December 11, 1997 REPUBLIC ACT NO. 8424 Effective January 1, 1998

AN ACT AMENDING THE NATIONAL INTERNAL REVENUE CODE,AS AMENDED, AND FOR OTHER PURPOSES

SECTION 1Short Title — This Act shall be cited as the "Tax Reform Act of 1997"

SECTION 2 State Policy — It is hereby declared the policy of the State to promote sustainable economic growth through the rationalization of the Philippine internal revenue tax system, including tax administration; to provide, as much as possible, an equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity; and to create a robust environment for business to enable firms to compete better in the regional as well as the global market, at the same time that the State ensures that Government is able to provide for the needs of those under its jurisdiction and care.

SECTION 3 Presidential Decree No. 1158, as amended by, among others, Presidential Decree No. 1994 and Executive Order No. 273, otherwise known as the National Internal Revenue Code, is hereby further amended to read as follows:

TITLE I Organization and Function of the Bureau of Internal Revenue

SECTION 1. Title of the Code — This Code shall be known as the National Internal Revenue Code of 1997.

SECTION 2. Powers and Duties of the Bureau of Internal Revenue — The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance and its powers and duties shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other laws.

SECTION 3. Chief Officials of the Bureau of Internal Revenue — The Bureau of Internal Revenue shall have a chief to be known as Commissioner of Internal Revenue, hereinafter referred to as the Commissioner and four (4) assistant chiefs to be known as Deputy Commissioners.

SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases — The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

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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.

Unlike 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 BLGF. SMART's dependence on BLGF's interpretation was thus misplaced.

City of Iloilo, et al. vs. Smart Communications, Inc., G.R. No. 167260, February 27, 2009

Period 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 30 days after the receipt of such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day 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. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same.

RCBC vs. CIR, G.R. No. 168498, April 24, 2007

Conclusions and opinions of the Court of Tax Appeals are extended due consideration.

It has been a long standing policy and practice of the Supreme Court to respect the conclusions of quasi-judicial agencies such as the Court of Tax Appeals, a highly specialized 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. Due consideration is extended to its opinion unless there is an abuse or improvident exercise of authority.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc., G.R. No. 143672, April 24, 2003

The Commissioner of Internal Revenue is not bound by the ruling of his predecessors.That 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.

Misamis Oriental Association of Coco Traders, Inc. vs. Dept. of Finance Secretary, et al., G.R. No. 108524, November 10, 1994

SECTION 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons - In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or material to such inquiry;

(B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the BangkoSentralngPilipinas and government-owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures or consortia and registered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to

the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony;(D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed.

The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for in Section 6(F) of this Code.

BIR ISSUANCES

REVENUE MEMORANDUM ORDER NO. 088-10 December 22, 2010Guidelines and Procedures in the Issuance and Enforcement of Subpoena DucesTecum; and the Prosecution of Cases for "Failure to Obey Summons"The powers of the Bureau of Internal Revenue to examine and inspect books of accounts and other accounting records and conduct investigations relating to internal revenue tax liabilities of taxpayers include the legal process of issuing "Summons" or "Subpoena DucesTecum" (SDT) to persons enumerated under Section 5 (c) of the National Internal Revenue Code of 1997 (NIRC). The BIR may invoke the authority of the courts in case of non-compliance with the aforesaid legal processes by filing a criminal case against the taxpayer for violation of Section 5, in relation to Sections 14 and 266 of the NIRC.

REVENUE MEMORANDUM CIRCULAR NO. 23-00 November 27, 2000Procedures on the Assessment of Deficiency Internal Revenue Taxes Based on the "Best Evidence Obtainable.""When a report required 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 Estimates is Valid in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even 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.

Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment.

REVENUE MEMORANDUM ORDER NO. 04-06 January 23, 2006Guidelines and Procedures in the Conduct of Benchmarking and Adapting/Implementing the Performance Benchmarking Method in the Revenue District OfficesThe 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 Section 5(E) of the National Internal Revenue Code, as amended, in relation to Section 6 (C) of the same Code. The performance benchmarking 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, Net VAT Due and Income Tax Due in relation to gross sales/receipts, could be an excellent tool in increasing taxpayers' voluntary compliance. Monitoring and evaluation of tax payments through the use of performance benchmarking will determine/identify taxpayers within industry groups who are paying below the minimum amount or set benchmarks for tax compliance purposes.

REVENUE REGULATIONS NO. 010-10 October 6, 2010SUBJECT : Exchange of Information RegulationsImplementing the necessary guidelines to enable the Bureau of Internal Revenue (BIR) to respond to a request for exchange of information pursuant to an existing international convention or agreement on tax matters and to implement Republic Act No. 10021 entitled "An Act to Allow the Exchange of Information by the Bureau of Internal Revenue on Tax Matters Pursuant to Internationally-Agreed Tax Standards, Amending Sections 6 (F), 71 and 270 of the National Internal Revenue Code of 1997, as Amended

REVENUE MEMORANDUM ORDER NO. 09-06 December 11, 2005Prescribing the Guidelines and Procedures in the Conduct of Tax Compliance Verification Drive (TCVD) in line with the Bureau's effort to expand its tax base, enhance tax compliance and consequently boost its tax collection effort, the Commissioner spearheaded actual tax mapping activities under the Tax Compliance Verification Drive (TCVD) project pursuant to RMO 31-2003. This is aimed at establishing cordial relationship with taxpayer by giving assistance thru tax information drive and verification of taxpayer's compliance requirements during the actual visitation of taxpayer's establishment and its branches.

SECTION 6.Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement

(A) Examination of Returns and Determination of Tax Due — After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative.

Any return, statement or declaration filed in any office authorized to receive the same shall not be withdrawn: Provided, That within three (3) years from the date of such filing, the same may be modified, changed, or amended: Provided, further, That no notice for audit or investigation of such return, statement or declaration has, in the meantime, been actually served upon the taxpayer.

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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 180-day period from date of submission of documents, a taxpayer can either: 1) file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day period; or 2) await the final decision of the Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. However, these options are mutually exclusive, and resort to one bars the application of the other.

RCBC vs. CIR, G.R. No. 168498, April 24, 2007

The power to collect forest charges rests with BIR, not with Bureau of Forestry.

Forest 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 Forestry. The computation and/or assessment of forest charges made by the Bureau of Forestry may or may not be adopted by the Commissioner of Internal Revenue and such computation made by the Bureau of Forestry is not appealable to the Court of Tax Appeals.

Mambulao Lumber Company vs. Republic of the Phil., G.R. No. L-37061, September 5, 1984

Mandamus may not lie against the Commissioner to compel him to impose a tax assessment.

Since 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. Such 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.

Meralco Securities Corp. vs. VictorinoSavellano, et al., G.R. No. L-36181, October 23, 1982

BIR ISSUANCES

REVENUE MEMORANDUM CIRCULAR NO. 40-03 July 3, 2003Effect of the Issuance and Receipt of Letter Notice (LN) to the Taxpayer's Right to Amend its Tax Returns as Provided under Section 6 of the National Internal Revenue Code."AnLN being served by the Bureau upon taxpayers who were found to have under-declared their sales or overdeclaredpurchases through the Third Party Information Program can be considered a notice of audit or investigation which would in effect disqualify the taxpayers concerned from amending any return which is the subject of such audit or investigation."

Section 6(B)Failure to Submit Required Returns, Statements, Reports and other Documents — When a report required 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.

In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own

knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.

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When 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 required 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 books 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 Section 16 of the Tax Code.

BonifaciaSy Po vs. Court of Tax Appeals, et al., G.R. No. L-81446, August 18, 1988

BIR ISSUANCES

REVENUE MEMORANDUM ORDER NO. 019-10 March 9, 2010

SUBJECT : Taxpayers' Lifestyle Check System

I. Objectives

It has been observed that there are several individual taxpayers with substantial investments, and assets and/or conspicuous lifestyles but have a relatively small income declared, and consequently, reduced income tax payments.

Likewise, it has been noted that individuals attempting to evade or minimize tax payments rarely report their income and would often not provide their books and records for scrutiny. This Order 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 books and records are inadequate, 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 and/or the lavish lifestyles they maintain.

II. Policies and Guidelines

1. Policies

1.1 It is the policy of the Bureau to exhaust all means and methodology of determining the individuals' income. This Order 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.

1.2 An individual's taxable income may be established by using direct evidence, whenever available.

1.3 Indirect methods can be used, however, when one or more of the following conditions, among others, prevail:

a. The taxpayer maintains no books and records.

b. The taxpayer's books and records are not available.

c. The taxpayer's books and records are inadequate.

d. The taxpayer withholds books and records from investigation/verification by authorized revenue officers.

The fact that the taxpayer's books 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 look beyond the "self-serving declaration" in the taxpayer's books and records and use any evidence available to contravene their accuracy. In this connection, the provisions of RAMO No. 1-2000 shall be followed. The BIR shall rely on RMC No. 23-2000 in making deficiency tax assessments based on the "Best Evidence Obtainable". Section 6 (c) of the National Internal Revenue Code allows the BIR to prescribe the minimum taxable base for which internal revenue taxes shall be determined.

REVENUE MEMORANDUM CIRCULAR NO. 23-00 November 27, 2000

Revenue Procedures on the Assessment of Deficiency Internal Revenue Taxes Based on the "Best Evidence Obtainable."

Scope — 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 Officer's report of investigation as required by the existing Audit Program 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, Section 6 (B) of the

National Internal Revenue Code of 1997 requires that the assessment of the tax be determined based on the "Best Evidence Obtainable," as follows:

"When a report required 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) Authority to Conduct Inventory-taking, Surveillance and to Prescribe Presumptive Gross Sales and Receipts — The Commissioner may, at any time during the taxable year, order inventory-taking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities, or may place the business operations of any person, natural or juridical, under observation or surveillance if there is reason to believe that such person is not declaring his correct income, sales or receipts for internal revenue tax purposes. The findings may be used as the basis for assessing the taxes for the other months or quarters of the same or different taxable years and such assessment shall be deemed prima facie correct.

When it is found that a person has failed to issue receipts and invoices in violation of the requirements of Sections 113 and 237 of this Code, or when there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed under the provisions of this Code, the Commissioner, after taking into account the sales, receipts, income or other taxable base of other persons engaged in similar businesses under similar situations or circumstances or after considering other relevant information, may prescribe a minimum amount of such gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such person.

BIR ISSUANCES

REVENUE MEMORANDUM ORDER NO. 003-09 January 15, 2009Guidelines in the Conduct of Surveillance and Stock-Taking Activities, and the Implementation of the Administrative Sanction of Suspension and Temporary Closure of BusinessMandatory Requirement for the Conduct of Surveillance and Apprehension of Business Establishments for Non-Compliance with the Provisions of Section 113, 114, 236, 237 and 238 of the NIRC, as amended. No surveillance activities shall be conducted nor

apprehension effected unless the same has been authorized by a mission order issued in accordance with the provisions of this Order.(D) Authority to Terminate Taxable Period — When it shall come to the knowledge of the Commissioner that a taxpayer is retiring from business subject to tax, or is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property, or is performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partly ineffective unless such proceedings are begun immediately, the Commissioner shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid, and said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time fixed in the demand made by the Commissioner.

(E) Authority of the Commissioner to Prescribe Real Property Values — The Commissioner is hereby authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be, whichever is the higher of:

(1)the fair market value as determined by the Commissioner; or

(2)the fair market value as shown in the schedule of values of the Provincial and City Assessors.

CASES DIGEST

Clearly, while the law grants to the Commissioner of Internal Revenue the power to determine zonal values, including the authority to delegate to the Assistant Commissioner of the Assessment Service the authority to approve and sign TCRPV resolutions involving requests for revaluation of established zonal values of real properties, the same is for the purpose of computing internal revenue taxes.

Capitol Steel Corp. vs. Phividec Industrial Authority, G.R. No. 169453, December 6, 2006

(F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and Other Related Information Held by Financial Institutions — Notwithstanding any contrary provision of Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, and other general and special laws, the Commissioner is hereby authorized to inquire into the bank deposits and other related information held by financial institutions of:

(1)a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204(A)(2) of this Code by reason of financial incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

(G) Authority to Accredit and Register Tax Agents — The Commissioner shall accredit and register, based on their professional competence, integrity, and moral fitness, individuals and general professional partnerships and their representatives who prepare and file tax returns, statements, reports, protests, and other papers with, or who appear before, the Bureau for taxpayers. Within one hundred twenty (120) days from January 1, 1998, the Commissioner shall create national and regional accreditation boards, the members of which shall serve for three (3) years, and shall designate from among the senior officials of the Bureau, one (1) chairman and two (2) members for each board, subject to such rules and regulations as the Secretary of Finance shall promulgate, upon the recommendation of the Commissioner.

Individuals and general professional partnerships and their representatives who are denied accreditation by the Commissioner and/or the national and regional accreditation boards may appeal such denial to the Secretary of Finance, who shall rule on the appeal within sixty (60) days from receipt of such appeal. Failure of the

Secretary of Finance to rule on the appeal within the prescribed period shall be deemed as approval of the application for accreditation of the appellant.

BIR ISSUANCES

REVENUE REGULATIONS NO. 004-10 February 24, 2010REVENUE REGULATIONS NO. 014-10 November 25, 2010Accreditation of Tax Practitioners/Agents as a Prerequisite to Their Practice and Representation of Taxpayers before the Bureau of Internal Revenue

Objectives — These Regulations are being issued to (1) prescribe additional guidelines in the accreditation of tax agents and practitioners (TAPs) to shorten the processing time; (2) ensure the continuing professional education and training of TAPs from duly accredited service providers; (3) implement a transparent and accessible database of accredited, suspended and delisted TAPs; (4) require the annual submission of schedule of services provided by the TAPs; (5) specify specific penalties and sanctions for violation of the provisions of these Regulations; and, (6) prescribe the payment of the annual registration fee for each TAP.(H) Authority of the Commissioner to Prescribe Additional Procedural or Documentary Requirements — The Commissioner may prescribe the manner of compliance with any documentary or procedural requirement in connection with the submission or preparation of financial statements accompanying the tax returns.

SECTION 7 Authority of the Commissioner to Delegate Power — The Commissioner may delegate the powers vested in him under the pertinent provisions of this Code to any or such subordinate officials with the rank equivalent to a division chief or higher, subject to such limitations and restrictions as may be imposed under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That the following powers of the Commissioner shall not be delegated:

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

(c) The power to compromise or abate, under Sec. 204(A) and (B) of this Code, any tax liability: Provided, however, That assessments issued by the regional

offices involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or less, and minor criminal violations, as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

CASES DIGEST

Under Section 7 of the NIRC, the Commissioner is authorized to delegate to his subordinates the powers vested in him except, among others, the power to issue rulings of first impression.

Secretary of Finance, et al. vs. La Suerte Cigar and Cigarette Factory, et al., G.R. No. 166498, June 11, 2009

COMMISSIONER OF INTERNAL REVENUE CANNOT DELEGATE POWER TO MAKE FINAL ASSESSMENT — The Commissioner of Internal Revenue cannot delegate the power to make a final assessment to his subordinate, and consequently despite an order of said Commissioner granting Regional Directors authority to close tax cases, said order(Memorandum Order No. V-634 dated July 3, 1956) is applicable to his subordinate officers only and could not bind the Commissioner himself, who has been entrusted by law to make final assessments.Delegatus non potestdelegare; the person to whom an office or duty is delegated cannot lawfully devolve the duty on another.

THE CITY LUMBER, INC. vs. THE HON. MELECIO R. DOMINGO, Commissioner of Internal Revenue and THE HON. COURT OF TAX APPEALS G.R. No. L-18611. January 30, 1964

SECTION 8. Duty of the Commissioner to Ensure the Provision and Distribution of Forms, Receipts, Certificates, and Appliances, and the Acknowledgment of Payment of Taxes —

(A) Provision and Distribution to Proper Officials. — It shall be the duty of the Commissioner, among other things, to prescribe, provide, and distribute to the proper officials the requisite licenses, internal revenue stamps, labels, all other forms, certificates, bonds, records, invoices, books, receipts, instruments, appliances and apparatus used in administering the laws falling within the jurisdiction of the Bureau. For this purpose, internal revenue stamps, strip stamps and labels shall be caused by the Commissioner to be printed with adequate security features.

Internal revenue stamps, whether of a bar code or fuson design, shall be firmly and conspicuously affixed on each pack of cigars and cigarettes subject to excise tax in the manner and form as prescribed by the Commissioner, upon approval of the Secretary of Finance.

(B) Receipts for Payment Made. — It shall be the duty of the Commissioner or his duly authorized representative or an authorized agent bank to whom any payment of any tax is made under the provisions of this Code to acknowledge the payment of such tax, expressing the amount paid and the particular account for which such payment was made in a form and manner prescribed therefor by the Commissioner.

SECTION 9 Internal Revenue Districts — With the approval of the Secretary of Finance, the Commissioner shall divide the Philippines into such number of revenue districts as may from time to time be required for administrative purposes. Each of these districts shall be under the supervision of a Revenue District Officer.

SECTION 10 Revenue Regional Director — Under rules and regulations, policies and standards formulated by the Commissioner, with the approval of the Secretary of Finance, the Revenue Regional Director shall, within the region and district offices under his jurisdiction, among others:

(a) Implement laws, policies, plans, programs, rules and regulations of the department or agencies in the regional area;

(b) Administer and enforce internal revenue laws, and rules and regulations, including the assessment and collection of all internal revenue taxes, charges and fees;

(c) Issue Letters of Authority for the examination of taxpayers within the region;

(d) Provide economical, efficient and effective service to the people in the area;

(e) Coordinate with regional offices or other departments, bureaus and agencies in the area;

(f) Coordinate with local government units in the area;

(g) Exercise control and supervision over the officers and employees within the region; and

(h) Perform such other functions as may be provided by law and as may be delegated by the Commissioner.

SECTION 11. Duties of Revenue District Officers and Other Internal Revenue Officers — It shall be the duty of every Revenue District Officer or other internal revenue officers and employees to ensure that all laws and rules and regulations affecting national internal revenue are faithfully executed and complied with, and to aid in the prevention, detection and punishment of frauds or delinquencies in connection therewith.

It shall be the duty of every Revenue District Officer to examine the efficiency of all officers and employees of the Bureau of Internal Revenue under his supervision, and to report in writing to the Commissioner, through the Regional Director, any neglect of duty, incompetency, delinquency, or malfeasance in office of any internal revenue officer of which he may obtain knowledge, with a statement of all the facts and any evidence sustaining each case.

SECTION 12. Agents and Deputies for Collection of National Internal Revenue Taxes — The following are hereby constituted agents of the Commissioner:

(a) The Commissioner of Customs and his subordinates with respect to the collection of national internal revenue taxes on imported goods;

(b) The head of the appropriate government office and his subordinates with respect to the collection of energy tax; and

(c) Banks duly accredited by the Commissioner with respect to receipt of payments of internal revenue taxes authorized to be made thru banks.

BIR ISSUANCES

REVENUE REGULATIONS NO. 04-97 March 1, 1997

Revenue Regulations Prescribing the Acceptable Modes of Payment of Internal Revenue Taxes Through Accredited Banks and their Subsidiaries and the Enrollment of Taxpayers Required Thereunderto ensure that tax payments are made only to authorized 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 (a) an over-the-counter cash transaction; (b) the bank debit system, or (c) a credit facility with a bank, a credit company or similar institution

Any officer or employee of an authorized agent bank assigned to receive internal revenue tax payments and transmit tax returns or documents to the Bureau of Internal Revenue shall be subject to the same sanctions and penalties prescribed in Sections 269 and 270 of this Code.

SECTION 13. Authority of a Revenue Officer — Subject to the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a Revenue Officer assigned to perform assessment functions in any district may, pursuant to a Letter of Authority issued by the Revenue Regional Director, examine taxpayers within the jurisdiction of the district in order to collect the correct amount of tax, or to recommend the assessment of any deficiency tax due in the same manner that the said acts could have been performed by the Revenue Regional Director himself.

CASES DIGEST

Role and significance of a Letter of Authority.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books 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. Equally important is that the revenue officer so authorized 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. Sony Phil., Inc., G.R. No. 178697, November 17, 2010

SECTION 14.Authority of Officers to Administer Oaths and Take Testimony — The Commissioner, Deputy Commissioners, Service Chiefs, Assistant Service Chiefs, Revenue Regional Directors, Assistant Revenue Regional Directors, Chiefs and Assistant Chiefs of Divisions, Revenue District Officers, special deputies of the Commissioner, internal revenue officers and any other employee of the Bureau thereunto especially deputized by the Commissioner shall have the power to administer oaths and to take testimony in any official matter or investigation conducted by them regarding matters within the jurisdiction of the Bureau.

SECTION 15. Authority of Internal Revenue Officers to Make Arrests and Seizures — The Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the Revenue District Officers and other internal revenue officers shall have authority to make arrests and seizures for the violation of any penal law, rule or regulation administered by the Bureau of Internal Revenue. Any person so arrested shall be forthwith brought before a court, there to be dealt with according to law.

SECTION 16. Assignment of Internal Revenue Officers Involved in Excise Tax Functions to Establishments Where Articles Subject to Excise Tax are Produced or Kept — The Commissioner shall employ, assign, or reassign internal revenue officers involved in excise tax functions, as often as the exigencies of the revenue service may require, to establishments or places where articles subject to excise tax are produced or kept: Provided, That an internal revenue officer assigned to any such establishment shall in no case stay in his assignment for more than two (2) years, subject to rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

SECTION 17. Assignment of Internal Revenue Officers and Other Employees to Other Duties — The Commissioner may, subject to the provisions of Section 16 and the laws on civil service, as well, as the rules and regulations to be prescribed by the Secretary of Finance, upon the recommendation of the Commissioner, assign or reassign internal revenue officers and employees of the Bureau of Internal Revenue, without change in their official rank and salary, to other or special duties connected with the enforcement or administration of the revenue

laws as the exigencies of the service may require: Provided, That internal revenue officers assigned to perform assessment or collection functions shall not remain in the same assignment for more than three (3) years: Provided, further, That assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed one (1) year.

CASES DIGEST

Re-assignments of Personnel

FACTS: The CIR filed with the COMELEC a request for exemption from the ban on the transfer, promotion, reassignment, and recruitment of public sector employees during the election period for the May 14, 2001 elections. The COMELEC granted the request. On May 24, 2001, or during the election period for the May 14, 2001 elections, petitioner issued a Revenue Travel Assignment Order (RTAO) reassigning private respondents as Technical Assistants in the Taxpayer Assistance Service at its National Office in Quezon City. The RTAO was issued pursuant to Section 17 of the Tax Reform Act of 1997 (Republic Act No. 8424) authorizing the BIR Commissioner to assign and reassign personnel in the exigencies of the service. On May 25, 2001, petitioner submitted to the COMELEC the names and positions of the said personnel detailed to other posts who were exempted from the ban on transfer during the election period.

On June 1, 2001, private respondents filed with the RTC a Complaint for Injunction with Prayer for a Temporary Restraining Order (TRO) and/or Preliminary Injunction. They sought to enjoin petitioner from implementing the RTAO, as well as the Memorandum ordering them to comply therewith. The complaint alleged that their transfer/reassignment pursuant to the RTAO 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 rank or status; and that the RTAO is void as it does not bear the imprimatur of the Secretary of Finance. On June 5, 2001, respondent judge issued a TRO enjoining petitioner from implementing the RTAO. Thereafter, she conducted hearings on private respondents' application for the issuance of a writ of preliminary injunction. On June 25, 2001, respondent judge issued an Order declaring the reassignment under the RTAO neither a demotion nor a removal without cause. Moreover, that the RTAO is in accordance with law. Still, respondent judge issued a preliminary injunction on the ground that petitioner had not "obtained any exemption from the election ban."

ISSUE: Whether respondent judge committed grave abuse of discretion amounting to lack or excess of jurisdiction in holding that petitioner violated the election ban on the transfer of BIR personnel during election period

HELD: Yes. Section 261(h) of the Omnibus Election 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 COMELEC. It is on record that petitioner, thru the Secretary of Finance, filed a request with the COMELEC for exemption from the election ban on the transfer, assignment, promotion, and recruitment of its officers and employees. The COMELEC granted the request on January 24, 2001, subject to the submission by petitioner of certain supporting documents. On March 27, 2001, petitioner complied with the COMELEC's requirement by submitting copies of Executive Order No. 175 and the BIR Organizational Structure as of March 27, 2001. On May 25, 2001, petitioner furnished the COMELEC with the names and positions of the BIR officers and employees transferred or reassigned to other places of work pursuant to RTAO No. 4-2001. But respondent judge ruled that a subsequent approval by the COMELEC of petitioner's compliance is still required. This is untenable and unnecessary.

Resolution No. 3499 of the COMELEC is clear and categorical. It granted petitioner's request for exemption from the election ban on the transfer of personnel subject only to submission of certain documents. Clearly, the COMELEC's further approval of these requirements is no longer necessary. Otherwise, the COMELEC should have withdrawn its favorable action had it found that petitioner's compliance was not in order. Therefore, in issuing the assailed Order granting private respondents' application for preliminary injunction, respondent judge gravely abused her discretion. Grave abuse of discretion exists where an act of a court or tribunal is performed with a capricious or whimsical exercise of judgment equivalent to lack of jurisdiction, as in this case.C I R vs. Rose Marie Alonzo-Legasto, et al., G.R. No. 148443, April 24, 2006

Re-assignment of Personnel

Facts: On 26 October 1993, President Fidel V. Ramos ("President Ramos") issued Executive Order No. 132, entitled "Approving the Streamlining of the Bureau of Internal Revenue." On 28 July 1997, President Ramos issued Executive Order No. 430 ("EO 430") entitled "Further Streamlining the Bureau of Internal Revenue in line with its Computerized Integrated Tax System."

Pitargue sued as a taxpayer fearing possible misappropriation of public funds. Vasquez, who received an Revenue Travel Assignment Order reassigning him, raised violation of his constitutional rights to security of tenure and to due process. Perez 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 RTAOs.

The central question for resolution is whether Pitargue, Perez and Vasquez 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. Moreover, the trial court's grant of the writ of preliminary injunction in favor of respondents despite the lack of a clear and unmistakable right on their part constitutes grave abuse of discretion amounting to lack of jurisdiction,therefore the corresponding writ of preliminary mandatory injunction dated 7 April 1998, both issued by Branch 77 of the Regional Trial Court of Quezon City in Civil Case No. Q-97-32928, are declared VOID.BEETHOVEN L. RUALO vs. ELISEO P. PITARGUE, NOBLE BAMBINA B. PEREZ and EDMUND VASQUEZ G.R. No. 140284. January 21, 2005

SECTION 18. Reports of Violation of Laws — When an internal revenue officer discovers evidence of a violation of this Code or of any law, rule or regulation administered by the Bureau of Internal Revenue, of such character as to warrant the institution of criminal proceedings, he shall immediately report the facts to the Commissioner, through his immediate superior, giving the name and address of the offender and the names of the witnesses, if possible: Provided, That in urgent cases, the Revenue Regional Director or Revenue District Officer, as the case may be, may send the report to the corresponding prosecuting officer. In the latter case, a copy of his report shall be sent to the Commissioner.

SECTION 19. Contents of Commissioner's Annual Report — The Annual Report of the Commissioner shall contain detailed statements of the collections of the Bureau with specifications of the sources of revenue by type of tax, by manner of payment, by revenue region and by industry group and its disbursements by classes of expenditures.

In case the actual collection exceeds or falls short of target as set in the annual national budget by fifteen percent (15%) or more, the Commissioner shall explain the reasons for such excess or shortfall.

SECTION 20Submission of Report and Pertinent Information by the Commissioner —

(A) Submission of Pertinent Information to Congress — The provision of Section 270 of this Code to the contrary notwithstanding, the Commissioner shall, upon request of Congress and in aid of legislation, furnish its appropriate Committee pertinent information including but not limited to: industry audits, collection performance data, status reports in criminal actions initiated against persons and taxpayer's returns: Provided, however, That any return or return information which can be associated with, or otherwise identify, directly or indirectly, a particular taxpayer shall be furnished the appropriate Committee of Congress only when sitting in Executive Session unless such taxpayer otherwise consents in writing to such disclosure.

(B) Report to Oversight Committee — The Commissioner shall, with reference to Section 204 of this Code, submit to the Oversight Committee referred to in Section 290 hereof, through the Chairmen of the Committee on Ways and Means of the Senate and House of Representatives, a report on the exercise of his powers pursuant to the said Section, every six (6) months of each calendar year.

SECTION 21 Sources of Revenue — The following taxes, fees and charges are deemed to be national internal revenue taxes:

(a) Income tax;

(b) Estate and donor's taxes;

(c) Value-added tax;

(d) Other percentage taxes;

(e) Excise taxes;

(f) Documentary stamp taxes; and

(g) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue.

TITLE II Tax on Income

CHAPTER I Definitions

SECTION 22 Definitions — When used in this Title:

(A) The term 'person' means an individual, a trust, estate, or corporation.

(B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

CASES DIGEST

Taxability of Partnerships

With respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation" and "partnership", as used in sections 24( Now Sec. 27) and 84( Now Sec 22B) of said Code, the pertinent parts of which read:

"SEC. 24 Rate of tax on corporations— 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 organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (compañiascolectivas), a tax upon such income equal to the sum of the following: . . . ."

"Sec. 84(b) The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include duly registered general copartnerships (compañiascolectivas)."

Article 1767 of the Civil Code of the Philippines provides:

"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."

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) 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. Hence, the issue narrows down to their intent in acting as they did. Upon 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, because:

1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.000. This was soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions undertaken, 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 acquired by petitioners in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.

For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the exception only of duly registered general co-partnerships — 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.

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and FRANCISCA EVANGELISTA vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS G.R. No. L-9996. October 15, 1957

To be taxed, a joint venture need not be constituted in accordance with usual legal requirements.

The qualifying expression: "the term corporation includes partnerships, no matter how created or organized" clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations.

Eufemia Evangelista vs. Collector of Internal Revenue, et al., G.R. No. L-9996, October 15, 1957

For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or 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. From 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 co-heirs under a single management to be used with the intent of making 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.Ona vs. Commissioner, G.R. No. L-19342, May 25, 1972

What constitutes a "partnership" under American law.

Under American law, the term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships with the exception only of duly registered general copartnershipswithin the purview of the term "corporation."

Eufemia Evangelista vs. Collector of Internal Revenue, et al., G.R. No. L-9996, October 15, 1957

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., G.R. No. 112675, January 25, 1999

Unregistered partnerships and associations are included in the concept of "corporations".

The Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Parenthetically, the NLRC's inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997.

Afisco Insurance Corp., et al. vs. Court of Appeals, et al., G.R. No. 112675, January 25, 1999

Personality is not a condition precedent to the existence of partnerships.

The term 'corporation' includes among others, joint accounts (cuentas en participacion) and associations, none of which has a legal personality of its own, independent of that of its members. The lawmakers could not have regarded personality as a condition precedent to the existence of partnerships referred to therein.

Florencio Reyes, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-24020-21, July 29, 1968

Taxes enforced against a corporate taxpayer cannot be imposed on its officers and stockholders.

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 stockholders, for this will violate the principle that a corporation has personality separate and distinct from the persons constituting it.

Proton Pilipinas Corp. vs. Republic of the Phil., G.R. No. 165027, October 16, 2006

(C) The term 'domestic,' when applied to a corporation, means created or organized in the Philippines or under its laws.

(D) The term 'foreign,' when applied to a corporation, means a corporation which is not domestic.

(E) The term 'nonresidentcitizen' means:

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

BIR ISSUANCES

REVENUE REGULATIONS NO. 05-01 July 31, 2001 Revoking the Requirement for Non-Resident Citizens, Overseas Contract Workers (OCWs) and Seamen to File Information Returns on Income Derived from Sources Outside the Philippines. Non-resident citizens who are exempt from tax with respect to income derived from sources outside the Philippines in accordance with Section 23(B) and (C), in relation to Section 22 (E) and Section 51 (A)(2)(d) and (A)(3) of the Tax Code of 1997, but who are nevertheless mandated to file information returns (BIR Form 1701C or the new computerized BIR Form 1703) pursuant to RMO 30-99 and RR 9-99, shall no longer be required to file the same on their income derived from sources outside the Philippines beginning taxable year 2001.

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

(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this Section.

(F) The term 'resident alien' means an individual whose residence is within the Philippines and who is not a citizen thereof.

BIR ISSUANCES

REVENUE REGULATIONS No. 2 / Section 5 Definition- A "non-resident alien individual" means an individual —

(a) Whose residence is not within the Philippines; and

(b) Who is not a citizen of the Philippines.

An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether 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 Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines 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 makes his home temporarily in the Philippines, 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.

(G) The term 'nonresident alien' means an individual whose residence is not within the Philippines and who is not a citizen thereof.

(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines.

(I)The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business within the Philippines.

(J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person.

(K) The term 'withholding agent' means any person required to deduct and withhold any tax under the provisions of Section 57

(L) The term 'shares of stock' shall include shares of stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of

participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates.

(M) The term 'shareholder' shall include holders of a share/s of stock, warrant/s and/or option/s to purchase shares of stock of a corporation, as well as a holder of a unit of participation in a partnership (except general professional partnerships) in a joint stock company, a joint account, a taxable joint venture, a member of an association, recreation or amusement club (such as golf, polo, or similar clubs) and a holder of a mutual fund certificate, a member in an association, joint-stock company, or insurance company.

(N) The term 'taxpayer' means any person subject to tax imposed by this Title

(O) The terms 'including' and 'includes', when used in a definition contained in this Title, shall not be deemed to exclude other things otherwise within the meaning of the term defined

(P) The term 'taxable year'means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. 'Taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the period for which such return is made.

(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on the last day of any month other than December.

(R) The terms 'paid or incurred' and 'paid or accrued' shall be construed according to the method of accounting upon the basis of which the net income is computed under this Title.

(S) The term 'trade or business' includes the performance of the functions of a public office.

(T) The term 'securities' means shares of stock in a corporation and rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes,

or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form.

CASES DIGEST

Shares of stock are ordinary assets only to a dealer in securities.

Shares of stock, like the other securities defined in the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

BIR ISSUANCES

REVENUE REGULATIONS NO. 001-08 February 1, 2008

SUBJECT : Amending Certain Provisions of Revenue Regulations No. 10-2006 Prescribing the Guidelines and Conditions for the Tax Treatment of Securities Borrowing and Lending Transactions Involving Shares of Stock or Securities Listed in the Philippine Stock Exchange

Concept of Securities Borrowing and Lending (SBL) — Securities Borrowing and Lending (SBL) is an important element in securities trading and capital market development among emerging markets. It is a vital facility behind the efficient trading settlements and growth of derivatives and options market. SBL exists for both equity and debt securities. For purposes of these Regulations, however, SBL shall be limited to borrowing and lending of shares of stock or securities listed in the PSE unless declared by the Securities and Exchange Commission to be ineligible for borrowing and lending under an SBL Program. SBL Program for other securities listed and traded in other Exchanges shall be covered by a separate Regulation.

SBL involves the lending of shares of stocks or securities by the Lender, who owns or controls them, to the Borrower who needs the shares of stocks/securities borrowed to support trading strategies or settlement obligations, in exchange for a collateral and the promise to return the equivalent shares of stocks/securities at the end of the borrowing period. The borrowing period in any agreement cannot be more than two (2) years.

Typically, the Borrower will use or dispose of the shares of stocks/securities borrowed strictly in connection with a particular purpose or purposes as herein mentioned. Being fungible in nature, the borrowed shares of stocks/securities are transferred from the Lender to the Borrower. For the duration of the borrowing and lending period under the agreement, the Lender temporarily loses ownership of the shares of stock/securities lent but acquires a contractual right to receive all benefits accruing to the shares of stock/securities. The objective is to put the Lender into the same economic position as the Lender would have been had the securities not been lent. This means that in case of corporate actions like stock rights, dividend declarations, and other benefits accruing to the shares of stock, the Borrower would have to "manufacture" the corresponding benefits thereon and return the same to the Lender as if the shares of stock/securities "never left his hands".

