwelling :in the place where its business is
done ,: as being :located where its franchises are exercised ,: and as being :present
where it is engaged in the prosecution of the corporate enterprise?: that a :foreign
corporation licensed to do business in a state is a resident of any country where it
maintains an office or agent for transaction of its usual and customary business for
venue purposes?: and that the :necessary element in its signification is locality of
existence: Courts have held that :a domestic corporation is regarded as having a
residence within the state at any place where it is engaged in the particulars of the
corporate enterprise, and not only at its chief place or home office?: that :a corporation
may be domiciled in one state and resident in another? its legal domicile in the state of its
creation presents no impediment to its residence in a real and practical sense in the state
of its business activities: The foregoing propositions are in accord with the dictionary
concept of residence as applied to juridical persons, a term which appears to
comprehend permanent as well as temporary residence
&tate Investment Douse, Inc, et al vs Citiban", et al,
$R )os ,//-+3-,, ;ctober *,, *//*
@hat constitutes :doing: or :engaging in: or :transacting: business
There is no specific criterion as to what constitutes :doing: or :engaging in: or
:transacting: business =ach case must be judged in the light of its peculiar
environmental circumstances The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or wor"s or the
exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organi6ation :In order
that a foreign corporation may be regarded as doing business within a &tate, there must
be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character(
Commissioner of Internal Revenue vs British ;verseas Airways Corp, et al , $R )os
#3+<,,13,4, April 1., */2,
0lace of activity prevails over place of business of the foreign corporation
Business implies continuity and progression of transactions while activity may consist of
only a single transaction An activity may occur outside the place of business &ection -4
of the Tax Code does not re5uire a foreign corporation to engage in business in the
0hilippines in subjecting its income to tax It suffices that the activity creating the income
is performed or done in the 0hilippines @hat is controlling, therefore, is not the place of
business but the place of activity that created an income
The 0hilippine $uaranty Co, Inc vs Commissioner of Internal Revenue, et al, $R )o
#3--.,4, April 1., */+<
Business transactions of a foreign corporation must be continuous
In order that a foreign corporation may be considered engaged in trade or business, its
business transactions must be continuous A casual business activity in the 0hilippines by
a foreign corporation, as in the present case, does not amount to engaging in trade or
business in the 0hilippines for income tax purposes
)> Reederij :Amsterdam:, et al vs Commissioner of Internal Revenue, $R )o #3
4+.-/, Aune -1, */22
%oreign airline company selling tic"et in the 0hilippines through local agent is
considered a resident foreign corporation doing business in the 0hilippines
There being no dispute that AA# constituted 0A# as local agent to sell its airline tic"ets,
there can be no conclusion other than that AA# is a resident foreign corporation, doing
business in the 0hilippines Indeed, the sale of tic"ets is the very lifeblood of the airline
business, the generation of sales being the paramount objective
Commissioner of Internal Revenue vs Aapan Air #ines, et al, $R )o +.,*4, ;ctober 4,
*//*
A single corporation cannot be both a resident and a non3resident corporation
A single corporate entity cannot be both a resident and a non3resident corporation
depending on the nature of the particular transaction involved Accordingly, whether the
dividends are paid directly to the head office or coursed through its local branch is of no
moment for after all, the head office and the office branch constitute but one corporate
entity, the 'arubeni Corporation, which, under both 0hilippine tax and corporate laws,
is a resident foreign corporation because it is transacting business in the 0hilippines
'arubeni Corp vs Commissioner of Internal Revenue, et al, $R )o
,+<,1, &eptember *4, */2/
$rant of license to foreign corporation merely gives legitimacy to its doing business here
It is not really the grant of a license to a foreign corporation to do business in this
country that ma"es it a resident? the license merely gives legitimacy to its doing business
here @hat effectively ma"es such a foreign corporation a resident corporation in the
0hilippines is its actually being in the 0hilippines and licitly doing business here
&tate Investment Douse, Inc, et al vs Citiban", et al,
$R )os ,//-+3-,, ;ctober *,, *//*
&ec -2 8A9 8*9 of the *//, )IRC is a general rule that resident foreign corporations are
liable for 1-Q tax on all income from sources within the 0hilippines &ec -2 8A9 819 is an
exception to this general rule
An exception is defined as :that which would otherwise be included in the provision from
which it is excepted It is a clause which exempts something from the operation of a
statute by express words: %urther, :an exception need not be introduced by the words
(except( or (unless( An exception will be construed as such if it removes something from
the operation of a provision of law:
In the instant case, the general rule is that resident foreign corporations shall be liable
for a 1-Q income tax on their income from within the 0hilippines, except for resident
foreign corporations that are international carriers that derive income :from carriage of
persons, excess baggage, cargo and mail originating from the 0hilippines: which shall
be taxed at - *B-Q of their $ross 0hilippine Billings 0etitioner, being an international
carrier with no flights originating from the 0hilippines, does not fall under the exception
As such, petitioner must fall under the general rule This principle is embodied in the
#atin maxim, exceptiofirmatregulam in casibus non exceptis, which means, a thing not
being excepted must be regarded as coming within the purview of the general rule
To reiterate, the correct interpretation of the above provisions is that, if an international
air carrier maintains flights to and from the 0hilippines, it shall be taxed at the rate of -
*B-Q of its $ross 0hilippine Billings, while international air carriers that do not have
flights to and from the 0hilippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 1-Q of such income
&outh African Airways vs Commissioner of Internal Revenue, $R )o *2.1<+,
%ebruary *+, -.*.
C;''I&&I;)=R ;% I)T=R)A# R=>=)!= vs AIR I)7IA and TD= C;!RT ;% TAH
A00=A#& O$R )o ,-441 Aanuary -/, */22P
&G##AB!&
* TAHATI;)? R=>=)!= 7=RI>=7 BG A) I)T=R)ATI;)A# AIR#I)=, DA>I)$ );
#A)7I)$ RI$DT&, %R;' &A#=& ;% AIR#I)= TICF=T& TDR;!$D IT A$=)T,
TAHAB#= A& I)C;'= E Revenue derived by an international air carrier from sales of
tic"ets in the 0hilippines for air transportation, while having no landing rights in the
country, constitutes income of the said international air carrier from 0hilippine sources and,
accordingly, taxable under &ection -4 8b9 8-9 of the )ational Internal Revenue Code as ruled
in Commissioner of Internal Revenue v British ;verseas Airways Corporation, *4/ &CRA
1/< 8*/2,9
- I7? @I##%!# )=$#=CT T; %I#= R=I!IR=7 TAH R=T!R) ;R %RA!7!#=)T
I)T=)T T; =>A7= 0AG'=)T ;% TAH=&, );T 0R=&!'=7 E The willful neglect to file
the re5uired tax return or the fraudulent intent to evade the payment of taxes, considering
that the same is accompanied by legal conse5uences, cannot be presumed The fraud
contemplated by law is actual and not constructive It must be intentional fraud, consisting
of deception willfully and deliberately done or resorted to in order to induce another to give
up some legal right )egligence, whether slight or gross, is not e5uivalent to the fraud with
intent to give up some legal right )egligence, whether slight or gross, is not e5uivalent to
the fraud with intent to evade the tax contemplated by the law It must amount to intentional
wrongdoing with the sole object of avoiding the tax
1 I7? I'0;&ITI;) ;% #=&&=R 0=)A#TG I) TD= AB&=)C= ;% @I##%!#
)=$#=CT T; %I#= TD= R=I!IR=7 TAH R=T!R) E There being no cogent basis to find
willful neglect to file the re5uired tax return on the part of the private respondent, the <.Q
surcharge or fraud penalty imposed upon it is improper )onetheless, such failure subjects
the private respondent to a -<Q penalty pursuant to &ection ,- of the tax code cited earlier
0,4,-.1/. constitutes the tax deficiency of the private respondent -<Q of this amount is
01,,*.*/<
4 I7? TAH 7=%ICI=)CG? I)T=R=&T C;##=CTIB#= );T T; =HC==7 1 G=AR& E
@e find the 4-Q interest assessed by the petitioner to be in order At the time the tax liability
of the private respondent accrued, &ection <* 8d9 of the tax code, before it was amended by
0residential 7ecree )o *,.< prescribed an interest rate of *4Q per annum, provided that
the maximum amount that could be collected as interest on the tax deficiency will not exceed
the amount corresponding to a period of three years Thus, the maximum interest rate then
was 4-Q This maximum interest rate is applicable to the private respondent inasmuch as
the period between 'arch 1*, */,+ 8the end of the fiscal year in 5uestion9 and %ebruary -.,
*/2* 8the time when the petitioner made the assessment in 5uestion9 exceeds three years
0,4,-.1/. constitutes the tax deficiency of the private respondent 4-Q of this amount is
01*,*+<+4
< I7? I7? A77ITI;)A# I)T=R=&T C;##=CTIB#= );T T; =HC==7 TDR==
G=AR& E 0ursuant to &ection <* 8e9 8-9 of the tax code, as amended by 0residential 7ecree
)o *,.<, the private respondent is liable to pay additional interest of -.Q per annum
8computed from %ebruary -., */2*, the date when the Commissioner sought the payment of
the tax deficiency9 on the total amount unpaid A careful reading of &ection <* 8e9 8-9 shows
that this interest is in addition to the interest provided in &ection <* 8d9 This view can be
gleaned from the use of the phrase :@here a deficiency, or any interest assessed in
connection therewith under paragraph 8d9 of this section: in &ection <* 8e9 8-9 The
additional interest is to be computed upon the entire amount of the tax liability 8previous
interest included9 which remains unpaid This is manifested by the use of the phrase :there
shall be collected upon the unpaid amount as part of the tax: in &ection <* 8e9 8-9 Dowever,
the same &ection provides that the maximum amount that may be collected as interest cannot
exceed the amount corresponding to a period of three years In this case, the maximum rate
would be +.Q
+ I7? I7? A77ITI;)A# &!RCDAR$=, 'A)7AT;RG E 0ursuant to &ection <* 8e9
819 of the same code, as amended by the said 7ecree, the private respondent is li"ewise
liable to pay an additional surcharge of *.Q 8flat rate9 of the total amount of tax unpaid An
examination of &ection <* 8e9819 reveals that this surcharge is imposed for the late payment
of the unpaid tax deficiency andBor unpaid interest assessed in connection therewith, in
addition to all other charges This is confirmed by the use of the words :there shall be
collected in addition to the interest prescribed herein Oreferring to the entire &ection <* 8e9P
and in paragraph 8d9 above Oreferring to &ection <* 8d9P: The additional surcharge is
computed on the amount of tax unpaid, exclusive of all other impositions This is confirmed
by the phrase :ten per centum of the amount of tax unpaid: The failure to pay the tax
deficiency within the re5uired period of time upon demand is penali6ed by this additional
surcharge !pon such failure to pay, the surcharge is automatically due? its imposition is
mandatory
7 = C I & I ; )
This is a 0etition which see"s the review of a 7ecision of the Court of Tax Appeals
The private respondent Air India is a foreign corporation organi6ed under the laws of India
It is not licensed to do business in the 0hilippines as an international carrier Its airplanes
do not operate within 0hilippine territory nor service passengers embar"ing from 0hilippine
ports The firm is represented in the 0hilippines by its general sales agent, 0hilippine
Air#ines, Inc, a corporate entity duly organi6ed under the laws of the 0hilippines Air India
sells airplane tic"ets in the 0hilippine through this agent These tic"ets are serviced by Air
India airplanes outside the 0hilippines In sum, Air India(s status in the 0hilippines is that of
an off3line international carrier not engaged in the business of air transportation in the
0hilippines
The total sales of airplane tic"ets transacted by 0hilippine Air #ines, Inc for the private
respondent during the fiscal year ending 'arch 1*, */,+ amounted to 0-,/+2,*<+.. ;n
account of the same, the herein petitioner Commissioner of Internal Revenue held the private
respondent liable for the payment of 0*4-,4,*+2 * The amount represents the -<Q income
tax on the private respondent(s gross 0hilippine billings for the said fiscal year pursuant to
&ection -4 8b9 8-9 of the )ational Internal Revenue Code, as amended, inclusive of the <.Q
surcharge and interest for willful neglect to file a return as provided under &ection ,- of the
same code The computation is as follows E
$ross 0hilippine billings 0-,/+2,*<+..
Income Tax due thereon at -<Q ,4,-.4..
AddC <.Q surcharge 1,,*.-..
*4Q interest per annum 84-Q maximum9 1*,*+<+2
EEEEEE
Total Amount 7ue and Collectible 0*4-,4,*+2
%rom the action ta"en by the petitioner, the private respondent brought an Appeal to the
Court of Tax Appeals The thrust of the Appeal is, inter alia, that the private respondent
cannot be held liable to pay the said imposition because it did not derive any income from
sources within the 0hilippines during the said fiscal year and that the amount of
0-,/+2,*<+.. mentioned in the assessment made by the petitioner was derived exclusively
from sources outside the 0hilippines
;n the other hand, the petitioner argued that the amount of 0-,/+2,*<+.. was reali6ed in
the 0hilippines and was, therefore, derived from sources within the 0hilippines 0etitioner
also stressed that in case of any doubt, the presumption is that the tax assessment is correct
In its 7ecision dated Aune -,, */2<, the Court of Tax Appeals ruled in favor of the private
respondent and set aside the decision of the petitioner The tax court li"ewise held that the
surcharge and interest imposed upon the private respondent are improper The pertinent
portions of the 7ecision are as followsC
:!nder the law, the situs of the income derived from labor or performance of service is
determined by the place where the labor is performed or the service rendered, not by the
place where payment is made 8&ec 1,, )at Int Rev Code9 It follows that the situs of the
income derived by foreign international carriers from the business of air transportation is
the place where the airplane service is rendered or performed Accordingly, to tax the
income derived by petitioner 8Air India9 from the transportation service rendered or
performed outside the 0hilippines would violate not only the )ational Internal Revenue
Code but also the due process clause of the Constitution
:xxx xxx xxx
: we fully agree with petitioner 8Air India9 that it is not liable for surcharge of <.Q,
: The surcharge of <.Q of the unpaid tax or deficiency tax is sought to be imposed in this
case under &ection ,- of the Revenue Code which provides that the said surcharge is to be
imposed E
:In case of willful neglect to file the return or list re5uired under this Title within the time
prescribed by law, or in case a false or fraudulent return or list is willfully made :
:There is no claim or pretense that herein petitioner 8Air India9 willfully failed to file an
income tax return for the fiscal year */,+ )either the report of the examiner nor the
Amended Answer filed by respondent 8the Commissioner9 ma"es mention of any fact or
circumstance to prove that the failure of petitioner 8Air India9 to file the return was willful
0etitioner is charged with failure to file a return
:@illful failure to file an income tax return which justifies the imposition of the <.Q
surcharge, or what is commonly called the fraud penalty, re5uires that the failure to file a
return was due to an intent to evade payment of tax legally due, in other words an intention
to defraud the $overnment of lawful revenue 'ere failure to file are turn is not in itself,
standing alone, evidence of fraud 8Citing A6nar v Court of Tax Appeals, <2 &CRA <*/9
:0etitioner 8Air India9 can not be charged with an intention to defraud the $overnment
because it honestly and sincerely believes that it is not liable for the tax sought to be imposed
upon it:
Dence, this 0etition for Review The 0etition is anchored on the argument that the private
respondent is liable for the imposition in 5uestion
Complying with the instructions of this Court, the private respondent submitted its Comment
on the 0etition
After subse5uent pleadings were filed by the parties, the case was deemed submitted for
decision
@e find merit in the 0etition
The principal issue raised in this 0etition is whether or not the revenue derived by an
international air carrier from sales of tic"ets in the 0hilippines for air transportation, while
having no landing rights in the country, constitutes income of the said international air
carrier from 0hilippine sources and, accordingly, taxable under &ection -4 8b9 8-9 of the
)ational Internal Revenue Code
This issue has been settled in the affirmative in Commissioner of Internal Revenue v British
;verseas Airways Corporation This Court, spea"ing, through 'me Austice Ameurfina A
'elencio3Derrera, held that such revenue constitutes taxable income The pertinent portions
of the said 7ecision are as follows E
:The Tax Code defines (gross income( thusC
:($ross Income( includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever "ind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales, or dealings in property, whether
real or personal, growing out of the ownership or use of or interest in such property? also
from interests, rents, dividends, securities, or the transactions of any business carried on for
gain or profit, or gains, profits, and income derived from any source whatever
:The definition is broad and comprehensive to include proceeds from sales of transport
documents (The words income from any source whatever( disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our
laws( Income means (cash received or its e5uivalent(? it is the amount of money coming to a
person within a specific time ? it means something distinct from principal or capital %or,
while capital is a fund, income is a flow As used in our income tax law, (income( refers to the
flow of wealth
xxx xxx xxx
:The source of an income is the property, activity or service that produced the income %or
the source of income to be considered as coming from the 0hilippines, it is sufficient that the
income is derived from activity within the 0hilippines In B;AC(s case, the sale of tic"ets in
the 0hilippines is the activity that produces the income The tic"ets exchanged hands here
and payments for fares were also made here in 0hilippine currency The situs of the source of
payments is the 0hilippines The flow of wealth proceeded from, and occurred within,
0hilippine territory, enjoying the protection accorded by the 0hilippine government In
consideration of such protection, the flow of wealth should share the burden of supporting
the government
xxx xxx xxx
:B;AC, however, would impress upon this Court that income derived from transportation is
income for services, with the result that the place where the services are rendered determines
the source and since B;AC(s service of transportation is performed outside the 0hilippines,
the income derived is from sources without the 0hilippines and, therefore, not taxable under
income tax laws,
:The absence of flight operations to and from the 0hilippines is not determinative of the
source of income or the situs of income taxation Admittedly, B;AC was an off3line
international airline at the time pertinent to this case The test of taxability is the (source(?
and the source of an income is that activity which produced the income !n5uestionably,
the passage documentations in these cases were sold in the 0hilippines and the revenue
therefrom was derived from a business activity regularly pursued within the 0hilippines And
even if the B;AC tic"ets sold covered the (transport of passengers and cargo to and from
foreign cities,( it cannot alter the fact that income from the sale of tic"ets was derived from
the 0hilippines The word source( conveys one essential idea, that of origin, and the origin of
the income herein is the 0hilippines:
'oreover, the taxable income involved in this case is for the fiscal year ending 'arch 1*,
*/,+ In the concurring opinion of Chief Austice Teehan"ee in aforesaid case he made the
following observationsC
:I just wish to point out that the conflict between the majority opinion penned by 'me
Austice 'elencio3Derrera and the dissenting opinion penned by 'r Austice %eliciano as to
the proper characteri6ation of the taxable income derived by respondent B;AC from the
sales in the 0hilippines of tic"ets for B;AC flights as sold and issued by its general sales
agent in the 0hilippines has become moot after )ovember -4, */,- Both opinions state that
by amendment through 07 )o +/, promulgated on )ovember -4, */,-, of section -4 8b98-9
of the Tax Code providing for the rate of income tax on foreign corporations, international
carriers such as respondent B;AC, have since then been taxed at a reduced rate of -3*B-Q
on their gross 0hilippine billings There is, therefore, no longer any source of substantial
conflict between the two opinions as to the present -3*B-Q tax on their gross 0hilippine
billings charged against such international carriers as herein respondent foreign
corporation:
;n the basis of the doctrine announced in British ;verseas Airways Corporation, the
revenue derived by the private respondent Air India from the sales of airplane tic"ets through
its agent 0hilippine Air #ines, Inc, here in the 0hilippines, must be considered taxable
income As correctly assessed by the petitioner, such income is subject to a -<Q tax
pursuant to 0residential 7ecree )o *1<<, amending &ection -4 8b98-9 of the tax code The
total 0hilippine billings of the private respondent for the taxable year in 5uestion amounts to
0-,/+2,*<+.. -<Q of this amount or 0,4,-.1/. constitutes the income tax due from the
private respondent
The tax liability of the private respondent thus settled, @e come now to the propriety of the
<.Q surcharge and the interest imposed upon it by the Commissioner of Internal Revenue
The <.Q surcharge or fraud penalty provided in &ection ,- of the )ational Internal Revenue
Code is imposed on a delin5uent taxpayer who willfully neglects to file the re5uired tax
return within the period prescribed by the law, or who willfully files a false or fraudulent tax
return, to wit E
:&ec ,- &urcharges for failure to render returns and for rendering false and fraudulent
returns E In case of willful neglect to file the return or list re5uired under this Title within
the time prescribed by law, or in case a false or fraudulent return or list is willfully made, the
Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in case any
payment has been made on the basis of such return before the discovery of the falsity or
fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax In case of
any failure to ma"e and file a return or list within the time prescribed by law or by the
Commissioner or other internal revenue officer, not due to willful neglect, the Commissioner
of Internal Revenue shall add to the tax twenty3five per centum of its amount, except that,
when a return is voluntarily and without notice from the Commissioner or other officer filed
after such time, and it is shown that the failure to file it was due to a reasonable cause, no
such addition shall be made to the tax The amount so added to any tax shall be collected at
the same time in the same manner and as part of the tax unless the tax has been paid before
the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be
collected in the same manner as the tax:
;n the other hand, the same &ection provides that if the failure to file the re5uired tax return
is not due to willful neglect, a penalty of -<Q is to be added to the amount of the tax due
from the taxpayer
@e have gone through the allegations of the petitioner as well as the 'emorandum
submitted by the &olicitor $eneral on behalf of the Commissioner and on the basis of the
same @e are not convinced that the private respondent can be considered to have willfully
neglected to file the re5uired tax return thereby warranting the imposition of the <.Q fraud
penalty provided in &ection ,- At the most, there is the barren claim that such failure was
fraudulent in character, without any evidence or justification for the same The willful
neglect to file the re5uired tax return or the fraudulent intent to evade the payment of taxes,
considering that the same is accompanied by legal conse5uences, cannot be presumed At
this point, @e call attention to the pronouncement of this Court in A6nar v Court of Tax
Appeals, to wit E
:The lower court(s conclusion regarding the existence of fraudulent intent to evade payment
of taxes was based merely on a presumption and not on evidence establishing a willful filing
of false and fraudulent returns so as to warrant the imposition of the fraud penalty The
fraud contemplated by law is actual and not constructive It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce
another to give up some legal right )egligence, whether slight or gross, is not e5uivalent to
the fraud with intent to give up some legal right )egligence, whether slight or gross, is not
e5uivalent to the fraud with intent to evade the tax contemplated by the law It must amount
to intentional wrongdoing with the sole object of avoiding the tax It necessarily follows that
a mere mista"e cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mista"es in ma"ing entries in the
returns and in the assessment, respectively, under the inventory method of determining tax
liability, it would be unfair to treat the mista"es of the petitioner as tainted with fraud and
those of the respondent as made in good faith:
There being no cogent basis to find willful neglect to file the re5uired tax return on the part
of the private respondent, the <.Q surcharge or fraud penalty imposed upon it is improper
)onetheless, such failure subjects the private respondent to a -<Q penalty pursuant to
&ection ,- of the tax code cited earlier 0,4,-.1/. constitutes the tax deficiency of the
private respondent -<Q of this amount is 01,,*.*/<
As for the interest which the private respondent is liable to pay, @e find the 4-Q interest
assessed by the petitioner to be in order At the time the tax liability of the private respondent
accrued, &ection <* 8d9 of the tax code, before it was amended by 0residential 7ecree )o
*,.< prescribed an interest rate of *4Q per annum, provided that the maximum amount that
could be collected as interest on the tax deficiency will not exceed the amount corresponding
to a period of three years Thus, the maximum interest rate then was 4-Q This maximum
interest rate is applicable to the private respondent inasmuch as the period between 'arch
1*, */,+ 8the end of the fiscal year in 5uestion9 and %ebruary -., */2* 8the time when the
petitioner made the assessment in 5uestion9 exceeds three years 0,4,-.1/. constitutes the
tax deficiency of the private respondent 4-Q of this amount is 01*,*+<+4
@e will now loo" into the propriety of the other impositions
The petitioner prays that pursuant to &ection <* 8e9 8-9 of the tax code, as amended by
0residential 7ecree )o *,.<, the private respondent is liable to pay additional interest of
-.Q per annum 8computed from %ebruary -., */2*, the date when the Commissioner sought
the payment of the tax deficiency9 on the total amount unpaid, to wit E
:8-9 7eficiency E @here a deficiency, or any interest assessed in connection therewith
under paragraph 8d9 of this section, or any addition to the taxes provided for in &ection
seventy3two of this Code is not paid in full within thirty days from the date of notice and
demand from the Commissioner of Internal Revenue, there shall be collected upon the
unpaid amount as part of the tax, interest at the rate of twenty per centum per annum from
the date of such notice and demand until it is paidC 0rovided, That the maximum amount that
may be collected as interest on deficiency shall in no case exceed the amount corresponding
to a period of three years, the present provisions regarding prescription to the contrary
notwithstanding:
A careful reading of &ection <* 8e9 8-9 shows that this interest is in addition to the interest
provided in &ection <* 8d9 This view can be gleaned from the use of the phrase :@here a
deficiency, or any interest assessed in connection therewith under paragraph 8d9 of this
section: in &ection <* 8e9 8-9 The additional interest is to be computed upon the entire
amount of the tax liability 8previous interest included9 which remains unpaid This is
manifested by the use of the phrase :there shall be collected upon the unpaid amount as part
of the tax: in &ection <* 8e9 8-9 Dowever, the same &ection provides that the maximum
amount that may be collected as interest cannot exceed the amount corresponding to a
period of three years In this case, the maximum rate would be +.Q
The petitioner also prays that pursuant to &ection <* 8e9 819 of the same code, as amended by
the said 7ecree, the private respondent is li"ewise liable to pay an additional surcharge of
*.Q 8flat rate9 of the total amount of tax unpaid to wit E
:819 &urcharge E If any amount of tax shown on the return is not paid in full on or before
the date prescribed for its payment under paragraph 8a9 of this &ection, or any amount of
deficiency, and any interest assessed in connection therewith, is not paid in full within the
period prescribed in the assessment notice and demand re5uired under paragraph 8b9 of this
&ection, there shall be collected in addition to the interest prescribed herein and in
paragraph 8d9 above and as part of the tax a surcharge of ten per centum of the amount of
tax unpaid:
An examination of &ection <* 8e9819 reveals that this surcharge is imposed for the late
payment of the unpaid tax deficiency andBor unpaid interest assessed in connection
therewith, in addition to all other charges This is confirmed by the use of the words :there
shall be collected in addition to the interest prescribed herein Oreferring to the entire &ection
<* 8e9P and in paragraph 8d9 above Oreferring to &ection <* 8d9P: The additional surcharge
is computed on the amount of tax unpaid, exclusive of all other impositions This is
confirmed by the phrase :ten per centum of the amount of tax unpaid: The failure to pay the
tax deficiency within the re5uired period of time upon demand is penali6ed by this additional
surcharge !pon such failure to pay, the surcharge is automatically due? its imposition is
mandatory
!nder the aforementioned provisions of the tax code, the private respondent became liable to
pay the additional interest provided in &ection <* 8e9 8-9 and the *.Q surcharge provided in
&ection <* 8e9 819 thirty days after %ebruary -., */2*, the date when the Commissioner of
Internal Revenue sought the payment of the deficiency 'ore than three years have passed
since and yet the account remains unsettled Thus, the additional interest and surcharge can
be imposed on the private respondent as asserted by the petitioner 0residential 7ecree )o
*,.< too" effect on August *, */2. It was, therefore, the law in effect when the additional
interest and surcharge could be legally imposed on the private respondent
#et !s now apply the additional interest to the tax liability of the private respondent The
income tax due from the private respondent for the taxable year ending 'arch 1*, */,+ is
0,4,-.4.. The -<Q surcharge under &ection ,- is 01,,*.*/< The 4-Q interest under
&ection <* 8d9 is 01*,*+<+4 The sum of these figures is 0*4-,4,*</
'ore than three years have passed since %ebruary -., */2* Dence, the three3year or +.Q
maximum interest provided in &ection <* 8e9 8-9 calls for application It is computed against
the total amount unpaid by the private respondent 3 0*4-,4,*</ +.Q of this amount is
02<,42-/< The tax liability of the private respondent, exclusive of interest and surcharge is
0,4,-.4.. *.Q of this amount is 0,,4-.4., representing the *.Q surcharge provided in
&ection <* 8e9 819
In sum, the following schedule illustrates the total tax liability of the private respondent E
Income Tax for %iscal year
ending 'arch 1*, */,+ 0,4,-.4..
AddC -<Q surcharge
under &ection ,- 1,,*.*/<
4-Q maximum interest
under &ection <* 8d9 1*,*+<+4
EEEEE
Total 0*4-,4,*</
AddC +.Q maximum additional
interest under 0residential
7ecree )o *,.< 8computed
on 0*4-,4,*</9 2<,42-/<
EEEEEE
Total 0--,,/<4<4
AddC *.Q additional surcharge
under 0residential 7ecree
)o *,.< 8computed on
unpaid tax of 0,4,-.4..9 0,,4-.4.
EEEEE
T;TA# TAH 7!= %R;' TD=
0RI>AT= R=&0;)7=)T 0-1<,1,4/4
Accordingly, @e hold that the private respondent is liable for unpaid taxes and charges in
the total amount of Two Dundred Thirty3%ive Thousand, Three Dundred &eventy3%our 0esos
and )inety3%our Centavos 80-1<,1,4/49
@D=R=%;R=, in view of the foregoing, the 7ecision of the Court of Tax Appeals in CTA
Case )o 144* is hereby &=T A&I7= The private respondent Air India is hereby ordered to
pay the amount of 0-1<,1,4/4 as deficiency tax, inclusive of interest and surcharges @e
ma"e no pronouncement as to costs
&; ;R7=R=7
>2? %i"im#m C,r3,r!te I"c,me T!2 ," Re/i0e"t *,rei4" C,r3,r!ti,"/ @ A
mi"im#m c,r3,r!te i"c,me t!2 ,f t5, 3erce"t >2G? ,f 4r,// i"c,me, !/
3re/cribe0. #"0er )ecti," 27>E? ,f t+i/ C,0e, /+!-- be im3,/e0, #"0er t+e /!me
c,"0iti,"/, ," ! re/i0e"t f,rei4" c,r3,r!ti," t!2!b-e #"0er 3!r!4r!3+ >1? ,f t+i/
)#b/ecti,".
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ./3/2 August -<, *//2
The Imposition of the 'inimum Corporate Income Tax 8'CIT9 of Two 8-Q9 percent on
7omestic Corporations and Resident %oreign Corporations
'I)I'!' C;R0;RAT= I)C;'= TAH 8'CIT9 ;) R=&I7=)T %;R=I$)
C;R0;RATI;) E A minimum corporate income tax of two percent 8-Q9 of the gross
income from sources within the 0hilippines is hereby imposed upon any resident foreign
corporation, beginning on the fourth 84th9 taxable year 8whether calendar or fiscal year,
depending on the accounting period employed9 immediately following the taxable year in
which the corporation commenced its business operations, whenever the amount of the
minimum corporate income tax is greater than the normal income tax due for such year
In computing for the minimum corporate income tax due from a resident foreign
corporation, the rules prescribed under &ec --,8=9 of these Regulations shall applyC
0rovided, however, that only the gross income from sources within the 0hilippines shall
be considered for such purposes
=xceptions E The minimum corporate income tax shall only apply to resident foreign
corporations which are subject to normal income tax Accordingly, the minimum
corporate income tax shall not apply to the following resident foreign corporationsC
8a9 Resident foreign corporations engaged in business as :international carrier: subject
to tax at two and one3half percent 8- YQ9 of their :$ross 0hilippine Billings:?
8b9 Resident foreign corporations engaged in business as ;ffshore Ban"ing !nits 8;B!s9
on their income from foreign currency transactions with local commercial ban"s,
including branches of foreign ban"s, authori6ed by the Bang"o&entralng0ilipinas 8B&09
to transact business with ;ffshore Ban"ing !nits 8;B!s9, including interest income from
foreign currency loans granted to residents of the 0hilippines, subject to a final income
tax at ten percent 8*.Q9 of such income? and
8c9 Resident foreign corporations engaged in business as regional operating
head5uarters subject to tax at ten percent 8*.Q9 of their taxable income
8d9 %irms that are taxed under a special income tax regime such as those in accordance
with RA ,/*+ and ,--, 8the 0=JA law and the Bases Conversion 7evelopment Act,
respectively9
>;? I"ter"!ti,"!- C!rrier . A" i"ter"!ti,"!- c!rrier 0,i"4 b#/i"e// i" t+e
P+i-i33i"e/ /+!-- 3!$ ! t!2 ,f t5, !"0 ,"e@+!-f 3erce"t >2 MG? ," it/ F&r,//
P+i-i33i"e Bi--i"4/F !/ 0efi"e0 +ere#"0er=
>!? I"ter"!ti,"!- Air C!rrier . F&r,// P+i-i33i"e Bi--i"4/F refer/ t, t+e !m,#"t ,f
4r,// reve"#e 0erive0 fr,m c!rri!4e ,f 3er/,"/, e2ce// b!44!4e, c!r4, !"0 m!i-
,ri4i"!ti"4 fr,m t+e P+i-i33i"e/ i" ! c,"ti"#,#/ !"0 #"i"terr#3te0 f-i4+t,
irre/3ective ,f t+e 3-!ce ,f /!-e ,r i//#e !"0 t+e 3-!ce ,f 3!$me"t ,f t+e tic9et ,r
3!//!4e 0,c#me"t= Pr,vi0e0, T+!t tic9et/ rev!-i0!te0, e2c+!"4e0 !"0D,r i"0,r/e0
t, !",t+er i"ter"!ti,"!- !ir-i"e f,rm 3!rt ,f t+e &r,// P+i-i33i"e Bi--i"4/ if t+e
3!//e"4er b,!r0/ ! 3-!"e i" ! 3,rt ,r 3,i"t i" t+e P+i-i33i"e/= Pr,vi0e0, f#rt+er,
T+!t f,r ! f-i4+t 5+ic+ ,ri4i"!te/ fr,m t+e P+i-i33i"e/, b#t tr!"//+i3me"t ,f
3!//e"4er t!9e/ 3-!ce !t !"$ 3,rt ,#t/i0e t+e P+i-i33i"e/ ," !",t+er !ir-i"e, ,"-$
t+e !-i8#,t 3,rti," ,f t+e c,/t ,f t+e tic9et c,rre/3,"0i"4 t, t+e -e4 f-,5" fr,m t+e
P+i-i33i"e/ t, t+e 3,i"t ,f tr!"//+i3me"t /+!-- f,rm 3!rt ,f &r,// P+i-i33i"e
Bi--i"4/.
CASES DIGEST
The test of taxability is the source or that activity which produced the income
The test of taxability is the :source: or that activity which produced the income The
source of an income is the property, activity or service that produced the income %or the
source of income to be considered as coming from the 0hilippines, it is sufficient that the
income is derived from activity within the 0hilippines The sale of tic"ets in the
0hilippines is the activity that produces the income The tic"ets exchanged hands here
and payments for fares were also made here in 0hilippine currency The situs of the
source of payments is the 0hilippines The flow of wealth proceeded from, and occurred
within, 0hilippine territory, enjoying the protection accorded by the 0hilippine
government In consideration of such protection, the flow of wealth should share the
burden of supporting the government
Commissioner of Internal Revenue vs British ;verseas Airways Corp, et al, $R )os
#3+<,,13,4, April 1., */2,
Commissioner of Internal Revenue vs Air India, et al,
$R )o #3,-441, Aanuary -/, */22
Commissioner of Internal Revenue vs American Airlines, Inc, et al,
$R )o +,/12, 7ecember */, */2/
CIR vs Aapan Air #ines, Inc $R )o +.,*4 ;ctober 4, *//*
&outh African Airways vs CIR CTA +,+. Aune ./, -..<
)ational 7ev Co vs CIR $R )o #3<1/+* Aune 1., */2,
CIR vs &C Aonhson and &ons, Inc 1./ &CRA *.-
The absence of flight operations to and from the 0hilippines is not determinative of the
source of income or the situs of income taxation The test of taxability is the :source:?
and the source of an income is that activity which produced the income !n5uestionably,
the passage documentations were sold in the 0hilippines and the revenue therefrom was
derived from a business activity regularly pursued within the 0hilippines And even if the
tic"ets sold covered the :transport of passengers and cargo to and from foreign cities,: it
cannot alter the fact that income from the sale of tic"ets was derived from the
0hilippines The word :source: conveys one essential idea, that of origin, and the origin
of the income herein is the 0hilippines
Commissioner of Internal Revenue vs British ;verseas Airways Corp, et al, $R )os
#3+<,,13,4, April 1., */2,
Commissioner of Internal Revenue vs Air India, et al, $R )o #3,-441, Aanuary -/,
*/22
Commissioner of Internal Revenue vs American Airlines, Inc, et al, $R )o +,/12,
7ecember */, */2/
&ec -2 8A9 8*9 of the *//, )IRC is a general rule that resident foreign corporations are
liable for 1-Q tax on all income from sources within the 0hilippines &ec -2 8A9 819 is an
exception to this general rule
An exception is defined as :that which would otherwise be included in the provision from
which it is excepted It is a clause which exempts something from the operation of a
statute by express words: %urther, :an exception need not be introduced by the words
(except( or (unless( An exception will be construed as such if it removes something from
the operation of a provision of law:
In the instant case, the general rule is that resident foreign corporations shall be liable
for a 1-Q income tax on their income from within the 0hilippines, except for resident
foreign corporations that are international carriers that derive income :from carriage of
persons, excess baggage, cargo and mail originating from the 0hilippines: which shall
be taxed at - *B-Q of their $ross 0hilippine Billings 0etitioner, being an international
carrier with no flights originating from the 0hilippines, does not fall under the exception
As such, petitioner must fall under the general rule This principle is embodied in the
#atin maxim, exceptiofirmatregulam in casibus non exceptis, which means, a thing not
being excepted must be regarded as coming within the purview of the general rule
To reiterate, the correct interpretation of the above provisions is that, if an international
air carrier maintains flights to and from the 0hilippines, it shall be taxed at the rate of -
*B-Q of its $ross 0hilippine Billings, while international air carriers that do not have
flights to and from the 0hilippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 1-Q of such income
&outh African Airways vs Commissioner of Internal Revenue,
$R )o *2.1<+, %ebruary *+, -.*.
=xemption from the general rule that resident foreign corporations are liable for 1-Q tax
on all income from sources within the 0hilippines
@e point out that &ec -2 8A9 819 8a9 of the *//, )IRC does not, in any categorical term,
exempt all international air carriers from the coverage of &ec -2 8A9 8*9 of the *//,
)IRC Certainly, had legislature(s intentions been to completely exclude all international
air carriers from the application of the general rule under &ec -2 8A9 8*9, it would have
used the appropriate language to do so? but the legislature did not Thus, the logical
interpretation of such provisions is that, if &ec -2 8A9 819 8a9 is applicable to a taxpayer,
then the general rule under &ec -2 8A9 8*9 would not apply If, however, &ec -2 8A9 819
8a9 does not apply, a resident foreign corporation, whether an international air carrier or
not, would be liable for the tax under &ec -2 8A9 8*9
&outh African Airways vs Commissioner of Internal Revenue,
$R )o *2.1<+, %ebruary *+, -.*.
%oreign airline company selling tic"et in the 0hilippines through local agent is
considered a resident foreign corporation doing business in the 0hilippines
There being no dispute that AA# constituted 0A# as local agent to sell its airline tic"ets,
there can be no conclusion other than that AA# is a resident foreign corporation, doing
business in the 0hilippines Indeed, the sale of tic"ets is the very lifeblood of the airline
business, the generation of sales being the paramount objective
Commissioner of Internal Revenue vs Aapan Air #ines, et al,
$R )o +.,*4, ;ctober 4, *//*
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); *<3.- 'ay 1., -..-
Revenue Regulations $overning the Imposition of Income Tax on the $ross 0hilippine
Billings, ;ther Income of International Air Carriers and Common Carrier(s Tax
0ursuant to &ections -28A98198a9 , -28A98*9 , and **2 of the )ational Internal Revenue
Code of *//, as well as the 'anner of Claiming 7eductions on Travel =xpenses and
%reight Charges Incurred 0ursuant to &ection 14 of the &ame Code
>b? I"ter"!ti,"!- )+i33i"4 . FF&r,// P+i-i33i"e Bi--i"4/F me!"/ 4r,// reve"#e
5+et+er f,r 3!//e"4er, c!r4, ,r m!i- ,ri4i"!ti"4 fr,m t+e P+i-i33i"e/ #3 t, fi"!-
0e/ti"!ti,", re4!r0-e// ,f t+e 3-!ce ,f /!-e ,r 3!$me"t/ ,f t+e 3!//!4e ,r frei4+t
0,c#me"t/.
CASES DIGESTIncome of foreign corporation engaged in transport of cargo must be
sourced from the 0hilippines
A resident foreign corporation engaged in the transport of cargo is liable for taxes
depending on the amount of income it derives from sources within the 0hilippines Thus,
before such a tax liability can be enforced the taxpayer must be shown to have earned
income sourced from the 0hilippines
Commissioner of Internal Revenue vs To"yo &hipping Co #td, et al,
$R )o +2-<-, 'ay -+, *//<
>4? Off/+,re B!"9i"4 U"it/ . T+e 3r,vi/i,"/ ,f !"$ -!5 t, t+e c,"tr!r$
",t5it+/t!"0i"4, i"c,me 0erive0 b$ ,ff/+,re b!"9i"4 #"it/ !#t+,ri6e0 b$ t+e
B!"49,)e"tr!-"4Pi-i3i"!/ >B)P?, fr,m f,rei4" c#rre"c$ tr!"/!cti,"/ 5it+
","re/i0e"t/, ,t+er ,ff/+,re b!"9i"4 #"it/, -,c!- c,mmerci!- b!"9/, i"c-#0i"4
br!"c+e/ ,f f,rei4" b!"9/ t+!t m!$ be !#t+,ri6e0 b$ t+e B!"49,)e"tr!-"4Pi-i3i"!/
>B)P? t, tr!"/!ct b#/i"e// 5it+ ,ff/+,re b!"9i"4 #"it/ /+!-- be e2em3t fr,m !--
t!2e/ e2ce3t "et i"c,me fr,m /#c+ tr!"/!cti,"/ !/ m!$ be /3ecifie0 b$ t+e
)ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e %,"et!r$ B,!r0 5+ic+ /+!-- be
/#b:ect t, t+e re4#-!r i"c,me t!2 3!$!b-e b$ b!"9/= Pr,vi0e0, +,5ever, T+!t !"$
i"tere/t i"c,me 0erive0 fr,m f,rei4" c#rre"c$ -,!"/ 4r!"te0 t, re/i0e"t/ ,t+er t+!"
,ff/+,re b!"9i"4 #"it/ ,r -,c!- c,mmerci!- b!"9/, i"c-#0i"4 -,c!- br!"c+e/ ,f
f,rei4" b!"9/ t+!t m!$ be !#t+,ri6e0 b$ t+e B)P t, tr!"/!ct b#/i"e// 5it+ ,ff/+,re
b!"9i"4 #"it/, /+!-- be /#b:ect ,"-$ t, ! fi"!- t!2 !t t+e r!te ,f te" 3erce"t >1CG?.
A"$ i"c,me ,f ","re/i0e"t/, 5+et+er i"0ivi0#!-/ ,r c,r3,r!ti,"/, fr,m
tr!"/!cti,"/ 5it+ /!i0 ,ff/+,re b!"9i"4 #"it/ /+!-- be e2em3t fr,m i"c,me t!2.
><? T!2 ," Br!"c+ Pr,fit/ Remitt!"ce/ . A"$ 3r,fit remitte0 b$ ! br!"c+ t, it/
+e!0 ,ffice /+!-- be /#b:ect t, ! t!2 ,f fiftee" 3erce"t >1<G? 5+ic+ /+!-- be b!/e0
," t+e t,t!- 3r,fit/ !33-ie0 ,r e!rm!r9e0 f,r remitt!"ce 5it+,#t !"$ 0e0#cti," f,r
t+e t!2 c,m3,"e"t t+ere,f >e2ce3t t+,/e !ctivitie/ 5+ic+ !re re4i/tere0 5it+ t+e
P+i-i33i"e Ec,",mic K,"e A#t+,rit$?. T+e t!2 /+!-- be c,--ecte0 !"0 3!i0 i" t+e
/!me m!""er !/ 3r,vi0e0 i" )ecti,"/ <7 !"0 <8 ,f t+i/ C,0e= Pr,vi0e0, T+!t
i"tere/t/, 0ivi0e"0/, re"t/, r,$!-tie/, i"c-#0i"4 rem#"er!ti," f,r tec+"ic!- /ervice/,
/!-!rie/, 5!4e/, 3remi#m/, !""#itie/, em,-#me"t/ ,r ,t+er fi2e0 ,r 0etermi"!b-e
!""#!-, 3eri,0ic ,r c!/#!- 4!i"/, 3r,fit/, i"c,me !"0 c!3it!- 4!i"/ receive0 b$ !
f,rei4" c,r3,r!ti," 0#ri"4 e!c+ t!2!b-e $e!r fr,m !-- /,#rce/ 5it+i" t+e
P+i-i33i"e/ /+!-- ",t be tre!te0 !/ br!"c+ 3r,fit/ #"-e// t+e /!me !re effective-$
c,""ecte0 5it+ t+e c,"0#ct ,f it/ tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/.
CASES DIGEST
Rationale for imposition of tax on branch profits remittances
The remittance tax was conceived in an attempt to e5uali6e the income tax burden on
foreign corporations maintaining, on the one hand, local branch offices and organi6ing,
on the other hand, subsidiary domestic corporations where at least a majority of all the
latter(s shares of stoc" are owned by such foreign corporations
Ban" of America )T R &A vs Court of Appeals, et al,
$R )o *.1./-, Auly -*, *//4
Branch 0rofit Remittance
%ACT&C Burroughs #imited, a foreign corporation authori6ed to engage in trade or
business in the 0hilippines, applied with the Central Ban" for authority to remit branch
profit to its parent company abroad and paid the *<Q branch profit remittance tax
Claiming that the *<Q profit remittance tax should have been computed on the basis of
the amount actually remitted and not on the amount before profit remittance tax,
Burroughs #td filed a written claim for the refund or tax credit of the amount
representing alleged overpaid branch profit remittance tax The CTA ordered to grant a
tax credit in favor of Burroughs #td
!nable to obtain a reconsideration from the said decision, the CIR filed the instant
petition before the &upreme Court
I&&!=C Is Burroughs #imited legally entitled to a refundS
R!#I)$C The pertinent provision of the )ational Revenue Code is &ec -4 8b9 8-9 8ii9 of
the )IRC, the pertinent provision under consideration, had been interpreted by the BIR
Ruling of Aanuary -*, */2. to mean that :the tax base upon which the *<Q branch profit
remittance tax shall be imposed 8is9 the profit actually remitted abroad and not on
the total branch profits out of which the remittance is to be made: Applying the said
ruling, the claim of Burroughs #td that it made an overpayment in the amount of
0*,-,.<2/. which is the difference between the remittance tax actually paid of
0*,*4,,.<2,. and the remittance tax that should have been paid of 0/,4,///2/ is well3
ta"en C I R vs Burroughs #td, et al, $R )o #3+++<1, Aune */, */2+
>A? Re4i,"!- ,r Are! 'e!08#!rter/ !"0 Re4i,"!- O3er!ti"4 'e!08#!rter/ ,f
%#-ti"!ti,"!- C,m3!"ie/ .
>!? Re4i,"!- ,r !re! +e!08#!rter/ !/ 0efi"e0 i" )ecti," 22>DD? /+!-- ",t be
/#b:ect t, i"c,me t!2.
>b? Re4i,"!- ,3er!ti"4 +e!08#!rter/ !/ 0efi"e0 i" )ecti," 22>EE? /+!-- 3!$ ! t!2
,f te" 3erce"t >1CG? ,f t+eir t!2!b-e i"c,me.
>7? T!2 ," Cert!i" I"c,me/ Receive0 b$ ! Re/i0e"t *,rei4" C,r3,r!ti," .
>!? I"tere/t fr,m De3,/it/ !"0 Jie-0 ,r !"$ ,t+er %,"et!r$ Be"efit fr,m
De3,/it )#b/tit#te/, Tr#/t *#"0/ !"0 )imi-!r Arr!"4eme"t/ !"0 R,$!-tie/. .
I"tere/t fr,m !"$ c#rre"c$ b!"9 0e3,/it !"0 $ie-0 ,r !"$ ,t+er m,"et!r$ be"efit
fr,m 0e3,/it /#b/tit#te/ !"0 fr,m tr#/t f#"0/ !"0 /imi-!r !rr!"4eme"t/ !"0
r,$!-tie/ 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/ /+!-- be /#b:ect t, ! fi"!-
i"c,me t!2 !t t+e r!te ,f t5e"t$ 3erce"t >2CG? ,f /#c+ i"tere/t= Pr,vi0e0, +,5ever,
T+!t i"tere/t i"c,me 0erive0 b$ ! re/i0e"t f,rei4" c,r3,r!ti," fr,m ! 0e3,/it,r$
b!"9 #"0er t+e e23!"0e0 f,rei4" c#rre"c$ 0e3,/it /$/tem /+!-- be /#b:ect t, ! fi"!-
i"c,me t!2 !t t+e r!te ,f /eve" !"0 ,"e@+!-f 3erce"t >7 1D2G? ,f /#c+ i"tere/t
i"c,me.
>b? I"c,me Derive0 #"0er t+e E23!"0e0 *,rei4" C#rre"c$ De3,/it )$/tem .
I"c,me 0erive0 b$ ! 0e3,/it,r$ b!"9 #"0er t+e e23!"0e0 f,rei4" c#rre"c$ 0e3,/it
/$/tem fr,m f,rei4" c#rre"c$ tr!"/!cti,"/ 5it+ ","re/i0e"t/, ,ff/+,re b!"9i"4
#"it/ i" t+e P+i-i33i"e/, -,c!- c,mmerci!- b!"9/ i"c-#0i"4 br!"c+e/ ,f f,rei4"
b!"9/ t+!t m!$ be !#t+,ri6e0 b$ t+e B!"49,)e"tr!-"4Pi-i3i"!/ >B)P? t, tr!"/!ct
b#/i"e// 5it+ f,rei4" c#rre"c$ 0e3,/it /$/tem #"it/ !"0 ,t+er 0e3,/it,r$ b!"9/
#"0er t+e e23!"0e0 f,rei4" c#rre"c$ 0e3,/it /$/tem /+!-- be e2em3t fr,m !-- t!2e/,
e2ce3t "et i"c,me fr,m /#c+ tr!"/!cti,"/ !/ m!$ be /3ecifie0 b$ t+e )ecret!r$ ,f
*i"!"ce, #3," rec,mme"0!ti," b$ t+e %,"et!r$ B,!r0 t, be /#b:ect t, t+e re4#-!r
i"c,me t!2 3!$!b-e b$ b!"9/= Pr,vi0e0, +,5ever, T+!t i"tere/t i"c,me fr,m
f,rei4" c#rre"c$ -,!"/ 4r!"te0 b$ /#c+ 0e3,/it,r$ b!"9/ #"0er /!i0 e23!"0e0
/$/tem t, re/i0e"t/ ,t+er t+!" ,ff/+,re b!"9i"4 #"it/ i" t+e P+i-i33i"e/ ,r ,t+er
0e3,/it,r$ b!"9/ #"0er t+e e23!"0e0 /$/tem /+!-- be /#b:ect t, ! fi"!- t!2 !t t+e
r!te ,f te" 3erce"t >1CG?.
A"$ i"c,me ,f ","re/i0e"t/, 5+et+er i"0ivi0#!-/ ,r c,r3,r!ti,"/, fr,m
tr!"/!cti,"/ 5it+ 0e3,/it,r$ b!"9/ #"0er t+e e23!"0e0 /$/tem /+!-- be e2em3t
fr,m i"c,me t!2.
>c? C!3it!- &!i"/ fr,m )!-e ,f )+!re/ ,f )t,c9 N,t Tr!0e0 i" t+e )t,c9 E2c+!"4e.
A fi"!- t!2 !t t+e r!te/ 3re/cribe0 be-,5 i/ +ereb$ im3,/e0 #3," t+e "et c!3it!-
4!i"/ re!-i6e0 0#ri"4 t+e t!2!b-e $e!r fr,m t+e /!-e, b!rter, e2c+!"4e ,r ,t+er
0i/3,/iti," ,f /+!re/ ,f /t,c9 i" ! 0,me/tic c,r3,r!ti," e2ce3t /+!re/ /,-0 ,r
0i/3,/e0 ,f t+r,#4+ t+e /t,c9 e2c+!"4e=
N,t ,ver P1CC,CCC<G
O" !"$ !m,#"t i" e2ce// ,f P1CC,CCC 1CG
>0? I"terc,r3,r!te Divi0e"0/ . Divi0e"0/ receive0 b$ ! re/i0e"t f,rei4"
c,r3,r!ti," fr,m ! 0,me/tic c,r3,r!ti," -i!b-e t, t!2 #"0er t+i/ C,0e /+!-- ",t be
/#b:ect t, t!2 #"0er t+i/ Tit-e.
>B? T!2 ," N,"re/i0e"t *,rei4" C,r3,r!ti," .
>1? I" &e"er!- . E2ce3t !/ ,t+er5i/e 3r,vi0e0 i" t+i/ C,0e, ! f,rei4"
c,r3,r!ti," ",t e"4!4e0 i" tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/ /+!-- 3!$ ! t!2 e8#!-
t, t+irt$@five 3erce"t >;<G? ,f t+e 4r,// i"c,me receive0 0#ri"4 e!c+ t!2!b-e $e!r
fr,m !-- /,#rce/ 5it+i" t+e P+i-i33i"e/, /#c+ !/ i"tere/t/, 0ivi0e"0/, re"t/,
r,$!-tie/, /!-!rie/, 3remi#m/ >e2ce3t rei"/#r!"ce 3remi#m/?, !""#itie/,
em,-#me"t/ ,r ,t+er fi2e0 ,r 0etermi"!b-e !""#!-, 3eri,0ic ,r c!/#!- 4!i"/, 3r,fit/
!"0 i"c,me, !"0 c!3it!- 4!i"/, e2ce3t c!3it!- 4!i"/ /#b:ect t, t!2 #"0er
/#b3!r!4r!3+ <>c?= Pr,vi0e0, T+!t effective !"#!r$ 1, 2CC9, t+e r!te ,f i"c,me t!2
/+!-- be t+irt$ 3erce"t >;CG?.
R=I)&!RA)C= 0R='I!'& C=7=7 T; %;R=I$) R=I)&!R=R& C;)&I7=R=7
I)C;'= %R;' 0DI#I00I)= &;!RC=&? 0#AC= ;% ACTI>ITG CR=ATI)$ I)C;'=
C;)TR;##I)$
Reinsurance premiums on local ris"s ceded by domestic insurers to foreign reinsurers not
doing business in the 0hilippines are subject to withholding tax @here the reinsurance
contracts show that the activities that constituted the underta"ing to reinsure a domestic
insurer against losses arising from the original insurances in the 0hilippines were
performed in the 0hilippines, the reinsurance premiums are considered as coming from
sources within the 0hilippines and are subject to 0hilippine income tax
&ection -4 8now &ec -2b9 of the Tax Code does not re5uire a foreign corporation to
engage in business in the 0hilippines in subjecting its income to tax It suffices that the
activity creating the income is performed or done in the 0hilippines @hat is controlling,
therefore, is not the place of business but the place of activity that created an income
TD= 0DI#I00I)= $!ARA)TG C;, I)C vs C;''I&&I;)=R ;% I)T=R)A#
R=>=)!= and TD= C;!RT ;% TAH A00=A#&, =T A#,
>2? N,"re/i0e"t Ci"em!t,4r!3+ic *i-m O5"er, Le//,r ,r Di/trib#t,r . A
ci"em!t,4r!3+ic fi-m ,5"er, -e//,r, ,r 0i/trib#t,r /+!-- 3!$ ! t!2 ,f t5e"t$@five
3erce"t >2<G? ,f it/ 4r,// i"c,me fr,m !-- /,#rce/ 5it+i" t+e P+i-i33i"e/.
>;? N,"re/i0e"t O5"er ,r Le//,r ,f (e//e-/ C+!rtere0 b$ P+i-i33i"e N!ti,"!-/
. A ","re/i0e"t ,5"er ,r -e//,r ,f ve//e-/ /+!-- be /#b:ect t, ! t!2 ,f f,#r !"0
,"e@+!-f 3erce"t >4 1D2G? ,f 4r,// re"t!-/, -e!/e ,r c+!rter fee/ fr,m -e!/e/ ,r
c+!rter/ t, *i-i3i", citi6e"/ ,r c,r3,r!ti,"/, !/ !33r,ve0 b$ t+e %!ritime I"0#/tr$
A#t+,rit$.
>4? N,"re/i0e"t O5"er ,r Le//,r ,f Aircr!ft, %!c+i"erie/ !"0 Ot+er E8#i3me"t
. Re"t!-/, c+!rter/ !"0 ,t+er fee/ 0erive0 b$ ! ","re/i0e"t -e//,r ,f !ircr!ft,
m!c+i"erie/ !"0 ,t+er e8#i3me"t /+!-- be /#b:ect t, ! t!2 ,f /eve" !"0 ,"e@+!-f
3erce"t >7 1D2G? ,f 4r,// re"t!-/ ,r fee/.
><? T!2 ," Cert!i" I"c,me/ Receive0 b$ ! N,"re/i0e"t *,rei4" C,r3,r!ti,"
>!? I"tere/t ," *,rei4" L,!"/ . A fi"!- 5it++,-0i"4 t!2 !t t+e r!te ,f t5e"t$
3erce"t >2CG? i/ +ereb$ im3,/e0 ," t+e !m,#"t ,f i"tere/t ," f,rei4" -,!"/
c,"tr!cte0 ," ,r !fter A#4#/t 1, 198A7
>b? I"terc,r3,r!te Divi0e"0/ . A fi"!- 5it++,-0i"4 t!2 !t t+e r!te ,f fiftee"
3erce"t >1<G? i/ +ereb$ im3,/e0 ," t+e !m,#"t ,f c!/+ !"0D,r 3r,3ert$ 0ivi0e"0/
receive0 fr,m ! 0,me/tic c,r3,r!ti,", 5+ic+ /+!-- be c,--ecte0 !"0 3!i0 !/
3r,vi0e0 i" )ecti," <7>A? ,f t+i/ C,0e, /#b:ect t, t+e c,"0iti," t+!t t+e c,#"tr$ i"
5+ic+ t+e ","re/i0e"t f,rei4" c,r3,r!ti," i/ 0,mici-e0, /+!-- !--,5 ! cre0it !4!i"/t
t+e t!2 0#e fr,m t+e ","re/i0e"t f,rei4" c,r3,r!ti," t!2e/ 0eeme0 t, +!ve bee"
3!i0 i" t+e P+i-i33i"e/ e8#iv!-e"t t, t5e"t$ 3erce"t >2CG?, 5+ic+ re3re/e"t/ t+e
0iffere"ce bet5ee" t+e re4#-!r i"c,me t!2 ,f t+irt$@five 3erce"t >;<NG? !"0 t+e
fiftee" 3erce"t >1<G? t!2 ," 0ivi0e"0/ !/ 3r,vi0e0 i" t+i/ /#b3!r!4r!3+= Pr,vi0e0,
T+!t effective !"#!r$ 1, 2CC9, t+e cre0it !4!i"/t t+e t!2 0#e /+!-- be e8#iv!-e"t t,
fiftee" 3erce"t >1<G?, 5+ic+ re3re/e"t/ t+e 0iffere"ce bet5ee" t+e re4#-!r i"c,me
t!2 ,f t+irt$ 3erce"t >;CG? !"0 t+e fiftee" 3erce"t>1<G? t!2 ," 0ivi0e"0/7
>c? C!3it!- &!i"/ fr,m )!-e ,f )+!re/ ,f )t,c9 ",t Tr!0e0 i" t+e )t,c9
E2c+!"4e . A fi"!- t!2 !t t+e r!te/ 3re/cribe0 be-,5 i/ +ereb$ im3,/e0 #3," t+e
"et c!3it!- 4!i"/ re!-i6e0 0#ri"4 t+e t!2!b-e $e!r fr,m t+e /!-e, b!rter, e2c+!"4e ,r
,t+er 0i/3,/iti," ,f /+!re/ ,f /t,c9 i" ! 0,me/tic c,r3,r!ti,", e2ce3t /+!re/ /,-0,
,r 0i/3,/e0 ,f t+r,#4+ t+e /t,c9 e2c+!"4e=
N,t ,ver P1CC,CCC<G
O" !"$ !m,#"t i" e2ce// ,f P1CC,CCC 1CG1
)ECTION 29 Im3,/iti," ,f Im3r,3er-$ Acc#m#-!te0 E!r"i"4/ T!2 .
>A? I" &e"er!-. . I" !00iti," t, ,t+er t!2e/ im3,/e0 b$ t+i/ Tit-e, t+ere i/ +ereb$
im3,/e0 f,r e!c+ t!2!b-e $e!r ," t+e im3r,3er-$ !cc#m#-!te0 t!2!b-e i"c,me ,f
e!c+ c,r3,r!ti," 0e/cribe0 i" )#b/ecti," B +ere,f, !" im3r,3er-$ !cc#m#-!te0
e!r"i"4/ t!2 e8#!- t, te" 3erce"t >1CG? ,f t+e im3r,3er-$ !cc#m#-!te0 t!2!b-e
i"c,me.
CASES DIGEST
Tax on improper accumulation of surplus is essentially a penalty tax
The provision discouraged tax avoidance through corporate surplus accumulation @hen
corporations do not declare dividends, income taxes are not paid on the undeclared
dividends received by the shareholders The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to distribute earnings so that
the said earnings by shareholders could, in turn, be taxed
Cyanamid 0hilippines, Inc vs Court of Appeals, et al,
$R )o *.2.+,, Aanuary -., -...
:Immediacy Test: may be used to determine the :reasonable needs: of the business
To determine the :reasonable needs: of the business in order to justify an accumulation
of earnings, the Courts of the !nited &tates have invented the so3called :Immediacy Test:
which construed the words :reasonable needs of the business: to mean the immediate
needs of the business, and it was generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and profits, the accumulation was
not for the reasonable needs of the business, and the penalty tax would apply
'anila @ine 'erchants, Inc vs Commissioner of Internal Revenue,
$R )o #3-+*4<, %ebruary -., */24
Touchstone of liability is the purpose behind the accumulation of the income and not the
conse5uences of the accumulation
A prere5uisite to the imposition of the tax has been that the corporation be formed or
availed of for the purpose of avoiding the income tax 8or surtax9 on its shareholders, or
on the shareholders of any other corporation by permitting the earnings and profits of
the corporation to accumulate instead of dividing them among or distributing them to the
shareholders If the earnings and profits were distributed, the shareholders would be
re5uired to pay an income tax thereon whereas, if the distribution were not made to them,
they would incur no tax in respect to the undistributed earnings and profits of the
corporation The touchstone of liability is the purpose behind the accumulation of the
income and not the conse5uences of the accumulation Thus, if the failure to pay
dividends is due to some other cause, such as the use of undistributed earnings and
profits for the reasonable needs of the business, such purpose does not fall within the
interdiction of the statute
'anila @ine 'erchants, Inc vs Commissioner of Internal Revenue, $R )o
#3-+*4<, %ebruary -., */24
Taxpayer(s intention at the time of accumulation is controlling
In order to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of accumulation not subse5uently
declared intentions which are merely the product of afterthought A speculative and
indefinite purpose will not suffice The mere recognition of a future problem and the
discussion of possible and alternative solutions is not sufficient 7efiniteness of plan
coupled with action ta"en towards its consummation are essential
'anila @ine 'erchants, Inc vs Commissioner of Internal Revenue, $R )o #3
-+*4<, %ebruary -., */24
!ndistributed earnings or profits of prior years are ta"en into consideration in
determining unreasonable accumulation for purposes of surtax
0revious accumulations should be considered in determining unreasonable accumulation
for the year concerned In determining whether accumulations of earnings or profits in a
particular year are within the reasonable needs of a corporation, it is necessary to ta"e
into account prior accumulations, since accumulations prior to the year involved may
have been sufficient to cover the business needs and additional accumulations during the
year involved would not reasonably be necessary
Basilan =states, Inc vs Commissioner of Internal Revenue, et al, $R )o #3
--4/-, &eptember <, */+,
>B? T!2 ," C,r3,r!ti,"/ )#b:ect t, Im3r,3er-$ Acc#m#-!te0 E!r"i"4/ T!2 .
>1? I" &e"er!- . T+e im3r,3er-$ !cc#m#-!te0 e!r"i"4/ t!2 im3,/e0 i" t+e
3rece0i"4 )ecti," /+!-- !33-$ t, ever$ c,r3,r!ti," f,rme0 ,r !v!i-e0 f,r t+e
3#r3,/e ,f !v,i0i"4 t+e i"c,me t!2 5it+ re/3ect t, it/ /+!re+,-0er/ ,r t+e
/+!re+,-0er/ ,f !"$ ,t+er c,r3,r!ti," b$ 3ermitti"4 e!r"i"4/ !"0 3r,fit/ t,
!cc#m#-!te i"/te!0 ,f bei"4 0ivi0e0 ,r 0i/trib#te0.
>2? E2ce3ti,"/ . T+e im3r,3er-$ !cc#m#-!te0 e!r"i"4/ t!2 !/ 3r,vi0e0 f,r #"0er
t+i/ )ecti," /+!-- ",t !33-$ t,=
>!? P#b-ic-$@+e-0 c,r3,r!ti,"/7
>b? B!"9/ !"0 ,t+er ","b!"9 fi"!"ci!- i"terme0i!rie/7 !"0
>c? I"/#r!"ce c,m3!"ie/.
>C? Evi0e"ce ,f P#r3,/e t, Av,i0 I"c,me T!2.
>1? Prim! *!cie Evi0e"ce . T+e f!ct t+!t !"$ c,r3,r!ti," i/ ! mere +,-0i"4
c,m3!"$ ,r i"ve/tme"t c,m3!"$ /+!-- be 3rim! f!cie evi0e"ce ,f ! 3#r3,/e t,
!v,i0 t+e t!2 ," it/ /+!re+,-0er/ ,r member/.