Upon demand of the Lender or at the end of the stipulated borrowing period, the Borrower is then obligated to return the equivalent shares of stock/securities and the Lender, in turn, returns the collateral put up by the Borrower. If the borrower fails to return the shares of stock/securities or the equivalent Shares of Stock/Securities, the Lender/Lending Agent, as part of the SBL transactions, may purchase shares of stock/securities from the stock exchange. In effect, SBL is similar to a simple collateralized cash loan transaction. However, instead of cash, what is borrowed are listed shares of stock/securities and what is provided as collateral is either cash, government or equity securities, or standby letter of credit issued by a bank."

(U) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof to customers; that is, one who, as a merchant, buys securities and re-sells them to customers with a view to the gains and profits that may be derived therefrom.

CASES DIGEST

Equity investment is capital, not ordinary, asset.

An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital asset. Thus, shares of stock, like the other securities defined in Section 20(t) 4 of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(V) The term 'bank' means every banking institution, as defined in Section 2 of Republic Act No. 337, as amended, otherwise known as the General Banking Act. A bank may either be a commercial bank, a thrift bank, a development bank, a rural bank or a specialized government bank.

BIR ISSUANCES

REVENUE REGULATIONS NO. 004-11 March 15, 2011Proper Allocation of Costs and Expenses Amongst Income Earnings of Banks and Other Financial Institutions for Income Tax Reporting Purposes

REVENUE REGULATIONS NO. 09-04 June 21, 2004Implementing Certain Provisions of Republic Act No. 9238, Re-Imposing the Gross Receipts Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking Functions and Other Non-Bank Financial Intermediaries Beginning January 1, 2004Definition of Terms — For purposes of these Regulations, the terms enumerated hereunder shall have the following meaning:2.1. Financial Institution — shall refer to banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries including finance companies. This does not, however, include insurance companies.2.2. Banks or Banking Institutions — shall refer to those entities as defined in Section 3 of Republic Act No. 8791, as amended, otherwise known as the General Banking Law of 2000. The term "banks" or "banking institutions" are synonymous and interchangeable and specifically include universal banks, commercial banks, thrift banks (savings and mortgage banks, stock savings and loan associations, and private development banks), cooperative banks, rural banks, Islamic banks and other classifications of banks as may be determined by the Monetary Board of the BangkoSentralngPilipinas.2.3. Non-bank Financial Intermediaries — shall refer to persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired 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 kind 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.2.4. Quasi–banking Activities — shall refer to the borrowing of funds from twenty (20) or more personal or corporate lenders at any one time, through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits for the

borrower’s 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. Provided, however, that commercial, industrial and other non-financial 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 quasi-banking functions.2.5. Deposit Substitutes — shall refer to an alternative form of obtaining funds from the public (the term ‘public’ means borrowing from twenty [20] or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s 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, bankers’ acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the BangkoSentralngPilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for inter-bank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities including those between or among banks and quasi-banks shall not be considered as deposit substitute debt instruments.2.6. Insurance Companies — shall refer to entities that undertakes for a consideration to indemnify another (insured) against loss, damage or liability arising from an unknown or contingent event.2.7. Financing Companies — shall refer to corporations except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized 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 (R.A. No. 5980 as amended by R.A. No. 8556). 2.8. Financial Leasing — shall refer to the mode of extending credit through a non-cancellable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, 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 amortize at least seventy percent (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) 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 owner-lessor at the end of the lease contract (R.A. No. 5980 as amended by R.A. No. 8556). A finance lease is a lease that transfers

substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred.2.9. Operating Lease — shall refer to a lease other than a finance lease of a finance company.2.10. Interest Income — the term shall include interest and discounts earned on loans and investment transactions.2.11. Securities — shall include shares of stock 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.2.12. Government Securities — shall refer to securities issued by the Republic of the Philippines or any of its agencies, instrumentalities, and political subdivisions.2.13. Private Securities — shall refer to securities not covered by Subsection 2.12. hereof.(W) The term 'non-bank financial intermediary' means a financial intermediary, as defined in Section 2(D)(c) of Republic Act No. 337, as amended, otherwise known as the General Banking Act, authorized by the BangkoSentralngPilipinas (BSP) to perform quasi-banking activities.

(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more personal or corporate lenders at any one time, through the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrower's 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: Provided, however, That commercial, industrial and other non-financial companies, which borrow 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 quasi-banking functions.

REVENUE REGULATIONS NO. 09-04 June 21, 2004Implementing Certain Provisions of Republic Act No. 9238, Re-Imposing the Gross Receipts Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking Functions and Other Non-Bank Financial Intermediaries Beginning January 1, 2004(Y) The term 'deposit substitutes' shall mean an alternative form of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's 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 bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the BangkoSentralngPilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.

(Z) The term 'ordinary income' includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a capital asset.

CASES DIGEST

An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital asset.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(AA) The term 'rank and file employees' shall mean all employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code of the Philippines, as amended.

(BB) The term 'mutual fund company' shall mean an open-end and close-end investment company as defined under the Investment Company Act.

(CC) The term 'trade, business or profession' shall not include performance of services by the taxpayer as an employee.

(DD) The term 'regional or area headquarters' shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.

(EE) The term 'regional operating headquarters' shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communication; and business development.

(FF) The term 'long-term deposit or investment certificate' shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the BangkoSentralngPilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP.

(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Laborand Employment (DOLE).

(HH)The term 'minimum wage earner' shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.

BIR ISSUANCES

REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as The National Internal Revenue Code" Relative to the Withholding of Income Tax on Compensation and Other Concerns

Exemptions from Withholding Tax on Compensation. — The following income payments are exempted from the requirements of withholding tax on compensation:

xxxxxxxxx

Compensation income of Minimum Wage Earnerss who work in the Private sector and being paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB 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.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise be covered by the above exemption. Provided, however, that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt form income tax, and consequently, from withholding tax.

MWEs 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 SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax and consequently, to withholding tax.

CHAPTER II General Principles

SECTION 23. General Principles of Income Taxation in the Philippines

Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

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

(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

BIR ISSUANCES

REVENUE REGULATIONS NO. 001-11 February 24, 2011

Tax Treatment of Income Earnings and Money Remittances of an Overseas Contract Worker (OCW) or Overseas Filipino Worker (OFW)

OCW refer to Filipino citizens employed in foreign countries, commonly referred to as OFWs, who are physically present in a foreign country as a consequence 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 Philippines. To be considered as an OCW or OFW, they must be duly registered as such with the Philippine Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC).

Seafarers or seamen are Filipino citizens 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 OCW or OFW they must be duly registered as such with the Philippine Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC) with a valid Seafarers Identification Record Book (SIRB) or Seaman's Book issued by the Maritime Industry Authority (MARINA).

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

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

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

CASES DIGEST

Taxes are the lifeblood of the government.

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On 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., G.R. No. 119322, June 4, 1996

Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. And, since taxes are what we pay for civilized 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 mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception.

Atlas Consolidated Mining and Dev't. Corp. vs. Commissioner of Internal Revenue, G.R. No. 159471, January 26, 2011

Symbiotic relationship between government and people is the rationale of taxation.

It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned 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., G.R. No. L-28896, February 17, 1988

Obligation 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 citizen by the government, but upon the necessity of money for the support of the state. For 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. While 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. When 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.

Pablo Lorenzo vs. Juan Posadas, Jr., G.R. No. 43082, June 18, 1937

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 State's sovereignty and a means to give the citizenry 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 citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide.

Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22074, April 30, 1965

Every 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 civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned 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., G.R. No. L-28896, February 17, 1988

Power of taxation must be exercised reasonably and in accordance with prescribed procedure.

a) But even as the inevitability and indispensability of taxation is conceded, it is a requirement 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. For all the awesome power of the tax collector, he may still be stopped in his tracks 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., G.R. No. 119322, June 4, 1996

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On 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., G.R. No. L-28896, February 17, 1988

The power to tax is not the power to destroy.

Taxation is said to be equitable 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 equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes' pen, thus: "The power to tax is not the power to destroy while this Court sits." "So it is in the Philippines."

Antero M. Sison, Jr. vs. Ruben B. Ancheta, et al., G.R. No. L-59431, July 25, 1984

Tax laws must operate equally and uniformly on all persons under similar circumstances.

The taxing power has the authority to make 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 equally 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.

Jose B.L. Reyes vs. Pedro Almanzor, et al., G.R. Nos. L-49839-46, April 26, 1991

Laws granting tax exemption are construed strictissimijuris

a) 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 equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.

Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004

The Court has laid down the rule that "as the power of taxation is a high prerogative of sovereignty, the relinquishment 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 unmistakable terms in order that it may be applied." More specifically stated, the general rule is that any claim for exemption from the tax statute should be strictly construed against the taxpayer

Luzon Stevedoring Corp. vs. Court of Tax Appeals, et al., G.R. No. L-30232, July 29, 1988

Along with police power and eminent domain, taxation is one of the three basic and necessary attributes of sovereignty. Thus, the State 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.

CompagnieFinanciereSucresEtDenrees vs. Commissioner of Internal Revenue, G.R. No. 133834, August 28, 2006

Tax amnesty is construed strictly against the taxpayer.

A tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority.Bibiano V. Bañas, Jr. vs. Court of Appeals, et al., G.R. No. 102967, February 10, 2000

Tax exemptions are not violative of the equal 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. Uniformity means that all property belonging to the same class shall be taxed alike. The Legislature 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 equal protection clause.

Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co., Inc., G.R. No. L-23771, August 4, 1988

Grant of tax exemption to National Power Corp. is not a case of tax evasion.

This tax exemption is intended not only to insure that the NPC 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 quite correct. There are various arrangements in the payment of crude oil purchased by NPC from oil companies. Generally, the customs duties paid by the oil companies are added to the selling price paid by NPC. As to the specific and ad valorem taxes, they are added as part of the seller's price, but NPC pays the price net of tax, on condition that

NPC would seek a tax refund to the oil companies. No tax component on fuel had been charged or recovered by NPC 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 NPC.

Ernesto M. Maceda vs. CatalinoMacaraig, Jr., et al., G.R. No. 88291, May 31, 1991

Tax exemption provision in a treaty should be construed in favor of the party for whose benefit the stipulation was inserted.

Where 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 Military Bases Agreement and in the "Aide Memoire" in accordance with which a contract was entered into, cannot be interpreted in favor of the American Government or for that matter a party claiming under it, like a taxpayer, especially when it is considered that for the Philippine Government "the exception contained in tax statutes must be strictly construed against the one claiming exemption and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted."

Commissioner of Internal Revenue vs. P. J. Kiener Co., Ltd., et al., G.R. No. L-24754, July 18, 1975

Requisites for availment of tax exemption under RP-US Military Bases Agreement.

In order to avail oneself of the tax exemption under the RP-US Military Bases Agreement: he must be a national of the United States employed in connection with the construction, maintenance, operation or defense of the bases, residing in the Philippines by reason of such employment, and the income derived is from the U.S. Government

Commissioner of Internal Revenue vs. Frank Robertson, et al., G.R. Nos. L-70116-19, August 12, 1986

Employees' claims prevail over government's claims only in case of bankruptcy or judicial liquidation of the employer.

There is no merit in the contention of the NLRC 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 question, the government's claim cannot prevail over the claims of employees of the Maritime Company of the Philippines which, pursuant to Art. 110 of the LaborCode,

"enjoy first preference." Art. 110 of the Labor Code on worker preference in case of bankruptcy applies only in case of bankruptcy or judicial liquidation of the employer. This is clear from the text of the law. This case does not involve the liquidation of the employer's business.

Commissioner of Internal Revenue vs. NLRC, et al., G.R. No. 74965, November 9, 1994

State's undertaking to guarantee promissory notes does not diminish its taxing power.

An undertaking of the Republic of the Philippines signed by the Secretary of Finance in each of the promissory notes merely guaranteed the obligations of the NDC but without diminution of its taxing power under existing laws.

National Development Company vs. Commissioner of Internal Revenue, G.R. No. L-53961, June 30, 1987

Mere filing of tax amnesty does not ipso facto shield taxpayer from immunity against prosecution.

The mere filing of tax amnesty return under P.D. 1740 and 1840 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 delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income.

Bibiano V. Bañas, Jr. vs. Court of Appeals, et al., G.R. No. 102967, February 10, 2000

Principle of estoppel does not operate against the government for neglect or omission of its officials tasked to collect taxes.

Taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. Upon taxation depends the Government'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 take 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.

Misael P. Vera, et al. vs. Jose F. Fernandez, et al., G.R. No. L-31364, March 30, 1979

The State 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 jeopardize the government's financial position.

Commissioner of Internal Revenue vs. Manila Bankers' Life Insurance Corp., G.R. No. 169103, March 16, 2011

The power to tax is an attribute of sovereignty.

Requisites for availment of tax exemption under RP-US Military Bases AgreementIn order to avail oneself of the tax exemption under the RP-US Military Bases Agreement: he must be a national of the United States employed in connection with the construction, maintenance, operation or defense of the bases, residing in the Philippines by reason of such employment, and the income derived is from the U.S. Government.

Commissioner of Internal Revenue vs. Frank Robertson, et al., G.R. Nos. L-70116-19, August 12, 1986

Employees' claims prevail over government's claims only in case of bankruptcy or judicial liquidation of the employer.

There is no merit in the contention of the NLRC 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 question, the government's claim cannot prevail over the claims of employees of the Maritime Company of the Philippines which, pursuant to Art. 110 of the LaborCode, "enjoy first preference." Art. 110 of the Labor Code on worker preference in case of bankruptcy applies only in case of bankruptcy or judicial liquidation of the employer. This is clear from the text of the law. This case does not involve the liquidation of the employer's business.

Commissioner of Internal Revenue vs. NLRC, et al., G.R. No. 74965, November 9, 1994

State's undertaking to guarantee promissory notes does not diminish its taxing power.

An undertaking of the Republic of the Philippines signed by the Secretary of Finance in each of the promissory notes merely guaranteed the obligations of the NDC but without diminution of its taxing power under existing laws.

National Development Company vs. Commissioner of Internal Revenue, G.R. No. L-53961, June 30, 1987

Atlas Consolidated Mining & Development Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981

CHAPTER III Tax on Individuals

BIR ISSUANCES

REVENUE REGULATIONS NO. 007-10 July 20, 2010Implementing the Tax Privileges Provisions of Republic Act No. 9994, Otherwise Known as the "Expanded Senior Citizens Act of 2010", and Prescribing the Guidelines for the Availment Thereof in order for the ff:1. The availment of the income tax exemption of Senior Citizens;2. The value-added tax exemption privileges granted to VAT-registered taxpayers selling goods and services identified in the Act to Senior Citizens;3. The tax privileges granted to establishments giving discount on their sale of goods and services to Senior Citizens;4. The tax implication of taking care and supporting senior citizens by their benefactors; and,5. The tax privileges granted to private entities who engage Senior Citizens as their employees.

REVENUE REGULATIONS NO. 001-09 December 9, 2008Regulations Implementing Republic Act No. 9442, entitled "An Act Amending Republic Act 7277, Otherwise Known as the Magna Carta for Persons with Disability", Relative to the Tax Privileges of Persons with Disability and Tax Incentives for Establishments Granting Sales Discount

SECTION 24Income Tax Rates

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. —

(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines by every individual citizen of the Philippines residing therein;

(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection (C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines.

(2) Rates of Tax on Taxable Income of Individuals. — The tax shall be computed in accordance with and at the rates established in the following schedule:

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.

For married individuals, the husband and wife, subject to the provision of Section 51(D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.

Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as The National Internal Revenue Code" Relative to the Withholding of Income Tax on Compensation and Other Concerns

(B) Rate of Tax on Certain Passive Income:

(1) Interests, Royalties, Prizes, and Other Winnings — A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual

trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BangkoSentralngPilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years — 5%;

Three (3) years to less than four (4) years — 12%; and

Less than three (3) years — 20%.

(2) Cash and/or Property Dividends — A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999;

Ten percent (10%) beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.

CASES DIGEST

Ordinary dividends distinguished from liquidated 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 quit with intent to liquidate the business. The distinction between a distribution in liquidation 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 stock it is an ordinary dividend. However, if the corporation is really winding up its business or recapitalizing and narrowing its activities, the distribution may properly be treated as in complete or partial liquidation and as payment by the corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out all or part of the stockholders' interest in the company.

Wise & Co., Inc. vs. Bibiano L. Meer, G.R. No. 48231, June 30, 1947

DIVIDENDS

FACTS: Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963 common shares. A month later, Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. Both sons are foreigners.

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a total shareholdings of 185,154 shares— 50,495 of which are original issues and the balance of 134,659 shares as stock dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to his wife Doña Carmen Soriano, as her conjugal share. The other half formed part of his estate. A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively received by the

Don Andres estate and Doña Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 19 common shares each.

On March 31, 1968 Doña Carmen exchanged her whole 138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its common shares for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to 127,727. On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M divided into 150,000 preferred shares and 600,000 common shares. About a year later, ANSCOR again redeemed 80,000 common shares from the Don Andres' estate, further reducing the latter's common shareholdings to 19,727. As stated in the Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company's foreign exchange remittances in case cash dividends are declared.

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and the second quarter of 1969 based on the transactions of exchange and redemption of stocks. The BIR made the corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty under P.D. 23 which were amended by P.D.'s 67 and 157. However, petitioner ruled that the invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed. ANSCOR's subsequent protest on the assessments was denied in 1983 by petitioner.

ISSUE: Whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend," making the proceeds thereof taxable under the provisions of the above-quoted law.

HELD: Yes.

General Rule

Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid down the general rule known as the 'proportionate test' wherein stock dividends once issued form part of the capital and, thus, not subject to income tax. Specifically, the general rule states that:

"A stock dividend representing the transfer of surplus to capital account shall not be subject to tax."

Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this provision originally referred to "stock dividends" only, without any exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So 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 stock dividends postpone the realization of profits because the "fund represented by the new stock 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 equivalent. It is gain derived and severed from capital, from labor or from both combined— so that to tax a stock dividend would be to tax a capital increase rather than the income. In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock 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 Exception

However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen.

In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber (that pro rata stock dividends are not taxable income), the exempting clause above quoted 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 capitalization by declaring the stock dividends previously issued and later redeem said dividends by paying cash to the stockholder. This process of issuance-redemption 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 — the exempting clause was added. It provides that the redemption or cancellation of stock dividends, depending on the "time" and "manner" it was made, is "essentially equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to the extent it represents profits". The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable.

Requisites:

For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends." Of these, the most important is the third. It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisputed that at the time of the last redemption, the original common shares owned by the estate were only 25,247.5. This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock 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 stock dividends. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine — wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate creditors.

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 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. Was this transaction used as a "continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to determine the "net effect" of the transaction between the shareholder-income taxpayer and the acquiring (redeeming) 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 know whether the issuance of

stock dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion plan.

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade becomes manifest. Depending on each case, the exempting provision of Sec. 83(b) of the 1939 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 Section 83(b) is, whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. Otherwise, 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. Such 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 Section 83(b) would be made to depend not on the income of the taxpayer, but on the business purposes of a third party (the corporation herein) from whom the income was earned. This is absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR) 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.

Exchange of Common With Preferred Shares

ANSCOR reclassified its shares into common and preferred, and that parts of the common shares of the Don Andres estate and all of Doña Carmen's shares were exchanged for the whole 150,000 preferred shares. Thereafter, both the Don Andres estate and Doña 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 stocks had the same par value. Under the facts herein, any difference in their market value would be immaterial at the time of exchange because no income is yet realized — 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 — there would be a shifting of the balance of stock features, like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realized income for tax purposes. A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary investors who take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the profits and losses of the enterprise. Moreover, under the doctrine of equality of shares — all stocks issued by the corporation are presumed equal 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 realized income to the subscriber. There is only a modification of the subscriber's rights and privileges — 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.

COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP. [G.R. No. 108576. January 20, 1999.]

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000 5%

On any amount in excess of P100,000 10%

BIR ISSUANCES

REVENUE REGULATIONS NO. 006-08 April 22, 2008

Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets

Pursuant to Section 244, in relation to Sections 24 (C), 25 (A) (3), 25 (B), 27 (D) (2), 28 (A) (7) (c), 28 (B) (5) (c), 34 (D) (4) (5), 38, 40, and Section 127 (A) and (B) of the 1997 National Internal Revenue Code (Tax Code), as amended, these Regulations are hereby promulgated in order to harmonize and consolidate the rules relative to the imposition of tax for the sale, barter, exchange or other disposition of shares of stock of domestic corporation that are listed and traded through the Local Stock Exchange, or disposition of shares through Initial Public Offering (IPO) or disposition of shares not traded through the Local Stock Exchange.

(D) Capital Gains from Sale of Real Property

(1) In General — The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or -controlled corporations shall be determined either under Section 24(A) or under this Subsection, at the option of the taxpayer;

BIR ISSUANCES

REVENUE REGULATIONS NO. 07-03

SUBJECT: Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary Income Tax under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of the same Code

CASES DIGESTS

SPOUSES MARIO AND ELIZABETH TORCUATOR vs. SPOUSES REMEGIO AND GLORIA BERNABE and SPOUSES DIOSDADO and LOURDES SALVADOR [G.R. No. 134219. June 8, 2005.]

TAXATION; CAPITAL GAINS TAX; WHEN IMPOSABLE.

The differences between a contract to sell and a contract of sale are well-settled in jurisprudence. As early as 1951, 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, non-payment 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 making 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 non-happening of which is not a breach, casual or serious, but simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. Capital gains taxes, after all, are only imposed on gains presumed to have been realized 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.

BIBIANO V. BAÑAS, JR., petitioner, vs. COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO TALON, respondents. [G.R. No. 102967. February 10, 2000.]

SYNOPSIS

Petitioner, Bibiano V. Bañas Jr., sold to Ayala Investment Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that upon the signing of the contract AYALA shall pay four hundred sixty-one thousand, seven hundred fifty-four (P461,754.00) pesos and the balance of one million, eight hundred forty-seven thousand and sixteen (P1,847,016.00) pesos to be paid in four equal consecutive

annual installments. The same day, petitioner discounted the promissory note with AYALA, for its face value of P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against Bank of the Philippine Islands with the uniform amount of two hundred five thousand, two hundred twenty-four (P205,224.00) pesos. In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight hundred seventy-seven (P230,877.00) pesos as gain from sale of capital asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital asset for the year. On April 11, 1978 then Revenue Director Mauro Calaguio authorized their tax examiners, Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976. Meantime, respondent Aquilino Larin who succeeded as Regional Director of Manila, Region IV-A, filed on June 17, 1981 a criminal complaint for tax evasion against the petitioner. On July 1, 1981, news items appeared in the now defunct Evening Express Evening Post and Bulletin Today, which mentioned petitioner's false income tax return concerning the sale of land to AYALA. Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of Manila an action for damages against respondents Larin, Tuazon 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 Larin damages. Respondent appellate court affirmed the trial court's decision. Hence, the present petition.

The Supreme 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. When petitioner had the promissory notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA 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 required 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 AYALA for the year 1976. The Court deleted the award of actual damages to respondent Larin for lack 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 Larin. Petitioner's actions against Larin were found by the

Court "unwarranted and baseless," bolstered by the fact that the criminal charges filed against him in the Tanodbayan and City Fiscal's Office were all dismissed.

SYLLABUS

1. TAXATION; TAX AMNESTY; MERE FILING OF TAX AMNESTY RETURN UNDER P.D. 1740 AND P.D. 1840 DOES NOT IPSO FACTO SHIELD TAXPAYER FROM IMMUNITY AGAINST PROSECUTION. — Petitioner did not meet the twin requirements of P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and 1840 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 delinquencies, 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 like a tax exemption, is never favoured nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. Hence, on this matter, it is our view that petitioner's claim of immunity from prosecution under the shield of availing tax amnesty is untenable.

2. ID.; NATIONAL INTERNAL REVENUE CODE; ACCOUNTING PERIOD AND METHODS OF ACCOUNTING; INCOME COMPUTED ON INSTALLMENT BASIS; DISCOUNTING OF PROMISSORY NOTES DONE BY THE SELLER HIMSELF WILL RESULT IN A TAXABLE DISPOSITION; INCOME DERIVED FROM SUCH DISCOUNTING MUST BE REPORTED IN THE RETURNS. — Where an installment obligation is discounted at a bank 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 United States. Since 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 acquires money for the settlement of his receivables. Logically then, the income should be reported at the time of the actual gain. For 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. When petitioner had the promissory

notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA 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 required by law to report in his returns the income derived from the discounting. 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 AYALA for the year 1976.

3. CIVIL LAW; DAMAGES; ACTUAL OR COMPENSATORY; AWARD DELETED FOR LACK OF BASIS. — Lastly, petitioner questions the damages awarded to respondent Larin. Any person who seeks 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. Larin 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 (P200,000.00) pesos as actual damages. However, the appellate court stated that, despite pendency of this case, Larin was given a promotion at the BIR. Said respondent court: "We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7, 11 December 1985), 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 (TSN, pp. 35-39, 04 November 1985)." Moreover, 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 guesswork 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. Since we have no basis with which to assess, with certainty, the actual or compensatory damages counter-claimed by respondent Larin, the award of such damages should be deleted.

4. ID.; ID.; MORAL DAMAGES; BASIS FOR AWARD ESTABLISHED. — We agree that there is sufficient basis for the award of moral and exemplary damages in favor of respondent Larin. The appellate court believed respondent Larin when he said he suffered anxiety and humiliation because of the unfounded charges against him. Petitioner's actions against Larin were found "unwarranted and baseless," and the criminal charges filed against him in the Tanodbayan and City Fiscal's Office were all dismissed. Hence, there is adequate support for respondent court's conclusion that moral damages have been proved.

5. ID.; ID.; ID.; AWARDING MORAL DAMAGES TO GOVERNMENT OFFICIALS IN CONNECTION WITH THEIR OFFICIAL FUNCTIONS MUST BE EXERCISED BY THE COURTS WITH CAUTION; REASON. — 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 counter-

claiming damages in suits filed against them in connection with their functions. Moreover, we must be careful lest the amounts awarded make citizens 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 (P200,000.00) pesos to seventy five thousand (P75,000.00) pesos, while the exemplary damage is set at P25,000.00 only.

D E C I S I O N

For review is the Decision of the Court of Appeals in CA-G.R. CV No. 17251 promulgated on November 29, 1991. It affirmed in toto the judgment of the Regional Trial Court (RTC), Branch 39, Manila, in Civil Case No. 82-12107. Said judgment disposed as follows:

"FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders judgment DISMISSING the complaint against all the defendants and ordering plaintiff [herein petitioner] to pay defendant Larin the amount of P200,000.00 (Two Hundred Thousand Pesos) as actual and compensatory damages; P200,000.00 as moral damages; and P50,000.00 as exemplary damages and attorneys fees of P100,000.00."

The facts, which we find supported by the records, have been summarized by the Court of Appeals as follows:

On February 20, 1976, petitioner, Bibiano V. Bañas Jr. sold to Ayala Investment Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that upon the signing of the contract AYALA shall pay four hundred sixty-one thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one million, eight hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal consecutive annual installments, with twelve (12%) percent interest per annum on the outstanding balance. AYALA issued one promissory note covering four equal annual installments. Each periodic payment of P461,754.00 pesos shall be payable starting on February 20, 1977, and every year thereafter, or until February 20, 1980.

The same day, petitioner discounted the promissory note with AYALA, for its face value of P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against Bank of the Philippine Islands with the uniform amount of two hundred five thousand, two hundred twenty-four (P205,224.00) pesos.

In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from disposition of capital asset.

Selling Price of LandP2,308,770.00

Less Initial Payment 461,754.00 3

——————

Unrealized Gain P1,847,016.00

1976 Declaration of Income on Disposition of Capital Asset subject to Tax:

Initial Payment P461,754.00

Less: Cost of Land and other incidental

Expenses (76,547.90)

——————

Income P385,206.10

Income subject to tax (P385,206.10 x 50%) P192,603.65

In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight hundred seventy-seven (P230,877.00) pesos 4 as gain from sale of capital asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital asset for the year.

On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976.

Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency tax assessment for two million, four hundred seventy-three thousand, six hundred seventy-three (P2,473,673.00) pesos.

Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A. After reviewing the examiners' report, Larin directed the revision of the audit report, with instruction to consider the land as capital asset. The tax due was only fifty (50%) percent of the total gain from sale of the property held by the taxpayer beyond twelve months pursuant to Section 34 5 of the 1977 National Internal Revenue Code (NIRC). The deficiency tax

assessment was reduced to nine hundred thirty six thousand, five hundred ninety-eight pesos and fifty centavos (P936,598.50), inclusive of surcharges and penalties for the year 1976.

On June 27, 1980, respondent Larin sent a letter to petitioner informing him of the income tax deficiency that must be settled immediately.

On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to AYALA was on installment.

On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the National Office of the BIR. The Chief of the Tax Fraud Unit recommended the prosecution of a criminal case for conspiring to file false and fraudulent returns, in violation of Section 51 of the Tax Code against petitioner and his accountants, Andres P. Alejandre and Conrado Bañas.

On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner.

On July 1, 1981, news items appeared in the now defunct Evening Express with the headline: "BIR Charges Realtor" and another in the defunct Evening Post with a news item: "BIR raps Realtor, 2 accountants." Another news item also appeared in the July 2, 1981, issue of the Bulletin Today entitled: "3-face P1-M tax evasion raps." All news items mentioned petitioner's false income tax return concerning the sale of land to AYALA.

On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of forty-one thousand, seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an additional amount of one thousand, five hundred twenty-five pesos and sixty-two centavos (P1,525.62). In both, petitioner did not recognize that his sale of land to AYALA was on cash basis.

Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of Manila an action 6 for damages against respondents Larin, Tuazon and Talon for extortion and malicious publication of the BIR's tax audit report. He 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, Presidential Decree Nos. 1740 and 1840.

The trial court decided in favor of the respondents and awarded Larin damages, as already stated. Petitioner seasonably appealed to the Court of Appeals. In its decision of November 29, 1991, the respondent court affirmed the trial court's decision, thus:

"The finding of the court a quo that plaintiff-appellant's actions against defendant-appellee Larin were unwarranted and baseless and as a result thereof, defendant-appellee Larin was subjected to unnecessary anxiety and humiliation is therefore supported by the evidence on record.

Defendant-appellee Larin 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 Fiscal's Office were all dismissed.

WHEREFORE, the appealed judgment is hereby AFFIRMED in toto."

Hence this petition, wherein petitioner raises before us the following queries:

I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF PERTINENT TAX LAWS, THUS IT FAILED TO APPRECIATE THE CORRECTNESS AND ACCURACY OF PETITIONER'S RETURN OF THE INCOME DERIVED FROM THE SALE OF THE LAND TO AYALA.

II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE WAS AN ALLEGED ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY PRIVATE RESPONDENTS.

III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF PRESIDENTIAL DECREE NOS. 1740 AND 1840, AMONG OTHERS, PETITIONER'S IMMUNITY FROM CRIMINAL PROSECUTION.

IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF WELL-ESTABLISHED DOCTRINES OF THIS HONORABLE COURT AS REGARDS THE AWARD OF ACTUAL, MORAL AND EXEMPLARY DAMAGES IN FAVOR OF RESPONDENT LARIN.

In essence, petitioner asks the Court to resolve seriatim the following issues:

1. Whether respondent court erred in ruling that there was no extortion attempt by BIR officials;

2. Whether respondent court erred in holding that P.D. 1740 and 1840 granting tax amnesties did not grant immunity from tax suits;

3. Whether respondent court erred in finding that petitioner's income from the sale of land in 1976 should be declared as a cash transaction in his tax return for the same year (because the buyer discounted the promissory note issued to the seller on future installment payments of the sale, on the same day of the sale);

4. Whether respondent court erred and committed grave abuse of discretion in awarding damages to respondent Larin.

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 defendants-appellees is the plaintiff-appellant's self serving declarations.

As found by the court a quo, "said attempt was known to plaintiff-appellant's son-in-law and counsel on record, yet, said counsel did not take the witness stand to corroborate the testimony of plaintiff." 8

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. 9 Similarly, 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.

On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax amnesties also granted immunity from criminal prosecution against tax offenses, the pertinent sections of these laws state:

P.D. No. 1740. — CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE INCOME TAX LAW UPON VOLUNTARY DISCLOSURE OF UNDECLARED INCOME FOR INCOME TAX PURPOSES AND REQUIRING PERIODIC SUBMISSION OF NET WORTH STATEMENT.

xxx xxx xxx

SECTION 1. Voluntary Disclosure of Correct Taxable Income. — Any individual who, for any or all of the taxable years 1974 to 1979, 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. Likewise, 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. (italics ours)

xxx xxx xxx

SECTION 5. Immunity from Penalties. — Any individual who voluntarily files a return under this Decree and pays the income tax due thereon shall be immune from the penalties,

civil or criminal, under the National 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 1974 to 1979: Provided, however, That these immunities shall not apply in cases where the amount of net taxable income declared under this Decree is understated to the extent of 25% or more of the correct net taxable income. (italics ours)

P.D. NO. 1840 — GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR WEALTH EARNED OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980 AND REQUIRING THE FILING OF THE STATEMENT OF ASSETS, LIABILITIES, AND NET WORTH.

SECTION 1. Coverage. — In case of voluntary disclosure of previously untaxed income and/or wealth such as earnings, receipts, gifts, bequests or any other acquisition from any source whatsoever, realized here or abroad, by any individual taxpayer, which are taxable under the National Internal Revenue Code, as amended, the assessment and collection of all internal revenue taxes, including the increments or penalties on account of non-payment, as well as all civil, criminal or administrative liabilities arising from or incident thereto under the National Internal Revenue Code, are hereby condoned provided that the individual taxpayer shall pay. (italics ours) . . .

SECTION 2. Conditions for Immunity. — The immunity granted under Section one of this Decree shall apply only under the following conditions:

a) Such previously untaxed income and/or wealth must have been earned or realized in any of the years 1974 to 1980;

b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully pay the tax due thereon;

c) The amnesty tax paid by the taxpayer under this Decree shall not be less than P1,000.00 per taxable year; and

d) The taxpayer must file a statement of assets, liabilities and net worth as of December 31, 1980, as required under Section 6 hereof.

It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the same day, he discounted the promissory note covering the future installments. The discounting seems questionable because ordinarily, when a bill is discounted, the lender (e.g. banks, financial institution) charges or deducts a certain percentage from the principal value as its compensation. Here, the discounting was done by the buyer. On July 2, 1981, two weeks after the filing of the tax evasion complaint against him by respondent Larin on

June 17, 1981, petitioner availed of the tax amnesty under P.D. No. 1740. His amended tax return for the years 1974 - 1979 was filed with the BIR office of Valenzuela, Bulacan, instead of Manila where the petitioner's principal office was located. He again availed of the tax amnesty under P.D. No. 1840. His disclosure, however, did not include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did not amend his income tax return. He did not pay the tax which was considerably increased by the income derived from the discounting. He did not meet the twin requirements of P.D 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and 1840 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 delinquencies, 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 like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 11 Hence, on this matter, it is our view that petitioner's claim of immunity from prosecution under the shield of availing tax amnesty is untenable.

On the third issue, petitioner asserts that his sale of the land to AYALA was not on cash basis but on installment as clearly specified in the Deed of Sale which states:

"That for and in consideration of the sum of TWO MILLION THREE HUNDRED EIGHT THOUSAND SEVEN HUNDRED SEVENTY (P2,308,770.00) PESOS Philippine Currency, to be paid as follows:

1. P461,754.00, upon the signing of the Deed of Sale; and,

2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive, annual installments with interest thereon at the rate of twelve percent (12%) per annum, beginning on February 20, 1976, said installments to be evidenced by four (4) negotiable promissory notes." 12

Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation No. 2 to support his claim.

Section 43 of the 1977 NIRC states,

Installment basis. — (a) Dealers in personal property. — . . .

(b) Sales of realty and casual sales of personalty — In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding one thousand pesos, or (2) of a sale or other disposition of real property if in either case the initial payments do not exceed twenty-five percentum of the selling price, the income may, under regulations prescribed by the Minister of Finance, 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 No. 2, Section 175 provides,

Sale of real property involving deferred payments. — Under Section 43 deferred-payment sales of real property include (1) 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 (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments. Such sales either under (a) or (b), fall into two classes when considered with respect to the terms of sale, as follows:

(1) Sales 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 25 per cent of the selling price;

(2) Deferred-payment 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 25 per cent of the selling price;

In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken 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 Section 43 of the Code, in sections 174 and 176 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 subsequent years. Commissions and other selling expenses paid or incurred by the vendor are not to be deducted or taken 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 make two or more payments, in later years.