>2? Evi0e"ce Determi"!tive ,f P#r3,/e . T+e f!ct t+!t t+e e!r"i"4/ ,r 3r,fit/ ,f !
c,r3,r!ti," !re 3ermitte0 t, !cc#m#-!te be$,"0 t+e re!/,"!b-e "ee0/ ,f t+e
b#/i"e// /+!-- be 0etermi"!tive ,f t+e 3#r3,/e t, !v,i0 t+e t!2 #3," it/
/+!re+,-0er/ ,r member/ #"-e// t+e c,r3,r!ti,", b$ t+e c-e!r 3re3,"0er!"ce ,f
evi0e"ce, /+!-- 3r,ve t, t+e c,"tr!r$.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& )o - &=CTI;) */0urpose to avoid tax? evidence? burden
of proof? definitions of holding or investment company E The Collector of Internal
Revenue(s determination that a corporation was formed or availed of for the purpose of
avoiding the tax on its shareholders or members is subject to disproof by competent
evidence The existence or non3existence of the purpose may be indicated by
circumstances other than the evidence specified in &ection -<8b9, 8now &ection -/c
)IRC9 and whether or not such purpose was present depends upon the particular
circumstances of each case In other words, a corporation is subject to taxation under
&ection -< 8 now &ection -/9 if it is formed or availed of for the purpose of preventing the
imposition of the progressive rates of tax upon shareholders through the medium of
permitting earnings or profits to accumulate, even though the corporation is not a mere
holding or investment company <. per cent or more of the outstanding stoc" of which is
owned directly or indirectly by one person, and does not have an unreasonable
accumulation of earnings or profits? and on the other hand, the fact that a corporation is
such a company or has an accumulation is not absolutely conclusive against it if, by
clear and convincing evidence, the taxpayer satisfies the Commissioner of Internal
Revenue that the corporation was neither formed nor availed of for the purpose of
avoiding the tax on individuals All the other circumstances which might be construed as
evidence of the purpose to avoid the tax on shareholders cannot be outlined, but among
other things the following will be consideredC 8*9 7ealings between the corporation and
its shareholders, such as withdrawal by the shareholders as personal loans or the
expenditure of funds by corporation for the personal benefit of the shareholders, and 8-9
the investment by the corporation of undistributed earnings in assets having no
reasonable connection with the business The mere fact that the corporation distributed a
large part of its earnings for the year in 5uestion does not necessarily prove that
earnings were not permitted to accumulate beyond reasonable needs or that the
corporation was not formed or availed of to avoid the tax upon shareholders
If the Commissioner of Internal Revenue determined that the corporation was formed or
availed of for the purpose of avoiding the progressive rates of tax on individuals through
the medium of permitting earnings or profits to accumulate, and the taxpayer contests
such determination of fact by litigation, the burden of proving the determination wrong
by a preponderance of evidence, together with the corresponding burden of first going
forward with evidence, is on the taxpayer under principles applicable to income tax cases
generally, and this is so even though the corporation is not a mere holding or investment
company and does not have an unreasonable accumulation of earnings or profits
Dowever, if the corporation is a mere holding or investment company, then the law gives
further weight to the presumption of correctness already arising from the Commissioner
of Internal Revenue(s determination by expressly providing an additional presumption of
the existence of a purpose to avoid the tax upon shareholders, while if earnings or profits
are permitted to accumulate beyond the reasonable needs of the business then the law
adds still more weight to the Commissioner of Internal Revenue(s determination by
providing that irrespective of whether or not the corporation is a mere holding or
investment company, the existence of such an accumulation is determinative of the
purpose to avoid the tax upon shareholders unless the taxpayer proves the contrary by
such a clear preponderance of all the evidence that the absence of such a purpose is
unmista"able
&=CTI;) -* !nreasonable accumulation of profits EAn accumulation of earnings or
profits 8including the undistributed earnings or profits of prior years9 is unreasonable if
it is not re5uired for the purposes of the business, considering all the circumstances of
the case It is not intended, however, to prevent accumulations of surplus for the
reasonable needs of the business if the purpose is not to prevent the imposition of the tax
upon shareholders )o attempt is here made to enumerate all the ways in which earnings
or profits of a corporation may be accumulated for the reasonable needs of the business
!ndistributed income is properly accumulated if retained for wor"ing capital needed by
the business? or if invested in additions to plant reasonably re5uired by the business? or if
in accordance with contract obligations placed to the credit of a sin"ing fund for the
purpose of retiring bonds issued by the corporation The nature of the investment of
earnings or profits is immaterial if they are not in fact needed in the business Among
other things, the nature of the business, the financial condition of the corporation at the
close of the taxable year, and the use of the undistributed earnings or profits will be
considered in determining the reasonableness of the accumulations
The business of a corporation is not merely that which it has previously carried on, but
includes in general any line of business which it may underta"e Dowever, a radical
change of business when a considerable surplus has been accumulated may afford
evidence of a purpose to avoid the tax If one corporation owns the stoc" of another
corporation in the same or a related line of business and in effect operates the other
corporation, the business of the latter may be considered in substance although not in
legal form the business of the first corporation =arnings or profits of the first
corporation put into the second through the purchase of stoc" or otherwise may,
therefore, if a subsidiary relationship is established, constitute employment of the income
in its own business Investment by a corporation of its income in stoc" and securities of
another corporation is not of itself to be regarded as employment of the income in its
business The business of one corporation may not be regarded as including the business
of another unless the other corporation is a mere instrumentality of the first? to establish
this it is ordinarily essential that the first corporation own all or substantially all of the
stoc" of the second
The Commissioner of Internal Revenue may re5uire any corporation to furnish a
statement of its accumulated earnings and profits, the name and address of, and number
of share held by each of its shareholders or members, and the amounts that would be
payable to each, if the income of the corporation were distributed
CASES DIGEST
Rationale for imposition of improperly accumulated earnings tax
The underlying purpose of the additional tax on a corporation(s improperly accumulated
profits or surplus is to avoid the situation where a corporation unduly retains its surplus
earnings instead of declaring and paying dividends to its shareholders or members who
would then have to pay the income tax due on such dividends received by them
Commissioner of Internal Revenue vs Ayala &ecurities Corp, et al,
$R )o #3-/42<, )ovember -*, */2.
0resumption of tax avoidance applies where corporation is a mere holding company
The prima facie evidence and presumption set up by law is applicable where the record
shows that respondent corporation is a mere holding company of its shareholders
through its mother company, a registered co3partnership then set up by the individual
shareholders belonging to the same family
Commissioner of Internal Revenue vs Ayala &ecurities Corp, et al,
$R )o #3-/42<, )ovember -*, */2.
>D? Im3r,3er-$ Acc#m#-!te0 T!2!b-e I"c,me . *,r 3#r3,/e/ ,f t+i/ )ecti,", t+e
term Fim3r,3er-$ !cc#m#-!te0 t!2!b-e i"c,meF me!"/ t!2!b-e i"c,me !0:#/te0 b$=
>1? I"c,me e2em3t fr,m t!27
>2? I"c,me e2c-#0e0 fr,m 4r,// i"c,me7
>;? I"c,me /#b:ect t, fi"!- t!27 !"0
>4? T+e !m,#"t ,f "et ,3er!ti"4 -,// c!rr$@,ver 0e0#cte07
A"0 re0#ce0 b$ t+e /#m ,f=
>1? Divi0e"0/ !ct#!--$ ,r c,"/tr#ctive-$ 3!i07 !"0
>2? I"c,me t!2 3!i0 f,r t+e t!2!b-e $e!r.
Pr,vi0e0, +,5ever, T+!t f,r c,r3,r!ti,"/ #/i"4 t+e c!-e"0!r $e!r b!/i/, t+e
!cc#m#-!te0 e!r"i"4/ t!2 /+!-- ",t !33-$ ," im3r,3er-$ !cc#m#-!te0 i"c,me !/ ,f
December ;1, 1997. I" t+e c!/e ,f c,r3,r!ti,"/ !0,3ti"4 t+e fi/c!- $e!r !cc,#"ti"4
3eri,0, t+e im3r,3er-$ !cc#m#-!te0 i"c,me ",t /#b:ect t, t+i/ t!2, /+!-- be
rec9,"e0, !/ ,f t+e e"0 ,f t+e m,"t+ c,m3ri/i"4 t+e t5e-ve >12?@m,"t+ 3eri,0 ,f
fi/c!- $e!r 1997@1998.
>E? Re!/,"!b-e Nee0/ ,f t+e B#/i"e// . *,r 3#r3,/e/ ,f t+i/ )ecti,", t+e term
Fre!/,"!b-e "ee0/ ,f t+e b#/i"e//F i"c-#0e/ t+e re!/,"!b-$ !"tici3!te0 "ee0/ ,f t+e
b#/i"e//.
)ECTION ;C E2em3ti,"/ fr,m T!2 ," C,r3,r!ti,"/ . T+e f,--,5i"4
,r4!"i6!ti,"/ /+!-- ",t be t!2e0 #"0er t+i/ Tit-e i" re/3ect t, i"c,me receive0 b$
t+em !/ /#c+=
>A?L!b,r, !4ric#-t#r!- ,r +,rtic#-t#r!- ,r4!"i6!ti," ",t ,r4!"i6e0 3ri"ci3!--$ f,r
3r,fit7
>B? %#t#!- /!vi"4/ b!"9 ",t +!vi"4 ! c!3it!- /t,c9 re3re/e"te0 b$ /+!re/, !"0
c,,3er!tive b!"9 5it+,#t c!3it!- /t,c9 ,r4!"i6e0 !"0 ,3er!te0 f,r m#t#!- 3#r3,/e/
!"0 5it+,#t 3r,fit7
>C? A be"efici!r$ /,ciet$, ,r0er ,r !//,ci!ti,", ,3er!ti"4 f,r t+e e2c-#/ive be"efit
,f t+e member/ /#c+ !/ ! fr!ter"!- ,r4!"i6!ti," ,3er!ti"4 #"0er t+e -,04e /$/tem,
,r ! m#t#!- !i0 !//,ci!ti," ,r ! ","/t,c9 c,r3,r!ti," ,r4!"i6e0 b$ em3-,$ee/
3r,vi0i"4 f,r t+e 3!$me"t ,f -ife, /ic9"e//, !cci0e"t, ,r ,t+er be"efit/ e2c-#/ive-$
t, t+e member/ ,f /#c+ /,ciet$, ,r0er, ,r !//,ci!ti,", ,r ","/t,c9 c,r3,r!ti," ,r
t+eir 0e3e"0e"t/7
>D? Cemeter$ c,m3!"$ ,5"e0 !"0 ,3er!te0 e2c-#/ive-$ f,r t+e be"efit ,f it/
member/7
>E?N,"/t,c9 c,r3,r!ti," ,r !//,ci!ti," ,r4!"i6e0 !"0 ,3er!te0 e2c-#/ive-$ f,r
re-i4i,#/, c+!rit!b-e, /cie"tific, !t+-etic, ,r c#-t#r!- 3#r3,/e/, ,r f,r t+e
re+!bi-it!ti," ,f veter!"/, ", 3!rt ,f it/ "et i"c,me ,r !//et /+!-- be-,"4 t, ,r i"#re
t, t+e be"efit ,f !"$ member, ,r4!"i6er, ,fficer ,r !"$ /3ecific 3er/,"7
CASES DIGEST
'edical, dental, hospital and veterinary services, except those rendered by professionals,
are exempt from value3added tax 8&ection *./ 8l9, )IRC of *//,, as amended9 The
maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and
essential service or facility rendered by any hospital for its patients Thus, the facility of
ma"ing drugs and medicines available to in3patients of the hospital, whether for reasons
of life3threatening urgency or mere convenience, cannot but be viewed as a hospital
service that is covered by the broad and general exemption provided in &ection *./ 8l9 of
the )IRC of *//,, as amended, for :hospital services:
CTA CA&= ); ,1.4 7ecember *, -.*.
0=R0=T!A# &!CC;!R D;&0ITA#, I)C and TD= &I&T=R& ;% &T 0A!# 7=
CDART=R& vs C;''I&&I;)=R ;% I)T=R)A# R=>=)!=
CDAR$I)$ '=7ICA# A)7 D;&0ITA# %==& E The mere charging of medical and
hospital fees from those who can afford to pay does not ma"e the institution one
established for profit or gain The fact that a hospital charges fees for paying beds does
not ma"e it lose its character as a charitable institution if the same were used to partly
finance the expenses of the free wards maintained by the hospital
A corporation organi6ed for (charitable, educational and religious purposes? that no part
of its net income inures to the benefit of any private individual is exempted from paying
income tax? that it operates a hospital in which medical assistance is given to destitute
persons free of charge? that it maintains a pharmacy department within the premises of
said hospital, to supply drugs and medicines only to charity and paying patients confined
therein? and that only the paying patients are re5uired to pay the medicines supplied to
them, for which they are charged the cost of medicines, plus an additional *.Q thereof,
to partly offset the cost of medicines supplied free of charge to charity patients !nder
these facts, we are of the opinion, and so hold, that the Dospital may not be regarded as
engaged in (business( by reason of said sale of medicines to its paying patients
It has been held that the mere charging of medical and hospital fees from those who
could afford to pay, did not ma"e the institution one established for profit or gain
D;&0ITA# 7= &A) A!A) 7= 7I;&, I)C vs 0A&AG CITG, 0AB#; C!)=TA City
'ayor $R )o #3*/1,* %ebruary -2, */++
=ducational and Charitable )on30rofit corporation
%ACT&C G'CA, a welfare, educational and charitable non3profit corporation, earned an
income from leasing out a portion of its premises to small shop owners and from par"ing
fees collected from non3members The CIR issued an assessment to G'CA including
surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes
on rentals and professional fees and deficiency withholding tax on wages G'CA
formally protested the assessment but the CIR denied its claims Contesting the denial of
its protest, the G'CA filed a petition for review at the CTA which ruled in its favor
7issatisfied with the CTA ruling, the CIR elevated the case to the CA The CA initially
decided in favor of the CIR but upon motion for reconsideration by G'CA the CA
reversed itself A denial of the CIRMs motion for reconsideration prompted this petition for
review
I&&!=C Is the income derived from rentals of real property owned by G'CA subject to
income tax under the )IRC and the ConstitutionS
R!#I)$C The exemption claimed by the G'CA is expressly disallowed by the very
wording of the last paragraph of then &ection -, of the )IRC which mandates that the
income of exempt organi6ations 8such as the G'CA9 from any of their properties, real or
personal, be subject to the tax imposed by the same Code Because the last paragraph of
said section une5uivocally subjects to tax the rent income of the G'CA from its real
property, the Court is duty3bound to abide strictly by its literal meaning and to refrain
from resorting to any convoluted attempt at construction The income from any property
of exempt organi6ations, as well as that arising from any activity it conducts for profit, is
taxable The phrase :any of their activities conducted for profit: does not 5ualify the
word :properties: This ma"es income from the property of the organi6ation taxable,
regardless of how that income is used E whether for profit or for lofty non3profit
purposes The law does not ma"e a distinction The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of @here the law does not
distinguish, neither should we
%or the G'CA to be granted the exemption it claims under Article HI>, &ection 4, par 1
of the Constitution, it must prove with substantial evidence that 8*9 it falls under the
classification non3stoc", non3profit educational institution? and 8-9 the income it see"s to
be exempted from taxation is used actually, directly, and exclusively for educational
purposes Dowever, the term :educational institution,: when used in laws granting tax
exemptions, refers to a : school seminary, college or educational establishment :
Therefore, G'CA cannot be deemed one of the educational institutions covered by the
said constitutional provision
C;''I&&I;)=R ;% I)T=R)A# R=>=)!= vs C;!RT ;% A00=A#&,
O$R )o *-4.41 ;ctober *4, *//2P
BIR wins vs &t #u"es hospital ordered to pay 0+1/' tax deficiency ;ct -<, -.*-
The &upreme Court has ordered &t #u"eMs 'edical Center Inc to pay the Bureau of
Internal Revenue 0+1/ million in deficiency income tax, value added tax and
withholding tax on compensation for *//2, based on the *.3percent preferential income
tax as stipulated in the *//, Tax Code
According to BIR head revenue executive assistant Claro ;rti6, this means that all
hospitals that claim to be non3profit but are proprietary will now have to pay income tax
In -..-, &t #u"e(s disputed the BIRMs assessment that it should be paying income taxes,
saying that it is a non3profit hospital The case eventually reached the &upreme Court In
a decision penned by Associate Austice Antonio Carpio on &ept -+ and received by the
BIR on ;ct *,, the &C reversed an earlier decision by the Court of Tax Appeals, which
dismissed the BIRMs assessment The appellate court had argued that &t #u"eMs was not
subject to income tax because non3stoc" corporations are exempt from paying income
tax
Dowever, the &C ruled that &t #u"eMs services that patients pay for are subject to income
tax
U&t #u"eMs 'edical Center is ordered to pay the deficiency income tax in *//2 based on
the *. percent preferential income tax rate under &ection -,8B9 of the )ational Internal
Revenue Code O)IRCP Dowever, it is not liable for surcharges and interest on such
deficiency income tax under &ections -42 and -4/ of the )IRC,V the decision stated The
BIR claimed that &t #u"eMs had total revenues of 0*,1 billion in *//2 alone &t #u"eMs
refuted the assessment, saying that its free services to patients amounted to 0-*2 million
in *//2
The &upreme Court ruled that while there is no dispute that &t #u"eMs is organi6ed as a
non3stoc" and non3profit charitable institution, this does not automatically exempt it from
paying taxes %or a charitable institution to be exempt from income taxes, U&ection 1.8=9
of the )IRC re5uires that OitP must be organi6ed and operated exclusively for charitable
purposes,V the &C said in its decision
Taxation of non3stoc", non3profit hospitals
*, ;ctober -.*- by Atty Anthony $ 0resto6a B Tax #aw for Business
TAHATI;) of non3stoc", non3profit organi6ations had always been a controversy There
are a number of types or classes of organi6ations or associations exempted from income
taxes by the Tax Code &o these types of organi6ations are the usual channel through
which activities are pursued if the intention is not for profit But despite the clear
exemption from income taxes, the number of cases pursued administratively and litigated
in the courts would indicate that the taxation of these class of organi6ations is not that
clear after all
Among the types of organi6ations exempted from income taxes are non3stoc"
corporations organi6ed for charitable purposes and not for profit, but operated
exclusively for the promotion of the general welfare %or one to invo"e exemption from
income tax, it must be organi6ed as non3stoc" and operated for the purposes in which it
was organi6ed That classification itself had been an issue in the area of income taxation
The Court had repeatedly defined what a non3stoc" organi6ation is but its relevance
crops up every time a tax3related issue is involved &o what really constitutes a non3stoc"
corporationS ;nce again, the &upreme Court, in $R */</./ and */</+., &eptember -+,
-.*-, referred to the definition in the Corporation Code of a Unon3stoc" corporationV as
Uone where no part of its income is distributable as dividends to its members, trustees, or
officers and that any profit obtained as an incident to its operations shall whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organi6edV
That case involves the income taxation of a non3stoc" and non3profit hospital organi6ed
for charitable and for social welfare purposes The institution claims that it is exempt
from income taxation under &ection 1. of the Tax Code, which exempts this "ind of
institution from income taxation The tax authority, on the other hand, claims that it
should be subject to income tax under &ection -,8B9 of the Tax Code, which imposes *.3
percent income tax on proprietary and nonprofit hospitals As decided by the Court, a
non3stoc", non3profit corporation is indeed exempt from income taxation That
exemption, however, is intended solely for the activities of a non3stoc", non3profit entity
which are Uoperated exclusivelyV for charitable or social welfare purposes Any other
income that may be generated by these entities shall be subject to the *.3percent
preferential tax rate the tax imposed on proprietary non3profit hospitals
Apparently, according to the Court, UproprietaryV means Uprivate,V and when applied to
a hospital means private hospital ;n the other hand, Unon3profitV means no net income
or asset accrues to or benefits any member or person, with all net income or asset
devoted to the institutionMs purposes and all its activities conducted not for profit
Thus, if a hospital not organi6ed for profit, generates income not in relation to its
charitable or social welfare purposes, it shall be taxed at the preferential rate of *.
percent &imply put, even if a hospital does not distribute income to its members or
trustees and uses the income proceeds from non3related activities in furtherance of its
purposes, the same shall still be taxable at a rate of *. percent
The implication of this is that a non3stoc", non3profit organi6ation, including a hospital,
organi6ed for charitable andBor for purposes of promoting the general welfare is not
subject to income tax The exemption, however, extends only to the activities pursued
exclusively for such purposes, that is, not3for3profit activities That exemption is not lost
even if said entity involves itself in activities conducted for profit But these revenues
derived from profit3 generating activities will be subject to income tax @ith respect to
hospitals, that income tax shall not be the regular income tax rate of 1. percent but the
special income tax rate of *. percent imposed on proprietary and nonprofit hospitals
>*? B#/i"e// -e!4#e, c+!mber ,f c,mmerce, ,r b,!r0 ,f tr!0e, ",t ,r4!"i6e0 f,r
3r,fit !"0 ", 3!rt ,f t+e "et i"c,me ,f 5+ic+ i"#re/ t, t+e be"efit ,f !"$ 3riv!te
/t,c9+,-0er ,r i"0ivi0#!-7
>&? Civic -e!4#e ,r ,r4!"i6!ti," ",t ,r4!"i6e0 f,r 3r,fit b#t ,3er!te0 e2c-#/ive-$
f,r t+e 3r,m,ti," ,f /,ci!- 5e-f!re7
>'? A ","/t,c9 !"0 ","3r,fit e0#c!ti,"!- i"/tit#ti,"7
>I? &,ver"me"t e0#c!ti,"!- i"/tit#ti,"7
>? *!rmer/F ,r ,t+er m#t#!- t$3+,," ,r fire i"/#r!"ce c,m3!"$, m#t#!- 0itc+ ,r
irri4!ti," c,m3!"$, m#t#!- ,r c,,3er!tive te-e3+,"e c,m3!"$, ,r -i9e ,r4!"i6!ti,"
,f ! 3#re-$ -,c!- c+!r!cter, t+e i"c,me ,f 5+ic+ c,"/i/t/ /,-e-$ ,f !//e//me"t/,
0#e/, !"0 fee/ c,--ecte0 fr,m member/ f,r t+e /,-e 3#r3,/e ,f meeti"4 it/
e23e"/e/7 !"0
>E? *!rmer/F, fr#it 4r,5er/F, ,r -i9e !//,ci!ti," ,r4!"i6e0 !"0 ,3er!te0 !/ ! /!-e/
!4e"t f,r t+e 3#r3,/e ,f m!r9eti"4 t+e 3r,0#ct/ ,f it/ member/ !"0 t#r"i"4 b!c9 t,
t+em t+e 3r,cee0/ ,f /!-e/, -e// t+e "ece//!r$ /e--i"4 e23e"/e/ ," t+e b!/i/ ,f t+e
8#!"tit$ ,f 3r,0#ce fi"i/+e0 b$ t+em7
N,t5it+/t!"0i"4 t+e 3r,vi/i,"/ i" t+e 3rece0i"4 3!r!4r!3+/, t+e i"c,me ,f
5+!tever 9i"0 !"0 c+!r!cter ,f t+e f,re4,i"4 ,r4!"i6!ti,"/ fr,m !"$ ,f t+eir
3r,3ertie/, re!- ,r 3er/,"!-, ,r fr,m !"$ ,f t+eir !ctivitie/ c,"0#cte0 f,r
3r,fitre4!r0-e// ,f t+e 0i/3,/iti," m!0e ,f /#c+ i"c,me, /+!-- be /#b:ect t, t!2
im3,/e0 #"0er t+i/ C,0e.
BIR ISSUANCES
R=>=)!= '=';RA)7!' CIRC!#AR ); ,+3.1 )ovember *4, -..1
Tax =xemptions of )on3&toc", )on30rofit Corporations under &ection 1., Tax Code of
*//, and )on3stoc", )on30rofit =ducational Institutions under 0aragraph 1, &ection 4,
Article HI> of the Constitution
The exemption of non3stoc", non3profit educational institutions refers to internal revenue
taxes imposed by the )ational $overnment on all revenues and assets used actually,
directly and exclusively for educational purposes 80aragraph 1, &ection 4, Article HI> of
the Constitution9
%urthermore, revenues derived from assets used in the operation of cafeteriasBcanteens
and boo"stores are exempt from taxation provided they are owned and operated by the
educational institution as ancillary activities and the same are located within the school
premises
0ursuant to &ection *./8m9 of the Tax Code of *//,, private educational institutions
shall be exempt from value3added tax provided they are accredited as such either by the
7epartment of =ducation, Culture and &ports or by the Commission on Digher
=ducation Dowever, this exemption does not extend to their other activities involving
sale of goods and services
Dowever, they shall be subject to internal revenue taxes on income from trade, business
or other activity, the conduct of which is not related to the exercise or performance by
such educational institutions of their educational purposes or functions 8&ec -, %inance
7epartment ;rder )o *1,32, as amended by %inance 7epartment ;rder )o /-3229 i e
rental payment from their buildingBpremises
R=>=)!= R=$!#ATI;)& ); *43., 7ecember **, -..,
Tax on )on3governmental ;rgani6ations 8)$;s9 and Cooperatives =ngaged in
'icrofinance Activities
Tax Treatment of 'icrofinance &ervices Rendered by )on3governmental ;rgani6ations
All )$;s falling under the enumeration of &ection 1. of the Tax Code of *//,, as
amended, are exempt from income taxes, in respect of income received by them as such
Dowever, income of such )$;s from microfinance activities, and which are not in
respect of their registered activities covered by &ection 1. of the Tax Code of *//,,
regardless of the disposition made of such income, shall be subject to tax under the Tax
Code of *//,, as amended
&imilarly, non3stoc", non3profit )$;s, whether or not engaged in microfinance
activities, are still also re5uired to file withholding tax returns and remit withholding
taxes on all income payments that are subject to withholding as specified in Revenue
'emorandum Circular )o ,+3-..1
CASES DIGEST
TAH =H='0TI;) ;% 0R;0=RTI=& ACT!A##G, 7IR=CT#G A)7 W
=HC#!&I>=#G !&=7 %;R R=#I$I;!&, CDARITAB#= A)7 =7!CATI;)A#
0!R0;&=&
%ACT&C The petitioner #ung Center of the 0hilippines is a non3stoc" and non3profit
entity established on Aanuary *+, */2* by virtue of 0residential 7ecree )o *2-1 It is
the registered owner of a parcel of land located at Iue6on Avenue, Iue6on City =rected
in the middle of the aforesaid lot is a hospital "nown as the #ung Center of the
0hilippines A big space at the ground floor is being leased to private parties, for canteen
and small store spaces, and to medical or professional practitioners who use the same as
their private clinics for their patients whom they charge for their professional services
Almost one3half of the entire area on the left side of the building along Iue6on Avenue is
vacant and idle, while a big portion on the right side, at the corner of Iue6on Avenue
and =lliptical Road, is being leased for commercial purposes to a private enterprise
"nown as the =lliptical ;rchids and $arden Center
The petitioner accepts paying and non3paying patients It also renders medical services
to out3patients, both paying and non3paying Aside from its income from paying patients,
the petitioner receives annual subsidies from the government ;n Aune ,, *//1, both the
land and the hospital building of the petitioner were assessed for real property taxes by
the City Assessor of Iue6on City
0etitioner filed a Claim for =xemption from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution 0etitioner contends that under
&ection -2, paragraph 1 of the */2, Constitution, the property is exempt from real
property taxes It averred that a minimum of +.Q of its hospital beds are exclusively used
for charity patients and that the major thrust of its hospital operation is to serve charity
patients It argues that it is a charitable institution and, as such, exempt from real
property taxes
I&&!=&C
* @hether the petitioner is a charitable institution within the context of 0residential
7ecree )o *2-1 and the */,1 and */2, Constitutions and &ection -148b9 of Republic
Act )o ,*+.
- @hether the real properties of petitioner are exempt from real property taxes
D=#7C
* Ges
To determine whether an enterprise is a charitable institutionBentity or not, the elements
which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by3laws, the methods of administration, the nature of the
actual wor" performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties
!nder 07 )o *2-1, the petitioner is a non3profit and non3stoc" corporation which,
subject to the provisions of the decree, is to be administered by the ;ffice of the 0resident
of the 0hilippines with the 'inistry of Dealth and the 'inistry of Duman &ettlements It
was organi6ed for the welfare and benefit of the %ilipino people principally to help
combat the high incidence of lung and pulmonary diseases in the 0hilippines
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out3patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it
is intended to achieve? and no money inures to the private benefit of the persons
managing or operating the institution 8Congregational &unday &chool, etc v Board of
Review? #utheran Dospital Association of &outh 7a"ota v Ba"er9
!nder 07 )o *2-1, the petitioner is entitled to receive donations The petitioner does
not lose its character as a charitable institution simply because the gift or donation is in
the form of subsidies granted by the government 8Gorgason v County Board of
=5uali6ation of &alt #a"e County9
In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for *//* and *//- for its patients and for
the operation of the hospital It even incurred a net loss in *//* and *//- from its
operations
- )otwithstanding the finding that petitioner is a charitable institution, those
portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for charitable
purposes
The settled rule is that laws granting exemption from tax are construed strictissimijuris
against the taxpayer and liberally in favor of the taxing power Taxation is the rule and
exemption is the exception The effect of an exemption is e5uivalent to an appropriation
Dence, a claim for exemption from tax payments must be clearly shown and based on
language in the law too plain to be mista"en 8&alvation Army v Doehn9
&ection - of 0residential 7ecree )o *2-1, relied upon by the petitioner, specifically
provides that petitioner shall enjoy tax exemptions and privileges Dowever, it is plain as
day that under the decree, petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon If the
intentions were otherwise, the same should have been among the enumeration of tax
exempt privileges under &ection -
It is a settled rule of statutory construction that the express mention of one person, thing,
or conse5uence implies the exclusion of all others The rule is expressed in the familiar
maxim, expressiouniusestexclusioalterius
The tax exemption under &ection -2819, Article >I of the */2, 0hilippine Constitution
covers property taxes only As Chief Austice Dilario $ 7avide, Ar, then a member of the
*/2+ Constitutional Commission, explainedC : what is exempted is not the institution
itself ? those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes:
Conse5uently, the constitutional provision is implemented by &ection -148b9 of Republic
Act )o ,*+. 8otherwise "nown as the #ocal $overnment Code of *//*9 as followsC
8)ote the following substantial changes in the ConstitutionC !nder the */1< Constitution,
: all lands, buildings, and improvements used (exclusively( for X charitable
purposes shall be exempt from taxation: Dowever, under the */,1 and the present
Constitutions, for :lands, buildings, and improvements: of the charitable institution to be
considered exempt, the same should not only be :exclusively: used for charitable
purposes? it is re5uired that such property be used :actually: and :directly: for such
purposes9
!nder the */,1 and */2, Constitutions and Rep Act )o ,*+. in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and une5uivocal proof, that
8a9 it is a charitable institution? and 8b9 its real properties are ACT!A##G, 7IR=CT#G
and =HC#!&I>=#G used for charitable purposes :=xclusive: is defined as possessed
and enjoyed to the exclusion of others? debarred from participation or enjoyment? and
:exclusively: is defined, :in a manner to exclude? as enjoying a privilege exclusively: If
real property is used for one or more commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation The words :dominant use: or :principal
use: cannot be substituted for the words :used exclusively: without doing violence to the
Constitutions and the law &olely is synonymous with exclusively
@hat is meant by actual, direct and exclusive use of the property for charitable purposes
is the direct and immediate and actual application of the property itself to the purposes
for which the charitable institution is organi6ed It is not the use of the income from the
real property that is determinative of whether the property is used for tax3exempt
purposes
The petitioner failed to discharge its burden to prove that the entirety of its real property
is actually, directly and exclusively used for charitable purposes @hile portions of the
hospital are used for the treatment of patients and the dispensation of medical services to
them, whether paying or non3paying, other portions thereof are being leased to private
individuals for their clinics and a canteen %urther, a portion of the land is being leased
to a private individual for her business enterprise under the business name :=lliptical
;rchids and $arden Center: Indeed, the petitioner(s evidence shows that it collected
0*,*1+,4214< as rentals in *//* and 0*,+,/,///-2 for *//- from the said lessees
Accordingly, the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes ;n the other
hand, the portions of the land occupied by the hospital and portions of the hospital used
for its patients, whether paying or non3paying, are exempt from real property taxes
#!)$ C=)T=R ;% TD= 0DI#I00I)=& vs I!=J;) CITG and C;)&TA)TI); 0
R;&A&, as City Assessor of Iue6on City O$R )o *44*.4 Aune -/, -..4P
BIR wins vs &t #u"es hospital ordered to pay 0+1/' tax deficiency ;ct -<, -.*-
The &upreme Court has ordered &t #u"eMs 'edical Center Inc to pay the Bureau of
Internal Revenue 0+1/ million in deficiency income tax, value added tax and
withholding tax on compensation for *//2, based on the *.3percent preferential income
tax as stipulated in the *//, Tax Code
According to BIR head revenue executive assistant Claro ;rti6, this means that all
hospitals that claim to be non3profit but are proprietary will now have to pay income tax
In -..-, &t #u"e(s disputed the BIRMs assessment that it should be paying income taxes,
saying that it is a non3profit hospital The case eventually reached the &upreme Court In
a decision penned by Associate Austice Antonio Carpio on &ept -+ and received by the
BIR on ;ct *,, the &C reversed an earlier decision by the Court of Tax Appeals, which
dismissed the BIRMs assessment The appellate court had argued that &t #u"eMs was not
subject to income tax because non3stoc" corporations are exempt from paying income
tax
Dowever, the &C ruled that &t #u"eMs services that patients pay for are subject to income
tax
U&t #u"eMs 'edical Center is ordered to pay the deficiency income tax in *//2 based on
the *. percent preferential income tax rate under &ection -,8B9 of the )ational Internal
Revenue Code O)IRCP Dowever, it is not liable for surcharges and interest on such
deficiency income tax under &ections -42 and -4/ of the )IRC,V the decision stated The
BIR claimed that &t #u"eMs had total revenues of 0*,1 billion in *//2 alone &t #u"eMs
refuted the assessment, saying that its free services to patients amounted to 0-*2 million
in *//2
The &upreme Court ruled that while there is no dispute that &t #u"eMs is organi6ed as a
non3stoc" and non3profit charitable institution, this does not automatically exempt it from
paying taxes %or a charitable institution to be exempt from income taxes, U&ection 1.8=9
of the )IRC re5uires that OitP must be organi6ed and operated exclusively for charitable
purposes,V the &C said in its decision
Taxation of non3stoc", non3profit hospitals
*, ;ctober -.*- by Atty Anthony $ 0resto6a B Tax #aw for Business
TAHATI;) of non3stoc", non3profit organi6ations had always been a controversy There
are a number of types or classes of organi6ations or associations exempted from income
taxes by the Tax Code &o these types of organi6ations are the usual channel through
which activities are pursued if the intention is not for profit But despite the clear
exemption from income taxes, the number of cases pursued administratively and litigated
in the courts would indicate that the taxation of these class of organi6ations is not that
clear after all
Among the types of organi6ations exempted from income taxes are non3stoc"
corporations organi6ed for charitable purposes and not for profit, but operated
exclusively for the promotion of the general welfare %or one to invo"e exemption from
income tax, it must be organi6ed as non3stoc" and operated for the purposes in which it
was organi6ed That classification itself had been an issue in the area of income taxation
The Court had repeatedly defined what a non3stoc" organi6ation is but its relevance
crops up every time a tax3related issue is involved &o what really constitutes a non3stoc"
corporationS ;nce again, the &upreme Court, in $R */</./ and */</+., &eptember -+,
-.*-, referred to the definition in the Corporation Code of a Unon3stoc" corporationV as
Uone where no part of its income is distributable as dividends to its members, trustees, or
officers and that any profit obtained as an incident to its operations shall whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organi6edV
That case involves the income taxation of a non3stoc" and non3profit hospital organi6ed
for charitable and for social welfare purposes The institution claims that it is exempt
from income taxation under &ection 1. of the Tax Code, which exempts this "ind of
institution from income taxation The tax authority, on the other hand, claims that it
should be subject to income tax under &ection -,8B9 of the Tax Code, which imposes *.3
percent income tax on proprietary and nonprofit hospitals As decided by the Court, a
non3stoc", non3profit corporation is indeed exempt from income taxation That
exemption, however, is intended solely for the activities of a non3stoc", non3profit entity
which are Uoperated exclusivelyV for charitable or social welfare purposes Any other
income that may be generated by these entities shall be subject to the *.3percent
preferential tax rate the tax imposed on proprietary non3profit hospitals
Apparently, according to the Court, UproprietaryV means Uprivate,V and when applied to
a hospital means private hospital ;n the other hand, Unon3profitV means no net income
or asset accrues to or benefits any member or person, with all net income or asset
devoted to the institutionMs purposes and all its activities conducted not for profit
Thus, if a hospital not organi6ed for profit, generates income not in relation to its
charitable or social welfare purposes, it shall be taxed at the preferential rate of *.
percent &imply put, even if a hospital does not distribute income to its members or
trustees and uses the income proceeds from non3related activities in furtherance of its
purposes, the same shall still be taxable at a rate of *. percent
The implication of this is that a non3stoc", non3profit organi6ation, including a hospital,
organi6ed for charitable andBor for purposes of promoting the general welfare is not
subject to income tax The exemption, however, extends only to the activities pursued
exclusively for such purposes, that is, not3for3profit activities That exemption is not lost
even if said entity involves itself in activities conducted for profit But these revenues
derived from profit3 generating activities will be subject to income tax @ith respect to
hospitals, that income tax shall not be the regular income tax rate of 1. percent but the
special income tax rate of *. percent imposed on proprietary and nonprofit hospitals
Construction of last paragraph of &ec 1. )IRC
Income derived from its property by a tax exempt organi6ation is not absolutely taxable
Ta"en in solitude, a word or phrase such as, in this case, :the income of whatever "ind
and character from any of their properties: might easily convey a meaning 5uite
different from the one actually intended and evident when a word or phrase is considered
with those with which it is associated It is a rule in statutory construction that every part
of the statute must be interpreted with reference to the context, that every part of the
statute must be considered together with the other parts and "ept subservient to the
general intent of the whole enactment A close reading of the last paragraph of &ec -, of
the )ational Internal Revenue Code, in relation to the whole section on tax exemption of
the organi6ations enumerated therein, shows that the phrase :conducted for profit: in the
last paragraph of &ec -, 5ualifies, limits and describes :the income of whatever "ind
and character of the foregoing organi6ations from any of their properties, real or
personal, or from any of their activities: in order to ma"e such income taxable It is the
exception to &ec -, pars 8g9 and 8h9 providing for the tax exemptions of the income of
said organi6ations Dence, if such income from property or any other property is not
conducted for profit, then it is not taxable
Commissioner of Internal Revenue vs Court of Appeals, et al, $R )o *-4.41, ;ctober
*4, *//2
Income from any property of exempt organi6ations is taxable
A reading of the last paragraph ineludibly shows that the income from any property of
exempt organi6ations, as well as that arising from any activity it conducts for profit, is
taxable The phrase :any of their activities conducted for profit: does not 5ualify the
word :properties: This ma"es income from the property of a non3profit organi6ation
taxable, regardless of how that income is used E whether for profit or for lofty non3profit
purposes The law does not ma"e a distinction The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of
Commissioner of Internal Revenue vs Court of Appeals, et al, $R )o *-4.41, ;ctober
*4, *//2
7efinition of :income:
The word :income: which is derived from property, real or personal, provided in the last
paragraph of &ec -, means the amount of money coming to a person or corporation
within a specified time as profit from investment? the return in money from one(s business
or capital invested Income from property also means gains and profits derived from the
sale or other disposition of capital assets? the money which any person or corporation
periodically receives either as profits from business, or as returns from investments The
word :income: as used in tax statutes is to be ta"en in its ordinary sense as gain or
profit
Commissioner of Internal Revenue vs Court of Appeals, et al, $R )o *-4.41, ;ctober
*4, *//2
G'CA is exempt from payment of property tax but not income tax on its property rentals
@hat is exempted is not the institution itself ? those exempted from real estate taxes
are lands, buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes G'CA is exempt from the payment of
property tax, but not income tax on the rentals from its property
Commissioner of Internal Revenue vs Court of Appeals, et al, $R )o *-4.41, ;ctober
*4, *//2
7efinition of :educational institution:
The term :educational institution: or :institution of learning: refers to schools The
school system is synonymous with formal education, which :refers to the hierarchically
structured and chronologically graded learnings organi6ed and provided by the formal
school system and for which certification is re5uired in order for the learner to progress
through the grades or move to the higher levels: =ven non3formal education is
understood to be school3based and :private auspices such as foundations and civic3
spirited organi6ations: are ruled out It is settled that the term :educational institution,:
when used in laws granting tax exemptions, refers to a : school seminary, college or
educational establishment :
Commissioner of Internal Revenue vs Court of Appeals, et al, $R )o *-4.41, ;ctober
*4, *//2
C'APTER ( C,m3#t!ti," ,f T!2!b-e I"c,me
)ECTION ;1 T!2!b-e I"c,me Defi"e0 . T+e term Ft!2!b-e i"c,meF me!"/
t+e 3erti"e"t item/ ,f 4r,// i"c,me /3ecifie0 i" t+i/ C,0e, -e// t+e 0e0#cti,"/
!"0D,r 3er/,"!- !"0 !00iti,"!- e2em3ti,"/, if !"$, !#t+,ri6e0 f,r /#c+ t$3e/ ,f
i"c,me b$ t+i/ C,0e ,r ,t+er /3eci!- -!5/.
CASES DIGEST
Taxable Income 7efined
Taxable income is defined under &ection 1* of the )IRC of *//, as the pertinent items of
gross income specified in the said Code, less the deductions andBor personal and
additional exemptions, if any, authori6ed for such types of income by the same Code or
other special laws The gross income, referred to in &ection 1*, is described in &ection 1-
of the )IRC of *//, as income from whatever source, including compensation for
services? the conduct of trade or business or the exercise of profession? dealings in
property? interests? rents? royalties? dividends? annuities? pri6es and winnings? pensions?
and a partner(s distributive share in the net income of a general professional partnership
Commissioner of Internal Revenue vs 0A#, Inc, $R )o *2..++, Auly ,, -../
C'APTER (I C,m3#t!ti," ,f &r,// I"c,me
)ECTION ;2 &r,// I"c,me .
>A? &e"er!- Defi"iti,". . E2ce3t 5+e" ,t+er5i/e 3r,vi0e0 i" t+i/ Tit-e, 4r,//
i"c,me me!"/ !-- i"c,me 0erive0 fr,m 5+!tever /,#rce, i"c-#0i"4 >b#t ",t -imite0
t,? t+e f,--,5i"4 item/=
>1? C,m3e"/!ti," f,r /ervice/ i" 5+!tever f,rm 3!i0, i"c-#0i"4, b#t ",t -imite0 t,
fee/, /!-!rie/, 5!4e/, c,mmi//i,"/, !"0 /imi-!r item/7
>2? &r,// i"c,me 0erive0 fr,m t+e c,"0#ct ,f tr!0e ,r b#/i"e// ,r t+e e2erci/e ,f !
3r,fe//i,"7
>;? &!i"/ 0erive0 fr,m 0e!-i"4/ i" 3r,3ert$7
CASES DIGEST
$ross IncomeC $ains derived from dealings in property
The tax conse5uences arising from gains from a sale of property are not to be determined
solely by the means employed to transfer legal title
$enerally, a sale or exchange of assets will have an income tax incidence only when it is
consummated The incidence of taxation depends upon the substance of a transaction
The tax conse5uences arising from gains from a sale of property are not finally to be
determined solely by the means employed to transfer legal title Rather, the transaction
must be viewed as a whole, and each step from the commencement of negotiations to the
consummation of the sale is relevant A sale by one person cannot be transformed for tax
purposes into a sale by another by using the latter as a conduit through which to pass
title To permit the true nature of the transaction to be disguised by mere formalisms,
which exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress
Commissioner of Internal Revenue vs The =state of Benigno 0 Toda, Ar, et al, $R )o
*4,*22, &eptember *4, -..4
>4? I"tere/t/7
><? Re"t/7
>A? R,$!-tie/7
>7? Divi0e"0/7
>8? A""#itie/7
>9? Pri6e/ !"0 5i""i"4/7
>1C? Pe"/i,"/7 !"0
>11? P!rt"erF/ 0i/trib#tive /+!re fr,m t+e "et i"c,me ,f t+e 4e"er!- 3r,fe//i,"!-
3!rt"er/+i3.
>B? E2c-#/i,"/ fr,m &r,// I"c,me . T+e f,--,5i"4 item/ /+!-- ",t be i"c-#0e0 i"
4r,// i"c,me !"0 /+!-- be e2em3t fr,m t!2!ti," #"0er t+i/ Tit-e=
>1? Life I"/#r!"ce. . T+e 3r,cee0/ ,f -ife i"/#r!"ce 3,-icie/ 3!i0 t, t+e +eir/ ,r
be"efici!rie/ #3," t+e 0e!t+ ,f t+e i"/#re0, 5+et+er i" ! /i"4-e /#m ,r ,t+er5i/e,
b#t if /#c+ !m,#"t/ !re +e-0 b$ t+e i"/#rer #"0er !" !4reeme"t t, 3!$ i"tere/t
t+ere,", t+e i"tere/t 3!$me"t/ /+!-- be i"c-#0e0 i" 4r,// i"c,me.
>2? Am,#"t Receive0 b$ I"/#re0 !/ Ret#r" ,f Premi#m. . T+e !m,#"t receive0
b$ t+e i"/#re0, !/ ! ret#r" ,f 3remi#m/ 3!i0 b$ +im #"0er -ife i"/#r!"ce,
e"0,5me"t, ,r !""#it$ c,"tr!ct/, eit+er 0#ri"4 t+e term ,r !t t+e m!t#rit$ ,f t+e
term me"ti,"e0 i" t+e c,"tr!ct ,r #3," /#rre"0er ,f t+e c,"tr!ct.
>;? &ift/, Be8#e/t/, !"0 Devi/e/. . T+e v!-#e ,f 3r,3ert$ !c8#ire0 b$ 4ift,
be8#e/t, 0evi/e, ,r 0e/ce"t= Pr,vi0e0, +,5ever, T+!t i"c,me fr,m /#c+ 3r,3ert$, !/
5e-- !/ 4ift, be8#e/t, 0evi/e, ,r 0e/ce"t ,f i"c,me fr,m !"$ 3r,3ert$, i" c!/e/ ,f
tr!"/fer/ ,f 0ivi0e0 i"tere/t, /+!-- be i"c-#0e0 i" 4r,// i"c,me.
>4? C,m3e"/!ti," f,r I":#rie/ ,r )ic9"e//. . Am,#"t/ receive0, t+r,#4+ Acci0e"t
,r 'e!-t+ I"/#r!"ce ,r #"0er B,r9me"F/ C,m3e"/!ti," Act/, !/ c,m3e"/!ti," f,r
3er/,"!- i":#rie/ ,r /ic9"e//, 3-#/ t+e !m,#"t/ ,f !"$ 0!m!4e/ receive0, 5+et+er
b$ /#it ,r !4reeme"t, ," !cc,#"t ,f /#c+ i":#rie/ ,r /ic9"e//.
><? I"c,me E2em3t #"0er Tre!t$. . I"c,me ,f !"$ 9i"0, t, t+e e2te"t re8#ire0 b$
!"$ tre!t$ ,b-i4!ti," bi"0i"4 #3," t+e &,ver"me"t ,f t+e P+i-i33i"e/.
>A? Retireme"t Be"efit/, Pe"/i,"/, &r!t#itie/, etc. .
>!? Retireme"t be"efit/ receive0 #"0er Re3#b-ic Act N,. 7A41 !"0 t+,/e receive0
b$ ,ffici!-/ !"0 em3-,$ee/ ,f 3riv!te firm/, 5+et+er i"0ivi0#!- ,r c,r3,r!te, i"
!cc,r0!"ce 5it+ ! re!/,"!b-e 3riv!te be"efit 3-!" m!i"t!i"e0 b$ t+e em3-,$er=
Pr,vi0e0, T+!t t+e retiri"4 ,ffici!- ,r em3-,$ee +!/ bee" i" t+e /ervice ,f t+e /!me
em3-,$er f,r !t -e!/t te" >1C? $e!r/ !"0 i/ ",t -e// t+!" fift$ ><C? $e!r/ ,f !4e !t t+e
time ,f +i/ retireme"t= Pr,vi0e0, f#rt+er, T+!t t+e be"efit/ 4r!"te0 #"0er t+i/
/#b3!r!4r!3+ /+!-- be !v!i-e0 ,f b$ !" ,ffici!- ,r em3-,$ee ,"-$ ,"ce. *,r
3#r3,/e/ ,f t+i/ )#b/ecti,", t+e term Fre!/,"!b-e 3riv!te be"efit 3-!"F me!"/ !
3e"/i,", 4r!t#it$, /t,c9 b,"#/ ,r 3r,fit@/+!ri"4 3-!" m!i"t!i"e0 b$ !" em3-,$er f,r
t+e be"efit ,f /,me ,r !-- ,f +i/ ,ffici!-/ ,r em3-,$ee/, 5+erei" c,"trib#ti,"/ !re
m!0e b$ /#c+ em3-,$er f,r t+e ,ffici!-/ ,r em3-,$ee/, ,r b,t+, f,r t+e 3#r3,/e ,f
0i/trib#ti"4 t, /#c+ ,ffici!-/ !"0 em3-,$ee/ t+e e!r"i"4/ !"0 3ri"ci3!- ,f t+e f#"0
t+#/ !cc#m#-!te0, !"0 5+erei" it i/ 3r,vi0e0 i" /!i0 3-!" t+!t !t ", time /+!-- !"$
3!rt ,f t+e c,r3#/ ,r i"c,me ,f t+e f#"0 be #/e0 f,r, ,r be 0iverte0 t,, !"$ 3#r3,/e
,t+er t+!" f,r t+e e2c-#/ive be"efit ,f t+e /!i0 ,ffici!-/ !"0 em3-,$ee/.
CASES DIGEST
Retirement Benefits, 0ensions, $ratuities, etc? =lements for exemption of retirement
benefits from withholding tax
!nder the )IRC, the retirement benefits of respondents are part of their gross income
subject to taxes %or the retirement benefits to be exempt from the withholding tax, the
taxpayer is burdened to prove the concurrence of the following elementsC 8*9 a
reasonable private benefit plan is maintained by the employer? 8-9 the retiring official or
employee has been in the service of the same employer for at least *. years? 819 the
retiring official or employee is not less than <. years of age at the time of his retirement?
and 849 the benefit had been availed of only once
'a Isabel T &antos vs &ervier 0hil, Inc, et al,
$R )o *++1,,, )ovember -2, -..2
Intercontinental Broadcasting Corp vs )oemi B Amarilla, et al,
$R )o *+-,,<, ;ctober -,, -..+
>b? A"$ !m,#"t receive0 b$ !" ,ffici!- ,r em3-,$ee ,r b$ +i/ +eir/ fr,m t+e
em3-,$er !/ ! c,"/e8#e"ce ,f /e3!r!ti," ,f /#c+ ,ffici!- ,r em3-,$ee fr,m t+e
/ervice ,f t+e em3-,$er bec!#/e ,f 0e!t+, /ic9"e// ,r ,t+er 3+$/ic!- 0i/!bi-it$ ,r
f,r !"$ c!#/e be$,"0 t+e c,"tr,- ,f t+e /!i0 ,ffici!- ,r em3-,$ee.
CASES DIGEST
R=TIR='=)T B=)=%IT&
%ACT&C 0etitioner 0#7T terminated in *//< the employment of several ran"3and3file,
supervisory, and executive employees due to redundancy In compliance with labor law
re5uirements, 0#7T paid those separated employees separation pay and other benefits
but deducted from the separation pay withholding taxes in the total amount of
0-1,,.,,/./-. which it remitted to the BIR 0#7T filed with the BIR a claim for tax
credit or refund of the 0-1,,.,,/./-., invo"ing &ection -2 8b9 8,9 8B9 8 now sec 1-B+b 9
of the */,, )ational Internal Revenue Code which excluded from gross income V OaPny
amount received by an official or employee or by his heirs from the employer as a
conse5uence of separation of such official or employee from the service of the employer
due to death, sic"ness or other physical disability or for any cause beyond the control of
the said official or employee
The CTA denied 0#7T(s claim on the ground that it :failed to sufficiently prove that the
terminated employees received separation pay and that taxes were withheld therefrom
and remitted to the BIR 0#7T filed a 'otion for )ew TrialBReconsideration, praying for
an opportunity to present the receipts and 5uitclaims executed by the employees and
prove that they received their separation pay The CTA denied 0#7T(s motion 0#7T
thus filed a 0etition for Review before the Court of Appeals which dismissed the same
Dence, this petition
I&&!=C 0#7T faulted the appellate court to have committed grave abuse of discretionC
8a9 @hen it held that proof of payment of separation pay to the employees is re5uired in
order to avail of refund of taxes erroneously paid to the Bureau of Internal Revenue
8b9 @hen it held that petitioner failed to establish that petitioner(s employees received
their separation pay
8c9 In disregarding the certificationBreport of &$> R Co, which certified that petitioner
is entitled to a refund of the amount of 0+,+,/,*+,,-
8d9 In not ordering a new trial to allow petitioner to present additional evidence in
support thereof
D=#7C The &upreme Court denied the petition
0#7T must prove that the employees received the income payments as part of gross
income and the fact of withholding The CTA found that 0#7T failed to establish that the
redundant employees actually received separation pay and that it withheld taxes
therefrom and remitted the same to the BIR This finding was affirmed by the CA @hile
&$> certified that it had :been able to trace the remittance of the withheld taxes
summari6ed in the COashP &OalaryP >OouchersP to the 'onthly Remittance Return of
Income Taxes @ithheld for the appropriate period covered by the final payment made to
the concerned executives, supervisors, and ran" and file staff members of 0#7T,: the
same cannot be appreciated in 0#7T(s favor as the courts cannot verify such claim
@hile the records of the case contain the Alphabetical #ist of =mployee from @hom
Taxes @ere @ithheld for the year *//< and the 'onthly Remittance Returns of Income
Taxes @ithheld for 7ecember *//<, the documents from which &$> :traced: the former
to the latter have not been presented %ailure to present these documents is fatal to
0#7T(s case under CTA Circular *3/<
;n the denial of 0#7T(s motion for new trial, the Court held that newly discovered
evidence as a basis of a motion for new trial should be supported by affidavits of the
witnesses by whom such evidence is expected to be given, or by duly authenticated
documents which are proposed to be introduced in evidence And the grant or denial of a
new trial is, generally spea"ing, addressed to the sound discretion of the court which
cannot be interfered with unless a clear abuse thereof is shown 0#7T has not shown any
such abuse, however
The affirmance by the appellate court of the CTA(s denial of 0#7T(s motion for new trial
on the ground of :newly discovered evidence,: is in order At all events, the alleged
:newly discovered evidence: that 0#7T see"s to offer does not suffice to establish its
claim for refund, as it would still have to comply with Revenue Regulation +32< by
proving that the redundant employees, on whose behalf it filed the claim for refund,
declared the separation pay received as part of their gross income0hilippine #ong
7istance Telephone Company vs Commissioner of Internal Revenue, $R )o *<,-+4,
Aanuary 1*, -..2
BIR ISSUANCES
R=>=)!= '=';RA)7!' ;R7=R ); -<3/* Auly *2, *//*
$uidelines for the determination of the tax treatment of &eparation Benefits received by
officials and employees on account of their separation from the service of government
and private entities due to sic"ness or other physical disability
It has come to the attention of this ;ffice that officialsBemployees of government and
private entities who resignBretire from their service of the employers allegedly for reasons
of ill3health or sic"ness, submit medical certification from their physicians in order to
avail of the tax exemption of their separation benefits, pursuant to &ection -2 8b9 , 8B9 of
the )ational Internal Revenue Code As to whether or not the certification issued by
attending physician truly reflects the seriousness of the disease suffered by the employee
concerned, and in order to erase doubts on the representation that the retiring or
resigning official or employee is actually suffering from any disease, such that to
continue wor"ing would be detrimental to his life, the following guidelines are hereby set
to facilitate the processing of the re5uest
0ursuant to &ection -2 8b9 , 8B9 of the )ational Internal Revenue Code, as amended, any
amount received by an official or employee or by his heirs from the employer 8whether
government or private9 as a conse5uence of separation by such official or employee from
the service of the employer, due to death, sic"ness or other physical disability, or for any
cause beyond the control of said official or employee is exempt from taxes regardless of
age or length of service
In order to facilitate the processing of re5uests for tax exemption of separation benefits
received by officials and employees as a result of their separation from the service of
their employers due to health reasons, the following documents are re5uired to be
submitted to the #egislative, Ruling R Research 7ivision to support such re5uestsC
* &worn Affidavits to be executed by the =mployer(s physician and the Dead of
;fficeB=ntity, attesting to the fact that the retiringBseparated official or employee is
suffering from a serious illness that affects the performance of his duties and endangers
his life, if he continues wor"ing? and
- Clinical Record of the employeeBofficial concerned indicating the history of illness
and initial diagnosis? and
1 #aboratory examination confirming the illness suffered by such employeeBofficial
&ubmission of the foregoing documents shall be without prejudice to further medical
examination as may be necessary, to be conducted by the BIR 'edical ;fficers in the
)ational ;ffice, andBor by specialists of identified government hospitals on the official or
employee concerned, if he lives in 'etro 'anila? or by the 'edical ;fficers of the
$overnment &ervice and Insurance &ystem or the &ocial &ecurity &ystem, as the case may
be, in the Regional ;ffice nearest to his residence, if outside 'etro 'anila
>c? T+e 3r,vi/i,"/ ,f !"$ e2i/ti"4 -!5 t, t+e c,"tr!r$ ",t5it+/t!"0i"4, /,ci!-
/ec#rit$ be"efit/, retireme"t 4r!t#itie/, 3e"/i,"/ !"0 ,t+er /imi-!r be"efit/ receive0
b$ re/i0e"t ,r ","re/i0e"t citi6e"/ ,f t+e P+i-i33i"e/ ,r !-ie"/ 5+, c,me t, re/i0e
3erm!"e"t-$ i" t+e P+i-i33i"e/ fr,m f,rei4" 4,ver"me"t !4e"cie/ !"0 ,t+er
i"/tit#ti,"/, 3riv!te ,r 3#b-ic.
>0? P!$me"t/ ,f be"efit/ 0#e ,r t, bec,me 0#e t, !"$ 3er/," re/i0i"4 i" t+e
P+i-i33i"e/ #"0er t+e -!5/ ,f t+e U"ite0 )t!te/ !0mi"i/tere0 b$ t+e U"ite0 )t!te/
(eter!"/ A0mi"i/tr!ti,".
>e? Be"efit/ receive0 fr,m ,r e":,$e0 #"0er t+e ),ci!- )ec#rit$ )$/tem i"
!cc,r0!"ce 5it+ t+e 3r,vi/i,"/ ,f Re3#b-ic Act N,. 8282.
>f? Be"efit/ receive0 fr,m t+e &)I) #"0er Re3#b-ic Act N,. 8291, i"c-#0i"4
retireme"t 4r!t#it$ receive0 b$ 4,ver"me"t ,ffici!-/ !"0 em3-,$ee/.
>7? %i/ce--!"e,#/ Item/ .
>!? I"c,me Derive0 b$ *,rei4" &,ver"me"t . I"c,me 0erive0 fr,m i"ve/tme"t/
i" t+e P+i-i33i"e/ i" -,!"/, /t,c9/, b,"0/ ,r ,t+er 0,me/tic /ec#ritie/, ,r fr,m
i"tere/t ," 0e3,/it/ i" b!"9/ i" t+e P+i-i33i"e/ b$ >i? f,rei4" 4,ver"me"t/, >ii?
fi"!"ci"4 i"/tit#ti,"/ ,5"e0, c,"tr,--e0, ,r e":,$i"4 refi"!"ci"4 fr,m f,rei4"
4,ver"me"t/, !"0 >iii? i"ter"!ti,"!- ,r re4i,"!- fi"!"ci!- i"/tit#ti,"/ e/t!b-i/+e0 b$
f,rei4" 4,ver"me"t/.
>b? I"c,me Derive0 b$ t+e &,ver"me"t ,r it/ P,-itic!- )#b0ivi/i,"/ . I"c,me
0erive0 fr,m !"$ 3#b-ic #ti-it$ ,r fr,m t+e e2erci/e ,f !"$ e//e"ti!- 4,ver"me"t!-
f#"cti," !ccr#i"4 t, t+e &,ver"me"t ,f t+e P+i-i33i"e/ ,r t, !"$ 3,-itic!-
/#b0ivi/i," t+ere,f.
>c? Pri6e/ !"0 A5!r0/ . Pri6e/ !"0 !5!r0/ m!0e 3rim!ri-$ i" rec,4"iti," ,f
re-i4i,#/, c+!rit!b-e, /cie"tific, e0#c!ti,"!-, !rti/tic, -iter!r$, ,r civic !c+ieveme"t
b#t ,"-$ if=
>i? T+e reci3ie"t 5!/ /e-ecte0 5it+,#t !"$ !cti," ," +i/ 3!rt t, e"ter t+e c,"te/t ,r
3r,cee0i"47 !"0
>ii? T+e reci3ie"t i/ ",t re8#ire0 t, re"0er /#b/t!"ti!- f#t#re /ervice/ !/ ! c,"0iti,"
t, receivi"4 t+e 3ri6e ,r !5!r0.
>0? Pri6e/ !"0 A5!r0/ i" )3,rt/ C,m3etiti," . A-- 3ri6e/ !"0 !5!r0/ 4r!"te0 t,
!t+-ete/ i" -,c!- !"0 i"ter"!ti,"!- /3,rt/ c,m3etiti,"/ !"0 t,#r"!me"t/ 5+et+er
+e-0 i" t+e P+i-i33i"e/ ,r !br,!0 !"0 /!"cti,"e0 b$ t+eir "!ti,"!- /3,rt/
!//,ci!ti,"/.
>e? 1;t+ %,"t+ P!$ !"0 Ot+er Be"efit/ . &r,// be"efit/ receive0 b$ ,ffici!-/ !"0
em3-,$ee/ ,f 3#b-ic !"0 3riv!te e"titie/= Pr,vi0e0, +,5ever, T+!t t+e t,t!-
e2c-#/i," #"0er t+i/ /#b3!r!4r!3+ /+!-- ",t e2cee0 T+irt$ t+,#/!"0 3e/,/
>P;C,CCC? 5+ic+ /+!-- c,ver=
>i? Be"efit/ receive0 b$ ,ffici!-/ !"0 em3-,$ee/ ,f t+e "!ti,"!- !"0 -,c!-
4,ver"me"t 3#r/#!"t t, Re3#b-ic Act N,. AA8A7
>ii? Be"efit/ receive0 b$ em3-,$ee/ 3#r/#!"t t, Pre/i0e"ti!- Decree N,. 8<1, !/
!me"0e0 b$ %em,r!"0#m Or0er N,. 28, 0!te0 A#4#/t 1;, 198A7
>iii? Be"efit/ receive0 b$ ,ffici!-/ !"0 em3-,$ee/ ",t c,vere0 b$ Pre/i0e"ti!-
Decree N,. 8<1, !/ !me"0e0 b$ %em,r!"0#m Or0er N,. 28, 0!te0 A#4#/t 1;,
198A7 !"0
>iv? Ot+er be"efit/ /#c+ !/ 3r,0#ctivit$ i"ce"tive/ !"0 C+ri/tm!/ b,"#/= Pr,vi0e0,
f#rt+er, T+!t t+e cei-i"4 ,f T+irt$ t+,#/!"0 3e/,/ >P;C,CCC? m!$ be i"cre!/e0
t+r,#4+ r#-e/ !"0 re4#-!ti,"/ i//#e0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, !fter c,"/i0eri"4, !m,"4 ,t+er/, t+e effect
," t+e /!me ,f t+e i"f-!ti," r!te !t t+e e"0 ,f t+e t!2!b-e $e!r.
>f? &)I), ))), %e0ic!re !"0 Ot+er C,"trib#ti,"/ @ &)I), ))), %e0ic!re !"0P!4@
Ibi4 c,"trib#ti,"/, !"0 #"i," 0#e/ ,f i"0ivi0#!-/.
>4? &!i"/ fr,m t+e )!-e ,f B,"0/, Debe"t#re/ ,r ,t+er Certific!te ,f I"0ebte0"e//
. &!i"/ re!-i6e0 fr,m t+e /!-e ,r e2c+!"4e ,r retireme"t ,f b,"0/, 0ebe"t#re/ ,r
,t+er certific!te ,f i"0ebte0"e// 5it+ ! m!t#rit$ ,f m,re t+!" five ><? $e!r/.
>+? &!i"/ fr,m Re0em3ti," ,f )+!re/ i" %#t#!- *#"0 . &!i"/ re!-i6e0 b$ t+e
i"ve/t,r #3," re0em3ti," ,f /+!re/ ,f /t,c9 i" ! m#t#!- f#"0 c,m3!"$ !/ 0efi"e0
i" )ecti," 22>BB? ,f t+i/ C,0e.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..-3** 'arch *, -.**
%iling of Income Tax Return andBor Annual Information Return by Individuals, Including
=states and Trusts shall include in the Account Information Return 8AIR9 such income
subject to final withholding tax and those exclusions from gross income
)ECTION ;; )3eci!- Tre!tme"t ,f *ri"4e Be"efit
>A? Im3,/iti," ,f T!2 . A fi"!- t!2 ,f t+irt$@f,#r 3erce"t >;4G? effective !"#!r$
1, 19987 t+irt$@t+ree 3erce"t >;;G? effective !"#!r$ 1, 19997 !"0 t+irt$@t5,
3erce"t >;2G? effective !"#!r$ 1, 2CCC !"0 t+ere!fter, i/ +ereb$ im3,/e0 ," t+e
4r,//e0@#3 m,"et!r$ v!-#e ,f fri"4e be"efit f#r"i/+e0 ,r 4r!"te0 t, t+e em3-,$ee
>e2ce3t r!"9 !"0 fi-e em3-,$ee/ !/ 0efi"e0 +erei"? b$ t+e em3-,$er, 5+et+er !"
i"0ivi0#!- ,r ! c,r3,r!ti," >#"-e// t+e fri"4e be"efit i/ re8#ire0 b$ t+e "!t#re ,f, ,r
"ece//!r$ t, t+e tr!0e, b#/i"e// ,r 3r,fe//i," ,f t+e em3-,$er, ,r 5+e" t+e fri"4e
be"efit i/ f,r t+e c,"ve"ie"ce ,r !0v!"t!4e ,f t+e em3-,$er?. T+e t!2 +erei"
im3,/e0 i/ 3!$!b-e b$ t+e em3-,$er 5+ic+ t!2 /+!-- be 3!i0 i" t+e /!me m!""er !/
3r,vi0e0 f,r #"0er )ecti," <7>A? ,f t+i/ C,0e. T+e 4r,//e0@#3 m,"et!r$ v!-#e ,f
t+e fri"4e be"efit /+!-- be 0etermi"e0 b$ 0ivi0i"4 t+e !ct#!- m,"et!r$ v!-#e ,f t+e
fri"4e be"efit b$ /i2t$@/i2 3erce"t >AAG? effective !"#!r$ 1, 19987 /i2t$@/eve"
3erce"t >A7G? effective !"#!r$ 1, 19997 !"0 /i2t$@ei4+t 3erce"t >A8G? effective
!"#!r$ 1, 2CCC !"0 t+ere!fter= Pr,vi0e0, +,5ever, T+!t fri"4e be"efit f#r"i/+e0 t,
em3-,$ee/ !"0 t!2!b-e #"0er )#b/ecti,"/ >B?, >C?, >D? !"0 >E? ,f )ecti," 2< /+!--
be t!2e0 !t t+e !33-ic!b-e r!te/ im3,/e0 t+ere!t= Pr,vi0e0, f#rt+er, T+!t t+e
4r,//e0@#3 v!-#e ,f t+e fri"4e be"efit /+!-- be 0etermi"e0 b$ 0ivi0i"4 t+e !ct#!-
m,"et!r$ v!-#e ,f t+e fri"4e be"efit b$ t+e 0iffere"ce bet5ee" ,"e +#"0re0 3erce"t
>1CCG? !"0 t+e !33-ic!b-e r!te/ ,f i"c,me t!2 #"0er )#b/ecti,"/ >B?, >C?, >D? !"0
>E? ,f )ecti," 2<.
>B? *ri"4e Be"efit Defi"e0 . *,r 3#r3,/e/ ,f t+i/ )ecti,", t+e term Ffri"4e be"efitF
me!"/ !"$ 4,,0, /ervice ,r ,t+er be"efit f#r"i/+e0 ,r 4r!"te0 i" c!/+ ,r i" 9i"0 b$
!" em3-,$er t, !" i"0ivi0#!- em3-,$ee >e2ce3t r!"9 !"0 fi-e em3-,$ee/ !/ 0efi"e0
+erei"? /#c+ !/, b#t ",t -imite0 t,, t+e f,--,5i"4=
>1? ',#/i"47
>2? E23e"/e !cc,#"t7
>;? (e+ic-e ,f !"$ 9i"07
>4? ',#/e+,-0 3er/,""e-, /#c+ !/ m!i0, 0river !"0 ,t+er/7
><? I"tere/t ," -,!" !t -e// t+!" m!r9et r!te t, t+e e2te"t ,f t+e 0iffere"ce bet5ee"
t+e m!r9et r!te !"0 !ct#!- r!te 4r!"te07
>A? %ember/+i3 fee/, 0#e/ !"0 ,t+er e23e"/e/ b,r"e b$ t+e em3-,$er f,r t+e
em3-,$ee i" /,ci!- !"0 !t+-etic c-#b/ ,r ,t+er /imi-!r ,r4!"i6!ti,"/7
>7? E23e"/e/ f,r f,rei4" tr!ve-7
>8? ',-i0!$ !"0 v!c!ti," e23e"/e/7
>9? E0#c!ti,"!- !//i/t!"ce t, t+e em3-,$ee ,r +i/ 0e3e"0e"t/7 !"0
>1C? Life ,r +e!-t+ i"/#r!"ce !"0 ,t+er ","@-ife i"/#r!"ce 3remi#m/ ,r /imi-!r
!m,#"t/ i" e2ce// ,f 5+!t t+e -!5 !--,5/.
>C? *ri"4e Be"efit/ N,t T!2!b-e. . T+e f,--,5i"4 fri"4e be"efit/ !re ",t t!2!b-e
#"0er t+i/ )ecti,"=
>1? *ri"4e be"efit/ 5+ic+ !re !#t+,ri6e0 !"0 e2em3te0 fr,m t!2 #"0er /3eci!-
-!5/7
>2? C,"trib#ti,"/ ,f t+e em3-,$er f,r t+e be"efit ,f t+e em3-,$ee t, retireme"t,
i"/#r!"ce !"0 +,/3it!-i6!ti," be"efit 3-!"/7
>;? Be"efit/ 4ive" t, t+e r!"9 !"0 fi-e em3-,$ee/, 5+et+er 4r!"te0 #"0er !
c,--ective b!r4!i"i"4 !4reeme"t ,r ",t7 !"0
>4? De mi"imi/ be"efit/ !/ 0efi"e0 i" t+e r#-e/ !"0 re4#-!ti,"/ t, be 3r,m#-4!te0
b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er.
T+e )ecret!r$ ,f *i"!"ce i/ +ereb$ !#t+,ri6e0 t, 3r,m#-4!te, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, /#c+ r#-e/ !"0 re4#-!ti,"/ !/ !re "ece//!r$
t, c!rr$ ,#t efficie"t-$ !"0 f!ir-$ t+e 3r,vi/i,"/ ,f t+i/ )ecti,", t!9i"4 i"t, !cc,#"t
t+e 3ec#-i!r "!t#re !"0 /3eci!- "ee0 ,f t+e tr!0e, b#/i"e// ,r 3r,fe//i," ,f t+e
em3-,$er.
BIR ISSUANCES
Revenue 'emorandum Circular 4*3./ Auly -1, -../
In the case of 0hilippine Appliance Corporation vs #aguesma, --+ &CRA ,1. 8*//19,
the &upreme Court held that a :managerial employee: is one who is vested with powers
or prerogatives to lay down and execute management policies andBor to hire, execute
management policies andBor to hire, transfer, suspend, lay3off, recall, discharge, assign
or discipline employees The test of :managerial status: depends on whether a person
possesses authority to act in the interest of his employer and whether such authority is
not merely routinary or clerical in nature, but re5uires the use of independent judgment
@here such recommendatory powers are subject to evaluation, review and final action by
the department heads and other higher executives of the company, the person having
such recommendatory powers is not a managerial employee The fact that his wor"
description is either manager or supervisor is of no moment considering that it is the
nature of his functions and not the said nomenclature of title which determines his status
To be a managerial employee, the following elements must concurC 8*9 his primary duty
consists of performance of wor" directly related to management policies? 8-9 he
customarily and regularly exercises discretion and independent judgment in the
performance of his functions? 819 he regularly and directly assists in the management of
the establishment? and 849 he does not devote -.Q of his time to wor" other than those
above prescribed The test is whether the position re5uires use of independent judgment
The employees are not managerial employees if they only execute approved and
established policies, leaving little or no discretion at all whether to implement said
policies or not >illuga vs )#RC, --< &CRA <1,
R=>=)!= R=$!#ATI;)& ); .13/2'ay -*, *//2
Implementing &ection 11 of the )ational Internal Revenue Code, as Amended by
Republic Act )o 24-4 Relative to the &pecial Treatment of %ringe Benefits
&0=CIA# TR=AT'=)T ;% %RI)$= B=)=%IT&
8A9 Imposition of %ringe Benefits Tax E A final withholding tax is hereby imposed on
the grossed3up monetary value of fringe benefit furnished, granted or paid by the
employer to the employee, except ran" and file employees as defined in these
Regulations, whether such employer is an individual, professional partnership or a
corporation, regardless of whether the corporation is taxable or not, or the government
and its instrumentalities except whenC 8*9 the fringe benefit is re5uired by the nature of or
necessary to the trade, business or profession of the employer? or 8-9 when the fringe
benefit is for the convenience or advantage of the employer The fringe benefit tax shall
be imposed at the following ratesC
=ffective Aanuary *, *//2 3 14Q
=ffective Aanuary *, */// 3 11Q
=ffective Aanuary *, -... 3 1-Q
The tax imposed under &ec 11 of the Code shall be treated as a final income tax on the
employee which shall be withheld and paid by the employer on a calendar 5uarterly
basis as provided under &ec <, 8A9 8@ithholding of %inal Tax on certain Incomes9 and
&ec <2 A 8Iuarterly Returns and 0ayments of Taxes @ithheld9 of the Code
The grossed3up monetary value of the fringe benefit shall be determined by dividing the
monetary value of the fringe benefit by the following percentages and in accordance with
the following scheduleC
=ffective Aanuary *, *//2 3 ++Q
=ffective Aanuary *, */// 3 +,Q
=ffective Aanuary *, -... 3 +2Q
The grossed3up monetary value of the fringe benefit represents the whole amount of
income reali6ed by the employee which includes the net amount of money or net
monetary value of property which has been received plus the amount of fringe benefit tax
thereon otherwise due from the employee but paid by the employer for and in behalf of
his employee
R=>=)!= R=$!#ATI;)& ); ..<3** 'arch *+, -.**
!pdated 7e 'inimis Benefits
The following shall be considered as :de minimis: benefits not subject to income tax as
well as withholding tax on compensation income of both managerial and ran" and file
employeesC
8a9 'oneti6ed unused vacation leave credits of private employees not exceeding ten
8*.9 days during the year?
8b9 'oneti6ed value of vacation and sic" leave credits paid to government officials
and employees?
8c9 'edical cash allowance to dependents of employees, not exceeding 0,<. per
employee per semester or 0*-< per month?
8d9 Rice subsidy of 0*,<.. or one 8*9 sac" of <. "g rice per month amounting to not
more than 0*,<..?
8e9 !niform and Clothing allowance not exceeding 04,... per annum?
8f9 Actual medical assistance, eg, medical allowance to cover medical and
healthcare needs, annual medicalBexecutive chec"3up, maternity assistance, and routine
consultations, not exceeding 0*.,..... per annum?
8g9 #aundry allowance not exceeding 01.. per month?
8h9 =mployees achievement awards, eg, for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding 0*.,... received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees?
8i9 $ifts given during Christmas and major anniversary celebrations not exceeding
0<,... per employee per annum?
8j9 7aily meal allowance for overtime wor" and nightBgraveyard shift not exceeding
twenty3five percent 8-<Q9 of the basic minimum wage on a per region basis?
All other benefits given by employers which are not included in the above enumeration
shall not be considered as :de minimis: benefits, and hence, shall be subject to income
tax as well as withholding tax on compensation income
R=>=)!= R=$!#ATI;)& ); .*.3.2 Auly 2, -..2
Implementing 0ertinent 0rovisions of Republic Act )o /<.4, :An Act Amending &ections
--, -4, 14, 1<, <*, and ,/ of Republic Act )o 24-4, as Amended, ;therwise Fnown as
The )ational Internal Revenue Code: Relative to the @ithholding of Income Tax on
Compensation and ;ther Concerns
=xemptions from @ithholding Tax on Compensation E The following income payments
are exempted from the re5uirements of withholding tax on compensationC
HHH HHHHHH
HHH HHHHHH
%acilities and privileges of relatively small value E ;rdinarily, facilities, and privileges
8such as entertainment, medical services, or so3called :courtesy: discounts on
purchases9, otherwise "nown as :de minimis benefits,: furnished or offered by an
employer to his employees, are not considered as compensation subject to income tax
and conse5uently to withholding tax, if such facilities or privileges are of relatively small
value and are offered or furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees
The following shall be considered as :de minimis: benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
ran" and file employeesC
8a9 'oneti6ed unused vacation leave credits of employees not exceeding ten 8*.9 days
during the year and the moneti6ed value of leave credits paid to government officials and
employees?
8b9 'edical cash allowance to dependents of employees not exceeding 0,<... per
employee per semester or 0*-< per month?
8c9 Rice subsidy of 0*,<.... or one 8*9 sac" of <.3"g rice per month amounting to
not more than 0*,<....?
8d9 !niforms and clothing allowance not exceeding 04,..... per annum?
8e9 Actual yearly medical benefits not exceeding 0*.,..... per annum?
8f9 #aundry allowance not exceeding 01.... per month?
8g9 =mployees achievement awards, eg, for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding 0*.,..... received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees?
8h9 $ifts given during Christmas and major anniversary celebrations not exceeding
0<,..... per employee per annum?
8i9 %lowers, fruits, boo"s, or similar items given to employees under special
circumstances, eg, on account of illness, marriage, birth of a baby, etc? and
8j9 7aily meal allowance for overtime wor" not exceeding twenty five percent 8-<Q9
of the basic minimum wage
The amount of (de minimis( benefits conforming to the ceiling herein prescribed shall not
be considered in determining the 01.,..... ceiling of (other benefits( excluded from
gross income under &ection 1- 8b9 8,9 8e9 of the Code 0rovided that, the excess of the
(de minimis( benefits over their respective ceilings prescribed by these regulations shall
be considered as part of (other benefits( and the employee receiving it will be subject to
tax only on the excess over the 01.,..... ceiling 0rovided, further, that '@=s
receiving (other benefits( exceeding the 01.,..... limit shall be taxable on the excess
benefits, as well as on his salaries, wages and allowances, just li"e an employee
receiving compensation income beyond the &'@
Any amount given by the employer as benefits to its employees, whether classified as :de
minimis: benefits or fringe benefits, shall constitute as deductible expense upon such
employer
@here compensation is paid in property other than money, the employer shall ma"e
necessary arrangements to ensure that the amount of the tax re5uired to be withheld is
available for payment to the Bureau of Internal Revenue
C'APTER (II A--,5!b-e De0#cti,"/
)ECTION ;4 De0#cti,"/ fr,m &r,// I"c,me . E2ce3t f,r t!23!$er/
e!r"i"4 c,m3e"/!ti," i"c,me !ri/i"4 fr,m 3er/,"!- /ervice/ re"0ere0 #"0er !"
em3-,$er@em3-,$ee re-!ti,"/+i3 5+ere ", 0e0#cti,"/ /+!-- be !--,5e0 #"0er t+i/
)ecti," ,t+er t+!" #"0er )#b/ecti," >%? +ere,f, i" c,m3#ti"4 t!2!b-e i"c,me
/#b:ect t, i"c,me t!2 #"0er )ecti,"/ 24>A?7 2<>A?7 2A7 27>A?, >B? !"0 >C?7 !"0
28>A?>1?, t+ere /+!-- be !--,5e0 t+e f,--,5i"4 0e0#cti,"/ fr,m 4r,// i"c,me=
>A? E23e"/e/ .
>1? Or0i"!r$ !"0 Nece//!r$ Tr!0e, B#/i"e// ,r Pr,fe//i,"!- E23e"/e/ .
>!? I" &e"er!-. . T+ere /+!-- be !--,5e0 !/ 0e0#cti," fr,m 4r,// i"c,me !-- t+e
,r0i"!r$ !"0 "ece//!r$ e23e"/e/ 3!i0 ,r i"c#rre0 0#ri"4 t+e t!2!b-e $e!r i"
c!rr$i"4 ," ,r 5+ic+ !re 0irect-$ !ttrib#t!b-e t,, t+e 0eve-,3me"t, m!"!4eme"t,
,3er!ti," !"0D,r c,"0#ct ,f t+e tr!0e, b#/i"e// ,r e2erci/e ,f ! 3r,fe//i,",
i"c-#0i"4=
>i? A re!/,"!b-e !--,5!"ce f,r /!-!rie/, 5!4e/, !"0 ,t+er f,rm/ ,f
c,m3e"/!ti," f,r 3er/,"!- /ervice/ !ct#!--$ re"0ere0, i"c-#0i"4 t+e 4r,//e0@#3
m,"et!r$ v!-#e ,f fri"4e be"efit f#r"i/+e0 ,r 4r!"te0 b$ t+e em3-,$er t, t+e
em3-,$ee= Pr,vi0e0, T+!t t+e fi"!- t!2 im3,/e0 #"0er )ecti," ;; +ere,f +!/ bee"
3!i07
>ii? A re!/,"!b-e !--,5!"ce f,r tr!ve- e23e"/e/, +ere !"0 !br,!0, 5+i-e !5!$
fr,m +,me i" t+e 3#r/#it ,f tr!0e, b#/i"e// ,r 3r,fe//i,"7
>iii? A re!/,"!b-e !--,5!"ce f,r re"t!-/ !"0D,r ,t+er 3!$me"t/ 5+ic+ !re re8#ire0
!/ ! c,"0iti," f,r t+e c,"ti"#e0 #/e ,r 3,//e//i,", f,r 3#r3,/e/ ,f t+e tr!0e,
b#/i"e// ,r 3r,fe//i,", ,f 3r,3ert$ t, 5+ic+ t+e t!23!$er +!/ ",t t!9e" ,r i/ ",t
t!9i"4 tit-e ,r i" 5+ic+ +e +!/ ", e8#it$ ,t+er t+!" t+!t ,f ! -e//ee, #/er ,r
3,//e//,r7
>iv? A re!/,"!b-e !--,5!"ce f,r e"tert!i"me"t, !m#/eme"t !"0 recre!ti,"
e23e"/e/ 0#ri"4 t+e t!2!b-e $e!r, t+!t !re 0irect-$ c,""ecte0 t, t+e 0eve-,3me"t,
m!"!4eme"t !"0 ,3er!ti," ,f t+e tr!0e, b#/i"e// ,r 3r,fe//i," ,f t+e t!23!$er, ,r
t+!t !re 0irect-$ re-!te0 t, ,r i" f#rt+er!"ce ,f t+e c,"0#ct ,f +i/ ,r it/ tr!0e,
b#/i"e// ,r e2erci/e ,f ! 3r,fe//i," ",t t, e2cee0 /#c+ cei-i"4/ !/ t+e )ecret!r$ ,f
*i"!"ce m!$, b$ r#-e/ !"0 re4#-!ti,"/ 3re/cribe, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er, t!9i"4 i"t, !cc,#"t t+e "ee0/ !/ 5e-- !/ t+e /3eci!- circ#m/t!"ce/,
"!t#re !"0 c+!r!cter ,f t+e i"0#/tr$, tr!0e, b#/i"e//, ,r 3r,fe//i," ,f t+e t!23!$er=
Pr,vi0e0, T+!t !"$ e23e"/e i"c#rre0 f,r e"tert!i"me"t, !m#/eme"t ,r recre!ti,"
t+!t i/ c,"tr!r$ t, -!5, m,r!-/, 3#b-ic 3,-ic$ ,r 3#b-ic ,r0er /+!-- i" ", c!/e be
!--,5e0 !/ ! 0e0#cti,".
>b? )#b/t!"ti!ti," Re8#ireme"t/. . N, 0e0#cti," fr,m 4r,// i"c,me /+!-- be
!--,5e0 #"0er )#b/ecti," >A? +ere,f #"-e// t+e t!23!$er /+!-- /#b/t!"ti!te 5it+
/#fficie"t evi0e"ce, /#c+ !/ ,ffici!- recei3t/ ,r ,t+er !0e8#!te rec,r0/= >i? t+e
!m,#"t ,f t+e e23e"/e bei"4 0e0#cte0, !"0 >ii? t+e 0irect c,""ecti," ,r re-!ti," ,f
t+e e23e"/e bei"4 0e0#cte0 t, t+e, 0eve-,3me"t, m!"!4eme"t, ,3er!ti," !"0D,r
c,"0#ct ,f t+e tr!0e, b#/i"e// ,r 3r,fe//i," ,f t+e t!23!$er.
CASES DIGEST
$uiding principles in determining :ordinary and necessary: expenses
This Court has never attempted to define with precision the terms :ordinary and
necessary: There are however, certain guiding principles worthy of serious
consideration in the proper adjudication of conflicting claims ;rdinarily, an expense
will be considered :necessary: where the expenditure is appropriate and helpful in the
development of the taxpayers business It is :ordinary: when it connotes a payment which
is normal in relation to the business of the taxpayer and the surrounding circumstances
The term :ordinary: does not re5uire that the payments be habitual or normal in the
sense that the same taxpayer will have to ma"e them often? the payment may be uni5ue or
non3recurring to the particular taxpayer affected
Atlas Consolidated 'ining R7evt Corp vs Commissioner of Internal Revenue, $R
)o #3-+/**, Aanuary -,, */2*
Intention of taxpayer may be the controlling factor in determining deductibility of
ordinary and necessary expenditures
There is no hard and fast rule on the right to a deduction which depends in each case on
the particular facts and the relation of the payment to the type of business in which the
taxpayer is engaged The intention of the taxpayer often may be the controlling fact in
ma"ing the determination Assuming that the expenditure is ordinary and necessary in
the operation of the taxpayer(s business, the answer to the 5uestion as to whether the
expenditure is an allowable deduction as a business expense must be determined from the
nature of the expenditure itself, which in turn depends on the extent and permanency of
the wor" accomplished by the expenditure
Atlas Consolidated 'ining R7evt Corp vs Commissioner of Internal Revenue, $R
)o #3-+/**, Aanuary -,, */2*
=xpenses incurred by charitable institution for handling its dividends and interests are
not deductible as business expenses
As the principle of allocating expenses is grounded on the premise that the taxable
income was derived from carrying on a trade or business, as distinguished from mere
receipt of interests and dividends from oneMs investments, said income should not share in
the allocation of administrative expenses Thus, expenses incurred by a charitable
institution for handling its funds or income consisting solely of dividends and interests,
are not expenses incurred in :carrying on any trade or business,: hence, not deductible
as business or administrative expenses
Dospital de &an Auan de 7ios, Inc vs Commissioner of Internal Revenue,
$R )o 1*1.<, 'ay *., *//.
@hat constitutes capital expenditures
=xpenses relating to recapitali6ation and reorgani6ation of the corporation, the cost of
obtaining stoc" subscription, promotions expenses and commission of fees paid for the
sale of stoc" reorgani6ation are capital expenditures
Atlas Consolidated 'ining R7evt Corp vs Commissioner of Internal Revenue, $R
)o #3-+/**, Aanuary -,, */2*
Iuestions in determining deductibility of compensation of corporate officers
@henever a controversy arises on the deductibility, for purposes of income tax, of certain
items for alleged compensation of officers of the taxpayer, two 8-9 5uestions become
material, namelyC 8a9 Dave (personal services been actually rendered( by said officersS
8b9 In the affirmative case, what is the (reasonable allowance( thereofS
Alhambra Cigar R Cigarette 'anufacturing Company vs Commissioner of Internal
Revenue, $R )o #3-1--+, )ovember -2, */+,
Compensation to directors without relation to actual services cannot be regarded as
ordinary and necessary expenses
The extraordinary and unusual amounts paid by the taxpayer to its directors in the guise
and form of compensation for their supposed services as such, without any relation to the
measure of their actual services, cannot be regarded as ordinary and necessary expenses
within the meaning of the law This posture is in line with the doctrine in the law of
taxation that the taxpayer must show that its claimed deductions clearly come within the
language of the law since allowances, li"e exemptions, are matters of legislative grace
Atlas Consolidated 'ining R7evt Corp vs Commissioner of Internal Revenue, $R
)o #3-+/**, Aanuary -,, */2*
Improper payments of royalty are not deductible as legitimate business expenses
Although the Tax Code allows payments of royalty to be deducted from gross income as
business expenses, it is CB Circular )o 1/1 that defines what royalty payments are
proper Improper payments of royalty are not deductible as legitimate business expenses
1' 0hilippines, Inc vs Commissioner of Internal Revenue, $R )o 2-211, &eptember
-+, */22
Conditions for deductibility of business expense
The statutory test of deductibility re5uires that to be deductible as a business expense,
three conditions are imposed, namelyC 8*9 the expense must be ordinary and necessary,
8-9 it must be paid or incurred within the taxable year, and 819 it must be paid or incurred
in carrying on a trade or business In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or records the deductions claimed
under the law, otherwise, the same will be disallowed The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not justify its deduction
=sso &tandard =astern, Inc vs Commissioner of Internal Revenue, $R )os -2<.23/,
Auly ,, */2/
Re5uisites for deductibility of advertising expense
To be deductible from gross income, advertising expense must comply with the following
re5uisitesC 8a9 the expense must be ordinary and necessary? 8b9 it must have been paid or
incurred during the taxable year? 8c9 it must have been paid or incurred in carrying on
the trade or business of the taxpayer? and 8d9 it must be supported by receipts, records or
other pertinent papers
Commissioner of Internal Revenue vs $eneral %oods 80hils9, Inc, $R )o *41+,-,
April -4, -..1
%actors to consider in determining the reasonableness of an advertising expense
There is yet to be a clear3cut criteria or fixed test for determining the reasonableness of
an advertising expense There being no hard and fast rule on the matter, the right to a
deduction depends on a number of factors such as but not limited toC the type and si6e of
business in which the taxpayer is engaged? the volume and amount of its net earnings?
the nature of the expenditure itself? the intention of the taxpayer and the general
economic conditions It is the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation
Commissioner of Internal Revenue vs $eneral %oods 80hils9, Inc, $R )o *41+,-,
April -4, -..1
Two "inds of advertising
Advertising is generally of two "indsC 8*9 advertising to stimulate the current sale of
merchandise or use of services and 8-9 advertising designed to stimulate the future sale
of merchandise or use of services The second type involves expenditures incurred, in
whole or in part, to create or maintain some form of goodwill for the taxpayer(s trade or
business or for the industry or profession of which the taxpayer is a member If the
expenditures are for the advertising of the first "ind, then, except as to the 5uestion of the
reasonableness of amount, there is no doubt such expenditures are deductible as business
expenses If, however, the expenditures are for advertising of the second "ind, then
normally they should be spread out over a reasonable period of time
Commissioner of Internal Revenue vs $eneral %oods 80hils9, Inc, $R )o *41+,-,
April -4, -..1
0rotection of brand franchise is a"in to ac5uisition of capital assets and therefore not
business expense
The protection of brand franchise is analogous to the maintenance of goodwill or title to
one(s property This is a capital expenditure which should be spread out over a
reasonable period of time Respondent corporation(s venture to protect its brand
franchise was tantamount to efforts to establish a reputation This was a"in to the
ac5uisition of capital assets and therefore expenses related thereto were not to be
considered as business expenses but as capital expenditures
Commissioner of Internal Revenue vs $eneral %oods 80hils9, Inc,
$R )o *41+,-, April -4, -..1
To be considered ordinary, an expense must be reasonable in amount
True, it is the taxpayer(s prerogative to determine the amount of advertising expenses it
will incur and where to apply them &aid prerogative, however, is subject to certain
considerations The first relates to the extent to which the expenditures are actually
capital outlays? this necessitates an in5uiry into the nature or purpose of such
expenditures The second, which must be applied in harmony with the first, relates to
whether the expenditures are ordinary and necessary Concomitantly, for an expense to
be considered ordinary, it must be reasonable in amount
Commissioner of Internal Revenue vs $eneral %oods 80hils9, Inc $R
)o *41+,-, April -4, -..1
Conditions for deductibility of employee bonuses
It is a general rule that bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible,
provided such payments, when added to the stipulated salaries, do not exceed a
reasonable compensation for the services rendered The conditions precedent to the
deduction of bonuses to employees areC 8*9 the payment of the bonuses is in fact
compensation? 8-9 it must be for personal services actually rendered? and 819 the
bonuses, when added to the salaries, are (reasonable when measured by the amount
and 5uality of the services performed with relation to the business of the particular
taxpayer(
C ' Dos"ins R Co, Inc vs Commissioner of Internal Revenue,
$R )o #3-4.</, )ovember -2, */+/
%actors in determining reasonableness of bonus as compensation
There is no fixed test for determining the reasonableness of a given bonus as
compensation This depends upon many factors, one of them being (the amount and
5uality of the services performed with relation to the business( ;ther tests suggested areC
payment must be (made in good faith(? (the character of the taxpayer(s business, the
volume and amount of its net earnings, its locality, the type and extent of the services
rendered, the salary policy of the corporation(? (the si6e of the particular business(? (the
employees( 5ualifications and contributions to the business venture(? and (general
economic conditions( Dowever, (in determining whether the particular salary or
compensation payment is reasonable, the situation must be considered as a whole
;rdinarily, no single factor is decisive it is important to "eep in mind that it seldom
happens that the application of one test can give satisfactory answer, and that ordinarily
it is the interplay of several factors, properly weighted for the particular case, which
must furnish the final answer:
C ' Dos"ins R Co, Inc vs Commissioner of Internal Revenue,
$R )o #3-4.</, )ovember -2, */+/
Tax deductions must also be strictly construed
It is a governing principle in taxation that tax exemptions must be construed in
strictissimijuris against the taxpayer and liberally in favor of the taxing authority? and he
who claims an exemption must be able to justify his claim by the clearest grant of organic
or statute law An exemption from the common burden cannot be permitted to exist upon
vague implications 7eductions for income tax purposes parta"e of the nature of tax
exemptions? hence, if tax exemptions are strictly construed, then deductions must also be
strictly construed
Commissioner of Internal Revenue vs $eneral %oods 80hils9, Inc, $R
)o *41+,-, April -4, -..1
=xpenses to establish reputation are capital expenditures
An expense incurred to create a favorable image of the corporation in order to gain or
maintain the publicMs and its stoc"holderMs patronage, does not ma"e it deductible as
business expense =fforts to establish reputation are a"in to ac5uisition of capital assets
and, therefore, expenses related thereto are not business expense but capital
expenditures
Atlas Consolidated 'ining R7evt Corp vs Commissioner of Internal Revenue, $R
)o #3-+/**, Aanuary -,, */2*
#isting fee is an ordinary and necessary business expense
A listing fee is an ordinary and necessary business expense for the privilege of having its
stoc" listed
Atlas Consolidated 'ining R7evt Corp vs Commissioner of Internal Revenue, $R
)o #3-+/**, Aanuary -,, */2*
#itigation expenses incurred in defense or protection of title are capital in nature and not
deductible
It is well settled that litigation expenses incurred in defense or protection of title are
capital in nature and not deductible, li"ewise, it was ruled by the !& Tax Court that
expenditures in defense of title property constitute a part of the cost of the property, are
not deductible as expense
Atlas Consolidated 'ining R7evt Corp vs Commissioner of Internal Revenue, $R
)o #3-+/**, Aanuary -,, */2*
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); *.3.- Auly *., -..-
Implementing the 0rovisions of &ection 148A98*98a98iv9 of the Tax Code of *//,,
Authori6ing the Imposition of a Ceiling on :=ntertainment, Amusement and Recreational
=xpenses: claimed by individual taxpayers engaged in business or in the practice of their
profession and of domestic or resident foreign corporations, to arrive at the taxable
income subject to income tax under &ections -48A9? -<8A98*9? -+? -,8A9, 8B9 and 8C9?
-28A98*9? -28A98+98b9 and &ection +* , of the Tax Code of *//,
These regulations shall cover entertainment, amusement and recreation expenses of the
following taxpayersC
a Individuals engaged in business, including taxable estates and trusts?
b Individuals engaged in the practice of profession?
c 7omestic corporations?
d Resident foreign corporations?
e $eneral professional partnerships, including its members
:=ntertainment, Amusement and Recreation =xpenses: includes representation expenses
andBor depreciation or rental expense relating to entertainment facilities, as described
below
The term :Representation =xpenses: shall refer to expenses incurred by a taxpayer in
connection with the conduct of his trade, business or exercise of profession, in
entertaining, providing amusement and recreation to, or meeting with, a guest or guests
at a dining place, place of amusement, country club, theater, concert, play, sporting
event, and similar events or places %or purposes of these Regulations, representation
expenses shall not refer to fixed representation allowances that are subject to withholding
tax on wages pursuant to appropriate revenue regulations C&Aa7=
In the case particularly of a country, golf, sports club, or any other similar club where
the employee or officer of the taxpayer is the registered member and the expenses
incurred in relation thereto are paid for by the taxpayer, there shall be a presumption that
such expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can
prove that these are actually representation expenses %or purposes of proving that said
expense is a representation expense and not fringe benefits, the taxpayer should maintain
receipts and ade5uate records that indicate the 8a9 amount of expense 8b9 date and place
of expense 8c9 purpose of expense 8d9 professional or business relationship of expense 8e9
name of person and company entertained with contact details
The term :=ntertainment %acilities: shall refer to 8*9 a yacht, vacation home or
condominium? and 8-9 any similar item of real or personal property used by the taxpayer
primarily for the entertainment, amusement, or recreation of guests or employees To be
considered an entertainment facility, such yacht, vacation home or condominium, or item
of real or personal property must be owned or form part of the taxpayer(s trade, business
or profession, or rented by such taxpayer, for which the taxpayer claims a depreciation or
rental expense A yacht shall be considered an entertainment facility under these
Regulations if its use is in fact not restricted to specified officers or employees or
positions in such a manner as to ma"e the same a fringe benefit for purposes of imposing
the fringe benefits tax
The term :$uests: shall mean persons or entities with which the taxpayer has direct
business relations, such as but not limited to, clientsBcustomers or prospective
clientsBcustomers The term shall not include employees, officers, partners, directors,
stoc"holders, or trustees of the taxpayer
=xclusionsE The following expenses are not considered entertainment, amusement and
recreation expenses as defined under &ection - hereof
a =xpenses which are treated as compensation or fringe benefits for services
rendered under an employer3employee relationship, pursuant to Revenue Regulations -3
/2 , 13/2 and amendments thereto?
b =xpenses for charitable or fund raising events?
c =xpenses for bonafide business meeting of stoc"holders, partners or directors?
d =xpenses for attending or sponsoring an employee to a business league or
professional organi6ation meeting?
e =xpenses for events organi6ed for promotion, mar"eting and advertising including
concerts, conferences, seminars, wor"shops, conventions, and other similar events?
f ;ther expenses of a similar nature
)otwithstanding the foregoing, such items of exclusions may, nonetheless, 5ualify as
items of deduction under &ection 14 of the Tax Code of *//,, subject to conditions for
deductibility stated therein
Re5uisites of 7eductibility of :=ntertainment, Amusement and Recreation =xpense: E
The following are the re5uisites for deductibility of entertainment, amusement and
recreation expense as defined above subject to the ceiling prescribed under &ection < of
these RegulationsC
a It must be paid or incurred during the taxable year?
b It must beC 8i9 directly connected to the development, management and operation
of the trade, business or profession of the taxpayer? or 8ii9 directly related to or in
furtherance of the conduct of his or its trade, business or exercise of a profession?
c It must not be contrary to law, morals, good customs, public policy or public
order?
d It must not have been paid, directly or indirectly, to an official or employee of the
national government, or any local government unit, or of any government3owned or
controlled corporation 8$;CC9, or of a foreign government, or to a private individual,
or corporation, or general professional partnership 8$009, or a similar entity, if it
constitutes a bribe, "ic"bac" or other similar payment?
e It must be duly substantiated by ade5uate proof The official receipts, or invoices,
or bills or statements of accounts should be in the name of the taxpayer claiming the
deduction? and
f The appropriate amount of withholding tax, if applicable, should have been
withheld therefrom and paid to the Bureau of Internal Revenue
&=CTI;) < Ceiling on =ntertainment, Amusement, and Recreation =xpense E There
shall be allowed a deduction from gross income for entertainment, amusement and
recreation expense, as defined in &ection - of these Regulations, in an amount e5uivalent
to the actual entertainment, amusement and recreation expense paid or incurred within
the taxable year by the taxpayer, but in no case shall such deduction exceed .<. percent
8Q9 of net sales 8ie, gross sales less sales returnsBallowances and sales discounts9 for
taxpayers engaged in sale of goods or properties? or *.. percent 8Q9 of net revenue 8ie,
gross revenue less discounts9 for taxpayers engaged in sale of services, including
exercise of profession and use or lease of properties Dowever, if the taxpayer is deriving
income from both sale of goodsBproperties and services, the allowable entertainment,
amusement and recreation expense shall in all cases be determined based on an
apportionment formula ta"ing into consideration the percentage of the net salesBnet
revenue to the total net salesBnet revenue, but which in no case shall exceed the maximum
percentage ceiling provided in these Regulations
>c? Bribe/, Eic9b!c9/ !"0 Ot+er )imi-!r P!$me"t/ . N, 0e0#cti," fr,m 4r,//
i"c,me /+!-- be !--,5e0 #"0er )#b/ecti," >A? +ere,f f,r !"$ 3!$me"t m!0e,
0irect-$ ,r i"0irect-$, t, !" ,ffici!- ,r em3-,$ee ,f t+e "!ti,"!- 4,ver"me"t, ,r t,
!" ,ffici!- ,r em3-,$ee ,f !"$ -,c!- 4,ver"me"t #"it, ,r t, !" ,ffici!- ,r em3-,$ee
,f ! 4,ver"me"t@,5"e0 ,r @c,"tr,--e0 c,r3,r!ti,", ,r t, !" ,ffici!- ,r em3-,$ee ,r
re3re/e"t!tive ,f ! f,rei4" 4,ver"me"t, ,r t, ! 3riv!te c,r3,r!ti,", 4e"er!-
3r,fe//i,"!- 3!rt"er/+i3, ,r ! /imi-!r e"tit$, if t+e 3!$me"t c,"/tit#te/ ! bribe ,r
9ic9b!c9.
>2? E23e"/e/ A--,5!b-e t, Priv!te E0#c!ti,"!- I"/tit#ti,"/ . I" !00iti," t, t+e
e23e"/e/ !--,5!b-e !/ 0e0#cti,"/ #"0er t+i/ C+!3ter, ! 3riv!te e0#c!ti,"!-
i"/tit#ti,", referre0 t, #"0er )ecti," 27>B? ,f t+i/ C,0e, m!$ !t it/ ,3ti," e-ect
eit+er= >!? t, 0e0#ct e23e"0it#re/ ,t+er5i/e c,"/i0ere0 !/ c!3it!- ,#t-!$/ ,f
0e3reci!b-e !//et/ i"c#rre0 0#ri"4 t+e t!2!b-e $e!r f,r t+e e23!"/i," ,f /c+,,-
f!ci-itie/, ,r >b? t, 0e0#ct !--,5!"ce f,r 0e3reci!ti," t+ere,f #"0er )#b/ecti," >*?
+ere,f.
>B? I"tere/t .
>1? I" &e"er!- . T+e !m,#"t ,f i"tere/t 3!i0 ,r i"c#rre0 5it+i" ! t!2!b-e $e!r
," i"0ebte0"e// i" c,""ecti," 5it+ t+e t!23!$erF/ 3r,fe//i,", tr!0e ,r b#/i"e//
/+!-- be !--,5e0 !/ 0e0#cti," fr,m 4r,// i"c,me= Pr,vi0e0, +,5ever, T+!t t+e
t!23!$erF/ ,t+er5i/e !--,5!b-e 0e0#cti," f,r i"tere/t e23e"/e /+!-- be re0#ce0 b$
f,rt$@t5, 3erce"t >42G? ,f t+e i"tere/t i"c,me /#b:ecte0 t, fi"!- t!2= Pr,vi0e0,
T+!t effective !"#!r$ 1, 2CC9, t+e 3erce"t!4e /+!-- be t+irt$@t+ree 3erce"t >;;G?.
*,rt$@,"e 3erce"t >41G? be4i""i"4 !"#!r$ 1, 19987
T+irt$@"i"e 3erce"t >;9G? be4i""i"4 !"#!r$ 1, 19997 !"0
T+irt$@ei4+t 3erce"t >;8G? be4i""i"4 !"#!r$ 1, 2CCC.
>2? E2ce3ti,"/. . N, 0e0#cti," /+!-- be !--,5e0 i" re/3ect ,f i"tere/t #"0er t+e
/#ccee0i"4 /#b3!r!4r!3+/=
>!? If 5it+i" t+e t!2!b-e $e!r !" i"0ivi0#!- t!23!$er re3,rti"4 i"c,me ," t+e c!/+
b!/i/ i"c#r/ !" i"0ebte0"e// ," 5+ic+ !" i"tere/t i/ 3!i0 i" !0v!"ce t+r,#4+
0i/c,#"t ,r ,t+er5i/e= Pr,vi0e0, T+!t /#c+ i"tere/t /+!-- be !--,5e0 !/ ! 0e0#cti,"
i" t+e $e!r t+e i"0ebte0"e// i/ 3!i0= Pr,vi0e0, f#rt+er, T+!t if t+e i"0ebte0"e// i/
3!$!b-e i" 3eri,0ic !m,rti6!ti,"/, t+e !m,#"t ,f i"tere/t 5+ic+ c,rre/3,"0/ t, t+e
!m,#"t ,f t+e 3ri"ci3!- !m,rti6e0 ,r 3!i0 0#ri"4 t+e $e!r /+!-- be !--,5e0 !/
0e0#cti," i" /#c+ t!2!b-e $e!r7
>b? If b,t+ t+e t!23!$er !"0 t+e 3er/," t, 5+,m t+e 3!$me"t +!/ bee" m!0e ,r i/
t, be m!0e !re 3er/,"/ /3ecifie0 #"0er )ecti," ;A>B?7 ,r
>c? If t+e i"0ebte0"e// i/ i"c#rre0 t, fi"!"ce 3etr,-e#m e23-,r!ti,".
>;? O3ti,"!- Tre!tme"t ,f I"tere/t E23e"/e. . At t+e ,3ti," ,f t+e t!23!$er,
i"tere/t i"c#rre0 t, !c8#ire 3r,3ert$ #/e0 i" tr!0e, b#/i"e// ,r e2erci/e ,f !
3r,fe//i," m!$ be !--,5e0 !/ ! 0e0#cti," ,r tre!te0 !/ ! c!3it!- e23e"0it#re.
CASES DIGESTS
Interest paid for late payment of tax is deductible from gross income
The term :indebtedness: as used in the Tax Code of the !nited &tates has been defined as
an unconditional and legally enforceable obligation for the payment of money @ithin the
meaning of that definition, it is apparent that a tax may be considered an indebtedness It
follows that the interest paid for the late payment of donor(s tax is deductible from
taxpayerMs gross income
Commissioner of Internal Revenue vs Consuelo # vdade0rieto,
$R )o #3*1/*-, &eptember 1., */+.
7efinition of :theoretical interest:
:Theoretical interest: refers to interest :calculated: or computed 8and not incurred or
paid9 for the purpose of determining the :opportunity cost: of investing funds in a given
business &uch :theoretical: or imputed interest does not arise from a legally demandable
interest3bearing obligation incurred by the taxpayer who however wishes to find out, eg,
whether he would have been better off by lending out his funds and earning interest
rather than investing such funds in his business
0aper Industries Corp of the 0hil vs Court of Appeals, et al,
$R )os *.+/4/3<., 7ecember *, *//<
:Carrying charges: may be capitali6ed or deducted from gross income at the option of
taxpayer
The :carrying charges: which may be capitali6ed under the !& Internal Revenue Code
include, interest on a loan :8but not theoretical funds9: &uch :carrying charges: may, at
the election of the taxpayer, either be 8a9 capitali6ed in which case the cost basis of the
capital assets, eg, machinery and e5uipment, will be adjusted by adding the amount of
such interest payments or, alternatively, be 8b9 deducted from gross income of the
taxpayer &hould the taxpayer elect to deduct the interest payments against its gross
income, the taxpayer cannot at the same time capitali6e the interest paymentsIn other
words, the taxpayer is not entitled to both the deduction from gross income and the
adjusted 8increased9 basis for determining gain or loss and the allowable depreciation
charge The !& Internal Revenue Code does not prohibit the deduction of interest on a
loan obtained for purchasing machinery and e5uipment against gross income, unless the
taxpayer has also or previously capitali6ed the same interest payments and thereby
adjusted the cost basis of such assets prem.2cd
0aper Industries Corp of the 0hil vs Court of Appeals, et al,
$R )os *.+/4/3<., 7ecember *, *//<
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); *13.. )ovember -., -...
Implementing &ection 148B9 of the Tax Code of *//, on the Re5uirements for
7eductibility of Interest =xpense from the $ross Income of a Taxpayer for deductibility of
interest expense from the gross income of a corporation or an individual engaged in
trade, business or in the practice of profession
Re5uisites for 7eductibility of Interest =xpense E In general, subject to certain
limitations, the following are the re5uisites for the deductibility of interest expense from
gross income, vi6C
8a9 There must be an indebtedness?
8b9 There should be an interest expense paid or incurred upon such indebtedness?
8c9 The indebtedness must be that of the taxpayer,
8d9 The indebtedness must be connected with the taxpayer(s trade, business or
exercise of profession?
8e9 The interest expense must have been paid or incurred during the taxable year?
8f9 The interest must have been stipulated in writing?
8g9 The interest must be legally due?
8h9 The interest payment arrangement must not be between related taxpayers as
mandated in &ec 148B98-98b9, in relation to &ec 1+8B9, both of the Tax Code of *//, ?
8i9 The interest must not be incurred to finance petroleum operations? and
8j9 In case of interest incurred to ac5uire property used in trade, business or exercise
of profession, the same was not treated as a capital expenditure
Rules on the 7eductibility of Interest =xpense E
8a9 $eneral Rule E In general, the amount of interest expense paid or incurred
within a taxable year on indebtedness in connection with the taxpayer(s trade, business
or exercise of profession shall be allowed as a deduction from the taxpayer(s gross
income
8b9 #imitation E The amount of interest expense paid or incurred by a taxpayer in
connection with his trade, business or exercise of a profession from an existing
indebtedness shall be reduced by an amount e5ual to the following percentages of the
interest income earned which had been subjected to final withholding tax depending on
the year when the interest income was earned, vi6C
%orty3one percent 84*Q9 beginning Aanuary *, *//2?
Thirty3nine percent 81/Q9 beginning Aanuary *, *///? and
Thirty3eight percent 812Q9beginning Aanuary *, -... and thereafter
This limitation shall apply regardless of whether or not a tax arbitrage scheme was
entered into by the taxpayer or regardless of the date when the interest bearing loan and
the date when the investment was made for as long as, during the taxable year, there is
an interest expense incurred on one side and an interest income earned on the other side,
which interest income had been subjected to final withholding tax This rule shall be
observed irrespective of the currency the loan was contracted andBor in whatever
currency the investments or deposits were made
>C?T!2e/ .
>1? I" &e"er!- . T!2e/ 3!i0 ,r i"c#rre0 5it+i" t+e t!2!b-e $e!r i" c,""ecti," 5it+
t+e t!23!$erF/ 3r,fe//i,", tr!0e ,r b#/i"e//, /+!-- be !--,5e0 !/ 0e0#cti,", e2ce3t=
>!? T+e i"c,me t!2 3r,vi0e0 f,r #"0er t+i/ Tit-e7
>b? I"c,me t!2e/ im3,/e0 b$ !#t+,rit$ ,f !"$ f,rei4" c,#"tr$7 b#t t+i/ 0e0#cti,"
/+!-- be !--,5e0 i" t+e c!/e ,f ! t!23!$er 5+, 0,e/ ",t /i4"if$ i" +i/ ret#r" +i/
0e/ire t, +!ve t, !"$ e2te"t t+e be"efit/ ,f 3!r!4r!3+ >;? ,f t+i/ )#b/ecti,"
>re-!ti"4 t, cre0it/ f,r t!2e/ ,f f,rei4" c,#"trie/?7
>c? E/t!te !"0 0,",rF/ t!2e/7 !"0
>0? T!2e/ !//e//e0 !4!i"/t -,c!- be"efit/ ,f ! 9i"0 te"0i"4 t, i"cre!/e t+e v!-#e ,f
t+e 3r,3ert$ !//e//e0.
Pr,vi0e0, T+!t t!2e/ !--,5e0 #"0er t+i/ )#b/ecti,", 5+e" ref#"0e0 ,r cre0ite0,
/+!-- be i"c-#0e0 !/ 3!rt ,f 4r,// i"c,me i" t+e $e!r ,f recei3t t, t+e e2te"t ,f t+e
i"c,me t!2 be"efit ,f /!i0 0e0#cti,".
>2? Limit!ti,"/ ," De0#cti,"/ . I" t+e c!/e ,f ! ","re/i0e"t !-ie" i"0ivi0#!-
e"4!4e0 i" tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/ !"0 ! re/i0e"t f,rei4" c,r3,r!ti,",
t+e 0e0#cti,"/ f,r t!2e/ 3r,vi0e0 i" 3!r!4r!3+ >1? ,f t+i/ )#b/ecti," >C? /+!-- be
!--,5e0 ,"-$ if !"0 t, t+e e2te"t t+!t t+e$ !re c,""ecte0 5it+ i"c,me fr,m /,#rce/
5it+i" t+e P+i-i33i"e/.
>;? Cre0it A4!i"/t T!2 f,r T!2e/ ,f *,rei4" C,#"trie/ . If t+e t!23!$er /i4"ifie/
i" +i/ ret#r" +i/ 0e/ire t, +!ve t+e be"efit/ ,f t+i/ 3!r!4r!3+, t+e t!2 im3,/e0 b$
t+i/ Tit-e /+!-- be cre0ite0 5it+=
>!? Citi6e" !"0 D,me/tic C,r3,r!ti," . I" t+e c!/e ,f ! citi6e" ,f t+e P+i-i33i"e/
!"0 ,f ! 0,me/tic c,r3,r!ti,", t+e !m,#"t ,f i"c,me t!2e/ 3!i0 ,r i"c#rre0 0#ri"4
t+e t!2!b-e $e!r t, !"$ f,rei4" c,#"tr$7 !"0
>b? P!rt"er/+i3/ !"0 E/t!te/ . I" t+e c!/e ,f !"$ /#c+ i"0ivi0#!- 5+, i/ ! member
,f ! 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3 ,r ! be"efici!r$ ,f !" e/t!te ,r tr#/t, +i/
3r,3,rti,"!te /+!re ,f /#c+ t!2e/ ,f t+e 4e"er!- 3r,fe//i,"!- 3!rt"er/+i3 ,r t+e
e/t!te ,r tr#/t 3!i0 ,r i"c#rre0 0#ri"4 t+e t!2!b-e $e!r t, ! f,rei4" c,#"tr$, if +i/
0i/trib#tive /+!re ,f t+e i"c,me ,f /#c+ 3!rt"er/+i3 ,r tr#/t i/ re3,rte0 f,r t!2!ti,"
#"0er t+i/ Tit-e.
A" !-ie" i"0ivi0#!- !"0 ! f,rei4" c,r3,r!ti," /+!-- ",t be !--,5e0 t+e cre0it/
!4!i"/t t+e t!2 f,r t+e t!2e/ ,f f,rei4" c,#"trie/ !--,5e0 #"0er t+i/ 3!r!4r!3+.
>4? Limit!ti,"/ ," Cre0it . T+e !m,#"t ,f t+e cre0it t!9e" #"0er t+i/ )ecti," /+!--
be /#b:ect t, e!c+ ,f t+e f,--,5i"4 -imit!ti,"/=
>!? T+e !m,#"t ,f t+e cre0it i" re/3ect t, t+e t!2 3!i0 ,r i"c#rre0 t, !"$ c,#"tr$
/+!-- ",t e2cee0 t+e /!me 3r,3,rti," ,f t+e t!2 !4!i"/t 5+ic+ /#c+ cre0it i/ t!9e",
5+ic+ t+e t!23!$erF/ t!2!b-e i"c,me fr,m /,#rce/ 5it+i" /#c+ c,#"tr$ #"0er t+i/
Tit-e be!r/ t, +i/ e"tire t!2!b-e i"c,me f,r t+e /!me t!2!b-e $e!r7 !"0
>b? T+e t,t!- !m,#"t ,f t+e cre0it /+!-- ",t e2cee0 t+e /!me 3r,3,rti," ,f t+e t!2
!4!i"/t 5+ic+ /#c+ cre0it i/ t!9e", 5+ic+ t+e t!23!$erF/ t!2!b-e i"c,me fr,m
/,#rce/ 5it+,#t t+e P+i-i33i"e/ t!2!b-e #"0er t+i/ Tit-e be!r/ t, +i/ e"tire t!2!b-e
i"c,me f,r t+e /!me t!2!b-e $e!r.
><? A0:#/tme"t/ ," P!$me"t ,f I"c#rre0 T!2e/ . If !ccr#e0 t!2e/ 5+e" 3!i0 0iffer
fr,m t+e !m,#"t/ c-!ime0 !/ cre0it/ b$ t+e t!23!$er, ,r if !"$ t!2 3!i0 i/ ref#"0e0
i" 5+,-e ,r i" 3!rt, t+e t!23!$er /+!-- ",tif$ t+e C,mmi//i,"er, 5+, /+!--
re0etermi"e t+e !m,#"t ,f t+e t!2 f,r t+e $e!r ,r $e!r/ !ffecte0, !"0 t+e !m,#"t ,f
t!2 0#e #3," /#c+ re0etermi"!ti,", if !"$, /+!-- be 3!i0 b$ t+e t!23!$er #3,"
",tice !"0 0em!"0 b$ t+e C,mmi//i,"er, ,r t+e !m,#"t ,f t!2 ,ver3!i0, if !"$,
/+!-- be cre0ite0 ,r ref#"0e0 t, t+e t!23!$er. I" t+e c!/e ,f /#c+ ! t!2 i"c#rre0 b#t
",t 3!i0, t+e C,mmi//i,"er !/ ! c,"0iti," 3rece0e"t t, t+e !--,5!"ce ,f t+i/ cre0it
m!$ re8#ire t+e t!23!$er t, 4ive ! b,"0 5it+ /#retie/ /!ti/f!ct,r$ t, !"0 t, be
!33r,ve0 b$ t+e C,mmi//i,"er i" /#c+ /#m !/ +e m!$ re8#ire, c,"0iti,"e0 #3,"
t+e 3!$me"t b$ t+e t!23!$er ,f !"$ !m,#"t ,f t!2 f,#"0 0#e #3," !"$ /#c+
re0etermi"!ti,". T+e b,"0 +erei" 3re/cribe0 /+!-- c,"t!i" /#c+ f#rt+er c,"0iti,"/
!/ t+e C,mmi//i,"er m!$ re8#ire.
>A? Je!r i" B+ic+ Cre0it T!9e" . T+e cre0it/ 3r,vi0e0 f,r i" )#b/ecti," >C?>;? ,f
t+i/ )ecti," m!$, !t t+e ,3ti," ,f t+e t!23!$er !"0 irre/3ective ,f t+e met+,0 ,f
!cc,#"ti"4 em3-,$e0 i" 9ee3i"4 +i/ b,,9/, be t!9e" i" t+e $e!r i" 5+ic+ t+e t!2e/
,f t+e f,rei4" c,#"tr$ 5ere i"c#rre0, /#b:ect, +,5ever, t, t+e c,"0iti,"/ 3re/cribe0
i" )#b/ecti," >C?><? ,f t+i/ )ecti,". If t+e t!23!$er e-ect/ t, t!9e /#c+ cre0it/ i"
t+e $e!r i" 5+ic+ t+e t!2e/ ,f t+e f,rei4" c,#"tr$ !ccr#e0, t+e cre0it/ f,r !--
/#b/e8#e"t $e!r/ /+!-- be t!9e" #3," t+e /!me b!/i/, !"0 ", 3,rti," ,f !"$ /#c+
t!2e/ /+!-- be !--,5e0 !/ ! 0e0#cti," i" t+e /!me ,r !"$ /#ccee0i"4 $e!r.
>7? Pr,,f ,f Cre0it/ . T+e cre0it/ 3r,vi0e0 i" )#b/ecti," >C?>;? +ere,f /+!-- be
!--,5e0 ,"-$ if t+e t!23!$er e/t!b-i/+e/ t, t+e /!ti/f!cti," ,f t+e C,mmi//i,"er t+e
f,--,5i"4=
>!? T+e t,t!- !m,#"t ,f i"c,me 0erive0 fr,m /,#rce/ 5it+,#t t+e P+i-i33i"e/7
>b? T+e !m,#"t ,f i"c,me 0erive0 fr,m e!c+ c,#"tr$, t+e t!2 3!i0 ,r i"c#rre0 t,
5+ic+ i/ c-!ime0 !/ ! cre0it #"0er /!i0 3!r!4r!3+, /#c+ !m,#"t t, be 0etermi"e0
#"0er r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce7 !"0
>c? A-- ,t+er i"f,rm!ti," "ece//!r$ f,r t+e verific!ti," !"0 c,m3#t!ti," ,f /#c+
cre0it/.
CASES DIGEST
7eductions from $ross Income
%ines and penalties paid for late payment of taxes are not deductible
7eductions from gross income are matters of legislative grace? what is not expressly
granted by Congress is withheld 'oreover, when acts are condemned by law and their
commission is made punishable by fines or forfeitures, to allow them to be deducted from
the wrongdoer(s gross income, reduces, and so in part defeats, the prescribed punishment
for the mandatory and timely payment of taxes
#ino $utierre6, et al vs Collector of Internal Revenue,
$R )o #3*/<1,, 'ay -., */+<
@hen distinction between :taxes: and :debts: are inconse5uential
@hile :taxes: and :debt: are distinguishable legal concepts, in certain cases, on account
of their nature, the distinction becomes inconse5uential This 5ualification is recogni6ed
even in the !nited &tates Thus, the term UdebtV is properly used in a comprehensive
sense as embracing not merely money due by contract, but whatever one is bound to
render to another, either for contract or the re5uirements of the law Although what is
involved in the 0rieto case was donor(s tax while the present suit pertains to interest paid
on the estate and inheritance tax, interpretation placed upon the law was predicated on
the congressional intent, not on the nature of the tax for which the interest was paid
Commissioner of Internal Revenue vs Carlos 0alanca, Ar,
$R )o #3*++-+, ;ctober -/, */++
>D? L,//e/ .
>1? I" &e"er!- . L,//e/ !ct#!--$ /#/t!i"e0 0#ri"4 t+e t!2!b-e $e!r !"0 ",t
c,m3e"/!te0 f,r b$ i"/#r!"ce ,r ,t+er f,rm/ ,f i"0em"it$ /+!-- be !--,5e0 !/
0e0#cti,"/=
>!? If i"c#rre0 i" tr!0e, 3r,fe//i," ,r b#/i"e//7
>b? Of 3r,3ert$ c,""ecte0 5it+ t+e tr!0e, b#/i"e// ,r 3r,fe//i,", if t+e -,// !ri/e/
fr,m fire/, /t,rm/, /+i35rec9, ,r ,t+er c!/#!-tie/, ,r fr,m r,bber$, t+eft ,r
embe66-eme"t.
T+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, i/ +ereb$
!#t+,ri6e0 t, 3r,m#-4!te r#-e/ !"0 re4#-!ti,"/ 3re/cribi"4, !m,"4 ,t+er t+i"4/, t+e
time !"0 m!""er b$ 5+ic+ t+e t!23!$er /+!-- /#bmit ! 0ec-!r!ti," ,f -,// /#/t!i"e0
fr,m c!/#!-t$ ,r fr,m r,bber$, t+eft ,r embe66-eme"t 0#ri"4 t+e t!2!b-e $e!r=
Pr,vi0e0, +,5ever, T+!t t+e time -imit t, be /, 3re/cribe0 i" t+e r#-e/ !"0
re4#-!ti,"/ /+!-- ",t be -e// t+!" t+irt$ >;C? 0!$/ ",r m,re t+!" "i"et$ >9C? 0!$/
fr,m t+e 0!te ,f 0i/c,ver$ ,f t+e c!/#!-t$ ,r r,bber$, t+eft ,r embe66-eme"t 4ivi"4
ri/e t, t+e -,//.
>c? N, -,// /+!-- be !--,5e0 !/ ! 0e0#cti," #"0er t+i/ )#b/ecti," if !t t+e time ,f
t+e fi-i"4 ,f t+e ret#r", /#c+ -,// +!/ bee" c-!ime0 !/ ! 0e0#cti," f,r e/t!te t!2
3#r3,/e/ i" t+e e/t!te t!2 ret#r".
>2? Pr,,f ,f L,// . I" t+e c!/e ,f ! ","re/i0e"t !-ie" i"0ivi0#!- ,r f,rei4"
c,r3,r!ti,", t+e -,//e/ 0e0#ctib-e /+!-- be t+,/e !ct#!--$ /#/t!i"e0 0#ri"4 t+e $e!r
i"c#rre0 i" b#/i"e//, tr!0e ,r e2erci/e ,f ! 3r,fe//i," c,"0#cte0 5it+i" t+e
P+i-i33i"e/, 5+e" /#c+ -,//e/ !re ",t c,m3e"/!te0 f,r b$ i"/#r!"ce ,r ,t+er f,rm/
,f i"0em"it$. T+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er, i/ +ereb$ !#t+,ri6e0 t, 3r,m#-4!te r#-e/ !"0 re4#-!ti,"/
3re/cribi"4, !m,"4 ,t+er t+i"4/, t+e time !"0 m!""er b$ 5+ic+ t+e t!23!$er /+!--
/#bmit ! 0ec-!r!ti," ,f -,// /#/t!i"e0 fr,m c!/#!-t$ ,r fr,m r,bber$, t+eft ,r
embe66-eme"t 0#ri"4 t+e t!2!b-e $e!r= Pr,vi0e0, T+!t t+e time t, be /, 3re/cribe0
i" t+e r#-e/ !"0 re4#-!ti,"/ /+!-- ",t be -e// t+!" t+irt$ >;C? 0!$/ ",r m,re t+!"
"i"et$ >9C? 0!$/ fr,m t+e 0!te ,f 0i/c,ver$ ,f t+e c!/#!-t$ ,r r,bber$, t+eft ,r
embe66-eme"t 4ivi"4 ri/e t, t+e -,//7 !"0
>;? Net O3er!ti"4 L,// C!rr$@,ver . T+e "et ,3er!ti"4 -,// ,f t+e b#/i"e// ,r
e"ter3ri/e f,r !"$ t!2!b-e $e!r imme0i!te-$ 3rece0i"4 t+e c#rre"t t!2!b-e $e!r,
5+ic+ +!0 ",t bee" 3revi,#/-$ ,ff/et !/ 0e0#cti," fr,m 4r,// i"c,me /+!-- be
c!rrie0 ,ver !/ ! 0e0#cti," fr,m 4r,// i"c,me f,r t+e "e2t t+ree >;? c,"/ec#tive
t!2!b-e $e!r/ imme0i!te-$ f,--,5i"4 t+e $e!r ,f /#c+ -,//= Pr,vi0e0, +,5ever, T+!t
!"$ "et -,// i"c#rre0 i" ! t!2!b-e $e!r 0#ri"4 5+ic+ t+e t!23!$er 5!/ e2em3t fr,m
i"c,me t!2 /+!-- ",t be !--,5e0 !/ ! 0e0#cti," #"0er t+i/ )#b/ecti,"= Pr,vi0e0,
f#rt+er, T+!t ! "et ,3er!ti"4 -,// c!rr$@,ver /+!-- be !--,5e0 ,"-$ if t+ere +!/ bee"
", /#b/t!"ti!- c+!"4e i" t+e ,5"er/+i3 ,f t+e b#/i"e// ,r e"ter3ri/e i" t+!t .
>i? N,t -e// t+!" /eve"t$@five 3erce"t >7<G? i" ",mi"!- v!-#e ,f ,#t/t!"0i"4 i//#e0
/+!re/, if t+e b#/i"e// i/ i" t+e "!me ,f ! c,r3,r!ti,", i/ +e-0 b$ ,r ," be+!-f ,f t+e
/!me 3er/,"/7 ,r
>ii? N,t -e// t+!" /eve"t$@five 3erce"t >7<G? ,f t+e 3!i0 #3 c!3it!- ,f t+e
c,r3,r!ti,", if t+e b#/i"e// i/ i" t+e "!me ,f ! c,r3,r!ti,", i/ +e-0 b$ ,r ," be+!-f
,f t+e /!me 3er/,"/.
*,r 3#r3,/e/ ,f t+i/ )#b/ecti,", t+e term F"et ,3er!ti"4 -,//F /+!-- me!" t+e e2ce//
,f !--,5!b-e 0e0#cti," ,ver 4r,// i"c,me ,f t+e b#/i"e// i" ! t!2!b-e $e!r=
Pr,vi0e0, T+!t f,r mi"e/ ,t+er t+!" ,i- !"0 4!/ 5e--/, ! "et ,3er!ti"4 -,// 5it+,#t
t+e be"efit ,f i"ce"tive/ 3r,vi0e0 f,r #"0er E2ec#tive Or0er N,. 22A, !/ !me"0e0,
,t+er5i/e 9",5" !/ t+e Om"ib#/ I"ve/tme"t/ C,0e ,f 1987, i"c#rre0 i" !"$ ,f t+e
fir/t te" >1C? $e!r/ ,f ,3er!ti," m!$ be c!rrie0 ,ver !/ ! 0e0#cti," fr,m t!2!b-e
i"c,me f,r t+e "e2t five ><? $e!r/ imme0i!te-$ f,--,5i"4 t+e $e!r ,f /#c+ -,//. T+e
e"tire !m,#"t ,f t+e -,// /+!-- be c!rrie0 ,ver t, t+e fir/t ,f t+e five ><? t!2!b-e
$e!r/ f,--,5i"4 t+e -,//, !"0 !"$ 3,rti," ,f /#c+ -,// 5+ic+ e2cee0/ t+e t!2!b-e
i"c,me ,f /#c+ fir/t $e!r /+!-- be 0e0#cte0 i" -i9e m!""er fr,m t+e t!2!b-e i"c,me
,f t+e "e2t rem!i"i"4 f,#r >4? $e!r/.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); *43.* August -,, -..*
Implementing &ection 14879819 of the )ational Internal Revenue Code of *//, Relative
to the Allowance of )et ;perating #oss Carry3;ver 8);#C;9 as a 7eduction from
$ross Income to govern the deduction from gross income of the )et ;perating #oss
Carry3;ver 8);#C;9 pursuant to &ection 14 879 819 of the Code, which providesC
:)et ;perating #oss Carry3;ver E The net operating loss of the business or enterprise
for any taxable year immediately preceding the current taxable year which had not been
previously offset as deduction from gross income shall be carried over as a deduction
from gross income for the next three 819 consecutive taxable years immediately following
the year of such lossC 0rovided, however, That any net loss incurred in a taxable year
during which the taxpayer was exempt from income tax shall not be allowed as a
deduction under this &ubsection 0rovided, further, That a net operating loss carry3over
shall be allowed only if there has been no substantial change in the ownership of the
business or enterprise in that E
8i9 )ot less than seventy percent 8,<Q9 in nominal value of outstanding issued shares
if the business is in the name of a corporation is held by or on behalf of the same
persons? or
8ii9 )ot less than seventy3five percent 8,<Q9 of the paid up capital of the corporation
if the business is in the name of a corporation, is held by or on behalf of the same
persons
%or purposes of this &ubsection the term (net operating loss( shall mean the excess of
allowable deduction over gross income of the business in a taxable year
>4? C!3it!- L,//e/ .
>!? Limit!ti," . L,//e/ fr,m /!-e/ ,r e2c+!"4e/ ,f c!3it!- !//et/ /+!-- be !--,5e0
,"-$ t, t+e e2te"t 3r,vi0e0 i" )ecti," ;9.
CASES DIGEST
Capital losses are deductible only to the extent of capital gains
Capital losses are allowed to be deducted only to the extent of capital gains, ie, gains
derived from the sale or exchange of capital assets, and not from any other income of the
taxpayer
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
><? L,//e/ *r,m B!/+ )!-e/ ,f )t,c9 ,r )ec#ritie/ . L,//e/ fr,m F5!/+ /!-e/F ,f
/t,c9 ,r /ec#ritie/ !/ 3r,vi0e0 i" )ecti," ;8.
>A? B!4eri"4 L,//e/ . L,//e/ fr,m 5!4eri"4 tr!"/!cti,"/ /+!-- be !--,5e0 ,"-$
t, t+e e2te"t ,f t+e 4!i"/ fr,m /#c+ tr!"/!cti,"/.
>7? Ab!"0,"me"t L,//e/ .
>!? I" t+e eve"t ! c,"tr!ct !re! 5+ere 3etr,-e#m ,3er!ti,"/ !re #"0ert!9e" i/
3!rti!--$ ,r 5+,--$ !b!"0,"e0, !-- !cc#m#-!te0 e23-,r!ti," !"0 0eve-,3me"t
e23e"0it#re/ 3ert!i"i"4 t+eret, /+!-- be !--,5e0 !/ ! 0e0#cti,"= Pr,vi0e0, T+!t
!cc#m#-!te0 e23e"0it#re/ i"c#rre0 i" t+!t !re! 3ri,r t, !"#!r$ 1, 1979 /+!-- be
!--,5e0 !/ ! 0e0#cti," ,"-$ fr,m !"$ i"c,me 0erive0 fr,m t+e /!me c,"tr!ct !re!.
I" !-- c!/e/, ",tice/ ,f !b!"0,"me"t /+!-- be fi-e0 5it+ t+e C,mmi//i,"er.
>b? I" c!/e ! 3r,0#ci"4 5e-- i/ /#b/e8#e"t-$ !b!"0,"e0, t+e #"!m,rti6e0 c,/t/
t+ere,f, !/ 5e-- !/ t+e #"0e3reci!te0 c,/t/ ,f e8#i3me"t 0irect-$ #/e0 t+erei", /+!--
be !--,5e0 !/ ! 0e0#cti," i" t+e $e!r /#c+ 5e--, e8#i3me"t ,r f!ci-it$ i/ !b!"0,"e0
b$ t+e c,"tr!ct,r= Pr,vi0e0, T+!t if /#c+ !b!"0,"e0 5e-- i/ ree"tere0 !"0
3r,0#cti," i/ re/#me0, ,r if /#c+ e8#i3me"t ,r f!ci-it$ i/ re/t,re0 i"t, /ervice, t+e
/!i0 c,/t/ /+!-- be i"c-#0e0 !/ 3!rt ,f 4r,// i"c,me i" t+e $e!r ,f re/#m3ti," ,r
re/t,r!ti," !"0 /+!-- be !m,rti6e0 ,r 0e3reci!te0, !/ t+e c!/e m!$ be.
>E? B!0 Debt/ .
>1? I" &e"er!-. . Debt/ 0#e t, t+e t!23!$er !ct#!--$ !/cert!i"e0 t, be 5,rt+-e//
!"0 c+!r4e0 ,ff 5it+i" t+e t!2!b-e $e!r e2ce3t t+,/e ",t c,""ecte0 5it+ 3r,fe//i,",
tr!0e ,r b#/i"e// !"0 t+,/e /#/t!i"e0 i" ! tr!"/!cti," e"tere0 i"t, bet5ee" 3!rtie/
me"ti,"e0 #"0er )ecti," ;A>B? ,f t+i/ C,0e= Pr,vi0e0, T+!t rec,ver$ ,f b!0 0ebt/
3revi,#/-$ !--,5e0 !/ 0e0#cti," i" t+e 3rece0i"4 $e!r/ /+!-- be i"c-#0e0 !/ 3!rt ,f
t+e 4r,// i"c,me i" t+e $e!r ,f rec,ver$ t, t+e e2te"t ,f t+e i"c,me t!2 be"efit ,f
/!i0 0e0#cti,".
CASES DIGEST
Re5uisites for deductibility of :bad debts:
%or debts to be considered as :worthless,: and thereby 5ualify as :bad debts: ma"ing
them deductible, the taxpayer should show that 8*9 there is a valid and subsisting debt?
8-9 the debt must be actually ascertained to be worthless and uncollectible during the
taxable year? 819 the debt must be charged off during the taxable year? and 849 the debt
must arise from the business or trade of the taxpayer Additionally, before a debt can be
considered worthless, the taxpayer must also show that it is indeed uncollectible even in
the future
0hilippine Refining Company vs Court of Appeals, et al, $R
)o **2,/4, 'ay 2, *//+
Criteria for ascertaining worthlessness of debts
The re5uirement of ascertainment of worthlessness re5uires proof of two factsC 8*9 that
the taxpayer did in fact ascertain the debt to be worthless, in the year for which the
deduction is sought? and 8-9 that, in so doing, he acted in good faith
Collector of Internal Revenue vs $oodrich International Rubber Co, $R )o
#3---+<, 7ecember --, */+,
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); -<3.- )ovember */, -..-
Implementing &ection 148=9 of the Tax Code of *//, on the Re5uirements for
7eductibility of Bad 7ebts from $ross Income on the re5uirements for deductibility of
bad debts from the gross income of a corporation, including ban"s and insurance
companies, or an individual, estate and trust that is engaged in trade or business or a
professional engaged in the practice of his profession
Re5uisites for valid deduction of bad debts from gross income E The re5uisites for
deductibility of bad debts areC
8*9 There must be an existing indebtedness due to the taxpayer which must be valid
and legally demandable?