Petitioner asserts that Sec. 43 allows him to return as income in the taxable years involved, the respective installments as provided by the deed of sale between him and AYALA. Consequently, he religiously reported his yearly income from sale of capital asset, subject to tax, as follows:

Year 1977 (50% of P461,754) P 230,877.00

1978 230,877.00

1979 230,877.00

1980 230,877.00

Petitioner says that his tax declarations are acceptable modes of payment under Section 175 of the Revenue Regulations (RR) No. 2. 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 subsequent years. Thus, the proceeds of the promissory notes, not yet due which he discounted to AYALA should not be included as income realized in 1976. Petitioner states that the original agreement in the Deed of Sale should not be affected by the subsequent discounting of the bill.

On the other hand, respondents assert that taxation is a matter of substance and not of form. Returns are scrutinized 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. When payment is in lump sum the tax for the year proportionately increases. Ultimately, 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.

Section 43 and Sec. 175 says that among the entities who may use the above-mentioned installment method is a seller of real property who disposes his property on installment, provided that the initial payment does not exceed 25% 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 subsequent years, like 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 subsequent years. Such disposition or discounting of receivable is material only as to the computation of the initial payment. If the initial payment is within 25% of total contract price, exclusive of the proceeds of discounted notes, the sale qualifies 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 subsequent payments or liquidation of certificates of indebtedness is reported using the installment method in computing the proportionate income to be returned, during the respective year it was realized. Non-dealer 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.

Where an installment obligation is discounted at a bank 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 United States. Since 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 acquires money for the settlement of his receivables. Logically then, the income should be reported at the time of the actual gain. For 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. When petitioner had the promissory notes covering the succeeding installment payments of the land

issued by AYALA, discounted by AYALA 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 required by law to report in his returns the income derived from the discounting. 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 AYALA for the year 1976.

Lastly, petitioner questions the damages awarded to respondent Larin.

Any person who seeks 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. Larin 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 (P200,000.00) pesos as actual damages. However, the appellate court stated that, despite pendency of this case, Larin was given a promotion at the BIR. Said respondent court:

"We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7, 11 December 1985), 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 (TSN, pp. 35-39, 04 November 1985)."

Moreover, 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 guesswork 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. Since we have no basis with which to assess, with certainty, the actual or compensatory damages counter-claimed by respondent Larin, the award of such damages should be deleted.

Moral damages may be recovered in cases involving acts referred to in Article 21 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. National Intelligence Board, et al., 132 SCRA 316, 330 (1984), we reiterated the test for actual malice as set forth in the landmark American case of New York Times vs. Sullivan, which we have long adopted, in defamation and libel cases, viz.:

". . . with knowledge that it was false or with reckless disregard of whether it was false or not."

We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had honestly believed that the law allowed him to declare the sale of the land, in installment. We 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 Larin. Petitioner presented no evidence to prove Larin extorted money from him. He even admitted that he never met nor talked to respondent Larin. When the tax investigation against the petitioner started, Larin was not yet the Regional Director of BIR Region IV-A, Manila. On respondent Larin'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 (50%) assessment, thus reducing the original tax assessment by half. These circumstances may be taken to show that Larin's involvement in extortion was not indubitable. Yet, petitioner went on to file the extortion cases against Larin in different fora. This is where actual malice could attach on petitioner's part. Significantly, the trial court did not err in dismissing petitioner's complaints, a ruling affirmed by the Court of Appeals.

Keeping 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 Larin. The appellate court believed respondent Larin when he said he suffered anxiety and humiliation because of the unfounded charges against him. Petitioner's actions against Larin were found "unwarranted and baseless," and the criminal charges filed against him in the Tanodbayan and City Fiscal's Office were all dismissed Hence, there is adequate support for respondent court's conclusion that moral damages have been proved.

Now, however, what would be a fair amount to be paid as compensation for moral damages also requires determination. Each case must be governed by its own peculiar circumstances. On this score, Del 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," thus:

"In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with approval the following observation from RCPI v. Rodriguez, viz.:

'. . . . Nevertheless, we find the award of P100,000.00 as moral damages in favor of respondent Rodriguez excessive and unconscionable. In the case of Prudenciado v. Alliance Transport System, Inc. (148 SCRA 440 [1987]) we said: ". . . [I]t is undisputed that the trial courts are given discretion to determine the amount of moral damages (Alcantara v. Surro, 93 Phil. 472) 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' (Gellada v. Warner Barnes & Co., Inc., 57 O.G. [4] 7347, 7358; Sadie v. Bacharach Motors Co., Inc., 57 O.G. [4] 636 and Adone v. Bacharach Motor Co., Inc., 57 O.G. 656). 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. . . . . (Italics ours.)'

'In other words, the moral damages awarded must be commensurate with the loss or injury suffered.'

"In the same case (PNB v. CA), this Court found the amount of exemplary damages required to be paid (P1,000,000.00) 'too excessive' and reduced it to an 'equitable level' (P25,000.00)."

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 counter-claiming damages in suits filed against them in connection with their functions. Moreover, we must be careful lest the amounts awarded make citizens 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 (P200,000.00) pesos to seventy five thousand (P75,000.00) pesos, while the exemplary damage is set at P25,000.00 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 Solicitor General in cases connected with the performance of official functions, considering the nature of the charges, herein respondent Larin 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 P50,000.00 as reasonable attorney's fees.

WHEREFORE, the assailed decision of the Court of Appeals dated November 29, 1991, is hereby AFFIRMED with MODIFICATION so that the award of actual damages are deleted; and that petitioner is hereby ORDERED to pay to respondent Larin moral damages in the amount of P75,000.00, exemplary damages in the amount of P25,000.00, and attorney's fees in the amount of P50,000.00 only.

No pronouncement as to costs. SO ORDERED.

(2) Exception — The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or

disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, That if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

BIR ISSUANCES

REVENUE REGULATIONS NO. 14-00 November 20, 2000 Sale, Exchange or Disposition, by a Natural Person, of His "Principal Residence" These regulations are hereby promulgated in order to streamline and make more efficient the collection of the capital gains tax, if any, presumed to have been realized from the sale, exchange or disposition, by a natural person, of his "Principal Residence."

REVENUE MEMORANDUM CIRCULAR NO. 45-02 October 14, 2002

Procedural Requirements for the Tax Exemption of Sale of Principal Residence.The concerned Revenue District Officer shall see to it that if upon the lapse of thirty (30) days following the end of the eighteen-month construction/acquisition period, there is no showing that the seller has utilized the proceeds of sale, exchange or disposition of his old principal residence to acquire or construct his new principal residence, said RDO shall forthwith initiate the assessment of the deficiency capital gains tax and, thereafter, apply the escrowed bank deposit account against the deficiency tax liability.

SECTION 25 Tax on Nonresident Alien Individual

(A)Nonresident Alien Engaged in Trade or Business Within the Philippines. —

(1) In General. — A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines', Section 22(G) of this Code notwithstanding.

CASES DIGEST

The important factor which determines the sources of income of personal services is the place where the services were actually rendered.

Non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the keyword in determining the taxability of non-resident 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. JulianeBaier-Nickel, G.R. No. 153793, August 29, 2006

The important factor which determines the sources of income of personal services is the place where the services were actually rendered.

FACTS: Respondent JulianeBaier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in "manufacturing, marketing on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile products." Through JUBANITEX's General Manager, Marina Q. Guzman, the corporation appointed and engaged the services of respondent as commission agent. It was agreed that respondent will receive 10% sales commission on all sales actually concluded and collected through her efforts.

In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which JUBANITEX withheld the corresponding 10%

withholding tax amounting to P170,777.26, and remitted the same to the BIR. On October 17, 1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26. On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR.

Respondent contended that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. Both the CTA and the CIR contended that the commissions received by respondent were actually her remuneration in the performance of her duties as President of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation.

ISSUE: Whether respondent's sales commission income is taxable in the Philippines.

HELD: Pursuant to Section 25 of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the income's "source." In construing the meaning of "source" in Section 25 of the NIRC, 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 Overseas 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 Philippines. 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 Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the Philippines 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 Justice Florentino P. Feliciano in his dissent. The majority, through Justice AmeurfinaMelencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke 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 BOAC but the place where the person or entity disbursing the income is located or where BOAC physically received the same. But such was not the import of the ruling of the Court. It even explained in detail the business activity undertaken by BOAC in the Philippines to

pinpoint the taxable activity and to justify its conclusion that BOAC is subject to Philippine income taxation.

Having 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 Philippine 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 Germany. Though not raised as an issue, the Court is clothed with authority to address the same because the resolution thereof will settle the vital question 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 JUBANITEX stipulated that the activity or the service which would entitle her to 10% commission income, are "sales actually concluded and collected through [her] efforts." What she presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes 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. However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither did she establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have transpired in Germany.

In sum, the faxed documents presented by respondent did not constitute substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to support the conclusion that it was in Germany where she performed the income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund should be denied. Commissioner of

Internal Revenue vs. JulianeBaier-Nickel, G.R. No. 153793, August 29, 2006

(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter of Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association, Interests, Royalties, Prizes, and Other Winnings — Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarter of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24); and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, That royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BangkoSentralngPilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years — 5%;

Three (3) years to less than four (4) years — 12%; and

Less than three (3) years — 20%.

(3) Capital Gains — Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B)Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines — There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies — There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.

BIR ISSUANCES

REVENUE REGULATIONS NO. 011-10 October 26, 2010Clarifying the Term "Managerial and Technical Positions" Including Guidelines on Availment of the Fifteen Percent (15%) Preferential Income Tax Rate for Qualified Filipino Personnel Employed by Regional or Area Headquarters (RHQs) and Regional Operating Headquarters (ROHQs) of Multinational Companies

Revenue Memorandum Circular 41-09 July 23, 2009In the case of Philippine Appliance Corporation vs. Laguesma, 226 SCRA 730 (1993), the Supreme Court held that a "managerial employee" is one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, execute management policies and/or to hire, transfer, suspend, lay-off, 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 requires the use of independent judgment. Where 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 work 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 concur: (1) his primary duty consists of performance of work directly related to management policies; (2) he customarily and regularly exercises discretion and independent judgment in the performance of his functions; (3) he regularly and directly assists in the management of the establishment; and (4) he does not devote 20% of his time to work other than those above prescribed. The test is whether the position requires 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. (Villuga vs. NLRC, 225 SCRA 537 )On the other hand, the term "technical position" is limited only to positions which are highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired. In view thereof, only Filipinos employed and occupying managerial and highly technical positions as defined above similar to the positions of the aliens employed by regional or area headquarters and regional operating headquarters of multinational companies shall be entitled to the option to be taxed at either 15% of gross income or at the regular income tax rate on their taxable income in accordance with Section 25 (C) of the Tax Code of 1997, as amended, if the employer, i.e., Regional Operating Headquarters, Regional or Area Headquarters, is governed by Book III of E.O. 226, as amended by R.A. 8756.(D) Alien Individual Employed by Offshore Banking Units — There shall be levied, collected and paid for each taxable year upon the gross income received by

every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such offshore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor — An alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.

SECTION 26 Tax Liability of Members of General Professional Partnerships A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

CASES DIGEST

Tax Liability of Members of General Professional Partnerships

Income tax is imposed on the partners, not on the professional partnership.

A general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), 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 flow-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, Jr., et al., G.R. No. 109289, October 3, 1994

BIR ISSUANCES

February 18, 2010 REVENUE REGULATIONS NO. 002-10

SUBJECT : Amendment to Sections 6 and 7 of Revenue Regulations No. 16-2008 with Respect to the Determination of the Optional Standard Deduction (OSD) of General Professional Partnerships (GPPs) and the Partners Thereof, as well as the Manner and Period for Making the Election to Claim OSD in the Income Tax Returns

SECTION 1. Scope. — Pursuant to the provisions of Sec. 244, in relation to Sec. 3 of Republic Act No. 9504 (RA 9504) amending Sec. 34 (L) of the Tax Code of 1997 (Code), as amended, these Regulations are hereby promulgated to amend certain provisions of Revenue Regulations No. 16-2008 to further clarify the manner of claiming the OSD by General Professional Partnerships and the partners comprising them and the manner of manifesting the election to use OSD for the taxable year concerned by all taxpayers entitled to it.

SECTION 2. Sec. 6 of Revenue Regulations No. 16-2008 is hereby amended to read as follows:

"SEC. 6. Determination of the Optional Standard Deduction for General Professional Partnerships (GPPs) and Partners of GPPs. — Pursuant to Sec. 26 of the Code, a GPP is not subject to income tax imposed under Title II thereof. However, the partners shall be liable to pay income tax on their separate and individual capabilities for their respective distributive share in the net income of the GPP.

Sec. 26 of the Code likewise provides that — "For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation." As such, a GPP may claim either the itemized deductions allowed under

Section 34(A) to (J) of the Code or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding forty percent (40%) of its gross income. The net income determined by either claiming the itemized deduction or OSD from the GPP's gross income is the distributable net income from which the share of each partner is to be determined. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-through" entity where its income is ultimately taxed to the partners comprising it. In computing taxable income defined under Section 31 of the Code, all expenses which are ordinary and necessary, incurred or paid for the practice of profession, are allowed as deductions. Since the taxable income is in the hands of the partner, as a rule apart from the expenses claimed by the GPP in determining its net income, the individual partner can still claim deductions incurred or paid by him that contributed to the earning of the income taxable to him. The following rules shall govern the claim of the partners of deductions from their share in the net income of the partnership, viz.:

1. If the GPP availed of the itemized deduction in computing its net income, the partners may still claim itemized deductions from said share, provided, that, in claiming itemized deductions, the partner is precluded from claiming the same expenses already claimed by the GPP. In fine, if the GPP claimed itemized deductions the partners comprising it can only claim itemized deductions which are in the nature of ordinary and necessary expenses for the practice of profession which were not claimed by the GPP in computing its net income or distributable net income during the year. Examples of these are representation expenses incurred by the partner where the covering invoice or receipt is issued in his name; travelling expenses while away from home, which were not liquidated by the partnership; depreciation of a car used in the practice of profession where said car is registered in the name of the partner; and similar expenses.

Hence, if the GPP availed of itemized deductions, the partners are not allowed to claim the OSD from their share in the net income because the OSD is a proxy for all the items of deductions allowed in arriving at taxable income. This means that the OSD is in lieu of the items of deductions claimed by the GPP and the items of deduction claimed by the partners.

2. If the GPP avails of OSD in computing its net income, the partners comprising it can no longer claim further deduction from their share in the said net income for the following reasons:

i. The partners' distributive share in the GPP is treated as his gross income not his gross sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be deducted not from his gross income but from his gross sales/receipts; and,

ii. The OSD being in lieu of the itemized deductions allowed in computing taxable income as defined under Section 31 of the Tax Code, it will answer for both the items of deduction allowed to the GPP and its partners.

3. Since one-layer of income tax is imposed on the income of the GPP and the individual partners where the law had placed the statutory incidence of the tax in the hands of the latter, the type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners. Accordingly, if the GPP claims itemized deductions, all items of deduction allowed under Section 34 can be claimed both at the level of the GPP and at the level of the partner in order to determine the taxable income. On the other hand, should the GPP opt to claim the OSD, the individual partners are deemed to have availed also of the OSD because the OSD is in lieu of the itemized deductions that can be claimed in computing taxable income.

4. If the partner also derives other gross income from trade, business or practice of profession apart and distinct from his share in the net income of the GPP, the deduction that he can claim from his other gross income would follow the same deduction availed of from his partnership income as explained in the foregoing rules. Provided, however, that if the GPP opts for the OSD, the individual partner may still claim 40% of its gross income from trade, business or practice of profession but not to include his share from the net income of the GPP.

SECTION 3. Sec. 7 of Revenue Regulations No. 16-2008 is hereby amended to read as follows:

"SEC. 7. Other Implications of the Optional Standard Deduction. — A taxpayer who elected to avail of the OSD not exceeding forty percent (40%) of gross sales or gross receipts, in case of an individual taxable under Secs. 24(A) and 25(A)(1) of the Tax Code, or forty percent (40%) of gross income, in case of a corporation subject to tax under Sec. 27(A) or 28(A)(1) of the same Code shall signify in his/its return such intention, otherwise he/it shall be considered as having availed himself of the itemized deductions allowed under Sec. 34 of the Code. Once the election to avail of the OSD or itemized deduction is signified in the return, it shall be irrevocable for the taxable year for which the return is made.

The election to claim either the OSD or the itemized deduction for the taxable year must be signified by checking the appropriate box in the income tax return filed for the first quarter of the taxable year adopted by the taxpayer. Once the election is made, the same type of deduction must be consistently applied for all the succeeding quarterly returns and in the final income tax return for the taxable year. Any taxpayer who is required but fails to file the quarterly income tax return for the first quarter shall be considered as having availed of the itemized deductions option for the taxable year.

Thus, a taxpayer who avails of the OSD in the first quarter of its/his taxable year shall have to claim the same OSD in determining its/his taxable income for the rest of the year, including the final income tax return which is due to be filed on or before the 15th day of the fourth month, following the close of the taxable year. Likewise, a taxpayer who avails of the itemized deduction in the first quarter of its/his taxable year or fails to file an income tax return for the first quarter of the taxable year, shall have to claim the itemized deduction in determining the taxable income for the rest of the year, including the final income tax return which is due to be filed on or before the 15th day of the fourth month, following the close of the taxable year.

An individual taxpayer who is entitled to and claimed the OSD shall not be required to submit with his tax return such financial statements otherwise required under the Code. Provided, that, except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts. In the case of a corporation, however, said corporation is still required to submit its financial statements when it files its annual income tax return and to keep such records pertaining to its gross income as herein defined."

SECTION 4. Repealing Clause. — All revenue issuances or portions thereof which are inconsistent with the provisions of these Regulations are hereby amended, modified or repealed accordingly.

SECTION 5. Effectivity Clause. — These regulations shall take effect 15 days following its publication in newspaper of general circulation.

(SGD.) MARGARITO B. TEVES Secretary of Finance

Recommending Approval: (SGD.) JOEL L. TAN-TORRES Commissioner of Internal Revenue

CHAPTER IV Tax on Corporations

SECTION 27 Rates of Income Tax on Domestic Corporations —

(A) In General — Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the new rate within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the recommendation of the Secretary of Finance, may, effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);

(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;

(3) A VAT tax effort of four percent (4%) of GNP; and

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme.

BIR ISSUANCES

REVENUE REGULATIONS NO. 07-03 December 27, 2002 Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax or the Minimum Corporate Income Tax (MCIT) The following terms shall be defined as follows:

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 Sec. 39(A)(1) of the Code.b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely:1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or4. Real property used in trade or business of the taxpayer.Real properties acquired by banks through foreclosure sales are considered as their ordinary assets. However, banks shall not be considered as habitually engaged in the real estate business for purposes of determining the applicable rate of withholding tax imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98 , as amended.Income Tax on Domestic Corporations

Income tax on domestic corporations is covered by Section 27 of the NIRC of 1997, . . . Hence, a domestic corporation must pay whichever is higher of: (1) the income tax under Section 27 (A) of the NIRC of 1997, computed by applying the tax rate therein to the taxable income of the corporation; or (2) the MCIT under Section 27 (E), also of the NIRC of 1997, equivalent to 2% 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 NIRC of 1997, it can only be applied to PAL to the extent allowed by the provisions in the franchise of PAL specifically governing its taxation.

Commissioner of Internal Revenue vs. PAL, Inc., G.R. No. 180066, July 7, 2009

Income tax on Domestic Corporations

Under the Tax Code, the term 'gross income' derived from business shall be equivalent 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.

For 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.

For 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.

Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at by subtracting from gross income deductions authorized, not just by the NIRC of 1997, but also by special laws. Presidential Decree No. 1590 may be considered as one of such special laws authorizing PAL, in computing its annual net taxable income, on which its basic corporate income tax shall be based, to deduct from its gross income the following: (1) depreciation of assets at twice the normal rate; and (2) net loss carry-over up to five years following the year of such loss. In comparison, the 2% MCIT under Section 27 (E) of the NIRC of 1997 shall be based on the gross income of the domestic corporation. The Court notes that gross income, as the basis for MCIT, is given a special definition under Section 27 (E) (4) of the NIRC of 1997, different from the general one under Section 34 of the same Code.

According to the last paragraph of Section 27 (E) (4) of the NIRC of 1997, 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 required by the customers and clients including (a) salaries and employee benefits of personnel, consultants, and specialists directly rendering the service; and (b) cost of facilities directly utilized in providing the service, such as depreciation or rental of equipment used and cost of supplies. Noticeably, inclusions in and exclusions/deductions from gross income for MCIT 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 NIRC of 1997 between taxable income, which is the basis for basic corporate income tax under Section 27 (A); and gross income, which is the basis for the MCIT under Section 27 (E). 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 PAL is liable under Section 13 (a) of Presidential Decree No. 1590, also covers MCIT

under Section 27 (E) of the NIRC of 1997, 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 MCIT are both income taxes under Section 27 of the NIRC of 1997, 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. Philippine Airlines, Inc., wherein it held that income tax on the passive income 21 of a domestic corporation, under Section 27 (D) of the NIRC of 1997, is different from the basic corporate income tax on the taxable income of a domestic corporation, imposed by Section 27 (A), also of the NIRC of 1997. Section 13 of Presidential Decree No. 1590 gives PAL 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 PAL falls within the category of "all other taxes" from which PAL is exempted, and which, if already collected, should be refunded to PAL.

Commissioner of Internal Revenue vs. PAL, Inc., G.R. No. 180066, July 7, 2009

BIR ISSUANCESREVENUE REGULATIONS NO. 004-11 March 15, 2011Proper Allocation of Costs and Expenses Amongst Income Earnings of Banks and Other Financial Institutions for Income Tax Reporting PurposesREVENUE REGULATIONS NO. 11-05 April 25, 2005Regulations Defining "Gross Income Earned" to Implement the Tax Incentive Provision in Section 24 of Republic Act No. 7916, known as "The Special Economic Zone Act of 1995"

Gross Income Earned — shall refer to gross sales or gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative, marketing, selling and/or operating expenses or incidental losses during a given taxable period.

For purposes of computing the total five percent (5%) tax rate imposed, the following direct costs are included in the allowable deductions to arrive at gross income earned for specific types of enterprises:

1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises:

— Direct salaries, wages or labor expenses

— Production supervision salaries— Raw materials used in the manufacture of products— Decrease in Goods in Process Account (Intermediate goods)— Decrease in Finished Goods Account— Supplies and fuels used in production— Depreciation of machinery and equipment used in production, and of that portion of the building owned or constructed that is used exclusively in the production of goods— Rent and utility charges associated with building, equipment and warehouses used in production— Financing charges associated with fixed assets used in production the amount of which were not previously capitalized2. ECOZONE Developer/Operator, Facilities, Utilities and Tourism Enterprises:

— Direct salaries, wages or labor expense— Service supervision salaries— Direct materials, supplies used— Depreciation of machineries and equipment 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— Rent and utility charges for buildings and capital equipment used in the rendition of registered services— Financing charges associated with fixed assets used in the registered service business the amount of which were not previously capitalized.(B)Proprietary Educational Institutions and Hospitals. — Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A 'proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

CASES DIGEST

Medical, dental, hospital and veterinary services, except those rendered by professionals, are exempt from value-added tax (Section 109 (l), NIRC of 1997, as amended). 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 making drugs and medicines available to in-patients of the hospital, whether for reasons of life-threatening urgency or mere convenience, cannot but be viewed as a hospital service that is covered by the broad and general exemption provided in Section 109 (l) of the NIRC of 1997, as amended, for "hospital services". C.T.A. CASE NO. 7304. December 1, 2010PERPETUAL SUCCOUR HOSPITAL, INC. and THE SISTERS OF ST. PAUL DE CHARTERS vs. COMMISSIONER OF INTERNAL REVENUE

CHARGING MEDICAL AND HOSPITAL FEES. — The mere charging of medical and hospital fees from those who can afford to pay does not make the institution one established for profit or gain. The fact that a hospital charges fees for paying beds does not make 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 organized 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 required to pay the medicines supplied to them, for which they are charged the cost of medicines, plus an additional 10% thereof, to partly offset the cost of medicines supplied free of charge to charity patients. Under these facts, we are of the opinion, and so hold, that the Hospital 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 make the institution one established for profit or gain.HOSPITAL DE SAN JUAN DE DIOS, INC. vs. PASAY CITY, PABLO CUNETA City MayorG.R. No. L-19371 February 28, 1966

BIR wins vs St. Lukes hospital ordered to pay P63.9M tax deficiency Oct 25, 2012

The Supreme Court has ordered St. Luke’s Medical Center Inc. to pay the Bureau of Internal Revenue P63.9 million in deficiency income tax, value added tax and withholding tax on compensation for 1998, based on the 10-percent preferential income tax as stipulated in the 1997 Tax Code.

According to BIR head revenue executive assistant Claro Ortiz, this means that all hospitals that claim to be non-profit but are proprietary will now have to pay income tax.

In 2002, St. Luke's disputed the BIR’s assessment that it should be paying income taxes, saying that it is a non-profit hospital. The case eventually reached the Supreme Court. In a decision penned by Associate Justice Antonio Carpio on Sept. 26 and received by the BIR on Oct. 17, the SC reversed an earlier decision by the Court of Tax Appeals, which dismissed the BIR’s assessment. The appellate court had argued that St. Luke’s was not subject to income tax because non-stock corporations are exempt from paying income tax.

However, the SC ruled that St. Luke’s services that patients pay for are subject to income tax.

“St. Luke’s Medical Center is ordered to pay the deficiency income tax in 1998 based on the 10 percent preferential income tax rate under Section 27(B) of the National Internal Revenue Code [NIRC]. However, it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the NIRC,” the decision stated. The BIR claimed that St. Luke’s had total revenues of P1.73 billion in 1998 alone. St. Luke’s refuted the assessment, saying that its free services to patients amounted to P218 million in 1998.

The Supreme Court ruled that while there is no dispute that St. Luke’s is organized as a non-stock and non-profit charitable institution, this does not automatically exempt it from paying taxes. For a charitable institution to be exempt from income taxes, “Section 30(E) of the NIRC requires that [it] must be organized and operated exclusively for charitable purposes,” the SC said in its decision.

Taxation of non-stock, non-profit hospitals

17 October 2012 by Atty. Anthony G. Prestoza / Tax Law for Business

TAXATION of non-stock, non-profit organizations had always been a controversy. There are a number of types or classes of organizations or associations exempted from income taxes by the Tax Code. So these types of organizations 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 organizations is not that clear after all.

Among the types of organizations exempted from income taxes are non-stock corporations organized for charitable purposes and not for profit, but operated exclusively for the promotion of the general welfare. For one to invoke exemption from

income tax, it must be organized as non-stock and operated for the purposes in which it was organized. That classification itself had been an issue in the area of income taxation. The Court had repeatedly defined what a non-stock organization is but its relevance crops up every time a tax-related issue is involved. So what really constitutes a non-stock corporation? Once again, the Supreme Court, in GR 195909 and 195960, September 26, 2012, referred to the definition in the Corporation Code of a “non-stock corporation” as “one 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 organized.”

That case involves the income taxation of a non-stock and non-profit hospital organized for charitable and for social welfare purposes. The institution claims that it is exempt from income taxation under Section 30 of the Tax Code, which exempts this kind of institution from income taxation. The tax authority, on the other hand, claims that it should be subject to income tax under Section 27(B) of the Tax Code, which imposes 10-percent income tax on proprietary and nonprofit hospitals. As decided by the Court, a non-stock, non-profit corporation is indeed exempt from income taxation. That exemption, however, is intended solely for the activities of a non-stock, non-profit entity which are “operated exclusively” for charitable or social welfare purposes. Any other income that may be generated by these entities shall be subject to the 10-percent preferential tax rate the tax imposed on proprietary non-profit hospitals.

Apparently, according to the Court, “proprietary” means “private,” and when applied to a hospital means private hospital. On the other hand, “non-profit” means no net income or asset accrues to or benefits any member or person, with all net income or asset devoted to the institution’s purposes and all its activities conducted not for profit.

Thus, if a hospital not organized for profit, generates income not in relation to its charitable or social welfare purposes, it shall be taxed at the preferential rate of 10 percent. Simply put, even if a hospital does not distribute income to its members or trustees and uses the income proceeds from non-related activities in furtherance of its purposes, the same shall still be taxable at a rate of 10 percent.

The implication of this is that a non-stock, non-profit organization, including a hospital, organized for charitable and/or 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, not-for-profit activities. That exemption is not lost even if said entity involves itself in activities conducted for profit. But these revenues

derived from profit- generating activities will be subject to income tax. With respect to hospitals, that income tax shall not be the regular income tax rate of 30 percent but the special income tax rate of 10 percent imposed on proprietary and nonprofit hospitals.

TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY AND _EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL PURPOSES

FACTS: The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16, 1981 by virtue of Presidential Decree No. 1823. It is the registered owner of a parcel of land located at Quezon Avenue, Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. 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 one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government. On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes by the City Assessor of Quezon City. Petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated on its claim that it is a charitable institution. Petitioner contends that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% 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. ISSUES:1. Whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160.2. Whether the real properties of petitioner are exempt from real property taxes. HELD:1. Yes.To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the

actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. 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 out-patient, 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. (Congregational Sunday School, etc. v. Board of Review; Lutheran Hospital Association of South Dakota v. Baker)Under P.D. No. 1823, 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. (Yorgason v. County Board of Equalization of Salt Lake County)In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from the government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its operations. 2. Notwithstanding 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 equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. (Salvation Army v. Hoehn) Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that petitioner shall enjoy tax exemptions and privileges. However, 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 Section 2. It is a settled rule of statutory construction that the express mention of one person, thing, or consequence implies the exclusion of all others. The rule is expressed in the familiar maxim, expressiouniusestexclusioalterius.The tax exemption under Section 28(3), Article VI of the 1987 Philippine Constitution covers property taxes only. As Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . 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."Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:(Note the following substantial changes in the Constitution: Under the 1935 Constitution, ". . . all lands, buildings, and improvements used 'exclusively' for … charitable . . . purposes shall be exempt from taxation." However, under the 1973 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 required that such property be used "actually" and "directly" for such purposes.) Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" 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. Solely is synonymous with exclusively. What 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 organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt 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. While portions of the hospital are used for the treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business enterprise under the business name "Elliptical Orchids and Garden Center." Indeed, the petitioner's evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 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. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P. ROSAS, as City Assessor of Quezon City [G.R. No. 144104. June 29, 2004.]

(C) Government-owned or Controlled Corporations, Agencies or InstrumentalitiesThe provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service and Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the local water districts (LWD) and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity.

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), petitioner, vs. THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO BUÑAG, in his official capacity as COMMISSIONER OF INTERNAL REVENUE, public respondent, [G.R. No. 172087. March 15, 2011.]

DECISION

For resolution of this Court is the Petition for Certiorari and Prohibition with prayer for the issuance of a Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner from exemption from corporate income tax for being repugnant to Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A on January 1, 1977. Simultaneous to its creation, P.D. No. 1067-B (supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross revenue. Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption.

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869 was issued. Section 13 thereof reads as follows:

Sec. 13. Exemptions. — . . .

(1) Customs Duties, taxes and other imposts on importations. — All importations of equipment, 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 Franchise shall be exempt from the payment of duties, taxes and other imposts, including all kinds of fees, levies, or charges of any kind or nature.

Vessels and/or 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 requirements of the casino, shall likewise be totally exempt from the payment of all customs duties, taxes and other imposts, including all kinds of fees, levies, assessments or charges of any kind or nature, whether National or Local.

(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges, or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five percent (5%) of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established, or collected by any municipal, provincial or national government authority.

(b) Others: 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 corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation as a result of essential facilities furnished and/or 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.

(3) Dividend Income. — Notwithstanding 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 (10%) 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 (6) months from the date the dividend income is received in the following:

(a) operation of the casino(s) 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 casino(s);

(b) Government bonds, securities, treasury notes, or government debentures; or

(c) BOI-registered or export-oriented corporation(s).

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by Letter of Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424, otherwise known as the National Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the Philippine Charity Sweepstakes Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. — The provisions of existing special general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar business, industry, or activity.

With the enactment of R.A. No. 9337 on May 24, 2005, certain sections of the National Internal Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. — The provisions of existing special general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned and controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity

Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar business, industry, or activity.

Different groups came to this Court via petitions for certiorari and prohibition assailing the validity and constitutionality of R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5, which imposes a 10% VAT on importation of goods; and Section 6, which imposes a 10% VAT on sale of services and use or lease of properties, all contain a uniform proviso authorizing the President, upon the recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions were alleged to be violative of Section 28 (2), Article VI of the Constitution, which section vests in Congress the exclusive authority to fix the rate of taxes, and of Section 1, Article III of the Constitution on due process, as well as of Section 26 (2), Article VI of the Constitution, which section provides for the "no amendment rule" upon the last reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the guarantee of equal protection of the laws, and Section 28 (1), Article VI of the Constitution; and

3) other technical aspects of the passage of the law, questioning the manner it was passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No. 9337. On the same date, respondent BIR issued Revenue Regulations (RR) No. 162005, specifically identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in part, reads:

Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. —

xxx xxx xxx

(h) . . .

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how their franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec. 108 of the Tax Code. This includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR), and its licensees or franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:

I

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.

II

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.

III

WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS WELL AS PETITIONER'S LICENSEES OR FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON PETITIONER'S LICENSEES OR FRANCHISEES.

The BIR, in its Comment dated December 29, 2006, counters:

I

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.

II

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.

III

BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL AUTHORITIES.

The Office of the Solicitor General (OSG), by way of Manifestation in Lieu of Comment, concurred with the arguments of the petitioner. It added that although the State is free to select the subjects of taxation and that the inequity 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. Furthermore, according to the OSG, public respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court finds the petition partly meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted from the list of GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it is violative of its right to equal protection of the laws under Section 1, Article III of the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.

In City of Manila v. Laguio, Jr., this Court expounded the meaning and scope of equal protection, thus:

Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights conferred and responsibilities imposed. Similar 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 like circumstances. The "equal protection of the laws is a pledge of the protection of equal laws." It limits governmental discrimination. The equal protection clause extends to artificial persons but only insofar as their property is concerned.

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Legislative 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 equal protection clause. The classification must, as an indispensable requisite, not be arbitrary. To be valid, it must conform to the following requirements:

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class.

It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs exempted from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which, reads:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. — The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar business, industry, or activity.

A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of corporate income tax was due to the acquiescence of the Committee on Ways on Means to the request of PAGCOR that it be exempt from such tax. The records of the Bicameral Conference Meeting reveal:

HON. R. DIAZ.

The other thing, sir, is we — I noticed we imposed a tax on lotto winnings.

CHAIRMAN ENRILE.

Wala na, tinanggal na namin yon.

HON. R. DIAZ.

Tinanggal na ba natin yon?

CHAIRMAN ENRILE.

Oo.

HON. R. DIAZ.

Because I was wondering whether we covered the tax on — Whether on a universal basis, we included a tax on cockfighting winnings.

CHAIRMAN ENRILE.

No, we removed the —

HON. R. DIAZ.

I . . . (inaudible) natin yong lotto?

CHAIRMAN ENRILE.

Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER.

Yeah, Philippine Insurance Commission.

CHAIRMAN ENRILE.

Philippine Insurance — Health, health ba. Yon ang request ng Chairman, I will accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.

HON. ROXAS.

Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would reflect the VAT and other sales taxes —

CHAIRMAN ENRILE.

No, we're talking of this measure only. We will not — (discontinued)

HON. ROXAS.

No, no, no, no, from the — arising from the exemption. Assuming that when we release the money into the hands of the public, they will not use that to — for wallpaper. They will spend that eh, Mr. Chairman. So when they spend that —

CHAIRMAN ENRILE.

There's a VAT.

HON. ROXAS.

There will be a VAT and there will be other sales taxes no. Is there a quantification? Is there an approximation?

CHAIRMAN JAVIER.

Not anything.

HON. ROXAS.

So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in the economy which is unrealistic.

CHAIRMAN ENRILE.

It does, it does, because this is taken and spent by government, somebody receives it in the form of wages and supplies and other services and other goods. They are not being taken from the public and stored in a vault.

CHAIRMAN JAVIER.

That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.

HON. ROXAS.

Precisely, so they will be spending it.

The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying corporate income tax was not based on a classification showing substantial distinctions which make for real differences, but to reiterate, the exemption was granted upon the request of PAGCOR that it be exempt from the payment of corporate income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded from the enumeration of GOCCs that are exempt from paying corporate income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment of corporate income tax, thus:

THE CHAIRMAN (SEN. RECTO).

Yes, Osmeña, the proponent of the amendment.

SEN. OSMEÑA.

Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we want to show the world who our creditors, that we are increasing official revenues that go to the national budget. Unfortunately today, Pagcor is unofficial.

Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some small taxes that they are subjected to. Of the 9.7 billion, they claim they remitted to national government seven billion. Pagkatapos, there are other specific remittances like to the Philippine Sports Commission, etc., as mandated by various laws, and then about 400 million to the President's Social Fund. But all in all, their net profit today should be about 12 billion. That's why I am questioning this two billion. Because while essentially they claim that the money goes to government, and I will accept that just for the sake of argument. It does not pass through the appropriation process. And I think that at least if we can capture 35 percent or 32 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.

REP. PUENTEBELLA.

Well, with all due respect, Mr. Chairman, follow up lang.

There is wisdom in the comments of my good friend from Cebu, Senator Osmeña.

SEN. OSMEÑA.

And Negros.

REP. PUENTEBELLA.

And Negros at the same time ay Kasimanwa. But I would not want to put my friends from the Department of Finance in a difficult position, but may we know your comments on this knowing that as Senator Osmeña just mentioned, he said, "I accept that that a lot of it is going to spending for basic services," you know, going to most, I think, supposedly a lot or most of it should go to government spending, social services and the like. What is your comment on this? This is going to affect a lot of services on the government side.

THE CHAIRMAN (REP. LAPUS).

Mr. Chair, Mr. Chair.

SEN. OSMEÑA.

It goes from pocket to the other, Monico.

REP. PUENTEBELLA.

I know that. But I wanted to ask them, Mr. Senator, because you may have your own pre-judgment on this and I don't blame you. I don't blame you. And I know you have your own research. But will this not affect a lot, the disbursements on social services and other?

REP. LOCSIN.

Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn'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 [been] spared [from] taxation by the government which is one rich source of revenues. Now, why do you save, why do you spare certain government corporations on that, like Pagcor? So, would it be easier for you to make an argument if everything was exposed to taxation?

REP. TEVES.

Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS).

Can we ask the DOF to respond to those before we call Congressman Teves?

MR. PURISIMA.

Thank you, Mr. Chair.

Yes, 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.

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REP. TEVES.

Mr. Chairman. DCcIaE

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THE CHAIRMAN (REP. LAPUS).

Congressman Teves.

REP. TEVES.

Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking here on value-added tax. Do you mean to say we are going to amend it from income tax to value-added tax, as far as Pagcor is concerned?

THE CHAIRMAN (SEN. RECTO).

No. We are just amending that section with regard to the exemption from income tax of Pagcor.

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REP. NOGRALES.

Mr. Chairman, Mr. Chairman. Mr. Chairman.

THE CHAIRMAN (REP. LAPUS).

Congressman Nograles.

REP. NOGRALES.

Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are VATable? What will we VAT in Pagcor?

THE CHAIRMAN (REP. LAPUS).

This is on own income tax. This is Pagcor income tax.

REP. NOGRALES.

No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?

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REP. VILLAFUERTE.

Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .

REP. NOGRALES.

Mr. Chairman, this is a secret agreement or the way they craft their contract, which basis?

THE CHAIRMAN (SEN. RECTO).

Congressman Nograles, the Senate version does not discuss a VAT on Pagcor but it just takes away their exemption from non-payment 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. Exemptions must be shown to exist clearly and categorically, and supported by clear legal provision.

In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR 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 consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. Thus, the express mention of the GOCCs exempted from payment of corporate income tax excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus non exceptis.

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCOR's exemption from payment of corporate income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid classification based on substantial distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law may operate only on some, and not all, without violating the equal protection clause. The legislative records show that the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCOR's own request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-impairment clause of the Constitution. Petitioner avers that laws form part of, and is read into, the contract even without the parties expressly saying so. Petitioner states that the private parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as the main consideration and inducement for their decision to transact/invest with it. Petitioner argues that the withdrawal of its exemption from corporate income tax by R.A. No. 9337 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 non-impairment clause of the Constitution.

Petitioner's contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that no law impairing the obligation of contracts shall be passed. The non-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 subsequent 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, Section 11, Article XII 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 requires.

In Manila Electric Company v. Province of Laguna, the Court held that a franchise partakes the nature of a grant, which is beyond the purview of the non-impairment clause of the Constitution. The pertinent portion of the case states:

While the Court has, not too infrequently, 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 non-impairment clause of the Constitution can rightly be invoked, 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 cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 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 requires.

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other recreation or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of the Philippines. Under Section 11, Article XII of the Constitution, PAGCOR's franchise is subject to amendment, alteration or repeal by Congress such as the amendment under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate income tax, which may affect any benefits to PAGCOR's transactions with private parties, is not violative of the non-impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 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 OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k) thereof, which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:

Section 109. Exempt Transactions. — (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax:

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(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except Presidential Decree No. 529.

Petitioner is exempt from the payment of VAT, because PAGCOR's charter, P.D. No. 1869, is a special law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to read as follows:

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: . . .

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(B) Transactions Subject to Zero Percent (0%) Rate. — The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate;

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(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;

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As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation. Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of the hotel's premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However, PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid only the amount due to Acesite minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02 to the Commissioner of Internal Revenue, fearing the legal consequences of its non-payment. In May 1998, Acesite sought the refund of the amount it paid as VAT on the ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR and Acesite were both exempt from paying VAT, thus:

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PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently provides:

Sec. 13. Exemptions. —

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(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a

Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority.

(b) Others: 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 corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the P30,152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax.

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, 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 10% 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 PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT 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. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services. — (a) Rate and base of tax — There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of services . . .; Provided, that the following services performed in the Philippines by VATregistered persons shall be subject to 0%.

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(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee WHO, 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 WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation was Section

102 (b) of the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424, it is still applicable to this case, since the provision relied upon has been retained in R.A. No. 9337.

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. 43 RR No. 16-2005, therefore, cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is hereby nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-owned and controlled corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.

No costs. SO ORDERED.

Footnotes

CREATING THE PHILIPPINE AMUSEMENTS AND GAMING CORPORATION, DEFINING ITS POWERS AND FUNCTIONS, PROVIDING FUNDS THEREFOR, AND FOR OTHER PURPOSES.

GRANTING THE PAGCOR A FRANCHISE TO ESTABLISH, OPERATE AND MAINTAIN GAMBLING CASINOS ON LAND OR WATER WITHIN THE TERRITORIAL JURISDICTION OF THE REPUBLIC OF THE

Section 4. Exemptions. — . . .

(1) Duties, taxes and other imposts on importation. — . . .

(2) Income and other taxes. —

(a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges, or levies of whatever nature, shall be assessed and collected under this Franchise from the Franchise Holder; nor shall any form of tax or charge attach in any way to the earnings of the Franchise Holder, except a Franchise Tax of five percent (5%) of the gross revenue or earnings derived by the Franchise Holder form its operation under this Franchise. Such tax shall be due and payable to the National Government and shall be in

lieu of all taxes, levies, fees or assessments of any kind, nature or description, levied, established, or collected by any municipal, provincial or national authority.

(b) Others: 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 corporation/s, association/s, agency/ies, or individual/s with whom the Franchise has any contractual relationship in connection with the operations of the casino/s authorized to be conducted under the franchise and to those receiving compensation or other remuneration from the Franchise Holder as a result of essential facilities furnished and/or technical services rendered to the Franchise Holder. (Emphasis supplied.)

The Constitution, Art. XII, Sec. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. Neither 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 requires. The State shall encourage equity 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 citizens of the Philippines. (Emphasis supplied.)

BIR ISSUANCES

REPUBLIC ACT NO. 10026 March 11, 2010AN ACT GRANTING INCOME TAX EXEMPTION TO LOCAL WATER DISTRICTS BY AMENDING SECTION 27 (C) OF THE NATIONAL INTERNAL REVENUE CODE (NIRC) OF 1997, AS AMENDEDSEC. 27. Rates of Income Tax on Domestic Corporations —(C) Government-owned or Controlled Corporations, Agencies or Instrumentalities — The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service and Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the local water districts (LWD) and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity.

REVENUE REGULATIONS NO. 006-10 June 29, 2010

Regulations Providing for the Policies, Guidelines and Procedures in the Implementation of the Tax Subsidy Granted Under Section 17 (c) of Republic Act No. 3591 (Philippine Deposit Insurance Corporation [PDIC] Charter), as Amended by Republic Act No. 9576 promulgated to implement:

(1) the tax expenditure subsidy provided for under Section 17 (c) of Republic Act (R.A.) No. 3591 (Philippine Deposit Insurance Corporation [PDIC] Charter), as amended by R.A. No. 9576, in favor of PDIC charging all of its tax obligations to the Tax Expenditure Fund (TEF) in the annual General Appropriation Act pursuant to the provisions of Executive Order No. 93, series of 1986 for a period of five (5) years reckoned from the date of effectivity of R.A. 9576;

(2) the tax exemption of PDIC starting on the 6th year and thereafter, from income tax, final withholding tax, and value-added tax on assessments collected from member banks.

CASES DIGEST

Tax exemptions should be strictly construed against those claiming to be qualified thereto.

The Philippine Casino Operators Corporation (PCOC) is not exempt from the payment of duties, taxes and other imposts on importations despite its concessionaire's contract with the Philippine Amusement and Gaming Corporation (PAGCOR). Under B.P. Blg. 1067-B, as amended, full exemption from the payment of importation-related taxes is granted to PAGCOR and no other irrespective of the type of article imported. While it grants exemption not only to PAGCOR but also to "any corporation having existing contractual arrangements with it," the exemption covers only the importation of vessels and/or accessory ferry boats. It is settled that tax exemptions should be strictly construed against those claiming to be qualified thereto.

Commissioner of Customs vs. Court of Tax Appeals, et al., G.R. No. 132929, March 27, 2000

(D) Rates of Tax on Certain Passive Incomes —

(1) Interest from Deposits and Yield or Any Other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties — A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other

monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

CASES DIGEST

Interest income, whether actually received or merely accrued, form part of a bank's taxable gross receipts.

There is an implied repeal of Section 4(e) of Revenue Regulations No. 12-80 as there exists a disparity between Section 4(e) which imposes the GRT only on all items of income actually received (as opposed to their mere accrual) and Section 7(c) of Revenue Regulations No. 17-84 which includes all interest income (whether actual or accrued) in computing the GRT. The exception having been eliminated, the clear intent is that the later R.R. No. 17-84 includes the exception within the scope of the general rule. Clearly, then, the current Revenue Regulations require interest income, whether actually received or merely accrued, to form part of the bank's taxable gross receipts.

Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, November 25, 2003

The imposition of the 20% FWT and 5% GRT does not constitute double taxation.

Double 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 kind of character of tax. This is not the situation in the case at bar. The GRT is a percentage tax under Title V of the Tax Code ([Section 121], Other Percentage Taxes), while the FWT is an income tax under Title II of the Code (Tax on Income). The two concepts are different from each other. In Solidbank 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 realized in a taxable year. It is subject to withholding. Thus, there can be no double taxation here as the Tax Code imposes two different kinds of taxes.

Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc., G.R. Nos. 139786-140857, September 27, 2006

Exemption of Cooperatives

Given that petitioner is a credit cooperative duly registered with the Cooperative Development Authority (CDA), the provision of Section 24 (B) (1) of the NIRC must be read together with RA 6938, as amended by RA 9520 on the exemptions given to these entities.

FACTS: Dumaguete Cathedral Credit Cooperative received Pre-Assessment Notices for deficiency withholding taxes for taxable years 1999 and 2000. It then availed of BIR’s Voluntary Assessment and Abatement Program and paid withholding taxes on the payments for the compensation, honorarium of the Board of Directors, security and janitorial services, and legal and professional services. After receiving Letters of Demand to pay the deficiency withholding taxes, inclusive of penalties, petitioner filed a protest before the Commissioner of Internal Revenue. When the protest remained unacted upon, it filed a petition for review before the CTA. The CTA First Division ruled against petitioner, ordering it to pay deficiency withholding taxes on interests from savings and time deposits of its members and 20% delinquency interest. Through a Petition for Review, the case reached the CTA En Banc.

The CTA En Banc affirmed the CTA First Division’s ruling, holding that Section 57 of the NIRC requires the withholding of tax at source and that Revenue Regulations No. 2-98 enumerated the income payments subject to final withholding tax, among which is "interest from any peso bank deposit and yield, or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements . . .". According to the CTA En Banc, petitioner's business falls under the phrase "similar arrangements;" as such, it should have withheld the corresponding 20% final tax on the interest from the deposits of its members. Through a Petition for Review on Certiorari with the Supreme Court, petitioner sought to set aside the CTA decision.

ISSUE: Whether petitioner is liable to pay the deficiency withholding taxes on interest from savings and time deposits of its members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per annum.

RULING: Petitioner 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 delinquency interest of 20% per annum.

BIR Ruling No. 551-88 clearly states, without any qualification, that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives are not required 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 61 and 62 of RA 6938. This exemption extends to members of cooperatives. It must be emphasized 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. Extending 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 126 of RA 6938.

The amendment in Article 61 of RA 9520, specifically providing that members of cooperatives are not subject to final taxes on their deposits, affirms the interpretation of the BIR that Section 24 (B) (1) of the NIRC does not apply to cooperatives and confirms that such ruling carries out the legislative intent.

DUMAGUETE CATHEDRAL CREDIT COOPERATIVE vs. COMMISSIONER OF INTERNAL REVENUE [G.R. No. 182722, January 22, 2010]

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange — A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000 5%

Amount in excess of P100,000 10%

COMPAGNIE FINANCIERE SUCRES ET DENREES, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. [G.R. No. 133834. August 28, 2006.]

D E C I S I O N

For our resolution is the instant Petition for Review on Certiorari assailing the Decision of the Court of Appeals dated October 27, 1997 in CA-G.R. SP No. 39501.

Compagnie Financiere Sucres et Denrees, petitioner, is a non-resident private corporation duly organized and existing under the laws of the Republic of France.

On October 21, 1991, petitioner transferred its eight percent (8%) equity interest in the Makati Shangri-La Hotel and Resort, Incorporated to Kerry Holdings Ltd. (formerly Sligo Holdings Ltd), as shown by a Deed of Sale and Assignment of Subscription and Right of Subscription of the same date. Transferred were (a) 107,929 issued shares of stock valued at P100.00 per share with a total par value of P10,792,900.00; (b) 152,031 with a par value of P100.00 per share with a total par value of P15,203,100.00; (c) deposits on stock subscriptions amounting to P43,147,630.28; and (d) petitioner's right of subscription.

On November 29, 1991, petitioner paid the documentary stamps tax and capital gains tax on the transfer under protest.

On October 21, 1993, petitioner filed with the Commissioner of Internal Revenue, herein respondent, a claim for refund of overpaid capital gains tax in the amount of P107,869.00 and overpaid documentary stamps taxes in the sum of P951,830.00 or a total of P1,059,699.00. Petitioner alleged that the transfer of deposits on stock subscriptions is not a sale/assignment of shares of stock subject to documentary stamps tax and capital gains tax.

However, respondent did not act on petitioner's claim for refund. Thus, on November 19, 1993, petitioner filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA Case No. 5042.

In its Decision dated October 6, 1995, the CTA denied petitioner's claim for refund. The CTA held that it is clear from Section 176 of the Tax Code that sales "to secure the future payment of money or for the future transfer of any bond, due-bill, certificates of obligation or stock" are taxable. Furthermore, petitioner admitted that it profited from the sale of shares of stocks. Such profit is subject to capital gains tax.

Petitioner filed a motion for reconsideration, but in a Resolution dated December 26, 1995, the CTA denied the same. This prompted petitioner to file with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 39501.

On October 27, 1997, the Court of Appeals denied the petition and affirmed the Decision 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 State. Petitioner failed to meet the requisite burden of proof to support its claim.

Hence, petitioner's recourse to this Court by way of a Petition 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 stock 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 State 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 seeks a refund. Tax refunds are a derogation of the State's taxing power. Hence, like tax exemptions, they are construed strictly against the taxpayer and liberally in favor of the State. Consequently, he who claims a refund or exemption from taxes has the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted. Significantly, petitioner cannot point to any specific provision of the National Internal Revenue Code authorizing its claim for an exemption or refund. Rather, Section 176 of the National Internal Revenue Code applicable to the issue provides that the future transfer of shares of stocks is subject to documentary stamp tax, thus:

SEC. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of due-bills, certificates of obligation, or shares or certificates of stock. — On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, 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 stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificates of obligation or stock, there shall be collected a documentary stamp tax of fifty centavos (P1.50) on each two hundred pesos(P200.00), or fractional part thereof, of the par value of such due-bill, certificates of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer; and Provided, further, That in case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percentum (25%) of the documentary stamp tax paid upon the original issue of the said stock. (Emphasis supplied).

Clearly, under the above provision, sales to secure "the future transfer of due-bills, certificates of obligation or certificates of stock" are liable for documentary stamp tax. No exemption from such payment of documentary stamp tax is specified therein.

Petitioner contends that the assignment of its "deposits on stock subscription" is not subject to capital gains tax because there is no gain to speak of. In the Capital Gains Tax Return on Stock Transaction, which petitioner filed with the Bureau of Internal Revenue, the acquisition cost of the shares it sold, including the stock subscription is P69,143,630.28. The transfer price to Kerry Holdings, Ltd. is P70,332,869.92. Obviously, petitioner has a net gain in the amount of P1,189,239.64. 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."

Verily, the Court of Appeals committed no error in affirming the CTA Decision.

We reiterate the well-established doctrine that as a matter of practice and principle, this Court will not set aside the conclusion reached by an agency, like 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.

WHEREFORE, we DENY the petition. The Decision of the Court of Appeals in CA-G.R. SP No. 39501 is AFFIRMED IN TOTO. Costs against petitioner. SO ORDERED.

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other

depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

BIR ISSUANCES

REVENUE MEMORANDUM CIRCULAR NO. 14-02 April 10, 2002Prescribing the Procedures for the Manner of Filing of Tax Returns for Income derived by Foreign Currency Deposit Units from Foreign Currency and other Transactions and the Manner of Reporting Their Income for Income Tax Purposes pursuant to Section 27(D)(3) and 28(A)(7)(b) of the Tax Code.

(4)Intercorporate Dividends — Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings — A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

BIR ISSUANCES

REVENUE REGULATIONS NO. 005-09 March 16, 2009

Reverting the Venue for the Filing of Returns and Payment of Capital Gains Tax, Creditable Withholding Tax and Documentary Stamp Tax Due on Sale, Transfer or Exchange of Real Property of Large Taxpayers to the Place Where the Property is Located

REVENUE REGULATIONS NO. 07-03 December 27, 2002 Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax or the Minimum Corporate Income Tax (MCIT) The following terms shall be defined as follows:

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 Sec. 39(A)(1) of the Code.b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely:1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or4. Real property used in trade or business of the taxpayer.Real properties acquired by banks through foreclosure sales are considered as their ordinary assets. However, banks shall not be considered as habitually engaged in the real estate business for purposes of determining the applicable rate of withholding tax imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98 , as amended.

CASES DIGESTDisposition of Lands and/or Buildings

Rev.Reg. 2-98 imposes a graduated Creditable Withholding Tax on income based on the Gross Selling Price or Fair Market Value of the real property categorized as ordinary assets. On the other hand, Section 27 (D) (5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R. No. 160756, March 9, 2010

(E) Minimum Corporate Income Tax on Domestic Corporations

(1) Imposition of Tax — A minimum corporate income tax of two percent (2%) 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 income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

BIR ISSUANCES

REVENUE REGULATIONS NO. 09-98 August 25, 1998

The Imposition of the Minimum Corporate Income Tax (MCIT) of Two (2%) percent on Domestic Corporations and Resident Foreign Corporations MINIMUM CORPORATE INCOME TAX (MCIT) ON DOMESTIC CORPORATIONS —(1) Imposition of the Tax — A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum-corporate 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 following:(a) Domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%) on their taxable income; or(b) Domestic corporations engaged in hospital operations which are non-profit subject to tax at ten percent (10%) on their taxable income; and(c) Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs), on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the foreign currency deposit system, including their interest income from foreign currency loans granted to residents of the Philippines under the expanded foreign currency deposit system, subject to final income tax at ten percent (10%) of such income.(d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).

REVENUE MEMORANDUM CIRCULAR NO. 04-03 December 31, 2002Clarifying Items that would Constitute Gross Receipts and Costs in Determining "Gross Income" on Services for the Purpose of Computing the Minimum Corporate Income Tax (MCIT) Pursuant to Sections 27(E) and 28(A)(2) of the National Internal Revenue Code of 1997of the following: Banks and non-bank financial intermediaries performing quasi-banking activities;Insurance and pension funding companies;Finance companies and other financial intermediaries not performing quasi-banking activities;Brokers of securities (excluding banks);Customs, insurance, real estate, immigration and commercial brokers;General engineering and/or building contractors;Common carriers or transportation contractors;Hotel, motel, rest/pension/lodging house and resort operators;Food service establishments;Lessors of property;Telephone and telegraph, electric, gas, and water utilities;andRadio and/or television broadcasting

CASES DIGEST

Minimum Corporate Income Tax on DomesticCorporations

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., petitioner, vs. THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., respondents. [G.R. No. 160756. March 9, 2010.]

DECISION: CORONA, J p:

In this original petition for certiorari and mandamus, petitioner Chamber of Real Estate and Builders' Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes.

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27 (E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2 (J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4 (a) (ii) and (c) (ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause because, like the MCIT, the government collects income tax even when the net income has not yet been determined. They contravene the equal protection

clause as well because the CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27 (A). If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years. Section 27 (E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. —

(1) Imposition of Tax. — A [MCIT] of two percent (2%) 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 income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. — Any excess of the [MCIT] over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. — The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulations that shall define

the terms and conditions under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. — For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term 'gross income' shall mean 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.

For 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.

For 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, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of banks, "cost of services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27 (E). The pertinent portions thereof read:

Sec. 2.27(E). [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec. 27 (A) and Sec. 28 (A) (1) of the Code xxx at 32% effective January 1, 2000 and thereafter.

xxxxxxxxx

(2) Carry forward of excess [MCIT]. — Any excess of the [MCIT] over the normal income tax as computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable years.

xxxxxxxxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes. 6 Under Section 2.57.2 (J) of RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than capital assets, by persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxxxxxxxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of. — Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule —

Those which are exempt from a Exempt xxx xxxxxx

withholding tax at source as

prescribed in Sec. 2.57.5 of Gross selling price shall mean

these regulations. the consideration stated in the

sales document or the fair

With a selling price of five 1.5% market value determined in

hundred thousand pesos accordance with Section 6 (E)

(P500,000.00) or less. of the Code, as amended,

whichever is higher. In an

With a selling price of more 3.0% exchange, the fair market

than five hundred thousand value of the property received

pesos (P500,000.00) but not in exchange, as determined

more than two million pesos in the Income Tax

(P2,000,000.00). Regulations shall be used.

With selling price of more 5.0% Where the consideration or part

than two million pesos thereof is payable on installment,

(P2,000,000.00) no withholding tax is required to

be made on the periodic installment

payments where the buyer is an

individual not engaged in trade or

business. In such a case, the

applicable rate of tax based on

the entire consideration shall be

withheld on the last installment

orinstallments to be paid to the

seller.

However, if the buyer is engaged

in trade or business, whether a

corporation or otherwise, the tax

shall be deducted and withheld

by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxxxxxxxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset. — A [CWT] based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of these regulations. — Exempt

Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business.

With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less. — 1.5%

With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more than Two Million Pesos (P2,000,000.00). — 3.0%

With a selling price of more than two Million Pesos (P2,000,000.00). — 5.0%

xxxxxxxxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the property received in exchange shall be considered as the consideration.

xxxxxxxxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is, payments in the year of sale exceed 25% of the selling

price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale, transfer or exchange of real property other than capital asset has been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58 (E) of RA 8424 provides that any sale, barter or exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and conveyances have been reported and the taxes thereof have been duly paid:

Sec. 2.58.2. Registration with the Register of Deeds. — Deeds of conveyances of land or land and building/improvement thereon arising from sales, barters, or exchanges subject to the creditable expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfers and conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid . . . .

On February 11, 2003, RR No. 7-2003 was promulgated, providing for the guidelines in determining whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. — Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines;

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(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

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c. In the case of domestic corporations. —

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(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.

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We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the question of constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the very lismota of the case.

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue regulations have actually and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is susceptible of judicial resolution as distinguished from a hypothetical

or abstract difference or dispute. On the other hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect on the individual challenging it.

Contrary to respondents' assertion, we do not have to wait until petitioner's members have shut down their operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-Savers' Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it may suffer from the enforcement of [the assailed provisions].

Legal standing or locus standi is a party's personal and substantial interest in a case such that it has sustained or will sustain direct injury as a result of the governmental act being challenged. In Holy Spirit Homeowners Association, Inc. v. Defensor, we held that the association had legal standing because its members stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition . . . . There is no dispute that the individual members of petitioner association are residents of the NGC. As such they are covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be unfavorable to the rights of its members. . . . Certainly, petitioner and its members have sustained direct injury arising from the enforcement of the IRR in that they have been disqualified and eliminated from the selection process.

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, ripeness or legal standing when paramount public interest is involved. The questioned MCIT and CWT affect not only petitioners but

practically all domestic corporate taxpayers in our country. The transcendental importance of the issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition.

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of corporations. It was devised as a relatively simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contribution to the support of the public sector. The congressional deliberations on this are illuminating:

Senator Enrile.

Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative convenience. . . . This will go a long way in ensuring that corporations will pay their just share in supporting our public life and our economic advancement.

Domestic corporations owe their corporate existence and their privilege to do business to the government. They also benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It is therefore fair for the government to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses otherwise called tax shelters.

Mr. Javier (E.)

. . . [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT]. Because from experience too, you have corporations which have been losing year in and year out and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that corporation has no business to be in business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor.

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the corporation commenced its operations. This grace period allows a new business to stabilize first and make its ventures viable before it is subjected to the MCIT.

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the three immediately succeeding years.

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses.

Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries, particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the committee hearings:

[Mr.Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there's a minimum of income tax of half a percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing you'll notice is the preponderance of Latin American countries that employed this method. Okay, those are additional Latin American countries.

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of the MCIT.

MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27 (E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account. 31 Thus, pegging the tax base of the MCIT to a corporation's gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain."

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good.

Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. 35 Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of

arbitrariness by the taxpayer. There must be a factual foundation to such an unconstitutional taint. This merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character.

Petitioner is correct in saying that income is distinct from capital. Income means all the wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. Income is gain derived and severed from capital. For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT 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 MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% 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.

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of taxation.

The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax rate but a broader tax base. Since our income tax laws are of American origin, interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation of these laws. Although our MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation are comparable. On

the question of the AMT's constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

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We thus join a number of other courts in upholding the constitutionality of the [AMT]. . . . [It] is a rational means of obtaining a broad-based tax, and therefore is constitutional.

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation.

American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross income in order to arrive at the net that it chooses to tax. This is because deductions are a matter of legislative grace.

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes. Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. The party alleging the law's unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.

RR 9-98 MERELY CLARIFIES

SECTION 27 (E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E). [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — . . . The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27 (E). This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected. Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale of real estate categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections 2.57.2 (J) and 2.58.2 of RR 2-98 and Sections 4 (a) (ii) and (c) (ii) of RR 7-2003 were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in contravention of law" because they ignore such distinctions. Petitioner's conclusion is based on the following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the end of the taxable period.

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on income from the sale of capital and ordinary assets.

Petitioner's arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE COLLECTION OF CWT ON SALES OF REAL PROPERTY CONSIDERED AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. It is well-settled that an administrative agency cannot amend an act of Congress.

We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws. The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the government's cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57 (B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. —

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(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% 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.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF INDIVIDUALS OR CORPORATIONS ENGAGED IN THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business' income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax obligation. They are installments on the annual tax which may be due at the end of the taxable year.

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be the entity's net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable year. 71 Precisely, Section 4 (a) (ii) and (c) (ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. — Gains/Income derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

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a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines;

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(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

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c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax under

Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said withholding agent's knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary assets. On the other hand, Section 27 (D) (5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax a) Taxes withheld on certain

withheld by the withholding income payments are intended

agent is constituted as a full to equal or at least approximate

and final payment of the the tax due of the payee on

income tax due from the said income.

payee on the said income.

b) The liability for payment of b) Payee of income is required to

the tax rests primarily on the report the income and/or pay

payor as a withholding agent. the difference between the tax

withheld and the tax due on the

income. The payee also has the

right to ask for a refund if the tax

withheld is more than the tax due.

c) The payee is not required to c) The income recipient is still required

file an income tax return for to file an income tax return, as

the particular income. prescribed in Sec. 51 and Sec. 52

of the NIRC, as amended.

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioner's contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary assets.

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer's act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence of the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in Section 57 (A) refers to passive income

being subjected to FWT. It follows that Section 57 (B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the [Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57 (A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. The BIR defines passive income by stating what it is not:

. . . 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 stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57 (B) provides that the Secretary can require a CWT on "income payable to natural or juridical persons, residing in the Philippines." There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57 (A) and (B) are distinct. Section 57 (A) refers to FWT while Section 57 (B) pertains to CWT. The former covers the kinds of passive income enumerated therein and

the latter encompasses any income other than those listed in 57 (A). Since the law itself makes distinctions, it is wrong to regard 57 (A) and 57 (B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57 (B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute does not require any particular procedure to be followed by an administrative agency, the agency may adopt any reasonable method to carry out its functions. Similarly, considering that the law uses the general term "income," the Secretary and CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the courts 78 in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields.

NO DEPRIVATION OF PROPERTY

WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members of their property without due process of law because, in their line of business, gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or earned.

Again, it is stressed that the CWT 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. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly, the due process requirement applies to the power to tax. The CWT does not impose new taxes nor does it increase taxes. It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait years and may even resort to litigation before they are granted a refund. 81 This argument is misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of collecting the tax.

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages, materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and

unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government agencies.

Petitioner's lamentations will not support its attack on the constitutionality of the CWT. Petitioner's complaints are essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales on installment are taxed on a per-installment basis. Petitioner's desire to utilize for its operational and capital expenses money earmarked for the payment of taxes may be a practical business option but it is not a fundamental right which can be demanded from the court or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not much different from that of a real estate enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of production and it incurs costs and expenditures on a regular basis. The only difference is that "goods" produced by the real estate business are house and lot units.

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances." Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class.

The taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, 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 frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. To require the customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g., heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT. As already discussed, the Secretary may adopt any reasonable method to carry out its functions. Under Section 57 (B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner's argument is not accurate. The sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for their transactions with said 5,000 corporations.

SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds 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. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as Section 58 (E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. —

(E) Registration with Register of Deeds. — No registration of any document transferring real property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid: . . . any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the income tax." When a party questions the constitutionality of an income tax measure, it has to contend not only with Einstein's observation but also with the vast and well-established jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED. Costs against petitioner.SO ORDERED.

Puno, C.J., Carpio, Carpio Morales, Velasco, Jr., Nachura, Leonardo-de Castro, Brion, Bersamin, Abad, Peralta, Del Castillo, Villarama, Jr., Perez and Mendoza, JJ., concur.

Minimum Corporate Income Tax on DomesticCorporations

FACTS: Chamber of Real Estate and Builders' Associations, an association of real estate developers and builders, challenges the validity of the imposition of minimum corporate income tax (MCIT) on corporations. Arguing that MCIT violates the due process clause because it levies income tax even if there is no realized gain, petitioner explains that gross income as defined under Section 27 (E) of RA 8424 only considers the cost of goods sold and other direct expenses and does not take into account administrative and interest expenses which are also necessary to produce gross income. Pegging the tax base of the MCIT to a corporation's gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain."

Petitioner further alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when there is actually a loss, or a zero or negative taxable income.

ISSUES: 1. Whether or not the imposition of the MCIT on domestic corporations is unconstitutional.

2. Whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets is unconstitutional.

RULING:

1. The MCIT 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, i.e., the cost of goods and other direct expenses from gross sales. In addition, the MCIT 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 MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at only 2% 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 MCIT, taken with the reduced rate of 2%, is not constitutionally objectionable.

2. The CWT 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. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly, the due process requirement applies to the power to tax. The CWT 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 CWT 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 CWT, 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 frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme.CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC. vs. ALBERTO ROMULO, ET AL [G.R. No. 160756, March 9, 2010]

Legislative intent relative to the minimum corporate income tax

FACTS: Petitioner, Manila Banking Corporation, was incorporated in 1961 and since then had engaged in the commercial banking industry until 1987 when the Monetary Board of the BangkoSentralngPilipinas (BSP) issued Resolution No. 505, pursuant to Section 29 of Republic Act (R.A.) No. 265 (the Central Bank Act), 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 government-appointed receiver. Meanwhile, R.A. No. 8424, otherwise known as the Comprehensive Tax Reform Act of 1997, became effective on January 1, 1998. One 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 No. 9-98 stating that the law allows a four (4) year period from the time the corporations were registered with the Bureau of Internal Revenue (BIR) during which the minimum corporate income tax should not be imposed. On June 23, 1999, after 12 years since petitioner stopped its business operations, the BSP authorized it to operate as a thrift bank. The following year, specifically on April 7, 2000, it filed with the BIR its annual corporate income tax return and paid P33,816,164.00 for taxable year 1999.

Prior to the filing of its income tax return, petitioner sent a letter to the BIR requesting a ruling on whether it is entitled to the four (4)-year grace period reckoned from 1999. In other words, petitioner's position is that since it resumed operations in 1999, it will pay its minimum corporate income tax only after four (4) years thereafter. On February 22, 2001, the BIR issued BIR Ruling No. 007-2001 stating that petitioner is entitled to the four (4)-year grace period. Since it reopened in 1999, the minimum corporate income tax may be imposed "not earlier than 2002, i.e. the fourth taxable year beginning 1999."

Pursuant to the above Ruling, petitioner filed with the BIR a claim for refund of the sum of P33,816,164.00 erroneously paid as minimum corporate income tax for taxable year 1999.

ISSUE: Whether petitioner is entitled to a refund of its minimum corporate income tax paid to the BIR for taxable year 1999.

HELD: Yes, under RR 4-95 (but NOT under RR 9-98 implementing RA 8424).

Section 27(E) of the Tax Code provides:

Sec. 27. Rates of Income Tax on Domestic Corporations. — . . .

(E) Minimum Corporate Income Tax on Domestic Corporations. —

(1) Imposition of Tax. — A minimum corporate income tax of two percent (2%) 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 Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. — Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

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On the other hand, Revenue Regulation No. 9-98 specifies the period when a corporation becomes subject to the minimum corporate income tax, thus:

(5) Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT (minimum corporate income tax) —

For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR).

Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998.

The intent of Congress relative to the minimum corporate income tax is to grant a four (4)-year suspension of tax payment to newly formed corporations. Corporations still starting their business operations have to stabilize 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 lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax.

Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise known as the "Thrift Banks Act of 1995." It took effect on March 18, 1995. This law provides for the regulation of the organization and operations of thrift banks. Under Section 3, thrift banks include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws. On June 15, 1999, the BIR issued Revenue Regulation No. 4-95 implementing certain provisions of the said R.A. No. 7906. Section 6 provides:

Sec. 6. Period of exemption. — All thrift banks created and organized 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 NIRC and as specified in Section 2(A) of these regulations, for a period of five (5) years from the date of commencement of operations; while for thrift banks which are already existing and operating as of the date of effectivity of the Act (March 18, 1995), the tax exemption shall be for a period of five (5) years reckoned from the date of such effectivity.