8-9 The same must be connected with the taxpayer(s trade, business or practice of
profession?
819 The same must not be sustained in a transaction entered into between related
parties enumerated under &ec 1+8B9 of the Tax Code of *//,?
849 The same must be actually charged off the boo"s of accounts of the taxpayer as of
the end of the taxable year? and
8<9 The same must be actually ascertained to be worthless and uncollectible as of the
end of the taxable year
:Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to
demonstrate with reasonable degree of certainty the uncollectibility of the debt The
Commissioner of Internal Revenue will consider all pertinent evidence, including the
value of the collateral, if any, securing the debt and the financial condition of the debtor
in determining whether a debt is worthless, or the assigning of the case for collection to
an independent collection lawyer who is not under the employ of the taxpayer and who
shall report on the legal obstacle and the virtual impossibility of collecting the same from
the debtor and who shall issue a statement under oath showing the propriety of the
deductions thereon made for alleged bad debts Thus, where the surrounding
circumstances indicate that a debt is worthless and uncollectible and that legal action to
enforce payment would in all probability not result in the satisfaction of execution on a
judgment, a showing of those facts will be sufficient evidence of the worthlessness of the
debt for the purpose of deduction
In the case of ban"s, the Commissioner of Internal Revenue shall determine whether or
not bad debts are worthless and uncollectible in the manner provided in the immediately
preceding paragraph @ithout prejudice to the Commissioner(s determination of the
worthlessness and uncollectibility of debts, the taxpayer shall submit a
Bang"o&entralng0ilipinasB'onetary Board written approval of the writing off of the
indebtedness from the ban"s( boo"s of accounts at the end of the taxable year
:Also, in no case may a receivable from an insurance or surety company be written3off
from the taxpayer(s boo"s and claimed as bad debts deduction unless such company has
been declared closed due to insolvency or for any such similar reason by the Insurance
Commissioner:
>2? )ec#ritie/ Bec,mi"4 B,rt+-e// . If /ec#ritie/, !/ 0efi"e0 i" )ecti," 22>T?, !re
!/cert!i"e0 t, be 5,rt+-e// !"0 c+!r4e0 ,ff 5it+i" t+e t!2!b-e $e!r !"0 !re c!3it!-
!//et/, t+e -,// re/#-ti"4 t+erefr,m /+!--, i" t+e c!/e ,f ! t!23!$er ,t+er t+!" ! b!"9
,r tr#/t c,m3!"$ i"c,r3,r!te0 #"0er t+e -!5/ ,f t+e P+i-i33i"e/ ! /#b/t!"ti!- 3!rt
,f 5+,/e b#/i"e// i/ t+e recei3t ,f 0e3,/it/, f,r t+e 3#r3,/e ,f t+i/ Tit-e, be
c,"/i0ere0 !/ ! -,// fr,m t+e /!-e ,r e2c+!"4e, ," t+e -!/t 0!$ ,f /#c+ t!2!b-e $e!r,
,f c!3it!- !//et/.
Re5uisites for capital gain or capital loss on securities transactions
&ecurities Becoming @orthless E If securities as defined in &ection --8T9 become
worthless during the taxable year and are capital assets, the loss resulting therefrom
shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets
The loss sustained by the holder of the securities, which are capital assets 8to him9, is to
be treated as a capital loss as if incurred from a sale or exchange transaction A capital
gain or a capital loss normally re5uires the concurrence of two conditions for it to resultC
8*9 There is a sale or exchange? and 8-9 the thing sold or exchanged is a capital asset
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
@hen securities become worthless, the law deems the loss as :a loss from the sale or
exchange of capital assets:
@hen securities become worthless, there is strictly no sale or exchange but the law
deems the loss anyway to be :a loss from the sale or exchange of capital assets: A
similar "ind of treatment is given by the )IRC on the retirement of certificates of
indebtedness with interest coupons or in registered form, short sales and options to buy
or sell property where no sale or exchange strictly exists In these cases, the )IRC
dispenses, in effect, with the standard re5uirement of a sale or exchange for the
application of the capital gain and loss provisions of the code
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
>*? De3reci!ti," .
>1? &e"er!- R#-e . T+ere /+!-- be !--,5e0 !/ ! 0e3reci!ti," 0e0#cti," !
re!/,"!b-e !--,5!"ce f,r t+e e2+!#/ti,", 5e!r !"0 te!r >i"c-#0i"4 re!/,"!b-e
!--,5!"ce f,r ,b/,-e/ce"ce? ,f 3r,3ert$ #/e0 i" t+e tr!0e ,r b#/i"e//. I" t+e c!/e
,f 3r,3ert$ +e-0 b$ ,"e 3er/," f,r -ife 5it+ rem!i"0er t, !",t+er 3er/,", t+e
0e0#cti," /+!-- be c,m3#te0 !/ if t+e -ife te"!"t 5ere t+e !b/,-#te ,5"er ,f t+e
3r,3ert$ !"0 /+!-- be !--,5e0 t, t+e -ife te"!"t. I" t+e c!/e ,f 3r,3ert$ +e-0 i" tr#/t,
t+e !--,5!b-e 0e0#cti," /+!-- be !33,rti,"e0 bet5ee" t+e i"c,me be"efici!rie/ !"0
t+e tr#/tee/ i" !cc,r0!"ce 5it+ t+e 3erti"e"t 3r,vi/i,"/ ,f t+e i"/tr#me"t cre!ti"4
t+e tr#/t, ,r i" t+e !b/e"ce ,f /#c+ 3r,vi/i,"/, ," t+e b!/i/ ,f t+e tr#/t i"c,me
!--,5!b-e t, e!c+.
>2? U/e ,f Cert!i" %et+,0/ !"0 R!te/ . T+e term Fre!/,"!b-e !--,5!"ceF !/ #/e0
i" t+e 3rece0i"4 3!r!4r!3+ /+!-- i"c-#0e, b#t ",t -imite0 t,, !" !--,5!"ce c,m3#te0
i" !cc,r0!"ce 5it+ r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce,
#3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, #"0er !"$ ,f t+e f,--,5i"4 met+,0/=
>!? T+e /tr!i4+t@-i"e met+,07
>b? Dec-i"i"4@b!-!"ce met+,0, #/i"4 ! r!te ",t e2cee0i"4 t5ice t+e r!te 5+ic+
5,#-0 +!ve bee" #/e0 +!0 t+e !""#!- !--,5!"ce bee" c,m3#te0 #"0er t+e met+,0
0e/cribe0 i" )#b/ecti," >*?>1?7
>c? T+e /#m@,f@t+e@$e!r/@0i4it met+,07 !"0
>0? A"$ ,t+er met+,0 5+ic+ m!$ be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er.
>;? A4reeme"t !/ t, U/ef#- Life ," B+ic+ De3reci!ti," R!te i/ B!/e0 . B+ere
#"0er r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, t+e t!23!$er !"0 t+e C,mmi//i,"er +!ve
e"tere0 i"t, !" !4reeme"t i" 5riti"4 /3ecific!--$ 0e!-i"4 5it+ t+e #/ef#- -ife !"0
r!te ,f 0e3reci!ti," ,f !"$ 3r,3ert$, t+e r!te /, !4ree0 #3," /+!-- be bi"0i"4 ,"
b,t+ t+e t!23!$er !"0 t+e N!ti,"!- &,ver"me"t i" t+e !b/e"ce ,f f!ct/ !"0
circ#m/t!"ce/ ",t t!9e" i"t, c,"/i0er!ti," 0#ri"4 t+e !0,3ti," ,f /#c+ !4reeme"t.
T+e re/3,"/ibi-it$ ,f e/t!b-i/+i"4 t+e e2i/te"ce ,f /#c+ f!ct/ !"0 circ#m/t!"ce/
/+!-- re/t 5it+ t+e 3!rt$ i"iti!ti"4 t+e m,0ific!ti,". A"$ c+!"4e i" t+e !4ree0 r!te
!"0 #/ef#- -ife ,f t+e 0e3reci!b-e 3r,3ert$ !/ /3ecifie0 i" t+e !4reeme"t /+!-- ",t
be effective f,r t!2!b-e $e!r/ 3ri,r t, t+e t!2!b-e $e!r i" 5+ic+ ",tice i" 5riti"4 b$
certifie0 m!i- ,r re4i/tere0 m!i- i/ /erve0 b$ t+e 3!rt$ i"iti!ti"4 /#c+ c+!"4e t, t+e
,t+er 3!rt$ t, t+e !4reeme"t=
Pr,vi0e0, +,5ever, T+!t 5+ere t+e t!23!$er +!/ !0,3te0 /#c+ #/ef#- -ife !"0
0e3reci!ti," r!te f,r !"$ 0e3reci!b-e !//et !"0 c-!ime0 t+e 0e3reci!ti," e23e"/e/
!/ 0e0#cti," fr,m +i/ 4r,// i"c,me, 5it+,#t !"$ 5ritte" ,b:ecti," ," t+e 3!rt ,f
t+e C,mmi//i,"er ,r +i/ 0#-$ !#t+,ri6e0 re3re/e"t!tive, t+e !f,re/!i0 #/ef#- -ife
!"0 0e3reci!ti," r!te /, !0,3te0 b$ t+e t!23!$er f,r t+e !f,re/!i0 0e3reci!b-e !//et
/+!-- be c,"/i0ere0 bi"0i"4 f,r 3#r3,/e/ ,f t+i/ )#b/ecti,".
CASES DIGEST
7efinition of :depreciation:
7epreciation is the gradual diminution in the useful value of tangible property resulting
from wear and tear and normal obsolescence The term is also applied to amorti6ation of
the value of intangible assets, the use of which in the trade or business is definitely
limited in duration
Basilan =states, Inc vs Commissioner of Internal Revenue, et al, $R )o #3--4/-,
&eptember <, */+,
7epreciation commences with the ac5uisition of the property
7epreciation commences with the ac5uisition of the property and its owner is not bound
to see his property gradually waste, without ma"ing provision out of earnings for its
replacement It is entitled to see that from earnings the value of the property invested is
"ept unimpaired, so that at the end of any given term of years, the original investment
remains as it was in the beginning It is not only the right of a company to ma"e such a
provision, but it is its duty to its bond and stoc"holders, and, in the case of a public
service corporation, at least, its plain duty to the public Accordingly, the law permits the
taxpayer to recover gradually his capital investment in wasting assets free from income
tax
Basilan =states, Inc vs Commissioner of Internal Revenue, et al,
$R )o #3--4/-, &eptember <, */+,
The law does not authori6e depreciation of an asset beyond its ac5uisition cost
The income tax law does not authori6e the depreciation of an asset beyond its ac5uisition
cost Dence, a deduction over and above such cost cannot be claimed and allowed The
reason is that deductions from gross income are privileges, not matters of right They are
not created by implication but upon clear expression in the law 'oreover, the recovery,
free of income tax, of an amount more than the invested capital in an asset will transgress
the underlying purpose of a depreciation allowance %or then what the taxpayer would
recover will be, not only the ac5uisition cost, but also some profit Recovery in due time
thru depreciation of investment made is the philosophy behind depreciation allowance?
the idea of profit on the investment made has never been the underlying reason for the
allowance of a deduction for depreciation
Basilan =states, Inc vs Commissioner of Internal Revenue, et al,
$R )o #3--4/-, &eptember <, */+,
7epreciation of building is based on construction cost, not on its assessed value
@here a building ac5uired by a corporation from the vendors in exchange for shares of
its stoc"s is revalued on the basis of its construction cost, which revaluation imports an
obligation of the corporation to pay the vendors the difference between the assessed
value and the revalued construction cost, it is held that the depreciation logically has to
be on the basis of the construction cost and not on the assessed value of the building,
since the corporate investment would ultimately be the construction cost
Commissioner of Internal Revenue vs 0riscila =state, Inc, et al,
$R )o #3*2-2-, 'ay -/, */+4
%indings of tax court on depreciation of assets should not be disturbed
7epreciation is a 5uestion of fact, and where the appellant does not claim that the tax
court, in applying certain rates and basis to arrive at the allowed amounts of
depreciation, was arbitrary or had abused its discretion, the findings of the tax court on
the depreciation of assets should not be disturbed
Commissioner of Internal Revenue vs 0riscila =state, Inc, et al,
$R )o #3*2-2-, 'ay -/, */+4
7epreciation of residence not used in trade or business is not deductible
The claim for depreciation of taxpayer(s residence is not deductible where such residence
was not used in his trade or business A taxpayer may deduct from gross income
reasonable allowance for deterioration of property arising out of its use or employment
in business or trade
#ino $utierre6, et al vs Collector of Internal Revenue,
$R )o #3*/<1,, 'ay -., */+<
@hen purchase of domestic goods and services considered as :capital goods or
properties:
%or petitioner(s purchases of domestic goods and services to be considered as :capital
goods or properties,: three re5uisites must concur %irst, useful life of goods or
properties must exceed one year? second, said goods or properties are treated as
depreciable assets under &ection 14 8f9 and? third, goods or properties must be used
directly or indirectly in the production or sale of taxable goods and services %rom
petitioner(s evidence, the account vouchers specifically indicate that the disallowed
purchases were recorded under inventory accounts, instead of depreciable accounts That
petitioner failed to indicate under its fixed assets or depreciable assets account, goods
and services allegedly purchased pursuant to the rehabilitation and maintenance of
'alaya 0ower 0lant Complex, militates against its claim for refund As correctly found
by the CTA, the goods or properties must be recorded and treated as depreciable assets
under &ection 14 8%9 of the )IRC
Fepco 0hil Corp vs Commissioner of Internal Revenue, $R
)o *,/1<+, 7ecember *4, -../
>4? De3reci!ti," ,f Pr,3ertie/ U/e0 i" Petr,-e#m O3er!ti,"/ . A" !--,5!"ce f,r
0e3reci!ti," i" re/3ect ,f !-- 3r,3ertie/ 0irect-$ re-!te0 t, 3r,0#cti," ,f 3etr,-e#m
i"iti!--$ 3-!ce0 i" /ervice i" ! t!2!b-e $e!r /+!-- be !--,5e0 #"0er t+e /tr!i4+t@-i"e
,r 0ec-i"i"4@b!-!"ce met+,0 ,f 0e3reci!ti," !t t+e ,3ti," ,f t+e /ervice c,"tr!ct,r.
',5ever, if t+e /ervice c,"tr!ct,r i"iti!--$ e-ect/ t+e 0ec-i"i"4@b!-!"ce met+,0, it
m!$ !t !"$ /#b/e8#e"t 0!te, /+ift t, t+e /tr!i4+t@-i"e met+,0.
T+e #/ef#- -ife ,f 3r,3ertie/ #/e0 i" ,r re-!te0 t, 3r,0#cti," ,f 3etr,-e#m /+!-- be
te" >1C? $e!r/ ,r /#c+ /+,rter -ife !/ m!$ be 3ermitte0 b$ t+e C,mmi//i,"er.
Pr,3ertie/ ",t #/e0 0irect-$ i" t+e 3r,0#cti," ,f 3etr,-e#m /+!-- be 0e3reci!te0
#"0er t+e /tr!i4+t@-i"e met+,0 ," t+e b!/i/ ,f !" e/tim!te0 #/ef#- -ife ,f five ><?
$e!r/.
><? De3reci!ti," ,f Pr,3ertie/ U/e0 i" %i"i"4 O3er!ti,"/ . A" !--,5!"ce f,r
0e3reci!ti," i" re/3ect ,f !-- 3r,3ertie/ #/e0 i" mi"i"4 ,3er!ti,"/ ,t+er t+!"
3etr,-e#m ,3er!ti,"/, /+!-- be c,m3#te0 !/ f,--,5/=
>!? At t+e ",rm!- r!te ,f 0e3reci!ti," if t+e e23ecte0 -ife i/ te" >1C? $e!r/ ,r -e//7
,r
>b? De3reci!te0 ,ver !"$ "#mber ,f $e!r/ bet5ee" five ><? $e!r/ !"0 t+e e23ecte0
-ife if t+e -!tter i/ m,re t+!" te" >1C? $e!r/, !"0 t+e 0e3reci!ti," t+ere," !--,5e0 !/
0e0#cti," fr,m t!2!b-e i"c,me= Pr,vi0e0, T+!t t+e c,"tr!ct,r ",tifie/ t+e
C,mmi//i,"er !t t+e be4i""i"4 ,f t+e 0e3reci!ti," 3eri,0 5+ic+ 0e3reci!ti," r!te
!--,5e0 b$ t+i/ )ecti," 5i-- be #/e0.
>A? De3reci!ti," De0#ctib-e b$ N,"re/i0e"t A-ie"/ E"4!4e0 i" Tr!0e ,r B#/i"e//
,r Re/i0e"t *,rei4" C,r3,r!ti,"/ . I" t+e c!/e ,f ! ","re/i0e"t !-ie" i"0ivi0#!-
e"4!4e0 i" tr!0e ,r b#/i"e// ,r re/i0e"t f,rei4" c,r3,r!ti,", ! re!/,"!b-e
!--,5!"ce f,r t+e 0eteri,r!ti," ,f 3r,3ert$ !ri/i"4 ,#t ,f it/ #/e ,r em3-,$me"t ,r
it/ ","@#/e i" t+e b#/i"e//, tr!0e ,r 3r,fe//i," /+!-- be 3ermitte0 ,"-$ 5+e" /#c+
3r,3ert$ i/ -,c!te0 i" t+e P+i-i33i"e/.
>&? De3-eti," ,f Oi- !"0 &!/ Be--/ !"0 %i"e/ .
>1? I" &e"er!- . I" t+e c!/e ,f ,i- !"0 4!/ 5e--/ ,r mi"e/, ! re!/,"!b-e !--,5!"ce
f,r 0e3-eti," ,r !m,rti6!ti," c,m3#te0 i" !cc,r0!"ce 5it+ t+e c,/t@0e3-eti,"
met+,0 /+!-- be 4r!"te0 #"0er r#-e/ !"0 re4#-!ti,"/ t, be 3re/cribe0 b$ t+e
)ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er= Pr,vi0e0, T+!t
5+e" t+e !--,5!"ce f,r 0e3-eti," /+!-- e8#!- t+e c!3it!- i"ve/te0 ", f#rt+er
!--,5!"ce /+!-- be 4r!"te0= Pr,vi0e0, f#rt+er, T+!t !fter 3r,0#cti," i" c,mmerci!-
8#!"titie/ +!/ c,mme"ce0, cert!i" i"t!"4ib-e e23-,r!ti," !"0 0eve-,3me"t 0ri--i"4
c,/t/= >!? /+!-- be 0e0#ctib-e i" t+e $e!r i"c#rre0 if /#c+ e23e"0it#re/ !re i"c#rre0
f,r ","@3r,0#ci"4 5e--/ !"0D,r mi"e/, ,r >b? /+!-- be 0e0#ctib-e i" f#-- i" t+e $e!r
3!i0 ,r i"c#rre0 ,r, !t t+e e-ecti," ,f t+e t!23!$er, m!$ be c!3it!-i6e0 !"0
!m,rti6e0 if /#c+ e23e"0it#re/ i"c#rre0 !re f,r 3r,0#ci"4 5e--/ !"0D,r mi"e/ i" t+e
/!me c,"tr!ct !re!.
I"t!"4ib-e c,/t/ i" 3etr,-e#m ,3er!ti,"/F refer/ t, !"$ c,/t i"c#rre0 i" 3etr,-e#m
,3er!ti,"/ 5+ic+ i" it/e-f +!/ ", /!-v!4e v!-#e !"0 5+ic+ i/ i"ci0e"t!- t, !"0
"ece//!r$ f,r t+e 0ri--i"4 ,f 5e--/ !"0 3re3!r!ti," ,f 5e--/ f,r t+e 3r,0#cti," ,f
3etr,-e#m= Pr,vi0e0, T+!t /!i0 c,/t/ /+!-- ",t 3ert!i" t, t+e !c8#i/iti," ,r
im3r,veme"t ,f 3r,3ert$ ,f ! c+!r!cter /#b:ect t, t+e !--,5!"ce f,r 0e3reci!ti,"
e2ce3t t+!t t+e !--,5!"ce/ f,r 0e3reci!ti," ," /#c+ 3r,3ert$ /+!-- be 0e0#ctib-e
#"0er t+i/ )#b/ecti,".
A"$ i"t!"4ib-e e23-,r!ti,", 0ri--i"4 !"0 0eve-,3me"t e23e"/e/ !--,5e0 !/ !
0e0#cti," i" c,m3#ti"4 t!2!b-e i"c,me 0#ri"4 t+e $e!r /+!-- ",t be t!9e" i"t,
c,"/i0er!ti," i" c,m3#ti"4 t+e !0:#/te0 c,/t b!/i/ f,r t+e 3#r3,/e ,f c,m3#ti"4
!--,5!b-e c,/t 0e3-eti,".
>2? E-ecti," t, De0#ct E23-,r!ti," !"0 Deve-,3me"t E23e"0it#re/ . I"
c,m3#ti"4 t!2!b-e i"c,me fr,m mi"i"4 ,3er!ti,"/, t+e t!23!$er m!$, !t +i/ ,3ti,",
0e0#ct e23-,r!ti," !"0 0eve-,3me"t e23e"0it#re/ !cc#m#-!te0 !/ c,/t ,r !0:#/te0
b!/i/ f,r c,/t 0e3-eti," !/ ,f 0!te ,f 3r,/3ecti"4, !/ 5e-- !/ e23-,r!ti," !"0
0eve-,3me"t e23e"0it#re/ 3!i0 ,r i"c#rre0 0#ri"4 t+e t!2!b-e $e!r= Pr,vi0e0, T+!t
t+e t,t!- !m,#"t 0e0#ctib-e f,r e23-,r!ti," !"0 0eve-,3me"t e23e"0it#re/ /+!-- ",t
e2cee0 t5e"t$@five 3erce"t >2<G? ,f t+e "et i"c,me fr,m mi"i"4 ,3er!ti,"/
c,m3#te0 5it+,#t t+e be"efit ,f !"$ t!2 i"ce"tive/ #"0er e2i/ti"4 -!5/. T+e !ct#!-
e23-,r!ti," !"0 0eve-,3me"t e23e"0it#re/ mi"#/ t5e"t$@five 3erce"t >2<G? ,f t+e
"et i"c,me fr,m mi"i"4 /+!-- be c!rrie0 f,r5!r0 t, t+e /#ccee0i"4 $e!r/ #"ti- f#--$
0e0#cte0.
T+e e-ecti," b$ t+e t!23!$er t, 0e0#ct t+e e23-,r!ti," !"0 0eve-,3me"t
e23e"0it#re/ i/ irrev,c!b-e !"0 /+!-- be bi"0i"4 i" /#ccee0i"4 t!2!b-e $e!r/.
1FNet i"c,me fr,m mi"i"4 ,3er!ti,"/F, !/ #/e0 i" t+i/ )#b/ecti,", /+!-- me!" 4r,//
i"c,me fr,m ,3er!ti,"/ -e// F!--,5!b-e 0e0#cti,"/F 5+ic+ !re "ece//!r$ ,r re-!te0
t, mi"i"4 ,3er!ti,"/. FA--,5!b-e 0e0#cti,"/F /+!-- i"c-#0e mi"i"4, mi--i"4 !"0
m!r9eti"4 e23e"/e/, !"0 0e3reci!ti," ,f 3r,3ertie/ 0irect-$ #/e0 i" t+e mi"i"4
,3er!ti,"/. T+i/ 3!r!4r!3+ /+!-- ",t !33-$ t, e23e"0it#re/ f,r t+e !c8#i/iti," ,r
im3r,veme"t ,f 3r,3ert$ ,f ! c+!r!cter 5+ic+ i/ /#b:ect t, t+e !--,5!"ce f,r
0e3reci!ti,".
I" ", c!/e /+!-- t+i/ 3!r!4r!3+ !33-$ 5it+ re/3ect t, !m,#"t/ 3!i0 ,r i"c#rre0 f,r
t+e e23-,r!ti," !"0 0eve-,3me"t ,f ,i- !"0 4!/.
T+e term Fe23-,r!ti," e23e"0it#re/F me!"/ e23e"0it#re/ 3!i0 ,r i"c#rre0 f,r t+e
3#r3,/e ,f !/cert!i"i"4 t+e e2i/te"ce, -,c!ti,", e2te"t, ,r 8#!-it$ ,f !"$ 0e3,/it ,f
,re ,r ,t+er mi"er!-, !"0 3!i0 ,r i"c#rre0 bef,re t+e be4i""i"4 ,f t+e 0eve-,3me"t
/t!4e ,f t+e mi"e ,r 0e3,/it.
T+e term F0eve-,3me"t e23e"0it#re/F me!"/ e23e"0it#re/ 3!i0 ,r i"c#rre0 0#ri"4
t+e 0eve-,3me"t /t!4e ,f t+e mi"e ,r ,t+er "!t#r!- 0e3,/it/. T+e 0eve-,3me"t
/t!4e ,f ! mi"e ,r ,t+er "!t#r!- 0e3,/it /+!-- be4i" !t t+e time 5+e" 0e3,/it/ ,f ,re
,r ,t+er mi"er!-/ !re /+,5" t, e2i/t i" /#fficie"t c,mmerci!- 8#!"tit$ !"0 8#!-it$
!"0 /+!-- e"0 #3," c,mme"ceme"t ,f !ct#!- c,mmerci!- e2tr!cti,".
>;? De3-eti," ,f Oi- !"0 &!/ Be--/ !"0 %i"e/ De0#ctib-e b$ ! N,"re/i0e"t A-ie"
I"0ivi0#!- ,r *,rei4" C,r3,r!ti,". . I" t+e c!/e ,f ! ","re/i0e"t !-ie" i"0ivi0#!-
e"4!4e0 i" tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/ ,r ! re/i0e"t f,rei4" c,r3,r!ti,",
!--,5!"ce f,r 0e3-eti," ,f ,i- !"0 4!/ 5e--/ ,r mi"e/ #"0er 3!r!4r!3+ >1? ,f t+i/
)#b/ecti," /+!-- be !#t+,ri6e0 ,"-$ i" re/3ect t, ,i- !"0 4!/ 5e--/ ,r mi"e/ -,c!te0
5it+i" t+e P+i-i33i"e/.
CASES DIGEST
The burden of justifying the allowance of deduction based on depletion rests on taxpayer
As an income tax concept, depletion is wholly a creation of the statute E :solely a matter
of legislative grace: Dence, the taxpayer has the burden of justifying the allowance of
any deduction claimed As in connection with all other tax controversies, the burden of
proof to show that a disallowance of depletion by the Commissioner is incorrect or that
an allowance made is inade5uate is upon the taxpayer, and this is true with respect to the
value of the property constituting the basis of the deduction This burden3of3proof rule
has been fre5uently applied and a value claimed has been disallowed for lac" of
evidence
Consolidated 'ines, Inc vs Court of Tax Appeals, et al, $R
)os #3*2241 R *2244, August -/, */,4
7ifferences between :depletion: and :depreciation:
Both depletion and depreciation are predicated on the same basic premise of avoiding a
tax on capital The allowance for depletion is based on the theory that the extraction of
minerals gradually exhausts the capital investment in the mineral deposit The purpose of
the depletion deduction is to permit the owner of a capital interest in mineral in place to
ma"e a tax3free recovery of that depleting capital asset A depletion is based upon the
concept of the exhaustion of a natural resource whereas depreciation is based upon the
concept of the exhaustion of the property, not otherwise a natural resource, used in a
trade or business or held for the production of income Thus, depletion and depreciation
are made applicable to different types of assets And a taxpayer may not deduct that
which the Code allows as a deduction of another
Consolidated 'ines, Inc vs Court of Tax Appeals, et al,
$R )os #3*2241 R *2244, August -/, */,4
>'? C+!rit!b-e !"0 Ot+er C,"trib#ti,"/ .
>1? I" &e"er!- . C,"trib#ti,"/ ,r 4ift/ !ct#!--$ 3!i0 ,r m!0e 5it+i" t+e t!2!b-e
$e!r t,, ,r f,r t+e #/e ,f t+e &,ver"me"t ,f t+e P+i-i33i"e/ ,r !"$ ,f it/ !4e"cie/
,r !"$ 3,-itic!- /#b0ivi/i," t+ere,f e2c-#/ive-$ f,r 3#b-ic 3#r3,/e/, ,r t,
!ccre0ite0 0,me/tic c,r3,r!ti,"/ ,r !//,ci!ti,"/ ,r4!"i6e0 !"0 ,3er!te0
e2c-#/ive-$ f,r re-i4i,#/, c+!rit!b-e, /cie"tific, $,#t+ !"0 /3,rt/ 0eve-,3me"t,
c#-t#r!- ,r e0#c!ti,"!- 3#r3,/e/ ,r f,r t+e re+!bi-it!ti," ,f veter!"/, ,r t, /,ci!-
5e-f!re i"/tit#ti,"/, ,r t, ","4,ver"me"t ,r4!"i6!ti,"/, i" !cc,r0!"ce 5it+ r#-e/
!"0 re4#-!ti,"/ 3r,m#-4!te0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f
t+e C,mmi//i,"er, ", 3!rt ,f t+e "et i"c,me ,f 5+ic+ i"#re/ t, t+e be"efit ,f !"$
3riv!te /t,c9+,-0er ,r i"0ivi0#!- i" !" !m,#"t ",t i" e2ce// ,f te" 3erce"t >1CG?
i" t+e c!/e ,f !" i"0ivi0#!-, !"0 five 3erce"t ><G? i" t+e c!/e ,f ! c,r3,r!ti,", ,f
t+e t!23!$erF/ t!2!b-e i"c,me 0erive0 fr,m tr!0e, b#/i"e// ,r 3r,fe//i," !/
c,m3#te0 5it+,#t t+e be"efit ,f t+i/ !"0 t+e f,--,5i"4 /#b3!r!4r!3+/.
>2? C,"trib#ti,"/ De0#ctib-e i" *#-- . N,t5it+/t!"0i"4 t+e 3r,vi/i,"/ ,f t+e
3rece0i"4 /#b3!r!4r!3+, 0,"!ti,"/ t, t+e f,--,5i"4 i"/tit#ti,"/ ,r e"titie/ /+!-- be
0e0#ctib-e i" f#--=
>!? D,"!ti,"/ t, t+e &,ver"me"t . D,"!ti,"/ t, t+e &,ver"me"t ,f t+e
P+i-i33i"e/ ,r t, !"$ ,f it/ !4e"cie/ ,r 3,-itic!- /#b0ivi/i,"/, i"c-#0i"4 f#--$@
,5"e0 4,ver"me"t c,r3,r!ti,"/, e2c-#/ive-$ t, fi"!"ce, t, 3r,vi0e f,r, ,r t, be
#/e0 i" #"0ert!9i"4 3ri,rit$ !ctivitie/ i" e0#c!ti,", +e!-t+, $,#t+ !"0 /3,rt/
0eve-,3me"t, +#m!" /ett-eme"t/, /cie"ce !"0 c#-t#re, !"0 i" ec,",mic
0eve-,3me"t !cc,r0i"4 t, ! N!ti,"!- Pri,rit$ P-!" 0etermi"e0 b$ t+e N!ti,"!-
Ec,",mic !"0 Deve-,3me"t A#t+,rit$ >NEDA?, i" c,"/#-t!ti," 5it+ !33r,3ri!te
4,ver"me"t !4e"cie/, i"c-#0i"4 it/ re4i,"!- 0eve-,3me"t c,#"ci-/ !"0 3riv!te
3+i-!"t+r,3ic 3er/,"/ !"0 i"/tit#ti,"/= Pr,vi0e0, T+!t !"$ 0,"!ti," 5+ic+ i/ m!0e
t, t+e &,ver"me"t ,r t, !"$ ,f it/ !4e"cie/ ,r 3,-itic!- /#b0ivi/i,"/ ",t i"
!cc,r0!"ce 5it+ t+e /!i0 !""#!- 3ri,rit$ 3-!" /+!-- be /#b:ect t, t+e -imit!ti,"/
3re/cribe0 i" 3!r!4r!3+ >1? ,f t+i/ )#b/ecti,"7
>b? D,"!ti,"/ t, Cert!i" *,rei4" I"/tit#ti,"/ ,r I"ter"!ti,"!- Or4!"i6!ti,"/ .
D,"!ti,"/ t, f,rei4" i"/tit#ti,"/ ,r i"ter"!ti,"!- ,r4!"i6!ti,"/ 5+ic+ !re f#--$
0e0#ctib-e i" 3#r/#!"ce ,f ,r i" c,m3-i!"ce 5it+ !4reeme"t/, tre!tie/, ,r
c,mmitme"t/ e"tere0 b$ t+e &,ver"me"t ,f t+e P+i-i33i"e/ !"0 t+e f,rei4"
i"/tit#ti,"/ ,r i"ter"!ti,"!- ,r4!"i6!ti,"/ ,r i" 3#r/#!"ce ,f /3eci!- -!5/7
>c? D,"!ti,"/ t, Accre0ite0 N,"4,ver"me"t Or4!"i6!ti,"/ . T+e term
F","4,ver"me"t ,r4!"i6!ti,"F me!"/ ! ","3r,fit 0,me/tic c,r3,r!ti,"=
>1? Or4!"i6e0 !"0 ,3er!te0 e2c-#/ive-$ f,r /cie"tific, re/e!rc+, e0#c!ti,"!-,
c+!r!cter@b#i-0i"4 !"0 $,#t+ !"0 /3,rt/ 0eve-,3me"t, +e!-t+, /,ci!- 5e-f!re,
c#-t#r!- ,r c+!rit!b-e 3#r3,/e/, ,r ! c,mbi"!ti," t+ere,f, ", 3!rt ,f t+e "et i"c,me
,f 5+ic+ i"#re/ t, t+e be"efit ,f !"$ 3riv!te i"0ivi0#!-7
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); *13/2 7ecember 2, *//2
7eductibility of Contributions or $ifts Actually 0aid or 'ade to Accredited 7onee
Institutions in Computing Taxable Income
7onations to accredited non3stoc", non3profit corporationsB)$;s shall be entitled to the
following benefitsC
8*9 #imited 7eductibility E 7onations, contributions or gifts actually paid or made
within the taxable year to accredited non3stoc", non3profit corporations shall be allowed
limited deductibility in an amount not in excess of ten percent 8*.Q9 for an individual
donor, and five percent 8<Q9 for a corporate donor, of the donor(s income derived from
trade, business or profession as computed without the benefit of this deduction
8-9 %ull 7eductibility E 7onations, contributions or gifts actually paid or made
within the taxable year to accredited )$;s shall be allowed full deductibility, subject to
the following conditionsC
8i9 The accredited )$; shall ma"e utili6ation directly for the active conduct of the
activities constituting the purpose or function for which it is organi6ed and operated, not
later than the fifteenth 8*<th9 day of the third month after the close of the accredited
)$;s taxable year in which contributions are received, unless an extended period is
granted by the &ecretary of %inance, upon recommendation of the Commissioner
%or this purpose, the term :utili6ation: shall have the meaning as defined under &ec *8c9
of these Regulations
8ii9 The level of administrative expenses of the accredited )$;, shall, on an annual
basis, not exceed thirty percent 81.Q9 of the total expenses for the taxable year?
8iii9 In the event of dissolution, the assets of the accredited )$;, would be distributed
to another accredited )$; organi6ed for similar purpose or purposes, or to the &tate for
public purpose, or purposes, or to the state for public purpose, or would be distributed
by a competent court of justice to another accredited )$; to be used in such manner as
in the judgment of said court shall best accomplished the general purpose for which the
dissolved organi6ation was organi6ed
8iv9 The amount of any charitable contribution of property other than money shall be
based on the ac5uisition cost of said property
8v9 All the members of the Board of Trustees of the non3stoc", non3profit corporation,
organi6ation or )$; do not receive compensation or remuneration for their service to
the aforementioned organi6ation
819 =xemption from 7onor(s Tax E 7onations and gifts made in favor of accredited
non3stoc", non3profit corporationsB)$;s shall be exempt from donor(s taxC 0rovided,
however, That not more than thirty percent 81.Q9 of the said donations and gifts for the
taxable year shall be used by such accredited non3stoc", non3profit corporationsB)$;s
institutions 5ualified3donee institution for administration purposes pursuant to the
provisions of &ection *.* 8A9819 and 8B98-9 of the Tax Code
>2? B+ic+, ",t -!ter t+!" t+e 1<t+ 0!$ ,f t+e t+ir0 m,"t+ !fter t+e c-,/e ,f t+e
!ccre0ite0 ","4,ver"me"t ,r4!"i6!ti,"/ t!2!b-e $e!r i" 5+ic+ c,"trib#ti,"/ !re
receive0, m!9e/ #ti-i6!ti," 0irect-$ f,r t+e !ctive c,"0#ct ,f t+e !ctivitie/
c,"/tit#ti"4 t+e 3#r3,/e ,r f#"cti," f,r 5+ic+ it i/ ,r4!"i6e0 !"0 ,3er!te0, #"-e//
!" e2te"0e0 3eri,0 i/ 4r!"te0 b$ t+e )ecret!r$ ,f *i"!"ce i" !cc,r0!"ce 5it+ t+e
r#-e/ !"0 re4#-!ti,"/ t, be 3r,m#-4!te0, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er7
>;? T+e -eve- ,f !0mi"i/tr!tive e23e"/e ,f 5+ic+ /+!--, ," !" !""#!- b!/i/, c,"f,rm
5it+ t+e r#-e/ !"0 re4#-!ti,"/ t, be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, b#t i" ", c!/e t, e2cee0 t+irt$ 3erce"t
>;CG? ,f t+e t,t!- e23e"/e/7 !"0
>4? T+e !//et/ ,f 5+ic+, i" t+e eve"t ,f 0i//,-#ti,", 5,#-0 be 0i/trib#te0 t, !",t+er
","3r,fit 0,me/tic c,r3,r!ti," ,r4!"i6e0 f,r /imi-!r 3#r3,/e ,r 3#r3,/e/, ,r t, t+e
/t!te f,r 3#b-ic 3#r3,/e, ,r 5,#-0 be 0i/trib#te0 b$ ! c,#rt t, !",t+er ,r4!"i6!ti,"
t, be #/e0 i" /#c+ m!""er !/ i" t+e :#04me"t ,f /!i0 c,#rt /+!-- be/t !cc,m3-i/+
t+e 4e"er!- 3#r3,/e f,r 5+ic+ t+e 0i//,-ve0 ,r4!"i6!ti," 5!/ ,r4!"i6e0.
)#b:ect t, /#c+ term/ !"0 c,"0iti,"/ !/ m!$ be 3re/cribe0 b$ t+e )ecret!r$ ,f
*i"!"ce, t+e term F#ti-i6!ti,"F me!"/=
>i? A"$ !m,#"t i" c!/+ ,r i" 9i"0 >i"c-#0i"4 !0mi"i/tr!tive e23e"/e/? 3!i0 ,r
#ti-i6e0 t, !cc,m3-i/+ ,"e ,r m,re 3#r3,/e/ f,r 5+ic+ t+e !ccre0ite0
","4,ver"me"t ,r4!"i6!ti," 5!/ cre!te0 ,r ,r4!"i6e0.
>ii? A"$ !m,#"t 3!i0 t, !c8#ire !" !//et #/e0 >,r +e-0 f,r #/e? 0irect-$ i" c!rr$i"4
,#t ,"e ,r m,re 3#r3,/e/ f,r 5+ic+ t+e !ccre0ite0 ","4,ver"me"t ,r4!"i6!ti,"
5!/ cre!te0 ,r ,r4!"i6e0.
A" !m,#"t /et !/i0e f,r ! /3ecific 3r,:ect 5+ic+ c,me/ 5it+i" ,"e ,r m,re
3#r3,/e/ ,f t+e !ccre0ite0 ","4,ver"me"t ,r4!"i6!ti," m!$ be tre!te0 !/ !
#ti-i6!ti,", b#t ,"-$ if !t t+e time /#c+ !m,#"t i/ /et !/i0e, t+e !ccre0ite0
","4,ver"me"t ,r4!"i6!ti," +!/ e/t!b-i/+e0 t, t+e /!ti/f!cti," ,f t+e
C,mmi//i,"er t+!t t+e !m,#"t 5i-- be 3!i0 f,r t+e /3ecific 3r,:ect 5it+i" ! 3eri,0
t, be 3re/cribe0 i" r#-e/ !"0 re4#-!ti,"/ t, be 3r,m#-4!te0 b$ t+e )ecret!r$ ,f
*i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, b#t ",t t, e2cee0 five ><?
$e!r/, !"0 t+e 3r,:ect i/ ,"e 5+ic+ c!" be better !cc,m3-i/+e0 b$ /etti"4 !/i0e
/#c+ !m,#"t t+!" b$ imme0i!te 3!$me"t ,f f#"0/.
>;? (!-#!ti," . T+e !m,#"t ,f !"$ c+!rit!b-e c,"trib#ti," ,f 3r,3ert$ ,t+er t+!"
m,"e$ /+!-- be b!/e0 ," t+e !c8#i/iti," c,/t ,f /!i0 3r,3ert$.
>4? Pr,,f ,f De0#cti,"/ . C,"trib#ti,"/ ,r 4ift/ /+!-- be !--,5!b-e !/ 0e0#cti,"
,"-$ if verifie0 #"0er t+e r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$ ,f
*i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er.
CASES DIGEST
Charitable institution remains tax3exempt although it derives income from paying
patients for its hospital operations
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out3patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it
is intended to achieve? and no money inures to the private benefit of the persons
managing or operating the institution
#ung Center of the 0hil vs Iue6on City, et al, $R )o *44*.4, Aune -/, -..4
Rationale for tax exemption of charitable institutions
An institution does not lose its charitable character, and conse5uent exemption from
taxation, by reason of the fact that those recipients of its benefits who are able to pay are
re5uired to do so, where no profit is made by the institution and the amounts so received
are applied in furthering its charitable purposes, and those benefits are refused to none
on account of inability to pay therefor The fundamental ground upon which all
exemptions in favor of charitable institutions are based is the benefit conferred upon the
public by them, and a conse5uent relief, to some extent, of the burden upon the state to
care for and advance the interests of its citi6ens
#ung Center of the 0hil vs Iue6on City, et al, $R )o *44*.4, Aune -/, -..4
BIR wins vs &t #u"es hospital ordered to pay 0+1/' tax deficiency ;ct -<, -.*-
The &upreme Court has ordered &t #u"eMs 'edical Center Inc to pay the Bureau of
Internal Revenue 0+1/ million in deficiency income tax, value added tax and
withholding tax on compensation for *//2, based on the *.3percent preferential income
tax as stipulated in the *//, Tax Code
According to BIR head revenue executive assistant Claro ;rti6, this means that all
hospitals that claim to be non3profit but are proprietary will now have to pay income tax
In -..-, &t #u"e(s disputed the BIRMs assessment that it should be paying income taxes,
saying that it is a non3profit hospital The case eventually reached the &upreme Court In
a decision penned by Associate Austice Antonio Carpio on &ept -+ and received by the
BIR on ;ct *,, the &C reversed an earlier decision by the Court of Tax Appeals, which
dismissed the BIRMs assessment The appellate court had argued that &t #u"eMs was not
subject to income tax because non3stoc" corporations are exempt from paying income
tax
Dowever, the &C ruled that &t #u"eMs services that patients pay for are subject to income
tax
U&t #u"eMs 'edical Center is ordered to pay the deficiency income tax in *//2 based on
the *. percent preferential income tax rate under &ection -,8B9 of the )ational Internal
Revenue Code O)IRCP Dowever, it is not liable for surcharges and interest on such
deficiency income tax under &ections -42 and -4/ of the )IRC,V the decision stated The
BIR claimed that &t #u"eMs had total revenues of 0*,1 billion in *//2 alone &t #u"eMs
refuted the assessment, saying that its free services to patients amounted to 0-*2 million
in *//2
The &upreme Court ruled that while there is no dispute that &t #u"eMs is organi6ed as a
non3stoc" and non3profit charitable institution, this does not automatically exempt it from
paying taxes %or a charitable institution to be exempt from income taxes, U&ection 1.8=9
of the )IRC re5uires that OitP must be organi6ed and operated exclusively for charitable
purposes,V the &C said in its decision
Taxation of non3stoc", non3profit hospitals
*, ;ctober -.*- by Atty Anthony $ 0resto6a B Tax #aw for Business
TAHATI;) of non3stoc", non3profit organi6ations had always been a controversy There
are a number of types or classes of organi6ations or associations exempted from income
taxes by the Tax Code &o these types of organi6ations are the usual channel through
which activities are pursued if the intention is not for profit But despite the clear
exemption from income taxes, the number of cases pursued administratively and litigated
in the courts would indicate that the taxation of these class of organi6ations is not that
clear after all
Among the types of organi6ations exempted from income taxes are non3stoc"
corporations organi6ed for charitable purposes and not for profit, but operated
exclusively for the promotion of the general welfare %or one to invo"e exemption from
income tax, it must be organi6ed as non3stoc" and operated for the purposes in which it
was organi6ed That classification itself had been an issue in the area of income taxation
The Court had repeatedly defined what a non3stoc" organi6ation is but its relevance
crops up every time a tax3related issue is involved &o what really constitutes a non3stoc"
corporationS ;nce again, the &upreme Court, in $R */</./ and */</+., &eptember -+,
-.*-, referred to the definition in the Corporation Code of a Unon3stoc" corporationV as
Uone where no part of its income is distributable as dividends to its members, trustees, or
officers and that any profit obtained as an incident to its operations shall whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organi6edV
That case involves the income taxation of a non3stoc" and non3profit hospital organi6ed
for charitable and for social welfare purposes The institution claims that it is exempt
from income taxation under &ection 1. of the Tax Code, which exempts this "ind of
institution from income taxation The tax authority, on the other hand, claims that it
should be subject to income tax under &ection -,8B9 of the Tax Code, which imposes *.3
percent income tax on proprietary and nonprofit hospitals As decided by the Court, a
non3stoc", non3profit corporation is indeed exempt from income taxation That
exemption, however, is intended solely for the activities of a non3stoc", non3profit entity
which are Uoperated exclusivelyV for charitable or social welfare purposes Any other
income that may be generated by these entities shall be subject to the *.3percent
preferential tax rate the tax imposed on proprietary non3profit hospitals
Apparently, according to the Court, UproprietaryV means Uprivate,V and when applied to
a hospital means private hospital ;n the other hand, Unon3profitV means no net income
or asset accrues to or benefits any member or person, with all net income or asset
devoted to the institutionMs purposes and all its activities conducted not for profit
Thus, if a hospital not organi6ed for profit, generates income not in relation to its
charitable or social welfare purposes, it shall be taxed at the preferential rate of *.
percent &imply put, even if a hospital does not distribute income to its members or
trustees and uses the income proceeds from non3related activities in furtherance of its
purposes, the same shall still be taxable at a rate of *. percent
The implication of this is that a non3stoc", non3profit organi6ation, including a hospital,
organi6ed for charitable andBor for purposes of promoting the general welfare is not
subject to income tax The exemption, however, extends only to the activities pursued
exclusively for such purposes, that is, not3for3profit activities That exemption is not lost
even if said entity involves itself in activities conducted for profit But these revenues
derived from profit3 generating activities will be subject to income tax @ith respect to
hospitals, that income tax shall not be the regular income tax rate of 1. percent but the
special income tax rate of *. percent imposed on proprietary and nonprofit hospitals
>I? Re/e!rc+ !"0 Deve-,3me"t. .
>1? I" &e"er!- . A t!23!$er m!$ tre!t re/e!rc+ ,r 0eve-,3me"t e23e"0it#re/
5+ic+ !re 3!i0 ,r i"c#rre0 b$ +im 0#ri"4 t+e t!2!b-e $e!r i" c,""ecti," 5it+ +i/
tr!0e, b#/i"e// ,r 3r,fe//i," !/ ,r0i"!r$ !"0 "ece//!r$ e23e"/e/ 5+ic+ !re ",t
c+!r4e!b-e t, c!3it!- !cc,#"t. T+e e23e"0it#re/ /, tre!te0 /+!-- be !--,5e0 !/
0e0#cti," 0#ri"4 t+e t!2!b-e $e!r 5+e" 3!i0 ,r i"c#rre0.
>2? Am,rti6!ti," ,f Cert!i" Re/e!rc+ !"0 Deve-,3me"t E23e"0it#re/ . At t+e
e-ecti," ,f t+e t!23!$er !"0 i" !cc,r0!"ce 5it+ t+e r#-e/ !"0 re4#-!ti,"/ t, be
3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er, t+e f,--,5i"4 re/e!rc+ !"0 0eve-,3me"t e23e"0it#re/ m!$ be
tre!te0 !/ 0eferre0 e23e"/e/=
>!? P!i0 ,r i"c#rre0 b$ t+e t!23!$er i" c,""ecti," 5it+ +i/ tr!0e, b#/i"e// ,r
3r,fe//i,"7
>b? N,t tre!te0 !/ e23e"/e/ #"0er 3!r!4r!3+ >1? +ere,f7 !"0
>c? C+!r4e!b-e t, c!3it!- !cc,#"t b#t ",t c+!r4e!b-e t, 3r,3ert$ ,f ! c+!r!cter
5+ic+ i/ /#b:ect t, 0e3reci!ti," ,r 0e3-eti,".
I" c,m3#ti"4 t!2!b-e i"c,me, /#c+ 0eferre0 e23e"/e/ /+!-- be !--,5e0 !/
0e0#cti," r!t!b-$ 0i/trib#te0 ,ver ! 3eri,0 ,f ",t -e// t+!" /i2t$ >AC? m,"t+/ !/
m!$ be e-ecte0 b$ t+e t!23!$er >be4i""i"4 5it+ t+e m,"t+ i" 5+ic+ t+e t!23!$er
fir/t re!-i6e/ be"efit/ fr,m /#c+ e23e"0it#re/?.
T+e e-ecti," 3r,vi0e0 b$ 3!r!4r!3+ >2? +ere,f m!$ be m!0e f,r !"$ t!2!b-e $e!r
be4i""i"4 !fter t+e effectivit$ ,f t+i/ C,0e, b#t ,"-$ if m!0e ",t -!ter t+!" t+e time
3re/cribe0 b$ -!5 f,r fi-i"4 t+e ret#r" f,r /#c+ t!2!b-e $e!r. T+e met+,0 /, e-ecte0,
!"0 t+e 3eri,0 /e-ecte0 b$ t+e t!23!$er, /+!-- be !0+ere0 t, i" c,m3#ti"4 t!2!b-e
i"c,me f,r t+e t!2!b-e $e!r f,r 5+ic+ t+e e-ecti," i/ m!0e !"0 f,r !-- /#b/e8#e"t
t!2!b-e $e!r/ #"-e//, 5it+ t+e !33r,v!- ,f t+e C,mmi//i,"er, ! c+!"4e t, !
0iffere"t met+,0 i/ !#t+,ri6e0 5it+ re/3ect t, ! 3!rt ,r !-- ,f /#c+ e23e"0it#re/.
T+e e-ecti," /+!-- ",t !33-$ t, !"$ e23e"0it#re 3!i0 ,r i"c#rre0 0#ri"4 !"$ t!2!b-e
$e!r 3ri,r t, t+e t!2!b-e $e!r f,r 5+ic+ t+e t!23!$er m!9e/ t+e e-ecti,".
>;? Limit!ti,"/ ," De0#cti," . T+i/ )#b/ecti," /+!-- ",t !33-$ t,=
>!? A"$ e23e"0it#re f,r t+e !c8#i/iti," ,r im3r,veme"t ,f -!"0, ,r f,r t+e
im3r,veme"t ,f 3r,3ert$ t, be #/e0 i" c,""ecti," 5it+ re/e!rc+ !"0 0eve-,3me"t
,f ! c+!r!cter 5+ic+ i/ /#b:ect t, 0e3reci!ti," !"0 0e3-eti,"7 !"0
>b? A"$ e23e"0it#re 3!i0 ,r i"c#rre0 f,r t+e 3#r3,/e ,f !/cert!i"i"4 t+e e2i/te"ce,
-,c!ti,", e2te"t, ,r 8#!-it$ ,f !"$ 0e3,/it ,f ,re ,r ,t+er mi"er!-, i"c-#0i"4 ,i- ,r
4!/.
>? Pe"/i," Tr#/t/ . A" em3-,$er e/t!b-i/+i"4 ,r m!i"t!i"i"4 ! 3e"/i," tr#/t t,
3r,vi0e f,r t+e 3!$me"t ,f re!/,"!b-e 3e"/i,"/ t, +i/ em3-,$ee/ /+!-- be !--,5e0
!/ ! 0e0#cti," >i" !00iti," t, t+e c,"trib#ti,"/ t, /#c+ tr#/t 0#ri"4 t+e t!2!b-e $e!r
t, c,ver t+e 3e"/i," -i!bi-it$ !ccr#i"4 0#ri"4 t+e $e!r, !--,5e0 !/ ! 0e0#cti,"
#"0er )#b/ecti," >A?>1? ,f t+i/ )ecti,"? ! re!/,"!b-e !m,#"t tr!"/ferre0 ,r 3!i0
i"t, /#c+ tr#/t 0#ri"4 t+e t!2!b-e $e!r i" e2ce// ,f /#c+ c,"trib#ti,"/, b#t ,"-$ if
/#c+ !m,#"t= >1? +!/ ",t t+eret,f,re bee" !--,5e0 !/ ! 0e0#cti,", !"0 >2? i/
!33,rti,"e0 i" e8#!- 3!rt/ ,ver ! 3eri,0 ,f te" >1C? c,"/ec#tive $e!r/ be4i""i"4
5it+ t+e $e!r i" 5+ic+ t+e tr!"/fer ,r 3!$me"t i/ m!0e.
CASES DIGEST
Income of pension trust is li"ewise tax3exempt
It is evident that tax exemption is li"ewise to be enjoyed by the income of the pension
trust ;therwise, taxation of those earnings would result in a diminution of accumulated
income and reduce whatever the trust beneficiaries would receive out of the trust fund
This would run afoul of the very intendment of the law The tax advantage in Rep Act )o
*/21, &ection <+8b9, was conceived in order to encourage the formation and
establishment of such private 0lans for the benefit of laborers and employees outside of
the &ocial &ecurity Act
Commissioner of Internal Revenue vs Court of Appeals, et al,
$R )o /<.--, 'arch -1, *//-
>E? A00iti,"!- Re8#ireme"t/ f,r De0#ctibi-it$ ,f Cert!i" P!$me"t/ . A"$
!m,#"t 3!i0 ,r 3!$!b-e 5+ic+ i/ ,t+er5i/e 0e0#ctib-e fr,m, ,r t!9e" i"t, !cc,#"t
i" c,m3#ti"4 4r,// i"c,me ,r f,r 5+ic+ 0e3reci!ti," ,r !m,rti6!ti," m!$ be
!--,5e0 #"0er t+i/ )ecti,", /+!-- be !--,5e0 !/ ! 0e0#cti," ,"-$ if it i/ /+,5" t+!t
t+e t!2 re8#ire0 t, be 0e0#cte0 !"0 5it++e-0 t+erefr,m +!/ bee" 3!i0 t, t+e B#re!#
,f I"ter"!- Reve"#e i" !cc,r0!"ce 5it+ t+i/ )ecti,", )ecti,"/ <8 !"0 81 ,f t+i/
C,0e.
>L? O3ti,"!- )t!"0!r0 De0#cti," . I" -ie# ,f t+e 0e0#cti,"/ !--,5e0 #"0er t+e
3rece0i"4 )#b/ecti,"/, !" i"0ivi0#!- /#b:ect t, t!2 #"0er )ecti," 24, ,t+er t+!" !
","re/i0e"t !-ie", m!$ e-ect ! /t!"0!r0 0e0#cti," i" !" !m,#"t ",t e2cee0i"4 f,rt$
3erce"t >4CG? ,f +i/ 4r,// /!-e/ ,r 4r,// recei3t/, !/ t+e c!/e m!$ be. I" t+e c!/e ,f
! c,r3,r!ti," /#b:ect t, t!2 #"0er )ecti,"/ 27>A? !"0 28>A?>1?, it m!$ e-ect !
/t!"0!r0 0e0#cti," i" !" !m,#"t ",t e2cee0i"4 f,rt$ 3erce"t >4CG? ,f it/ 4r,//
i"c,me !/ 0efi"e0 i" )ecti," ;2 ,f t+i/ C,0e. U"-e// t+e t!23!$er /i4"ifie/ i" +i/
ret#r" +i/ i"te"ti," t, e-ect t+e ,3ti,"!- /t!"0!r0 0e0#cti,", +e /+!-- be c,"/i0ere0
!/ +!vi"4 !v!i-e0 +im/e-f ,f t+e 0e0#cti,"/ !--,5e0 i" t+e 3rece0i"4 )#b/ecti,"/.
)#c+ e-ecti," 5+e" m!0e i" t+e ret#r" /+!-- be irrev,c!b-e f,r t+e t!2!b-e $e!r f,r
5+ic+ t+e ret#r" i/ m!0e= Pr,vi0e0, T+!t !" i"0ivi0#!- 5+, i/ e"tit-e0 t, !"0
c-!ime0 f,r t+e ,3ti,"!- /t!"0!r0 0e0#cti," /+!-- ",t be re8#ire0 t, /#bmit 5it+ +i/
t!2 ret#r" /#c+ fi"!"ci!- /t!teme"t/ ,t+er5i/e re8#ire0 #"0er t+i/ C,0e= Pr,vi0e0,
f#rt+er, T+!t e2ce3t 5+e" t+e C,mmi//i,"er ,t+er5i/e 3ermit/, t+e /!i0 i"0ivi0#!-
/+!-- 9ee3 /#c+ rec,r0/ 3ert!i"i"4 t, +i/ 4r,// /!-e/ ,r 4r,// recei3t/, ,r t+e /!i0
c,r3,r!ti," /+!-- 9ee3 /#c+ rec,r0/ 3ert!i"i"4 t, +i/ 4r,// i"c,me !/ 0efi"e0 i"
)ecti," ;2 ,f t+i/ C,0e 0#ri"4 t+e t!2!b-e $e!r, !/ m!$ be re8#ire0 b$ t+e r#-e/
!"0 re4#-!ti,"/ 3r,m#-4!te0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f
t+e C,mmi//i,"er.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..-3*. %ebruary *2, -.*.
7etermination of the ;ptional &tandard 7eduction 8;&79 of $eneral 0rofessional
0artnerships 8$00s9 and the 0artners Thereof, as well as the 'anner and 0eriod for
'a"ing the =lection to Claim ;&7 in the Income Tax Returns
R=>=)!= R=$!#ATI;)& ); .*+3.2 )ovember -+, -..2
Implementing the 0rovisions of Republic Act )o /<.4 8'inimum @age #aw9, 7ealing on
the ;ptional &tandard 7eduction 8;&79 Allowed to Individuals and Corporations in
Computing Their Taxable Income in lieu of the itemi6ed deductions
7etermination of the Amount of ;ptional &tandard 7eduction for Individuals E The
;&7 allowed to individual taxpayers shall be a maximum of forty percent 84.Q9 of gross
sales or gross receipts during the taxable year If the individual is on the accrual basis of
accounting for his income and deductions, the ;&7 shall be based on the gross sales
during the taxable year ;n the other hand, if the individual employs the cash basis of
accounting for his income and deductions, the ;&7 shall be based on his gross receipts
during the taxable year
It should be emphasi6ed that the :cost of sales: in case of individual seller of goods, or
the :cost of services: in the case of individual seller of services, are not allowed to be
deducted for purposes of determining the basis of the ;&7 inasmuch as the law 8RA
/<.49 is specific as to the basis thereof which states that for individuals, the basis of the
4.Q ;&7 shall be the :gross sales: or :gross receipts: and not the :gross income:%or
other individual taxpayers allowed by law to report their income and deductions under a
different method of accounting 8eg percentage of completion basis, etc9 other than cash
and accrual method of accounting, the :gross sales: or :gross receipts: pursuant to this
&ection shall be determined in accordance with said acceptable method of accounting
7etermination of the Amount of ;ptional &tandard 7eduction for Corporations E In the
case of corporate taxpayers subject to tax under &ections -, 8A9 and -2 8A9 8*9 of the
Code, as amended, the ;&7 allowed shall be in an amount not exceeding forty percent
84.Q9 of their gross income
%or purposes of these Regulations, :$ross Income: shall mean the gross sales less sales
returns, discounts and allowances and cost of goods sold :$ross sales: shall include
only sales contributory to income taxable under &ec -, 8A9 of the Code :Cost of goods
sold: shall include the purchase price or cost to produce the merchandise and all
expenses directly incurred in bringing them to their present location and use
%or trading or merchandising concern, :cost of goods sold: means the invoice cost of
goods sold, plus import duties, freight in transporting the goods to the place where the
goods are actually sold, including insurance while the goods are in transit
%or manufacturing concern, :cost of goods sold: means all costs incurred in the
production of the finished goods such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse The term may be used
interchangeably with :cost of goods manufactured and sold:
In the case of sellers of services, the term :gross income: means the :gross receipts: less
sales returns, allowances, discounts and cost of services :Cost of services: means all
direct costs and expenses necessarily incurred to provide the services re5uired by the
customers and clients including 8a9 salaries and employee benefits of personnel,
consultants and specialists directly rendering the service, and 8b9 cost of facilities
directly utili6ed in providing the service such as depreciation or rental of e5uipment used
and cost of suppliesC 0rovided, however, that :cost of services: shall not include interest
expense except in the case of ban"s and other financial institutions The term :gross
receipts: as used herein means amounts actually or constructively received during the
taxable year Dowever, for taxpayers engaged as sellers of services but employing the
accrual basis of accounting for their income, the term :gross receipts: shall mean
amounts earned as gross revenue during the taxable year
The items of gross income under &ection 1- 8A9 of the Code, as amended, which are
re5uired to be declared in the income tax return of the taxpayer for the taxable year are
part of the gross income against which the ;&7 may be deducted in arriving at taxable
income 0assive incomes which have been subjected to a final tax at source shall not
form part of the gross income for purposes of computing the forty percent 84.Q9 optional
standard deduction
>%? Premi#m P!$me"t/ ," 'e!-t+ !"0D,r ',/3it!-i6!ti," I"/#r!"ce ,f !"
I"0ivi0#!- T!23!$er . T+e !m,#"t ,f 3remi#m/ ",t t, e2cee0 T5, t+,#/!"0 f,#r
+#"0re0 3e/,/ >P2,4CC? 3er f!mi-$ ,r T5, +#"0re0 3e/,/ >P2CC? ! m,"t+ 3!i0
0#ri"4 t+e t!2!b-e $e!r f,r +e!-t+ !"0D,r +,/3it!-i6!ti," i"/#r!"ce t!9e" b$ t+e
t!23!$er f,r +im/e-f, i"c-#0i"4 +i/ f!mi-$, /+!-- be !--,5e0 !/ ! 0e0#cti," fr,m +i/
4r,// i"c,me= Pr,vi0e0, T+!t /!i0 f!mi-$ +!/ ! 4r,// i"c,me ,f ",t m,re t+!" T5,
+#"0re0 fift$ t+,#/!"0 3e/,/ >P2<C,CCC? f,r t+e t!2!b-e $e!r= Pr,vi0e0, fi"!--$,
T+!t i" t+e c!/e ,f m!rrie0 t!23!$er/, ,"-$ t+e /3,#/e c-!imi"4 t+e !00iti,"!-
e2em3ti," f,r 0e3e"0e"t/ /+!-- be e"tit-e0 t, t+i/ 0e0#cti,".
N,t5it+/t!"0i"4 t+e 3r,vi/i,"/ ,f t+e 3rece0i"4 )#b/ecti,"/, t+e )ecret!r$ ,f
*i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, !fter ! 3#b-ic +e!ri"4 /+!--
+!ve bee" +e-0 f,r t+i/ 3#r3,/e, m!$ 3re/cribe b$ r#-e/ !"0 re4#-!ti,"/, -imit!ti,"/
,r cei-i"4/ f,r !"$ ,f t+e itemi6e0 0e0#cti,"/ #"0er )#b/ecti,"/ >A? t, >? ,f t+i/
)ecti,"= Pr,vi0e0, T+!t f,r 3#r3,/e/ ,f 0etermi"i"4 /#c+ cei-i"4/ ,r -imit!ti,"/,
t+e )ecret!r$ ,f *i"!"ce /+!-- c,"/i0er t+e f,--,5i"4 f!ct,r/= >1? !0e8#!c$ ,f t+e
3re/cribe0 -imit/ ," t+e !ct#!- e23e"0it#re re8#ireme"t/ ,f e!c+ 3!rtic#-!r
i"0#/tr$7 !"0 >2? effect/ ,f i"f-!ti," ," e23e"0it#re -eve-/= Pr,vi0e0, f#rt+er, T+!t
", cei-i"4/ /+!-- f#rt+er be im3,/e0 ," item/ ,f e23e"/e !-re!0$ /#b:ect t, cei-i"4/
#"0er 3re/e"t -!5.
)ECTION ;< A--,5!"ce ,f Per/,"!- E2em3ti," f,r I"0ivi0#!- T!23!$er
>A? I" &e"er!- . *,r 3#r3,/e/ ,f 0etermi"i"4 t+e t!2 3r,vi0e0 i" )ecti," 24>A?
,f t+i/ Tit-e, t+ere /+!-- be !--,5e0 ! b!/ic 3er/,"!- e2em3ti," !m,#"ti"4 t, *ift$
t+,#/!"0 3e/,/ >P<C,CCC? f,r e!c+ i"0ivi0#!- t!23!$er.
I" t+e c!/e ,f m!rrie0 i"0ivi0#!-/ 5+ere ,"-$ ,"e ,f t+e /3,#/e/ i/ 0erivi"4 4r,//
i"c,me, ,"-$ /#c+ /3,#/e /+!-- be !--,5e0 t+e 3er/,"!- e2em3ti,".
>B? A00iti,"!- E2em3ti," f,r De3e"0e"t/. . T+ere /+!-- be !--,5e0 !"
!00iti,"!- e2em3ti," ,f T5e"t$@five t+,#/!"0 3e/,/ >P2<,CCC? f,r e!c+ 0e3e"0e"t
",t e2cee0i"4 f,#r >4?.
T+e !00iti,"!- e2em3ti," f,r 0e3e"0e"t/ /+!-- be c-!ime0 b$ ,"-$ ,"e ,f t+e
/3,#/e/ i" t+e c!/e ,f m!rrie0 i"0ivi0#!-/.
I" t+e c!/e ,f -e4!--$ /e3!r!te0 /3,#/e/, !00iti,"!- e2em3ti,"/ m!$ be c-!ime0
,"-$ b$ t+e /3,#/e 5+, +!/ c#/t,0$ ,f t+e c+i-0 ,r c+i-0re"= Pr,vi0e0, T+!t t+e
t,t!- !m,#"t ,f !00iti,"!- e2em3ti,"/ t+!t m!$ be c-!ime0 b$ b,t+ /+!-- ",t
e2cee0 t+e m!2im#m !00iti,"!- e2em3ti,"/ +erei" !--,5e0.
*,r 3#r3,/e/ ,f t+i/ )#b/ecti,", ! F0e3e"0e"tF me!"/ ! -e4itim!te, i--e4itim!te ,r
-e4!--$ !0,3te0 c+i-0 c+ief-$ 0e3e"0e"t #3," !"0 -ivi"4 5it+ t+e t!23!$er if /#c+
0e3e"0e"t i/ ",t m,re t+!" t5e"t$@,"e >21? $e!r/ ,f !4e, #"m!rrie0 !"0 ",t
4!i"f#--$ em3-,$e0 ,r if /#c+ 0e3e"0e"t, re4!r0-e// ,f !4e, i/ i"c!3!b-e ,f /e-f@
/#33,rt bec!#/e ,f me"t!- ,r 3+$/ic!- 0efect.
>C? C+!"4e ,f )t!t#/ . If t+e t!23!$er m!rrie/ ,r /+,#-0 +!ve !00iti,"!-
0e3e"0e"t>/? !/ 0efi"e0 !b,ve 0#ri"4 t+e t!2!b-e $e!r, t+e t!23!$er m!$ c-!im t+e
c,rre/3,"0i"4 !00iti,"!- e2em3ti,", !/ t+e c!/e m!$ be, i" f#-- f,r /#c+ $e!r.