For purposes of these regulations, "date of commencement of operations" shall be understood to mean the date when the thrift bank was registered with the Securities and Exchange Commission or the date when the Certificate of Authority to Operate was issued by the Monetary Board of the BangkoSentralngPilipinas, whichever comes later.

Petitioner bank was registered with the BIR in 1961. However, in 1987, it was found insolvent by the Monetary Board of the BSP and was placed under receivership. After twelve (12) years, or on June 23, 1999, the BSP issued to it a Certificate of Authority to Operate as a thrift bank. Earlier, or on January 21, 1999, it registered with the BIR. Then it filed with the SEC its Articles of Incorporation which was approved on June 22, 1999.

It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. Revenue Regulations No. 9-98, implementing R.A. No. 8424 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. However, under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks, such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later.

Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate income tax after four (4) years from 1999.

The intent of Congress relative to the minimum corporate income tax is to grant a four (4)-year suspension of tax payment to newly formed corporations. Corporations still starting their business operations have to stabilize 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.

Manila Banking Corp. vs. Commissioner of Internal Revenue, G.R. No. 168118, August 28, 2006

A thrift bank is entitled to a grace period of four years from the time it is authorized by the BSP to operate as a thrift bank.

Revenue Regulations No. 9-98, implementing R.A. No. 8424 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. However, under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate income tax after four (4) years from 1999.

Manila Banking Corp. vs. Commissioner of Internal Revenue, G.R. No. 168118, August 28, 2006

Minimum Corporate Income Tax

It is clear from the provision of Revenue Regulations No. 4-95 that the date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later.

Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424 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. However, under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks, such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later.

Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate income tax after four (4) years from 1999.

THE MANILA BANKING CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE G.R. No. 168118. August 28, 2006

Legislative intent relative to the minimum corporate income tax

FACTS: For fiscal year 2000-2001, PAL allegedly incurred zero taxable income, which left it with unapplied creditable withholding tax. It did not pay any MCIT for the period and requested for the refund of its unapplied creditable withholding tax for FY 2000-2001. BIR denied the claim for refund and assessed PAL for deficiency MCIT. PAL protested. Upon Petition for Review, the CTA Second Division ruled in favor of PAL, a decision affirmed by the CTA en banc. Hence, this Petition for Review on Certiorari.

ISSUE: Whether PAL is liable for deficiency MCIT for FY 2000-2001.

RULING: PAL cannot be subjected to MCIT for FY 2000-2001.

First, Sec. 13 (a) of P.D. No. 1590, the franchise of PAL, 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 35% (reduced to 32% by the year 2000) as stipulated in Sec. 27 (A) of the NIRC of 1997.

Second, Sec. 13 (a) of P.D. No. 1590 further provides that the basic corporate income tax of PAL shall be based on its annual net taxable income. This is consistent with Sec. 27 (A) of the NIRC of 1997, which provides that the rate of basic corporate income tax, which is 32% beginning 1 January 2000, shall be imposed on the taxable income of the domestic corporation. There is an apparent distinction under the NIRC of 1997 between taxable income, which is the basis for basic corporate income tax under Sec. 27 (A); and gross income, which is the basis for the MCIT under Section 27 (E). The two terms have their respective technical meanings, and cannot be used interchangeably.

Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of the NIRC of 1997, and one is paid in place of the other, the two are distinct and separate taxes. The MCIT is different from the basic corporate income tax, not just in the rates, but also in the bases for their computation. Not being covered by Sec. 13 (a) of P.D. No. 1590, which makes PAL liable only for basic corporate income tax, then MCIT is included in "all other taxes" from which PAL is exempted. That, under general circumstances, the MCIT 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 Government the opportunity to collect the higher amount between the two.

Fourth, the evident intent of Sec. 13 of P.D. No. 1520 is to extend to PAL tax concessions not ordinarily available to other domestic corporations. It permits PAL 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. Hence, under its franchise, PAL is to pay the least amount of tax possible.

Fifth, as ruled in Commissioner of Internal Revenue v. PAL, G.R. No. 160528, October 9, 2006: “A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes" proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL 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 option.”COMMISSIONER OF INTERNAL REVENUE vs. PAL [G.R. No. 180066.July 7, 2009.]

(2) Carry Forward of Excess Minimum Tax — Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain ConditionsThe Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulations that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.

(4)Gross Income Defined — For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean 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.

For 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.

For 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, discounts and cost of services. 'Cost ofservices' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense.

CASES DIGEST

Proper computation of senior citizens' discount as deduction from gross income

For 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. Here, 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 (or loss) 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 citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.

Carlos Superdrug Corp. vs. DSWD, et al., G.R. No. 166494, June 29, 2007

SECTION 28 Rates of Income Tax on Foreign Corporations

(A) Tax on Resident Foreign Corporations —

(1) In General — Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the new rate within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27, (A).

CASES DIGEST

What constitutes "residence" of a corporation.

The same principle is recognized in American law: 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.

State Investment House, Inc., et al. vs. Citibank, et al., G.R. Nos. 79926-27, October 17, 1991

What constitutes "doing" or "engaging in" or "transacting" business

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each 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 works 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 organization. "In order that a foreign corporation may be regarded as doing business within a State, 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 Overseas Airways Corp., et al. , G.R. Nos. L-65773-74, April 30, 1987

Place 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. Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.

The Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22074, April 30, 1965

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 Philippines by a foreign corporation, as in the present case, does not amount to engaging in trade or business in the Philippines for income tax purposes.

N.V. Reederij "Amsterdam", et al. vs. Commissioner of Internal Revenue, G.R. No. L-46029, June 23, 1988

Foreign airline company selling ticket in the Philippines through local agent is considered a resident foreign corporation doing business in the Philippines.

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there can be no conclusion other than that JAL is a resident foreign corporation, doing business in the Philippines. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the paramount objective.

Commissioner of Internal Revenue vs. Japan Air Lines, et al., G.R. No. 60714, October 4, 1991

A single corporation cannot be both a resident and a non-resident corporation.

A single corporate entity cannot be both a resident and a non-resident 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 Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign corporation because it is transacting business in the Philippines.

Marubeni Corp. vs. Commissioner of Internal Revenue, et al., G.R. No. 76573, September 14, 1989

Grant 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 makes it a resident; the license merely gives legitimacy to its doing business here. What effectively makes such a foreign corporation a resident corporation in the Philippines is its actually being in the Philippines and licitly doing business here.

State Investment House, Inc., et al. vs. Citibank, et al., G.R. Nos. 79926-27, October 17, 1991

Sec. 28 (A) (1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all income from sources within the Philippines. Sec. 28 (A) (3) 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." Further, "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 32% income tax on their income from within the Philippines, except for resident foreign corporations that are international carriers that derive income "from carriage of persons, excess baggage, cargo and mail originating from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This principle is embodied in the Latin 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 Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.

South African Airways vs. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010

COMMISSIONER OF INTERNAL REVENUE vs. AIR INDIA and THE COURT OF TAX APPEALS [G.R. No. 72443. January 29, 1988.]

SYLLABUS

1. TAXATION; REVENUE DERIVED BY AN INTERNATIONAL AIRLINE, HAVING NO LANDING RIGHTS, FROM SALES OF AIRLINE TICKETS THROUGH IT AGENT, TAXABLE AS INCOME. — Revenue derived by an international air carrier from sales of tickets in the Philippines for air transportation, while having no landing rights in the country, constitutes income of the said international air carrier from Philippine sources and, accordingly, taxable under Section 24 (b) (2) of the National Internal Revenue Code as ruled in Commissioner of Internal Revenue v. British Overseas Airways Corporation, 149 SCRA 395 (1987).

2. ID.; WILLFUL NEGLECT TO FILE REQUIRED TAX RETURN OR FRAUDULENT INTENT TO EVADE PAYMENT OF TAXES, NOT PRESUMED. — The willful neglect to file the required tax return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, 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. Negligence, whether slight or gross, is not equivalent to the fraud with intent to give up some legal right. Negligence, whether slight or gross, is not equivalent 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.

3. ID.; IMPOSITION OF LESSER PENALTY IN THE ABSENCE OF WILLFUL NEGLECT TO FILE THE REQUIRED TAX RETURN. — There being no cogent basis to find willful neglect to file the required tax return on the part of the private respondent, the 50% surcharge or fraud penalty imposed upon it is improper. Nonetheless, such failure subjects the private respondent to a 25% penalty pursuant to Section 72 of the tax code cited earlier. P74,203.90 constitutes the tax deficiency of the private respondent. 25% of this amount is P37,101.95.

4. ID.; TAX DEFICIENCY; INTEREST COLLECTIBLE NOT TO EXCEED 3 YEARS. — We find the 42% interest assessed by the petitioner to be in order. At the time the tax liability of the private respondent accrued, Section 51 (d) of the tax code, before it was amended by Presidential Decree No. 1705 prescribed an interest rate of 14% 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 42%. This maximum interest rate is applicable to the private respondent inasmuch as the period between March 31, 1976 (the end of the fiscal year in question) and February 20, 1981 (the time when the petitioner made the assessment in question) exceeds three years. P74,203.90 constitutes the tax deficiency of the private respondent. 42% of this amount is P31,165.64.

5. ID.; ID.; ADDITIONAL INTEREST COLLECTIBLE NOT TO EXCEED THREE YEARS. — Pursuant to Section 51 (e) (2) of the tax code, as amended by Presidential Decree No. 1705, the private respondent is liable to pay additional interest of 20% per annum (computed from February 20, 1981, the date when the Commissioner sought the payment of the tax deficiency) on the total amount unpaid. A careful reading of Section 51 (e) (2) shows that this interest is in addition to the interest provided in Section 51 (d). This view can be gleaned from the use of the phrase "Where a deficiency, or any interest assessed in connection therewith under paragraph (d) of this section" in Section 51 (e) (2). The additional interest is to be computed upon the entire amount of the tax liability (previous interest included) 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 Section 51 (e) (2). However, the same Section 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 60%.

6. ID.; ID.; ADDITIONAL SURCHARGE, MANDATORY. — Pursuant to Section 51 (e) (3) of the same code, as amended by the said Decree, the private respondent is likewise liable to pay an additional surcharge of 10% (flat rate) of the total amount of tax unpaid. An examination of Section 51 (e)(3) reveals that this surcharge is imposed for the late payment of the unpaid tax deficiency and/or 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 [referring to the entire Section 51 (e)] and in paragraph (d) above [referring to Section 51 (d)]." 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 required period of time upon demand is penalized by this additional surcharge. Upon such failure to pay, the surcharge is automatically due; its imposition is mandatory.

D E C I S I O N

This is a Petition which seeks the review of a Decision of the Court of Tax Appeals.

The private respondent Air India is a foreign corporation organized under the laws of India. It is not licensed to do business in the Philippines as an international carrier. Its airplanes do not operate within Philippine territory nor service passengers embarking from Philippine ports. The firm is represented in the Philippines by its general sales agent, Philippine AirLines, Inc., a corporate entity duly organized under the laws of the Philippines. Air India sells airplane tickets in the Philippine through this agent. These tickets are serviced by Air India airplanes outside the Philippines. In sum, Air India's status in the Philippines is that of an off-line international carrier not engaged in the business of air transportation in the Philippines.

The total sales of airplane tickets transacted by Philippine Air Lines, Inc. for the private respondent during the fiscal year ending March 31, 1976 amounted to P2,968,156.00. On account of the same, the herein petitioner Commissioner of Internal Revenue held the private respondent liable for the payment of P142,471.68. 1 The amount represents the 2.5% income tax on the private respondent's gross Philippine billings for the said fiscal year pursuant to Section 24 (b) (2) of the National Internal Revenue Code, as amended, inclusive of the 50% surcharge and interest for willful neglect to file a return as provided under Section 72 of the same code. The computation is as follows —

Gross Philippine billings P2,968,156.00

Income Tax due thereon at 2.5% 74,204.00

Add: 50% surcharge 37,102.00

14% interest per annum (42% maximum) 31,165.68

——————

Total Amount Due and Collectible P142,471.68

From the action taken 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 Philippines during the said fiscal year and that the amount of P2,968,156.00 mentioned in the assessment made by the petitioner was derived exclusively from sources outside the Philippines.

On the other hand, the petitioner argued that the amount of P2,968,156.00 was realized in the Philippines and was, therefore, derived from sources within the Philippines. Petitioner also stressed that in case of any doubt, the presumption is that the tax assessment is correct.

In its Decision dated June 27, 1985, the Court of Tax Appeals ruled in favor of the private respondent and set aside the decision of the petitioner. The tax court likewise held that the surcharge and interest imposed upon the private respondent are improper. The pertinent portions of the Decision are as follows:

"Under 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 (Sec. 37, Nat. Int. Rev. Code.) 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 (Air India) from the transportation service rendered or performed outside the Philippines would violate not only the National Internal Revenue Code but also the due process clause of the Constitution.

"xxx xxx xxx

". . . we fully agree with petitioner (Air India) that it is not liable for surcharge of 50%, . . .

". . .The surcharge of 50% of the unpaid tax or deficiency tax is sought to be imposed in this case under Section 72 of the Revenue Code which provides that the said surcharge is to be imposed —

"In case of willful neglect to file the return or list required 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 (Air India) willfully failed to file an income tax return for the fiscal year 1976. Neither the report of the examiner nor the Amended Answer filed by respondent (the Commissioner) makes mention of any fact or circumstance to prove that the failure of petitioner (Air India) to file the return was willful. Petitioner is charged with failure to file a return.

"Willful failure to file an income tax return which justifies the imposition of the 50% surcharge, or what is commonly called the fraud penalty, requires 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 Government of lawful revenue. Mere failure to file are turn is not in itself, standing alone, evidence of fraud . . .(Citing Aznar v. Court of Tax Appeals, 58 SCRA 519.)

"Petitioner (Air India) can not be charged with an intention to defraud the Government because it honestly and sincerely believes that it is not liable for the tax sought to be imposed upon it."

Hence, this Petition for Review. The Petition is anchored on the argument that the private respondent is liable for the imposition in question.

Complying with the instructions of this Court, the private respondent submitted its Comment on the Petition.

After subsequent pleadings were filed by the parties, the case was deemed submitted for decision.

We find merit in the Petition.

The principal issue raised in this Petition is whether or not the revenue derived by an international air carrier from sales of tickets in the Philippines for air transportation, while having no landing rights in the country, constitutes income of the said international air carrier from Philippine sources and, accordingly, taxable under Section 24 (b) (2) of the National Internal Revenue Code.

This issue has been settled in the affirmative in Commissioner of Internal Revenue v. British Overseas Airways Corporation This Court, speaking, through Mme. Justice Ameurfina A. Melencio-Herrera, held that such revenue constitutes taxable income. The pertinent portions of the said Decision are as follows —

"The Tax Code defines 'gross income' thus:

"'Gross Income' includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind 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 equivalent'; it is the amount of money coming to a person within a specific time . . . ; it means something distinct from principal or capital. For, 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. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.

xxx xxx xxx

"BOAC, 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 BOAC's service of transportation is performed outside the Philippines, the income derived is from sources without the Philippines and, therefore, not taxable under income tax laws, . . .

"The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. Admittedly, BOAC was an off-line 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. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. And

even if the BOAC tickets sold covered the 'transport of passengers and cargo to and from foreign cities,' it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word source' conveys one essential idea, that of origin, and the origin of the income herein is the Philippines."

Moreover, the taxable income involved in this case is for the fiscal year ending March 31, 1976. In the concurring opinion of Chief Justice Teehankee in aforesaid case he made the following observations:

"I just wish to point out that the conflict between the majority opinion penned by Mme. Justice Melencio-Herrera and the dissenting opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income derived by respondent BOAC from the sales in the Philippines of tickets for BOAC flights as sold and issued by its general sales agent in the Philippines has become moot after November 24, 1972. Both opinions state that by amendment through P.D. No. 69, promulgated on November 24, 1972, of section 24 (b)(2) of the Tax Code providing for the rate of income tax on foreign corporations, international carriers such as respondent BOAC, have since then been taxed at a reduced rate of 2-1/2% on their gross Philippine billings. There is, therefore, no longer any source of substantial conflict between the two opinions as to the present 2-1/2% tax on their gross Philippine billings charged against such international carriers as herein respondent foreign corporation."

On the basis of the doctrine announced in British Overseas Airways Corporation, the revenue derived by the private respondent Air India from the sales of airplane tickets through its agent Philippine Air Lines, Inc., here in the Philippines, must be considered taxable income. As correctly assessed by the petitioner, such income is subject to a 2.5% tax pursuant to Presidential Decree No. 1355, amending Section 24 (b)(2) of the tax code. The total Philippine billings of the private respondent for the taxable year in question amounts to P2,968,156.00. 2.5% of this amount or P74,203.90 constitutes the income tax due from the private respondent.

The tax liability of the private respondent thus settled, We come now to the propriety of the 50% surcharge and the interest imposed upon it by the Commissioner of Internal Revenue.

The 50% surcharge or fraud penalty provided in Section 72 of the National Internal Revenue Code is imposed on a delinquent taxpayer who willfully neglects to file the required tax return within the period prescribed by the law, or who willfully files a false or fraudulent tax return, to wit —

"Sec. 72. Surcharges for failure to render returns and for rendering false and fraudulent returns. — In case of willful neglect to file the return or list required 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 make 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 twenty-five 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."

On the other hand, the same Section provides that if the failure to file the required tax return is not due to willful neglect, a penalty of 25% is to be added to the amount of the tax due from the taxpayer.

We have gone through the allegations of the petitioner as well as the Memorandum submitted by the Solicitor General on behalf of the Commissioner and on the basis of the same. We are not convinced that the private respondent can be considered to have willfully neglected to file the required tax return thereby warranting the imposition of the 50% fraud penalty provided in Section 72. 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 required tax return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot be presumed. At this point, We call attention to the pronouncement of this Court in Aznar v. Court of Tax Appeals, to wit —

"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. Negligence, whether slight or gross, is not equivalent to the fraud with intent to give up some legal right. Negligence, whether slight or gross, is not equivalent 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 mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the

returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes 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 required tax return on the part of the private respondent, the 50% surcharge or fraud penalty imposed upon it is improper. Nonetheless, such failure subjects the private respondent to a 25% penalty pursuant to Section 72 of the tax code cited earlier. P74,203.90 constitutes the tax deficiency of the private respondent. 25% of this amount is P37,101.95.

As for the interest which the private respondent is liable to pay, We find the 42% interest assessed by the petitioner to be in order. At the time the tax liability of the private respondent accrued, Section 51 (d) of the tax code, before it was amended by Presidential Decree No. 1705 prescribed an interest rate of 14% 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 42%. This maximum interest rate is applicable to the private respondent inasmuch as the period between March 31, 1976 (the end of the fiscal year in question) and February 20, 1981 (the time when the petitioner made the assessment in question) exceeds three years. P74,203.90 constitutes the tax deficiency of the private respondent. 42% of this amount is P31,165.64.

We will now look into the propriety of the other impositions.

The petitioner prays that pursuant to Section 51 (e) (2) of the tax code, as amended by Presidential Decree No. 1705, the private respondent is liable to pay additional interest of 20% per annum (computed from February 20, 1981, the date when the Commissioner sought the payment of the tax deficiency) on the total amount unpaid, to wit —

"(2) Deficiency. — Where a deficiency, or any interest assessed in connection therewith under paragraph (d) of this section, or any addition to the taxes provided for in Section seventy-two 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 paid: Provided, 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 Section 51 (e) (2) shows that this interest is in addition to the interest provided in Section 51 (d). This view can be gleaned from the use of the phrase "Where a deficiency, or any interest assessed in connection therewith under paragraph (d) of this

section" in Section 51 (e) (2). The additional interest is to be computed upon the entire amount of the tax liability (previous interest included) 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 Section 51 (e) (2). However, the same Section 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 60%.

The petitioner also prays that pursuant to Section 51 (e) (3) of the same code, as amended by the said Decree, the private respondent is likewise liable to pay an additional surcharge of 10% (flat rate) of the total amount of tax unpaid to wit —

"(3) Surcharge. — 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 (a) of this Section, 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 required under paragraph (b) of this Section, there shall be collected in addition to the interest prescribed herein and in paragraph (d) above and as part of the tax a surcharge of ten per centum of the amount of tax unpaid."

An examination of Section 51 (e)(3) reveals that this surcharge is imposed for the late payment of the unpaid tax deficiency and/or 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 [referring to the entire Section 51 (e)] and in paragraph (d) above [referring to Section 51 (d)]." 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 required period of time upon demand is penalized by this additional surcharge. Upon such failure to pay, the surcharge is automatically due; its imposition is mandatory.

Under the aforementioned provisions of the tax code, the private respondent became liable to pay the additional interest provided in Section 51 (e) (2) and the 10% surcharge provided in Section 51 (e) (3) thirty days after February 20, 1981, the date when the Commissioner of Internal Revenue sought the payment of the deficiency. More 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. Presidential Decree No. 1705 took effect on August 1, 1980. It was, therefore, the law in effect when the additional interest and surcharge could be legally imposed on the private respondent.

Let Us 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 March 31, 1976 is

P74,204.00. The 25% surcharge under Section 72 is P37,101.95. The 42% interest under Section 51 (d) is P31,165.64. The sum of these figures is P142,471.59.

More than three years have passed since February 20, 1981. Hence, the three-year or 60% maximum interest provided in Section 51 (e) (2) calls for application. It is computed against the total amount unpaid by the private respondent - P142,471.59. 60% of this amount is P85,482.95. The tax liability of the private respondent, exclusive of interest and surcharge is P74,204.00. 10% of this amount is P7,420.40, representing the 10% surcharge provided in Section 51 (e) (3).

In sum, the following schedule illustrates the total tax liability of the private respondent —

Income Tax for Fiscal year

ending March 31, 1976 P74,204.00

Add: 25% surcharge

under Section 72 37,101.95

42% maximum interest

under Section 51 (d) 31,165.64

—————

Total P142,471.59

Add: 60% maximum additional

interest under Presidential

Decree No. 1705 (computed

on P142,471.59) 85,482.95

——————

Total P227,954.54

Add: 10% additional surcharge

under Presidential Decree

No. 1705 (computed on

unpaid tax of P74,204.00) P7,420.40

—————

TOTAL TAX DUE FROM THE

PRIVATE RESPONDENT P235,374.94

Accordingly, We hold that the private respondent is liable for unpaid taxes and charges in the total amount of Two Hundred Thirty-Five Thousand, Three Hundred Seventy-Four Pesos and Ninety-Four Centavos (P235,374.94).

WHEREFORE, in view of the foregoing, the Decision of the Court of Tax Appeals in CTA Case No. 3441 is hereby SET ASIDE. The private respondent Air India is hereby ordered to pay the amount of P235,374.94 as deficiency tax, inclusive of interest and surcharges. We make no pronouncement as to costs.

SO ORDERED.

(2) Minimum Corporate Income Tax on Resident Foreign Corporations - A minimum corporate income tax of two percent (2%) of gross income, as prescribed. under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.

BIR ISSUANCES

REVENUE REGULATIONS NO. 09-98 August 25, 1998The Imposition of the Minimum Corporate Income Tax (MCIT) of Two (2%) percent on Domestic Corporations and Resident Foreign Corporations MINIMUM CORPORATE INCOME TAX (MCIT) ON RESIDENT FOREIGN CORPORATION — A minimum corporate income tax of two percent (2%) of the gross income from sources within the Philippines is hereby imposed upon any resident foreign corporation, beginning on the fourth (4th) taxable year (whether calendar or fiscal year, depending on the accounting period employed) 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 Sec. 2.27(E) of these Regulations shall apply: Provided, however, that only the gross income from sources within the Philippines shall be considered for such purposes.Exceptions — 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 corporations:

(a) Resident foreign corporations engaged in business as "international carrier" subject to tax at two and one-half percent (2 ½%) of their "Gross Philippine Billings";(b) Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the BangkoSentralngPilipinas (BSP) to transact business with Offshore Banking Units (OBUs), including interest income from foreign currency loans granted to residents of the Philippines, subject to a final income tax at ten percent (10%) of such income; and(c) Resident foreign corporations engaged in business as regional operating headquarters subject to tax at ten percent (10%) of their taxable income.(d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively). (3) International Carrier — An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 ½%) on its 'Gross Philippine Billings' as defined hereunder:

(a) International Air Carrier — 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

CASES DIGEST

The test of taxability is the source or that activity which produced the incomeThe 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. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. The sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred

within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.

Commissioner of Internal Revenue vs. British Overseas Airways Corp., et al., G.R. Nos. L-65773-74, April 30, 1987Commissioner of Internal Revenue vs. Air India, et al.,G.R. No. L-72443, January 29, 1988Commissioner of Internal Revenue vs. American Airlines, Inc., et al.,G.R. No. 67938, December 19, 1989

CIR vs. Japan Air Lines, Inc. G.R No. 60714 October 4, 1991South African Airways vs. CIR CTA 6760 June 09, 2005National Dev. Co. vs. CIR G.R. No. L-53961 June 30, 1987CIR vs. S.C. Jonhson and Sons, Inc. 309 SCRA 102

The absence of flight operations to and from the Philippines 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. Unquestionably, the passage documentations were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. And even if the tickets sold covered the "transport of passengers and cargo to and from foreign cities," it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.Commissioner of Internal Revenue vs. British Overseas Airways Corp., et al., G.R. Nos. L-65773-74, April 30, 1987Commissioner of Internal Revenue vs. Air India, et al., G.R. No. L-72443, January 29, 1988Commissioner of Internal Revenue vs. American Airlines, Inc., et al., G.R. No. 67938, December 19, 1989

Sec. 28 (A) (1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all income from sources within the Philippines. Sec. 28 (A) (3) 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." Further, "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 32% income tax on their income from within the Philippines, except for resident foreign corporations that are international carriers that derive income "from carriage of persons, excess baggage, cargo and mail originating from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This principle is embodied in the Latin 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 Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income. South African Airways vs. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010

Exemption from the general rule that resident foreign corporations are liable for 32% tax on all income from sources within the Philippines

We point out that Sec. 28 (A) (3) (a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers from the coverage of Sec. 28 (A) (1) of the 1997 NIRC. Certainly, had legislature's intentions been to completely exclude all international air carriers from the application of the general rule under Sec. 28 (A) (1), 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 Sec. 28 (A) (3) (a) is applicable to a taxpayer, then the general rule under Sec. 28 (A) (1) would not apply. If, however, Sec. 28 (A) (3) (a) does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec. 28 (A) (1).

South African Airways vs. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010

Foreign airline company selling ticket in the Philippines through local agent is considered a resident foreign corporation doing business in the Philippines.

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there can be no conclusion other than that JAL is a resident foreign corporation, doing

business in the Philippines. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the paramount objective.

Commissioner of Internal Revenue vs. Japan Air Lines, et al., G.R. No. 60714, October 4, 1991

BIR ISSUANCES

REVENUE REGULATIONS NO. 15-02 May 30, 2002 Revenue Regulations Governing the Imposition of Income Tax on the Gross Philippine Billings, Other Income of International Air Carriers and Common Carrier's Tax Pursuant to Sections 28(A)(3)(a) , 28(A)(1) , and 118 of the National Internal Revenue Code of 1997 as well as the Manner of Claiming Deductions on Travel Expenses and Freight Charges Incurred Pursuant to Section 34 of the Same Code.

(b) International Shipping — ''Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.CASES DIGESTIncome of foreign corporation engaged in transport of cargo must be sourced from the Philippines.

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 Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines.

Commissioner of Internal Revenue vs. Tokyo Shipping Co. Ltd., et al., G.R. No. 68252, May 26, 1995

(4) Offshore Banking Units — The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the BangkoSentralngPilipinas (BSP), from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the BangkoSentralngPilipinas (BSP) to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular income tax payable by banks: Provided, however, That any

interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances — Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

CASES DIGEST

Rationale for imposition of tax on branch profits remittances.

The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latter's shares of stock are owned by such foreign corporations.

Bank of America NT & SA vs. Court of Appeals, et al., G.R. No. 103092, July 21, 1994

Branch Profit Remittance

FACTS: Burroughs Limited, a foreign corporation authorized to engage in trade or business in the Philippines, applied with the Central Bank for authority to remit branch profit to its parent company abroad and paid the 15% branch profit remittance tax. Claiming that the 15% 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 Ltd. 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 Ltd.

Unable to obtain a reconsideration from the said decision, the CIR filed the instant petition before the Supreme Court.

ISSUE: Is Burroughs Limited legally entitled to a refund?

RULING: The pertinent provision of the National Revenue Code is Sec. 24 (b) (2) (ii) of the NIRC, the pertinent provision under consideration, had been interpreted by the BIR Ruling of January 21, 1980 to mean that "the tax base upon which the 15% branch profit remittance tax . . . shall be imposed . . . (is) 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 Ltd. that it made an overpayment in the amount of P172,058.90 which is the difference between the remittance tax actually paid of P1,147,058.70 and the remittance tax that should have been paid of P974,999.89 is well-taken. C I R vs. Burroughs Ltd., et al., G.R. No. L-66653, June 19, 1986

(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies —

(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax.

(b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income.

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation —

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. — Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final

income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(b) Income Derived under the Expanded Foreign Currency Deposit System — Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000 5%

On any amount in excess of P100,000 10%

(d) Intercorporate Dividends — Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title.

(B) Tax on Nonresident Foreign Corporation —

(1) In General — Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%).

REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS CONSIDERED INCOME FROM PHILIPPINE SOURCES; PLACE OF ACTIVITY CREATING INCOME CONTROLLINGReinsurance premiums on local risks ceded by domestic insurers to foreign reinsurers not doing business in the Philippines are subject to withholding tax. Where the reinsurance contracts show that the activities that constituted the undertaking to reinsure a domestic insurer against losses arising from the original insurances in the Philippines were performed in the Philippines, the reinsurance premiums are considered as coming from sources within the Philippines and are subject to Philippine income tax.Section 24 (now Sec 28b) of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.THE PHILIPPINE GUARANTY CO., INC. vs. COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, ET AL.,

(2) Nonresident Cinematographic Film Owner, Lessor or Distributor — A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.

(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals — A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment — Rentals, charters and other fees derived by a nonresident lessor of aircraft,

machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation

(a) Interest on Foreign Loans — A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends — A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents the difference between the regular income tax of thirty-five percent (35°%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent(15%) tax on dividends;

(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange — A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not over P100,000 5%

On any amount in excess of P100,000 10%"

SECTION 29 Imposition of Improperly Accumulated Earnings Tax —

(A) In General. — In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated

earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.

CASES DIGEST

Tax on improper accumulation of surplus is essentially a penalty tax.

The provision discouraged tax avoidance through corporate surplus accumulation. When 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 Philippines, Inc. vs. Court of Appeals, et al., G.R. No. 108067, January 20, 2000

"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 United States have invented the so-called "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.

Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, G.R. No. L-26145, February 20, 1984

Touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation.

A prerequisite to the imposition of the tax has been that the corporation be formed or availed of for the purpose of avoiding the income tax (or surtax) 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 required 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 consequences 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.

Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, G.R. No. L-26145, February 20, 1984

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 subsequently 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. Definiteness of plan coupled with action taken towards its consummation are essential.

Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, G.R. No. L-26145, February 20, 1984

Undistributed earnings or profits of prior years are taken into consideration in determining unreasonable accumulation for purposes of surtax.

Previous 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 take 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 Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22492, September 5, 1967

(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax —

(1) In General — The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation by permitting earnings and profits to accumulate instead of being divided or distributed.

(2) Exceptions — The improperly accumulated earnings tax as provided for under this Section shall not apply to:

(a) Publicly-held corporations;

(b) Banks and other nonbank financial intermediaries; and

(c) Insurance companies.

(C) Evidence of Purpose to Avoid Income Tax.

(1) Prima Facie Evidence — The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax on its shareholders or members.

(2) Evidence Determinative of Purpose — The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary.

BIR ISSUANCES

REVENUE REGULATIONS No. 2 SECTION 19Purpose to avoid tax; evidence; burden of proof; definitions of holding or investment company — 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 non-existence of the purpose may be indicated by circumstances other than the evidence specified in Section 25(b), (now Section 29c NIRC) 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 Section 25 ( now Section 29) 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 50 per cent or more of the outstanding stock 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 considered: (1) Dealings 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 (2) 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 question 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. However, 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 unmistakable.

SECTION 21 Unreasonable accumulation of profits —An accumulation of earnings or profits (including the undistributed earnings or profits of prior years) is unreasonable if it is not required 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. No 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. Undistributed income is properly accumulated if retained for working capital needed by the business; or if invested in additions to plant reasonably required by the business; or if in accordance with contract obligations placed to the credit of a sinking 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 undertake. However, 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 stock 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. Earnings or profits of the first corporation put into the second through the purchase of stock 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 stock 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 stock of the second.

The Commissioner of Internal Revenue may require 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 Securities Corp., et al., G.R. No. L-29485, November 21, 1980

Presumption 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 co-partnership then set up by the individual shareholders belonging to the same family

Commissioner of Internal Revenue vs. Ayala Securities Corp., et al., G.R. No. L-29485, November 21, 1980

(D) Improperly Accumulated Taxable Income — For purposes of this Section, the term 'improperly accumulated taxable income' means taxable income adjusted by:

(1) Income exempt from tax;

(2) Income excluded from gross income;

(3) Income subject to final tax; and

(4) The amount of net operating loss carry-over deducted;

And reduced by the sum of:

(1) Dividends actually or constructively paid; and

(2) Income tax paid for the taxable year.

Provided, however, That for corporations using the calendar year basis, the accumulated earnings tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998.

(E) Reasonable Needs of the Business — For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably anticipated needs of the business.

SECTION 30 Exemptions from Tax on Corporations — The following organizations shall not be taxed under this Title in respect to income received by them as such:

(A)Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E)Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;

CASES DIGEST

Medical, dental, hospital and veterinary services, except those rendered by professionals, are exempt from value-added tax (Section 109 (l), NIRC of 1997, as amended). 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 making drugs and medicines available to in-patients of the hospital, whether for reasons of life-threatening urgency or mere convenience, cannot but be viewed as a hospital service that is covered by the broad and general exemption provided in Section 109 (l) of the NIRC of 1997, as amended, for "hospital services".

C.T.A. CASE NO. 7304. December 1, 2010PERPETUAL SUCCOUR HOSPITAL, INC. and THE SISTERS OF ST. PAUL DE CHARTERS vs. COMMISSIONER OF INTERNAL REVENUE

CHARGING MEDICAL AND HOSPITAL FEES. — The mere charging of medical and hospital fees from those who can afford to pay does not make the institution one established for profit or gain. The fact that a hospital charges fees for paying beds does not make 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 organized 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 required to pay the medicines supplied to them, for which they are charged the cost of medicines, plus an additional 10% thereof, to partly offset the cost of medicines supplied free of charge to charity patients. Under these facts, we are of the opinion, and so hold, that the Hospital 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 make the institution one established for profit or gain.

HOSPITAL DE SAN JUAN DE DIOS, INC. vs. PASAY CITY, PABLO CUNETA City Mayor G.R. No. L-19371 February 28, 1966

Educational and Charitable Non-Profit corporation

FACTS: YMCA, a welfare, educational and charitable non-profit corporation, earned an income from leasing out a portion of its premises to small shop owners and from parking fees collected from non-members. The CIR issued an assessment to YMCA including surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. YMCA formally protested the assessment but the CIR denied its claims. Contesting the denial of its protest, the YMCA filed a petition for review at the CTA which ruled in its favor. Dissatisfied 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 YMCA the CA reversed itself. A denial of the CIR’s motion for reconsideration prompted this petition for review.

ISSUE: Is the income derived from rentals of real property owned by YMCA subject to income tax under the NIRC and the Constitution?

RULING: The exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) 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 unequivocally subjects to tax the rent income of the YMCA from its real property, the Court is duty-bound 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 organizations, 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 qualify the word "properties." This makes income from the property of the organization taxable, regardless of how that income is used — whether for profit or for lofty non-profit purposes. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we.

For the YMCA to be granted the exemption it claims under Article XIV, Section 4, par. 3 of the Constitution, it must prove with substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the term "educational institution," when used in laws granting tax exemptions, refers to a ". . . school seminary, college or educational establishment . . ." Therefore, YMCA cannot be deemed one of the educational institutions covered by the said constitutional provision. COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, [G.R. No. 124043 October 14, 1998.]

BIR wins vs St. Lukes hospital ordered to pay P63.9M tax deficiency Oct 25, 2012

The Supreme Court has ordered St. Luke’s Medical Center Inc. to pay the Bureau of Internal Revenue P63.9 million in deficiency income tax, value added tax and withholding tax on compensation for 1998, based on the 10-percent preferential income tax as stipulated in the 1997 Tax Code.

According to BIR head revenue executive assistant Claro Ortiz, this means that all hospitals that claim to be non-profit but are proprietary will now have to pay income tax. In 2002, St. Luke's disputed the BIR’s assessment that it should be paying income taxes, saying that it is a non-profit hospital. The case eventually reached the Supreme Court. In a decision penned by Associate Justice Antonio Carpio on Sept. 26 and received by the BIR on Oct. 17, the SC reversed an earlier decision by the Court of Tax Appeals, which

dismissed the BIR’s assessment. The appellate court had argued that St. Luke’s was not subject to income tax because non-stock corporations are exempt from paying income tax.

However, the SC ruled that St. Luke’s services that patients pay for are subject to income tax.

“St. Luke’s Medical Center is ordered to pay the deficiency income tax in 1998 based on the 10 percent preferential income tax rate under Section 27(B) of the National Internal Revenue Code [NIRC]. However, it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the NIRC,” the decision stated. The BIR claimed that St. Luke’s had total revenues of P1.73 billion in 1998 alone. St. Luke’s refuted the assessment, saying that its free services to patients amounted to P218 million in 1998.

The Supreme Court ruled that while there is no dispute that St. Luke’s is organized as a non-stock and non-profit charitable institution, this does not automatically exempt it from paying taxes. For a charitable institution to be exempt from income taxes, “Section 30(E) of the NIRC requires that [it] must be organized and operated exclusively for charitable purposes,” the SC said in its decision.

Taxation of non-stock, non-profit hospitals

17 October 2012 by Atty. Anthony G. Prestoza / Tax Law for Business

TAXATION of non-stock, non-profit organizations had always been a controversy. There are a number of types or classes of organizations or associations exempted from income taxes by the Tax Code. So these types of organizations 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 organizations is not that clear after all.

Among the types of organizations exempted from income taxes are non-stock corporations organized for charitable purposes and not for profit, but operated exclusively for the promotion of the general welfare. For one to invoke exemption from income tax, it must be organized as non-stock and operated for the purposes in which it was organized. That classification itself had been an issue in the area of income taxation. The Court had repeatedly defined what a non-stock organization is but its relevance crops up every time a tax-related issue is involved. So what really constitutes a non-stock

corporation? Once again, the Supreme Court, in GR 195909 and 195960, September 26, 2012, referred to the definition in the Corporation Code of a “non-stock corporation” as “one 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 organized.”

That case involves the income taxation of a non-stock and non-profit hospital organized for charitable and for social welfare purposes. The institution claims that it is exempt from income taxation under Section 30 of the Tax Code, which exempts this kind of institution from income taxation. The tax authority, on the other hand, claims that it should be subject to income tax under Section 27(B) of the Tax Code, which imposes 10-percent income tax on proprietary and nonprofit hospitals. As decided by the Court, a non-stock, non-profit corporation is indeed exempt from income taxation. That exemption, however, is intended solely for the activities of a non-stock, non-profit entity which are “operated exclusively” for charitable or social welfare purposes. Any other income that may be generated by these entities shall be subject to the 10-percent preferential tax rate the tax imposed on proprietary non-profit hospitals.

Apparently, according to the Court, “proprietary” means “private,” and when applied to a hospital means private hospital. On the other hand, “non-profit” means no net income or asset accrues to or benefits any member or person, with all net income or asset devoted to the institution’s purposes and all its activities conducted not for profit.

Thus, if a hospital not organized for profit, generates income not in relation to its charitable or social welfare purposes, it shall be taxed at the preferential rate of 10 percent. Simply put, even if a hospital does not distribute income to its members or trustees and uses the income proceeds from non-related activities in furtherance of its purposes, the same shall still be taxable at a rate of 10 percent.

The implication of this is that a non-stock, non-profit organization, including a hospital, organized for charitable and/or 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, not-for-profit activities. That exemption is not lost even if said entity involves itself in activities conducted for profit. But these revenues derived from profit- generating activities will be subject to income tax. With respect to hospitals, that income tax shall not be the regular income tax rate of 30 percent but the special income tax rate of 10 percent imposed on proprietary and nonprofit hospitals.

(F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profitregardless of the disposition made of such income, shall be subject to tax imposed under this Code.

BIR ISSUANCES

REVENUE MEMORANDUM CIRCULAR NO. 76-03 November 14, 2003

Tax Exemptions of Non-Stock, Non-Profit Corporations under Section 30, Tax Code of 1997 and Non-stock, Non-Profit Educational Institutions under Paragraph 3, Section 4, Article XIV of the Constitution

The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes imposed by the National Government on all revenues and assets used actually, directly and exclusively for educational purposes (Paragraph 3, Section 4, Article XIV of the Constitution).

Furthermore, revenues derived from assets used in the operation of cafeterias/canteens and bookstores 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.

Pursuant to Section 109(m) of the Tax Code of 1997, private educational institutions shall be exempt from value-added tax provided they are accredited as such either by the Department of Education, Culture and Sports or by the Commission on Higher Education. However, this exemption does not extend to their other activities involving sale of goods and services.

However, 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 (Sec. 2, Finance Department Order No. 137-87 as amended by Finance Department Order No. 92-88) i. e. rental payment from their building/premises.

REVENUE REGULATIONS NO. 14-07 December 11, 2007

Tax on Non-governmental Organizations (NGOs) and Cooperatives Engaged in Microfinance Activities

Tax Treatment of Microfinance Services Rendered by Non-governmental Organizations

All NGOs falling under the enumeration of Section 30 of the Tax Code of 1997, as amended, are exempt from income taxes, in respect of income received by them as such. However, income of such NGOs from microfinance activities, and which are not in respect of their registered activities covered by Section 30 of the Tax Code of 1997, regardless of the disposition made of such income, shall be subject to tax under the Tax Code of 1997, as amended.

Similarly, non-stock, non-profit NGOs, whether or not engaged in microfinance activities, are still also required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding as specified in Revenue Memorandum Circular No. 76-2003.

CASES DIGEST

TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY AND _EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL PURPOSES

FACTS: The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16, 1981 by virtue of Presidential Decree No. 1823. It is the registered owner of a parcel of land located at Quezon Avenue, Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. 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 one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government. On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes by the City Assessor of Quezon City.

Petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated on its claim that it is a charitable institution. Petitioner contends that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% 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.

ISSUES:

1. Whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160.

2. Whether the real properties of petitioner are exempt from real property taxes.

HELD:

1. Yes.

To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the

actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines.

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 out-patient, 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. (Congregational Sunday School, etc. v. Board of Review; Lutheran Hospital Association of South Dakota v. Baker)

Under P.D. No. 1823, 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. (Yorgason v. County Board of Equalization of Salt Lake County)

In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from the government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its operations.

2. Notwithstanding 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 equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. (Salvation Army v. Hoehn)

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that petitioner shall enjoy tax exemptions and privileges. However, 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 Section 2.

It is a settled rule of statutory construction that the express mention of one person, thing, or consequence implies the exclusion of all others. The rule is expressed in the familiar maxim, expressiouniusestexclusioalterius.

The tax exemption under Section 28(3), Article VI of the 1987 Philippine Constitution covers property taxes only. As Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . 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."

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:

(Note the following substantial changes in the Constitution: Under the 1935 Constitution, ". . . all lands, buildings, and improvements used 'exclusively' for … charitable . . . purposes shall be exempt from taxation." However, under the 1973 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 required that such property be used "actually" and "directly" for such purposes.)

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" 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. Solely is synonymous with exclusively.

What 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 organized. It is not the use of the income from the

real property that is determinative of whether the property is used for tax-exempt 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. While portions of the hospital are used for the treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business enterprise under the business name "Elliptical Orchids and Garden Center." Indeed, the petitioner's evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 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. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P. ROSAS, as City Assessor of Quezon City [G.R. No. 144104. June 29, 2004.]

Construction of last paragraph of Sec. 30 NIRC

Income derived from its property by a tax exempt organization is not absolutely taxable. Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind and character . . . from any of their properties" might easily convey a meaning quite 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 kept subservient to the general intent of the whole enactment. A close reading of the last paragraph of Sec. 27 of the National Internal Revenue Code, in relation to the whole section on tax exemption of the organizations enumerated therein, shows that the phrase "conducted for profit" in the last paragraph of Sec. 27 qualifies, limits and describes "the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities" in order to make such income taxable. It is the exception to Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of said organizations. Hence, 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., G.R. No. 124043, October 14, 1998

Income from any property of exempt organizations is taxable.

A reading of the last paragraph ineludibly shows that the income from any property of exempt organizations, 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 qualify the word "properties." This makes income from the property of a non-profit organization taxable, regardless of how that income is used — whether for profit or for lofty non-profit purposes. The law does not make 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., G.R. No. 124043, October 14, 1998

Definition of "income"

The word "income" which is derived from property, real or personal, provided in the last paragraph of Sec. 27 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 taken in its ordinary sense as gain or profit.

Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October 14, 1998

YMCA is exempt from payment of property tax but not income tax on its property rentals.

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 YMCA 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., G.R. No. 124043, October 14, 1998

Definition 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 organized and provided by the formal

school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels." Even non-formal education is understood to be school-based and "private auspices such as foundations and civic-spirited organizations" 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., G.R. No. 124043, October 14, 1998

CHAPTER V Computation of Taxable Income

SECTION 31 Taxable Income Defined — The term 'taxable income' means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws.

CASES DIGEST

Taxable Income Defined

Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent items of gross income specified in the said Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the same Code or other special laws. The gross income, referred to in Section 31, is described in Section 32 of the NIRC of 1997 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; prizes and winnings; pensions; and a partner's distributive share in the net income of a general professional partnership.

Commissioner of Internal Revenue vs. PAL, Inc., G.R. No. 180066, July 7, 2009

CHAPTER VI Computation of Gross Income

SECTION 32 Gross Income —

(A) General Definition. — Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items:

(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;

(2) Gross income derived from the conduct of trade or business or the exercise of a profession;

(3) Gains derived from dealings in property;

CASES DIGEST

Gross Income: Gains derived from dealings in property

The tax consequences arising from gains from a sale of property are not to be determined solely by the means employed to transfer legal title.

Generally, 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 consequences 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 Estate of Benigno P. Toda, Jr., et al., G.R. No. 147188, September 14, 2004

(4) Interests;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Annuities;

(9) Prizes and winnings;

(10) Pensions; and

(11) Partner's distributive share from the net income of the general professional partnership.

(B) Exclusions from Gross Income — The following items shall not be included in gross income and shall be exempt from taxation under this Title:

(1) Life Insurance. — The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

(2) Amount Received by Insured as Return of Premium. — The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.

(3) Gifts, Bequests, and Devises. — The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise, or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.

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

(5) Income Exempt under Treaty. — Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.

(6) Retirement Benefits, Pensions, Gratuities, etc. —

(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For

purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

CASES DIGEST

Retirement Benefits, Pensions, Gratuities, etc; Elements for exemption of retirement benefits from withholding tax

Under the NIRC, the retirement benefits of respondents are part of their gross income subject to taxes. For the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once.

Ma. Isabel T. Santos vs. Servier Phil., Inc., et al., G.R. No. 166377, November 28, 2008

Intercontinental Broadcasting Corp. vs. Noemi B. Amarilla, et al., G.R. No. 162775, October 27, 2006

(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee.

CASES DIGEST

RETIREMENT BENEFITS

FACTS: Petitioner PLDT terminated in 1995 the employment of several rank-and-file, supervisory, and executive employees due to redundancy. In compliance with labor law requirements, PLDT paid those separated employees separation pay and other benefits

but deducted from the separation pay withholding taxes in the total amount of P23,707,909.20 which it remitted to the BIR. PLDT filed with the BIR a claim for tax credit or refund of the P23,707,909.20, invoking Section 28 (b) (7) (B) ( now sec 32B6b ) of the 1977 National Internal Revenue Code which excluded from gross income ” [a]ny amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee.

The CTA denied PLDT'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. PLDT filed a Motion for New Trial/Reconsideration, praying for an opportunity to present the receipts and quitclaims executed by the employees and prove that they received their separation pay. The CTA denied PLDT's motion. PLDT thus filed a Petition for Review before the Court of Appeals which dismissed the same. Hence, this petition.

ISSUE: PLDT faulted the appellate court to have committed grave abuse of discretion:

(a) When it held that proof of payment of separation pay to the employees is required in order to avail of refund of taxes erroneously paid to the Bureau of Internal Revenue.

(b) When it held that petitioner failed to establish that petitioner's employees received their separation pay.

(c) In disregarding the certification/report of SGV & Co., which certified that petitioner is entitled to a refund of the amount of P6,679,167.72.

(d) In not ordering a new trial to allow petitioner to present additional evidence in support thereof.

HELD: The Supreme Court denied the petition.

PLDT must prove that the employees received the income payments as part of gross income and the fact of withholding. The CTA found that PLDT 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. While SGV certified that it had "been able to trace the remittance of the withheld taxes summarized in the C[ash] S[alary] V[ouchers] to the Monthly Remittance Return of Income Taxes Withheld for the appropriate period covered by the final payment made to the concerned executives, supervisors, and rank and file staff members of PLDT," the

same cannot be appreciated in PLDT's favor as the courts cannot verify such claim. While the records of the case contain the Alphabetical List of Employee from Whom Taxes Were Withheld for the year 1995 and the Monthly Remittance Returns of Income Taxes Withheld for December 1995, the documents from which SGV "traced" the former to the latter have not been presented. Failure to present these documents is fatal to PLDT's case under CTA Circular 1-95.

On the denial of PLDT'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 speaking, addressed to the sound discretion of the court which cannot be interfered with unless a clear abuse thereof is shown. PLDT has not shown any such abuse, however.

The affirmance by the appellate court of the CTA's denial of PLDT's motion for new trial on the ground of "newly discovered evidence," is in order. At all events, the alleged "newly discovered evidence" that PLDT seeks to offer does not suffice to establish its claim for refund, as it would still have to comply with Revenue Regulation 6-85 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 income.Philippine Long Distance Telephone Company vs. Commissioner of Internal Revenue, G.R. No. 157264, January 31, 2008

BIR ISSUANCES

REVENUE MEMORANDUM ORDER NO. 25-91 July 18, 1991

Guidelines for the determination of the tax treatment of Separation Benefits received by officials and employees on account of their separation from the service of government and private entities due to sickness or other physical disability.

It has come to the attention of this Office that officials/employees of government and private entities who resign/retire from their service of the employers allegedly for reasons of ill-health or sickness, submit medical certification from their physicians in order to avail of the tax exemption of their separation benefits, pursuant to Section 28 (b) 7 (B) of the National 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 working would be detrimental to his life, the following guidelines are hereby set to facilitate the processing of the request.

Pursuant to Section 28 (b) 7 (B) of the National Internal Revenue Code, as amended, any amount received by an official or employee or by his heirs from the employer (whether government or private) as a consequence of separation by such official or employee from the service of the employer, due to death, sickness 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 requests 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 required to be submitted to the Legislative, Ruling & Research Division to support such requests:

1. Sworn Affidavits to be executed by the Employer's physician and the Head of Office/Entity, attesting to the fact that the retiring/separated official or employee is suffering from a serious illness that affects the performance of his duties and endangers his life, if he continues working; and

2. Clinical Record of the employee/official concerned indicating the history of illness and initial diagnosis; and

3. Laboratory examination confirming the illness suffered by such employee/official.

Submission of the foregoing documents shall be without prejudice to further medical examination as may be necessary, to be conducted by the BIR Medical Officers in the National Office, and/or by specialists of identified government hospitals on the official or employee concerned, if he lives in Metro Manila; or by the Medical Officers of the Government Service and Insurance System or the Social Security System, as the case may be, in the Regional Office nearest to his residence, if outside Metro Manila.

(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.

(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration.

(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.

(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.

(7) Miscellaneous Items —

(a) Income Derived by Foreign Government — Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.

(b) Income Derived by the Government or its Political Subdivisions — Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.

(c) Prizes and Awards — Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:

(i) The recipient was selected without any action on his part to enter the contest or proceeding; and

(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.

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

(e) 13th Month Pay and Other Benefits — Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover:

(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;

(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;

(iii) Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year.

(f) GSIS, SSS, Medicare and Other Contributions - GSIS, SSS, Medicare andPag-Ibig contributions, and union dues of individuals.

(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness — Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.

(h) Gains from Redemption of Shares in Mutual Fund — Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of this Code.

BIR ISSUANCES

REVENUE REGULATIONS NO. 002-11 March 1, 2011Filing of Income Tax Return and/or Annual Information Return by Individuals, Including Estates and Trusts shall include in the Account Information Return (AIR) such income subject to final withholding tax and those exclusions from gross income.

SECTION 33 Special Treatment of Fringe Benefit

(A) Imposition of Tax — A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57(A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed-up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D) and (E) of Section 25.

(B) Fringe Benefit Defined — For purposes of this Section, the term 'fringe benefit' means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following:

(1) Housing;

(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;

(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

(C) Fringe Benefits Not Taxable. — The following fringe benefits are not taxable under this Section:

(1) Fringe benefits which are authorized and exempted from tax under special laws;

(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and

(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade, business or profession of the employer.

BIR ISSUANCES

Revenue Memorandum Circular 41-09 July 23, 2009In the case of Philippine Appliance Corporation vs. Laguesma, 226 SCRA 730 (1993), the Supreme Court held that a "managerial employee" is one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, execute management policies and/or to hire, transfer, suspend, lay-off, 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 requires the use of independent judgment. Where 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 work 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 concur: (1) his primary duty consists of performance of work directly related to management policies; (2) he customarily and regularly exercises discretion and independent judgment in the performance of his functions; (3) he regularly and directly assists in the management of the establishment; and (4) he does not devote 20% of his time to work other than those above prescribed. The test is whether the position requires 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. Villuga vs. NLRC, 225 SCRA 537

REVENUE REGULATIONS NO. 03-98May 21, 1998

Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits

SPECIAL TREATMENT OF FRINGE BENEFITS

(A) Imposition of Fringe Benefits Tax — A final withholding tax is hereby imposed on the grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank 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 when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the following rates:

Effective January 1, 1998 - 34%

Effective January 1, 1999 - 33%

Effective January 1, 2000 - 32%

The tax imposed under Sec. 33 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 quarterly basis

as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code.

The grossed-up 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 schedule:

Effective January 1, 1998 - 66%

Effective January 1, 1999 - 67%

Effective January 1, 2000 - 68%

The grossed-up monetary value of the fringe benefit represents the whole amount of income realized 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

REVENUE REGULATIONS NO. 005-11 March 16, 2011

Updated De Minimis 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 rank and file employees:

(a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year;

(b) Monetized value of vacation and sick leave credits paid to government officials and employees;

(c) Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month;

(d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500;

(e) Uniform and Clothing allowance not exceeding P4,000 per annum;

(f) Actual medical assistance, e.g., medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum;

(g) Laundry allowance not exceeding P300 per month;

(h) Employees achievement awards, e.g., 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 P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

(i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;

(j) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) 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.

REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as The National Internal Revenue Code" Relative to the Withholding of Income Tax on Compensation and Other Concerns

Exemptions from Withholding Tax on Compensation. — The following income payments are exempted from the requirements of withholding tax on compensation:

XXX XXXXXX

XXX XXXXXX

Facilities and privileges of relatively small value — Ordinarily, facilities, and privileges (such as entertainment, medical services, or so-called "courtesy" discounts on purchases), otherwise known as "de minimis benefits," furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently 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 rank and file employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees;

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;

(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,500.00;

(d) Uniforms and clothing allowance not exceeding P4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;

(f) Laundry allowance not exceeding P300.00 per month;

(g) Employees achievement awards, e.g., 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 P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from gross income under Section 32 (b) (7) (e) of the Code. Provided 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 P30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the SMW.

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.

Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Bureau of Internal Revenue.

CHAPTER VII Allowable Deductions

SECTION 34 Deductions from Gross Income — Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the following deductions from gross income:

(A) Expenses —

(1) Ordinary and Necessary Trade, Business or Professional Expenses —

(a) In General. — There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including:

(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid;

(ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession;

(iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor;

(iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals, public policy or public order shall in no case be allowed as a deduction.

(b) Substantiation Requirements. — No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the, development, management, operation and/or conduct of the trade, business or profession of the taxpayer.

CASES DIGEST

Guiding 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. Ordinarily, 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 require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981

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 making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question 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 work accomplished by the expenditure.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981

Expenses 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 one’s 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.

Hospital de San Juan de Dios, Inc. vs. Commissioner of Internal Revenue, G.R. No. 31305, May 10, 1990

What constitutes capital expenditures

Expenses relating to recapitalization and reorganization of the corporation, the cost of obtaining stock subscription, promotions expenses and commission of fees paid for the sale of stock reorganization are capital expenditures.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981

Questions in determining deductibility of compensation of corporate officers

Whenever a controversy arises on the deductibility, for purposes of income tax, of certain items for alleged compensation of officers of the taxpayer, two (2) questions become material, namely: (a) Have 'personal services been actually rendered' by said officers? (b) In the affirmative case, what is the 'reasonable allowance' thereof?

Alhambra Cigar & Cigarette Manufacturing Company vs. Commissioner of Internal Revenue, G.R. No. L-23226, November 28, 1967

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, like exemptions, are matters of legislative grace.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981

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 No. 393 that defines what royalty payments are proper. Improper payments of royalty are not deductible as legitimate business expenses.

3M Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 82833, September 26, 1988

Conditions for deductibility of business expense

The statutory test of deductibility requires that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) 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.

Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 28508-9, July 7, 1989

Requisites for deductibility of advertising expense.

To be deductible from gross income, advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc., G.R. No. 143672, April 24, 2003

Factors to consider in determining the reasonableness of an advertising expense

There is yet to be a clear-cut 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 to: the type and size 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. General Foods (Phils.), Inc., G.R. No. 143672, April 24, 2003

Two kinds of advertising.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer's trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc., G.R. No. 143672, April 24, 2003

Protection of brand franchise is akin to acquisition 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 akin to the acquisition 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. General Foods (Phils.), Inc., G.R. No. 143672, April 24, 2003

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. Said prerogative, however, is subject to certain considerations. The first relates to the extent to which the expenditures are actually capital outlays; this necessitates an inquiry 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. General Foods (Phils.), Inc. G.R. No. 143672, April 24, 2003

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 are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) the bonuses, when added to the salaries, are 'reasonable . . . when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer'

C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, G.R. No. L-24059, November 28, 1969

Factors 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 quality of the services performed with relation to the business.' Other tests suggested are: 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 size of the particular business'; 'the employees' qualifications and contributions to the business venture'; and 'general economic conditions'. However, 'in determining whether the particular salary or compensation payment is reasonable, the situation must be considered as a whole. Ordinarily, no single factor is decisive. . . . it is important to keep 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. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, G.R. No. L-24059, November 28, 1969

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. Deductions for income tax purposes partake 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. General Foods (Phils.), Inc., G.R. No. 143672, April 24, 2003

Expenses to establish reputation are capital expenditures.

An expense incurred to create a favorable image of the corporation in order to gain or maintain the public’s and its stockholder’s patronage, does not make it deductible as business expense. Efforts to establish reputation are akin to acquisition of capital assets

and, therefore, expenses related thereto are not business expense but capital expenditures.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981

Listing fee is an ordinary and necessary business expense.

A listing fee is an ordinary and necessary business expense for the privilege of having its stock listed.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981

Litigation 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, likewise, it was ruled by the U.S. 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 Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981

BIR ISSUANCES

REVENUE REGULATIONS NO. 10-02 July 10, 2002

Implementing the Provisions of Section 34(A)(1)(a)(iv) of the Tax Code of 1997, Authorizing the Imposition of a Ceiling on "Entertainment, Amusement and Recreational Expenses" 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 Sections 24(A); 25(A)(1); 26; 27(A), (B) and (C); 28(A)(1); 28(A)(6)(b) and Section 61 , of the Tax Code of 1997.

These regulations shall cover entertainment, amusement and recreation expenses of the following taxpayers:

a. Individuals engaged in business, including taxable estates and trusts;b. Individuals engaged in the practice of profession;c. Domestic corporations;d. Resident foreign corporations;

e. General professional partnerships, including its members."Entertainment, Amusement and Recreation Expenses" includes representation expenses and/or depreciation or rental expense relating to entertainment facilities, as described below.

The term "Representation Expenses" 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. For 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. CSAaDE

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. For purposes of proving that said expense is a representation expense and not fringe benefits, the taxpayer should maintain receipts and adequate records that indicate the (a) amount of expense (b) date and place of expense (c) purpose of expense (d) professional or business relationship of expense (e) name of person and company entertained with contact details.

The term "Entertainment Facilities" shall refer to (1) a yacht, vacation home or condominium; and (2) 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 make the same a fringe benefit for purposes of imposing the fringe benefits tax.

The term "Guests" shall mean persons or entities with which the taxpayer has direct business relations, such as but not limited to, clients/customers or prospective clients/customers. The term shall not include employees, officers, partners, directors, stockholders, or trustees of the taxpayer.

Exclusions— The following expenses are not considered entertainment, amusement and recreation expenses as defined under Section 2 hereof.

a. Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee relationship, pursuant to Revenue Regulations 2-98 , 3-98 and amendments thereto;b. Expenses for charitable or fund raising events;c. Expenses for bonafide business meeting of stockholders, partners or directors;d. Expenses for attending or sponsoring an employee to a business league or professional organization meeting;e. Expenses for events organized for promotion, marketing and advertising including concerts, conferences, seminars, workshops, conventions, and other similar events;f. Other expenses of a similar nature.Notwithstanding the foregoing, such items of exclusions may, nonetheless, qualify as items of deduction under Section 34 of the Tax Code of 1997, subject to conditions for deductibility stated therein.

Requisites of Deductibility of "Entertainment, Amusement and Recreation Expense". — The following are the requisites for deductibility of entertainment, amusement and recreation expense as defined above subject to the ceiling prescribed under Section 5 of these Regulations:

a. It must be paid or incurred during the taxable year;b. It must be: (i) directly connected to the development, management and operation of the trade, business or profession of the taxpayer; or (ii) 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 government-owned or controlled corporation (GOCC), or of a foreign government, or to a private individual, or corporation, or general professional partnership (GPP), or a similar entity, if it constitutes a bribe, kickback or other similar payment;e. It must be duly substantiated by adequate proof. The official receipts, or invoices, or bills or statements of accounts should be in the name of the taxpayer claiming the deduction; andf. The appropriate amount of withholding tax, if applicable, should have been withheld therefrom and paid to the Bureau of Internal Revenue.SECTION 5. Ceiling on Entertainment, Amusement, and Recreation Expense. — There shall be allowed a deduction from gross income for entertainment, amusement and recreation expense, as defined in Section 2 of these Regulations, in an amount equivalent 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 0.50 percent (%) of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1.00 percent (%) of net revenue (i.e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties. However, if the taxpayer is deriving income from both sale of goods/properties and services, the allowable entertainment, amusement and recreation expense shall in all cases be determined based on an apportionment formula taking into consideration the percentage of the net sales/net revenue to the total net sales/net revenue, but which in no case shall exceed the maximum percentage ceiling provided in these Regulations.

(c) Bribes, Kickbacks and Other Similar Payments — No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or -controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback.

(2) Expenses Allowable to Private Educational Institutions — In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27(B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof.

(B) Interest —

(1) In General — The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax: Provided, That effective January 1, 2009, the percentage shall be thirty-three percent (33%).

Forty-one percent (41%) beginning January 1, 1998;

Thirty-nine percent (39%) beginning January 1, 1999; and

Thirty-eight percent (38%) beginning January 1, 2000.

(2) Exceptions. — No deduction shall be allowed in respect of interest under the succeeding subparagraphs:

(a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year;

(b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36(B); or

(c) If the indebtedness is incurred to finance petroleum exploration.

(3) Optional Treatment of Interest Expense. — At the option of the taxpayer, interest incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.

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 United States has been defined as an unconditional and legally enforceable obligation for the payment of money. Within 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 taxpayer’s gross income.

Commissioner of Internal Revenue vs. Consuelo L. vda.dePrieto, G.R. No. L-13912, September 30, 1960

Definition of "theoretical interest"

"Theoretical interest" refers to interest "calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity cost" of investing funds in a given

business. Such "theoretical" or imputed interest does not arise from a legally demandable interest-bearing obligation incurred by the taxpayer who however wishes to find out, e.g., whether he would have been better off by lending out his funds and earning interest rather than investing such funds in his business.

Paper Industries Corp. of the Phil. vs. Court of Appeals, et al., G.R. Nos. 106949-50, December 1, 1995

"Carrying charges" may be capitalized or deducted from gross income at the option of taxpayer

The "carrying charges" which may be capitalized under the U.S. Internal Revenue Code include, interest on a loan "(but not theoretical funds)." Such "carrying charges" may, at the election of the taxpayer, either be (a) capitalized in which case the cost basis of the capital assets, e.g., machinery and equipment, will be adjusted by adding the amount of such interest payments or, alternatively, be (b) deducted from gross income of the taxpayer. Should the taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments.In other words, the taxpayer is not entitled to both the deduction from gross income and the adjusted (increased) basis for determining gain or loss and the allowable depreciation charge. The U.S. Internal Revenue Code does not prohibit the deduction of interest on a loan obtained for purchasing machinery and equipment against gross income, unless the taxpayer has also or previously capitalized the same interest payments and thereby adjusted the cost basis of such assets. prem08cd

Paper Industries Corp. of the Phil. vs. Court of Appeals, et al., G.R. Nos. 106949-50, December 1, 1995

BIR ISSUANCES

REVENUE REGULATIONS NO. 13-00 November 20, 2000

Implementing Section 34(B) of the Tax Code of 1997 on the Requirements for Deductibility of Interest Expense from the Gross 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.

Requisites for Deductibility of Interest Expense. — In general, subject to certain limitations, the following are the requisites for the deductibility of interest expense from gross income, viz:

(a) There must be an indebtedness;(b) There should be an interest expense paid or incurred upon such indebtedness;(c) The indebtedness must be that of the taxpayer,(d) The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;(e) The interest expense must have been paid or incurred during the taxable year;(f) The interest must have been stipulated in writing;(g) The interest must be legally due;(h) The interest payment arrangement must not be between related taxpayers as mandated in Sec. 34(B)(2)(b), in relation to Sec. 36(B), both of the Tax Code of 1997 ;(i) The interest must not be incurred to finance petroleum operations; and (j) In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure.Rules on the Deductibility of Interest Expense. —

(a) General Rule. — 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.

(b) Limitation. — 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 equal 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, viz:

Forty-one percent (41%) beginning January 1, 1998;

Thirty-nine percent (39%) beginning January 1, 1999; and

Thirty-eight percent (38%).beginning January 1, 2000 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 and/or in whatever currency the investments or deposits were made.

(C)Taxes —

(1) In General — Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except:

(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this Subsection (relating to credits for taxes of foreign countries);

(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.

(2) Limitations on Deductions — In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.

(3) Credit Against Tax for Taxes of Foreign Countries — If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with:

(a) Citizen and Domestic Corporation — In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and

(b) Partnerships and Estates — In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title.

An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph.

(4) Limitations on Credit — The amount of the credit taken under this Section shall be subject to each of the following limitations:

(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.

(5) Adjustments on Payment of Incurred Taxes — If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require.

(6) Year in Which Credit Taken — The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all

subsequent years shall be taken upon the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.

(7) Proof of Credits — The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:

(a) The total amount of income derived from sources without the Philippines;

(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and

(c) All other information necessary for the verification and computation of such credits.

CASES DIGEST

Deductions from Gross Income

Fines and penalties paid for late payment of taxes are not deductible

Deductions from gross income are matters of legislative grace; what is not expressly granted by Congress is withheld. Moreover, 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.

Lino Gutierrez, et al. vs. Collector of Internal Revenue, G.R. No. L-19537, May 20, 1965

When distinction between "taxes" and "debts" are inconsequential

While "taxes" and "debt" are distinguishable legal concepts, in certain cases, on account of their nature, the distinction becomes inconsequential. This qualification is recognized even in the United States. Thus, the term “debt” 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 requirements of the law. Although what is involved in the Prieto 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 Palanca, Jr., G.R. No. L-16626, October 29, 1966

(D) Losses —

(1) In General — Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions:

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.

(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return.

(2) Proof of Loss — In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than

ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and

(3) Net Operating Loss Carry-over — The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, 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 Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that —

(i) Not less than seventy-five percent (75%) 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

(ii) Not less than seventy-five percent (75%) 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.

For purposes of this Subsection, the term 'net operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year:

Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining four (4) years.

BIR ISSUANCES

REVENUE REGULATIONS NO. 14-01 August 27, 2001

Implementing Section 34(D)(3) of the National Internal Revenue Code of 1997 Relative to the Allowance of Net Operating Loss Carry-Over (NOLCO) as a Deduction from Gross Income to govern the deduction from gross income of the Net Operating Loss Carry-Over (NOLCO) pursuant to Section 34 (D) (3) of the Code, which provides:

"Net Operating Loss Carry-Over — The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, 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 Subsection. Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that —

(i) Not less than seventy percent (75%) 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 (ii) Not less than seventy-five percent (75%) 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.

For purposes of this Subsection the term 'net operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year.

(4) Capital Losses —

(a) Limitation — Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in Section 39.

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, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(5) Losses From Wash Sales of Stock or Securities — Losses from 'wash sales' of stock or securities as provided in Section 38.

(6) Wagering Losses — Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

(7) Abandonment Losses —

(a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner.

(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.

(E) Bad Debts —

(1) In General. — Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36(B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.

CASES DIGEST

Requisites for deductibility of "bad debts"

For debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt;

(2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) 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.

Philippine Refining Company vs. Court of Appeals, et al., G.R. No. 118794, May 8, 1996

Criteria for ascertaining worthlessness of debts

The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthless, in the year for which the deduction is sought; and (2) that, in so doing, he acted in good faith.

Collector of Internal Revenue vs. Goodrich International Rubber Co., G.R. No. L-22265, December 22, 1967

BIR ISSUANCES

REVENUE REGULATIONS NO. 25-02 November 19, 2002Implementing Section 34(E) of the Tax Code of 1997 on the Requirements for Deductibility of Bad Debts from Gross Income on the requirements for deductibility of bad debts from the gross income of a corporation, including banks 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. Requisites for valid deduction of bad debts from gross income — The requisites for deductibility of bad debts are:(1) There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;(2) The same must be connected with the taxpayer's trade, business or practice of profession;(3) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997;(4) The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and(5) 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 banks, 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. Without prejudice to the Commissioner's determination of the worthlessness and uncollectibility of debts, the taxpayer shall submit a BangkoSentralngPilipinas/Monetary Board written approval of the writing off of the indebtedness from the banks' books of accounts at the end of the taxable year. "Also, in no case may a receivable from an insurance or surety company be written-off from the taxpayer's books 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) Securities Becoming Worthless — If securities, as defined in Section 22(T), are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

Requisites for capital gain or capital loss on securities transactions

Securities Becoming Worthless. — If securities as defined in Section 22(T) 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 (to him), 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 requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

When securities become worthless, the law deems the loss as "a loss from the sale or exchange of capital assets"

When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets." A similar kind of treatment is given by the NIRC 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 NIRC dispenses, in effect, with the standard requirement of a sale or exchange for the application of the capital gain and loss provisions of the code.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(F) Depreciation —

(1) General Rule — There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each.

(2) Use of Certain Methods and Rates — The term 'reasonable allowance' as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods:

(a) The straight-line method;

(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F)(1);

(c) The sum-of-the-years-digit method; and

(d) Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner.

(3) Agreement as to Useful Life on Which Depreciation Rate is Based — Where under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the National Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement:

Provided, however, That where the taxpayer has adopted such useful life and depreciation rate for any depreciable asset and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representative, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection.

CASES DIGEST

Definition of "depreciation"

Depreciation 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 amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration.

Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22492, September 5, 1967

Depreciation commences with the acquisition of the property.

Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept 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 make such a provision, but it is its duty to its bond and stockholders, 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 Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22492, September 5, 1967

The law does not authorize depreciation of an asset beyond its acquisition cost.