If t+e t!23!$er 0ie/ 0#ri"4 t+e t!2!b-e $e!r, +i/ e/t!te m!$ /ti-- c-!im t+e 3er/,"!-
!"0 !00iti,"!- e2em3ti,"/ f,r +im/e-f !"0 +i/ 0e3e"0e"t>/? !/ if +e 0ie0 !t t+e
c-,/e ,f /#c+ $e!r.
If t+e /3,#/e ,r !"$ ,f t+e 0e3e"0e"t/ 0ie/ ,r if !"$ ,f /#c+ 0e3e"0e"t/ m!rrie/,
bec,me/ t5e"t$@,"e >21? $e!r/ ,-0 ,r bec,me/ 4!i"f#--$ em3-,$e0 0#ri"4 t+e
t!2!b-e $e!r, t+e t!23!$er m!$ /ti-- c-!im t+e /!me e2em3ti,"/ !/ if t+e /3,#/e ,r
!"$ ,f t+e 0e3e"0e"t/ 0ie0, ,r !/ if /#c+ 0e3e"0e"t/ m!rrie0, bec!me t5e"t$@,"e
>21? $e!r/ ,-0 ,r bec!me 4!i"f#--$ em3-,$e0 !t t+e c-,/e ,f /#c+ $e!r.
CASES DIGEST
Tax due is determined by the individual taxpayer(s status and 5ualified dependents at the
close of the taxable year
@hat the law should consider for the purpose of determining the tax due from an
individual taxpayer is his status and 5ualified dependents at the close of the taxable year
and not at the time the return is filed and the tax due thereon is paid =mphasis must be
made that &ection 1< 8C9 of the )IRC allows a taxpayer to still claim the corresponding
full amount of exemption for a taxable year, eg if he marries? have additional
dependents? he, his spouse, or any of his dependents die? and if any of his dependents
marry, turn -* years old? or become gainfully employed It is as if the changes in his or
his dependents( status too" place at the close of the taxable year
Carmelino % 0ansacola vs CIR, $R )o *<///*, )ovember *+, -..+
Tax due is determined by the individual taxpayer(s status and 5ualified dependents at the
close of the taxable year
%ACT&C ;n April *1, *//2, petitioner Carmelino % 0ansacola filed his income tax
return for the taxable year *//, that reflected an overpayment of 0<,/<. In it he claimed
the increased amounts of personal and additional exemptions under &ection 1< 4 of the
)IRC, although his certificate of income tax withheld on compensation indicated the
lesser allowed amounts on these exemptions De claimed a refund of 0<,/<. with the
BIR, which was denied #ater, the CTA also denied his claim because according to the tax
court, :it would be absurd for the law to allow the deduction from a taxpayer(s gross
income earned on a certain year of exemptions availing on a different taxable year :
0etitioner sought reconsideration, but the same was denied
;n appeal, the Court of Appeals denied his petition for lac" of merit The appellate court
ruled that the )IRC too" effect on Aanuary *, *//2, thus the increased exemptions were
effective only to cover taxable year *//2 and cannot be applied retroactively
I&&!=C Could the exemptions under &ection 1< of the )IRC, which too" effect on
Aanuary *, *//2, be availed of for the taxable year *//,S
D=#7C )o 0refatorily, personal and additional exemptions under &ection 1< of the
)IRC are fixed amounts to which certain individual taxpayers 8citi6ens, resident aliens9
*- are entitled 0ersonal exemptions are the theoretical personal, living and family
expenses of an individual allowed to be deducted from the gross or net income of an
individual taxpayer These are arbitrary amounts which have been calculated by our
lawma"ers to be roughly e5uivalent to the minimum of subsistence, ta"ing into account
the personal status and additional 5ualified dependents of the taxpayer They are fixed
amounts in the sense that the amounts have been predetermined by our lawma"ers as
provided under &ection 1< 8A9 and 8B9 !nless and until our lawma"ers ma"e new
adjustments on these personal exemptions, the amounts allowed to be deducted by a
taxpayer are fixed as predetermined by Congress
A careful scrutiny of the provisions of the )IRC specifically shows that &ection ,/ 879
provides that the personal and additional exemptions shall be determined in accordance
with the main provisions in Title II of the )IRC Its main provisions pertain to &ection 1<
8A9 and 8B9
&ection 1< 8A9 and 8B9 allow the basic personal and additional exemptions as deductions
from gross or net income, as the case may be, to arrive at the correct taxable income of
certain individual taxpayers &ection -4 8A9 8*9 8a9 imposed income tax on a resident
citi6en(s taxable income derived for each taxable year
&ection 1* defines :taxable income: as the pertinent items of gross income specified in
the )IRC, less the deductions andBor personal and additional exemptions, if any,
authori6ed for such types of income by the )IRC or other special laws As defined in
&ection -- 809, :taxable year: means the calendar year, upon the basis of which the net
income is computed under Title II of the )IRC &ection 41 also supports the rule that the
taxable income of an individual shall be computed on the basis of the calendar year In
addition, &ection 4< provides that the deductions provided for under Title II of the )IRC
shall be ta"en for the taxable year in which they are :paid or accrued: or :paid or
incurred:
'oreover, &ection ,/ 8D9 re5uires the employer to determine, on or before the end of the
calendar year but prior to the payment of the compensation for the last payroll period,
the tax due from each employee(s taxable compensation income for the entire taxable
year in accordance with &ection -4 8A9 This is for the purpose of either withholding from
the employee(s 7ecember salary, or refunding to him not later than Aanuary -< of the
succeeding year, the difference between the tax due and the tax withheld
Therefore, as provided in &ection -4 8A9 8*9 8a9 in relation to &ections 1* and -- 809 and
&ections 41, 4< and ,/ 8D9 of the )IRC, the income subject to income tax is the
taxpayer(s income as derived and computed during the calendar year, his taxable year
Clearly from the above5uoted provisions, what the law should consider for the purpose
of determining the tax due from an individual taxpayer is his status and 5ualified
dependents at the close of the taxable year and not at the time the return is filed and the
tax due thereon is paid )ow comes &ection 1< 8C9 of the )IRC which allows a taxpayer
to still claim the corresponding full amount of exemption for a taxable year, eg if he
marries? have additional dependents? he, his spouse, or any of his dependents die? and if
any of his dependents marry, turn -* years old? or become gainfully employed It is as if
the changes in his or his dependents( status too" place at the close of the taxable year
Conse5uently, his correct taxable income and his corresponding allowable deductions
eg personal and additional deductions, if any, had already been determined as of the
end of the calendar year
In the case of petitioner, the availability of the aforementioned deductions if he is thus
entitled, would be reflected on his tax return filed on or before the *<th day of April *///
as mandated by &ection <* 8C9 8*9 &ince the )IRC too" effect on Aanuary *, *//2, the
increased amounts of personal and additional exemptions under &ection 1<, can only be
allowed as deductions from the individual taxpayer(s gross or net income, as the case
may be, for the taxable year *//2 to be filed in */// The )IRC made no reference that
the personal and additional exemptions shall apply on income earned before Aanuary *,
*//2 Carmelino % 0ansacola vs C I R, $R )o *<///*, )ovember *+, -..+
>D? Per/,"!- E2em3ti," A--,5!b-e t, N,"re/i0e"t A-ie" I"0ivi0#!- . A
","re/i0e"t !-ie" i"0ivi0#!- e"4!4e0 i" tr!0e, b#/i"e// ,r i" t+e e2erci/e ,f !
3r,fe//i," i" t+e P+i-i33i"e/ /+!-- be e"tit-e0 t, ! 3er/,"!- e2em3ti," i" t+e
!m,#"t e8#!- t, t+e e2em3ti,"/ !--,5e0 i" t+e i"c,me t!2 -!5 i" t+e c,#"tr$ ,f
5+ic+ +e i/ ! /#b:ect ,r citi6e", t, citi6e"/ ,f t+e P+i-i33i"e/ ",t re/i0i"4 i" /#c+
c,#"tr$, ",t t, e2cee0 t+e !m,#"t fi2e0 i" t+i/ )ecti," !/ e2em3ti," f,r citi6e"/ ,r
re/i0e"t/ ,f t+e P+i-i33i"e/= Pr,vi0e0, T+!t /!i0 ","re/i0e"t !-ie" /+,#-0 fi-e ! tr#e
!"0 !cc#r!te ret#r" ,f t+e t,t!- i"c,me receive0 b$ +im fr,m !-- /,#rce/ i" t+e
P+i-i33i"e/, !/ re8#ire0 b$ t+i/ Tit-e.
)ECTION ;A Item/ ",t De0#ctib-e
>A? &e"er!- R#-e . I" c,m3#ti"4 "et i"c,me, ", 0e0#cti," /+!-- i" !"$ c!/e be
!--,5e0 i" re/3ect t, .
>1? Per/,"!-, -ivi"4 ,r f!mi-$ e23e"/e/7
>2? A"$ !m,#"t 3!i0 ,#t f,r "e5 b#i-0i"4/ ,r f,r 3erm!"e"t im3r,veme"t/, ,r
betterme"t/ m!0e t, i"cre!/e t+e v!-#e ,f !"$ 3r,3ert$ ,r e/t!te7 c0t!i
T+i/ )#b/ecti," /+!-- ",t !33-$ t, i"t!"4ib-e 0ri--i"4 !"0 0eve-,3me"t c,/t/
i"c#rre0 i" 3etr,-e#m ,3er!ti,"/ 5+ic+ !re 0e0#ctib-e #"0er )#b/ecti," >&?>1? ,f
)ecti," ;4 ,f t+i/ C,0e.
>;? A"$ !m,#"t e23e"0e0 i" re/t,ri"4 3r,3ert$ ,r i" m!9i"4 4,,0 t+e e2+!#/ti,"
t+ere,f f,r 5+ic+ !" !--,5!"ce i/ ,r +!/ bee" m!0e7 ,r
>4? Premi#m/ 3!i0 ," !"$ -ife i"/#r!"ce 3,-ic$ c,veri"4 t+e -ife ,f !"$ ,fficer ,r
em3-,$ee, ,r ,f !"$ 3er/," fi"!"ci!--$ i"tere/te0 i" !"$ tr!0e ,r b#/i"e// c!rrie0
," b$ t+e t!23!$er, i"0ivi0#!- ,r c,r3,r!te, 5+e" t+e t!23!$er i/ 0irect-$ ,r
i"0irect-$ ! be"efici!r$ #"0er /#c+ 3,-ic$.
>B? L,//e/ fr,m )!-e/ ,r E2c+!"4e/ ,f Pr,3ert$. . I" c,m3#ti"4 "et i"c,me, ",
0e0#cti," /+!-- i" !"$ c!/e be !--,5e0 i" re/3ect ,f -,//e/ fr,m /!-e/ ,r e2c+!"4e/
,f 3r,3ert$ 0irect-$ ,r i"0irect-$ .
>1? Bet5ee" member/ ,f ! f!mi-$. *,r 3#r3,/e/ ,f t+i/ 3!r!4r!3+, t+e f!mi-$ ,f !"
i"0ivi0#!- /+!-- i"c-#0e ,"-$ +i/ br,t+er/ !"0 /i/ter/ >5+et+er b$ t+e 5+,-e ,r +!-f@
b-,,0?, /3,#/e, !"ce/t,r/, !"0 -i"e!- 0e/ce"0!"t/7 ,r
>2? E2ce3t i" t+e c!/e ,f 0i/trib#ti,"/ i" -i8#i0!ti,", bet5ee" !" i"0ivi0#!- !"0 !
c,r3,r!ti," m,re t+!" fift$ 3erce"t ><CG? i" v!-#e ,f t+e ,#t/t!"0i"4 /t,c9 ,f
5+ic+ i/ ,5"e0, 0irect-$ ,r i"0irect-$, b$ ,r f,r /#c+ i"0ivi0#!-7 ,r
>;? E2ce3t i" t+e c!/e ,f 0i/trib#ti,"/ i" -i8#i0!ti,", bet5ee" t5, c,r3,r!ti,"/
m,re t+!" fift$ 3erce"t ><CG? i" v!-#e ,f t+e ,#t/t!"0i"4 /t,c9 ,f e!c+ ,f 5+ic+ i/
,5"e0, 0irect-$ ,r i"0irect-$, b$ ,r f,r t+e /!me i"0ivi0#!-, if eit+er ,"e ,f /#c+
c,r3,r!ti,"/, 5it+ re/3ect t, t+e t!2!b-e $e!r ,f t+e c,r3,r!ti," 3rece0i"4 t+e 0!te
,f t+e /!-e ,r e2c+!"4e 5!/, #"0er t+e -!5 !33-ic!b-e t, /#c+ t!2!b-e $e!r, !
3er/,"!- +,-0i"4 c,m3!"$ ,r ! f,rei4" 3er/,"!- +,-0i"4 c,m3!"$7
>4? Bet5ee" t+e 4r!"t,r !"0 ! fi0#ci!r$ ,f !"$ tr#/t7 ,r
><? Bet5ee" t+e fi0#ci!r$ ,f ! tr#/t !"0 t+e fi0#ci!r$ ,f !",t+er tr#/t if t+e /!me
3er/," i/ ! 4r!"t,r 5it+ re/3ect t, e!c+ tr#/t7 ,r
>A? Bet5ee" ! fi0#ci!r$ ,f ! tr#/t !"0 ! be"efici!r$ ,f /#c+ tr#/t.
CASES DIGEST
@hen loss is deemed to be a loss from the sale or exchange of capital assets
In the hands of another who holds the shares of stoc" by way of an investment, the shares
to him would be capital assets @hen the shares held by such investor become worthless,
the loss is deemed to be a loss from the sale or exchange of capital assets prem.<cd
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
)ECTION ;7)3eci!- Pr,vi/i,"/ Re4!r0i"4 I"c,me !"0 De0#cti,"/ ,f I"/#r!"ce
C,m3!"ie/, B+et+er D,me/tic ,r *,rei4".
>A? )3eci!- De0#cti,"/ A--,5e0 t, I"/#r!"ce C,m3!"ie/ . I" t+e c!/e ,f
i"/#r!"ce c,m3!"ie/, 5+et+er 0,me/tic ,r f,rei4" 0,i"4 b#/i"e// i" t+e
P+i-i33i"e/, t+e "et !00iti,"/, if !"$, re8#ire0 b$ -!5 t, be m!0e 5it+i" t+e $e!r t,
re/erve f#"0/ !"0 t+e /#m/ ,t+er t+!" 0ivi0e"0/ 3!i0 5it+i" t+e $e!r ," 3,-ic$ !"0
!""#it$ c,"tr!ct/ m!$ be 0e0#cte0 fr,m t+eir 4r,// i"c,me= Pr,vi0e0, +,5ever,
T+!t t+e re-e!/e0 re/erve be tre!te0 !/ i"c,me f,r t+e $e!r ,f re-e!/e.
>B? %#t#!- I"/#r!"ce C,m3!"ie/ . I" t+e c!/e ,f m#t#!- fire !"0 m#t#!-
em3-,$er/F -i!bi-it$ !"0 m#t#!- 5,r9me"F/ c,m3e"/!ti," !"0 m#t#!- c!/#!-t$
i"/#r!"ce c,m3!"ie/ re8#iri"4 t+eir member/ t, m!9e 3remi#m 0e3,/it/ t,
3r,vi0e f,r -,//e/ !"0 e23e"/e/, /!i0 c,m3!"ie/ /+!-- ",t ret#r" !/ i"c,me !"$
3,rti," ,f t+e 3remi#m 0e3,/it/ ret#r"e0 t, t+eir 3,-ic$+,-0er/, b#t /+!-- ret#r" !/
t!2!b-e i"c,me !-- i"c,me receive0 b$ t+em fr,m !-- ,t+er /,#rce/ 3-#/ /#c+
3,rti," ,f t+e 3remi#m 0e3,/it/ !/ !re ret!i"e0 b$ t+e c,m3!"ie/ f,r 3#r3,/e/
,t+er t+!" t+e 3!$me"t ,f -,//e/ !"0 e23e"/e/ !"0 rei"/#r!"ce re/erve/.
>C? %#t#!- %!ri"e I"/#r!"ce C,m3!"ie/ . %#t#!- m!ri"e i"/#r!"ce c,m3!"ie/
/+!-- i"c-#0e i" t+eir ret#r" ,f 4r,// i"c,me, 4r,// 3remi#m/ c,--ecte0 !"0
receive0 b$ t+em -e// !m,#"t/ 3!i0 f,r rei"/#r!"ce, b#t /+!-- be e"tit-e0 t, i"c-#0e
i" t+e 0e0#cti,"/ fr,m 4r,// i"c,me !m,#"t/ re3!i0 t, 3,-ic$+,-0er/ ," !cc,#"t ,f
3remi#m/ 3revi,#/-$ 3!i0 b$ t+em !"0 i"tere/t 3!i0 #3," t+,/e !m,#"t/ bet5ee"
t+e !/cert!i"me"t !"0 3!$me"t t+ere,f.
>D? A//e//me"t I"/#r!"ce C,m3!"ie/ . A//e//me"t i"/#r!"ce c,m3!"ie/,
5+et+er 0,me/tic ,r f,rei4", m!$ 0e0#ct fr,m t+eir 4r,// i"c,me t+e !ct#!-
0e3,/it ,f /#m/ 5it+ t+e ,fficer/ ,f t+e &,ver"me"t ,f t+e P+i-i33i"e/ 3#r/#!"t t,
-!5, !/ !00iti,"/ t, 4#!r!"tee ,r re/erve f#"0/.
)ECTION ;8L,//e/ fr,m B!/+ )!-e/ ,f )t,c9 ,r )ec#ritie/ .
>A? I" t+e c!/e ,f !"$ -,// c-!ime0 t, +!ve bee" /#/t!i"e0 fr,m !"$ /!-e ,r ,t+er
0i/3,/iti," ,f /+!re/ ,f /t,c9 ,r /ec#ritie/ 5+ere it !33e!r/ t+!t 5it+i" ! 3eri,0
be4i""i"4 t+irt$ >;C? 0!$/ bef,re t+e 0!te ,f /#c+ /!-e ,r 0i/3,/iti," !"0 e"0i"4
t+irt$ >;C? 0!$/ !fter /#c+ 0!te, t+e t!23!$er +!/ !c8#ire0 >b$ 3#rc+!/e ,r b$
e2c+!"4e #3," 5+ic+ t+e e"tire !m,#"t ,f 4!i" ,r -,// 5!/ rec,4"i6e0 b$ -!5?, ,r
+!/ e"tere0 i"t, ! c,"tr!ct ,r ,3ti," /, t, !c8#ire, /#b/t!"ti!--$ i0e"tic!- /t,c9 ,r
/ec#ritie/, t+e" ", 0e0#cti," f,r t+e -,// /+!-- be !--,5e0 #"0er )ecti," ;4 #"-e//
t+e c-!im i/ m!0e b$ ! 0e!-er i" /t,c9 ,r /ec#ritie/ !"0 5it+ re/3ect t, ! tr!"/!cti,"
m!0e i" t+e ,r0i"!r$ c,#r/e ,f t+e b#/i"e// ,f /#c+ 0e!-er.
>B? If t+e !m,#"t ,f /t,c9 ,r /ec#ritie/ !c8#ire0 >,r c,vere0 b$ t+e c,"tr!ct ,r
,3ti," t, !c8#ire? i/ -e// t+!" t+e !m,#"t ,f /t,c9 ,r /ec#ritie/ /,-0 ,r ,t+er5i/e
0i/3,/e0 ,f, t+e" t+e 3!rtic#-!r /+!re/ ,f /t,c9 ,r /ec#ritie/, t+e -,// fr,m t+e /!-e
,r ,t+er 0i/3,/iti," ,f 5+ic+ i/ ",t 0e0#ctib-e, /+!-- be 0etermi"e0 #"0er r#-e/ !"0
re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er.
>C? If t+e !m,#"t ,f /t,c9 ,r /ec#ritie/ !c8#ire0 >,r c,vere0 b$ t+e c,"tr!ct ,r
,3ti," t, !c8#ire? i/ ",t -e// t+!" t+e !m,#"t ,f /t,c9 ,r /ec#ritie/ /,-0 ,r
,t+er5i/e 0i/3,/e0 ,f, t+e" t+e 3!rtic#-!r /+!re/ ,f /t,c9 ,r /ec#ritie/, t+e
!c8#i/iti," ,f 5+ic+ >,r t+e c,"tr!ct ,r ,3ti," t, !c8#ire 5+ic+? re/#-te0 i" t+e
","@0e0#ctibi-it$ ,f t+e -,//, /+!-- be 0etermi"e0 #"0er r#-e/ !"0 re4#-!ti,"/
3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er.
)ECTION ;9C!3it!- &!i"/ !"0 L,//e/
>A? Defi"iti,"/ @ A/ #/e0 i" t+i/ Tit-e .
>1? C!3it!- A//et/. . T+e term Fc!3it!- !//et/F me!"/ 3r,3ert$ +e-0 b$ t+e t!23!$er
>5+et+er ,r ",t c,""ecte0 5it+ +i/ tr!0e ,r b#/i"e//?, b#t 0,e/ ",t i"c-#0e /t,c9 i"
tr!0e ,f t+e t!23!$er ,r ,t+er 3r,3ert$ ,f ! 9i"0 5+ic+ 5,#-0 3r,3er-$ be i"c-#0e0
i" t+e i"ve"t,r$ ,f t+e t!23!$er if ," +!"0 !t t+e c-,/e ,f t+e t!2!b-e $e!r, ,r
3r,3ert$ +e-0 b$ t+e t!23!$er 3rim!ri-$ f,r /!-e t, c#/t,mer/ i" t+e ,r0i"!r$ c,#r/e
,f +i/ tr!0e ,r b#/i"e//, ,r 3r,3ert$ #/e0 i" t+e tr!0e ,r b#/i"e//, ,f ! c+!r!cter
5+ic+ i/ /#b:ect t, t+e !--,5!"ce f,r 0e3reci!ti," 3r,vi0e0 i" )#b/ecti," >*? ,f
)ecti," ;47 ,r re!- 3r,3ert$ #/e0 i" tr!0e ,r b#/i"e// ,f t+e t!23!$er.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..+3.2 April --, -..2Consolidated Regulations
0rescribing the Rules on the Taxation of &ale, Barter, =xchange or ;ther 7isposition of
&hares of &toc" of domestic corporation that are listed and traded through the #ocal
&toc" =xchange, or disposition of shares through Initial 0ublic ;ffering 8I0;9 or
disposition of shares not traded through the #ocal &toc" =xchange andDeld as Capital
Assets
CASES DIGEST
#i5uidation test is not acceptable in determining whether or not a taxpayer is carrying
on a trade or business
The fact that property is sold for purposes of li5uidation does not foreclose a
determination that a :trade or business: is being conducted by the seller The sole
5uestion is E were the taxpayers in the business of subdividing real estateS If they were,
then it seems indisputable that the property sold falls within the exception in the
definition of capital assets? that is, that it constituted Zproperty held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business(:
Tomas Calasan6, et al vs Commissioner of Internal Revenue, et al,
$R )o #3-+-24, ;ctober /, */2+
$ains from sale of subdivided lots are ordinary income
;ne may, of course, li5uidate a capital asset To do so, it is necessary to sell The sale
may be conducted in the most advantageous manner to the seller and he will not lose the
benefits of the capital gain provision of the statute unless he enters the real estate
business and carries on the sale in the manner in which such a business is ordinarily
conducted In that event, the li5uidation constitutes a business and a sale in the ordinary
course of such a business and the preferred tax status is lost
Tomas Calasan6, et al vs Commissioner of Internal Revenue, et al
$R )o #3-+-24, ;ctober /, */2+
If the asset is not among the exceptions provided the )IRC, it is a capital asset
The statutory definition of capital assets is negative in nature If the asset is not among
the exceptions, it is a capital asset? conversely, assets falling within the exceptions are
ordinary assets And necessarily, any gain resulting from the sale or exchange of an asset
is a capital gain or an ordinary gain depending on the "ind of asset involved in the
transaction
Tomas Calasan6, et al vs Commissioner of Internal Revenue, et al, $R
)o #3-+-24, ;ctober /, */2+
There is no rigid rule in determining with finality whether property sold by a taxpayer is
held primarily for sale to customers in the ordinary course of his trade or business or as
capital asset
There is no rigid rule or fixed formula by which it can be determined with finality
whether property sold by a taxpayer was held primarily for sale to customers in the
ordinary course of his trade or business or whether it was sold as a capital asset
Although several factors or indices have been recogni6ed as helpful guides in ma"ing a
determination, none of these is decisive? neither is the presence nor the absence of these
factors conclusive =ach case must in the last analysis rest upon its own peculiar facts
and circumstances
Tomas Calasan6, et al vs Commissioner of Internal Revenue, et al,
$R )o #3-+-24, ;ctober /, */2+
Inherited property is deemed primarily for sale in the ordinary course of business if it is
substantially improved orBand very actively sold
Also a property initially classified as a capital asset may thereafter be treated as an
ordinary asset if a combination of the factors indubitably tend to show that the activity
was in furtherance of or in the course of the taxpayer(s trade or business Thus, a sale of
inherited real property usually gives capital gain or loss even though the property has to
be subdivided or improved or both to ma"e it salable Dowever, if the inherited property
is substantially improved or very actively sold or both it may be treated as held primarily
for sale to customers in the ordinary course of the heir(s business
Tomas Calasan6, et al vs Commissioner of Internal Revenue, et al,
$R )o #3-+-24, ;ctober /, */2+
0roperty ceases to be a capital asset if the amount expended to improve it is double its
original cost
A property ceases to be a capital asset if the amount expended to improve it is double its
original cost, for the extensive improvement indicates that the seller held the property
primarily for sale to customers in the ordinary course of his business
Tomas Calasan6, et al vs Commissioner of Internal Revenue, et al, $R )o #3-+-24,
;ctober /, */2+
>2? Net C!3it!- &!i" . T+e term F"et c!3it!- 4!i"F me!"/ t+e e2ce// ,f t+e 4!i"/
fr,m /!-e/ ,r e2c+!"4e/ ,f c!3it!- !//et/ ,ver t+e -,//e/ fr,m /#c+ /!-e/ ,r
e2c+!"4e/.
>;? Net C!3it!- L,// . T+e term F"et c!3it!- -,//F me!"/ t+e e2ce// ,f t+e -,//e/
fr,m /!-e/ ,r e2c+!"4e/ ,f c!3it!- !//et/ ,ver t+e 4!i"/ fr,m /#c+ /!-e/ ,r
e2c+!"4e/.
>B? Perce"t!4e T!9e" i"t, Acc,#"t . I" t+e c!/e ,f ! t!23!$er, ,t+er t+!" !
c,r3,r!ti,", ,"-$ t+e f,--,5i"4 3erce"t!4e/ ,f t+e 4!i" ,r -,// rec,4"i6e0 #3," t+e
/!-e ,r e2c+!"4e ,f ! c!3it!- !//et /+!-- be t!9e" i"t, !cc,#"t i" c,m3#ti"4 "et
c!3it!- 4!i", "et c!3it!- -,//, !"0 "et i"c,me=
>1? O"e +#"0re0 3erce"t >1CCG? if t+e c!3it!- !//et +!/ bee" +e-0 f,r ",t m,re t+!"
t5e-ve >12? m,"t+/7 !"0
>2? *ift$ 3erce"t ><CG? if t+e c!3it!- !//et +!/ bee" +e-0 f,r m,re t+!" t5e-ve >12?
m,"t+/7
>C? Limit!ti," ," C!3it!- L,//e/ . L,//e/ fr,m /!-e/ ,r e2c+!"4e/ ,f c!3it!-
!//et/ /+!-- be !--,5e0 ,"-$ t, t+e e2te"t ,f t+e 4!i"/ fr,m /#c+ /!-e/ ,r
e2c+!"4e/. If ! b!"9 ,r tr#/t c,m3!"$ i"c,r3,r!te0 #"0er t+e -!5/ ,f t+e
P+i-i33i"e/, ! /#b/t!"ti!- 3!rt ,f 5+,/e b#/i"e// i/ t+e recei3t ,f 0e3,/it/, /e--/ !"$
b,"0, 0ebe"t#re, ",te, ,r certific!te ,r ,t+er evi0e"ce ,f i"0ebte0"e// i//#e0 b$
!"$ c,r3,r!ti," >i"c-#0i"4 ,"e i//#e0 b$ ! 4,ver"me"t ,r 3,-itic!- /#b0ivi/i,"
t+ere,f?, 5it+ i"tere/t c,#3,"/ ,r i" re4i/tere0 f,rm, !"$ -,// re/#-ti"4 fr,m /#c+
/!-e /+!-- ",t be /#b:ect t, t+e f,re4,i"4 -imit!ti," !"0 /+!-- ",t be i"c-#0e0 i"
0etermi"i"4 t+e !33-ic!bi-it$ ,f /#c+ -imit!ti," t, ,t+er -,//e/.
CASES DIGEST
#osses on e5uity investments are not deductible as bad debts
The exclusionary clause found in the law does not include all forms of securities but
specifically covers only bonds, debentures, notes, certificates or other evidence of
indebtedness, with interest coupons or in registered form, which are the instruments of
credit normally dealt with in the usual lending operations of a financial institution
=5uity holdings cannot come close to being within the purview of :evidence of
indebtedness:>erily, it is for a li"e thesis that the loss of petitioner ban" in its e5uity
investment in the Dong"ong subsidiary cannot also be deductible as a bad debt The
shares of stoc" in 5uestion do not constitute a loan extended by it to its subsidiary 8%irst
CBC Capital9 or a debt subject to obligatory repayment by the latter, essential elements
to constitute a bad debt, but a long term investment made by CBC
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); *23.* )ovember *1, -..*
$uidelines on the 'onitoring of the Basis of 0roperty Transferred and &hares Received,
0ursuant to a Tax3%ree =xchange of 0roperty for &hares under &ection 4.8C98-9 of the
)ational Internal Revenue Code of *//,, 0rescribing the 0enalties for %ailure to Comply
with such $uidelines, and Authori6ing the Imposition of %ees for the 'onitoring Thereof
>D? Net C!3it!- L,// C!rr$@,ver . If !"$ t!23!$er, ,t+er t+!" ! c,r3,r!ti,",
/#/t!i"/ i" !"$ t!2!b-e $e!r ! "et c!3it!- -,//, /#c+ -,// >i" !" !m,#"t ",t i" e2ce//
,f t+e "et i"c,me f,r /#c+ $e!r? /+!-- be tre!te0 i" t+e /#ccee0i"4 t!2!b-e $e!r !/ !
-,// fr,m t+e /!-e ,r e2c+!"4e ,f ! c!3it!- !//et +e-0 f,r ",t m,re t+!" t5e-ve >12?
m,"t+/.
>E? Retireme"t ,f B,"0/, Etc . *,r 3#r3,/e/ ,f t+i/ Tit-e, !m,#"t/ receive0 b$
t+e +,-0er #3," t+e retireme"t ,f b,"0/, 0ebe"t#re/, ",te/ ,r certific!te/ ,r ,t+er
evi0e"ce/ ,f i"0ebte0"e// i//#e0 b$ !"$ c,r3,r!ti," >i"c-#0i"4 t+,/e i//#e0 b$ !
4,ver"me"t ,r 3,-itic!- /#b0ivi/i," t+ere,f? 5it+ i"tere/t c,#3,"/ ,r i" re4i/tere0
f,rm, /+!-- be c,"/i0ere0 !/ !m,#"t/ receive0 i" e2c+!"4e t+eref,r.
>*? &!i"/ !"0 L,//e/ fr,m )+,rt )!-e/, Etc. . *,r 3#r3,/e/ ,f t+i/ Tit-e .
>1? &!i"/ ,r -,//e/ fr,m /+,rt /!-e/ ,f 3r,3ert$ /+!-- be c,"/i0ere0 !/ 4!i"/ ,r
-,//e/ fr,m /!-e/ ,r e2c+!"4e/ ,f c!3it!- !//et/7 !"0
>2? &!i"/ ,r -,//e/ !ttrib#t!b-e t, t+e f!i-#re t, e2erci/e 3rivi-e4e/ ,r ,3ti,"/ t,
b#$ ,r /e-- 3r,3ert$ /+!-- be c,"/i0ere0 !/ c!3it!- 4!i"/ ,r -,//e/.
CASES DIGEST
Two conditions for a capital gain or a capital loss to result
&ection -/8d98498B9 of the )IRC conveys that the loss sustained by the holder of the
securities, which are capital assets 8to him9, is to be treated as a capital loss as if
incurred from a sale or exchange transaction A capital gain or a capital loss normally
re5uires the concurrence of two conditions for it to resultC 8*9 There is a sale or
exchange? and 8-9 the thing sold or exchanged is a capital asset @hen securities become
worthless, there is strictly no sale or exchange but the law deems the loss anyway to be
:a loss from the sale or exchange of capital assets: A similar "ind of treatment is given
by the )IRC on the retirement of certificates of indebtedness with interest coupons or in
registered form, short sales and options to buy or sell property where no sale or
exchange strictly exists In these cases, the )IRC dispenses, in effect, with the standard
re5uirement of a sale or exchange for the application of the capital gain and loss
provisions of the code
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
)ECTION 4CDetermi"!ti," ,f Am,#"t !"0 Rec,4"iti," ,f &!i" ,r L,//
>A?C,m3#t!ti," ,f &!i" ,r L,// . T+e 4!i" fr,m t+e /!-e ,r ,t+er 0i/3,/iti," ,f
3r,3ert$ /+!-- be t+e e2ce// ,f t+e !m,#"t re!-i6e0 t+erefr,m ,ver t+e b!/i/ ,r
!0:#/te0 b!/i/ f,r 0etermi"i"4 4!i", !"0 t+e -,// /+!-- be t+e e2ce// ,f t+e b!/i/ ,r
!0:#/te0 b!/i/ f,r 0etermi"i"4 -,// ,ver t+e !m,#"t re!-i6e0. T+e !m,#"t re!-i6e0
fr,m t+e /!-e ,r ,t+er 0i/3,/iti," ,f 3r,3ert$ /+!-- be t+e /#m ,f m,"e$ receive0
3-#/ t+e f!ir m!r9et v!-#e ,f t+e 3r,3ert$ >,t+er t+!" m,"e$? receive07
CASES DIGEST
Instances when no recognition of gain or loss is made in sale or exchange of property
The law should be ta"en within the context on the general subject of the determination
and recognition of gain or loss It is not preclusive of, let alone renders completely
inconse5uential, the more specific provisions of the code Thus, no such recognition shall
be made if the sale or exchange is made in pursuance of a plan of corporate merger or
consolidation or, if as a result of an exchange of property for stoc"s, the exchanger, alone
or together with others not exceeding four, gains control of the corporation
China Ban"ing Corp vs Court of Appeals, et al, $R )o *-<<.2, Auly */, -...
>B? B!/i/ f,r Determi"i"4 &!i" ,r L,// fr,m )!-e ,r Di/3,/iti," ,f Pr,3ert$ .
T+e b!/i/ ,f 3r,3ert$ /+!-- be .
>1? T+e c,/t t+ere,f i" t+e c!/e ,f 3r,3ert$ !c8#ire0 ," ,r !fter %!rc+ 1, 191;, if
/#c+ 3r,3ert$ 5!/ !c8#ire0 b$ 3#rc+!/e7 ,r
>2? T+e f!ir m!r9et 3rice ,r v!-#e !/ ,f t+e 0!te ,f !c8#i/iti,", if t+e /!me 5!/
!c8#ire0 b$ i"+erit!"ce7 ,r
>;? If t+e 3r,3ert$ 5!/ !c8#ire0 b$ 4ift, t+e b!/i/ /+!-- be t+e /!me !/ if it 5,#-0 be
i" t+e +!"0/ ,f t+e 0,",r ,r t+e -!/t 3rece0i"4 ,5"er b$ 5+,m it 5!/ ",t !c8#ire0
b$ 4ift, e2ce3t t+!t if /#c+ b!/i/ i/ 4re!ter t+!" t+e f!ir m!r9et v!-#e ,f t+e 3r,3ert$
!t t+e time ,f t+e 4ift t+e", f,r t+e 3#r3,/e ,f 0etermi"i"4 -,//, t+e b!/i/ /+!-- be
/#c+ f!ir m!r9et v!-#e7 ,r
>4? If t+e 3r,3ert$ 5!/ !c8#ire0 f,r -e// t+!" !" !0e8#!te c,"/i0er!ti," i" m,"e$
,r m,"e$F/ 5,rt+, t+e b!/i/ ,f /#c+ 3r,3ert$ i/ t+e !m,#"t 3!i0 b$ t+e tr!"/feree
f,r t+e 3r,3ert$7 ,r
><? T+e b!/i/ !/ 0efi"e0 i" 3!r!4r!3+ >C?><? ,f t+i/ )ecti,", if t+e 3r,3ert$ 5!/
!c8#ire0 i" ! tr!"/!cti," 5+ere 4!i" ,r -,// i/ ",t rec,4"i6e0 #"0er 3!r!4r!3+>C?
>2? ,f t+i/ )ecti,".
>C? E2c+!"4e ,f Pr,3ert$ .
>1? &e"er!- R#-e . E2ce3t !/ +erei" 3r,vi0e0, #3," t+e /!-e ,r e2c+!"4e ,f
3r,3ert$, t+e e"tire !m,#"t ,f t+e 4!i" ,r -,//, !/ t+e c!/e m!$ be, /+!-- be
rec,4"i6e0.
>2? E2ce3ti," . N, 4!i" ,r -,// /+!-- be rec,4"i6e0 if i" 3#r/#!"ce ,f ! 3-!" ,f
mer4er ,r c,"/,-i0!ti," .
>!? A c,r3,r!ti,", 5+ic+ i/ ! 3!rt$ t, ! mer4er ,r c,"/,-i0!ti,", e2c+!"4e/
3r,3ert$ /,-e-$ f,r /t,c9 i" ! c,r3,r!ti,", 5+ic+ i/ ! 3!rt$ t, t+e mer4er ,r
c,"/,-i0!ti,"7 ,r
>b? A /+!re+,-0er e2c+!"4e/ /t,c9 i" ! c,r3,r!ti,", 5+ic+ i/ ! 3!rt$ t, t+e mer4er
,r c,"/,-i0!ti,", /,-e-$ f,r t+e /t,c9 ,f !",t+er c,r3,r!ti," !-/, ! 3!rt$ t, t+e
mer4er ,r c,"/,-i0!ti,"7 ,r
>c? A /ec#rit$ +,-0er ,f ! c,r3,r!ti,", 5+ic+ i/ ! 3!rt$ t, t+e mer4er ,r
c,"/,-i0!ti,", e2c+!"4e/ +i/ /ec#ritie/ i" /#c+ c,r3,r!ti,", /,-e-$ f,r /t,c9 ,r
/ec#ritie/ i" !",t+er c,r3,r!ti,", ! 3!rt$ t, t+e mer4er ,r c,"/,-i0!ti,".
N, 4!i" ,r -,// /+!-- !-/, be rec,4"i6e0 if 3r,3ert$ i/ tr!"/ferre0 t, ! c,r3,r!ti,"
b$ ! 3er/," i" e2c+!"4e f,r /t,c9 ,r #"it ,f 3!rtici3!ti," i" /#c+ ! c,r3,r!ti," ,f
5+ic+ !/ ! re/#-t ,f /#c+ e2c+!"4e /!i0 3er/,", !-,"e ,r t,4et+er 5it+ ,t+er/, ",t
e2cee0i"4 f,#r >4? 3er/,"/, 4!i"/ c,"tr,- ,f /!i0 c,r3,r!ti,"= Pr,vi0e0, T+!t /t,c9/
i//#e0 f,r /ervice/ /+!-- ",t be c,"/i0ere0 !/ i//#e0 i" ret#r" f,r 3r,3ert$.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& no *23-..* )ovember *1, -..*
$uidelines on the 'onitoring of the Basis of 0roperty Transferred and &hares Received,
pursuant to a Tax3%ree =xchange of 0roperty for &hares under &ec4. 8c9 8-9 of the )IRC
of *//,, 0rescribing the 0enalties for %ailure to Comply with such $uidelines, and
Authori6ing the imposition of %ees for the 'onitoring Thereof
>;? E2c+!"4e ",t ),-e-$ i" Ei"0
>!? If, i" c,""ecti," 5it+ !" e2c+!"4e 0e/cribe0 i" t+e !b,ve e2ce3ti,"/, !"
i"0ivi0#!-, ! /+!re+,-0er, ! /ec#rit$ +,-0er ,r ! c,r3,r!ti," receive/ ",t ,"-$ /t,c9
,r /ec#ritie/ 3ermitte0 t, be receive0 5it+,#t t+e rec,4"iti," ,f 4!i" ,r -,//, b#t
!-/, m,"e$ !"0D,r 3r,3ert$, t+e 4!i", if !"$, b#t ",t t+e -,//, /+!-- be rec,4"i6e0
b#t i" !" !m,#"t ",t i" e2ce// ,f t+e /#m ,f t+e m,"e$ !"0 t+e f!ir m!r9et v!-#e
,f /#c+ ,t+er 3r,3ert$ receive0= Pr,vi0e0, T+!t !/ t, t+e /+!re+,-0er, if t+e m,"e$
!"0D,r ,t+er 3r,3ert$ receive0 +!/ t+e effect ,f ! 0i/trib#ti," ,f ! t!2!b-e 0ivi0e"0,
t+ere /+!-- be t!2e0 !/ 0ivi0e"0 t, t+e /+!re+,-0er !" !m,#"t ,f t+e 4!i"
rec,4"i6e0 ",t i" e2ce// ,f +i/ 3r,3,rti,"!te /+!re ,f t+e #"0i/trib#te0 e!r"i"4/
!"0 3r,fit/ ,f t+e c,r3,r!ti,"7 t+e rem!i"0er, if !"$, ,f t+e 4!i" rec,4"i6e0 /+!-- be
tre!te0 !/ ! c!3it!- 4!i".
>b? If, i" c,""ecti," 5it+ t+e e2c+!"4e 0e/cribe0 i" t+e !b,ve e2ce3ti,"/, t+e
tr!"/fer,r c,r3,r!ti," receive/ ",t ,"-$ /t,c9 3ermitte0 t, be receive0 5it+,#t t+e
rec,4"iti," ,f 4!i" ,r -,// b#t !-/, m,"e$ !"0D,r ,t+er 3r,3ert$, t+e" >i? if t+e
c,r3,r!ti," receivi"4 /#c+ m,"e$ !"0D,r ,t+er 3r,3ert$ 0i/trib#te/ it i" 3#r/#!"ce
,f t+e 3-!" ,f mer4er ,r c,"/,-i0!ti,", ", 4!i" t, t+e c,r3,r!ti," /+!-- be
rec,4"i6e0 fr,m t+e e2c+!"4e, b#t >ii? if t+e c,r3,r!ti," receivi"4 /#c+ ,t+er
3r,3ert$ !"0D,r m,"e$ 0,e/ ",t 0i/trib#te it i" 3#r/#!"ce ,f t+e 3-!" ,f mer4er ,r
c,"/,-i0!ti,", t+e 4!i", if !"$, b#t ",t t+e -,// t, t+e c,r3,r!ti," /+!-- be
rec,4"i6e0 b#t i" !" !m,#"t ",t i" e2ce// ,f t+e /#m ,f /#c+ m,"e$ !"0 t+e f!ir
m!r9et v!-#e ,f /#c+ ,t+er 3r,3ert$ /, receive0, 5+ic+ i/ ",t 0i/trib#te0.
>4? A//#m3ti," ,f Li!bi-it$
>!? If t+e t!23!$er, i" c,""ecti," 5it+ t+e e2c+!"4e/ 0e/cribe0 i" t+e f,re4,i"4
e2ce3ti,"/, receive/ /t,c9 ,r /ec#ritie/ 5+ic+ 5,#-0 be 3ermitte0 t, be receive0
5it+,#t t+e rec,4"iti," ,f t+e 4!i" if it 5ere t+e /,-e c,"/i0er!ti,", !"0 !/ ! 3!rt ,f
t+e c,"/i0er!ti,", !",t+er 3!rt$ t, t+e e2c+!"4e !//#me/ ! -i!bi-it$ ,f t+e t!23!$er,
,r !c8#ire/ fr,m t+e t!23!$er 3r,3ert$, /#b:ect t, ! -i!bi-it$, t+e" /#c+ !//#m3ti,"
,r !c8#i/iti," /+!-- ",t be tre!te0 !/ m,"e$ !"0D,r ,t+er 3r,3ert$, !"0 /+!-- ",t
3reve"t t+e e2c+!"4e fr,m bei"4 5it+i" t+e e2ce3ti,"/.
1>b? If t+e !m,#"t ,f t+e -i!bi-itie/ !//#me0 3-#/ t+e !m,#"t ,f t+e -i!bi-itie/ t,
5+ic+ t+e 3r,3ert$ i/ /#b:ect e2cee0 t+e t,t!- ,f t+e !0:#/te0 b!/i/ ,f t+e 3r,3ert$
tr!"/ferre0 3#r/#!"t t, /#c+ e2c+!"4e, t+e" /#c+ e2ce// /+!-- be c,"/i0ere0 !/ !
4!i" fr,m t+e /!-e ,r e2c+!"4e ,f ! c!3it!- !//et ,r ,f 3r,3ert$ 5+ic+ i/ ",t !
c!3it!- !//et, !/ t+e c!/e m!$ be.
><? B!/i/. .
>!? T+e b!/i/ ,f t+e /t,c9 ,r /ec#ritie/ receive0 b$ t+e tr!"/fer,r #3," t+e e2c+!"4e
/3ecifie0 i" t+e !b,ve e2ce3ti," /+!-- be t+e /!me !/ t+e b!/i/ ,f t+e 3r,3ert$,
/t,c9 ,r /ec#ritie/ e2c+!"4e0, 0ecre!/e0 b$ >1? t+e m,"e$ receive0, !"0 >2? t+e f!ir
m!r9et v!-#e ,f t+e ,t+er 3r,3ert$ receive0, !"0 i"cre!/e0 b$ >!? t+e !m,#"t
tre!te0 !/ 0ivi0e"0 ,f t+e /+!re+,-0er !"0 >b? t+e !m,#"t ,f !"$ 4!i" t+!t 5!/
rec,4"i6e0 ," t+e e2c+!"4e= Pr,vi0e0, T+!t t+e 3r,3ert$ receive0 !/ Fb,,tF /+!--
+!ve !/ b!/i/ it/ f!ir m!r9et v!-#e= Pr,vi0e0, f#rt+er, T+!t if !/ 3!rt ,f t+e
c,"/i0er!ti," t, t+e tr!"/fer,r, t+e tr!"/feree ,f 3r,3ert$ !//#me/ ! -i!bi-it$ ,f t+e
tr!"/fer,r ,r !c8#ire/ fr,m t+e -!tter 3r,3ert$ /#b:ect t, ! -i!bi-it$, /#c+ !//#m3ti,"
,r !c8#i/iti," >i" t+e !m,#"t ,f t+e -i!bi-it$? /+!--, f,r 3#r3,/e/ ,f t+i/ 3!r!4r!3+,
be tre!te0 !/ m,"e$ receive0 b$ t+e tr!"/fer,r ," t+e e2c+!"4e= Pr,vi0e0, fi"!--$,
T+!t if t+e tr!"/fer,r receive/ /ever!- 9i"0/ ,f /t,c9 ,r /ec#ritie/, t+e
C,mmi//i,"er i/ +ereb$ !#t+,ri6e0 t, !--,c!te t+e b!/i/ !m,"4 t+e /ever!- c-!//e/
,f /t,c9/ ,r /ec#ritie/.
>b? T+e b!/i/ ,f t+e 3r,3ert$ tr!"/ferre0 i" t+e +!"0/ ,f t+e tr!"/feree /+!-- be t+e
/!me !/ it 5,#-0 be i" t+e +!"0/ ,f t+e tr!"/fer,r i"cre!/e0 b$ t+e !m,#"t ,f t+e
4!i" rec,4"i6e0 t, t+e tr!"/fer,r ," t+e tr!"/fer.
>A? Defi"iti,"/. .
>!? T+e term F/ec#ritie/F me!"/ b,"0/ !"0 0ebe"t#re/ b#t ",t F",te/F ,f 5+!tever
c-!// ,r 0#r!ti,".
>b? T+e term Fmer4erF ,r Fc,"/,-i0!ti,"F, 5+e" #/e0 i" t+i/ )ecti,", /+!-- be
#"0er/t,,0 t, me!"= >i? t+e ,r0i"!r$ mer4er ,r c,"/,-i0!ti,", ,r >ii? t+e !c8#i/iti,"
b$ ,"e c,r3,r!ti," ,f !-- ,r /#b/t!"ti!--$ !-- t+e 3r,3ertie/ ,f !",t+er c,r3,r!ti,"
/,-e-$ f,r /t,c9= Pr,vi0e0, T+!t f,r ! tr!"/!cti," t, be re4!r0e0 !/ ! mer4er ,r
c,"/,-i0!ti," 5it+i" t+e 3#rvie5 ,f t+i/ )ecti,", it m#/t be #"0ert!9e" f,r ! b,"!
fi0e b#/i"e// 3#r3,/e !"0 ",t /,-e-$ f,r t+e 3#r3,/e ,f e/c!3i"4 t+e b#r0e" ,f
t!2!ti,"= Pr,vi0e0, f#rt+er, T+!t i" 0etermi"i"4 5+et+er ! b,"! fi0e b#/i"e//
3#r3,/e e2i/t/, e!c+ !"0 ever$ /te3 ,f t+e tr!"/!cti," /+!-- be c,"/i0ere0 !"0 t+e
5+,-e tr!"/!cti," ,r /erie/ ,f tr!"/!cti,"/ /+!-- be tre!te0 !/ ! /i"4-e #"it=
Pr,vi0e0, fi"!--$, T+!t i" 0etermi"i"4 5+et+er t+e 3r,3ert$ tr!"/ferre0 c,"/tit#te/
! /#b/t!"ti!- 3,rti," ,f t+e 3r,3ert$ ,f t+e tr!"/fer,r, t+e term F3r,3ert$F /+!-- be
t!9e" t, i"c-#0e t+e c!/+ !//et/ ,f t+e tr!"/fer,r.
>c? T+e term Fc,"tr,-F, 5+e" #/e0 i" t+i/ )ecti,", /+!-- me!" ,5"er/+i3 ,f /t,c9/ i"
! c,r3,r!ti," 3,//e//i"4 !t -e!/t fift$@,"e 3erce"t ><1G? ,f t+e t,t!- v,ti"4 3,5er
,f !-- c-!//e/ ,f /t,c9/ e"tit-e0 t, v,te.
>0? T+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, i/
+ereb$ !#t+,ri6e0 t, i//#e r#-e/ !"0 re4#-!ti,"/ f,r t+e 3#r3,/e ,f 0etermi"i"4 t+e
3r,3er !m,#"t ,f tr!"/ferre0 !//et/ 5+ic+ meet t+e /t!"0!r0 ,f t+e 3+r!/e
F/#b/t!"ti!--$ !--F !"0 f,r t+e 3r,3er im3-eme"t!ti," ,f t+i/ )ecti,".
)ECTION 41. I"ve"t,rie/. . B+e"ever i" t+e :#04me"t ,f t+e
C,mmi//i,"er, t+e #/e ,f i"ve"t,rie/ i/ "ece//!r$ i" ,r0er t, 0etermi"e c-e!r-$ t+e
i"c,me ,f !"$ t!23!$er, i"ve"t,rie/ /+!-- be t!9e" b$ /#c+ t!23!$er #3," /#c+
b!/i/ !/ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er,
m!$, b$ r#-e/ !"0 re4#-!ti,"/, 3re/cribe !/ c,"f,rmi"4 !/ "e!r-$ !/ m!$ be t, t+e
be/t !cc,#"ti"4 3r!ctice i" t+e tr!0e ,r b#/i"e// !"0 !/ m,/t c-e!r-$ ref-ecti"4 t+e
i"c,me.
If ! t!23!$er, !fter +!vi"4 c,m3-ie0 5it+ t+e term/ !"0 c,"0iti,"/ 3re/cribe0 b$
t+e C,mmi//i,"er, #/e/ ! 3!rtic#-!r met+,0 ,f v!-#i"4 it/ i"ve"t,r$ f,r !"$ t!2!b-e
$e!r, t+e" /#c+ met+,0 /+!-- be #/e0 i" !-- /#b/e8#e"t t!2!b-e $e!r/ #"-e//=
>i? 5it+ t+e !33r,v!- ,f t+e C,mmi//i,"er, ! c+!"4e t, ! 0iffere"t met+,0 i/
!#t+,ri6e07 ,r
>ii? t+e C,mmi//i,"er fi"0/ t+!t t+e "!t#re ,f t+e /t,c9 ," +!"0 >e.4., it/ /c!rcit$,
-i8#i0it$, m!r9et!bi-it$ !"0 3rice m,veme"t/? i/ /#c+ t+!t i"ve"t,r$ 4!i"/ /+,#-0
be c,"/i0ere0 re!-i6e0 f,r t!2 3#r3,/e/ !"0, t+eref,re, it i/ "ece//!r$ t, m,0if$ t+e
v!-#!ti," met+,0 f,r 3#r3,/e/ ,f !/cert!i"i"4 t+e i"c,me, 3r,fit/, ,r -,// i" ! m,re
re!-i/tic m!""er= Pr,vi0e0, +,5ever, T+!t t+e C,mmi//i,"er /+!-- ",t e2erci/e +i/
!#t+,rit$ t, re8#ire ! c+!"4e i" i"ve"t,r$ met+,0 m,re ,fte" t+!" ,"ce ever$ t+ree
>;? $e!r/= Pr,vi0e0, f#rt+er, T+!t !"$ c+!"4e i" !" i"ve"t,r$ v!-#!ti," met+,0
m#/t be /#b:ect t, !33r,v!- b$ t+e )ecret!r$ ,f *i"!"ce.
)ECTION 42. I"c,me fr,m ),#rce/ Bit+i" t+e P+i-i33i"e/
>A? &r,// I"c,me *r,m ),#rce/ Bit+i" t+e P+i-i33i"e/. . T+e f,--,5i"4 item/ ,f
4r,// i"c,me /+!-- be tre!te0 !/ 4r,// i"c,me fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/=
>1? I"tere/t/. . I"tere/t/ 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/, !"0 i"tere/t/
," b,"0/, ",te/ ,r ,t+er i"tere/t@be!ri"4 ,b-i4!ti,"/ ,f re/i0e"t/, c,r3,r!te ,r
,t+er5i/e7
CASES DIGEST
Residence of obligor who pays the interest determines the source of interest income
The law does not spea" of activity but of :source: =ven if all the related activities such
as the signing of the contract, the construction of the vessels, the payment of the
stipulated price, and their delivery to the )7C were done in To"yo, it is the residence of
the obligor who pays the interest which is the determining factor of the source of interest
income
)ational 7evelopment Company vs Commissioner of Internal Revenue,
$R )o #3<1/+*, Aune 1., */2,
>2? Divi0e"0/. . T+e !m,#"t receive0 !/ 0ivi0e"0/=
>!? *r,m ! 0,me/tic c,r3,r!ti,"7 !"0
>b? *r,m ! f,rei4" c,r3,r!ti,", #"-e// -e// t+!" fift$ 3erce"t ><CG? ,f t+e 4r,//
i"c,me ,f /#c+ f,rei4" c,r3,r!ti," f,r t+e t+ree@$e!r 3eri,0 e"0i"4 5it+ t+e c-,/e
,f it/ t!2!b-e $e!r 3rece0i"4 t+e 0ec-!r!ti," ,f /#c+ 0ivi0e"0/ >,r f,r /#c+ 3!rt ,f
/#c+ 3eri,0 !/ t+e c,r3,r!ti," +!/ bee" i" e2i/te"ce? 5!/ 0erive0 fr,m /,#rce/
5it+i" t+e P+i-i33i"e/ !/ 0etermi"e0 #"0er t+e 3r,vi/i,"/ ,f t+i/ )ecti,"7 b#t ,"-$
i" !" !m,#"t 5+ic+ be!r/ t+e /!me r!ti, t, /#c+ 0ivi0e"0/ !/ t+e 4r,// i"c,me ,f
t+e c,r3,r!ti," f,r /#c+ 3eri,0 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/ be!r/
t, it/ 4r,// i"c,me fr,m !-- /,#rce/.
>;? )ervice/. . C,m3e"/!ti," f,r -!b,r ,r 3er/,"!- /ervice/ 3erf,rme0 i" t+e
P+i-i33i"e/7
>4? Re"t!-/ !"0 R,$!-tie/. . Re"t!-/ !"0 r,$!-tie/ fr,m 3r,3ert$ -,c!te0 i" t+e
P+i-i33i"e/ ,r fr,m !"$ i"tere/t i" /#c+ 3r,3ert$, i"c-#0i"4 re"t!-/ ,r r,$!-tie/ f,r
.
>!? T+e #/e ,f ,r t+e ri4+t ,r 3rivi-e4e t, #/e i" t+e P+i-i33i"e/ !"$ c,3$ri4+t,
3!te"t, 0e/i4" ,r m,0e-, 3-!", /ecret f,rm#-! ,r 3r,ce//, 4,,05i--, tr!0em!r9, tr!0e
br!"0 ,r ,t+er -i9e 3r,3ert$ ,r ri4+t7
>b? T+e #/e ,f, ,r t+e ri4+t t, #/e i" t+e P+i-i33i"e/ !"$ i"0#/tri!-, c,mmerci!- ,r
/cie"tific e8#i3me"t7
>c? T+e /#33-$ ,f /cie"tific, tec+"ic!-, i"0#/tri!- ,r c,mmerci!- 9",5-e04e ,r
i"f,rm!ti,"7
>0? T+e /#33-$ ,f !"$ !//i/t!"ce t+!t i/ !"ci--!r$ !"0 /#b/i0i!r$ t,, !"0 i/ f#r"i/+e0
!/ ! me!"/ ,f e"!b-i"4 t+e !33-ic!ti," ,r e":,$me"t ,f, !"$ /#c+ 3r,3ert$ ,r ri4+t
!/ i/ me"ti,"e0 i" 3!r!4r!3+ >!?, !"$ /#c+ e8#i3me"t !/ i/ me"ti,"e0 i" 3!r!4r!3+
>b? ,r !"$ /#c+ 9",5-e04e ,r i"f,rm!ti," !/ i/ me"ti,"e0 i" 3!r!4r!3+ >c?7
>e? T+e /#33-$ ,f /ervice/ b$ ! ","re/i0e"t 3er/," ,r +i/ em3-,$ee i" c,""ecti,"
5it+ t+e #/e ,f 3r,3ert$ ,r ri4+t/ be-,"4i"4 t,, ,r t+e i"/t!--!ti," ,r ,3er!ti," ,f
!"$ br!"0, m!c+i"er$ ,r ,t+er !33!r!t#/ 3#rc+!/e0 fr,m /#c+ ","re/i0e"t 3er/,"7
>f? Tec+"ic!- !0vice, !//i/t!"ce ,r /ervice/ re"0ere0 i" c,""ecti," 5it+ tec+"ic!-
m!"!4eme"t ,r !0mi"i/tr!ti," ,f !"$ /cie"tific, i"0#/tri!- ,r c,mmerci!-
#"0ert!9i"4, ve"t#re, 3r,:ect ,r /c+eme7 !"0
>4? T+e #/e ,f ,r t+e ri4+t t, #/e=
>i? %,ti," 3ict#re fi-m/7
>ii? *i-m/ ,r vi0e, t!3e/ f,r #/e i" c,""ecti," 5it+ te-evi/i,"7 !"0
>iii? T!3e/ f,r #/e i" c,""ecti," 5it+ r!0i, br,!0c!/ti"4.
><? )!-e ,f Re!- Pr,3ert$. . &!i"/, 3r,fit/ !"0 i"c,me fr,m t+e /!-e ,f re!-
3r,3ert$ -,c!te0 i" t+e P+i-i33i"e/7 !"0
>A? )!-e ,f Per/,"!- Pr,3ert$. . &!i"/, 3r,fit/ !"0 i"c,me fr,m t+e /!-e ,f
3er/,"!- 3r,3ert$, !/ 0etermi"e0 i" )#b/ecti," >E? ,f t+i/ )ecti,".
>B? T!2!b-e I"c,me *r,m ),#rce/ Bit+i" t+e P+i-i33i"e/. .
>1? &e"er!- R#-e. . *r,m t+e item/ ,f 4r,// i"c,me /3ecifie0 i" )#b/ecti," >A? ,f
t+i/ )ecti,", t+ere /+!-- be 0e0#cte0 t+e e23e"/e/, -,//e/ !"0 ,t+er 0e0#cti,"/
3r,3er-$ !--,c!te0 t+eret, !"0 ! r!t!b-e 3!rt ,f e23e"/e/, i"tere/t/, -,//e/ !"0 ,t+er
0e0#cti,"/ effective-$ c,""ecte0 5it+ t+e b#/i"e// ,r tr!0e c,"0#cte0 e2c-#/ive-$
5it+i" t+e P+i-i33i"e/ 5+ic+ c!"",t 0efi"ite-$ be !--,c!te0 t, /,me item/ ,r c-!//
,f 4r,// i"c,me= Pr,vi0e0, T+!t /#c+ item/ ,f 0e0#cti,"/ /+!-- be !--,5e0 ,"-$ if
f#--$ /#b/t!"ti!te0 b$ !-- t+e i"f,rm!ti," "ece//!r$ f,r it/ c!-c#-!ti,". T+e
rem!i"0er, if !"$, /+!-- be tre!te0 i" f#-- !/ t!2!b-e i"c,me fr,m /,#rce/ 5it+i" t+e
P+i-i33i"e/.
>2? E2ce3ti,". . N, 0e0#cti,"/ f,r i"tere/t 3!i0 ,r i"c#rre0 !br,!0 /+!-- be
!--,5e0 fr,m t+e item ,f 4r,// i"c,me /3ecifie0 i" )#b/ecti," >A? #"-e//
i"0ebte0"e// 5!/ !ct#!--$ i"c#rre0 t, 3r,vi0e f#"0/ f,r #/e i" c,""ecti," 5it+ t+e
c,"0#ct ,r ,3er!ti," ,f tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/.
>C? &r,// I"c,me *r,m ),#rce/ Bit+,#t t+e P+i-i33i"e/. . T+e f,--,5i"4 item/
,f 4r,// i"c,me /+!-- be tre!te0 !/ i"c,me fr,m /,#rce/ 5it+,#t t+e P+i-i33i"e/=
>1? I"tere/t/ ,t+er t+!" t+,/e 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/ !/
3r,vi0e0 i" 3!r!4r!3+ >1? ,f )#b/ecti," >A? ,f t+i/ )ecti,"7
>2? Divi0e"0/ ,t+er t+!" t+,/e 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/ !/
3r,vi0e0 i" 3!r!4r!3+ >2? ,f )#b/ecti," >A? ,f t+i/ )ecti,"7
>;? C,m3e"/!ti," f,r -!b,r ,r 3er/,"!- /ervice/ 3erf,rme0 5it+,#t t+e P+i-i33i"e/7
>4? Re"t!-/ ,r r,$!-tie/ fr,m 3r,3ert$ -,c!te0 5it+,#t t+e P+i-i33i"e/ ,r fr,m !"$
i"tere/t i" /#c+ 3r,3ert$ i"c-#0i"4 re"t!-/ ,r r,$!-tie/ f,r t+e #/e ,f ,r f,r t+e
3rivi-e4e ,f #/i"4 5it+,#t t+e P+i-i33i"e/, 3!te"t/, c,3$ri4+t/, /ecret 3r,ce//e/ !"0
f,rm#-!/, 4,,05i--, tr!0em!r9/, tr!0e br!"0/, fr!"c+i/e/ !"0 ,t+er -i9e 3r,3ertie/7
!"0
><? &!i"/, 3r,fit/ !"0 i"c,me fr,m t+e /!-e ,f re!- 3r,3ert$ -,c!te0 5it+,#t t+e
P+i-i33i"e/.
>D? T!2!b-e I"c,me *r,m ),#rce/ Bit+,#t t+e P+i-i33i"e/. . *r,m t+e item/ ,f
4r,// i"c,me /3ecifie0 i" )#b/ecti," >C? ,f t+i/ )ecti," t+ere /+!-- be 0e0#cte0 t+e
e23e"/e/, -,//e/, !"0 ,t+er 0e0#cti,"/ 3r,3er-$ !33,rti,"e0 ,r !--,c!te0 t+eret,
!"0 ! r!t!b-e 3!rt ,f !"$ e23e"/e, -,// ,r ,t+er 0e0#cti," 5+ic+ c!"",t 0efi"ite-$
be !--,c!te0 t, /,me item/ ,r c-!//e/ ,f 4r,// i"c,me. T+e rem!i"0er, if !"$, /+!--
be tre!te0 i" f#-- !/ t!2!b-e i"c,me fr,m /,#rce/ 5it+,#t t+e P+i-i33i"e/.
>E? I"c,me *r,m ),#rce/ P!rt-$ Bit+i" !"0 P!rt-$ Bit+,#t t+e P+i-i33i"e/. .
Item/ ,f 4r,// i"c,me, e23e"/e/, -,//e/ !"0 0e0#cti,"/, ,t+er t+!" t+,/e /3ecifie0
i" )#b/ecti,"/ >A? !"0 >C? ,f t+i/ )ecti,", /+!-- be !--,c!te0 ,r !33,rti,"e0 t,
/,#rce/ 5it+i" ,r 5it+,#t t+e P+i-i33i"e/, #"0er t+e r#-e/ !"0 re4#-!ti,"/
3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er. B+ere item/ ,f 4r,// i"c,me !re /e3!r!te-$ !--,c!te0 t, /,#rce/
5it+i" t+e P+i-i33i"e/, t+ere /+!-- be 0e0#cte0 >f,r t+e 3#r3,/e ,f c,m3#ti"4 t+e
t!2!b-e i"c,me t+erefr,m? t+e e23e"/e/, -,//e/ !"0 ,t+er 0e0#cti,"/ 3r,3er-$
!33,rti,"e0 ,r !--,c!te0 t+eret, !"0 ! r!t!b-e 3!rt ,f ,t+er e23e"/e/, -,//e/ ,r
,t+er 0e0#cti,"/ 5+ic+ c!"",t 0efi"ite-$ be !--,c!te0 t, /,me item/ ,r c-!//e/ ,f
4r,// i"c,me. T+e rem!i"0er, if !"$, /+!-- be i"c-#0e0 i" f#-- !/ t!2!b-e i"c,me
fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/. I" t+e c!/e ,f 4r,// i"c,me 0erive0 fr,m
/,#rce/ 3!rt-$ 5it+i" !"0 3!rt-$ 5it+,#t t+e P+i-i33i"e/, t+e t!2!b-e i"c,me m!$
fir/t be c,m3#te0 b$ 0e0#cti"4 t+e e23e"/e/, -,//e/ ,r ,t+er 0e0#cti,"/
!33,rti,"e0 ,r !--,c!te0 t+eret, !"0 ! r!t!b-e 3!rt ,f !"$ e23e"/e, -,// ,r ,t+er
0e0#cti," 5+ic+ c!"",t 0efi"ite-$ be !--,c!te0 t, /,me item/ ,r c-!//e/ ,f 4r,//
i"c,me7 !"0 t+e 3,rti," ,f /#c+ t!2!b-e i"c,me !ttrib#t!b-e t, /,#rce/ 5it+i" t+e
P+i-i33i"e/ m!$ be 0etermi"e0 b$ 3r,ce//e/ ,r f,rm#-!/ ,f 4e"er!- !33,rti,"me"t
3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce. &!i"/, 3r,fit/ !"0 i"c,me fr,m t+e /!-e ,f
3er/,"!- 3r,3ert$ 3r,0#ce0 >i" 5+,-e ,r i" 3!rt? b$ t+e t!23!$er 5it+i" !"0 /,-0
5it+,#t t+e P+i-i33i"e/, ,r 3r,0#ce0 >i" 5+,-e ,r i" 3!rt? b$ t+e t!23!$er 5it+,#t
!"0 /,-0 5it+i" t+e P+i-i33i"e/, /+!-- be tre!te0 !/ 0erive0 3!rt-$ fr,m /,#rce/
5it+i" !"0 3!rt-$ fr,m /,#rce/ 5it+,#t t+e P+i-i33i"e/.