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, 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. Moreover, 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. For then what the taxpayer would recover will be, not only the acquisition 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 Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22492, September 5, 1967

Depreciation of building is based on construction cost, not on its assessed value.

Where a building acquired by a corporation from the vendors in exchange for shares of its stocks 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. Priscila Estate, Inc., et al., G.R. No. L-18282, May 29, 1964

Findings of tax court on depreciation of assets should not be disturbed.

Depreciation is a question 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. Priscila Estate, Inc., et al., G.R. No. L-18282, May 29, 1964

Depreciation 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.

Lino Gutierrez, et al. vs. Collector of Internal Revenue, G.R. No. L-19537, May 20, 1965

When purchase of domestic goods and services considered as "capital goods or properties"

For petitioner's purchases of domestic goods and services to be considered as "capital goods or properties," three requisites must concur. First, useful life of goods or properties must exceed one year; second, said goods or properties are treated as depreciable assets under Section 34 (f) and; third, goods or properties must be used directly or indirectly in the production or sale of taxable goods and services. From 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 Malaya Power Plant 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 Section 34 (F) of the NIRC.

Kepco Phil. Corp. vs. Commissioner of Internal Revenue, G.R. No. 179356, December 14, 2009

(4) Depreciation of Properties Used in Petroleum Operations — An allowance for depreciation in respect of all properties directly related to production of petroleum

initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor.

However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line method.

The useful life of properties used in or related to production of petroleum shall be ten (10) years or such shorter life as may be permitted by the Commissioner.

Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five (5) years.

(5) Depreciation of Properties Used in Mining Operations — An allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows:

(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or

(b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used.

(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations — In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business, trade or profession shall be permitted only when such property is located in the Philippines.

(G) Depletion of Oil and Gas Wells and Mines —

(1) In General — In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, That

when the allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or, at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area.

Intangible costs in petroleum operations' refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection.

Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion.

(2) Election to Deduct Exploration and Development Expenditures — In computing taxable income from mining operations, the taxpayer may, at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the total amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted.

The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years.

"'Net income from mining operations', as used in this Subsection, shall mean gross income from operations less 'allowable deductions' which are necessary or related to mining operations. 'Allowable deductions' shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation.

In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas.

The term 'exploration expenditures' means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit.

The term 'development expenditures' means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction.

(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien Individual or Foreign Corporation. — In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines.

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 — "solely a matter of legislative grace." Hence, 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 inadequate is upon the taxpayer, and this is true with respect to the

value of the property constituting the basis of the deduction. This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence.

Consolidated Mines, Inc. vs. Court of Tax Appeals, et al., G.R. Nos. L-18843 & 18844, August 29, 1974

Differences 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 make a tax-free 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 Mines, Inc. vs. Court of Tax Appeals, et al., G.R. Nos. L-18843 & 18844, August 29, 1974

(H) Charitable and Other Contributions —

(1) In General — Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to nongovernment organizations, in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (5%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs.

(2) Contributions Deductible in Full — Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full:

(a) Donations to the Government — Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), in consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;

(b) Donations to Certain Foreign Institutions or International Organizations — Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws;

(c) Donations to Accredited Nongovernment Organizations — The term 'nongovernment organization' means a nonprofit domestic corporation:

(1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual;

BIR ISSUANCES

REVENUE REGULATIONS NO. 13-98 December 8, 1998

Deductibility of Contributions or Gifts Actually Paid or Made to Accredited Donee Institutions in Computing Taxable Income.

Donations to accredited non-stock, non-profit corporations/NGOs shall be entitled to the following benefits:

(1) Limited Deductibility. — Donations, contributions or gifts actually paid or made within the taxable year to accredited non-stock, non-profit corporations shall be allowed limited deductibility in an amount not in excess of ten percent (10%) for an individual donor, and five percent (5%) for a corporate donor, of the donor's income derived from trade, business or profession as computed without the benefit of this deduction.

(2) Full Deductibility. — Donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs shall be allowed full deductibility, subject to the following conditions:

(i) The accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, not later than the fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the Commissioner.

For this purpose, the term "utilization" shall have the meaning as defined under Sec. 1(c) of these Regulations.

(ii) The level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed thirty percent (30%) of the total expenses for the taxable year;

(iii) In the event of dissolution, the assets of the accredited NGO, would be distributed to another accredited NGO organized for similar purpose or purposes, or to the State 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 NGO to be used in such manner as in the judgment of said court shall best accomplished the general purpose for which the dissolved organization was organized.

(iv) The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property

(v) All the members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization.

(3) Exemption from Donor's Tax — Donations and gifts made in favor of accredited non-stock, non-profit corporations/NGOs shall be exempt from donor's tax: Provided,

however, That not more than thirty percent (30%) of the said donations and gifts for the taxable year shall be used by such accredited non-stock, non-profit corporations/NGOs institutions qualified-donee institution for administration purposes pursuant to the provisions of Section 101 (A)(3) and (B)(2) of the Tax Code .

(2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner;

(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and

(4) The assets of which, in the event of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means:

(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized.

(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized.

An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited

nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds.

(3) Valuation — The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property.

(4) Proof of Deductions — Contributions or gifts shall be allowable as deduction only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

CASES DIGEST

Charitable institution remains tax-exempt 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 out-patient, 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.

Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004

Rationale for tax exemption of charitable institutions

An institution does not lose its charitable character, and consequent exemption from taxation, by reason of the fact that those recipients of its benefits who are able to pay are required 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 consequent relief, to some extent, of the burden upon the state to care for and advance the interests of its citizens.

Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004

(I) Research and Development. —

(1) In General — A taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred.

(2) Amortization of Certain Research and Development Expenditures — At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses:

(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;

(b) Not treated as expenses under paragraph (1) hereof; and

(c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion.

In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures).

The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless, with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year prior to the taxable year for which the taxpayer makes the election.

(3) Limitations on Deduction — This Subsection shall not apply to:

(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and

(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.

(J) Pension Trusts — An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A)(1) of this Section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount: (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made.

CASES DIGEST

Income of pension trust is likewise tax-exempt

It is evident that tax exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, 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 No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private Plans for the benefit of laborers and employees outside of the Social Security Act.

Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 95022, March 23, 1992

(K) Additional Requirements for Deductibility of Certain Payments — Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that

the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section, Sections 58 and 81 of this Code.

(L) Optional Standard Deduction — In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under Sections 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

BIR ISSUANCES

February 18, 2010 REVENUE REGULATIONS NO. 002-10

SUBJECT : Amendment to Sections 6 and 7 of Revenue Regulations No. 16-2008 with Respect to the Determination of the Optional Standard Deduction (OSD) of General Professional Partnerships (GPPs) and the Partners Thereof, as well as the Manner and Period for Making the Election to Claim OSD in the Income Tax Returns

TO : All Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to the provisions of Sec. 244, in relation to Sec. 3 of Republic Act No. 9504 (RA 9504) amending Sec. 34 (L) of the Tax Code of 1997 (Code), as amended, these Regulations are hereby promulgated to amend certain provisions of RevenueRegulations No. 16-2008 to further clarify the manner of claiming the OSD by General Professional Partnerships and the partners comprising them and the manner of manifesting the election to use OSD for the taxable year concerned by all taxpayers entitled to it.

SECTION 2. Sec. 6 of Revenue Regulations No. 16-2008 is hereby amended to read as follows:

"SEC. 6. Determination of the Optional Standard Deduction for General Professional Partnerships (GPPs) and Partners of GPPs. — Pursuant to Sec. 26 of the Code, a GPP is not subject to income tax imposed under Title II thereof. However, the partners shall be liable to pay income tax on their separate and individual capabilities for their respective distributive share in the net income of the GPP.

Sec. 26 of the Code likewise provides that — "For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation." As such, a GPP may claim either the itemized deductions allowed under Section 34(A) to (J) of the Code or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding forty percent (40%) of its gross income. The net income determined by either claiming the itemized deduction or OSD from the GPP's gross income is the distributable net income from which the share of each partner is to be determined. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-through" entity where its income is ultimately taxed to the partners comprising it. In computing taxable income defined under Section 31 of the Code, all expenses which are

taxable to him. The following rules shall govern the claim of the partners of deductions from their share in the net income of the partnership, viz.:

1. If the GPP availed of the itemized deduction in computing its net income, the partners may still claim itemized deductions from said share, provided, that, in claiming itemized deductions, the partner is precluded from claiming the same expenses already claimed by the GPP. In fine, if the GPP claimed itemized deductions the partners comprising it can only claim itemized deductions which are in the nature of ordinary and necessary expenses for the practice of profession which were not claimed by the GPP in computing its net income or distributable net income during the year. Examples of these are representation expenses incurred by the partner where the covering invoice or receipt is issued in his name; travelling expenses while away from home, which were not liquidated by the partnership; depreciation of a car used in the practice of profession where said car is registered in the name of the partner; and similar expenses.

Hence, if the GPP availed of itemized deductions, the partners are not allowed to claim the OSD from their share in the net income because the OSD is a proxy for all the items of deductions allowed in arriving at taxable income. This means that the OSD is in lieu of the items of deductions claimed by the GPP and the items of deduction claimed by the partners.

2. If the GPP avails of OSD in computing its net income, the partners comprising it can no longer claim further deduction from their share in the said net income for the following reasons:

i. The partners' distributive share in the GPP is treated as his gross income not his gross sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be deducted not from his gross income but from his gross sales/receipts; and,

ii. The OSD being in lieu of the itemized deductions allowed in computing taxable income as defined under Section 31 of the Tax Code, it will answer for both the items of deduction allowed to the GPP and its partners.

3. Since one-layer of income tax is imposed on the income of the GPP and the individual partners where the law had placed the statutory incidence of the tax in the hands of the latter, the type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners. Accordingly, if the GPP claims itemized deductions, all items of deduction allowed under Section 34 can be claimed both at the level of the GPP and at the level of the partner in order to determine the taxable income. On the other hand, should the GPP opt to claim the OSD, the individual partners are deemed to have availed also of the OSD because the OSD is in lieu of the itemized deductions that can be claimed in computing taxable income.

4. If the partner also derives other gross income from trade, business or practice of profession apart and distinct from his share in the net income of the GPP, the deduction that he can claim from his other gross income would follow the same deduction availed of from his partnership income as explained in the foregoing rules. Provided, however, that if the GPP opts for the OSD, the individual partner may still claim 40% of its gross income from trade, business or practice of profession but not to include his share from the net income of the GPP.

SECTION 3. Sec. 7 of Revenue Regulations No. 16-2008 is hereby amended to read as follows:

"SEC. 7. Other Implications of the Optional Standard Deduction. — A taxpayer who elected to avail of the OSD not exceeding forty percent (40%) of gross sales or gross receipts, in case of an individual taxable under Secs. 24(A) and 25(A)(1) of the Tax Code, or forty percent (40%) of gross income, in case of a corporation subject to tax under Sec. 27(A) or 28(A)(1) of the same Code shall signify in his/its return such intention, otherwise he/it shall be considered as having availed himself of the itemized deductions allowed under Sec. 34 of the Code. Once the election to avail of the OSD or itemized deduction is signified in the return, it shall be irrevocable for the taxable year for which the return is made.

The election to claim either the OSD or the itemized deduction for the taxable year must be signified by checking the appropriate box in the income tax return filed for the first quarter of the taxable year adopted by the taxpayer. Once the election is made, the same type of deduction must be consistently applied for all the succeeding quarterly returns and in the final income tax return for the taxable year. Any taxpayer who is required but fails to file the quarterly income tax return for the first quarter shall be considered as having availed of the itemized deductions option for the taxable year.

Thus, a taxpayer who avails of the OSD in the first quarter of its/his taxable year shall have to claim the same OSD in determining its/his taxable income for the rest of the year, including the final income tax return which is due to be filed on or before the 15th day of the fourth month, following the close of the taxable year. Likewise, a taxpayer who avails of the itemized deduction in the first quarter of its/his taxable year or fails to file an income tax return for the first quarter of the taxable year, shall have to claim the itemized deduction in determining the taxable income for the rest of the year, including the final income tax return which is due to be filed on or before the 15th day of the fourth month, following the close of the taxable year.

An individual taxpayer who is entitled to and claimed the OSD shall not be required to submit with his tax return such financial statements otherwise required under the Code. Provided, that, except when the Commissioner otherwise permits, the said individual shall

keep such records pertaining to his gross sales or gross receipts. In the case of a corporation, however, said corporation is still required to submit its financial statements when it files its annual income tax return and to keep such records pertaining to its gross income as herein defined."

SECTION 4. Repealing Clause. — All revenue issuances or portions thereof which are inconsistent with the provisions of these Regulations are hereby amended, modified or repealed accordingly.

SECTION 5. Effectivity Clause. — These regulations shall take effect 15 days following its publication in newspaper of general circulation.

(SGD.) MARGARITO B. TEVES

Secretary of Finance

Recommending Approval:

(SGD.) JOEL L. TAN-TORRES

Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 016-08 November 26, 2008

Implementing the Provisions of Republic Act No. 9504 (Minimum Wage Law), Dealing on the Optional Standard Deduction (OSD) Allowed to Individuals and Corporations in Computing Their Taxable Income in lieu of the itemized deductions.

Determination of the Amount of Optional Standard Deduction for Individuals — The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) 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 OSD shall be based on the gross sales during the taxable year. On the other hand, if the individual employs the cash basis of accounting for his income and deductions, the OSD shall be based on his gross receipts during the taxable year.

It should be emphasized 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 OSD inasmuch as the law (RA 9504) is specific as to the basis thereof which states that for individuals, the basis of the 40% OSD shall be the "gross sales" or "gross receipts" and not the "gross income".For

other individual taxpayers allowed by law to report their income and deductions under a different method of accounting (e.g. percentage of completion basis, etc.) other than cash and accrual method of accounting, the "gross sales" or "gross receipts" pursuant to this Section shall be determined in accordance with said acceptable method of accounting.

Determination of the Amount of Optional Standard Deduction for Corporations — In the case of corporate taxpayers subject to tax under Sections 27 (A) and 28 (A) (1) of the Code, as amended, the OSD allowed shall be in an amount not exceeding forty percent (40%) of their gross income.

For purposes of these Regulations, "Gross Income" shall mean the gross sales less sales returns, discounts and allowances and cost of goods sold. "Gross sales" shall include only sales contributory to income taxable under Sec. 27 (A) 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.

For 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.

For 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 required by the customers and clients including (a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service, and (b) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that "cost of services" shall not include interest expense except in the case of banks and other financial institutions. The term "gross receipts" as used herein means amounts actually or constructively received during the taxable year. However, 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 Section 32 (A) of the Code, as amended, which are required to be declared in the income tax return of the taxpayer for the taxable year are part of the gross income against which the OSD may be deducted in arriving at taxable income. Passive 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 (40%) optional standard deduction.

(M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer — The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

Notwithstanding the provisions of the preceding Subsections, the Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2) effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law.

SECTION 35 Allowance of Personal Exemption for Individual Taxpayer

(A) In General — For purposes of determining the tax provided in Section 24(A) of this Title, there shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer.

In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption.

(B) Additional Exemption for Dependents. — There shall be allowed an additional exemption of Twenty-five thousand pesos (P25,000) for each dependent not exceeding four (4).

The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals.

In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed.

For purposes of this Subsection, a 'dependent' means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

(C) Change of Status — If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year.

If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year.

CASES DIGEST

Tax due is determined by the individual taxpayer's status and qualified dependents at the close of the taxable year.

What the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year

and not at the time the return is filed and the tax due thereon is paid. Emphasis must be made that Section 35 (C) of the NIRC allows a taxpayer to still claim the corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn 21 years old; or become gainfully employed. It is as if the changes in his or his dependents' status took place at the close of the taxable year.

Carmelino F. Pansacola vs. CIR, G.R. No. 159991, November 16, 2006

Tax due is determined by the individual taxpayer's status and qualified dependents at the close of the taxable year.

FACTS: On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950. In it he claimed the increased amounts of personal and additional exemptions under Section 35 4 of the NIRC, although his certificate of income tax withheld on compensation indicated the lesser allowed amounts on these exemptions. He claimed a refund of P5,950 with the BIR, which was denied. Later, 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. . ." Petitioner sought reconsideration, but the same was denied.

On appeal, the Court of Appeals denied his petition for lack of merit. The appellate court ruled that the NIRC took effect on January 1, 1998, thus the increased exemptions were effective only to cover taxable year 1998 and cannot be applied retroactively.

ISSUE: Could the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997?

HELD: No. Prefatorily, personal and additional exemptions under Section 35 of the NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens) 12 are entitled. Personal 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 lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our lawmakers make 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 NIRC specifically shows that Section 79 (D) provides that the personal and additional exemptions shall be determined in accordance with the main provisions in Title II of the NIRC. Its main provisions pertain to Section 35 (A) and (B).

Section 35 (A) and (B) 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. Section 24 (A) (1) (a) imposed income tax on a resident citizen's taxable income derived for each taxable year.

Section 31 defines "taxable income" as the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. As defined in Section 22 (P), "taxable year" means the calendar year, upon the basis of which the net income is computed under Title II of the NIRC. Section 43 also supports the rule that the taxable income of an individual shall be computed on the basis of the calendar year. In addition, Section 45 provides that the deductions provided for under Title II of the NIRC shall be taken for the taxable year in which they are "paid or accrued" or "paid or incurred."

Moreover, Section 79 (H) requires 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 Section 24 (A). This is for the purpose of either withholding from the employee's December salary, or refunding to him not later than January 25 of the succeeding year, the difference between the tax due and the tax withheld.

Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, 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 abovequoted provisions, what the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. Now comes Section 35 (C) of the NIRC which allows a taxpayer to still claim the corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn 21 years old; or become gainfully employed. It is as if the changes in his or his dependents' status took place at the close of the taxable year.

Consequently, his correct taxable income and his corresponding allowable deductions e.g. 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 15th day of April 1999 as mandated by Section 51 (C) (1). Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayer's gross or net income, as the case may be, for the taxable year 1998 to be filed in 1999. The NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998. Carmelino F. Pansacola vs. C I R, G.R. No. 159991, November 16, 2006

(D) Personal Exemption Allowable to Nonresident Alien Individual — A nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens or residents of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title.

SECTION 36 Items not Deductible

(A) General Rule — In computing net income, no deduction shall in any case be allowed in respect to —

(1) Personal, living or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate;

This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under Subsection (G)(1) of Section 34 of this Code.

(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or

(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy.

(B) Losses from Sales or Exchanges of Property. — In computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly —

(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or

(2) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or

(5) Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and a beneficiary of such trust.

CASES DIGEST

When 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 stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. prem05cdChina Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

SECTION 37Special Provisions Regarding Income and Deductions of Insurance Companies, Whether Domestic or Foreign—

(A) Special Deductions Allowed to Insurance Companies — In the case of insurance companies, whether domestic or foreign doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, That the released reserve be treated as income for the year of release.

(B) Mutual Insurance Companies — In the case of mutual fire and mutual employers' liability and mutual workmen's compensation and mutual casualty insurance companies requiring their members to make premium deposits to provide for losses and expenses, said companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portion of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves.

(C) Mutual Marine Insurance Companies — Mutual marine insurance companies shall include in their return of gross income, gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in the deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon those amounts between the ascertainment and payment thereof.

(D) Assessment Insurance Companies — Assessment insurance companies, whether domestic or foreign, may deduct from their gross income the actual deposit of sums with the officers of the Government of the Philippines pursuant to law, as additions to guarantee or reserve funds.

SECTION 38 Losses from Wash Sales of Stock or Securities —

(A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by purchase or by

exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34 unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer.

(B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss from the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is not less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the acquisition of which (or the contract or option to acquire which) resulted in the non-deductibility of the loss, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

SECTION 39 Capital Gains and Losses

(A) Definitions - As used in this Title —

(1) Capital Assets. — The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

BIR ISSUANCES

REVENUE REGULATIONS NO. 006-08 April 22, 2008Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of

Shares of Stock of domestic corporation that are listed and traded through the Local Stock Exchange, or disposition of shares through Initial Public Offering (IPO) or disposition of shares not traded through the Local Stock Exchange andHeld as Capital Assets

CASES DIGEST

Liquidation 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 liquidation does not foreclose a determination that a "trade or business" is being conducted by the seller. The sole question is — were the taxpayers in the business of subdividing real estate? 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 `property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.'"Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-26284, October 9, 1986

Gains from sale of subdivided lots are ordinary income.

One may, of course, liquidate 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 liquidation constitutes a business and a sale in the ordinary course of such a business and the preferred tax status is lost.Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al. G.R. No. L-26284, October 9, 1986

If the asset is not among the exceptions provided the NIRC, 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 kind of asset involved in the transaction.

Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-26284, October 9, 1986

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 recognized as helpful guides in making a determination, none of these is decisive; neither is the presence nor the absence of these factors conclusive. Each case must in the last analysis rest upon its own peculiar facts and circumstances.

Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-26284, October 9, 1986

Inherited property is deemed primarily for sale in the ordinary course of business if it is substantially improved or/and 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 make it salable. However, 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 Calasanz, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-26284, October 9, 1986

Property 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 Calasanz, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-26284, October 9, 1986

(2) Net Capital Gain — The term 'net capital gain' means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.

(3) Net Capital Loss — The term 'net capital loss' means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.

(B) Percentage Taken into Account — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income:

(1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and

(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

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

CASES DIGEST

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

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

BIR ISSUANCESREVENUE REGULATIONS NO. 18-01 November 13, 2001Guidelines on the Monitoring of the Basis of Property Transferred and Shares Received, Pursuant to a Tax-Free Exchange of Property for Shares under Section 40(C)(2) of the National Internal Revenue Code of 1997, Prescribing the Penalties for Failure to Comply with such Guidelines, and Authorizing the Imposition of Fees for the Monitoring Thereof.

(D) Net Capital Loss Carry-over — If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months.

(E) Retirement of Bonds, Etc — For purposes of this Title, amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof) with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

(F) Gains and Losses from Short Sales, Etc. — For purposes of this Title —

(1) Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets; and

(2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses.

CASES DIGEST

Two conditions for a capital gain or a capital loss to resultSection 29(d)(4)(B) of the NIRC conveys that the loss sustained by the holder of the securities, which are capital assets (to him), 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 requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets". A similar kind of treatment is given by the NIRC 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 NIRC dispenses, in effect, with the standard

requirement of a sale or exchange for the application of the capital gain and loss provisions of the code.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

SECTION 40Determination of Amount and Recognition of Gain or Loss (A)Computation of Gain or Loss — The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received;

CASES DIGEST

Instances when no recognition of gain or loss is made in sale or exchange of property.The law should be taken 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 inconsequential, 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 stocks, the exchanger, alone or together with others not exceeding four, gains control of the corporation.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(B) Basis for Determining Gain or Loss from Sale or Disposition of Property — The basis of property shall be —

(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or

(2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or

(3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property

at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value; or

(4) If the property was acquired for less than an adequate consideration in money or money's worth, the basis of such property is the amount paid by the transferee for the property; or

(5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction where gain or loss is not recognized under paragraph(C)(2) of this Section.

(C) Exchange of Property —

(1) General Rule — Except as herein provided, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized.

(2) Exception — No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation —

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or

(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.

BIR ISSUANCES

REVENUE REGULATIONS no. 18-2001 November 13, 2001Guidelines on the Monitoring of the Basis of Property Transferred and Shares Received, pursuant to a Tax-Free Exchange of Property for Shares under Sec.40 (c) (2) of the NIRC of 1997, Prescribing the Penalties for Failure to Comply with such Guidelines, and Authorizing the imposition of Fees for the Monitoring Thereof.

(3) Exchange not Solely in Kind

(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a security holder or a corporation receives not only stock or securities permitted to be received without the recognition of gain or loss, but also money and/or property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and the fair market value of such other property received: Provided, That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital gain.

(b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also money and/or other property, then (i) if the corporation receiving such money and/or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but (ii) if the corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not distributed.

(4) Assumption of Liability

(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as a part of the consideration, another party to the exchange assumes a liability of the taxpayer,

or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions.

"(b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be.

(5) Basis. —

(a) The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value: Provided, further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided, finally, That if the transferor receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes of stocks or securities.

(b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer.

(6) Definitions. —

(a) The term 'securities' means bonds and debentures but not 'notes' of whatever class or duration.

(b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition

by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Provided, finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor.

(c) The term 'control', when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote.

(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules and regulations for the purpose of determining the proper amount of transferred assets which meet the standard of the phrase 'substantially all' and for the proper implementation of this Section.

SECTION 41. Inventories. — Whenever in the judgment of the Commissioner, the use of inventories is necessary in order to determine clearly the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations, prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

If a taxpayer, after having complied with the terms and conditions prescribed by the Commissioner, uses a particular method of valuing its inventory for any taxable year, then such method shall be used in all subsequent taxable years unless:

(i) with the approval of the Commissioner, a change to a different method is authorized; or

(ii) the Commissioner finds that the nature of the stock on hand (e.g., its scarcity, liquidity, marketability and price movements) is such that inventory gains should

be considered realized for tax purposes and, therefore, it is necessary to modify the valuation method for purposes of ascertaining the income, profits, or loss in a more realistic manner: Provided, however, That the Commissioner shall not exercise his authority to require a change in inventory method more often than once every three (3) years: Provided, further, That any change in an inventory valuation method must be subject to approval by the Secretary of Finance.

SECTION 42. Income from Sources Within the Philippines

(A) Gross Income From Sources Within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines:

(1) Interests. — Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise;

CASES DIGEST

Residence of obligor who pays the interest determines the source of interest income.The law does not speak of activity but of "source". Even 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 NDC were done in Tokyo, it is the residence of the obligor who pays the interest which is the determining factor of the source of interest income.

National Development Company vs. Commissioner of Internal Revenue, G.R. No. L-53961, June 30, 1987

(2) Dividends. — The amount received as dividends:

(a) From a domestic corporation; and

(b) From a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ratio to such dividends as the gross income of

the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.

(3) Services. — Compensation for labor or personal services performed in the Philippines;

(4) Rentals and Royalties. — Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for —

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge or information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);

(e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;

(f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and

(iii) Tapes for use in connection with radio broadcasting.

(5) Sale of Real Property. — Gains, profits and income from the sale of real property located in the Philippines; and

(6) Sale of Personal Property. — Gains, profits and income from the sale of personal property, as determined in Subsection (E) of this Section.

(B) Taxable Income From Sources Within the Philippines. —

(1) General Rule. — From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines.

(2) Exception. — No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in Subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines.

(C) Gross Income From Sources Without the Philippines. — The following items of gross income shall be treated as income from sources without the Philippines:

(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section;

(2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section;

(3) Compensation for labor or personal services performed without the Philippines;

(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and

(5) Gains, profits and income from the sale of real property located without the Philippines.

(D) Taxable Income From Sources Without the Philippines. — From the items of gross income specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines.

(E) Income From Sources Partly Within and Partly Without the Philippines. — Items of gross income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines.

Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property

without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement.

(F) Definitions. — As used in this Section the words 'sale' or 'sold' include 'exchange' or 'exchanged'; and the word 'produced' includes 'created,' 'fabricated, 'manufactured,' 'extracted,' 'processed,' 'cured' or 'aged'.

CHAPTER VIIIAccounting Periods and Methods of Accounting

SECTION 43. General Rule. — The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.

CASES DIGESTUnder 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 knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question 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., G.R. No. 172231, February 12, 2007

Income realized within taxpayer's annual accounting period becomes the basis for computation of the gross income and the tax liability.Under the withholding tax system, income is viewed as a flow and is measured over a period of time known as an "accounting period." An accounting period covers twelve months, subdivided into four equal segments known as "quarters." Income realized within the taxpayer's annual accounting period (fiscal or calendar year) becomes the basis for the computation of the gross income and the tax liability.

Citibank, N.A. vs. Court of Appeals, et al., G.R. No. 107434, October 10, 1997

Accounting methods for tax purposes differentiated from methods for accounting purposes.While 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 quick to treat an item as income, slow to recognize deductions or losses. Thus, the tax law will not recognize deductions for contingent future losses except in very limited situations. Good accounting, on the other hand, requires their recognition. Once this fundamental difference in approach is accepted, income tax accounting methods can be understood more easily.

Consolidated Mines, Inc. vs. Court of Tax Appeals, et al., G.R. Nos. L-18843 & 18844, August 29, 1974

SECTION 44. Period in which Items of Gross Income Included. — The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.

SECTION 45. Period for which Deductions and Credits Taken. — The deductions provided for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly

reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period.

CASES DIGEST

ACCRUAL METHOD OF ACCOUNTING

FACTS: The BIR disallowed respondent's claimed expense deductions for professional and security services for the taxable year 1986; hence, it issued Assessment Notices for deficiency income tax. The BIR contended that, since respondent uses the accrual method of accounting, expenses for professional services which accrued in 1984 and 1985, 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 1986. Both the CTA and the CA cancelled the Assessment Notices holding that the claimed deductions were properly claimed in 1986 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 1984 or 1985, respondent could not declare the same as deduction for said years as the amount thereof could not be determined at that time

ISSUE: For taxpayers adopting the accrual method of accounting, when is an expense deemed to have accrued for purposes of availing the deduction allowed therefor under Sec. 34 of the Tax Code?

HELD: The accrual method relies upon the taxpayer's RIGHT TO RECEIVE amounts or its OBLIGATION TO PAY them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income ACCRUE where the right to receive them become FIXED; where there is created an ENFORCEABLE liability. Similarly, 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 ALL-EVENTS TEST has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) 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 known 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

1984 and 1985 legal and retainer fees of the law firm BengzonZarragaNarcisoCudalaPecsonAzcuna&Bengson. The firm has been respondent’s counsel since the 1960s. Respondent can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. Failure 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. For one, respondent, in the exercise of due diligence, could have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For 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 Similarly, the professional fees of SGV & Co. for auditing the financial statements of respondent for the year 1985 cannot be validly claimed as expense deductions in 1986 because respondent failed to present evidence showing that even with only "reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company would charge for its services.

The accrual method presents largely a question of fact and the taxpayer bears the burden of establishing the accrual of an expense or income. Respondent failed to discharge this burden.

Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly deducted from respondent's gross income for 1986 and were therefore properly disallowed by the BIR. C I R vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007

[CA-G.R. SP No. 70025. April 19, 2004.] COMMISSIONER OF INTERNAL REVENUE, vs. AYALA HOTELS, INC.

D E C I S I O N

May the Bureau of Internal Revenue (BIR) still assess a taxpayer for alleged deficiency income taxes despite the expiration of the three-year period provided for by law 1 as the period of limitation for assessment of taxes?

The Case

Petitioner, as the official of the Republic of the Philippines charged with the duty of assessing and collecting internal revenue taxes, seeks a review of the Decision, dated 10 January 2002, of the Court of Tax Appeals (CTA) in C.T.A. Case No. 6002 entitled Ayala Hotels, Inc. vs. Commissioner of Internal Revenue, the dispositive portion of which reads:

IN THE LIGHT OF ALL THE FOREGOING, the instant Petition for Review is hereby GRANTED. Accordingly, the subject assessment issued by the Respondent against Petitioner for the year 1993 is hereby ORDERED CANCELLED AND WITHDRAWN.

SO ORDERED.

and from the Resolution, dated 12 March 2002, denying petitioner's motion for reconsideration of the above-mentioned Decision, the dispositive portion of which reads:

WHEREFORE, Motion for Reconsideration is hereby DENIED for lack of merit.

SO ORDERED.

The Facts

The facts are undisputed. 4 Private respondent Ayala Hotels, Inc. (hereinafter referred to as respondent) entered into two (2) separate contracts of lease with two (2) lessees, namely, Manila Mandarin Hotel and Manila Peninsula Hotel, covering two (2) parcels of land in Makati. Both lease contracts similarly provide:

a) that each of the Lessees, with the consent of Petitioner, will erect a building on the parcels of land, to be used as a hotel;

b) the duration of the contract is twenty-five (25) years starting from the date of actual occupancy of the hotel by the first paying guest;

c) that the Petitioner 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 quality that will fit into the pattern of development of the surrounding area;

d) that the Lessees have an option to renew the lease for an additional period of 25 years under the same terms and conditions as those obtaining during the last year of such lease, the Lessees agree to promptly notify the Petitioner in writing within ninety (90) days before the termination of the original term of the lease; and

e) that the Lessees shall own the hotel building and all the improvements.

For the taxable year ending 31 December 1993, respondent duly filed on 15 April 1994 its Corporate Annual Income Tax Return (ITR) with the BIR.

On 7 October 1999 or 5½ years from the time respondent filed its ITR, respondent received from petitioner a Formal Assessment Notice (FAN) dated 17 September 1999, which FAN

alleged that respondent had deficiency income taxes dues to the Government for the taxable year 1993 total amount of P19,779,385.50, broken down as flows:

Net income per return P59,297,967.00

Add: Unreported income for the year 1993

on improvements by Lessees:

Manila Mandarin Hotel: P7,546,227.00

Manila Peninsula Hotel: 8,600,210.00

——————

P16,146,437.00

——————

Net income per investigation P75,444,404.00

===========

Income tax due thereon P26,405,541.00

Less: Income tax already paid 20,754,288.00

——————

Deficiency income tax 5,651,253.00

Add: 50% Surcharge 2,825,626.50

25% Surcharge 1,412,813.25

——————

9,889,692.75

Add: 20% interest per annum from

4-15-94 to 10-15-99 9,889,692.75

——————

Total Amount Due P19,779,385.50

===========

The deficiency assessment arose from the finding of the petitioner that the respondent should have reported as part of its income for taxable year 1993, the total amount of P16,146,437.00 representing a portion of the total value of the leasehold improvements introduced by the two lessees of respondent, namely, Manila Mandarin Hotel and Manila Peninsula Hotel.

Petitioner's findings were premised mainly on the application of Section 49 of Revenue Regulations No. 2 (Income Tax Regulations) which provides:

Section 49. Improvements by Lessees. — When 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 bases:

(a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease.

(b) 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 aliquot part thereof.

Specifically, 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 Section 49, that is, to report the fair market 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 aliquot part of the estimated depreciated value of such buildings or improvements at the termination of the lease.

Pursuant to the Audit Report sent to the respondent by petitioner through the revenue officers who conducted the examination of respondent's books, the following calculations were made to establish the amounts alleged as "unreported income" subject of the instant deficiency assessment:

Manila Mandarin Manila Peninsula

Hotel (in Pesos) Hotel (in Pesos)

COST OF IMPROVEMENTS

Site Improvement 4,084,259.00 314,905,352.00

Building and Building

Equipment 398,949,466.00 120,738,873.00

APPRAISAL INCREASE

Site Improvement 329,005.00 121,320,807.00

Building and Building

Equipment 99,719,098.0016,382,293.00

Total Value

(Estimated useful life

@ 40 years) (a) 503,081,828.00 573,347,325.00

NET BOOK VALUE

AFTER 25 YEARS (b) 188,655,686.00 215,005,247.00

ANNUAL REPORTABLE

INCOME FOR 25 YEARS (c) 7,546,227.00 8,600,210.00

TAXABLE INCOME

FOR 1993 7,546,227.00 8,600,210.00

The amount of alleged unreported income for 1993 was arrived at by —

(i) taking the total value of the improvements (including the building equipment) in (a) above;

(ii) dividing the same by 40 years representing estimated useful life to arrive at the annual depreciation over 40 years;

(iii) multiplying the annual depreciation over 40 years by 25 years (representing the original 25-year term of the lease) to arrive at the total depreciation expense to be claimed by the lessee for the first 25-year term of the lease;

(iv) deducting the total depreciation expense for 25 years arrived at in (iii) above from the total value of the improvements in (a) above to arrive at the net depreciated value of the improvements after 25 years in (b) above; and

(v) dividing the net depreciated value after 25 years in (b) above by 25 years to arrive at the aliquot part of the net depreciated value of the improvements at the end of the original 25-year term of the lease which should allegedly be reported as income for each year of the original 25-year term of the lease.

On 5 November 1999, respondent, through its external auditors, filed with petitioner its protest letter dated 4 November 1999, pursuant to Section 228 of the Tax Code, as amended. Said protest letter specified the factual and legal bases of the protest against said alleged deficiency income tax assessment, and further requested that the deficiency tax assessment be withdrawn and cancelled.