&!i"/, 3r,fit/ !"0 i"c,me 0erive0 fr,m t+e 3#rc+!/e ,f 3er/,"!- 3r,3ert$ 5it+i"
!"0 it/ /!-e 5it+,#t t+e P+i-i33i"e/, ,r fr,m t+e 3#rc+!/e ,f 3er/,"!- 3r,3ert$
5it+,#t !"0 it/ /!-e 5it+i" t+e P+i-i33i"e/ /+!-- be tre!te0 !/ 0erive0 e"tire-$ fr,m
/,#rce/ 5it+i" t+e c,#"tr$ i" 5+ic+ /,-0= Pr,vi0e0, +,5ever, T+!t 4!i" fr,m t+e
/!-e ,f /+!re/ ,f /t,c9 i" ! 0,me/tic c,r3,r!ti," /+!-- be tre!te0 !/ 0erive0 e"tire-$
fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/ re4!r0-e// ,f 5+ere t+e /!i0 /+!re/ !re /,-0.
T+e tr!"/fer b$ ! ","re/i0e"t !-ie" ,r ! f,rei4" c,r3,r!ti," t, !"$,"e ,f !"$ /+!re
,f /t,c9 i//#e0 b$ ! 0,me/tic c,r3,r!ti," /+!-- ",t be effecte0 ,r m!0e i" it/ b,,9
#"-e//= >1? t+e tr!"/fer,r +!/ fi-e0 5it+ t+e C,mmi//i,"er ! b,"0 c,"0iti,"e0 #3,"
t+e f#t#re 3!$me"t b$ +im ,f !"$ i"c,me t!2 t+!t m!$ be 0#e ," t+e 4!i"/ 0erive0
fr,m /#c+ tr!"/fer, ,r >2? t+e C,mmi//i,"er +!/ certifie0 t+!t t+e t!2e/, if !"$,
im3,/e0 i" t+i/ Tit-e !"0 0#e ," t+e 4!i" re!-i6e0 fr,m /#c+ /!-e ,r tr!"/fer +!ve
bee" 3!i0. It /+!-- be t+e 0#t$ ,f t+e tr!"/fer,r !"0 t+e c,r3,r!ti," t+e /+!re/ ,f
5+ic+ !re /,-0 ,r tr!"/ferre0, t, !0vi/e t+e tr!"/feree ,f t+i/ re8#ireme"t.
>*? Defi"iti,"/. . A/ #/e0 i" t+i/ )ecti," t+e 5,r0/ F/!-eF ,r F/,-0F i"c-#0e
Fe2c+!"4eF ,r Fe2c+!"4e0F7 !"0 t+e 5,r0 F3r,0#ce0F i"c-#0e/ Fcre!te0,F Ff!bric!te0,
Fm!"#f!ct#re0,F Fe2tr!cte0,F F3r,ce//e0,F Fc#re0F ,r F!4e0F.
C'APTER (IIIAcc,#"ti"4 Peri,0/ !"0 %et+,0/ ,f Acc,#"ti"4
)ECTION 4;. &e"er!- R#-e. . T+e t!2!b-e i"c,me /+!-- be c,m3#te0 #3,"
t+e b!/i/ ,f t+e t!23!$erF/ !""#!- !cc,#"ti"4 3eri,0 >fi/c!- $e!r ,r c!-e"0!r $e!r, !/
t+e c!/e m!$ be? i" !cc,r0!"ce 5it+ t+e met+,0 ,f !cc,#"ti"4 re4#-!r-$ em3-,$e0
i" 9ee3i"4 t+e b,,9/ ,f /#c+ t!23!$er7 b#t if ", /#c+ met+,0 ,f !cc,#"ti"4 +!/
bee" /, em3-,$e0, ,r if t+e met+,0 em3-,$e0 0,e/ ",t c-e!r-$ ref-ect t+e i"c,me,
t+e c,m3#t!ti," /+!-- be m!0e i" !cc,r0!"ce 5it+ /#c+ met+,0 !/ i" t+e ,3i"i," ,f
t+e C,mmi//i,"er c-e!r-$ ref-ect/ t+e i"c,me. If t+e t!23!$erF/ !""#!- !cc,#"ti"4
3eri,0 i/ ,t+er t+!" ! fi/c!- $e!r, !/ 0efi"e0 i" )ecti," 22>H?, ,r if t+e t!23!$er +!/
", !""#!- !cc,#"ti"4 3eri,0, ,r 0,e/ ",t 9ee3 b,,9/, ,r if t+e t!23!$er i/ !"
i"0ivi0#!-, t+e t!2!b-e i"c,me /+!-- be c,m3#te0 ," t+e b!/i/ ,f t+e c!-e"0!r $e!r.
CASES DIGEST
!nder the accrual method of accounting, the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction
The correctness or propriety of an accrual must be judged by the facts that a taxpayer
"new, or could reasonably be expected to have "nown, at the closing of its boo"s for the
taxable year Accrual method of accounting presents largely a 5uestion of fact? such that
the taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction
C I R vs Isabela Cultural Corp, $R )o *,--1*, %ebruary *-, -..,
Income reali6ed within taxpayer(s annual accounting period becomes the basis for
computation of the gross income and the tax liability
!nder the withholding tax system, income is viewed as a flow and is measured over a
period of time "nown as an :accounting period: An accounting period covers twelve
months, subdivided into four e5ual segments "nown as :5uarters: Income reali6ed
within the taxpayer(s annual accounting period 8fiscal or calendar year9 becomes the
basis for the computation of the gross income and the tax liability
Citiban", )A vs Court of Appeals, et al, $R )o *.,414, ;ctober *., *//,
Accounting methods for tax purposes differentiated from methods for accounting
purposes
@hile taxable income is based on the method of accounting used by the taxpayer, it will
almost always differ from accounting income This is so because of a fundamental
difference in the ends the two concepts serve Accounting attempts to match cost against
revenue Tax law is aimed at collecting revenue It is 5uic" to treat an item as income,
slow to recogni6e deductions or losses Thus, the tax law will not recogni6e deductions
for contingent future losses except in very limited situations $ood accounting, on the
other hand, re5uires their recognition ;nce this fundamental difference in approach is
accepted, income tax accounting methods can be understood more easily
Consolidated 'ines, Inc vs Court of Tax Appeals, et al,
$R )os #3*2241 R *2244, August -/, */,4
)ECTION 44. Peri,0 i" 5+ic+ Item/ ,f &r,// I"c,me I"c-#0e0. . T+e
!m,#"t ,f !-- item/ ,f 4r,// i"c,me /+!-- be i"c-#0e0 i" t+e 4r,// i"c,me f,r t+e
t!2!b-e $e!r i" 5+ic+ receive0 b$ t+e t!23!$er, #"-e//, #"0er met+,0/ ,f
!cc,#"ti"4 3ermitte0 #"0er )ecti," 4;, !"$ /#c+ !m,#"t/ !re t, be 3r,3er-$
!cc,#"te0 f,r !/ ,f ! 0iffere"t 3eri,0. I" t+e c!/e ,f t+e 0e!t+ ,f ! t!23!$er, t+ere
/+!-- be i"c-#0e0 i" c,m3#ti"4 t!2!b-e i"c,me f,r t+e t!2!b-e 3eri,0 i" 5+ic+ f!--/
t+e 0!te ,f +i/ 0e!t+, !m,#"t/ !ccr#e0 #3 t, t+e 0!te ,f +i/ 0e!t+ if ",t ,t+er5i/e
3r,3er-$ i"c-#0ib-e i" re/3ect ,f /#c+ 3eri,0 ,r ! 3ri,r 3eri,0.
)ECTION 4<. Peri,0 f,r 5+ic+ De0#cti,"/ !"0 Cre0it/ T!9e". . T+e
0e0#cti,"/ 3r,vi0e0 f,r i" t+i/ Tit-e /+!-- be t!9e" f,r t+e t!2!b-e $e!r i" 5+ic+
F3!i0 ,r !ccr#e0F ,r F3!i0 ,r i"c#rre0F, 0e3e"0e"t #3," t+e met+,0 ,f !cc,#"ti"4
#3," t+e b!/i/ ,f 5+ic+ t+e "et i"c,me i/ c,m3#te0, #"-e// i" ,r0er t, c-e!r-$
ref-ect t+e i"c,me, t+e 0e0#cti,"/ /+,#-0 be t!9e" !/ ,f ! 0iffere"t 3eri,0. I" t+e
c!/e ,f t+e 0e!t+ ,f ! t!23!$er, t+ere /+!-- be !--,5e0 !/ 0e0#cti,"/ f,r t+e t!2!b-e
3eri,0 i" 5+ic+ f!--/ t+e 0!te ,f +i/ 0e!t+, !m,#"t/ !ccr#e0 #3 t, t+e 0!te ,f +i/
0e!t+ if ",t ,t+er5i/e 3r,3er-$ !--,5!b-e i" re/3ect ,f /#c+ 3eri,0 ,r ! 3ri,r
3eri,0.
CASES DIGEST
ACCR!A# '=TD;7 ;% ACC;!)TI)$
%ACT&C The BIR disallowed respondent(s claimed expense deductions for professional
and security services for the taxable year */2+? hence, it issued Assessment )otices for
deficiency income tax The BIR contended that, since respondent uses the accrual
method of accounting, expenses for professional services which accrued in */24 and
*/2<, should have been declared as deductions during said years and failure of
respondent to do so bars it from claiming said expenses as deduction for the taxable year
*/2+ Both the CTA and the CA cancelled the Assessment )otices holding that the
claimed deductions were properly claimed in */2+ because it was only in said year when
the bills demanding payment were sent to respondent? hence, even if these professional
services were rendered in */24 or */2<, respondent could not declare the same as
deduction for said years as the amount thereof could not be determined at that time
I&&!=C %or taxpayers adopting the accrual method of accounting, when is an expense
deemed to have accrued for purposes of availing the deduction allowed therefor under
&ec 14 of the Tax CodeS
D=#7C The accrual method relies upon the taxpayer(s RI$DT T; R=C=I>= amounts or
its ;B#I$ATI;) T; 0AG them, in opposition to actual receipt or payment, which
characteri6es the cash method of accounting Amounts of income ACCR!= where the
right to receive them become %IH=7? where there is created an =)%;RC=AB#=
liability &imilarly, liabilities are accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time of payment The accrual of income and
expense is permitted when the A##3=>=)T& T=&T has been met This test re5uiresC 8*9
fixing of a right to income or liability to pay? and 8-9 the availability of the reasonable
accurate determination of such income or liability
The test does not demand that the amount of income or liability be "nown absolutely,
only that a taxpayer has at his disposal the information necessary to compute the amount
with reasonable accuracy In the instant case, the expenses for legal services pertain to
the */24 and */2< legal and retainer fees of the law firm
Beng6onJarraga)arcisoCudala0ecsonA6cunaRBengson The firm has been respondentMs
counsel since the */+.s Respondent can be expected to have reasonably "nown the
retainer fees charged by the firm as well as the compensation for its legal services
%ailure to determine the exact amount of the expense during the taxable year when they
could have been claimed as deductions cannot thus be attributed solely to the delayed
billing of these liabilities by the firm %or one, respondent, in the exercise of due
diligence, could have in5uired into the amount of their obligation to the firm, especially
so that it is using the accrual method of accounting %or another, it could have
reasonably determined the amount of legal and retainer fees owing to its familiarity with
the rates charged by their long time legal consultant &imilarly, the professional fees of
&$> R Co for auditing the financial statements of respondent for the year */2< cannot
be validly claimed as expense deductions in */2+ because respondent failed to present
evidence showing that even with only :reasonable accuracy,: as the standard to ascertain
its liability to &$> R Co in the year */2<, it cannot determine the professional fees
which said company would charge for its services
The accrual method presents largely a 5uestion of fact and the taxpayer bears the burden
of establishing the accrual of an expense or income Respondent failed to discharge this
burden
Dence, per Revenue Audit 'emorandum ;rder )o *3-..., they cannot be validly
deducted from respondent(s gross income for */2+ and were therefore properly
disallowed by the BIR
C I R vs Isabela Cultural Corp, $R )o *,--1*, %ebruary *-, -..,
OCA3$R &0 )o ,..-< April */, -..4P C;''I&&I;)=R ;% I)T=R)A# R=>=)!=, vs
AGA#A D;T=#&, I)C
7 = C I & I ; )
'ay the Bureau of Internal Revenue 8BIR9 still assess a taxpayer for alleged deficiency
income taxes despite the expiration of the three3year period provided for by law * as the
period of limitation for assessment of taxesS
The Case
0etitioner, as the official of the Republic of the 0hilippines charged with the duty of
assessing and collecting internal revenue taxes, see"s a review of the 7ecision, dated *.
Aanuary -..-, of the Court of Tax Appeals 8CTA9 in CTA Case )o +..- entitled Ayala
Dotels, Inc vs Commissioner of Internal Revenue, the dispositive portion of which readsC
I) TD= #I$DT ;% A## TD= %;R=$;I)$, the instant 0etition for Review is hereby
$RA)T=7 Accordingly, the subject assessment issued by the Respondent against 0etitioner
for the year *//1 is hereby ;R7=R=7 CA)C=##=7 A)7 @ITD7RA@)
&; ;R7=R=7
and from the Resolution, dated *- 'arch -..-, denying petitioner(s motion for
reconsideration of the above3mentioned 7ecision, the dispositive portion of which readsC
@D=R=%;R=, 'otion for Reconsideration is hereby 7=)I=7 for lac" of merit
&; ;R7=R=7
The %acts
The facts are undisputed 4 0rivate respondent Ayala Dotels, Inc 8hereinafter referred to as
respondent9 entered into two 8-9 separate contracts of lease with two 8-9 lessees, namely,
'anila 'andarin Dotel and 'anila 0eninsula Dotel, covering two 8-9 parcels of land in
'a"ati Both lease contracts similarly provideC
a9 that each of the #essees, with the consent of 0etitioner, will erect a building on the
parcels of land, to be used as a hotel?
b9 the duration of the contract is twenty3five 8-<9 years starting from the date of actual
occupancy of the hotel by the first paying guest?
c9 that the 0etitioner represents that the leased property forms an essential part of a
commercial center is an integrated and controlled development project, and all buildings
and improvements thereon shall be exclusively used and occupied by commercial businesses
of a type and 5uality that will fit into the pattern of development of the surrounding area?
d9 that the #essees have an option to renew the lease for an additional period of -<
years under the same terms and conditions as those obtaining during the last year of such
lease, the #essees agree to promptly notify the 0etitioner in writing within ninety 8/.9 days
before the termination of the original term of the lease? and
e9 that the #essees shall own the hotel building and all the improvements
%or the taxable year ending 1* 7ecember *//1, respondent duly filed on *< April *//4 its
Corporate Annual Income Tax Return 8ITR9 with the BIR
;n , ;ctober */// or <Y years from the time respondent filed its ITR, respondent received
from petitioner a %ormal Assessment )otice 8%A)9 dated *, &eptember *///, which %A)
alleged that respondent had deficiency income taxes dues to the $overnment for the taxable
year *//1 total amount of 0*/,,,/,12<<., bro"en down as flowsC
)et income per return 0</,-/,,/+,..
AddC !nreported income for the year *//1
on improvements by #esseesC
'anila 'andarin DotelC 0,,<4+,--,..
'anila 0eninsula DotelC 2,+..,-*...
EEEEEE
0*+,*4+,41,..
EEEEEE
)et income per investigation 0,<,444,4.4..
[[[[[[[[[[[
Income tax due thereon 0-+,4.<,<4*..
#essC Income tax already paid -.,,<4,-22..
EEEEEE
7eficiency income tax <,+<*,-<1..
AddC <.Q &urcharge -,2-<,+-+<.
-<Q &urcharge *,4*-,2*1-<
EEEEEE
/,22/,+/-,<
AddC -.Q interest per annum from
43*<3/4 to *.3*<3// /,22/,+/-,<
EEEEEE
Total Amount 7ue 0*/,,,/,12<<.
[[[[[[[[[[[
The deficiency assessment arose from the finding of the petitioner that the respondent should
have reported as part of its income for taxable year *//1, the total amount of
0*+,*4+,41,.. representing a portion of the total value of the leasehold improvements
introduced by the two lessees of respondent, namely, 'anila 'andarin Dotel and 'anila
0eninsula Dotel
0etitioner(s findings were premised mainly on the application of &ection 4/ of Revenue
Regulations )o - 8Income Tax Regulations9 which providesC
&ection 4/ Improvements by #essees E @hen buildings are erected or improvements
made by a lessee in pursuance of an agreement with the lessor, and such buildings or
improvements are not subject to removal by the lessee, the lessor may at his option report the
income therefrom upon either of the following basesC
8a9 The lessor may report as income at the time when such buildings or improvements are
completed the fair mar"et value of such buildings or improvements subject to the lease
8b9 The lessor may spread over the life of the lease the estimated depreciated value of
such buildings or improvements at the termination of the lease and report as income for each
year of the lease an ali5uot part thereof
&pecifically, petitioner posits that the improvements introduced by respondent(s lessees are
not subject to removal and hence, must be reported by respondent as income based on either
of the two rules under &ection 4/, that is, to report the fair mar"et value of the buildings or
improvements as income at the time when such buildings or improvements are completed, or
to report as income for each year of the lease an ali5uot part of the estimated depreciated
value of such buildings or improvements at the termination of the lease
0ursuant to the Audit Report sent to the respondent by petitioner through the revenue
officers who conducted the examination of respondent(s boo"s, the following calculations
were made to establish the amounts alleged as :unreported income: subject of the instant
deficiency assessmentC
'anila 'andarin 'anila 0eninsula
Dotel 8in 0esos9 Dotel 8in 0esos9
C;&T ;% I'0R;>='=)T&
&ite Improvement 4,.24,-</.. 1*4,/.<,1<-..
Building and Building
=5uipment 1/2,/4/,4++.. *-.,,12,2,1..
A00RAI&A# I)CR=A&=
&ite Improvement 1-/,..<.. *-*,1-.,2.,..
Building and Building
=5uipment //,,*/,./2..*+,12-,-/1..
Total >alue
8=stimated useful life
\ 4. years9 8a9 <.1,.2*,2-2.. <,1,14,,1-<..
)=T B;;F >A#!=
A%T=R -< G=AR& 8b9 *22,+<<,+2+.. -*<,..<,-4,..
A))!A# R=0;RTAB#=
I)C;'= %;R -< G=AR& 8c9 ,,<4+,--,.. 2,+..,-*...
TAHAB#= I)C;'=
%;R *//1 ,,<4+,--,.. 2,+..,-*...
The amount of alleged unreported income for *//1 was arrived at by E
8i9 ta"ing the total value of the improvements 8including the building e5uipment9 in 8a9
above?
8ii9 dividing the same by 4. years representing estimated useful life to arrive at the
annual depreciation over 4. years?
8iii9 multiplying the annual depreciation over 4. years by -< years 8representing the
original -<3year term of the lease9 to arrive at the total depreciation expense to be claimed
by the lessee for the first -<3year term of the lease?
8iv9 deducting the total depreciation expense for -< years arrived at in 8iii9 above from
the total value of the improvements in 8a9 above to arrive at the net depreciated value of the
improvements after -< years in 8b9 above? and
8v9 dividing the net depreciated value after -< years in 8b9 above by -< years to arrive at
the ali5uot part of the net depreciated value of the improvements at the end of the original
-<3year term of the lease which should allegedly be reported as income for each year of the
original -<3year term of the lease
;n < )ovember *///, respondent, through its external auditors, filed with petitioner its
protest letter dated 4 )ovember *///, pursuant to &ection --2 of the Tax Code, as amended
&aid protest letter specified the factual and legal bases of the protest against said alleged
deficiency income tax assessment, and further re5uested that the deficiency tax assessment
be withdrawn and cancelled
;n -, 7ecember *///, petitioner(s letter, dated + 7ecember *///, was received by
respondent(s external auditors, denying the protest filed on < )ovember *///
The denial of respondent(s protest is based on the following groundsC
8i9 the respondent(s failure to report alleged rental income in the amount of
0*+,*4+,41,.. can be legally considered a fraudulent act with intent to evade tax? hence,
the ten3year and not the three3year, prescriptive period should apply?
8ii9 even granting that there was no willful intent on the part of the respondent to
understate its rental income for purpose of evading its corporate income, tax, the &upreme
case, of A6nar vs Commissioner of Internal Revenues < that the filing of a false tax return,
even without any intent to evade tax, is li"ewise embraced under the ten3year statute of
limitations?
8iii9 that &ection 4/ of Revenue Regulations )o -, upon which the assessment issued
against respondent is based, is legal and has the force and effect of law?
8iv9 that the <.Q surcharge is being imposed in the assessment against the respondent by
reason of the finding of petitioner that respondent failed to report its income from the
leasehold improvements introduced by the lessees which amounts were considered
substantial? and
8v9 that the imposition of the -<Q surcharge in addition to the <.Q surcharge is justified
considering that, since the assessment against the 0etitioner pertains to calendar year *//1,
the provisions of the old )IRC should apply, and not those of the Tax Reform Act of *//, and
Revenue Regulations )o *-3//
;n -+ Aanuary -..., respondent filed with the CTA a petition for review, which prayed for
the cancellation and termination of the alleged deficiency income tax assessment for the
taxable year *//1 in the amount of 0*/,,,/,12<<.
After the presentation of evidence by the parties, the CTA ruled in favor of respondents,
ordering the cancellation of the subject assessment issued by petitioner against respondent
In upholding respondent(s stance, the CTA ruled that petitioner(s right to assess has already
prescribed for having been issued beyond the three3year prescriptive period and that there is
no basis to apply the extended ten3year prescriptive period considering that there was no
willful intention to evade tax on the part of respondent in failing to report as income the
amount of improvements introduced by its lessees
The CTA is of the view that for the ten3year prescriptive period to apply, the must be, apart
from the element of mista"e, a clear, une5uivocal and willful intention to evade tax
Considering that no evidence was presented to show the existence of fraud, no :false return:
was filed to justify the application of the ten3year period 0etitioner(s reliance on the A6nar
Case, according to the CTA, was misplaced Citing 0ac"aging 0roducts Corporation vs
Commissioner of Internal Revenue, CTA Case )o 44+4, dated ** Aanuary *//<, the court
ruled that there must appear, if not a design to mislead or deceive on the part of the taxpayer
at least culpable negligence A mista"e, not culpable in respect of its value would not
constitute such false return
%rom the said 7ecision of the CTA, petitioner filed a motion for reconsideration + which was
denied in a Resolution dated *- 'arch -..- , @ith regard to petitioner(s argument that
&ection 4/ of Revenue Regulation )o - is still valid and applicable in the instant case, the
CTA ruled that &ection 4/ of Revenue Regulation )o -, which served as basis for the
issuance of the subject assessment was declared without force and effect by the !nited &tates
&upreme Court 8!&&C9 The BIR recogni6es this fact when on + 'ay */,<, it issued a BIR
Ruling addressed to 'r Antonio ' de Gnchausti adopting the said ruling Considering that
the interpretation of the !&&C of our tax law carries great weight and respect, having
patterned our own law after the !& Tax Code, the basis for which the subject assessment was
issued become doubtful
The 0etition
0etitioner is now before this Court see"ing a review of the said 7ecision and Resolution
issued by the CTA
0etitioner argues that respondent(s failure to report in its *//1 income tax return the rental
income from improvements introduced by its lessees, although unintentional, ma"es the *//1
return a false return, therefore, the ten3year prescriptive period applies as prescribed by
&ection --1 of the Tax Code 8now &ection --- of the *//, )IRC 2 9 0etitioner, again cites
the A6nar Case where the &upreme Court ruled that the law should be interpreted to mean a
separation of the three different situations of false return, fraudulent return with intent to
evade tax, and failure to file a return This view is strengthened by the last portion of the
provision which segregates the situations into three different classes, namely E :falsity:,
:fraud: and :omission: That there is a difference between :false return: and :fraudulent
return: cannot be denied @hile the first merely implies deviation from the truth, whether
intentional or not, the second implies intentional or deceitful entry with intent to evade the
taxes due
0etitioner further argues that &ection 4/ of Revenue Regulation )o - has the force and
effect of law having been promulgated by the &ecretary of %inance, upon recommendation of
the Commissioner of Internal Revenue, in the exercise of his power under &ection -44 of the
*//, )IRC to :promulgate all needful rules and regulations in connection with the
implementation of the provisions of internal revenue laws: )ot having been modified or
revo"ed, it is still valid and legal until declared otherwise
The surcharges thus imposed on the deficiency income tax assessment against respondent
finds basis in the fact that the said return was considered as a :false return,: thus ma"ing the
respondent liable for the <.Q surcharge The -<Q surcharge, on the other hand, was
imposed applying the old )IRC considering that the case pertains to deficiency income tax
for the calendar year *//1
Respondent, on the other hand, maintains that petitioner(s right to assess deficiency income
taxes has prescribed considering that the %A) was issued only after <Y years from the time
respondent filed its ITR, way beyond the three3year prescriptive period provided for under
&ection -.1 of the *//, )IRC To bolster its argument, respondent cites CTA case &an
'iguel Corporation vs Commissioner of Internal Revenue 8+ Aanuary *//<9 which ruled
that there is nothing in the A6nar Case which establishes a hard and fast rule that every
:deviation: from the truth necessarily brings a particular return under the coverage of
&ection --1 of the Tax Code It is only where the falsity or :deviation: would place the
government at a disadvantage so as to prevent the assessment and collection of the correct
amount of taxes that the ordinary prescriptive period provided under &ection 11* 8now
&ection -.19 of the Tax Code should not be applied
Respondent further argues, by citing the case of Commissioner of Internal Revenue vs B%
$oodrich 0hils, Inc, *. that mere falsity of a return does not merit the application of the
ten3year prescriptive period The element of fraud, as in the case of the taxpayer(s intent to
evade the payment of the correct amount of tax, must be clearly established In the absence
of proof that there exists fraudulent intent on the part of respondent in failing to report as
income the improvements introduced by its lessees, there is no basis for the application of the
ten3year prescriptive period
;n the validity of &ection 4/ of Revenue Regulation )o -, respondent posits that the said
revenue regulation should no longer be enforced considering that in the *- 'arch -..-
Resolution of the CTA, the court mentioned the fact that its counterpart provision in the !&
Revenue Regulations was declared without force and effect by the !& &upreme Court and the
BIR itself adopted this ruling in its + 'ay */,< ruling issued to 'r Antonio ' de Gnchausti
stating that, &ection 4/ of Revenue Regulation )o -, which was patterned after the !&
Revenue Regulations, should no longer be enforced
The Issue
The central issue that needs to be resolved in this case is whether or not petitioner(s right to
assess herein deficiency income taxes has indeed prescribed as ruled by the CTA
The Court(s Ruling
The petition has no merit
0etitioner mainly argues that respondent, in failing to report as part of its income the
improvements introduced by its lessees in its ITR, filed a :false return: as defined in the
A6nar Case and conse5uently, the assessment made <Y years after the ITR was filed on *<
April *//4 was still within the ten3year prescriptive period provided for in &ection --- of the
*//, )IRC
@hat, therefore, constitutes :false return: to warrant the application of the ten3year
prescriptive periodS
&ection --- of the *//, )IRC providesC
8a9 In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be filed without assessment, at any time within ten 8*.9 years after the discovery of the
falsity, fraud or omission? provided, that in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially ta"en cogni6ance of in the civil or criminal
action for the collection thereof
In interpreting the above provision, it is important to note that commentaries ** consider two
8-9 groups of exceptions provided for in &ection ---C The first, where there is a failure to file
the re5uired return? and the second, where there is a return filed but the same is false or
fraudulent and made with intent to evade tax It appears that the phrase :with intent to evade
tax: 5ualifies not only the word :fraudulent: but also the word :false:, having been grouped
together as one category under the exceptions
!nder the rules of statutory construction, the 5ualifying words :with intent to evade tax:
should refer to both the words :false: and :fraudulent: since these words are not separated
by a comma If it was the intent of the lawma"ers to 5ualify only the word :fraudulent: then
the same should have been treated separately or at the very least, the words :false: and
:fraudulent: should have been separated by a comma to show separate treatment of the two
In the case of %lorentino and Jandueta vs 0)B, *- the &upreme Court ruled in this wiseC
$rammatically, the 5ualifying clause refers only to the last antecedent? that is, :any citi6en
of the 0hilippines or any association or corporation organi6ed under the laws of the
0hilippines: It should be noted that there is a comma before the words :or to any citi6en,
etc,: which separates said phrase from the preceding ones
The words :false: and :fraudulent: can therefore be treated as one category of exception
5ualified by the phrase :with intent to evade tax:
But even if @e disregard the grammatical construction, there are still persuasive reasons
why the 5ualifying phrase should refer to both the words :false: and :fraudulent:
It is more logical to follow such interpretation considering that our tax law provides a
statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers
from any unreasonable examination, investigation or assessment Thus, the law on
prescription should be liberally construed in order to afford such protection Conse5uently,
the exceptions to the law on prescription should be strictly construed *1 To allow a different
interpretation of the said provision would be unfair for the taxpayer and would negate the
purpose for which said periods were intended
Reliance on the A6nar Case with regard to the issue of prescription is misplaced Although in
the said case, the &upreme Court ruled that a :false return: merely implies a deviation from
the truth, whether intentional or not, such pronouncement should not be given a sweeping
application in all cases where a mista"e in ITR entries are made by taxpayers ;therwise,
any mista"e, however slight, in a return filed by a taxpayer in good faith would justify the
application of the ten3year prescriptive period for assessment Conse5uently, the protection
provided for under &ection -.1 of the *//, )IRC is rendered nugatory #ogically therefore,
not all :false returns: would call for an application of &ection --- of the *//, )IRC ;nly
:false returns: which are filed by a taxpayer with intent to evade tax should warrant an
application of the ten3year prescriptive period
In order to render a return made by a taxpayer a :false return: within the meaning of &ection
---, of the Tax Code, there must appear, a design to mislead or deceive on the part of the
taxpayer, or at least culpable negligence A mista"e, not culpable in respect of its value
would not constitute a false return
'oreover, the factual setting of the A6nar Case is entirely different from that of the case at
bar In the said case, the taxpayer was assessed deficiency income taxes for the years */4+ to
*/<*, covering more than five taxable years ;n the other hand, in this case, respondent was
assessed deficiency income taxes only for the year *//1
There is a false or fraudulent return if any of the following are presentC
* There is intentional substantial under declaration of income
- There is intentional substantial overstatement of deductions
1 There is intentional under declaration of selling price and overvaluation of cost or
property sold
4 Recurrence of the understatement of income or overstatement of deductions for more
than one taxable year 8emphasis supplied9
In the A6nar Case the taxpayer undoubtedly filed several false tax returns warranting the
application of the ten3year prescriptive period Clearly, in this case, even if respondent made
an understatement of income in its ITR, the same cannot constitute a :false: or :fraudulent:
return, since the subject deficiency assessment pertains only to one taxable year 'oreover,
no proof was presented to show that such understatement of income was done intentionally
to evade taxes
The CTA correctly ruled that,
There is no basis for the application of the ten3year prescriptive period based on the ground
that there is no :willful intention to evade tax: on the part of the 0etitioner 8respondent
herein9
An indispensable ingredient that must be proven to exist for the *.3year prescriptive period
to apply is that there must be, apart from the element of mista"e, a clear, une5uivocal and
willful intention to evade tax
In this case, the failure of respondent to report as part of its income the improvements
introduced by its lessees was omission done in good faith and not intentionally to evade
taxes due to the government, considering that &ection 4/ of Revenue Regulation )o - admits
of different interpretations
In one commentary, the authors recogni6e that with respect to improvements introduced by
the lessee, several rules may be followed, thus,
In the case of lease agreements where the improvements introduced by the lessee would
thereby or later become the lessor(s property, the following rules have been offeredC
8a9 BIR Rule 8Rev Reg )o -9C At his option, the lessor may consider the property as
income E
8*9 !pon the completion of the improvement? or
8-9 By spreading the value of the improvement over the life of the lease
8b9 !nited &tates Rule 8Blatt vs !&, 1.2 !& -+,9C E
8*9 If the improvements are in the concept of rents, the lessor must treat the property as
income upon completion of the improvement? but
8-9 If the introduction of improvement is merely an incidental element of the contract,
then the lessor must treat the property as income upon the termination of the lease
The problem being indeed one of accounting, due consideration should be given to the
taxpayer(s own accounting preference =5ually acceptable perhaps would be the following
approaches to a lessor who is
8a9 ;n cash basis E The lessor may consider the improvements as income upon the
effective transfer of legal and beneficial ownership to him, ie, fulfillment of all conditions
therefore If such transfer were to ta"e place prior to the termination of the lease it shall be
its fair mar"et value at the time of transfer minus its expected depreciation for the balance of
the period 8such remaining value being what the improvement would be worth to the
taxpayer9 If the transfer were to ta"e place upon the termination of the lease then the
taxable income would be the fair mar"et value of the property at that time This remaining
value, having been earned, may then serve as a basis for possible depreciation allowance
over the further useful life of the improvement
8b9 ;n accrual basis E The value of the improvement may be spread over the life of the
lease and the value allocated over each taxable year is the portion that is deemed earned If,
for any reason, the improvement suffers a loss or is totally lost, then to that extent, not
exceeding what has been earned, this may become a deductible loss
It appears, therefore, that in applying &ection 4/ of Revenue Regulation )o -, the choice is
given to the lessor on when to treat the said improvements as income and when to report the
same in its ITR There is no hard and fast rule with respect to the application of the said
provision The lessor may opt to apply the BIR Rule or the !& Rule since no fixed guideline
with respect to reporting such improvements as income has been provided for It cannot be
said, therefore, that in failing to report as income the improvements introduced by the lessee,
respondent was motivated by ill will with intent to evade taxes 7ifferences in interpretation
of the law between the Commissioner and the taxpayer 8do9 not necessarily ma"e the
taxpayer(s return false
The burden of proving fraud is with the BIR ;ne of the disputable presumptions provided in
&ection 1 8ff9, Rule *1* of the Revised Rules of Court is that the law has been obeyed If the
three3year period for assessment has expired at the time of the mailing of the notice of
deficiency, the burden is on the BIR to show that the ten 8*.9 year period is applicable
The &upreme Court has ruled,
;n the issue of whether &ec 11* or &ec 11- 8a9 of the )ational Internal Revenue Code
should apply to this case, there is no iota of evidence presented by the petitioner as to any
fraud or falsity on the return with intent to evade payment of tax 0etitioner merely relies
on the provisions of &ection -< of the )ational Internal Revenue Code, violation of which,
according to petitioner, presupposes the existence of fraud But this is begging the 5uestion
and @e do not subscribe to the view of the petitioner
%raud is a 5uestion of fact and the circumstances constituting fraud must be alleged and
proved in the court below %raud is never lightly presumed because it is a serious charge
8emphasis supplied9 -.
In the above 5uoted case of Commissioner of Internal Revenue vs Ayala &ecurities
Corporation, -* the &upreme Court applied the A6nar doctrine 8on false and fraudulent
return in relation to the fraud penalty9 to the prescriptive period, stating that fraud must be
alleged and proved and never lightly presumed The A6nar Case provided thus,
The lower court(s conclusion regarding the existence of fraudulent intent to evade payment
of taxes was based merely on a presumption and not on evidence establishing a willful filing
of false and fraudulent returns so as to warrant the imposition of the fraud penalty The
fraud contemplated by law is actual and not constructive It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce
another to give up some legal right )egligence, whether slight or gross, is not e5uivalent to
the fraud with intent to evade the tax contemplated by the law It must amount to intentional
wrong3doing with the sole object of avoiding the tax It necessarily follows that a mere
mista"e cannot be considered fraudulent intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed mista"es in ma"ing entries in the returns and
in the assessment, respectively, under the inventory method of determining tax liability, it
would be unfair to treat the mista"es of the petitioner as tainted with fraud and those of the
respondent as made in good faith 8emphasis supplied9
Considering the foregoing, there is no basis to disregard the three3year prescriptive period
&ince the petitioner failed to present proof that respondent filed a false return with intent to
evade tax, the period for assessment that should apply is the three3year period provided in
&ection -.1 of the *//, )IRC and not the ten3year period provided in &ection --- of the
Code Therefore, petitioner(s right to assess respondent the subject deficiency income taxes
has already prescribed considering that the assessment notice was issued more than three
years, or five and a half years to be exact, after respondent filed its ITR
@D=R=%;R=, the petition is 7I&'I&&=7 The 7ecision, dated *. Aanuary -..-, of the
Court of Tax Appeals 8CTA9 in CTA Case )o +..- entitled Ayala Dotels, Inc vs
Commissioner of Internal Revenue, is hereby A%%IR'=7 in toto &; ;R7=R=7
%ootnotes
&=C -.1 0eriod of limitation upon assessment and collection E =xcept as provided in
&ection ---, internal revenue taxes shall be assessed within three 819 years after the last day
prescribed by law for the filing of the return, and no proceeding in court without assessment
for the collection of such taxes shall be begun after the expiration of such period? provided,
that in a case where a return is filed beyond the period prescribed by law, the three3year
period shall be counted from the day the return was filed %or purposes of this &ection, a
return filed before the last day prescribed by law for the filing thereof shall be considered as
filed on such last day 8The )ational Internal Revenue Code O)IRCP of *//,9
&=C --- =xceptions as to period of limitation of assessment and collection of taxes E
8a9 In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be filed without assessment, at any time within ten 8*.9 years after the discovery of the
falsity, fraud or omission? provided, that in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially ta"en cogni6ance of in the civil or criminal
action for the collection thereof 8*//, )IRC9
)ECTION 4A C+!"4e ,f Acc,#"ti"4 Peri,0. If ! t!23!$er, ,t+er t+!" !"
i"0ivi0#!-, c+!"4e/ +i/ !cc,#"ti"4 3eri,0 fr,m fi/c!- $e!r t, c!-e"0!r $e!r, fr,m
c!-e"0!r $e!r t, fi/c!- $e!r, ,r fr,m ,"e fi/c!- $e!r t, !",t+er, t+e "et i"c,me /+!--,
5it+ t+e !33r,v!- ,f t+e C,mmi//i,"er, be c,m3#te0 ," t+e b!/i/ ,f /#c+ "e5
!cc,#"ti"4 3eri,0, /#b:ect t, t+e 3r,vi/i,"/ ,f )ecti," 47.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..13** 'arch ,, -.**
0olicies, $uidelines and 0rocedures on the Application for Change in Accounting 0eriod
of a Taxpayer
Change of Accounting 0eriod E 0ursuant to &ection 4+ of the )IRC of *//,, as
amended, if a taxpayer, other than an individual, changes his accounting period from
fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to
another, the net income shall, with the approval of the Bureau of Internal Revenue 8BIR9,
be computed on the basis of such new accounting period @henever a taxpayer changes
its accounting period, the taxpayer is re5uired to file with the BIR a separate final or
adjustment return for the period between the close of the original accounting period and
the date designated as the close of the new accounting period
)ECTION 47 *i"!- ,r A0:#/tme"t Ret#r"/ f,r ! Peri,0 ,f Le// t+!" T5e-ve
>12? %,"t+/. .
>A? Ret#r"/ f,r )+,rt Peri,0 Re/#-ti"4 fr,m C+!"4e ,f Acc,#"ti"4 Peri,0. . If !
t!23!$er, ,t+er t+!" !" i"0ivi0#!-, 5it+ t+e !33r,v!- ,f t+e C,mmi//i,"er, c+!"4e/
t+e b!/i/ ,f c,m3#ti"4 "et i"c,me fr,m fi/c!- $e!r t, c!-e"0!r $e!r, ! /e3!r!te
fi"!- ,r !0:#/tme"t ret#r" /+!-- be m!0e f,r t+e 3eri,0 bet5ee" t+e c-,/e ,f t+e -!/t
fi/c!- $e!r f,r 5+ic+ ret#r" 5!/ m!0e !"0 t+e f,--,5i"4 December ;1. If t+e
c+!"4e i/ fr,m c!-e"0!r $e!r t, fi/c!- $e!r, ! /e3!r!te fi"!- ,r !0:#/tme"t ret#r"
/+!-- be m!0e f,r t+e 3eri,0 bet5ee" t+e c-,/e ,f t+e -!/t c!-e"0!r $e!r f,r 5+ic+
ret#r" 5!/ m!0e !"0 t+e 0!te 0e/i4"!te0 !/ t+e c-,/e ,f t+e fi/c!- $e!r. If t+e
c+!"4e i/ fr,m ,"e fi/c!- $e!r t, !",t+er fi/c!- $e!r, ! /e3!r!te fi"!- ,r !0:#/tme"t
ret#r" /+!-- be m!0e f,r t+e 3eri,0 bet5ee" t+e c-,/e ,f t+e f,rmer fi/c!- $e!r !"0
t+e 0!te 0e/i4"!te0 !/ t+e c-,/e ,f t+e "e5 fi/c!- $e!r.
>B? I"c,me C,m3#te0 ," B!/i/ ,f )+,rt Peri,0. . B+ere ! /e3!r!te fi"!- ,r
!0:#/tme"t ret#r" i/ m!0e #"0er )#b/ecti," >A? ," !cc,#"t ,f ! c+!"4e i" t+e
!cc,#"ti"4 3eri,0, !"0 i" !-- ,t+er c!/e/ 5+ere ! /e3!r!te fi"!- ,r !0:#/tme"t
ret#r" i/ re8#ire0 ,r 3ermitte0 b$ r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$
,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, t, be m!0e f,r ! fr!cti,"!-
3!rt ,f ! $e!r, t+e" t+e i"c,me /+!-- be c,m3#te0 ," t+e b!/i/ ,f t+e 3eri,0 f,r
5+ic+ /e3!r!te fi"!- ,r !0:#/tme"t ret#r" i/ m!0e.
)ECTION 48. Acc,#"ti"4 f,r L,"4@term C,"tr!ct/. . I"c,me fr,m -,"4@
term c,"tr!ct/ /+!-- be re3,rte0 f,r t!2 3#r3,/e/ i" t+e m!""er !/ 3r,vi0e0 i" t+i/
)ecti,". A/ #/e0 +erei", t+e term F-,"4@term c,"tr!ct/F me!"/ b#i-0i"4, i"/t!--!ti,"
,r c,"/tr#cti," c,"tr!ct/ c,veri"4 ! 3eri,0 i" e2ce// ,f ,"e >1? $e!r. Per/,"/
5+,/e 4r,// i"c,me i/ 0erive0 i" 5+,-e ,r i" 3!rt fr,m /#c+ c,"tr!ct/ /+!-- re3,rt
/#c+ i"c,me #3," t+e b!/i/ ,f 3erce"t!4e ,f c,m3-eti,". T+e ret#r" /+,#-0 be
!cc,m3!"ie0 b$ ! ret#r" certific!te ,f !rc+itect/ ,r e"4i"eer/ /+,5i"4 t+e
3erce"t!4e ,f c,m3-eti," 0#ri"4 t+e t!2!b-e $e!r ,f t+e e"tire 5,r9 3erf,rme0
#"0er c,"tr!ct. T+ere /+,#-0 be 0e0#cte0 fr,m /#c+ 4r,// i"c,me !-- e23e"0it#re/
m!0e 0#ri"4 t+e t!2!b-e $e!r ," !cc,#"t ,f t+e c,"tr!ct, !cc,#"t bei"4 t!9e" ,f t+e
m!teri!- !"0 /#33-ie/ ," +!"0 !t t+e be4i""i"4 !"0 e"0 ,f t+e t!2!b-e 3eri,0 f,r
#/e i" c,""ecti," 5it+ t+e 5,r9 #"0er t+e c,"tr!ct b#t ",t $et /, !33-ie0. If #3,"
c,m3-eti," ,f ! c,"tr!ct, it i/ f,#"0 t+!t t+e t!2!b-e "et i"c,me !ri/i"4 t+ere#"0er
+!/ ",t bee" c-e!r-$ ref-ecte0 f,r !"$ $e!r ,r $e!r/, t+e C,mmi//i,"er m!$ 3ermit
,r re8#ire !" !me"0e0 ret#r".
)ECTION 49 I"/t!--me"tB!/i/. .
>A? )!-e/ ,f De!-er/ i" Per/,"!- Pr,3ert$. . U"0er r#-e/ !"0 re4#-!ti,"/
3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er, ! 3er/," 5+, re4#-!r-$ /e--/ ,r ,t+er5i/e 0i/3,/e/ ,f 3er/,"!-
3r,3ert$ ," t+e i"/t!--me"t 3-!" m!$ ret#r" !/ i"c,me t+erefr,m i" !"$ t!2!b-e
$e!r t+!t 3r,3,rti," ,f t+e i"/t!--me"t 3!$me"t/ !ct#!--$ receive0 i" t+!t $e!r,
5+ic+ t+e 4r,// 3r,fit re!-i6e0 ,r t, be re!-i6e0 5+e" 3!$me"t i/ c,m3-ete0, be!r/
t, t+e t,t!- c,"tr!ct 3rice.
>B? )!-e/ ,f Re!-t$ !"0 C!/#!- )!-e/ ,f Per/,"!-t$. . I" t+e c!/e >1? ,f ! c!/#!-
/!-e ,r ,t+er c!/#!- 0i/3,/iti," ,f 3er/,"!- 3r,3ert$ >,t+er t+!" 3r,3ert$ ,f ! 9i"0
5+ic+ 5,#-0 3r,3er-$ be i"c-#0e0 i" t+e i"ve"t,r$ ,f t+e t!23!$er if ," +!"0 !t t+e
c-,/e ,f t+e t!2!b-e $e!r?, f,r ! 3rice e2cee0i"4 O"e t+,#/!"0 3e/,/ >P1,CCC?, ,r
>2? ,f ! /!-e ,r ,t+er 0i/3,/iti," ,f re!- 3r,3ert$, if i" eit+er c!/e t+e i"iti!-
3!$me"t/ 0, ",t e2cee0 t5e"t$@five 3erce"t >2<G? ,f t+e /e--i"4 3rice, t+e i"c,me
m!$, #"0er r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, be ret#r"e0 ," t+e b!/i/ !"0 i" t+e m!""er
!b,ve 3re/cribe0 i" t+i/ )ecti,". A/ #/e0 i" t+i/ )ecti,", t+e term Fi"iti!- 3!$me"t/F
me!"/ t+e 3!$me"t/ receive0 i" c!/+ ,r 3r,3ert$ ,t+er t+!" evi0e"ce/ ,f
i"0ebte0"e// ,f t+e 3#rc+!/er 0#ri"4 t+e t!2!b-e 3eri,0 i" 5+ic+ t+e /!-e ,r ,t+er
0i/3,/iti," i/ m!0e.
>C? )!-e/ ,f Re!- Pr,3ert$ C,"/i0ere0 !/ C!3it!- A//et b$ I"0ivi0#!-/. . A"
i"0ivi0#!- 5+, /e--/ ,r 0i/3,/e/ ,f re!- 3r,3ert$, c,"/i0ere0 !/ c!3it!- !//et, !"0 i/
,t+er5i/e 8#!-ifie0 t, re3,rt t+e 4!i" t+erefr,m #"0er )#b/ecti," >B? m!$ 3!$ t+e
c!3it!- 4!i"/ t!2 i" i"/t!--me"t/ #"0er r#-e/ !"0 re4#-!ti,"/ t, be 3r,m#-4!te0 b$
t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er.
>D? C+!"4e fr,m Accr#!- t, I"/t!--me"t B!/i/. . If ! t!23!$er e"tit-e0 t, t+e
be"efit/ ,f )#b/ecti," >A? e-ect/ f,r !"$ t!2!b-e $e!r t, re3,rt +i/ t!2!b-e i"c,me
," t+e i"/t!--me"t b!/i/, t+e" i" c,m3#ti"4 +i/ i"c,me f,r t+e $e!r ,f c+!"4e ,r
!"$ /#b/e8#e"t $e!r, !m,#"t/ !ct#!--$ receive0 0#ri"4 !"$ /#c+ $e!r ," !cc,#"t ,f
/!-e/ ,r ,t+er 0i/3,/iti,"/ ,f 3r,3ert$ m!0e i" !"$ 3ri,r $e!r /+!-- ",t be e2c-#0e0.
)ECTION <C A--,c!ti," ,f I"c,me !"0 De0#cti,"/. . I" t+e c!/e ,f t5, ,r
m,re ,r4!"i6!ti,"/, tr!0e/ ,r b#/i"e//e/ >5+et+er ,r ",t i"c,r3,r!te0 !"0 5+et+er
,r ",t ,r4!"i6e0 i" t+e P+i-i33i"e/? ,5"e0 ,r c,"tr,--e0 0irect-$ ,r i"0irect-$ b$
t+e /!me i"tere/t/, t+e C,mmi//i,"er i/ !#t+,ri6e0 t, 0i/trib#te, !33,rti," ,r
!--,c!te 4r,// i"c,me ,r 0e0#cti,"/ bet5ee" ,r !m,"4 /#c+ ,r4!"i6!ti,", tr!0e ,r
b#/i"e//, if +e 0etermi"e/ t+!t /#c+ 0i/trib#ti,", !33,rti,"me"t ,r !--,c!ti," i/
"ece//!r$ i" ,r0er t, 3reve"t ev!/i," ,f t!2e/ ,r c-e!r-$ t, ref-ect t+e i"c,me ,f
!"$ /#c+ ,r4!"i6!ti,", tr!0e ,r b#/i"e//.
C'APTER IIRet#r"/ !"0 P!$me"t ,f T!2
)ECTION <1 I"0ivi0#!- Ret#r". .
>A? Re8#ireme"t/. .
>1? E2ce3t !/ 3r,vi0e0 i" 3!r!4r!3+ >2? ,f t+i/ )#b/ecti,", t+e f,--,5i"4
i"0ivi0#!-/ !re re8#ire0 t, fi-e !" i"c,me t!2 ret#r"=
>!? Ever$ *i-i3i", citi6e" re/i0i"4 i" t+e P+i-i33i"e/7
>b? Ever$ *i-i3i", citi6e" re/i0i"4 ,#t/i0e t+e P+i-i33i"e/, ," +i/ i"c,me fr,m
/,#rce/ 5it+i" t+e P+i-i33i"e/7
>c? Ever$ !-ie" re/i0i"4 i" t+e P+i-i33i"e/, ," i"c,me 0erive0 fr,m /,#rce/ 5it+i"
t+e P+i-i33i"e/7 !"0
>0? Ever$ ","re/i0e"t !-ie" e"4!4e0 i" tr!0e ,r b#/i"e// ,r i" t+e e2erci/e ,f
3r,fe//i," i" t+e P+i-i33i"e/.
>2? T+e f,--,5i"4 i"0ivi0#!-/ /+!-- ",t be re8#ire0 t, fi-e !" i"c,me t!2 ret#r"=
>!? A" i"0ivi0#!- 5+,/e 4r,// i"c,me 0,e/ ",t e2cee0 +i/ t,t!- 3er/,"!- !"0
!00iti,"!- e2em3ti,"/ f,r 0e3e"0e"t/ #"0er )ecti," ;<= Pr,vi0e0, T+!t ! citi6e" ,f
t+e P+i-i33i"e/ !"0 !"$ !-ie" i"0ivi0#!- e"4!4e0 i" b#/i"e// ,r 3r!ctice ,f
3r,fe//i," 5it+i" t+e P+i-i33i"e/ /+!-- fi-e !" i"c,me t!2 ret#r", re4!r0-e// ,f t+e
!m,#"t ,f 4r,// i"c,me7
>b? A" i"0ivi0#!- 5it+ re/3ect t, 3#re c,m3e"/!ti," i"c,me, !/ 0efi"e0 i" )ecti,"
;2>A?>1?, 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/, t+e i"c,me t!2 ," 5+ic+
+!/ bee" c,rrect-$ 5it++e-0 #"0er t+e 3r,vi/i,"/ ,f )ecti," 79 ,f t+i/ C,0e=
Pr,vi0e0, T+!t !" i"0ivi0#!- 0erivi"4 c,m3e"/!ti," c,"c#rre"t-$ fr,m t5, ,r
m,re em3-,$er/ !t !"$ time 0#ri"4 t+e t!2!b-e $e!r /+!-- fi-e !" i"c,me t!2 ret#r"7
>c? A" i"0ivi0#!- 5+,/e /,-e i"c,me +!/ bee" /#b:ecte0 t, fi"!- 5it++,-0i"4 t!2
3#r/#!"t t, )ecti," <7>A? ,f t+i/ C,0e7 !"0
>0? A mi"im#m 5!4e e!r"er !/ 0efi"e0 i" )ecti," 22>''? ,f t+i/ C,0e ,r !"
i"0ivi0#!- 5+, i/ e2em3t fr,m i"c,me t!2 3#r/#!"t t, t+e 3r,vi/i,"/ ,f t+i/ C,0e
!"0 ,t+er -!5/, 4e"er!- ,r /3eci!-.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .*.3.2 Auly 2, -..2
Implementing 0ertinent 0rovisions of Republic Act )o /<.4, :An Act Amending &ections
--, -4, 14, 1<, <*, and ,/ of Republic Act )o 24-4, as Amended, ;therwise Fnown as
The )ational Internal Revenue Code: Relative to the @ithholding of Income Tax on
Compensation and ;ther Concerns
=xemptions from @ithholding Tax on Compensation E The following income payments
are exempted from the re5uirements of withholding tax on compensationC
HHH HHHHHHCompensation income of 'inimum @age =arners 8'@=s9 who wor"
in the private sector and being paid the &tatutory 'inimum @age 8&'@9, as fixed by
Regional Tripartite @age and 0roductivity Board 8RT@0B9B)ational @ages and
0roductivity Commission 8)@0C9, applicable to the place where heBshe is assigned
The aforesaid income shall li"ewise be exempted from income tax
(&tatutory 'inimum @age( 8&'@9 shall refer to the rate fixed by the Regional Tripartite
@age and 0roductivity Board 8RT@0B9, as defined by the Bureau of #abor and
=mployment &tatistics 8B#=&9 of the 7epartment of #abor and =mployment 87;#=9 The
RT@0B of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose
Doliday pay, overtime pay, night shift differential pay and ha6ard pay earned by the
aforementioned '@= shall li"ewise be covered by the above exemption 0rovided,
however, that an employee who receivesBearns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of 01.,....., taxable allowances and other taxable income other than the
&'@, holiday pay, overtime pay, ha6ard pay and night shift differential pay shall not
enjoy the privilege of being a '@= and, therefore, hisBher entire earnings are not exempt
form income tax, and conse5uently, from withholding tax
'@=s receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year This rule, notwithstanding, the &'@, Doliday pay, overtime pay, night shift
differential pay and ha6ard pay shall still be exempt from withholding tax
%or purposes of these regulations, ha6ard pay shall mean the amount paid by the
employer to '@=s who were actually assigned to danger or strife3torn areas, disease3
infested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life Any ha6ard pay paid to '@=s which does not
satisfy the above criteria is deemed subject to income tax and conse5uently, to
withholding tax
HHH HHHHHH
%acilities and privileges of relatively small value E ;rdinarily, facilities, and privileges
8such as entertainment, medical services, or so3called :courtesy: discounts on
purchases9, otherwise "nown as :de minimis benefits,: furnished or offered by an
employer to his employees, are not considered as compensation subject to income tax
and conse5uently to withholding tax, if such facilities or privileges are of relatively small
value and are offered or furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees
The following shall be considered as :de minimis: benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
ran" and file employeesC
8a9 'oneti6ed unused vacation leave credits of employees not exceeding ten 8*.9 days
during the year and the moneti6ed value of leave credits paid to government officials and
employees?
8b9 'edical cash allowance to dependents of employees not exceeding 0,<... per
employee per semester or 0*-< per month?
8c9 Rice subsidy of 0*,<.... or one 8*9 sac" of <.3"g rice per month amounting to
not more than 0*,<....?
8d9 !niforms and clothing allowance not exceeding 04,..... per annum?
8e9 Actual yearly medical benefits not exceeding 0*.,..... per annum?
8f9 #aundry allowance not exceeding 01.... per month?
8g9 =mployees achievement awards, eg, for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding 0*.,..... received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees?
8h9 $ifts given during Christmas and major anniversary celebrations not exceeding
0<,..... per employee per annum?
8i9 %lowers, fruits, boo"s, or similar items given to employees under special
circumstances, eg, on account of illness, marriage, birth of a baby, etc? and
8j9 7aily meal allowance for overtime wor" not exceeding twenty five percent 8-<Q9
of the basic minimum wage
The amount of (de minimis( benefits conforming to the ceiling herein prescribed shall not
be considered in determining the 01.,..... ceiling of (other benefits( excluded from
gross income under &ection 1- 8b9 8,9 8e9 of the Code 0rovided that, the excess of the
(de minimis( benefits over their respective ceilings prescribed by these regulations shall
be considered as part of (other benefits( and the employee receiving it will be subject to
tax only on the excess over the 01.,..... ceiling 0rovided, further, that '@=s
receiving (other benefits( exceeding the 01.,..... limit shall be taxable on the excess
benefits, as well as on his salaries, wages and allowances, just li"e an employee
receiving compensation income beyond the &'@
Any amount given by the employer as benefits to its employees, whether classified as :de
minimis: benefits or fringe benefits, shall constitute as deductible expense upon such
employer
@here compensation is paid in property other than money, the employer shall ma"e
necessary arrangements to ensure that the amount of the tax re5uired to be withheld is
available for payment to the Bureau of Internal Revenue
>;? T+e f,re4,i"4 ",t5it+/t!"0i"4, !"$ i"0ivi0#!- ",t re8#ire0 t, fi-e !" i"c,me
t!2 ret#r" m!$ "evert+e-e// be re8#ire0 t, fi-e !" i"f,rm!ti," ret#r" 3#r/#!"t t,
r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er.
>4? T+e i"c,me t!2 ret#r" /+!-- be fi-e0 i" 0#3-ic!te b$ t+e f,--,5i"4 3er/,"/=
>!? A re/i0e"t citi6e" . ," +i/ i"c,me fr,m !-- /,#rce/7
>b? A ","re/i0e"t citi6e" . ," +i/ i"c,me 0erive0 fr,m /,#rce/ 5it+i" t+e
P+i-i33i"e/7
>c? A re/i0e"t !-ie" . ," +i/ i"c,me 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/7
!"0
>0? A ","re/i0e"t !-ie" e"4!4e0 i" tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/ . ," +i/
i"c,me 0erive0 fr,m /,#rce/ 5it+i" t+e P+i-i33i"e/.
>B? B+ere t, *i-e. . E2ce3t i" c!/e/ 5+ere t+e C,mmi//i,"er ,t+er5i/e 3ermit/,
t+e ret#r" /+!-- be fi-e0 5it+ !" !#t+,ri6e0 !4e"t b!"9, Reve"#e Di/trict Officer,
C,--ecti," A4e"t ,r 0#-$ !#t+,ri6e0 Tre!/#rer ,f t+e cit$ ,r m#"ici3!-it$ i" 5+ic+
/#c+ 3er/," +!/ +i/ -e4!- re/i0e"ce ,r 3ri"ci3!- 3-!ce ,f b#/i"e// i" t+e
P+i-i33i"e/, ,r if t+ere be ", -e4!- re/i0e"ce ,r 3-!ce ,f b#/i"e// i" t+e P+i-i33i"e/,
5it+ t+e Office ,f t+e C,mmi//i,"er.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..13*. %ebruary -4, -.*.
&ubmission of the &tatement of 'anagement Responsibility
R=>=)!= R=$!#ATI;)& ); .-3.+ 7ecember *, -..<
'andatory Attachments of the &ummary Alphalist of @ithholding Agents of Income
0ayments &ubjected to Tax @ithheld at &ource 8&A@T9 to Tax Returns @ith Claimed Tax
Credits due to Creditable Tax @ithheld at &ource and of the 'onthly Alphalist of 0ayees
8'A09 @hose Income Received Dave Been &ubjected to @ithholding Tax to the
@ithholding Tax Remittance Return %iled by the @ithholding AgentB0ayor of Income
0ayments
R=>=)!= R=$!#ATI;)& ); ..-3** 'arch *, -.**
%iling of Income Tax Return andBor Annual Information Return by Individuals, Including
=states and Trusts shall include in the Account Information Return 8AIR9 such income
subject to final withholding tax and those exclusions from gross income
%iling of ITR with AIR E &tarting with taxable year -.*., individuals, estates and trusts
re5uired under the law and existing issuances to file an ITR should file said ITR together
with the AIR 8BIR %orm )o *,.<9 &aid individuals, estates and trusts shall include in the
AIR such income subject to final withholding tax and those exclusions from gross income
under &ection 1- 8B9 of the Tax Code, as amended Individuals not re5uired to file
income tax returns or those 5ualified for substituted filing, may file an ITR for purposes
of loans, foreign travel re5uirements, etc Dowever, if they file an ITR, they should
li"ewise attach a duly accomplished AIR
R=>=)!= R=$!#ATI;)& ); .*<3*. )ovember -<, -.*.
)otes to %inancial &tatements in the Income Tax Returns shall include information on
taxes, duties and license fees paid or accrued during the taxable year, particularly the
followingC
* The amount of >AT output tax declared during the year and the account title and
amountBs upon which the same was based If there are 6ero3rated salesBreceipts andBor
exempt salesBreceipts, a statement to that effect and the legal basis therefor?
- The amount of >AT Input taxes claimed bro"en down intoC
a Beginning of the year?
b Current year(s domestic purchasesBpayments forC
i $oods for resaleBmanufacture or further processing
ii $oods other than for resale or manufacture
iii Capital goods subject to amorti6ation
iv Capital goods not subject to amorti6ation
v &ervices lodged under cost of goods sold
vi &ervices lodged under other accounts?
c Claims for tax creditBrefund and other adjustments? and
d Balance at the end of the year
1 The landed cost of imports and the amount of customs duties and tariff fees paid
or accrued thereon?
4 The amount of excise taxBes, classified per major product category, ie, tobacco
products, alcohol products, automobiles, minerals, oil and petroleum, etc paid on E
a #ocally produced excisable items, and
b Imported excisable items
< 7ocumentary stamp tax 87&T9 on loan instruments, shares of stoc" and other
transactions subject thereto?
+ All other taxes, local and national, including real estate taxes, license and permit
fees lodged under the Taxes and #icenses account both under the Cost of &ales and
;perating =xpense accounts?
, The amount of withholding taxes categori6ed intoC
i Tax on compensation and benefits
ii Creditable withholding taxBes
iii %inal withholding taxBes
2 0eriods covered and amountBs of deficiency tax assessments, whether protested or
not?
/ Tax cases, and amounts involved, under preliminary investigation, litigation
andBor prosecution in courts or bodies outside the BIR:
CASES DIGEST
%ailure to file a return by the taxpayer
The :failure to file an income tax return: is not a crime involving moral turpitude as the
mere omission is already a violation regardless of the fraudulent intent or willfulness of
the individual This conclusion is supported by the provisions of the )IRC as well as
previous Court decisions which show that with regard to the filing of an income tax
return, the )IRC considers three distinct violationsC 8*9 a false return, 8-9 a fraudulent
return with intent to evade tax, and 819 failure to file a return
The same is illustrated in &ection <* 8b9 of the )IRC which readsC
8b9 Assessment and payment of deficiency tax
In case a person fails to ma"e and file a return or list at the time prescribed by law, or
ma"es willfully or otherwise, false or fraudulent return or list
Republic of the 0hil vs %erdinand R 'arcos II, et al,
$R )os *1.1,* R *1.2<<, August 4, -../
>C? B+e" t, *i-e. .
>1? T+e ret#r" ,f !"$ i"0ivi0#!- /3ecifie0 !b,ve /+!-- be fi-e0 ," ,r bef,re t+e
fiftee"t+ >1<t+? 0!$ ,f A3ri- ,f e!c+ $e!r c,veri"4 i"c,me f,r t+e 3rece0i"4
t!2!b-e $e!r.
>2? I"0ivi0#!-/ /#b:ect t, t!2 ," c!3it!- 4!i"/=
>!? *r,m t+e /!-e ,r e2c+!"4e ,f /+!re/ ,f /t,c9 ",t tr!0e0 t+r# ! -,c!- /t,c9
e2c+!"4e !/ 3re/cribe0 #"0er )ecti," 24>C? /+!-- fi-e ! ret#r" 5it+i" t+irt$ >;C?
0!$/ !fter e!c+ tr!"/!cti," !"0 ! fi"!- c,"/,-i0!te0 ret#r" ," ,r bef,re A3ri- 1< ,f
e!c+ $e!r c,veri"4 !-- /t,c9 tr!"/!cti,"/ ,f t+e 3rece0i"4 t!2!b-e $e!r7 !"0
>b? *r,m t+e /!-e ,r 0i/3,/iti," ,f re!- 3r,3ert$ #"0er )ecti," 24>D? /+!-- fi-e !
ret#r" 5it+i" t+irt$ >;C? 0!$/ f,--,5i"4 e!c+ /!-e ,r ,t+er 0i/3,/iti,".
>D? '#/b!"0 !"0 Bife. . %!rrie0 i"0ivi0#!-/, 5+et+er citi6e"/, re/i0e"t ,r
","re/i0e"t !-ie"/, 5+, 0, ",t 0erive i"c,me 3#re-$ fr,m c,m3e"/!ti,", /+!-- fi-e
! ret#r" f,r t+e t!2!b-e $e!r t, i"c-#0e t+e i"c,me ,f b,t+ /3,#/e/, b#t 5+ere it i/
im3r!ctic!b-e f,r t+e /3,#/e/ t, fi-e ,"e ret#r", e!c+ /3,#/e m!$ fi-e ! /e3!r!te
ret#r" ,f i"c,me b#t t+e ret#r"/ /, fi-e0 /+!-- be c,"/,-i0!te0 b$ t+e B#re!# f,r
3#r3,/e/ ,f verific!ti," f,r t+e t!2!b-e $e!r.
>E? Ret#r" ,f P!re"t t, I"c-#0e I"c,me ,f C+i-0re". . T+e i"c,me ,f #"m!rrie0
mi",r/ 0erive0 fr,m 3r,3ert$ receive0 fr,m ! -ivi"4 3!re"t /+!-- be i"c-#0e0 i" t+e
ret#r" ,f t+e 3!re"t, e2ce3t >1? 5+e" t+e 0,",rF/ t!2 +!/ bee" 3!i0 ," /#c+
3r,3ert$, ,r >2? 5+e" t+e tr!"/fer ,f /#c+ 3r,3ert$ i/ e2em3t fr,m 0,",rF/ t!2.
>*? Per/,"/ U"0er Di/!bi-it$. . If t+e t!23!$er i/ #"!b-e t, m!9e +i/ ,5" ret#r",
t+e ret#r" m!$ be m!0e b$ +i/ 0#-$ !#t+,ri6e0 !4e"t ,r re3re/e"t!tive ,r b$ t+e
4#!r0i!" ,r ,t+er 3er/," c+!r4e0 5it+ t+e c!re ,f +i/ 3er/," ,r 3r,3ert$, t+e
3ri"ci3!- !"0 +i/ re3re/e"t!tive ,r 4#!r0i!" !//#mi"4 t+e re/3,"/ibi-it$ ,f m!9i"4
t+e ret#r" !"0 i"c#rri"4 3e"!-tie/ 3r,vi0e0 f,r err,"e,#/, f!-/e ,r fr!#0#-e"t
ret#r"/.
>&? )i4"!t#re Pre/#me0 C,rrect. . T+e f!ct t+!t !" i"0ivi0#!-F/ "!me i/ /i4"e0 t,
! fi-e0 ret#r" /+!-- be 3rim! f!cie evi0e"ce f,r !-- 3#r3,/e/ t+!t t+e ret#r" 5!/
!ct#!--$ /i4"e0 b$ +im.
The 0eople vs $loria Fintanar tax evasion case wherein the respondent was a sales
agent of %orever #iving products who did not report proper income taxes is a landmar"
case because the &upreme Court upheld the Court of Tax AppealMs Uwillful blindnessV
doctrine that re5uires taxpayers to be responsible for their tax returns and that they could
not just blame their accountants for fraudulent tax returns that they signed and filed with
the Bureau of Internal Revenue
R=>=)!= R=$!#ATI;)& ); ..13*. %ebruary -4, -.*.
&ubmission of the &tatement of 'anagement Responsibility
)ECTION <2 C,r3,r!ti," Ret#r"/.
>A? Re8#ireme"t/. . Ever$ c,r3,r!ti," /#b:ect t, t+e t!2 +erei" im3,/e0, e2ce3t
f,rei4" c,r3,r!ti,"/ ",t e"4!4e0 i" tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/, /+!--
re"0er, i" 0#3-ic!te, ! tr#e !"0 !cc#r!te 8#!rter-$ i"c,me t!2 ret#r" !"0 fi"!- ,r
!0:#/tme"t ret#r" i" !cc,r0!"ce 5it+ t+e 3r,vi/i,"/ ,f C+!3ter III ,f t+i/ Tit-e.
T+e ret#r" /+!-- be fi-e0 b$ t+e 3re/i0e"t, vice@3re/i0e"t ,r ,t+er 3ri"ci3!- ,fficer,
!"0 /+!-- be /5,r" t, b$ /#c+ ,fficer !"0 b$ t+e tre!/#rer ,r !//i/t!"t tre!/#rer.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..13./ %ebruary /, -../
Regulations =xpanding the =lectronic %iling and 0ayment &ystem 8=%0&9 Coverage to
Include the Top -.,... 0rivate Corporations 7uly Identified !nder RR )o *43-..2
R=>=)!= R=$!#ATI;)& ); ..13*. %ebruary -4, -.*.
&ubmission of the &tatement of 'anagement Responsibility
>B? T!2!b-e Je!r ,f C,r3,r!ti,". . A c,r3,r!ti," m!$ em3-,$ eit+er c!-e"0!r
$e!r ,r fi/c!- $e!r !/ ! b!/i/ f,r fi-i"4 it/ !""#!- i"c,me t!2 ret#r"= Pr,vi0e0, T+!t
t+e c,r3,r!ti," /+!-- ",t c+!"4e t+e !cc,#"ti"4 3eri,0 em3-,$e0 5it+,#t 3ri,r
!33r,v!- fr,m t+e C,mmi//i,"er i" !cc,r0!"ce 5it+ t+e 3r,vi/i,"/ ,f )ecti," 47
,f t+i/ C,0e.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .*,3*. )ovember -+, -.*.
Consolidated Regulations Implementing Republic Act )o ,+4+, An Act Authori6ing the
Commissioner of Internal Revenue to 0rescribe the 0lace for 0ayment of Internal
Revenue Taxes by #arge Taxpayers and 0rescribing the Coverage and Criteria for
7etermining #arge Taxpayers
R=>=)!= R=$!#ATI;)& ); .*,3*. )ovember -+, -.*.
Consolidated Regulations Implementing Republic Act )o ,+4+, An Act Authori6ing the
Commissioner of Internal Revenue to 0rescribe the 0lace for 0ayment of Internal
Revenue Taxes by #arge Taxpayers and 0rescribing the Coverage and Criteria for
7etermining #arge Taxpayers
>C? Ret#r" ,f C,r3,r!ti," C,"tem3-!ti"4 Di//,-#ti," ,r Re,r4!"i6!ti,". . Ever$
c,r3,r!ti," /+!--, 5it+i" t+irt$ >;C? 0!$/ !fter t+e !0,3ti," b$ t+e c,r3,r!ti," ,f !
re/,-#ti," ,r 3-!" f,r it/ 0i//,-#ti,", ,r f,r t+e -i8#i0!ti," ,f t+e 5+,-e ,r !"$ 3!rt
,f it/ c!3it!- /t,c9, i"c-#0i"4 ! c,r3,r!ti," 5+ic+ +!/ bee" ",tifie0 ,f 3,//ib-e
i"v,-#"t!r$ 0i//,-#ti," b$ t+e )ec#ritie/ !"0 E2c+!"4e C,mmi//i,", ,r f,r it/
re,r4!"i6!ti,", re"0er ! c,rrect ret#r" t, t+e C,mmi//i,"er, verifie0 #"0er ,!t+,
/etti"4 f,rt+ t+e term/ ,f /#c+ re/,-#ti," ,r 3-!" !"0 /#c+ ,t+er i"f,rm!ti," !/ t+e
)ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, /+!--, b$ r#-e/
!"0 re4#-!ti,"/, 3re/cribe.
T+e 0i//,-vi"4 ,r re,r4!"i6i"4 c,r3,r!ti," /+!--, 3ri,r t, t+e i//#!"ce b$ t+e
)ec#ritie/ !"0 E2c+!"4e C,mmi//i," ,f t+e Certific!te ,f Di//,-#ti," ,r
Re,r4!"i6!ti,", !/ m!$ be 0efi"e0 b$ r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e
)ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, /ec#re !
certific!te ,f t!2 c-e!r!"ce fr,m t+e B#re!# ,f I"ter"!- Reve"#e 5+ic+ certific!te
/+!-- be /#bmitte0 t, t+e )ec#ritie/ !"0 E2c+!"4e C,mmi//i,".
CASES DIGEST
Return of Corporation Contemplating 7issolution or Reorgani6ation
A tax clearance from the BIR is re5uired before the &=C could approve the dissolution of
a corporation &ection <-8C9 of the Tax Code of *//, and the BIR3&=C Regulations )o
* regulate the relations only as between the &=C and the BIR, ma"ing a certificate of tax
clearance a prior re5uirement before the &=C could approve the dissolution of a
corporation &ection 1. of the )ew Central Ban" Act lays down the proceedings for
receivership and li5uidation of a ban" The said provision is silent as regards the
securing of a tax clearance from the BIR
In ReC Rural Ban" of Bo"od 8Benguet9, Inc, 07IC vs BIR,
$R )o *<2-+*, 7ecember *2, -..+
The 07IC, as receiver and li5uidator, is duty3bound to file a final return
The first paragraph of &ection 1.8C9 of the Tax Code of *//,, read in conjunction with
&ection <4 of the same Code, clearly imposes upon 07IC, as the receiver and li5uidator
of RBBI, the duty to file a final return
In ReC Rural Ban" of Bo"od 8Benguet9, Inc, 07IC vs BIR,
$R )o *<2-+*, 7ecember *2, -..+
>D? Ret#r" ," C!3it!- &!i"/ Re!-i6e0 fr,m )!-e ,f )+!re/ ,f )t,c9 ",t Tr!0e0 i"
t+e L,c!- )t,c9 E2c+!"4e. . Ever$ c,r3,r!ti," 0erivi"4 c!3it!- 4!i"/ fr,m t+e
/!-e ,r e2c+!"4e ,f /+!re/ ,f /t,c9 ",t tr!0e0 t+r# ! -,c!- /t,c9 e2c+!"4e !/
3re/cribe0 #"0er )ecti,"/ 24>C?, 2<>A?>;?, 27>E?>2?, 28>A?>8?>c? !"0 28>B?><?>c?
/+!-- fi-e ! ret#r" 5it+i" t+irt$ >;C? 0!$/ !fter e!c+ tr!"/!cti," !"0 ! fi"!-
c,"/,-i0!te0 ret#r" ,f !-- tr!"/!cti,"/ 0#ri"4 t+e t!2!b-e $e!r ," ,r bef,re t+e
fiftee"t+ >1<t+? 0!$ ,f t+e f,#rt+ >4t+? m,"t+ f,--,5i"4 t+e c-,/e ,f t+e t!2!b-e
$e!r.
)ECTION <;. E2te"/i," ,f Time t, *i-e Ret#r"/. . T+e C,mmi//i,"er m!$,
i" merit,ri,#/ c!/e/, 4r!"t ! re!/,"!b-e e2te"/i," ,f time f,r fi-i"4 ret#r"/ ,f
i"c,me >,r fi"!- !"0 !0:#/tme"t ret#r"/ i" c!/e ,f c,r3,r!ti,"/?, /#b:ect t, t+e
3r,vi/i,"/ ,f )ecti," <A ,f t+i/ C,0e.
)ECTION <4. Ret#r"/ ,f Receiver/, Tr#/tee/ i" B!"9r#3tc$ ,r A//i4"ee/. .
I" c!/e/ 5+erei" receiver/, tr#/tee/ i" b!"9r#3tc$ ,r !//i4"ee/ !re ,3er!ti"4 t+e
3r,3ert$ ,r b#/i"e// ,f ! c,r3,r!ti,", /#b:ect t, t+e t!2 im3,/e0 b$ t+i/ Tit-e, /#c+
receiver/, tr#/tee/ ,r !//i4"ee/ /+!-- m!9e ret#r"/ ,f "et i"c,me !/ !"0 f,r /#c+
c,r3,r!ti,", i" t+e /!me m!""er !"0 f,rm !/ /#c+ ,r4!"i6!ti," i/ +erei"bef,re
re8#ire0 t, m!9e ret#r"/, !"0 !"$ t!2 0#e ," t+e i"c,me !/ ret#r"e0 b$ receiver/,
tr#/tee/ ,r !//i4"ee/ /+!-- be !//e//e0 !"0 c,--ecte0 i" t+e /!me m!""er !/ if
!//e//e0 0irect-$ !4!i"/t t+e ,r4!"i6!ti,"/ ,f 5+,/e b#/i"e//e/ ,r 3r,3ertie/ t+e$
+!ve c#/t,0$ ,r c,"tr,-.
)ECTION <<. Ret#r"/ ,f &e"er!- Pr,fe//i,"!- P!rt"er/+i3/. . Ever$ 4e"er!-
3r,fe//i,"!- 3!rt"er/+i3 /+!-- fi-e, i" 0#3-ic!te, ! ret#r" ,f it/ i"c,me, e2ce3t
i"c,me e2em3t #"0er )ecti," ;2>B? ,f t+i/ Tit-e, /etti"4 f,rt+ t+e item/ ,f 4r,//
i"c,me !"0 ,f 0e0#cti,"/ !--,5e0 b$ t+i/ Tit-e, !"0 t+e "!me/, T!23!$er
I0e"tific!ti," N#mber/ >TIN?, !00re//e/ !"0 /+!re/ ,f e!c+ ,f t+e 3!rt"er/.
)ECTION <A. P!$me"t !"0 A//e//me"t ,f I"c,me T!2 f,r I"0ivi0#!-/ !"0
C,r3,r!ti,"/. .
>A? P!$me"t ,f T!2. .
>1? I" &e"er!-. . T+e t,t!- !m,#"t ,f t!2 im3,/e0 b$ t+i/ Tit-e /+!-- be 3!i0 b$
t+e 3er/," /#b:ect t+eret, !t t+e time t+e ret#r" i/ fi-e0. I" t+e c!/e ,f tr!m3
ve//e-/, t+e /+i33i"4 !4e"t/ !"0D,r t+e +#/b!"0i"4 !4e"t/, !"0 i" t+eir !b/e"ce, t+e
c!3t!i"/ t+ere,f !re re8#ire0 t, fi-e t+e ret#r" +erei" 3r,vi0e0 !"0 3!$ t+e t!2 0#e
t+ere," bef,re t+eir 0e3!rt#re. U3," f!i-#re ,f t+e /!i0 !4e"t/ ,r c!3t!i"/ t, fi-e t+e
ret#r" !"0 3!$ t+e t!2, t+e B#re!# ,f C#/t,m/ i/ +ereb$ !#t+,ri6e0 t, +,-0 t+e
ve//e- !"0 3reve"t it/ 0e3!rt#re #"ti- 3r,,f ,f 3!$me"t ,f t+e t!2 i/ 3re/e"te0 ,r !
/#fficie"t b,"0 i/ fi-e0 t, !"/5er f,r t+e t!2 0#e.
>2? I"/t!--me"t P!$me"t. . B+e" t+e t!2 0#e i/ i" e2ce// ,f T5, t+,#/!"0 3e/,/
>P2,CCC?, t+e t!23!$er ,t+er t+!" ! c,r3,r!ti," m!$ e-ect t, 3!$ t+e t!2 i" t5, >2?
e8#!- i"/t!--me"t/ i" 5+ic+ c!/e, t+e fir/t i"/t!--me"t /+!-- be 3!i0 !t t+e time t+e
ret#r" i/ fi-e0 !"0 t+e /ec,"0 i"/t!--me"t, ," ,r bef,re #-$ 1< f,--,5i"4 t+e c-,/e
,f t+e c!-e"0!r $e!r. If !"$ i"/t!--me"t i/ ",t 3!i0 ," ,r bef,re t+e 0!te fi2e0 f,r it/
3!$me"t, t+e 5+,-e !m,#"t ,f t+e t!2 #"3!i0 bec,me/ 0#e !"0 3!$!b-e, t,4et+er
5it+ t+e 0e-i"8#e"c$ 3e"!-tie/.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..*3*. Aanuary -*, -.*.
=xpanding the Coverage of Taxpayers Re5uired to %ile Returns and 0ay Taxes Through
the =lectronic %iling and 0ayment &ystem 8=%0&9 of the Bureau of Internal Revenue
R=>=)!= R=$!#ATI;)& ); ..-3.2 Aanuary *., -..2
Amending Certain Rules and Regulations Relative to the Collection and Remittance of
Taxes 0aid to Authori6ed Agent Ban"s 8AABs9 thru ;ver3the3Counter 8;TC9 and
=lectronic %iling and 0ayment &ystem 8=%0&9 and Amending %urther the 'emorandum
of Agreement Relative to the Accreditation of the AABs
>;? P!$me"t ,f C!3it!- &!i"/ T!2. . T+e t,t!- !m,#"t ,f t!2 im3,/e0 !"0
3re/cribe0 #"0er )ecti,"/ 24>C?, 24>D?, 27>E?>2?, 28>A?>8?>c? !"0 28>B?><?>c?
/+!-- be 3!i0 ," t+e 0!te t+e ret#r" 3re/cribe0 t+eref,r i/ fi-e0 b$ t+e 3er/," -i!b-e
t+eret,= Pr,vi0e0, T+!t if t+e /e--er /#bmit/ 3r,,f ,f +i/ i"te"ti," t, !v!i- +im/e-f
,f t+e be"efit ,f e2em3ti," ,f c!3it!- 4!i"/ #"0er e2i/ti"4 /3eci!- -!5/, ", /#c+
3!$me"t/ /+!-- be re8#ire0= Pr,vi0e0, f#rt+er, T+!t i" c!/e ,f f!i-#re t, 8#!-if$ f,r
e2em3ti," #"0er /#c+ /3eci!- -!5/ !"0 im3-eme"ti"4 r#-e/ !"0 re4#-!ti,"/, t+e t!2
0#e ," t+e 4!i"/ re!-i6e0 fr,m t+e ,ri4i"!- tr!"/!cti," /+!-- imme0i!te-$ bec,me
0#e !"0 3!$!b-e, !"0 /#b:ect t, t+e 3e"!-tie/ 3re/cribe0 #"0er !33-ic!b-e
3r,vi/i,"/ ,f t+i/ C,0e= Pr,vi0e0, fi"!--$, T+!t if t+e /e--er, +!vi"4 3!i0 t+e t!2,
/#bmit/ /#c+ 3r,,f ,f i"te"t 5it+i" /i2 >A? m,"t+/ fr,m t+e re4i/tr!ti," ,f t+e
0,c#me"t tr!"/ferri"4 t+e re!- 3r,3ert$, +e /+!-- be e"tit-e0 t, ! ref#"0 ,f /#c+ t!2
#3," verific!ti," ,f +i/ c,m3-i!"ce 5it+ t+e re8#ireme"t/ f,r /#c+ e2em3ti,".
I" c!/e t+e t!23!$er e-ect/ !"0 i/ 8#!-ifie0 t, re3,rt t+e 4!i" b$ i"/t!--me"t/ #"0er
)ecti," 49 ,f t+i/ C,0e, t+e t!2 0#e fr,m e!c+ i"/t!--me"t 3!$me"t /+!-- be 3!i0
5it+i" t+irt$ >;C? 0!$/ fr,m t+e recei3t ,f /#c+ 3!$me"t/.
N, re4i/tr!ti," ,f !"$ 0,c#me"t tr!"/ferri"4 re!- 3r,3ert$ /+!-- be effecte0 b$ t+e
Re4i/ter ,f Dee0/ #"-e// t+e C,mmi//i,"er ,r +i/ 0#-$ !#t+,ri6e0 re3re/e"t!tive
+!/ certifie0 t+!t /#c+ tr!"/fer +!/ bee" re3,rte0, !"0 t+e t!2 +erei" im3,/e0, if
!"$, +!/ bee" 3!i0.
>B? A//e//me"t !"0 P!$me"t ,f Deficie"c$ T!2. . After t+e ret#r" i/ fi-e0, t+e
C,mmi//i,"er /+!-- e2!mi"e it !"0 !//e// t+e c,rrect !m,#"t ,f t+e t!2. T+e t!2 ,r
0eficie"c$ i"c,me t!2 /, 0i/c,vere0 /+!-- be 3!i0 #3," ",tice !"0 0em!"0 fr,m
t+e C,mmi//i,"er.
A/ #/e0 i" t+i/ C+!3ter, i" re/3ect ,f ! t!2 im3,/e0 b$ t+i/ Tit-e, t+e term
F0eficie"c$F me!"/=
>1? T+e !m,#"t b$ 5+ic+ t+e t!2 im3,/e0 b$ t+i/ Tit-e e2cee0/ t+e !m,#"t /+,5"
!/ t+e t!2 b$ t+e t!23!$er #3," +i/ ret#r"7 b#t t+e !m,#"t /, /+,5" ," t+e ret#r"
/+!-- be i"cre!/e0 b$ t+e !m,#"t/ 3revi,#/-$ !//e//e0 >,r c,--ecte0 5it+,#t
!//e//me"t? !/ ! 0eficie"c$, !"0 0ecre!/e0 b$ t+e !m,#"t 3revi,#/-$ !b!te0,
cre0ite0, ret#r"e0 ,r ,t+er5i/e re3!i0 i" re/3ect ,f /#c+ t!27 ,r
>2? If ", !m,#"t i/ /+,5" !/ t+e t!2 b$ t+e t!23!$er #3," +i/ ret#r", ,r if ", ret#r"
i/ m!0e b$ t+e t!23!$er, t+e" t+e !m,#"t b$ 5+ic+ t+e t!2 e2cee0/ t+e !m,#"t/
3revi,#/-$ !//e//e0 >,r c,--ecte0 5it+,#t !//e//me"t? !/ ! 0eficie"c$7 b#t /#c+
!m,#"t/ 3revi,#/-$ !//e//e0 ,r c,--ecte0 5it+,#t !//e//me"t /+!-- fir/t be
0ecre!/e0 b$ t+e !m,#"t/ 3revi,#/-$ !b!te0, cre0ite0, ret#r"e0 ,r ,t+er5i/e re3!i0
i" re/3ect ,f /#c+ t!2.
)ECTION <7 Bit++,-0i"4 ,f T!2 !t ),#rce. .
>A? Bit++,-0i"4 ,f *i"!- T!2 ," Cert!i" I"c,me/. . )#b:ect t, r#-e/ !"0
re4#-!ti,"/ t+e )ecret!r$ ,f *i"!"ce m!$ 3r,m#-4!te, #3," t+e rec,mme"0!ti," ,f
t+e C,mmi//i,"er, re8#iri"4 t+e fi-i"4 ,f i"c,me t!2 ret#r" b$ cert!i" i"c,me
3!$ee/, t+e t!2 im3,/e0 ,r 3re/cribe0 b$ )ecti,"/ 24>B?>1?, 24>B?>2?, 24>C?, 24>D?
>1?7 2<>A?>2?, 2<>A?>;?, 2<>B?, 2<>C?, 2<>D?, 2<>E?7 27>D?>1?, 27>D?>2?, 27>D?>;?,
27>D?><?7 28>A?>4?, 28>A?><?, 28>A?>7?>!?, 28>A?>7?>b?, 28>A?>7?>c?, 28>B?>1?,
28>B?>2?, 28>B?>;?, 28>B?>4?, 28>B?><?>!?, 28>B?><?>b?, 28>B?><?>c?7 ;;7 !"0 282 ,f
t+i/ C,0e ," /3ecifie0 item/ ,f i"c,me /+!-- be 5it++e-0 b$ 3!$,r@c,r3,r!ti,"
!"0D,r 3er/," !"0 3!i0 i" t+e /!me m!""er !"0 /#b:ect t, t+e /!me c,"0iti,"/ !/
3r,vi0e0 i" )ecti," <8 ,f t+i/ C,0e.
BIR ISUANCES
R=>=)!= R=$!#ATI;)& ); .*.3.2 Auly 2, -..2
Implementing 0ertinent 0rovisions of Republic Act )o /<.4, :An Act Amending &ections
--, -4, 14, 1<, <*, and ,/ of Republic Act )o 24-4, as Amended, ;therwise Fnown as
The )ational Internal Revenue Code: Relative to the @ithholding of Income Tax on
Compensation Income and ;ther Concerns
R=>=)!= R=$!#ATI;)& ); .-3.+ 7ecember *, -..<
'andatory Attachments of the &ummary Alphalist of @ithholding Agents of Income
0ayments &ubjected to Tax @ithheld at &ource 8&A@T9 to Tax Returns @ith Claimed Tax
Credits due to Creditable Tax @ithheld at &ource and of the 'onthly Alphalist of 0ayees
8'A09 @hose Income Received Dave Been &ubjected to @ithholding Tax to the
@ithholding Tax Remittance Return %iled by the @ithholding AgentB0ayor of Income
0ayments
CASES DIGEST
&ection <, 8A9 expressly states that final tax can be imposed on certain "inds of income
and enumerates these as passive income The BIR defines passive income by stating what
it is notC if the income is generated in the active pursuit and performance of the
corporation(s primary purposes, the same is not passive income It is income generated
by the taxpayer(s assets These assets can be in the form of real properties that return
rental income, shares of stoc" in a corporation that earn dividends or interest income
received from savings
Chamber of Real =state and Builders( Associations, Inc vs Alberto Romulo, et al, $R
)o *+.,<+, 'arch /, -.*.
>B? Bit++,-0i"4 ,f Cre0it!b-e T!2 !t ),#rce . T+e )ecret!r$ ,f *i"!"ce m!$,
#3," t+e rec,mme"0!ti," ,f t+e C,mmi//i,"er, re8#ire t+e 5it++,-0i"4 ,f ! t!2
," t+e item/ ,f i"c,me 3!$!b-e t, "!t#r!- ,r :#ri0ic!- 3er/,"/, re/i0i"4 i" t+e
P+i-i33i"e/, b$ 3!$,r@c,r3,r!ti,"D3er/,"/ !/ 3r,vi0e0 f,r b$ -!5, !t t+e r!te ,f ",t
-e// t+!" ,"e 3erce"t >1G? b#t ",t m,re t+!" t+irt$@t5, 3erce"t >;2G? t+ere,f,
5+ic+ /+!-- be cre0ite0 !4!i"/t t+e i"c,me t!2 -i!bi-it$ ,f t+e t!23!$er f,r t+e
t!2!b-e $e!r.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..+3./ Aune 1, -../
Additional Criteria in the 7etermination of Top -.,... 0rivate Corporations, Including
the Threshold on Their 0urchases of Agricultural 0roducts, and Additional Transactions
&ubject to Creditable @ithholding Tax on Income 0ayments 'ade by the Top %ive
Thousand 8<,...9 Individual Taxpayers =ngaged in TradeBBusiness or 0ractice of
0rofession
R=>=)!= R=$!#ATI;)& ); .*43.2 )ovember -+, -..2
Amending %urther &ection -<,- 8'9 of Revenue Regulations )o -3/2, as Amended,
Increasing the Coverage of @ithholding Tax Agents Re5uired to @ithhold *Q from
Regular &uppliers of $oods and -Q from Regular &uppliers of &ervices from the Top
*.,... 0rivate Corporations to Top -.,... 0rivate Corporations
R=>=)!= R=$!#ATI;)& ); .13.- 'arch --, -..-
&ubmission of the Alphabetical #ists of =mployeesB0ayees in 7is"ette %orm and the
&ubstituted %iling of Income Tax Returns of 0ayeesB=mployees Receiving 0urely
Compensation Income from ;nly ;ne =mployer for ;ne Taxable Gear @hose Tax 7ue is
=5ual to Tax @ithheld and Individual30ayees @hose Compensation Income is &ubject to
%inal @ithholding Tax
R=>=)!= R=$!#ATI;)& ); ..23./ ;ctober --, -../
Amending %urther &ecs -<,- and -<,1 of Revenue Regulations )o -3/2, as
Amended, &ubjecting to Creditable @ithholding Tax the Income 0ayments 'ade by
0olitical 0arties and Candidates of #ocal and )ational =lections of All Their Campaign
=xpenditures and Income 0ayments 'ade by an Individual or Auridical 0erson %orming
0art of Their Campaign Contributions to Candidates of #ocal and )ational =lections
and to 0olitical 0arties
CASES DIGEST
@ithholding of Creditable Tax at &ource
Respondent &ecretary has the authority to re5uire the withholding of a tax on items of
income payable to any person, national or juridical, residing in the 0hilippines &uch
authority is derived from &ection <, 8B9 of RA 24-4The 5uestioned provisions of RR -3
/2, as amended, are well within the authority given by &ection <,8B9 to the &ecretary, ie,
the graduated rate of *<Q3<Q is between the *Q31-Q range? the withholding tax is
imposed on the income payable and the tax is creditable against the income tax liability
of the taxpayer for the taxable year
Chamber of Real =state and Builders( Associations, Inc vs Alberto Romulo, et al,
$R )o *+.,<+, 'arch /, -.*.
Income 0ayments to )atural or Auridical 0ersons
&ection <, 8B9 provides that the &ecretary can re5uire a Creditable @ithholding Tax on
:income payable to natural or juridical persons, residing in the 0hilippines: There is no
re5uirement that this income be passive income If that were the intent of Congress, it
could have easily said so Indeed, &ection <, 8A9 and 8B9 are distinct &ection <, 8A9
refers to %@T while &ection <, 8B9 pertains to C@T The former covers the "inds of
passive income enumerated therein and the latter encompasses any income other than
those listed in <, 8A9 &ince the law itself ma"es distinctions, it is wrong to regard <, 8A9
and <, 8B9 in the same way
Chamber of Real =state and Builders( Associations, Inc vs Alberto Romulo, et al,
$R )o *+.,<+, 'arch /, -.*.
>C? T!2@free C,ve"!"t B,"0/. . I" !"$ c!/e 5+ere b,"0/, m,rt4!4e/, 0ee0/ ,f
tr#/t ,r ,t+er /imi-!r ,b-i4!ti,"/ ,f 0,me/tic ,r re/i0e"t f,rei4" c,r3,r!ti,"/,
c,"t!i" ! c,"tr!ct ,r 3r,vi/i," b$ 5+ic+ t+e ,b-i4,r !4ree/ t, 3!$ !"$ 3,rti," ,f
t+e t!2 im3,/e0 i" t+i/ Tit-e #3," t+e ,b-i4ee ,r t, reimb#r/e t+e ,b-i4ee f,r !"$
3,rti," ,f t+e t!2 ,r t, 3!$ t+e i"tere/t 5it+,#t 0e0#cti," f,r !"$ t!2 5+ic+ t+e
,b-i4,r m!$ be re8#ire0 ,r 3ermitte0 t, 3!$ t+ere," ,r t, ret!i" t+erefr,m #"0er
!"$ -!5 ,f t+e P+i-i33i"e/, ,r !"$ /t!te ,r c,#"tr$, t+e ,b-i4,r /+!-- 0e0#ct !"0
5it++,-0 ! t!2 e8#!- t, t+irt$ 3erce"t >;CG? ,f t+e i"tere/t ,r ,t+er 3!$me"t/ #3,"
t+,/e b,"0/, m,rt4!4e/, 0ee0/ ,f tr#/t ,r ,t+er ,b-i4!ti,"/, 5+et+er t+e i"tere/t ,r
,t+er 3!$me"t/ !re 3!$!b-e !""#!--$ ,r !t /+,rter ,r -,"4er 3eri,0/, !"0 5+et+er
t+e b,"0/, /ec#ritie/ ,r ,b-i4!ti,"/ +!0 bee" ,r 5i-- be i//#e0 ,r m!r9ete0, !"0 t+e
i"tere/t ,r ,t+er 3!$me"t t+ere," 3!i0, 5it+i" ,r 5it+,#t t+e P+i-i33i"e/, if t+e
i"tere/t ,r ,t+er 3!$me"t i/ 3!$!b-e t, ! ","re/i0e"t !-ie" ,r t, ! citi6e" ,r re/i0e"t
,f t+e P+i-i33i"e/.
CASES DIGEST
Reasons for devising the withholding tax system
The withholding tax system was devised for two main reasonsC first, to provide the
taxpayer a convenient manner to meet his probable income tax liability? and second, to
ensure the collection of the income tax which could otherwise be lost or substantially
reduced through failure to file the corresponding returns To these, a third reason may be
added to improve the government(s cash flow
Citiban", )A vs Court of Appeals, et al, $R )o *.,414, ;ctober *., *//,
Taxes withheld are in the nature of payment by a taxpayer in order to extinguish his
possible tax obligation
A taxpayer, resident or non3resident who contributes to the withholding tax system, does
not really deposit an amount to the Commissioner of Internal Revenue, but, in truth, to
perform and extinguish his tax obligation for the year concerned In other words, he is
paying his tax liabilities for that year Conse5uently, a taxpayer whose income is withheld
at the source will be deemed to have paid his tax liability when the same falls due at the
end of the tax year
%inley A $ibbs, et al vs Commissioner of Internal Revenue, et al, $R
)o #3*,4.+, )ovember -/, */+<
The withholding agent is the agent of both the $overnment and the taxpayer
The law sets no condition for the personal liability of the withholding agent to attach
The reason is to compel the withholding agent to withhold the tax under all
circumstances In effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the $overnment has
jurisdiction Thus, the withholding agent is constituted the agent of both the $overnment
and the taxpayer @ith respect to the collection andBor withholding of the tax, he is the
$overnment(s agent In regard to the filing of the necessary income tax return and the
payment of the tax to the $overnment, he is the agent of the taxpayer The withholding
agent, therefore, is no ordinary government agent especially because under &ection <18c9
he is held personally liable for the tax he is duty bound to withhold? whereas, the
Commissioner of Internal Revenue and his deputies are not made liable by law
0hilippine $uaranty Co, Inc vs Commissioner of Internal Revenue, et al, $R
)o #3--.,4, &eptember +, */+<
@ithholding agent has implied authority to file claim for refund
If the withholding agent is also an agent of the beneficial owner of the dividends with
respect to the filing of the necessary income tax return and with respect to actual
payment of the tax to the government, such authority may reasonably be held to include
the authority to file a claim for refund and to bring an action for recovery of such claim
This implied authority is especially warranted where the withholding agent is the wholly
owned subsidiary of the parent3stoc"holder and therefore, at all times, under the effective
control of such parent3stoc"holder
Commissioner of Internal Revenue vs 0rocter R $amble 0hilippine 'fg Corp, $R
)o ++212, 7ecember -, *//*
Types of income subject to withholding tax
!nder &ection <, of RA 24-4, the types of income subject to withholding tax are divided
into three categoriesC 8a9 withholding of final tax on certain incomes? 8b9 withholding of
creditable tax at source and 8c9 tax3free covenant bonds
Chamber of Real =state and Builders( Associations, Inc vs Alberto Romulo, et al, $R
)o *+.,<+, 'arch /, -.*.
)ECTION <8 Ret#r"/ !"0 P!$me"t ,f T!2e/ Bit++e-0 !t ),#rce .
>A? H#!rter-$ Ret#r"/ !"0 P!$me"t/ ,f T!2e/ Bit++e-0. . T!2e/ 0e0#cte0 !"0
5it++e-0 #"0er )ecti," <7 b$ 5it++,-0i"4 !4e"t/ /+!-- be c,vere0 b$ ! ret#r" !"0
3!i0 t,, e2ce3t i" c!/e/ 5+ere t+e C,mmi//i,"er ,t+er5i/e 3ermit/, !" !#t+,ri6e0
!4e"t b!"9, Reve"#e Di/trict Officer, C,--ecti," A4e"t, ,r 0#-$ !#t+,ri6e0
Tre!/#rer ,f t+e cit$ ,r m#"ici3!-it$ 5+ere t+e 5it++,-0i"4 !4e"t +!/ +i/ -e4!-
re/i0e"ce ,r 3ri"ci3!- 3-!ce ,f b#/i"e//, ,r 5+ere t+e 5it++,-0i"4 !4e"t i/ !
c,r3,r!ti,", 5+ere t+e 3ri"ci3!- ,ffice i/ -,c!te0.
T+e t!2e/ 0e0#cte0 !"0 5it++e-0 b$ t+e 5it++,-0i"4 !4e"t /+!-- be +e-0 !/ !
/3eci!- f#"0 i" tr#/t f,r t+e 4,ver"me"t #"ti- 3!i0 t, t+e c,--ecti"4 ,fficer/.
T+e ret#r" f,r fi"!- 5it++,-0i"4 t!2 /+!-- be fi-e0 !"0 t+e 3!$me"t m!0e 5it+i"
t5e"t$@five ><? 0!$/ fr,m t+e c-,/e ,f e!c+ c!-e"0!r 8#!rter, 5+i-e t+e ret#r" f,r
cre0it!b-e 5it++,-0i"4 t!2e/ /+!-- be fi-e0 !"0 t+e 3!$me"t m!0e ",t -!ter t+!" t+e
-!/t 0!$ ,f t+e m,"t+ f,--,5i"4 t+e c-,/e ,f t+e 8#!rter 0#ri"4 5+ic+ 5it++,-0i"4
5!/ m!0e= Pr,vi0e0, T+!t t+e C,mmi//i,"er, 5it+ t+e !33r,v!- ,f t+e )ecret!r$ ,f
*i"!"ce, m!$ re8#ire t+e/e 5it++,-0i"4 !4e"t/ t, 3!$ ,r 0e3,/it t+e t!2e/ 0e0#cte0
,r 5it++e-0 !t m,re fre8#e"t i"terv!-/ 5+e" "ece//!r$ t, 3r,tect t+e i"tere/t ,f t+e
4,ver"me"t.
CASES DIGEST
Commissioner may re5uire withholding agents to regularly pay or deposit the taxes
withheld
It is said that taxes are what we pay for civili6ed society @ithout taxes, the government
would be paraly6ed for lac" of the motive power to activate and operate it It is the
lifeblood of the government and so should be collected without unnecessary hindrance
In line with this principle, the Tax Code provides that :the Commissioner of Internal
Revenue may, with the approval of the &ecretary of %inance, re5uire the withholding
agents to pay or deposit the taxes deducted and withheld at more fre5uent intervals when
necessary to protect the interest of the government The return shall be filed and the
payment made within -< days from the close of each calendar 5uarter:
Commissioner of Internal Revenue vs @yeth &uaco #aboratories, Inc, et al, $R )o
,+-2*, &eptember 1., *//*
>B? )t!teme"t ,f I"c,me P!$me"t/ %!0e !"0 T!2e/ Bit++e-0. . Ever$
5it++,-0i"4 !4e"t re8#ire0 t, 0e0#ct !"0 5it++,-0 t!2e/ #"0er )ecti," <7 /+!--
f#r"i/+ e!c+ reci3ie"t, i" re/3ect t, +i/ ,r it/ recei3t/ 0#ri"4 t+e c!-e"0!r 8#!rter ,r
$e!r, ! 5ritte" /t!teme"t /+,5i"4 t+e i"c,me ,r ,t+er 3!$me"t/ m!0e b$ t+e
5it++,-0i"4 !4e"t 0#ri"4 /#c+ 8#!rter ,r $e!r, !"0 t+e !m,#"t ,f t+e t!2 0e0#cte0
!"0 5it++e-0 t+erefr,m, /im#-t!"e,#/-$ #3," 3!$me"t !t t+e re8#e/t ,f t+e 3!$ee,
b#t ",t -!ter t+!" t+e t5e"tiet+ >2Ct+? 0!$ f,--,5i"4 t+e c-,/e ,f t+e 8#!rter i" t+e
c!/e ,f c,r3,r!te 3!$ee, ,r ",t -!ter t+!" %!rc+ 1 ,f t+e f,--,5i"4 $e!r i" t+e c!/e
,f i"0ivi0#!- 3!$ee f,r cre0it!b-e 5it++,-0i"4 t!2e/. *,r fi"!- 5it++,-0i"4 t!2e/,
t+e /t!teme"t /+,#-0 be 4ive" t, t+e 3!$ee ," ,r bef,re !"#!r$ ;1 ,f t+e
/#ccee0i"4 $e!r.
>C? A""#!- I"f,rm!ti," Ret#r". . Ever$ 5it++,-0i"4 !4e"t re8#ire0 t, 0e0#ct !"0
5it++,-0 t!2e/ #"0er )ecti," <7 /+!-- /#bmit t, t+e C,mmi//i,"er !" !""#!-
i"f,rm!ti," ret#r" c,"t!i"i"4 t+e -i/t ,f 3!$ee/ !"0 i"c,me 3!$me"t/, !m,#"t ,f
t!2e/ 5it++e-0 fr,m e!c+ 3!$ee !"0 /#c+ ,t+er 3erti"e"t i"f,rm!ti," !/ m!$ be
re8#ire0 b$ t+e C,mmi//i,"er. I" t+e c!/e ,f fi"!- 5it++,-0i"4 t!2e/, t+e ret#r"
/+!-- be fi-e0 ," ,r bef,re !"#!r$ ;1 ,f t+e /#ccee0i"4 $e!r, !"0 f,r cre0it!b-e
5it++,-0i"4 t!2e/, ",t -!ter t+!" %!rc+ 1 ,f t+e $e!r f,--,5i"4 t+e $e!r f,r 5+ic+
t+e !""#!- re3,rt i/ bei"4 /#bmitte0. T+i/ ret#r", if m!0e !"0 fi-e0 i" !cc,r0!"ce
5it+ t+e r#-e/ !"0 re4#-!ti,"/ !33r,ve0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, /+!-- be /#fficie"t c,m3-i!"ce 5it+ t+e
re8#ireme"t/ ,f )ecti," A8 ,f t+i/ Tit-e i" re/3ect t, t+e i"c,me 3!$me"t/. c0t!i
T+e C,mmi//i,"er m!$, b$ r#-e/ !"0 re4#-!ti,"/, 4r!"t t, !"$ 5it++,-0i"4 !4e"t !
re!/,"!b-e e2te"/i," ,f time t, f#r"i/+ !"0 /#bmit t+e ret#r" re8#ire0 i" t+i/
)#b/ecti,".
>D? I"c,me ,f Reci3ie"t. . I"c,me #3," 5+ic+ !"$ cre0it!b-e t!2 i/ re8#ire0 t,
be 5it++e-0 !t /,#rce #"0er )ecti," <7 /+!-- be i"c-#0e0 i" t+e ret#r" ,f it/
reci3ie"t b#t t+e e2ce// ,f t+e !m,#"t ,f t!2 /, 5it++e-0 ,ver t+e t!2 0#e ," +i/
ret#r" /+!-- be ref#"0e0 t, +im /#b:ect t, t+e 3r,vi/i,"/ ,f )ecti," 2C47 if t+e
i"c,me t!2 c,--ecte0 !t /,#rce i/ -e// t+!" t+e t!2 0#e ," +i/ ret#r", t+e 0iffere"ce
/+!-- be 3!i0 i" !cc,r0!"ce 5it+ t+e 3r,vi/i,"/ ,f )ecti," <A.
A-- t!2e/ 5it++e-0 3#r/#!"t t, t+e 3r,vi/i,"/ ,f t+i/ C,0e !"0 it/ im3-eme"ti"4
r#-e/ !"0 re4#-!ti,"/ !re +ereb$ c,"/i0ere0 tr#/t f#"0/ !"0 /+!-- be m!i"t!i"e0 i" !
/e3!r!te !cc,#"t !"0 ",t c,mmi"4-e0 5it+ !"$ ,t+er f#"0/ ,f t+e 5it++,-0i"4
!4e"t.
>E? Re4i/tr!ti," 5it+ Re4i/ter ,f Dee0/. . N, re4i/tr!ti," ,f !"$ 0,c#me"t
tr!"/ferri"4 re!- 3r,3ert$ /+!-- be effecte0 b$ t+e Re4i/ter ,f Dee0/ #"-e// t+e
C,mmi//i,"er ,r +i/ 0#-$ !#t+,ri6e0 re3re/e"t!tive +!/ certifie0 t+!t /#c+ tr!"/fer
+!/ bee" re3,rte0, !"0 t+e c!3it!- 4!i"/ ,r cre0it!b-e 5it++,-0i"4 t!2, if !"$, +!/
bee" 3!i0= Pr,vi0e0, +,5ever, T+!t t+e i"f,rm!ti," !/ m!$ be re8#ire0 b$ r#-e/
!"0 re4#-!ti,"/ t, be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, /+!-- be !"",t!te0 b$ t+e Re4i/ter ,f Dee0/
i" t+e Tr!"/fer Certific!te ,f Tit-e ,r C,"0,mi"i#m Certific!te ,f Tit-e= Pr,vi0e0,
f#rt+er, T+!t i" c!/e/ ,f tr!"/fer ,f 3r,3ert$ t, ! c,r3,r!ti,", 3#r/#!"t t, ! mer4er,
c,"/,-i0!ti," ,r re,r4!"i6!ti,", !"0 5+ere t+e -!5 !--,5/ 0eferre0 rec,4"iti," ,f
i"c,me i" !cc,r0!"ce 5it+ )ecti," 4C, t+e i"f,rm!ti," !/ m!$ be re8#ire0 b$ r#-e/
!"0 re4#-!ti,"/ t, be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, /+!-- be !"",t!te0 b$ t+e Re4i/ter ,f Dee0/
!t t+e b!c9 ,f t+e Tr!"/fer Certific!te ,f Tit-e ,r C,"0,mi"i#m Certific!te ,f Tit-e
,f t+e re!- 3r,3ert$ i"v,-ve0= Pr,vi0e0, fi"!--$, T+!t !"$ vi,-!ti," ,f t+i/ 3r,vi/i,"
b$ t+e Re4i/ter ,f Dee0/ /+!-- be /#b:ect t, t+e 3e"!-tie/ im3,/e0 #"0er )ecti,"
2A9 ,f t+i/ C,0e.
CASES DIGEST
Registration with Register of 7eeds
0etitioner assails &ection -<2- of Rev Reg -3/2, which provides that the Registry of
7eeds should not effect the registration of any document transferring real property
unless a certification is issued by the CIR that the withholding tax has been paid
0etitioner proffers hardly any reason to stri"e down this rule except to rely on its
contention that the Creditable @ithholding Tax is unconstitutional @e have ruled that it
is not %urthermore, this provision uses almost exactly the same wording as &ection <2
8=9 of RA 24-4 and is un5uestionably in accordance with it
Chamber of Real =state and Builders( Associations, Inc vs Alberto Romulo, et al, $R
)o *+.,<+, 'arch /, -.*.
)ECTION <9. T!2 ," Pr,fit/ C,--ectib-e fr,m O5"er ,r Ot+er Per/,"/. .
T+e t!2 im3,/e0 #"0er t+i/ Tit-e #3," 4!i"/, 3r,fit/, !"0 i"c,me ",t f!--i"4 #"0er
t+e f,re4,i"4 !"0 ",t ret#r"e0 !"0 3!i0 b$ virt#e ,f t+e f,re4,i"4 ,r !/ ,t+er5i/e
3r,vi0e0 b$ -!5 /+!-- be !//e//e0 b$ 3er/,"!- ret#r" #"0er r#-e/ !"0 re4#-!ti,"/ t,
be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er. T+e i"te"t !"0 3#r3,/e ,f t+e Tit-e i/ t+!t !-- 4!i"/, 3r,fit/ !"0
i"c,me ,f ! t!2!b-e c-!//, !/ 0efi"e0 i" t+i/ Tit-e, /+!-- be c+!r4e0 !"0 !//e//e0
5it+ t+e c,rre/3,"0i"4 t!2 3re/cribe0 b$ t+i/ Tit-e, !"0 /!i0 t!2 /+!-- be 3!i0 b$
t+e ,5"er/ ,f /#c+ 4!i"/, 3r,fit/ !"0 i"c,me, ,r t+e 3r,3er 3er/," +!vi"4 t+e
recei3t, c#/t,0$, c,"tr,- ,r 0i/3,/!- ,f t+e /!me. *,r 3#r3,/e/ ,f t+i/ Tit-e,
,5"er/+i3 ,f /#c+ 4!i"/, 3r,fit/ !"0 i"c,me ,r -i!bi-it$ t, 3!$ t+e t!2 /+!-- be
0etermi"e0 !/ ,f t+e $e!r f,r 5+ic+ ! ret#r" i/ re8#ire0 t, be re"0ere0.
C'APTER IE/t!te/ !"0 Tr#/t/
)ECTION AC Im3,/iti," ,f T!2. .
>A? A33-ic!ti," ,f T!2. . T+e t!2 im3,/e0 b$ t+i/ Tit-e #3," i"0ivi0#!-/ /+!--
!33-$ t, t+e i"c,me ,f e/t!te/ ,r ,f !"$ 9i"0 ,f 3r,3ert$ +e-0 i" tr#/t, i"c-#0i"4=
>1? I"c,me !cc#m#-!te0 i" tr#/t f,r t+e be"efit ,f #"b,r" ,r #"!/cert!i"e0 3er/,"
,r 3er/,"/ 5it+ c,"ti"4e"t i"tere/t/, !"0 i"c,me !cc#m#-!te0 ,r +e-0 f,r f#t#re
0i/trib#ti," #"0er t+e term/ ,f t+e 5i-- ,r tr#/t7
>2? I"c,me 5+ic+ i/ t, be 0i/trib#te0 c#rre"t-$ b$ t+e fi0#ci!r$ t, t+e be"efici!rie/,
!"0 i"c,me c,--ecte0 b$ ! 4#!r0i!" ,f !" i"f!"t 5+ic+ i/ t, be +e-0 ,r 0i/trib#te0
!/ t+e c,#rt m!$ 0irect7
>;? I"c,me receive0 b$ e/t!te/ ,f 0ece!/e0 3er/,"/ 0#ri"4 t+e 3eri,0 ,f
!0mi"i/tr!ti," ,r /ett-eme"t ,f t+e e/t!te7 !"0
>4? I"c,me 5+ic+, i" t+e 0i/creti," ,f t+e fi0#ci!r$, m!$ be eit+er 0i/trib#te0 t, t+e
be"efici!rie/ ,r !cc#m#-!te0.
>B? E2ce3ti,". . T+e t!2 im3,/e0 b$ t+i/ Tit-e /+!-- ",t !33-$ t, em3-,$eeF/ tr#/t
5+ic+ f,rm/ 3!rt ,f ! 3e"/i,", /t,c9 b,"#/ ,r 3r,fit@/+!ri"4 3-!" ,f !" em3-,$er
f,r t+e be"efit ,f /,me ,r !-- ,f +i/ em3-,$ee/ >1? if c,"trib#ti,"/ !re m!0e t, t+e
tr#/t b$ /#c+ em3-,$er, ,r em3-,$ee/, ,r b,t+ f,r t+e 3#r3,/e ,f 0i/trib#ti"4 t,
/#c+ em3-,$ee/ t+e e!r"i"4/ !"0 3ri"ci3!- ,f t+e f#"0 !cc#m#-!te0 b$ t+e tr#/t i"
!cc,r0!"ce 5it+ /#c+ 3-!", !"0 >2? if #"0er t+e tr#/t i"/tr#me"t it i/ im3,//ib-e, !t
!"$ time 3ri,r t, t+e /!ti/f!cti," ,f !-- -i!bi-itie/ 5it+ re/3ect t, em3-,$ee/ #"0er
t+e tr#/t, f,r !"$ 3!rt ,f t+e c,r3#/ ,r i"c,me t, be >5it+i" t+e t!2!b-e $e!r ,r
t+ere!fter? #/e0 f,r, ,r 0iverte0 t,, 3#r3,/e/ ,t+er t+!" f,r t+e e2c-#/ive be"efit ,f
+i/ em3-,$ee/= Pr,vi0e0, T+!t !"$ !m,#"t !ct#!--$ 0i/trib#te0 t, !"$ em3-,$ee ,r
0i/trib#tee /+!-- be t!2!b-e t, +im i" t+e $e!r i" 5+ic+ /, 0i/trib#te0 t, t+e e2te"t
t+!t it e2cee0/ t+e !m,#"t c,"trib#te0 b$ /#c+ em3-,$ee ,r 0i/trib#tee.
CASES DIGEST
=xception from Income Tax 3 =states and Trusts
A $ratuity 0lan will lose its tax3exempt status if the retirement benefits are released prior
to the retirement of the employees !nder the law, the trust funds of employees other than
those of private employers are 5ualified for certain tax exemptions pursuant to &ection
+.8B9 of the )ational Internal Revenue Code The $ratuity 0lan provides that the
gratuity benefits of a 5ualified 7B0 employee shall be released only :upon retirement
under the 0lan: If the earnings and principal of the %und are distributed to 7B0
employees prior to their retirement, the $ratuity 0lan will no longer 5ualify for
exemption under &ection +.8B9 If 7B0 insists that its employees may receive the
dividends, the necessary conse5uence will be the non35ualification of the $ratuity 0lan
as a tax3exempt plan
7ev(t Ban" of the 0hil vs Commission on Audit,
$R )o *44<*+, %ebruary **, -..4
>C? C,m3#t!ti," !"0 P!$me"t. .
>1? I" &e"er!-. . T+e t!2 /+!-- be c,m3#te0 #3," t+e t!2!b-e i"c,me ,f t+e e/t!te
,r tr#/t !"0 /+!-- be 3!i0 b$ t+e fi0#ci!r$, e2ce3t !/ 3r,vi0e0 i" )ecti," A;
>re-!ti"4 t, rev,c!b-e tr#/t/? !"0 )ecti," A4 >re-!ti"4 t, i"c,me f,r t+e be"efit ,f
t+e 4r!"t,r?.
>2? C,"/,-i0!ti," ,f I"c,me ,f T5, ,r %,re Tr#/t/. . B+ere, i" t+e c!/e ,f t5,
,r m,re tr#/t/, t+e cre!t,r ,f t+e tr#/t i" e!c+ i"/t!"ce i/ t+e /!me 3er/,", !"0 t+e
be"efici!r$ i" e!c+ i"/t!"ce i/ t+e /!me, t+e t!2!b-e i"c,me ,f !-- t+e tr#/t/ /+!--
be c,"/,-i0!te0 !"0 t+e t!2 3r,vi0e0 i" t+i/ )ecti," c,m3#te0 ," /#c+
c,"/,-i0!te0 i"c,me, !"0 /#c+ 3r,3,rti," ,f /!i0 t!2 /+!-- be !//e//e0 !"0
c,--ecte0 fr,m e!c+ tr#/tee 5+ic+ t+e t!2!b-e i"c,me ,f t+e tr#/t !0mi"i/tere0 b$
+im be!r/ t, t+e c,"/,-i0!te0 i"c,me ,f t+e /ever!- tr#/t/.
)ECTION A1. T!2!b-e I"c,me. . T+e t!2!b-e i"c,me ,f t+e e/t!te ,r tr#/t
/+!-- be c,m3#te0 i" t+e /!me m!""er !"0 ," t+e /!me b!/i/ !/ i" t+e c!/e ,f !"
i"0ivi0#!-, e2ce3t t+!t=
>A? T+ere /+!-- be !--,5e0 !/ ! 0e0#cti," i" c,m3#ti"4 t+e t!2!b-e i"c,me ,f t+e
e/t!te ,r tr#/t t+e !m,#"t ,f t+e i"c,me ,f t+e e/t!te ,r tr#/t f,r t+e t!2!b-e $e!r
5+ic+ i/ t, be 0i/trib#te0 c#rre"t-$ b$ t+e fi0#ci!r$ t, t+e be"efici!rie/, !"0 t+e
!m,#"t ,f t+e i"c,me c,--ecte0 b$ ! 4#!r0i!" ,f !" i"f!"t 5+ic+ i/ t, be +e-0 ,r
0i/trib#te0 !/ t+e c,#rt m!$ 0irect, b#t t+e !m,#"t /, !--,5e0 !/ ! 0e0#cti," /+!--
be i"c-#0e0 i" c,m3#ti"4 t+e t!2!b-e i"c,me ,f t+e be"efici!rie/, 5+et+er
0i/trib#te0 t, t+em ,r ",t. A"$ !m,#"t !--,5e0 !/ ! 0e0#cti," #"0er t+i/
)#b/ecti," /+!-- ",t be !--,5e0 !/ ! 0e0#cti," #"0er )#b/ecti," >B? ,f t+i/ )ecti,"
i" t+e /!me ,r !"$ /#ccee0i"4 t!2!b-e $e!r.
>B? I" t+e c!/e ,f i"c,me receive0 b$ e/t!te/ ,f 0ece!/e0 3er/,"/ 0#ri"4 t+e 3eri,0
,f !0mi"i/tr!ti," ,r /ett-eme"t ,f t+e e/t!te, !"0 i" t+e c!/e ,f i"c,me 5+ic+, i"
t+e 0i/creti," ,f t+e fi0#ci!r$, m!$ be eit+er 0i/trib#te0 t, t+e be"efici!r$ ,r
!cc#m#-!te0, t+ere /+!-- be !--,5e0 !/ !" !00iti,"!- 0e0#cti," i" c,m3#ti"4 t+e
t!2!b-e i"c,me ,f t+e e/t!te ,r tr#/t t+e !m,#"t ,f t+e i"c,me ,f t+e e/t!te ,r tr#/t
f,r it/ t!2!b-e $e!r, 5+ic+ i/ 3r,3er-$ 3!i0 ,r cre0ite0 0#ri"4 /#c+ $e!r t, !"$
-e4!tee, +eir ,r be"efici!r$ b#t t+e !m,#"t /, !--,5e0 !/ ! 0e0#cti," /+!-- be
i"c-#0e0 i" c,m3#ti"4 t+e t!2!b-e i"c,me ,f t+e -e4!tee, +eir ,r be"efici!r$.
>C? I" t+e c!/e ,f ! tr#/t !0mi"i/tere0 i" ! f,rei4" c,#"tr$, t+e 0e0#cti,"/
me"ti,"e0 i" )#b/ecti,"/ >A? !"0 >B? ,f t+i/ )ecti," /+!-- ",t be !--,5e0=
Pr,vi0e0, T+!t t+e !m,#"t ,f !"$ i"c,me i"c-#0e0 i" t+e ret#r" ,f /!i0 tr#/t /+!--
",t be i"c-#0e0 i" c,m3#ti"4 t+e i"c,me ,f t+e be"efici!rie/.
)ECTION A2 E2em3ti," A--,5e0 t, E/t!te/ !"0 Tr#/t/. . *,r t+e 3#r3,/e ,f
t+e t!2 3r,vi0e0 f,r i" t+i/ Tit-e, t+ere /+!-- be !--,5e0 !" e2em3ti," ,f T5e"t$
t+,#/!"0 3e/,/ >P2C,CCC? fr,m t+e i"c,me ,f t+e e/t!te ,r tr#/t.
)ECTION A; Rev,c!b-e Tr#/t/. . B+ere !t !"$ time t+e 3,5er t, reve/t i"
t+e 4r!"t,r tit-e t, !"$ 3!rt ,f t+e c,r3#/ ,f t+e tr#/t i/ ve/te0 >1? i" t+e 4r!"t,r
eit+er !-,"e ,r i" c,":#"cti," 5it+ !"$ 3er/," ",t +!vi"4 ! /#b/t!"ti!- !0ver/e
i"tere/t i" t+e 0i/3,/iti," ,f /#c+ 3!rt ,f t+e c,r3#/ ,r t+e i"c,me t+erefr,m, ,r >2?
i" !"$ 3er/," ",t +!vi"4 ! /#b/t!"ti!- !0ver/e i"tere/t i" t+e 0i/3,/iti," ,f /#c+
3!rt ,f t+e c,r3#/ ,r t+e i"c,me t+erefr,m, t+e i"c,me ,f /#c+ 3!rt ,f t+e tr#/t
/+!-- be i"c-#0e0 i" c,m3#ti"4 t+e t!2!b-e i"c,me ,f t+e 4r!"t,r.
)ECTION A4 I"c,me f,r Be"efit ,f &r!"t,r. .
>A? B+ere !"$ 3!rt ,f t+e i"c,me ,f ! tr#/t >1? i/, ,r i" t+e 0i/creti," ,f t+e 4r!"t,r
,r ,f !"$ 3er/," ",t +!vi"4 ! /#b/t!"ti!- !0ver/e i"tere/t i" t+e 0i/3,/iti," ,f /#c+
3!rt ,f t+e i"c,me m!$ be +e-0 ,r !cc#m#-!te0 f,r f#t#re 0i/trib#ti," t, t+e
4r!"t,r7 ,r >2? m!$, ,r i" t+e 0i/creti," ,f t+e 4r!"t,r ,r ,f !"$ 3er/," ",t +!vi"4 !
/#b/t!"ti!- !0ver/e i"tere/t i" t+e 0i/3,/iti," ,f /#c+ 3!rt ,f t+e i"c,me, be
0i/trib#te0 t, t+e 4r!"t,r7 ,r >;? i/, ,r i" t+e 0i/creti," ,f t+e 4r!"t,r ,r ,f !"$
3er/," ",t +!vi"4 ! /#b/t!"ti!- !0ver/e i"tere/t i" t+e 0i/3,/iti," ,f /#c+ 3!rt ,f
t+e i"c,me m!$ be !33-ie0 t, t+e 3!$me"t ,f 3remi#m/ #3," 3,-icie/ ,f i"/#r!"ce
," t+e -ife ,f t+e 4r!"t,r, /#c+ 3!rt ,f t+e i"c,me ,f t+e tr#/t /+!-- be i"c-#0e0 i"
c,m3#ti"4 t+e t!2!b-e i"c,me ,f t+e 4r!"t,r.
>B? A/ #/e0 i" t+i/ )ecti,", t+e term Fi" t+e 0i/creti," ,f t+e 4r!"t,rF me!"/ i" t+e
0i/creti," ,f t+e 4r!"t,r, eit+er !-,"e ,r i" c,":#"cti," 5it+ !"$ 3er/," ",t +!vi"4
! /#b/t!"ti!- !0ver/e i"tere/t i" t+e 0i/3,/iti," ,f t+e 3!rt ,f t+e i"c,me i"
8#e/ti,".
)ECTION A< *i0#ci!r$ Ret#r"/. . &#!r0i!"/, tr#/tee/, e2ec#t,r/,
!0mi"i/tr!t,r/, receiver/, c,"/erv!t,r/ !"0 !-- 3er/,"/ ,r c,r3,r!ti,"/, !cti"4 i"
!"$ fi0#ci!r$ c!3!cit$, /+!-- re"0er, i" 0#3-ic!te, ! ret#r" ,f t+e i"c,me ,f t+e
3er/,", tr#/t ,r e/t!te f,r 5+,m ,r 5+ic+ t+e$ !ct, !"0 be /#b:ect t, !-- t+e
3r,vi/i,"/ ,f t+i/ Tit-e, 5+ic+ !33-$ t, i"0ivi0#!-/ i" c!/e /#c+ 3er/,", e/t!te ,r
tr#/t +!/ ! 4r,// i"c,me ,f T5e"t$ t+,#/!"0 3e/,/ >P2C,CCC? ,r ,ver 0#ri"4 t+e
t!2!b-e $e!r. )#c+ fi0#ci!r$ ,r 3er/," fi-i"4 t+e ret#r" f,r +im ,r it, /+!-- t!9e ,!t+
t+!t +e +!/ /#fficie"t 9",5-e04e ,f t+e !ff!ir/ ,f /#c+ 3er/,", tr#/t ,r e/t!te t,
e"!b-e +im t, m!9e /#c+ ret#r" !"0 t+!t t+e /!me i/, t, t+e be/t ,f +i/ 9",5-e04e
!"0 be-ief, tr#e !"0 c,rrect, !"0 be /#b:ect t, !-- t+e 3r,vi/i,"/ ,f t+i/ Tit-e 5+ic+
!33-$ t, i"0ivi0#!-/= Pr,vi0e0, T+!t ! ret#r" m!0e b$ ,r f,r ,"e ,r t5, ,r m,re
:,i"t fi0#ci!rie/ fi-e0 i" t+e 3r,vi"ce 5+ere /#c+ fi0#ci!rie/ re/i0e7 #"0er /#c+
r#-e/ !"0 re4#-!ti,"/ !/ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er, /+!-- 3re/cribe, /+!-- be ! /#fficie"t c,m3-i!"ce 5it+ t+e
re8#ireme"t/ ,f t+i/ )ecti,".
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); ..-3** 'arch *, -.**
%iling of Income Tax Return andBor Annual Information Return by Individuals, Including
=states and Trusts shall include in the Account Information Return 8AIR9 such income
subject to final withholding tax and those exclusions from gross income
)ECTION AA *i0#ci!rie/ I"0em"ifie0 A4!i"/t C-!im/ f,r T!2e/ P!i0. .
Tr#/tee/, e2ec#t,r/, !0mi"i/tr!t,r/ !"0 ,t+er fi0#ci!rie/ !re i"0em"ifie0 !4!i"/t
t+e c-!im/ ,r 0em!"0/ ,f ever$ be"efici!r$ f,r !-- 3!$me"t/ ,f t!2e/ 5+ic+ t+e$
/+!-- be re8#ire0 t, m!9e #"0er t+e 3r,vi/i,"/ ,f t+i/ Tit-e, !"0 t+e$ /+!-- +!ve
cre0it f,r t+e !m,#"t ,f /#c+ 3!$me"t/ !4!i"/t t+e be"efici!r$ ,r 3ri"ci3!- i" !"$
!cc,#"ti"4 5+ic+ t+e$ m!9e !/ /#c+ tr#/tee/ ,r ,t+er fi0#ci!rie/.
C'APTER II Ot+er I"c,me T!2 Re8#ireme"t/
)ECTION A7 C,--ecti," ,f *,rei4" P!$me"t/. . A-- 3er/,"/, c,r3,r!ti,"/,
0#-$ re4i/tere0 4e"er!- c,@3!rt"er/+i3/ >c,m3!"i!/c,-ectiv!/? #"0ert!9i"4 f,r
3r,fit ,r ,t+er5i/e t+e c,--ecti," ,f f,rei4" 3!$me"t/ ,f i"tere/t/ ,r 0ivi0e"0/ b$
me!"/ ,f c,#3,"/, c+ec9/ ,r bi--/ ,f e2c+!"4e /+!-- ,bt!i" ! -ice"/e fr,m t+e
C,mmi//i,"er, !"0 /+!-- be /#b:ect t, /#c+ r#-e/ !"0 re4#-!ti,"/ e"!b-i"4 t+e
4,ver"me"t t, ,bt!i" t+e i"f,rm!ti," re8#ire0 #"0er t+i/ Tit-e, !/ t+e )ecret!r$ ,f
*i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, /+!-- 3re/cribe. c0t!i
)ECTION A8 I"f,rm!ti," !t ),#rce !/ t, I"c,me P!$me"t/. . A-- 3er/,"/,
c,r3,r!ti,"/ ,r 0#-$ re4i/tere0 c,@3!rt"er/+i3/ >c,m3!"i!/c,-ectiv!/?, i" 5+!tever
c!3!cit$ !cti"4, i"c-#0i"4 -e//ee/ ,r m,rt4!4,r/ ,f re!- ,r 3er/,"!- 3r,3ert$,
tr#/tee/, !cti"4 i" !"$ tr#/t c!3!cit$, e2ec#t,r/, !0mi"i/tr!t,r/, receiver/,
c,"/erv!t,r/ !"0 em3-,$ee/ m!9i"4 3!$me"t t, !",t+er 3er/,", c,r3,r!ti," ,r
0#-$ re4i/tere0 4e"er!- c,@3!rt"er/+i3 >c,m3!"i!c,-ectiv!?, ,f i"tere/t/, re"t/,
/!-!rie/, 5!4e/, 3remi#m/, !""#itie/, c,m3e"/!ti,"/, rem#"er!ti,"/, em,-#me"t/
,r ,t+er fi2e0 ,r 0etermi"!b-e 4!i"/, 3r,fit/ !"0 i"c,me, ,t+er t+!" 3!$me"t
0e/cribe0 i" )ecti," A9, i" !"$ t!2!b-e $e!r, ,r i" t+e c!/e ,f /#c+ 3!$me"t/ m!0e
b$ t+e &,ver"me"t ,f t+e P+i-i33i"e/, t+e ,fficer/ ,r em3-,$ee/ ,f t+e
&,ver"me"t +!vi"4 i"f,rm!ti," !/ t, /#c+ 3!$me"t/ !"0 re8#ire0 t, m!9e ret#r"/
i" re4!r0 t+eret,, !re !#t+,ri6e0 !"0 re8#ire0 t, re"0er ! tr#e !"0 !cc#r!te ret#r" t,
t+e C,mmi//i,"er, #"0er /#c+ r#-e/ !"0 re4#-!ti,"/, !"0 i" /#c+ f,rm !"0 m!""er
!/ m!$ be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er, /etti"4 f,rt+ t+e !m,#"t ,f /#c+ 4!i"/, 3r,fit/ !"0 i"c,me !"0 t+e
"!me !"0 !00re// ,f t+e reci3ie"t ,f /#c+ 3!$me"t/= Pr,vi0e0, T+!t /#c+ ret#r"/
/+!-- be re8#ire0, i" t+e c!/e ,f 3!$me"t/ ,f i"tere/t #3," b,"0/ !"0 m,rt4!4e/ ,r
0ee0/ ,f tr#/t ,r ,t+er /imi-!r ,b-i4!ti,"/ ,f c,r3,r!ti,"/, !"0 i" t+e c!/e ,f
c,--ecti,"/ ,f item/, ",t 3!$!b-e i" t+e P+i-i33i"e/, ,f i"tere/t #3," t+e b,"0/ ,f
f,rei4" c,#"trie/ !"0 i"tere/t fr,m t+e b,"0/ !"0 0ivi0e"0/ fr,m t+e /t,c9 ,f
f,rei4" c,r3,r!ti,"/ b$ 3er/,"/, c,r3,r!ti,"/ ,r 0#-$ re4i/tere0 4e"er!- c,@
3!rt"er/+i3/ >c,m3!"i!/c,-ectiv!/?, #"0ert!9i"4 !/ ! m!tter ,f b#/i"e// ,r f,r
3r,fit ,r ,t+er5i/e t+e c,--ecti," ,f f,rei4" 3!$me"t/ ,f /#c+ i"tere/t/ ,r 0ivi0e"0/
b$ me!"/ ,f c,#3,"/ ,r bi--/ ,f e2c+!"4e.
)ECTION A9. Ret#r" ,f I"f,rm!ti," ,f Br,9er/. . Ever$ 3er/,", c,r3,r!ti,"
,r 0#-$ re4i/tere0 4e"er!- c,@3!rt"er/+i3 >c,m3!"i!c,-ectiv!?, 0,i"4 b#/i"e// !/ !
br,9er i" !"$ e2c+!"4e ,r b,!r0 ,r ,t+er /imi-!r 3-!ce ,f b#/i"e//, /+!--, 5+e"
re8#ire0 b$ t+e C,mmi//i,"er, re"0er ! c,rrect ret#r" 0#-$ verifie0 #"0er ,!t+,
#"0er /#c+ r#-e/ !"0 re4#-!ti,"/ !/ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, m!$ 3re/cribe, /+,5i"4 t+e "!me/ ,f
c#/t,mer/ f,r 5+,m /#c+ 3er/,", c,r3,r!ti," ,r 0#-$ re4i/tere0 4e"er!- c,@
3!rt"er/+i3 >c,m3!"i!c,-ectiv!? +!/ tr!"/!cte0 !"$ b#/i"e//, 5it+ /#c+ 0et!i-/ !/
t, t+e 3r,fit/, -,//e/ ,r ,t+er i"f,rm!ti," 5+ic+ t+e C,mmi//i,"er, m!$ re8#ire !/
t, e!c+ ,f /#c+ c#/t,mer/ !/ 5i-- e"!b-e t+e C,mmi//i,"er t, 0etermi"e 5+et+er
!-- i"c,me t!2 0#e ," 3r,fit/ ,r 4!i"/ ,f /#c+ c#/t,mer/ +!/ bee" 3!i0.
)ECTION 7C Ret#r"/ ,f *,rei4" C,r3,r!ti,"/. .
>A? Re8#ireme"t/ . U"0er r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e )ecret!r$ ,f
*i"!"ce, #3," t+e rec,mme"0!ti," ,f t+e C,mmi//i,"er, !"$ !tt,r"e$, !cc,#"t!"t,
fi0#ci!r$, b!"9, tr#/t c,m3!"$, fi"!"ci!- i"/tit#ti," ,r ,t+er 3er/,", 5+, !i0/,
!//i/t/, c,#"/e-/ ,r !0vi/e/ i", ,r 5it+ re/3ect t,, t+e f,rm!ti,", ,r4!"i6!ti," ,r
re,r4!"i6!ti," ,f !"$ f,rei4" c,r3,r!ti,", /+!--, 5it+i" t+irt$ >;C? 0!$/ t+ere!fter,
fi-e 5it+ t+e C,mmi//i,"er ! ret#r".
>B? *,rm !"0 C,"te"t/ ,f Ret#r" . )#c+ ret#r" /+!-- be i" /#c+ f,rm !"0 /+!-- /et
f,rt+, #"0er ,!t+, i" re/3ect ,f e!c+ /#c+ c,r3,r!ti,", t, t+e f#-- e2te"t ,f t+e
i"f,rm!ti," 5it+i" t+e 3,//e//i," ,r 9",5-e04e ,r #"0er t+e c,"tr,- ,f t+e 3er/,"
re8#ire0 t, fi-e t+e ret#r", /#c+ i"f,rm!ti," !/ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er, /+!-- 3re/cribe b$ r#-e/ !"0 re4#-!ti,"/ !/
"ece//!r$ f,r c!rr$i"4 ,#t t+e 3r,vi/i,"/ ,f t+i/ Tit-e. N,t+i"4 i" t+i/ )ecti," /+!--
be c,"/tr#e0 t, re8#ire t+e 0iv#-4i"4 ,f 3rivi-e4e0 c,mm#"ic!ti,"/ bet5ee"
!tt,r"e$ !"0 c-ie"t.
)ECTION 71 Di/3,/iti," ,f I"c,me T!2 Ret#r"/, P#b-ic!ti," ,f Li/t/ ,f
T!23!$er/ !"0 *i-er/ . After t+e !//e//me"t /+!-- +!ve bee" m!0e, !/ 3r,vi0e0 i"
t+i/ Tit-e, t+e ret#r"/, t,4et+er 5it+ !"$ c,rrecti,"/ t+ere,f 5+ic+ m!$ +!ve bee"
m!0e b$ t+e C,mmi//i,"er, /+!-- be fi-e0 i" t+e Office ,f t+e C,mmi//i,"er !"0
/+!-- c,"/tit#te 3#b-ic rec,r0/ !"0 be ,3e" t, i"/3ecti," !/ /#c+ #3," t+e ,r0er ,f
t+e Pre/i0e"t ,f t+e P+i-i33i"e/, #"0er r#-e/ !"0 re4#-!ti,"/ t, be 3re/cribe0 b$ t+e
)ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er.
T+e C,mmi//i,"er m!$, i" e!c+ $e!r, c!#/e t, be 3re3!re0 !"0 3#b-i/+e0 i" !"$
"e5/3!3er t+e -i/t/ c,"t!i"i"4 t+e "!me/ !"0 !00re//e/ ,f 3er/,"/ 5+, +!ve fi-e0
i"c,me t!2 ret#r"/.
I"c,me t!2 ret#r"/ ,f /3ecific t!23!$er/ /#b:ect ,f ! re8#e/t f,r e2c+!"4e ,f
i"f,rm!ti," b$ ! f,rei4" t!2 !#t+,rit$ 3#r/#!"t t, !" i"ter"!ti,"!- c,"ve"ti," ,r
!4reeme"t ," t!2 m!tter/ t, 5+ic+ t+e P+i-i33i"e/ i/ ! /i4"!t,r$ ,r ! 3!rt$ ,f, /+!--
be ,3e" t, i"/3ecti," #3," t+e ,r0er ,f t+e Pre/i0e"t ,f t+e P+i-i33i"e/, #"0er r#-e/
!"0 re4#-!ti,"/ !/ m!$ be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er.
)ECTION 72 )#it t, Rec,ver T!2 B!/e0 ," *!-/e ,r *r!#0#-e"t Ret#r"/ .
B+e" !" !//e//me"t i/ m!0e i" c!/e ,f !"$ -i/t, /t!teme"t ,r ret#r", 5+ic+ i" t+e
,3i"i," ,f t+e C,mmi//i,"er 5!/ f!-/e ,r fr!#0#-e"t ,r c,"t!i"e0 !"$
#"0er/t!teme"t ,r #"0erv!-#!ti,", ", t!2 c,--ecte0 #"0er /#c+ !//e//me"t /+!-- be
rec,vere0 b$ !"$ /#it, #"-e// it i/ 3r,ve0 t+!t t+e /!i0 -i/t, /t!teme"t ,r ret#r" 5!/
",t f!-/e ",r fr!#0#-e"t !"0 0i0 ",t c,"t!i" !"$ #"0er/t!teme"t ,r #"0erv!-#!ti,"7
b#t t+i/ 3r,vi/i," /+!-- ",t !33-$ t, /t!teme"t/ ,r ret#r"/ m!0e ,r t, be m!0e i"
4,,0 f!it+ re4!r0i"4 !""#!- 0e3reci!ti," ,f ,i- ,r 4!/ 5e--/ !"0 mi"e/.
)ECTION 7; Di/trib#ti," ,f Divi0e"0/ ,r A//et/ b$ C,r3,r!ti,"/ .
>A? Defi"iti," ,f Divi0e"0/ . T+e term F0ivi0e"0/F 5+e" #/e0 i" t+i/ Tit-e me!"/
!"$ 0i/trib#ti," m!0e b$ ! c,r3,r!ti," t, it/ /+!re+,-0er/ ,#t ,f it/ e!r"i"4/ ,r
3r,fit/ !"0 3!$!b-e t, it/ /+!re+,-0er/, 5+et+er i" m,"e$ ,r i" ,t+er 3r,3ert$.
1B+ere ! c,r3,r!ti," 0i/trib#te/ !-- ,f it/ !//et/ i" c,m3-ete -i8#i0!ti," ,r
0i//,-#ti,", t+e 4!i" re!-i6e0 ,r -,// /#/t!i"e0 b$ t+e /t,c9+,-0er, 5+et+er
i"0ivi0#!- ,r c,r3,r!te, i/ ! t!2!b-e i"c,me ,r ! 0e0#ctib-e -,//, !/ t+e c!/e m!$
be.
>B? )t,c9 Divi0e"0 . A /t,c9 0ivi0e"0 re3re/e"ti"4 t+e tr!"/fer ,f /#r3-#/ t,
c!3it!- !cc,#"t /+!-- ",t be /#b:ect t, t!2. ',5ever, if ! c,r3,r!ti," c!"ce-/ ,r
re0eem/ /t,c9 i//#e0 !/ ! 0ivi0e"0 !t /#c+ time !"0 i" /#c+ m!""er !/ t, m!9e t+e
0i/trib#ti," !"0 c!"ce--!ti," ,r re0em3ti,", i" 5+,-e ,r i" 3!rt, e//e"ti!--$
e8#iv!-e"t t, t+e 0i/trib#ti," ,f ! t!2!b-e 0ivi0e"0, t+e !m,#"t /, 0i/trib#te0 i"
re0em3ti," ,r c!"ce--!ti," ,f t+e /t,c9 /+!-- be c,"/i0ere0 !/ t!2!b-e i"c,me t,
t+e e2te"t t+!t it re3re/e"t/ ! 0i/trib#ti," ,f e!r"i"4/ ,r 3r,fit/.
>C? Divi0e"0/ Di/trib#te0 !re Deeme0 %!0e fr,m %,/t Rece"t-$ Acc#m#-!te0
Pr,fit/ . A"$ 0i/trib#ti," m!0e t, t+e /+!re+,-0er/ ,r member/ ,f ! c,r3,r!ti,"
/+!-- be 0eeme0 t, +!ve bee" m!0e fr,m t+e m,/t rece"t-$ !cc#m#-!te0 3r,fit/ ,r
/#r3-#/, !"0 /+!-- c,"/tit#te ! 3!rt ,f t+e !""#!- i"c,me ,f t+e 0i/trib#tee f,r t+e
$e!r i" 5+ic+ receive0.
>D? Net I"c,me ,f ! P!rt"er/+i3 Deeme0 C,"/tr#ctive-$ Receive0 b$ P!rt"er/ .
T+e t!2!b-e i"c,me 0ec-!re0 b$ ! 3!rt"er/+i3 f,r ! t!2!b-e $e!r 5+ic+ i/ /#b:ect t,
t!2 #"0er )ecti," 27>A? ,f t+i/ C,0e, !fter 0e0#cti"4 t+e c,r3,r!te i"c,me t!2
im3,/e0 t+erei", /+!-- be 0eeme0 t, +!ve bee" !ct#!--$ ,r c,"/tr#ctive-$ receive0
b$ t+e 3!rt"er/ i" t+e /!me t!2!b-e $e!r !"0 /+!-- be t!2e0 t, t+em i" t+eir
i"0ivi0#!- c!3!cit$, 5+et+er !ct#!--$ 0i/trib#te0 ,r ",t.
C'APTER IIIH#!rter-$ C,r3,r!te I"c,me T!2 A""#!- Dec-!r!ti," !"0 H#!rter-$
P!$me"t/ ,f I"c,me T!2e/
)ECTION 74 Dec-!r!ti," ,f I"c,me T!2 f,r I"0ivi0#!-/. .
>A? I" &e"er!- . E2ce3t !/ ,t+er5i/e 3r,vi0e0 i" t+i/ )ecti,", ever$ i"0ivi0#!-
/#b:ect t, i"c,me t!2 #"0er )ecti,"/ 24 !"0 2<>A? ,f t+i/ Tit-e, 5+, i/ receivi"4
/e-f@em3-,$me"t i"c,me, 5+et+er it c,"/tit#te/ t+e /,-e /,#rce ,f +i/ i"c,me ,r i"
c,mbi"!ti," 5it+ /!-!rie/, 5!4e/ !"0 ,t+er fi2e0 ,r 0etermi"!b-e i"c,me, /+!--
m!9e !"0 fi-e ! 0ec-!r!ti," ,f +i/ e/tim!te0 i"c,me f,r t+e c#rre"t t!2!b-e $e!r ,"
,r bef,re A3ri- 1< ,f t+e /!me t!2!b-e $e!r. I" 4e"er!-, /e-f@em3-,$me"t i"c,me
c,"/i/t/ ,f t+e e!r"i"4/ 0erive0 b$ t+e i"0ivi0#!- fr,m t+e 3r!ctice ,f 3r,fe//i," ,r
c,"0#ct ,f tr!0e ,r b#/i"e// c!rrie0 ," b$ +im !/ ! /,-e 3r,3riet,r ,r b$ !
3!rt"er/+i3 ,f 5+ic+ +e i/ ! member. N,"re/i0e"t *i-i3i", citi6e"/, 5it+ re/3ect t,
i"c,me fr,m 5it+,#t t+e P+i-i33i"e/, !"0 ","re/i0e"t !-ie"/ ",t e"4!4e0 i" tr!0e
,r b#/i"e// i" t+e P+i-i33i"e/, !re ",t re8#ire0 t, re"0er ! 0ec-!r!ti," ,f e/tim!te0
i"c,me t!2. T+e 0ec-!r!ti," /+!-- c,"t!i" /#c+ 3erti"e"t i"f,rm!ti," !/ t+e
)ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, m!$, b$ r#-e/
!"0 re4#-!ti,"/ 3re/cribe. A" i"0ivi0#!- m!$ m!9e !me"0me"t/ ,f ! 0ec-!r!ti,"
fi-e0 0#ri"4 t+e t!2!b-e $e!r #"0er t+e r#-e/ !"0 re4#-!ti,"/ 3re/cribe0 b$ t+e
)ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er.
>B? Ret#r" !"0 P!$me"t ,f E/tim!te0 I"c,me T!2 b$ I"0ivi0#!-/ . T+e !m,#"t ,f
e/tim!te0 i"c,me !/ 0efi"e0 i" )#b/ecti," >C? 5it+ re/3ect t, 5+ic+ ! 0ec-!r!ti,"
i/ re8#ire0 #"0er )#b/ecti," >A? /+!-- be 3!i0 i" f,#r >4? i"/t!--me"t/. T+e fir/t
i"/t!--me"t /+!-- be 3!i0 !t t+e time ,f t+e 0ec-!r!ti," !"0 t+e /ec,"0 !"0 t+ir0
/+!-- be 3!i0 ," A#4#/t 1< !"0 N,vember 1< ,f t+e c#rre"t $e!r, re/3ective-$. T+e
f,#rt+ i"/t!--me"t /+!-- be 3!i0 ," ,r bef,re A3ri- 1< ,f t+e f,--,5i"4 c!-e"0!r
$e!r 5+e" t+e fi"!- !0:#/te0 i"c,me t!2 ret#r" i/ 0#e t, be fi-e0.
>C? Defi"iti," ,f E/tim!te0 T!2 . I" t+e c!/e ,f !" i"0ivi0#!-, t+e term Fe/tim!te0
t!2F me!"/ t+e !m,#"t 5+ic+ t+e i"0ivi0#!- 0ec-!re0 !/ i"c,me t!2 i" +i/ fi"!-
!0:#/te0 !"0 !""#!- i"c,me t!2 ret#r" f,r t+e 3rece0i"4 t!2!b-e $e!r mi"#/ t+e
/#m ,f t+e cre0it/ !--,5e0 #"0er t+i/ Tit-e !4!i"/t t+e /!i0 t!2. If, 0#ri"4 t+e
c#rre"t t!2!b-e $e!r, t+e t!23!$er re!/,"!b-$ e23ect/ t, 3!$ ! bi44er i"c,me t!2,
+e /+!-- fi-e !" !me"0e0 0ec-!r!ti," 0#ri"4 !"$ i"terv!- ,f i"/t!--me"t 3!$me"t
0!te/.
)ECTION 7< Dec-!r!ti," ,f H#!rter-$ C,r3,r!te I"c,me T!2 . Ever$
c,r3,r!ti," /+!-- fi-e i" 0#3-ic!te ! 8#!rter-$ /#mm!r$ 0ec-!r!ti," ,f it/ 4r,//
i"c,me !"0 0e0#cti,"/ ," ! c#m#-!tive b!/i/ f,r t+e 3rece0i"4 8#!rter ,r 8#!rter/
#3," 5+ic+ t+e i"c,me t!2, !/ 3r,vi0e0 i" Tit-e II ,f t+i/ C,0e, /+!-- be -evie0,
c,--ecte0 !"0 3!i0. T+e t!2 /, c,m3#te0 /+!-- be 0ecre!/e0 b$ t+e !m,#"t ,f t!2
3revi,#/-$ 3!i0 ,r !//e//e0 0#ri"4 t+e 3rece0i"4 8#!rter/ !"0 /+!-- be 3!i0 ",t
-!ter t+!" /i2t$ >AC? 0!$/ fr,m t+e c-,/e ,f e!c+ ,f t+e fir/t t+ree >;? 8#!rter/ ,f t+e
t!2!b-e $e!r, 5+et+er c!-e"0!r ,r fi/c!- $e!r.
)ECTION 7A *i"!- A0:#/tme"t Ret#r" . Ever$ c,r3,r!ti," -i!b-e t, t!2
#"0er )ecti," 27 /+!-- fi-e ! fi"!- !0:#/tme"t ret#r" c,veri"4 t+e t,t!- t!2!b-e
i"c,me f,r t+e 3rece0i"4 c!-e"0!r ,r fi/c!- $e!r. If t+e /#m ,f t+e 8#!rter-$ t!2
3!$me"t/ m!0e 0#ri"4 t+e /!i0 t!2!b-e $e!r i/ ",t e8#!- t, t+e t,t!- t!2 0#e ," t+e
e"tire t!2!b-e i"c,me ,f t+!t $e!r, t+e c,r3,r!ti," /+!-- eit+er=
>A? P!$ t+e b!-!"ce ,f t!2 /ti-- 0#e7 ,r
>B? C!rr$@,ver t+e e2ce// cre0it7 ,r
>C? Be cre0ite0 ,r ref#"0e0 5it+ t+e e2ce// !m,#"t 3!i0, !/ t+e c!/e m!$ be.
I" c!/e t+e c,r3,r!ti," i/ e"tit-e0 t, ! t!2 cre0it ,r ref#"0 ,f t+e e2ce// e/tim!te0
8#!rter-$ i"c,me t!2e/ 3!i0, t+e e2ce// !m,#"t /+,5" ," it/ fi"!- !0:#/tme"t
ret#r" m!$ be c!rrie0 ,ver !"0 cre0ite0 !4!i"/t t+e e/tim!te0 8#!rter-$ i"c,me t!2
-i!bi-itie/ f,r t+e t!2!b-e 8#!rter/ ,f t+e /#ccee0i"4 t!2!b-e $e!r/. O"ce t+e ,3ti,"
t, c!rr$@,ver !"0 !33-$ t+e e2ce// 8#!rter-$ i"c,me t!2 !4!i"/t i"c,me t!2 0#e f,r
t+e t!2!b-e 8#!rter/ ,f t+e /#ccee0i"4 t!2!b-e $e!r/ +!/ bee" m!0e, /#c+ ,3ti,"
/+!-- be c,"/i0ere0 irrev,c!b-e f,r t+!t t!2!b-e 3eri,0 !"0 ", !33-ic!ti," f,r c!/+
ref#"0 ,r i//#!"ce ,f ! t!2 cre0it certific!te /+!-- be !--,5e0 t+eref,r.
CASES DIGEST
Changes brought by &ection ,+ of the *//, )IRC and its purpose
&ection ,+ of the *//, )IRC wrought two changes to its predecessor, &ection +/ of the
*/,, )IRCC first, it mandates that the taxpayer(s exercise of its option to either see"
refund or crediting is irrevocable? and second, the taxpayer(s decision to carry3over and
apply its current overpayment to future tax liability continues until the overpayment has
been fully applied, no matter how many tax cycles it ta"es
&ection ,+ of the *//, )IRC is, li"e its predecessor &ection +/ of the */,, )IRC, a tax
administration measure crafted to ease tax collection By re5uiring corporate taxpayers
to indicate in their final adjustment return whether, in case of overpayment, they wish to
have the excess amount refunded or carried3over and applied to their future tax liability,
the provision aims to properly manage claims for refund or tax credit Administratively
spea"ing, &ection ,+ serves the same purpose as its companion provisions in Title II,
Chapter HII of the *//, )IRC, namely, &ection ,4 on the declaration of income tax by
individuals, &ection ,< on the declaration of 5uarterly corporate income tax, and &ection
,, on the place and time of filing and payment of 5uarterly corporate income tax E they
are all tools designed to promote rational and efficient functioning of the tax system
These provisions should be distinguished from the provisions in Title II, Chapter I> 8Tax
on Corporations9 and Chapter >II 8Allowable 7eductions9, among others, relating to the
5uestion on the intrinsic taxability of corporate transactions
Commissioner of Internal Revenue vs 'c$eorge %ood Industries, Inc,
$R )o *,4*<,, ;ctober -., -.*.
Asiaworld 0roperties 0hil Corp vs Commissioner of Internal Revenue,
$R )o *,*,++, Auly -/, -.*.
Irrevocability rule
&ection ,/ of the )IRC of */2< was reproduced as &ection ,+ of the )IRC of *//,, with
the addition of one important sentence, which laid down the irrevocability ruleC
0hilam Asset 'anagement, Inc vs Commissioner of Internal Revenue,
$R )os *<++1,B*+-..4, 7ecember *4, -..<
Two options offered by &ection ,+ of the )IRC of *//,
The &upreme Court, recogni6ed the two options offered by &ection ,+ of the )IRC of
*//, to a taxable corporation whose total 5uarterly income tax payments in a given
taxable year exceeds its total income tax due These options areC 8*9 filing for a tax
refund or 8-9 availing of a tax credit The Court further explainedC
The Court categorically declared in 0hilam thatC :&ection ,+ remains clear and
une5uivocal ;nce the carry3over option is ta"en, actually or constructively, it becomes
irrevocable: It mentioned no exception or 5ualification to the irrevocability rule
The Court of Appeals mista"enly understood the phrase :for that taxable period: as a
prescriptive period for the irrevocability rule This would mean that since the tax credit
in this case was ac5uired in *//2, and B0I opted to carry it over to *///, then the
irrevocability of the option to carry over expired by the end of *///, leaving B0I free to
again ta"e another option as regards its *//2 excess income tax credit This construal
effectively renders nugatory the irrevocability rule The evident intent of the legislature,
in adding the last sentence to &ection ,+ of the )IRC of *//,, is to "eep the taxpayer
from flip3flopping on its options, and avoid confusion and complication as regards said
taxpayer(s excess tax credit The interpretation of the Court of Appeals only delays the
flip3flopping to the end of each succeeding taxable periodCommissioner of Internal
Revenue vs B0I, $R )o *,24/., Auly ,, -../
A corporation entitled to a refund of excess creditable withholding tax may either obtain
the refund or credit the amount to the succeeding taxable year
The Court, in 0hilam, recogni6ed the two options offered by &ection ,+ of the )IRC of
*//, to a taxable corporation whose total 5uarterly income tax payments in a given
taxable year exceeds its total income tax due These options areC 8*9 filing for a tax
refund or 8-9 availing of a tax credit The Court further explainedC
The Court categorically declared in 0hilam thatC :&ection ,+ remains clear and
une5uivocal ;nce the carry3over option is ta"en, actually or constructively, it becomes
irrevocable: It mentioned no exception or 5ualification to the irrevocability rule
Commissioner of Internal Revenue vs B0I, $R )o *,24/., Auly ,, -../
0hilam Asset 'anagement, Inc vs Commissioner of Internal Revenue,
$R )os *<++1,B*+-..4, 7ecember *4, -..<
The controlling factor for the operation of the irrevocability rule
The controlling factor for the operation of the irrevocability rule is that the taxpayer
chose an option? and once it had already done so, it could no longer ma"e another one
Conse5uently, after the taxpayer opts to carry3over its excess tax credit to the following
taxable period, the 5uestion of whether or not it actually gets to apply said tax credit is
irrelevant &ection ,+ of the )IRC of *//, is explicit in stating that once the option to
carry over has been made, :no application for tax refund or issuance of a tax credit
certificate shall be allowed therefor:
The last sentence of &ection ,+ of the )IRC of *//, readsC :;nce the option to carry3
over and apply the excess 5uarterly income tax against income tax due for the taxable
5uarters of the succeeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor: The phrase :for that taxable period: merely
identifies the excess income tax, subject of the option, by referring to the taxable period
when it was ac5uired by the taxpayer In the present case, the excess income tax credit,
which B0I opted to carry over, was ac5uired by the said ban" during the taxable year
*//2 The option of B0I to carry over its *//2 excess income tax credit is irrevocable? it
cannot later on opt to apply for a refund of the very same *//2 excess income tax credit
Commissioner of Internal Revenue vs B0I, $R )o *,24/., Auly ,, -../
;ption to carry3over excess creditable tax extends to the next succeeding taxable year
!nder &ection ,+ of the )IRC of *//,, the application of the option to carry3over the
excess creditable tax is not limited only to the immediately following taxable year but
extends to the next succeeding taxable years The clear intent in the amendment under
&ection ,+ is to ma"e the option, once exercised, irrevocable for the :succeeding taxable
years: Thus, once the taxpayer opts to carry3over the excess income tax against the
taxes due for the succeeding taxable years, such option is irrevocable for the whole
amount of the excess income tax, thus, prohibiting the taxpayer from applying for a
refund for that same excess income tax in the next succeeding taxable years The
unutili6ed excess tax credits will remain in the taxpayer(s account and will be carried
over and applied against the taxpayer(s income tax liabilities in the succeeding taxable
years until fully utili6ed Asiaworld 0roperties 0hil Corp vs Commissioner of
Internal Revenue, $R )o *,*,++, Auly -/, -.*.
A corporation entitled to a refund of excess the creditable withholding tax may either
obtain the refund or credit the amount to the succeeding taxable year
The amount being claimed as a refund would remain in the account of the taxpayer until
utili6ed in succeeding taxable years, as provided in &ection ,+ of the )IRC of *//, It is
worthy to note that unli"e the option for refund of excess income tax, which prescribes
after two years from the filing of the %AR, there is no prescriptive period for the carrying
over of the same Therefore, the excess income tax credit of B0I, which it ac5uired in
*//2 and opted to carry over, may be repeatedly carried over to succeeding taxable
years, ie, to *///, -..., -..*, and so on and so forth, until actually applied or credited
to a tax liability of B0I!nder &ection +/ 8now &ection ,+9 of the Tax Code then in force,
a corporation entitled to a refund of excess creditable withholding tax may either obtain
the refund or credit the amount to the succeeding taxable yearThe Court of Appeals
mista"enly understood the phrase :for that taxable period: as a prescriptive period for
the irrevocability rule This would mean that since the tax credit in this case was
ac5uired in *//2, and B0I opted to carry it over to *///, then the irrevocability of the
option to carry over expired by the end of *///, leaving B0I free to again ta"e another
option as regards its *//2 excess income tax credit This construal effectively renders
nugatory the irrevocability rule The evident intent of the legislature, in adding the last
sentence to &ection ,+ of the )IRC of *//,, is to "eep the taxpayer from flip3flopping on
its options, and avoid confusion and complication as regards said taxpayer(s excess tax
credit The interpretation of the Court of Appeals only delays the flip3flopping to the end
of each succeeding taxable period
Commissioner of Internal Revenue vs B0I, $R )o *,24/., Auly ,, -../
%inal Adjustment Return
&ection +/8now &ec ,+9 %inal Adjustment Return E =very corporation liable to tax
under &ection -4 shall file a final adjustment return covering the total net income for the
preceding calendar or fiscal year If the sum of the 5uarterly tax payments made during
the said taxable year is not e5ual to the total tax due on the entire taxable net income of
that year the corporation shall eitherC
8a9 0ay the excess tax still due? or
8b9 Be refunded the excess amount paid, as the case may be
In case the corporation is entitled to a refund of the excess estimated 5uarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated 5uarterly income tax liabilities for the taxable 5uarters of the
succeeding taxable year
It is well3defined from the said provision that if the total tax due is less than the 5uarterly
tax payments made during the year, a taxpayer is entitled to a refund or credit for the
excess amount paid 0etitioner(s *//, income tax due amounted to 0/,,.1,*+<<4 After
applying its tax excess credits for *//+ in the amount of 0/,-2/,.24.., the net income
tax payable for *//, was only 04*4,.2*<4 Dowever, based on the 5uarterly income tax
payments of petitioner, the total creditable withholding tax for the year *//, amounted to
0*4,141,2,<.< Thus, the amount of overpayment of tax as of *//, was 0*1,/-/,,/1<*
8after deducting 04*4,.2*<4 from 0*4,141,2,<.<9 In the final adjustment return filed
for the same taxable year, petitioner indicated its option to apply the said overpayment as
tax credit for the succeeding taxable year *//2, not */// There still remains a
considerable excess payment in the amount of 0/,,4-,-,.<* after petitionerMs payment
of tax due for the year *//2 in the sum of 04,*2,,<-1.. &ection +/ 8now &ec ,+9 clearly
provides that a taxable corporation is entitled to a tax refund when the sum of the
5uarterly income taxes it paid during a taxable year exceeds its total income tax due also
for that year Conse5uently, the refundable amount that is shown on its final adjustment
return may be credited, at its option, against its 5uarterly income tax liabilities for the
next taxable year =xcess income taxes paid in a year that could not be applied to taxes
due the following year may be refunded the next year Thus, if the excess income taxes
paid in a given taxable year have not been entirely used by a taxable corporation against
its 5uarterly income tax liabilities for the next taxable year, the unused amount of the
excess may still be refunded, provided that the claim for such a refund is made within two
years after payment of the tax
&tate #and Investment Corp vs Commissioner of Internal Revenue,
$R )o *,*/<+, Aanuary *2, -..2
@ithout the tax return, it is error to grant a refund
The grant of a refund is founded on the assumption that the tax return is valid, ie, that
the facts stated therein are true and correct @ithout the tax return, it is error to grant a
refund since it would be virtually impossible to determine whether the proper taxes have
been assessed and paid In this case, petitioner(s failure to present sufficient evidence to
prove its claim for refund is fatal to its cause After all, it is axiomatic that a claimant has
the burden of proof to establish the factual basis of his or her claim for tax credit or
refund Tax refunds, li"e tax exemptions, are construed strictly against the taxpayer
0aseo Realty R 7evelopment Corp vs Court of Appeals, et al,
$R )o **/-2+, ;ctober *1, -..4
The carrying forward of any excess or overpaid income tax for a given taxable year is
limited to the succeeding taxable year only
In case the corporation is entitled to a refund of the excess estimated 5uarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated 5uarterly income tax liabilities for the taxable 5uarters of the
succeeding year The carrying forward of any excess or overpaid income tax for a given
taxable year is limited to the succeeding taxable year only
0aseo Realty R 7evelopment Corp vs Court of Appeals, et al, $R
)o **/-2+, ;ctober *1, -..4
IRR=>;CABI#ITG R!#=
%actsC %or the taxable year ending 7ec 1*, *//2, respondent B0I filed with the BIR its
final adjusted Corporate Annual Income Tax Return It credited certain amounts against
the total tax due from it at the end of *//2 and computed an overpayment of income taxes
to the BIR This excess tax credit was carried over by B0I to the succeeding taxable year
Dowever, for *///, B0I ended up with a net loss? its still unapplied excess tax credit
carried over from *//2? and more excess tax credit ac5uired in */// Thus, the total
excess tax credits of B0I increased to 04+,/--,2<*.. in *///, which it chose again to
carry over to the following taxable year
%or the taxable year ending 7ec 1*, -..., B0I declared in its Corporate Annual ITRC
8*9 6ero taxable income? 8-9 excess tax credit carried over from *//2 and *///? and 819
even more excess tax credit, gained in -... This time, B0I failed to indicate in its ITR its
choice of whether to carry over its excess tax credits or to claim the refund of or issuance
of a tax credit certificate for the said amounts B0I then filed a claim for refund in the
amount of 011,/4,,*.*.., representing its excess creditable income tax for *//2 @hen
the petitioner CIR failed to act on its claim, B0I filed a 0etition for Review before the
CTA Relying on the irrevocability rule, the CTA ruled that B0I was barred from filing a
claim for refund because it had opted to carry over its *//2 excess tax credit to */// and
-... After its 'otion for Reconsideration was denied by the CTA, B0I filed an appeal
with the Court of Appeals which reversed the CTAMs decision based on B0I3%amily
&avings Ban", Inc v CA, 12+ 0hil ,*/ 8-...9 The CIR then filed a 'otion for
Reconsideration which was denied? hence, this 0etition for Review
I&&!=C @hether the irrevocability rule under &ec ,+ of the Tax Code bars petitioner
from as"ing for a tax refund
R!#I)$C B0IMs choice to carry over its *//2 excess income tax credit to succeeding
taxable years is irrevocable, regardless of whether it was able to actually apply the said
amount to a tax liability The reiteration by B0I of the carry over option in its ITR for
*/// was already a superfluity, as far as its *//2 excess income tax credit was
concerned, given the irrevocability of the initial choice made by the ban" to carry over
the said amount The Court categorically declared in 0hilam Asset 'anagement, Inc v
CIR 8$R )os *<++1, and *+-..4, 7ec *4, -..<9 thatC :&ection ,+ remains clear and
une5uivocal ;nce the carry3over option is ta"en, actually or constructively, it becomes
irrevocable: It mentioned no exception or 5ualification to the irrevocability rule The
Court of Appeals erred in relying on B0I3%amily &avings Ban", Inc v CA, because when
the case was decided by this Court, it did not yet have the irrevocability rule to consider
This case involved tax credit ac5uired by the ban" in */2/, which it initially opted to
carry over to *//. The prevailing tax law then was the )IRC of */2<, &ec ,/, later
reproduced as &ec ,+ of the )IRC of *//,, with the addition of one important sentence,
which laid down the irrevocability rule
The Court of Appeals mista"enly understood the phrase :for that taxable period: as a
prescriptive period for the irrevocability rule This would mean that since the tax credit
in this case was ac5uired in *//2, and B0I opted to carry it over to *///, then the
irrevocability of the option to carry over expired by the end of *///, leaving B0I free to
again ta"e another option as regards its *//2 excess income tax credit This construal
effectively renders nugatory the irrevocability rule The evident intent of the legislature,
in adding the last sentence to &ec ,+ of the )IRC of *//,, is to "eep the taxpayer from
flip3flopping on its options, and avoid confusion and complication as regards said
taxpayer(s excess tax creditC;''I&&I;)=R ;% I)T=R)A# R=>=)!= vs B0I
O$R )o *,24/.Auly ,, -../P
;ption to carry3over excess creditable tax extends to the next succeeding taxable year
!nder &ection ,+ of the )IRC of *//,, the application of the option to carry3over the
excess creditable tax is not limited only to the immediately following taxable year but
extends to the next succeeding taxable years The clear intent in the amendment under
&ection ,+ is to ma"e the option, once exercised, irrevocable for the :succeeding taxable
years: Thus, once the taxpayer opts to carry3over the excess income tax against the
taxes due for the succeeding taxable years, such option is irrevocable for the whole
amount of the excess income tax, thus, prohibiting the taxpayer from applying for a
refund for that same excess income tax in the next succeeding taxable years The
unutili6ed excess tax credits will remain in the taxpayer(s account and will be carried
over and applied against the taxpayer(s income tax liabilities in the succeeding taxable
years until fully utili6ed Asiaworld 0roperties 0hil Corp vs Commissioner of Internal
Revenue, $R )o *,*,++, Auly -/, -.*.
Two alternative options of a corporate taxpayer
In 0hilam Asset 'anagement, Inc v Commissioner of Internal Revenue, the Court
expounds on the two alternative options of a corporate taxpayer whose total 5uarterly
income tax payments exceed its tax liability, and on how the choice of one option
precludes the other, vi6C
The first option is relatively simple Any tax on income that is paid in excess of the
amount due the government may be refunded, provided that a taxpayer properly applies
for the refund
The second option wor"s by applying the refundable amount, as shown on the %AR of a
given taxable year, against the estimated 5uarterly income tax liabilities of the
succeeding taxable year
These two options under &ection ,+ are alternative in nature The choice of one precludes
the other Indeed, in 0hilippine Ban" of Communications v Commissioner of Internal
Revenue, the Court ruled that a corporation must signify its intention E whether to
re5uest a tax refund or claim a tax credit E by mar"ing the corresponding option box
provided in the %AR @hile a taxpayer is re5uired to mar" its choice in the form provided
by the BIR, this re5uirement is only for the purpose of facilitating tax collection
;ne cannot get a tax refund and a tax credit at the same time for the same excess income
taxes paid Commissioner of Internal Revenue vs 0# 'anagement International 0hil,
Inc, et al, $R )o *+./4/, April 4, -.**
Availment of one remedy still precludes the other
!nder the new law 8&ection ,+ of the *//, )IRC9, in case of overpayment of income
taxes, the remedies are still the same? and the availment of one remedy still precludes the
other But unli"e &ection +/ of the old )IRC, the carry3over of excess income tax
payments is no longer limited to the succeeding taxable year !nutili6ed excess income
tax payments may now be carried over to the succeeding taxable years until fully utili6ed
In addition, the option to carry3over excess income tax payments is now irrevocable
Dence, unutili6ed excess income tax payments may no longer be refunded To repeat,
under the new law, once the option to carry3over excess income tax payments to the
succeeding years has been made, it becomes irrevocable Thus, applications for refund of
the unutili6ed excess income tax payments may no longer be allowedBelle Corp vs
Commissioner of Internal Revenue, $R )o *2*-/2, Aanuary *., -.**
)ECTION 77 P-!ce !"0 Time ,f *i-i"4 !"0 P!$me"t ,f H#!rter-$ C,r3,r!te
I"c,me T!2 .
>A? P-!ce ,f *i-i"4 . E2ce3t !/ t+e C,mmi//i,"er ,t+er5i/e 3ermit/, t+e 8#!rter-$
i"c,me t!2 0ec-!r!ti," re8#ire0 i" )ecti," 7< !"0 t+e fi"!- !0:#/tme"t ret#r"
re8#ire0 i" )ecti," 7A /+!-- be fi-e0 5it+ t+e !#t+,ri6e0 !4e"t b!"9/ ,r Reve"#e
Di/trict Officer ,r C,--ecti," A4e"t ,r 0#-$ !#t+,ri6e0 Tre!/#rer ,f t+e cit$ ,r
m#"ici3!-it$ +!vi"4 :#ri/0icti," ,ver t+e -,c!ti," ,f t+e 3ri"ci3!- ,ffice ,f t+e
c,r3,r!ti," fi-i"4 t+e ret#r" ,r 3-!ce 5+ere it/ m!i" b,,9/ ,f !cc,#"t/ !"0 ,t+er
0!t! fr,m 5+ic+ t+e ret#r" i/ 3re3!re0 !re 9e3t.
>B? Time ,f *i-i"4 t+e I"c,me T!2 Ret#r" . T+e c,r3,r!te 8#!rter-$ 0ec-!r!ti,"
/+!-- be fi-e0 5it+i" /i2t$ >AC? 0!$/ f,--,5i"4 t+e c-,/e ,f e!c+ ,f t+e fir/t t+ree >;?
8#!rter/ ,f t+e t!2!b-e $e!r. T+e fi"!- !0:#/tme"t ret#r" /+!-- be fi-e0 ," ,r bef,re
t+e fiftee"t+ >1<t+? 0!$ ,f A3ri-, ,r ," ,r bef,re t+e fiftee"t+ >1<t+? 0!$ ,f t+e
f,#rt+ >4t+? m,"t+ f,--,5i"4 t+e c-,/e ,f t+e fi/c!- $e!r, !/ t+e c!/e m!$ be.
>C? Time ,f P!$me"t ,f t+e I"c,me T!2 . T+e i"c,me t!2 0#e ," t+e c,r3,r!te
8#!rter-$ ret#r"/ !"0 t+e fi"!- !0:#/tme"t i"c,me t!2 ret#r"/ c,m3#te0 i"
!cc,r0!"ce 5it+ )ecti,"/ 7< !"0 7A /+!-- be 3!i0 !t t+e time t+e 0ec-!r!ti," ,r
ret#r" i/ fi-e0 i" ! m!""er 3re/cribe0 b$ t+e C,mmi//i,"er.
C'APTER IIII Bit++,-0i"4 ," B!4e/
)ECTION 78 Defi"iti,"/. . A/ #/e0 i" t+i/ C+!3ter=
>A? B!4e/ . T+e term F5!4e/F me!"/ !-- rem#"er!ti," >,t+er t+!" fee/ 3!i0 t, !
3#b-ic ,ffici!-? f,r /ervice/ 3erf,rme0 b$ !" em3-,$ee f,r +i/ em3-,$er, i"c-#0i"4
t+e c!/+ v!-#e ,f !-- rem#"er!ti," 3!i0 i" !"$ me0i#m ,t+er t+!" c!/+, e2ce3t t+!t
/#c+ term /+!-- ",t i"c-#0e rem#"er!ti," 3!i0=
>1? *,r !4ric#-t#r!- -!b,r 3!i0 e"tire-$ i" 3r,0#ct/ ,f t+e f!rm 5+ere t+e -!b,r i/
3erf,rme0, ,r
>2? *,r 0,me/tic /ervice i" ! 3riv!te +,me, ,r
>;? *,r c!/#!- -!b,r ",t i" t+e c,#r/e ,f t+e em3-,$erF/ tr!0e ,r b#/i"e//, ,r
>4? *,r /ervice/ b$ ! citi6e" ,r re/i0e"t ,f t+e P+i-i33i"e/ f,r ! f,rei4" 4,ver"me"t
,r !" i"ter"!ti,"!- ,r4!"i6!ti,".
If t+e rem#"er!ti," 3!i0 b$ !" em3-,$er t, !" em3-,$ee f,r /ervice/ 3erf,rme0
0#ri"4 ,"e@+!-f >M? ,r m,re ,f !"$ 3!$r,-- 3eri,0 ,f ",t m,re t+!" t+irt$@,"e >;1?
c,"/ec#tive 0!$/ c,"/tit#te/ 5!4e/, !-- t+e rem#"er!ti," 3!i0 b$ /#c+ em3-,$er t,
/#c+ em3-,$ee f,r /#c+ 3eri,0 /+!-- be 0eeme0 t, be 5!4e/7 b#t if t+e
rem#"er!ti," 3!i0 b$ !" em3-,$er t, !" em3-,$ee f,r /ervice/ 3erf,rme0 0#ri"4
m,re t+!" ,"e@+!-f >M? ,f !"$ /#c+ 3!$r,-- 3eri,0 0,e/ ",t c,"/tit#te 5!4e/, t+e"
","e ,f t+e rem#"er!ti," 3!i0 b$ /#c+ em3-,$er t, /#c+ em3-,$ee f,r /#c+ 3eri,0
/+!-- be 0eeme0 t, be 5!4e/.
>B? P!$r,-- Peri,0 . T+e term F3!$r,-- 3eri,0F me!"/ ! 3eri,0 f,r 5+ic+ 3!$me"t
,f 5!4e/ i/ ,r0i"!ri-$ m!0e t, t+e em3-,$ee b$ +i/ em3-,$er, !"0 t+e term
Fmi/ce--!"e,#/ 3!$r,-- 3eri,0F me!"/ ! 3!$r,-- 3eri,0 ,t+er t+!", ! 0!i-$, 5ee9-$,
bi5ee9-$, /emi@m,"t+-$, m,"t+-$, 8#!rter-$, /emi@!""#!-, ,r !""#!- 3eri,0.
>C? Em3-,$ee . T+e term Fem3-,$eeF refer/ t, !"$ i"0ivi0#!- 5+, i/ t+e reci3ie"t
,f 5!4e/ !"0 i"c-#0e/ !" ,fficer, em3-,$ee ,r e-ecte0 ,ffici!- ,f t+e &,ver"me"t
,f t+e P+i-i33i"e/ ,r !"$ 3,-itic!- /#b0ivi/i,", !4e"c$ ,r i"/tr#me"t!-it$ t+ere,f.
T+e term Fem3-,$eeF !-/, i"c-#0e/ !" ,fficer ,f ! c,r3,r!ti,".
>D? Em3-,$er . T+e term Fem3-,$erF me!"/ t+e 3er/," f,r 5+,m !" i"0ivi0#!-
3erf,rm/ ,r 3erf,rme0 !"$ /ervice, ,f 5+!tever "!t#re, !/ t+e em3-,$ee ,f /#c+
3er/,", e2ce3t t+!t=
>1? If t+e 3er/," f,r 5+,m t+e i"0ivi0#!- 3erf,rm/ ,r 3erf,rme0 !"$ /ervice 0,e/
",t +!ve c,"tr,- ,f t+e 3!$me"t ,f t+e 5!4e/ f,r /#c+ /ervice/, t+e term Fem3-,$erF
>e2ce3t f,r t+e 3#r3,/e ,f )#b/ecti," A? me!"/ t+e 3er/," +!vi"4 c,"tr,- ,f t+e
3!$me"t ,f /#c+ 5!4e/7 !"0
>2? I" t+e c!/e ,f ! 3er/," 3!$i"4 5!4e/ ," be+!-f ,f ! ","re/i0e"t !-ie"
i"0ivi0#!-, f,rei4" 3!rt"er/+i3 ,r f,rei4" c,r3,r!ti," ",t e"4!4e0 i" tr!0e ,r
b#/i"e// 5it+i" t+e P+i-i33i"e/, t+e term Fem3-,$erF >e2ce3t f,r t+e 3#r3,/e ,f
)#b/ecti," A? me!"/ /#c+ 3er/,".
)ECTION 79 I"c,me T!2 C,--ecte0 !t ),#rce .
>A? Re8#ireme"t ,f Bit++,-0i"4 . E2ce3t i" t+e c!/e ,f ! mi"im#m 5!4e e!r"er
!/ 0efi"e0 i" )ecti," 22>''? ,f t+i/ C,0e, ever$ em3-,$er m!9i"4 3!$me"t ,f
5!4e/ /+!-- 0e0#ct !"0 5it++,-0 #3," /#c+ 5!4e/ ! t!2 0etermi"e0 i" !cc,r0!"ce
5it+ t+e r#-e/ !"0 re4#-!ti,"/ t, be 3re/cribe0 b$ t+e )ecret!r$ ,f *i"!"ce, #3,"
rec,mme"0!ti," ,f t+e C,mmi//i,"er.
BIR ISSUANCES
R=>=)!= R=$!#ATI;)& ); .*.3.2 Auly 2, -..2
Implementing 0ertinent 0rovisions of Republic Act )o /<.4, :An Act Amending &ections
--, -4, 14, 1<, <*, and ,/ of Republic Act )o 24-4, as Amended, ;therwise Fnown as
The )ational Internal Revenue Code: Relative to the @ithholding of Income Tax on
Compensation and ;ther Concerns
=xemptions from @ithholding Tax on Compensation E The following income payments
are exempted from the re5uirements of withholding tax on compensationC
HHH HHHHHHCompensation income of 'inimum @age =arners 8'@=s9 who wor"
in the private sector and being paid the &tatutory 'inimum @age 8&'@9, as fixed by
Regional Tripartite @age and 0roductivity Board 8RT@0B9B)ational @ages and
0roductivity Commission 8)@0C9, applicable to the place where heBshe is assigned
The aforesaid income shall li"ewise be exempted from income tax
(&tatutory 'inimum @age( 8&'@9 shall refer to the rate fixed by the Regional Tripartite
@age and 0roductivity Board 8RT@0B9, as defined by the Bureau of #abor and
=mployment &tatistics 8B#=&9 of the 7epartment of #abor and =mployment 87;#=9 The
RT@0B of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose
Doliday pay, overtime pay, night shift differential pay and ha6ard pay earned by the
aforementioned '@= shall li"ewise be covered by the above exemption 0rovided,
however, that an employee who receivesBearns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of 01.,....., taxable allowances and other taxable income other than the
&'@, holiday pay, overtime pay, ha6ard pay and night shift differential pay shall not
enjoy the privilege of being a '@= and, therefore, hisBher entire earnings are not exempt
form income tax, and conse5uently, from withholding tax
'@=s receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year This rule, notwithstanding, the &'@, Doliday pay, overtime pay, night shift
differential pay and ha6ard pay shall still be exempt from withholding tax
%or purposes of these regulations, ha6ard pay shall mean the amount paid by the
employer to '@=s who were actually assigned to danger or strife3torn areas, disease3
infested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life Any ha6ard pay paid to '@=s which does not
satisfy the above criteria is deemed subject to income tax and conse5uently, to
withholding tax
HHH HHHHHH
%acilities and privileges of relatively small value E ;rdinarily, facilities, and privileges
8such as entertainment, medical services, or so3called :courtesy: discounts on
purchases9, otherwise "nown as :de minimis benefits,: furnished or offered by an
employer to his employees, are not considered as compensation subject to income tax
and conse5uently to withholding tax, if such facilities or privileges are of relatively small
value and are offered or furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees
The following shall be considered as :de minimis: benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
ran" and file employeesC
8a9 'oneti6ed unused vacation leave credits of employees not exceeding ten 8*.9 days
during the year and the moneti6ed value of leave credits paid to government officials and
employees?
8b9 'edical cash allowance to dependents of employees not exceeding 0,<... per
employee per semester or 0*-< per month?
8c9 Rice subsidy of 0*,<.... or one 8*9 sac" of <.3"g rice per month amounting to
not more than 0*,<....?
8d9 !niforms and clothing allowance not exceeding 04,..... per annum?
8e9 Actual yearly medical benefits not exceeding 0*.,..... per annum?
8f9 #aundry allowance not exceeding 01.... per month?
8g9 =mployees achievement awards, eg, for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding 0*.,..... received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees?
8h9 $ifts given during Christmas and major anniversary celebrations not exceeding
0<,..... per employee per annum?
8i9 %lowers, fruits, boo"s, or similar items given to employees under special
circumstances, eg, on account of illness, marriage, birth of a baby, etc? and
8j9 7aily meal allowance for overtime wor" not exceeding twenty five percent 8-<Q9
of the basic minimum wage
The amount of (de minimis( benefits conforming to the ceiling herein prescribed shall not
be considered in determining the 01.,..... ceiling of (other benefits( excluded from
gross income under &ection 1- 8b9 8,9 8e9 of the Code 0rovided that, the excess of the
(de minimis( benefits over their respective ceilings prescribed by these regulations shall
be considered as part of (other benefits( and the employee receiving it will be subject to
tax only on the excess over the 01.,..... ceiling 0rovided, further, that '@=s
receiving (other benefits( exceeding the 01.,..... limit shall be taxable on the excess
benefits, as well as on his salaries, wages and allowances, just li"e an employee
receiving compensation income beyond the &'@
Any amount given by the employer as benefits to its employees, whether classified as :de
minimis: benefits or fringe benefits, shall constitute as deductible expense upon such
employer
@here compensation is paid in property other than money, the employer shall ma"e
necessary arrangements to ensure that the amount of the tax re5uired to be withheld is
available for payment to the Bureau of Internal Revenue
>B? T!2 P!i0 b$ Reci3ie"t . If t+e em3-,$er, i" vi,-!ti," ,f t+e 3r,vi/i,"/ ,f t+i/
C+!3ter, f!i-/ t, 0e0#ct !"0 5it++,-0 t+e t!2 !/ re8#ire0 #"0er t+i/ C+!3ter, !"0
t+ere!fter t+e t!2 !4!i"/t 5+ic+ /#c+ t!2 m!$ be cre0ite0 i/ 3!i0, t+e t!2 /,
re8#ire0 t, be 0e0#cte0 !"0 5it++e-0 /+!-- ",t be c,--ecte0 fr,m t+e em3-,$er7 b#t
t+i/ )#b/ecti," /+!-- i" ", c!/e re-ieve t+e em3-,$er fr,m -i!bi-it$ f,r !"$ 3e"!-t$
,r !00iti," t, t+e t!2 ,t+er5i/e !33-ic!b-e i" re/3ect ,f /#c+ f!i-#re t, 0e0#ct !"0
5it++,-0.
>C? Ref#"0/ ,r Cre0it/ .
>1? Em3-,$er . B+e" t+ere +!/ bee" !" ,ver3!$me"t ,f t!2 #"0er t+i/ )ecti,",
ref#"0 ,r cre0it /+!-- be m!0e t, t+e em3-,$er ,"-$ t, t+e e2te"t t+!t t+e !m,#"t ,f
/#c+ ,ver3!$me"t 5!/ ",t 0e0#cte0 !"0 5it++e-0 +ere#"0er b$ t+e em3-,$er.
>2? Em3-,$ee/ . T+e !m,#"t 0e0#cte0 !"0 5it++e-0 #"0er t+i/ C+!3ter 0#ri"4
!"$ c!-e"0!r $e!r /+!-- be !--,5e0 !/ ! cre0it t, t+e reci3ie"t ,f /#c+ i"c,me
!4!i"/t t+e t!2 im3,/e0 #"0er )ecti," 24>A? ,f t+i/ Tit-e. Ref#"0/ !"0 cre0it/ i"
c!/e/ ,f e2ce//ive 5it++,-0i"4 /+!-- be 4r!"te0 #"0er r#-e/ !"0 re4#-!ti,"/
3r,m#-4!te0 b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e
C,mmi//i,"er.
A"$ e2ce// ,f t+e t!2e/ 5it++e-0 ,ver t+e t!2 0#e fr,m t+e t!23!$er /+!-- be
ret#r"e0 ,r cre0ite0 5it+i" t+ree >;? m,"t+/ fr,m t+e fiftee"t+ >1<t+? 0!$ ,f A3ri-.
Ref#"0/ ,r cre0it/ m!0e !fter /#c+ time /+!-- e!r" i"tere/t !t t+e r!te ,f /i2 3erce"t
>AG? 3er !""#m, /t!rti"4 !fter t+e -!3/e ,f t+e t+ree@m,"t+ 3eri,0 t, t+e 0!te t+e
ref#"0 ,f cre0it i/ m!0e.
Ref#"0/ /+!-- be m!0e #3," 5!rr!"t/ 0r!5" b$ t+e C,mmi//i,"er ,r b$ +i/ 0#-$
!#t+,ri6e0 re3re/e"t!tive 5it+,#t t+e "ece//it$ ,f c,#"ter@/i4"!t#re b$ t+e
C+!irm!", C,mmi//i," ," A#0it ,r t+e -!tterF/ 0#-$ !#t+,ri6e0 re3re/e"t!tive !/ !"
e2ce3ti," t, t+e re8#ireme"t 3re/cribe0 b$ )ecti," 49, C+!3ter 8, )#btit-e B, Tit-e
I ,f B,,9 ( ,f E2ec#tive Or0er N,. 292, ,t+er5i/e 9",5" !/ t+e A0mi"i/tr!tive
C,0e ,f 1987.
>D? Per/,"!- E2em3ti,"/ .
>1? I" &e"er!- . U"-e// ,t+er5i/e 3r,vi0e0 b$ t+i/ C+!3ter, t+e 3er/,"!- !"0
!00iti,"!- e2em3ti,"/ !33-ic!b-e #"0er t+i/ C+!3ter /+!-- be 0etermi"e0 i"
!cc,r0!"ce 5it+ t+e m!i" 3r,vi/i,"/ ,f t+i/ Tit-e.
>2? E2em3ti," Certific!te/. .
>!? B+e" t, *i-e . O" ,r bef,re t+e 0!te ,f c,mme"ceme"t ,f em3-,$me"t 5it+
!" em3-,$er, t+e em3-,$ee /+!-- f#r"i/+ t+e em3-,$er 5it+ ! /i4"e0 5it++,-0i"4
e2em3ti," certific!te re-!ti"4 t, t+e 3er/,"!- !"0 !00iti,"!- e2em3ti,"/ t, 5+ic+
+e i/ e"tit-e0.
>b? C+!"4e ,f )t!t#/ . I" c!/e ,f c+!"4e ,f /t!t#/ ,f !" em3-,$ee !/ ! re/#-t ,f
5+ic+ +e 5,#-0 be e"tit-e0 t, ! -e//er ,r 4re!ter !m,#"t ,f e2em3ti,", t+e
em3-,$ee /+!--, 5it+i" te" >1C? 0!$/ fr,m /#c+ c+!"4e, fi-e 5it+ t+e em3-,$er !
"e5 5it++,-0i"4 e2em3ti," certific!te ref-ecti"4 t+e c+!"4e.
>c? U/e ,f Certific!te/. . T+e certific!te/ fi-e0 +ere#"0er /+!-- be #/e0 b$ t+e
em3-,$er i" t+e 0etermi"!ti," ,f t+e !m,#"t ,f t!2e/ t, be 5it++e-0.
>0? *!i-#re t, *#r"i/+ Certific!te. . B+ere !" em3-,$ee, i" vi,-!ti," ,f t+i/
C+!3ter, eit+er f!i-/ ,r ref#/e/ t, fi-e ! 5it++,-0i"4 e2em3ti," certific!te, t+e
em3-,$er /+!-- 5it++,-0 t+e t!2e/ 3re/cribe0 #"0er t+e /c+e0#-e f,r 6er,
e2em3ti," ,f t+e 5it++,-0i"4 t!2 t!b-e 0etermi"e0 3#r/#!"t t, )#b/ecti," >A?
+ere,f.
>E? Bit++,-0i"4 ," B!/i/ ,f Aver!4e B!4e/ . T+e C,mmi//i,"er m!$, #"0er
r#-e/ !"0 re4#-!ti,"/ 3r,m#-4!te0 b$ t+e )ecret!r$ ,f *i"!"ce, !#t+,ri6e
em3-,$er/ t,=
>1? e/tim!te t+e 5!4e/ 5+ic+ 5i-- be 3!i0 t, !" em3-,$ee i" !"$ 8#!rter ,f t+e
c!-e"0!r $e!r7
>2? 0etermi"e t+e !m,#"t t, be 0e0#cte0 !"0 5it++e-0 #3," e!c+ 3!$me"t ,f
5!4e/ t, /#c+ em3-,$ee 0#ri"4 /#c+ 8#!rter !/ if t+e !33r,3ri!te !ver!4e ,f t+e
5!4e/ /, e/tim!te0 c,"/tit#te0 t+e !ct#!- 5!4e/ 3!i07 !"0
>;? 0e0#ct !"0 5it++,-0 #3," !"$ 3!$me"t ,f 5!4e/ t, /#c+ em3-,$ee 0#ri"4 /#c+
8#!rter /#c+ !m,#"t !/ m!$ be re8#ire0 t, be 0e0#cte0 !"0 5it++e-0 0#ri"4 /#c+
8#!rter 5it+,#t re4!r0 t, t+i/ )#b/ecti,".
>*? '#/b!"0 !"0 Bife. . B+e" ! +#/b!"0 !"0 5ife e!c+ !re reci3ie"t/ ,f 5!4e/,
5+et+er fr,m t+e /!me ,r fr,m 0iffere"t em3-,$er/, t!2e/ t, be 5it++e-0 /+!-- be
0etermi"e0 ," t+e f,--,5i"4 b!/e/=
>1? T+e +#/b!"0 /+!-- be 0eeme0 t+e +e!0 ,f t+e f!mi-$ !"0 3r,3er c-!im!"t ,f t+e
!00iti,"!- e2em3ti," i" re/3ect t, !"$ 0e3e"0e"t c+i-0re", #"-e// +e e23-icit-$
5!ive/ +i/ ri4+t i" f!v,r ,f +i/ 5ife i" t+e 5it++,-0i"4 e2em3ti," certific!te.
>2? T!2e/ /+!-- be 5it++e-0 fr,m t+e 5!4e/ ,f t+e 5ife i" !cc,r0!"ce 5it+ t+e
/c+e0#-e f,r 6er, e2em3ti," ,f t+e 5it++,-0i"4 t!2 t!b-e 3re/cribe0 i" )#b/ecti,"
>D?>2?>0? +ere,f.
>&? N,"re/i0e"t A-ie"/. . B!4e/ 3!i0 t, ","re/i0e"t !-ie" i"0ivi0#!-/ e"4!4e0 i"
tr!0e ,r b#/i"e// i" t+e P+i-i33i"e/ /+!-- be /#b:ect t, t+e 3r,vi/i,"/ ,f t+i/
C+!3ter.
>'? Je!r@e"0 A0:#/tme"t. . O" ,r bef,re t+e e"0 ,f t+e c!-e"0!r $e!r b#t 3ri,r t,
t+e 3!$me"t ,f t+e c,m3e"/!ti," f,r t+e -!/t 3!$r,-- 3eri,0, t+e em3-,$er /+!--
0etermi"e t+e t!2 0#e fr,m e!c+ em3-,$ee ," t!2!b-e c,m3e"/!ti," i"c,me f,r t+e
e"tire t!2!b-e $e!r i" !cc,r0!"ce 5it+ )ecti," 24>A?. T+e 0iffere"ce bet5ee" t+e
t!2 0#e fr,m t+e em3-,$ee f,r t+e e"tire $e!r !"0 t+e /#m ,f t!2e/ 5it++e-0 fr,m
!"#!r$ t, N,vember /+!-- eit+er be 5it++e-0 fr,m +i/ /!-!r$ i" December ,f t+e
c#rre"t c!-e"0!r $e!r ,r ref#"0e0 t, t+e em3-,$ee ",t -!ter t+!" !"#!r$ 2< ,f t+e
/#ccee0i"4 $e!r.
)ECTION 8C Li!bi-it$ f,r T!2. .
>A? Em3-,$er . T+e em3-,$er /+!-- be -i!b-e f,r t+e 5it++,-0i"4 !"0 remitt!"ce
,f t+e c,rrect !m,#"t ,f t!2 re8#ire0 t, be 0e0#cte0 !"0 5it++e-0 #"0er t+i/
C+!3ter. If t+e em3-,$er f!i-/ t, 5it++,-0 !"0 remit t+e c,rrect !m,#"t ,f t!2 !/
re8#ire0 t, be 5it++e-0 #"0er t+e 3r,vi/i," ,f t+i/ C+!3ter, /#c+ t!2 /+!-- be
c,--ecte0 fr,m t+e em3-,$er t,4et+er 5it+ t+e 3e"!-tie/ ,r !00iti,"/ t, t+e t!2
,t+er5i/e !33-ic!b-e i" re/3ect t, /#c+ f!i-#re t, 5it++,-0 !"0 remit.
>B? Em3-,$ee . B+ere !" em3-,$ee f!i-/ ,r ref#/e/ t, fi-e t+e 5it++,-0i"4
e2em3ti," certific!te ,r 5i--f#--$ /#33-ie/ f!-/e ,r i"!cc#r!te i"f,rm!ti,"
t+ere#"0er, t+e t!2 ,t+er5i/e re8#ire0 t, be 5it++e-0 b$ t+e em3-,$er /+!-- be
c,--ecte0 fr,m +im i"c-#0i"4 3e"!-tie/ ,r !00iti,"/ t, t+e t!2 fr,m t+e 0#e 0!te ,f
remitt!"ce #"ti- t+e 0!te ,f 3!$me"t. O" t+e ,t+er +!"0, e2ce// t!2e/ 5it++e-0
m!0e b$ t+e em3-,$er 0#e t,=
>1? f!i-#re ,r ref#/!- t, fi-e t+e 5it++,-0i"4 e2em3ti," certific!te7 ,r
>2? f!-/e !"0 i"!cc#r!te i"f,rm!ti," /+!-- ",t be ref#"0e0 t, t+e em3-,$ee b#t /+!--
be f,rfeite0 i" f!v,r ,f t+e &,ver"me"t.
)ECTION 81 *i-i"4 ,f Ret#r" !"0 P!$me"t ,f T!2e/ Bit++e-0 . E2ce3t !/
t+e C,mmi//i,"er ,t+er5i/e 3ermit/, t!2e/ 0e0#cte0 !"0 5it++e-0 b$ t+e em3-,$er
," 5!4e/ ,f em3-,$ee/ /+!-- be c,vere0 b$ ! ret#r" !"0 3!i0 t, !" !#t+,ri6e0
!4e"t b!"9, C,--ecti," A4e"t, ,r t+e 0#-$ !#t+,ri6e0 Tre!/#rer ,f t+e cit$ ,r
m#"ici3!-it$ 5+ere t+e em3-,$er +!/ +i/ -e4!- re/i0e"ce ,r 3ri"ci3!- 3-!ce ,f
b#/i"e//, ,r i" c!/e t+e em3-,$er i/ ! c,r3,r!ti,", 5+ere t+e 3ri"ci3!- ,ffice i/
-,c!te0.
T+e ret#r" /+!-- be fi-e0 !"0 t+e 3!$me"t m!0e 5it+i" t5e"t$@five >2<? 0!$/ fr,m
t+e c-,/e ,f e!c+ c!-e"0!r 8#!rter= Pr,vi0e0, +,5ever, T+!t t+e C,mmi//i,"er
m!$, 5it+ t+e !33r,v!- ,f t+e )ecret!r$ ,f *i"!"ce, re8#ire t+e em3-,$er/ t, 3!$ ,r
0e3,/it t+e t!2e/ 0e0#cte0 !"0 5it++e-0 !t m,re fre8#e"t i"terv!-/, i" c!/e/ 5+ere
/#c+ re8#ireme"t i/ 0eeme0 "ece//!r$ t, 3r,tect t+e i"tere/t ,f t+e &,ver"me"t.
T+e t!2e/ 0e0#cte0 !"0 5it++e-0 b$ em3-,$er/ /+!-- be +e-0 i" ! /3eci!- f#"0 i"
tr#/t f,r t+e &,ver"me"t #"ti- t+e /!me !re 3!i0 t, t+e /!i0 c,--ecti"4 ,fficer/.
)ECTION 82 Ret#r" !"0 P!$me"t i" C!/e ,f &,ver"me"t Em3-,$ee/ @ If t+e
em3-,$er i/ t+e &,ver"me"t ,f t+e P+i-i33i"e/ ,r !"$ 3,-itic!- /#b0ivi/i,", !4e"c$
,r i"/tr#me"t!-it$ t+ere,f, t+e ret#r" ,f t+e !m,#"t 0e0#cte0 !"0 5it++e-0 #3,"
!"$ 5!4e /+!-- be m!0e b$ t+e ,fficer ,r em3-,$ee +!vi"4 c,"tr,- ,f t+e 3!$me"t
,f /#c+ 5!4e, ,r b$ !"$ ,fficer ,r em3-,$ee 0#-$ 0e/i4"!te0 f,r t+e 3#r3,/e.
)ECTION 8; )t!teme"t/ !"0 Ret#r"/ .
>A? Re8#ireme"t/. . Ever$ em3-,$er re8#ire0 t, 0e0#ct !"0 5it++,-0 ! t!2 /+!--
f#r"i/+ t, e!c+ /#c+ em3-,$ee i" re/3ect ,f +i/ em3-,$me"t 0#ri"4 t+e c!-e"0!r
$e!r, ," ,r bef,re !"#!r$ t+irt$@fir/t >;1/t? ,f t+e /#ccee0i"4 $e!r, ,r if +i/
em3-,$me"t i/ termi"!te0 bef,re t+e c-,/e ,f /#c+ c!-e"0!r $e!r, ," t+e /!me 0!$
,f 5+ic+ t+e -!/t 3!$me"t ,f 5!4e/ i/ m!0e, ! 5ritte" /t!teme"t c,"firmi"4 t+e
5!4e/ 3!i0 b$ t+e em3-,$er t, /#c+ em3-,$ee 0#ri"4 t+e c!-e"0!r $e!r, !"0 t+e
!m,#"t ,f t!2 0e0#cte0 !"0 5it++e-0 #"0er t+i/ C+!3ter i" re/3ect ,f /#c+ 5!4e/.
T+e /t!teme"t re8#ire0 t, be f#r"i/+e0 b$ t+i/ )ecti," i" re/3ect ,f !"$ 5!4e /+!--
c,"t!i" /#c+ ,t+er i"f,rm!ti,", !"0 /+!-- be f#r"i/+e0 !t /#c+ ,t+er time !"0 i"
/#c+ f,rm !/ t+e )ecret!r$ ,f *i"!"ce, #3," t+e rec,mme"0!ti," ,f t+e
C,mmi//i,"er m!$, b$ r#-e/ !"0 re4#-!ti,"/, 3re/cribe.
>B? A""#!- I"f,rm!ti," Ret#r"/ . Ever$ em3-,$er re8#ire0 t, 0e0#ct !"0
5it++,-0 t+e t!2e/ i" re/3ect ,f t+e 5!4e/ ,f +i/ em3-,$ee/ /+!--, ," ,r bef,re
!"#!r$ t+irt$@fir/t >;1/t? ,f t+e /#ccee0i"4 $e!r, /#bmit t, t+e C,mmi//i,"er !"
!""#!- i"f,rm!ti," ret#r" c,"t!i"i"4 ! -i/t ,f em3-,$ee/, t+e t,t!- !m,#"t ,f
c,m3e"/!ti," i"c,me ,f e!c+ em3-,$ee, t+e t,t!- !m,#"t ,f t!2e/ 5it++e-0
t+erefr,m 0#ri"4 t+e $e!r, !cc,m3!"ie0 b$ c,3ie/ ,f t+e /t!teme"t referre0 t, i"
t+e 3rece0i"4 3!r!4r!3+, !"0 /#c+ ,t+er i"f,rm!ti," !/ m!$ be 0eeme0 "ece//!r$.
T+i/ ret#r", if m!0e !"0 fi-e0 i" !cc,r0!"ce 5it+ r#-e/ !"0 re4#-!ti,"/ 3r,m#-4!te0
b$ t+e )ecret!r$ ,f *i"!"ce, #3," rec,mme"0!ti," ,f t+e C,mmi//i,"er, /+!-- be
/#fficie"t c,m3-i!"ce 5it+ t+e re8#ireme"t/ ,f )ecti," A8 ,f t+i/ Tit-e i" re/3ect ,f
/#c+ 5!4e/.
>C? E2te"/i," ,f Time . T+e C,mmi//i,"er, #"0er /#c+ r#-e/ !"0 re4#-!ti,"/ !/
m!$ be 3r,m#-4!te0 b$ t+e )ecret!r$ ,f *i"!"ce, m!$ 4r!"t t, !"$ em3-,$er !
re!/,"!b-e e2te"/i," ,f time t, f#r"i/+ !"0 /#bmit t+e /t!teme"t/ !"0 ret#r"/
re8#ire0 #"0er t+i/ )ecti,".