On 27 December 1999, petitioner's letter, dated 6 December 1999, was received by respondent's external auditors, denying the protest filed on 5 November 1999.

The denial of respondent's protest is based on the following grounds:

(i) the respondent's failure to report alleged rental income in the amount of P16,146,437.00 can be legally considered a fraudulent act with intent to evade tax; hence, the ten-year and not the three-year, prescriptive period should apply;

(ii) 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 Supreme case, of Aznar vs. Commissioner of Internal Revenues 5 that the filing of a false tax return, even without any intent to evade tax, is likewise embraced under the ten-year statute of limitations;

(iii) that Section 49 of Revenue Regulations No. 2, upon which the assessment issued against respondent is based, is legal and has the force and effect of law;

(iv) that the 50% 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

(v) that the imposition of the 25% surcharge in addition to the 50% surcharge is justified considering that, since the assessment against the Petitioner pertains to calendar year 1993, the provisions of the old NIRC should apply, and not those of the Tax Reform Act of 1997 and Revenue Regulations No. 12-99.

On 26 January 2000, 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 1993 in the amount of P19,779,385.50.

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 three-year prescriptive period and that there is no basis to apply the extended ten-year 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 ten-year prescriptive period to apply, the must be, apart from the element of mistake, a clear, unequivocal 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 ten-year period. Petitioner's reliance on the Aznar Case, according to the CTA, was misplaced. Citing Packaging Products Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4464, dated 11 January 1995, 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 mistake, not culpable in respect of its value would not constitute such false return.

From the said Decision of the CTA, petitioner filed a motion for reconsideration 6 which was denied in a Resolution dated 12 March 2002 7. With regard to petitioner's argument that Section 49 of Revenue Regulation No. 2 is still valid and applicable in the instant case, the CTA ruled that Section 49 of Revenue Regulation No. 2, which served as basis for the issuance of the subject assessment was declared without force and effect by the United States Supreme Court (USSC). The BIR recognizes this fact when on 6 May 1975, it issued a BIR Ruling addressed to Mr. Antonio M. de Ynchausti adopting the said ruling. Considering that the interpretation of the USSC of our tax law carries great weight and respect, having patterned our own law after the US Tax Code, the basis for which the subject assessment was issued become doubtful.

The Petition

Petitioner is now before this Court seeking a review of the said Decision and Resolution issued by the CTA.

Petitioner argues that respondent's failure to report in its 1993 income tax return the rental income from improvements introduced by its lessees, although unintentional, makes the 1993 return a false return, therefore, the ten-year prescriptive period applies as prescribed by Section 223 of the Tax Code (now Section 222 of the 1997 NIRC 8 ). Petitioner, again cites the Aznar Case where the Supreme 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 — "falsity", "fraud" and "omission". That there is a difference between "false return" and "fraudulent return" cannot be denied. While 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.

Petitioner further argues that Section 49 of Revenue Regulation No. 2 has the force and effect of law having been promulgated by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, in the exercise of his power under Section 244 of the 1997 NIRC to "promulgate all needful rules and regulations in connection with the implementation of the provisions of internal revenue laws." Not having been modified or revoked, 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 making the respondent liable for the 50% surcharge. The 25% surcharge, on the other hand, was imposed applying the old NIRC considering that the case pertains to deficiency income tax for the calendar year 1993.

Respondent, on the other hand, maintains that petitioner's right to assess deficiency income taxes has prescribed considering that the FAN was issued only after 5½ years from the time respondent filed its ITR, way beyond the three-year prescriptive period provided for under Section 203 of the 1997 NIRC. To bolster its argument, respondent cites CTA case San Miguel Corporation vs. Commissioner of Internal Revenue (6 January 1995) which ruled that there is nothing in the Aznar Case which establishes a hard and fast rule that every "deviation" from the truth necessarily brings a particular return under the coverage of Section 223 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 Section 331 (now Section 203) of the Tax Code should not be applied.

Respondent further argues, by citing the case of Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc., 10 that mere falsity of a return does not merit the application of the ten-year 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 ten-year prescriptive period.

On the validity of Section 49 of Revenue Regulation No. 2, respondent posits that the said revenue regulation should no longer be enforced considering that in the 12 March 2002 Resolution of the CTA, the court mentioned the fact that its counterpart provision in the US Revenue Regulations was declared without force and effect by the US Supreme Court and the BIR itself adopted this ruling in its 6 May 1975 ruling issued to Mr. Antonio M. de Ynchausti stating that, Section 49 of Revenue Regulation No. 2, which was patterned after the US 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.

Petitioner 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 Aznar Case and consequently, the assessment made 5½ years after the ITR was filed on 15 April 1994 was still within the ten-year prescriptive period provided for in Section 222 of the 1997 NIRC.

What, therefore, constitutes "false return" to warrant the application of the ten-year prescriptive period?

Section 222 of the 1997 NIRC provides:

(a) 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 (10) 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 taken cognizance of in the civil or criminal action for the collection thereof.

In interpreting the above provision, it is important to note that commentaries 11 consider two (2) groups of exceptions provided for in Section 222: The first, where there is a failure to file the required 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" qualifies not only the word "fraudulent" but also the word "false", having been grouped together as one category under the exceptions.

Under the rules of statutory construction, the qualifying 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 lawmakers to qualify 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 Florentino and Zandueta vs. P.N.B., 12 the Supreme Court ruled in this wise:

Grammatically, the qualifying clause refers only to the last antecedent; that is, "any citizen of the Philippines or any association or corporation organized under the laws of the Philippines." It should be noted that there is a comma before the words "or to any citizen, etc.," which separates said phrase from the preceding ones.

The words "false" and "fraudulent" can therefore be treated as one category of exception qualified by the phrase "with intent to evade tax."

But even if We disregard the grammatical construction, there are still persuasive reasons why the qualifying 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. Consequently, the exceptions to the law on prescription should be strictly construed. 13 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 Aznar Case with regard to the issue of prescription is misplaced. Although in the said case, the Supreme 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 mistake in ITR entries are made by taxpayers. Otherwise, any mistake, however slight, in a return filed by a taxpayer in good faith would justify the application of the ten-year prescriptive period for assessment. Consequently, the protection provided for under Section 203 of the 1997 NIRC is rendered nugatory. Logically therefore, not all "false returns" would call for an application of Section 222 of the 1997 NIRC. Only

"false returns" which are filed by a taxpayer with intent to evade tax should warrant an application of the ten-year prescriptive period.

In order to render a return made by a taxpayer a "false return" within the meaning of Section 222, 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 mistake, not culpable in respect of its value would not constitute a false return.

Moreover, the factual setting of the Aznar 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 1946 to 1951, covering more than five taxable years. On the other hand, in this case, respondent was assessed deficiency income taxes only for the year 1993.

There is a false or fraudulent return if any of the following are present:

1. There is intentional substantial under declaration of income.

2. There is intentional substantial overstatement of deductions.

3. 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. (emphasis supplied)

In the Aznar Case the taxpayer undoubtedly filed several false tax returns warranting the application of the ten-year 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. Moreover, 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 ten-year prescriptive period based on the ground that there is no "willful intention to evade tax" on the part of the Petitioner (respondent herein).

An indispensable ingredient that must be proven to exist for the 10-year prescriptive period to apply is that there must be, apart from the element of mistake, a clear, unequivocal 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 Section 49 of Revenue Regulation No. 2 admits of different interpretations.

In one commentary, the authors recognize 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 offered:

(a) BIR Rule (Rev. Reg. No. 2): At his option, the lessor may consider the property as income —

(1) Upon the completion of the improvement; or

(2) By spreading the value of the improvement over the life of the lease.

(b) United States Rule (Blatt vs. U.S., 308 U.S. 267): —

(1) If the improvements are in the concept of rents, the lessor must treat the property as income upon completion of the improvement; but

(2) 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. Equally acceptable perhaps would be the following approaches to a lessor who is

(a) On cash basis — The lessor may consider the improvements as income upon the effective transfer of legal and beneficial ownership to him, i.e., fulfillment of all conditions therefore. If such transfer were to take place prior to the termination of the lease it shall be its fair market value at the time of transfer minus its expected depreciation for the balance of the period (such remaining value being what the improvement would be worth to the taxpayer). If the transfer were to take place upon the termination of the lease then the taxable income would be the fair market 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.

(b) On accrual basis — 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 Section 49 of Revenue Regulation No. 2, 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 U.S. 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. Differences in interpretation of the law between the Commissioner and the taxpayer (do) not necessarily make the taxpayer's return false.

The burden of proving fraud is with the BIR. One of the disputable presumptions provided in Section 3 (ff), Rule 131 of the Revised Rules of Court is that the law has been obeyed. If the three-year 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 (10) year period is applicable.

The Supreme Court has ruled,

On the issue of whether Sec 331 or Sec. 332 (a) of the National 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. . . . Petitioner merely relies on the provisions of Section 25 of the National Internal Revenue Code, violation of which, according to petitioner, presupposes the existence of fraud. But this is begging the question and We do not subscribe to the view of the petitioner.

Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the court below. . . . Fraud is never lightly presumed because it is a serious charge. (emphasis supplied) 20

In the above quoted case of Commissioner of Internal Revenue vs. Ayala Securities Corporation, 21 the Supreme Court applied the Aznar doctrine (on false and fraudulent return in relation to the fraud penalty) to the prescriptive period, stating that fraud must be alleged and proved and never lightly presumed. The Aznar 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. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by the law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere

mistake cannot be considered fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith. (emphasis supplied)

Considering the foregoing, there is no basis to disregard the three-year prescriptive period. Since 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 three-year period provided in Section 203 of the 1997 NIRC and not the ten-year period provided in Section 222 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.

WHEREFORE, the petition is DISMISSED. The Decision, dated 10 January 2002, of the Court of Tax Appeals (CTA) in C.T.A. Case No. 6002 entitled Ayala Hotels, Inc. vs. Commissioner of Internal Revenue, is hereby AFFIRMED in toto. SO ORDERED.

Footnotes

SEC. 203. Period of limitation upon assessment and collection. — Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) 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 three-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. (The National Internal Revenue Code [NIRC] of 1997).

SEC. 222. Exceptions as to period of limitation of assessment and collection of taxes. —

(a) 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 (10) 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 taken cognizance of in the civil or criminal action for the collection thereof. (1997 NIRC).

SECTION 46 Change of Accounting Period— 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 Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47.

BIR ISSUANCES

REVENUE REGULATIONS NO. 003-11 March 7, 2011

Policies, Guidelines and Procedures on the Application for Change in Accounting Period of a Taxpayer

Change of Accounting Period — Pursuant to Section 46 of the NIRC of 1997, 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 (BIR), be computed on the basis of such new accounting period. Whenever a taxpayer changes its accounting period, the taxpayer is required 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.

SECTION 47 Final or Adjustment Returns for a Period of Less than Twelve (12) Months. —

(A) Returns for Short Period Resulting from Change of Accounting Period. — If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.

(B) Income Computed on Basis of Short Period. — Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary

of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made.

SECTION 48. Accounting for Long-term Contracts. — Income from long-term contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.

SECTION 49 InstallmentBasis. —

(A) Sales of Dealers in Personal Property. — Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price.

(B) Sales of Realty and Casual Sales of Personalty. — In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income

may, under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term 'initial payments' 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.

(C) Sales of Real Property Considered as Capital Asset by Individuals. — An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

(D) Change from Accrual to Installment Basis. — If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.

SECTION 50 Allocation of Income and Deductions. — In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.

CHAPTER IXReturns and Payment of Tax

SECTION 51 Individual Return. —

(A) Requirements. —

(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;

(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;

(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and

(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.

(2) The following individuals shall not be required to file an income tax return:

(a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return, regardless of the amount of gross income;

(b) An individual with respect to pure compensation income, as defined in Section 32(A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return;

(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and

(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.

BIR ISSUANCES

REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as The National Internal Revenue Code" Relative to the Withholding of Income Tax on Compensation and Other Concerns

Exemptions from Withholding Tax on Compensation. — The following income payments are exempted from the requirements of withholding tax on compensation:

XXX XXXXXXCompensation income of Minimum Wage Earners (MWEs) who work in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB 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.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise be covered by the above exemption. Provided, however, that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt form income tax, and consequently, from withholding tax.

MWEs 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 SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax and consequently, to withholding tax.

XXX XXXXXX

Facilities and privileges of relatively small value — Ordinarily, facilities, and privileges (such as entertainment, medical services, or so-called "courtesy" discounts on purchases), otherwise known as "de minimis benefits," furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently 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 rank and file employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees;

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;

(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,500.00;

(d) Uniforms and clothing allowance not exceeding P4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;

(f) Laundry allowance not exceeding P300.00 per month;

(g) Employees achievement awards, e.g., 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 P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from gross income under Section 32 (b) (7) (e) of the Code. Provided 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 P30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the SMW.

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.

Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Bureau of Internal Revenue.

(3) The foregoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

(4) The income tax return shall be filed in duplicate by the following persons:

(a) A resident citizen — on his income from all sources;

(b) A nonresident citizen — on his income derived from sources within the Philippines;

(c) A resident alien — on his income derived from sources within the Philippines; and

(d) A nonresident alien engaged in trade or business in the Philippines — on his income derived from sources within the Philippines.

(B) Where to File. — Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the

Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner.

BIR ISSUANCES

REVENUE REGULATIONS NO. 003-10 February 24, 2010 Submission of the Statement of Management Responsibility

REVENUE REGULATIONS NO. 02-06 December 1, 2005Mandatory Attachments of the Summary Alphalist of Withholding Agents of Income Payments Subjected to Tax Withheld at Source (SAWT) to Tax Returns With Claimed Tax Credits due to Creditable Tax Withheld at Source and of the Monthly Alphalist of Payees (MAP) Whose Income Received Have Been Subjected to Withholding Tax to the Withholding Tax Remittance Return Filed by the Withholding Agent/Payor of Income Payments

REVENUE REGULATIONS NO. 002-11 March 1, 2011Filing of Income Tax Return and/or Annual Information Return by Individuals, Including Estates and Trusts shall include in the Account Information Return (AIR) such income subject to final withholding tax and those exclusions from gross income.Filing of ITR with AIR. — Starting with taxable year 2010, individuals, estates and trusts required under the law and existing issuances to file an ITR should file said ITR together with the AIR (BIR Form No. 1705) Said individuals, estates and trusts shall include in the AIR such income subject to final withholding tax and those exclusions from gross income under Section 32 (B) of the Tax Code, as amended. Individuals not required to file income tax returns or those qualified for substituted filing, may file an ITR for purposes of loans, foreign travel requirements, etc. However, if they file an ITR, they should likewise attach a duly accomplished AIR.

REVENUE REGULATIONS NO. 015-10 November 25, 2010Notes to Financial Statements in the Income Tax Returns shall include information on taxes, duties and license fees paid or accrued during the taxable year, particularly the following:1. The amount of VAT output tax declared during the year and the account title and amount/s upon which the same was based. If there are zero-rated sales/receipts and/or exempt sales/receipts, a statement to that effect and the legal basis therefor; 2. The amount of VAT Input taxes claimed broken down into:a. Beginning of the year; b. Current year's domestic purchases/payments for:i. Goods for resale/manufacture or further processingii. Goods other than for resale or manufactureiii. Capital goods subject to amortizationiv. Capital goods not subject to amortization

v. Services lodged under cost of goods soldvi. Services lodged under other accounts; c. Claims for tax credit/refund and other adjustments; andd. Balance at the end of the year.3. The landed cost of imports and the amount of customs duties and tariff fees paid or accrued thereon;4. The amount of excise tax/es, classified per major product category, i.e., tobacco products, alcohol products, automobiles, minerals, oil and petroleum, etc. paid on —a. Locally produced excisable items, andb. Imported excisable items.5. Documentary stamp tax (DST) on loan instruments, shares of stock and other transactions subject thereto; 6. All other taxes, local and national, including real estate taxes, license and permit fees lodged under the Taxes and Licenses account both under the Cost of Sales and Operating Expense accounts;7. The amount of withholding taxes categorized into:i. Tax on compensation and benefitsii. Creditable withholding tax/esiii. Final withholding tax/es8. Periods covered and amount/s of deficiency tax assessments, whether protested or not;9. Tax cases, and amounts involved, under preliminary investigation, litigation and/or prosecution in courts or bodies outside the BIR."

CASES DIGESTFailure to file a return by the taxpayerThe "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 NIRC as well as previous Court decisions which show that with regard to the filing of an income tax return, the NIRC considers three distinct violations: (1) a false return, (2) a fraudulent return with intent to evade tax, and (3) failure to file a return. The same is illustrated in Section 51 (b) of the NIRC which reads:(b) Assessment and payment of deficiency tax In case a person fails to make and file a return or list at the time prescribed by law, or makes willfully or otherwise, false or fraudulent return or list .

Republic of the Phil. vs. Ferdinand R. Marcos II, et al., G.R. Nos. 130371 & 130855, August 4, 2009

(C) When to File. —

(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.

(2) Individuals subject to tax on capital gains:

(a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(C) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and

(b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition.

(D) Husband and Wife. — Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year.

(E) Return of Parent to Include Income of Children. — The income of unmarried minors derived from property received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax.

(F) Persons Under Disability. — If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.

(G) Signature Presumed Correct. — The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him.

The People vs Gloria Kintanar tax evasion case wherein the respondent was a sales agent of Forever Living products who did not report proper income taxes is a landmark case because the Supreme Court upheld the Court of Tax Appeal’s “willful blindness” doctrine that requires 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.

REVENUE REGULATIONS NO. 003-10 February 24, 2010 Submission of the Statement of Management Responsibility

SECTION 52 Corporation Returns.

(A) Requirements. — Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.

BIR ISSUANCES

REVENUE REGULATIONS NO. 003-09 February 9, 2009

Regulations Expanding the Electronic Filing and Payment System (EFPS) Coverage to Include the Top 20,000 Private Corporations Duly Identified Under RR No. 14-2008

REVENUE REGULATIONS NO. 003-10 February 24, 2010 Submission of the Statement of Management Responsibility

(B) Taxable Year of Corporation. — A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code.

BIR ISSUANCES

REVENUE REGULATIONS NO. 017-10 November 26, 2010Consolidated Regulations Implementing Republic Act No. 7646, An Act Authorizing the Commissioner of Internal Revenue to Prescribe the Place for Payment of Internal

Revenue Taxes by Large Taxpayers and Prescribing the Coverage and Criteria for Determining Large Taxpayers

REVENUE REGULATIONS NO. 017-10 November 26, 2010

Consolidated Regulations Implementing Republic Act No. 7646, An Act Authorizing the Commissioner of Internal Revenue to Prescribe the Place for Payment of Internal Revenue Taxes by Large Taxpayers and Prescribing the Coverage and Criteria for Determining Large Taxpayers

(C) Return of Corporation Contemplating Dissolution or Reorganization. — Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

CASES DIGEST

Return of Corporation Contemplating Dissolution or ReorganizationA tax clearance from the BIR is required before the SEC could approve the dissolution of a corporation. Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations No. 1 regulate the relations only as between the SEC and the BIR, making a certificate of tax clearance a prior requirement before the SEC could approve the dissolution of a corporation. Section 30 of the New Central Bank Act lays down the proceedings for receivership and liquidation of a bank. The said provision is silent as regards the securing of a tax clearance from the BIR.

In Re: Rural Bank of Bokod (Benguet), Inc., PDIC vs. BIR, G.R. No. 158261, December 18, 2006

The PDIC, as receiver and liquidator, is duty-bound to file a final return.The first paragraph of Section 30(C) of the Tax Code of 1997, read in conjunction with Section 54 of the same Code, clearly imposes upon PDIC, as the receiver and liquidator of RBBI, the duty to file a final return.

In Re: Rural Bank of Bokod (Benguet), Inc., PDIC vs. BIR, G.R. No. 158261, December 18, 2006

(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. — Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24(C), 25(A)(3), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall file a return within thirty (30) days after each transaction and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.

SECTION 53. Extension of Time to File Returns. — The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code.

SECTION 54. Returns of Receivers, Trustees in Bankruptcy or Assignees. — In cases wherein receivers, trustees in bankruptcy or assignees are operating the property or business of a corporation, subject to the tax imposed by this Title, such receivers, trustees or assignees shall make returns of net income as and for such corporation, in the same manner and form as such organization is hereinbefore required to make returns, and any tax due on the income as returned by receivers, trustees or assignees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody or control.

SECTION 55. Returns of General Professional Partnerships. — Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32(B) of this Title, setting forth the items of gross

income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners.

SECTION 56. Payment and Assessment of Income Tax for Individuals and Corporations. —

(A) Payment of Tax. —

(1) In General. — The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due.

(2) Installment Payment. — When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.

BIR ISSUANCES

REVENUE REGULATIONS NO. 001-10 January 21, 2010

Expanding the Coverage of Taxpayers Required to File Returns and Pay Taxes Through the Electronic Filing and Payment System (EFPS) of the Bureau of Internal Revenue

REVENUE REGULATIONS NO. 002-08 January 10, 2008

Amending Certain Rules and Regulations Relative to the Collection and Remittance of Taxes Paid to Authorized Agent Banks (AABs) thru Over-the-Counter (OTC) and Electronic Filing and Payment System (EFPS) and Amending Further the Memorandum of Agreement Relative to the Accreditation of the AABs

(3) Payment of Capital Gains Tax. — The total amount of tax imposed and prescribed under Sections 24(C), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required: Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, and subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption.

In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within thirty (30) days from the receipt of such payments.

No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid.

(B) Assessment and Payment of Deficiency Tax. — After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner.

As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means:

(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or

(2) If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax.

SECTION 57 Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.

BIR ISUANCES

REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as The National Internal Revenue Code" Relative to the Withholding of Income Tax on Compensation Income and Other Concerns

REVENUE REGULATIONS NO. 02-06 December 1, 2005Mandatory Attachments of the Summary Alphalist of Withholding Agents of Income Payments Subjected to Tax Withheld at Source (SAWT) to Tax Returns With Claimed Tax Credits due to Creditable Tax Withheld at Source and of the Monthly Alphalist of Payees (MAP) Whose Income Received Have Been Subjected to Withholding Tax to the Withholding Tax Remittance Return Filed by the Withholding Agent/Payor of Income PaymentsCASES DIGEST

Section 57 (A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. The BIR defines passive income by stating what

it is not: 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 stock in a corporation that earn dividends or interest income received from savings.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R. No. 160756, March 9, 2010

(B) Withholding of Creditable Tax at Source — The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.

BIR ISSUANCES

REVENUE REGULATIONS NO. 006-09 June 3, 2009

Additional Criteria in the Determination of Top 20,000 Private Corporations, Including the Threshold on Their Purchases of Agricultural Products, and Additional Transactions Subject to Creditable Withholding Tax on Income Payments Made by the Top Five Thousand (5,000) Individual Taxpayers Engaged in Trade/Business or Practice of Profession

REVENUE REGULATIONS NO. 014-08 November 26, 2008

Amending Further Section 2.57.2 (M) of Revenue Regulations No. 2-98, as Amended, Increasing the Coverage of Withholding Tax Agents Required to Withhold 1% from Regular Suppliers of Goods and 2% from Regular Suppliers of Services from the Top 10,000 Private Corporations to Top 20,000 Private Corporations

REVENUE REGULATIONS NO. 03-02 March 22, 2002

Submission of the Alphabetical Lists of Employees/Payees in Diskette Form and the Substituted Filing of Income Tax Returns of Payees/Employees Receiving Purely Compensation Income from Only One Employer for One Taxable Year Whose Tax Due is Equal to Tax Withheld and Individual-Payees Whose Compensation Income is Subject to Final Withholding Tax.

REVENUE REGULATIONS NO. 008-09 October 22, 2009

Amending Further Secs. 2.57.2 and 2.57.3 of Revenue Regulations No. 2-98, as Amended, Subjecting to Creditable Withholding Tax the Income Payments Made by Political Parties and Candidates of Local and National Elections of All Their Campaign Expenditures and Income Payments Made by an Individual or Juridical Person Forming Part of Their Campaign Contributions to Candidates of Local and National Elections and to Political Parties

CASES DIGEST

Withholding of Creditable Tax at Source

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57 (B) of RA 8424.The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% 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 Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R. No. 160756, March 9, 2010

Income Payments to Natural or Juridical PersonsSection 57 (B) provides that the Secretary can require a Creditable Withholding Tax on "income payable to natural or juridical persons, residing in the Philippines." There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so. Indeed, Section 57 (A) and (B) are distinct. Section 57 (A) refers to FWT while Section 57 (B) pertains to CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any income other than those listed in 57 (A). Since the law itself makes distinctions, it is wrong to regard 57 (A) and 57 (B) in the same way.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R. No. 160756, March 9, 2010

(C) Tax-free Covenant Bonds. — In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under

any law of the Philippines, or any state or country, the obligor shall deduct and withhold a tax equal to thirty percent (30%) of the interest or other payments upon those bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines.

CASES DIGEST

Reasons for devising the withholding tax systemThe withholding tax system was devised for two main reasons: 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.Citibank, N.A. vs. Court of Appeals, et al., G.R. No. 107434, October 10, 1997

Taxes withheld are in the nature of payment by a taxpayer in order to extinguish his possible tax obligation.A taxpayer, resident or non-resident 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. Consequently, 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.

Finley J. Gibbs, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-17406, November 29, 1965

The withholding agent is the agent of both the Government 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 Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because under Section 53(c) 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.

Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22074, September 6, 1965

Withholding 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 parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder.

Commissioner of Internal Revenue vs. Procter & Gamble Philippine Mfg. Corp., G.R. No. 66838, December 2, 1991

Types of income subject to withholding taxUnder Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R. No. 160756, March 9, 2010

SECTION 58 Returns and Payment of Taxes Withheld at Source —

(A) Quarterly Returns and Payments of Taxes Withheld. — Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized agent bank, Revenue District Officer, Collection Agent, or duly authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within twenty-five (5) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government.

CASES DIGEST

Commissioner may require withholding agents to regularly pay or deposit the taxes withheld.It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack 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 Secretary of Finance, require the withholding agents to pay or deposit the taxes deducted and withheld at more frequent intervals when necessary to protect the interest of the government. The return shall be filed and the payment made within 25 days from the close of each calendar quarter".

Commissioner of Internal Revenue vs. Wyeth Suaco Laboratories, Inc., et al., G.R. No. 76281, September 30, 1991

(B) Statement of Income Payments Made and Taxes Withheld. — Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not later than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year.

(C) Annual Information Return. — Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments. cdtai

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection.

(D) Income of Recipient. — Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent.

(E) Registration with Register of Deeds. — No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided,

further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code.

CASES DIGEST

Registration with Register of DeedsPetitioner assails Section 2.58.2 of Rev. Reg. 2-98, which provides that the Registry of Deeds 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. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the Creditable Withholding Tax is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as Section 58 (E) of RA 8424 and is unquestionably in accordance with it.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R. No. 160756, March 9, 2010

SECTION 59. Tax on Profits Collectible from Owner or Other Persons. — The tax imposed under this Title upon gains, profits, and income not falling under the foregoing and not returned and paid by virtue of the foregoing or as otherwise provided by law shall be assessed by personal return under rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. The intent and purpose of the Title is that all gains, profits and income of a taxable class, as defined in this Title, shall be charged and assessed with the corresponding tax prescribed by this Title, and said tax shall be paid by the owners of such gains, profits and income, or the proper person having the receipt, custody, control or disposal of the same. For purposes of this Title, ownership of such gains, profits and income or liability to pay the tax shall be determined as of the year for which a return is required to be rendered.

CHAPTER X Estates and Trusts

SECTION 60 Imposition of Tax. —

(A) Application of Tax. — The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including:

(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;

(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;

(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and

(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

(B) Exception. — The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

CASES DIGEST

Exception from Income Tax - Estates and TrustsA Gratuity Plan will lose its tax-exempt status if the retirement benefits are released prior to the retirement of the employees. Under the law, the trust funds of employees other than those of private employers are qualified for certain tax exemptions pursuant to Section 60(B) of the National Internal Revenue Code. The Gratuity Plan provides that the

gratuity benefits of a qualified DBP employee shall be released only "upon retirement under the Plan." If the earnings and principal of the Fund are distributed to DBP employees prior to their retirement, the Gratuity Plan will no longer qualify for exemption under Section 60(B). If DBP insists that its employees may receive the dividends, the necessary consequence will be the non-qualification of the Gratuity Plan as a tax-exempt plan.

Dev't. Bank of the Phil. vs. Commission on Audit, G.R. No. 144516, February 11, 2004

(C) Computation and Payment. —

(1) In General. — The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable trusts) and Section 64 (relating to income for the benefit of the grantor).

(2) Consolidation of Income of Two or More Trusts. — Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax provided in this Section computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts.

SECTION 61. Taxable Income. — The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that:

(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year.

(B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary.

(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries.

SECTION 62 Exemption Allowed to Estates and Trusts. — For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate or trust.

SECTION 63 Revocable Trusts. — Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor.

SECTION 64 Income for Benefit of Grantor. —

(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor; or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance

on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor.

(B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.

SECTION 65 Fiduciary Returns. — Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.

BIR ISSUANCES

REVENUE REGULATIONS NO. 002-11 March 1, 2011Filing of Income Tax Return and/or Annual Information Return by Individuals, Including Estates and Trusts shall include in the Account Information Return (AIR) such income subject to final withholding tax and those exclusions from gross income.

SECTION 66 Fiduciaries Indemnified Against Claims for Taxes Paid. — Trustees, executors, administrators and other fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries.

CHAPTER XI Other Income Tax Requirements

SECTION 67 Collection of Foreign Payments. — All persons, corporations, duly registered general co-partnerships (companiascolectivas) undertaking for profit or otherwise the collection of foreign payments of interests or dividends by means of coupons, checks or bills of exchange shall obtain a license from the Commissioner, and shall be subject to such rules and regulations enabling the government to obtain the information required under this Title, as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe. cdtai

SECTION 68 Information at Source as to Income Payments. — All persons, corporations or duly registered co-partnerships (companiascolectivas), in whatever capacity acting, including lessees or mortgagors of real or personal property, trustees, acting in any trust capacity, executors, administrators, receivers, conservators and employees making payment to another person, corporation or duly registered general co-partnership (companiacolectiva), of interests, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable gains, profits and income, other than payment described in Section 69, in any taxable year, or in the case of such payments made by the Government of the Philippines, the officers or employees of the Government having information as to such payments and required to make returns in regard thereto, are authorized and required to render a true and accurate return to the Commissioner, under such rules and regulations, and in such form and manner as may be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, setting forth the amount of such gains, profits and income and the name and address of the recipient of such payments: Provided, That such returns shall be required, in the case of payments of interest upon bonds and mortgages or deeds of trust or other similar obligations of corporations, and in the case of collections of items, not payable in the Philippines, of interest upon the bonds of foreign countries and interest from the bonds and dividends from the stock of foreign corporations by persons, corporations or duly registered general co-partnerships (companiascolectivas), undertaking as a matter of business or for profit or otherwise the collection of foreign payments of such interests or dividends by means of coupons or bills of exchange.

SECTION 69. Return of Information of Brokers. — Every person, corporation or duly registered general co-partnership (companiacolectiva), doing business as a broker in any exchange or board or other similar place of business, shall, when required by the Commissioner, render a correct return duly verified under oath, under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, may prescribe, showing the names of customers for whom such person, corporation or duly registered general co-partnership (companiacolectiva) has transacted any business, with such details as to the profits, losses or other information which the Commissioner, may require as to each of such customers as will enable the Commissioner to determine whether all income tax due on profits or gains of such customers has been paid.

SECTION 70 Returns of Foreign Corporations. —

(A) Requirements — Under rules and regulations prescribed by the Secretary of Finance, upon the recommendation of the Commissioner, any attorney, accountant, fiduciary, bank, trust company, financial institution or other person, who aids, assists, counsels or advises in, or with respect to, the formation, organization or reorganization of any foreign corporation, shall, within thirty (30) days thereafter, file with the Commissioner a return.

(B) Form and Contents of Return — Such return shall be in such form and shall set forth, under oath, in respect of each such corporation, to the full extent of the information within the possession or knowledge or under the control of the person required to file the return, such information as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe by rules and regulations as necessary for carrying out the provisions of this Title. Nothing in this Section shall be construed to require the divulging of privileged communications between attorney and client.

SECTION 71 Disposition of Income Tax Returns, Publication of Lists of Taxpayers and Filers — After the assessment shall have been made, as provided in this Title, the returns, together with any corrections thereof which may have been made by the Commissioner, shall be filed in the Office of the Commissioner and shall constitute public records and be open to inspection as such upon the order of

the President of the Philippines, under rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

The Commissioner may, in each year, cause to be prepared and published in any newspaper the lists containing the names and addresses of persons who have filed income tax returns.

Income tax returns of specific taxpayers subject of a request for exchange of information by a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of, shall be open to inspection upon the order of the President of the Philippines, under rules and regulations as may be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

SECTION 72 Suit to Recover Tax Based on False or Fraudulent Returns — When an assessment is made in case of any list, statement or return, which in the opinion of the Commissioner was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suit, unless it is proved that the said list, statement or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines.

SECTION 73 Distribution of Dividends or Assets by Corporations —

(A) Definition of Dividends — The term 'dividends' when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property.

"Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be.

(B) Stock Dividend — A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially

equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits.

(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits — Any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received.

(D) Net Income of a Partnership Deemed Constructively Received by Partners — The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27(A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not.

CHAPTER XIIQuarterly Corporate Income Tax Annual Declaration and Quarterly Payments of Income Taxes

SECTION 74 Declaration of Income Tax for Individuals. —

(A) In General — Except as otherwise provided in this Section, every individual subject to income tax under Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. In general, self-employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax. The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration

filed during the taxable year under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

(B) Return and Payment of Estimated Income Tax by Individuals — The amount of estimated income as defined in Subsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before April 15 of the following calendar year when the final adjusted income tax return is due to be filed.

(C) Definition of Estimated Tax — In the case of an individual, the term 'estimated tax' means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year, the taxpayer reasonably expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates.

SECTION 75 Declaration of Quarterly Corporate Income Tax — Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year.

SECTION 76 Final Adjustment Return — Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

CASES DIGEST

Changes brought by Section 76 of the 1997 NIRC and its purpose.Section 76 of the 1997 NIRC wrought two changes to its predecessor, Section 69 of the 1977 NIRC: first, it mandates that the taxpayer's exercise of its option to either seek refund or crediting is irrevocable; and second, the taxpayer's decision to carry-over and apply its current overpayment to future tax liability continues until the overpayment has been fully applied, no matter how many tax cycles it takes.Section 76 of the 1997 NIRC is, like its predecessor Section 69 of the 1977 NIRC, a tax administration measure crafted to ease tax collection. By requiring corporate taxpayers to indicate in their final adjustment return whether, in case of overpayment, they wish to have the excess amount refunded or carried-over and applied to their future tax liability, the provision aims to properly manage claims for refund or tax credit. Administratively speaking, Section 76 serves the same purpose as its companion provisions in Title II, Chapter XII of the 1997 NIRC, namely, Section 74 on the declaration of income tax by individuals, Section 75 on the declaration of quarterly corporate income tax, and Section 77 on the place and time of filing and payment of quarterly corporate income tax — 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 IV (Tax on Corporations) and Chapter VII (Allowable Deductions), among others, relating to the question on the intrinsic taxability of corporate transactions.Commissioner of Internal Revenue vs. McGeorge Food Industries, Inc., G.R. No. 174157, October 20, 2010Asiaworld Properties Phil. Corp. vs. Commissioner of Internal Revenue, G.R. No. 171766, July 29, 2010

Irrevocability ruleSection 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC of 1997, with the addition of one important sentence, which laid down the irrevocability rule: . . .

Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, December 14, 2005

Two options offered by Section 76 of the NIRC of 1997

The Supreme Court, recognized the two options offered by Section 76 of the NIRC of 1997 to a taxable corporation whose total quarterly income tax payments in a given taxable year exceeds its total income tax due. These options are: (1) filing for a tax refund or (2) availing of a tax credit. The Court further explained:

The Court categorically declared in Philam that: "Section 76 remains clear and unequivocal. Once the carry-over option is taken, actually or constructively, it becomes irrevocable." It mentioned no exception or qualification to the irrevocability rule.

The Court of Appeals mistakenly 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 acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the option to carry over expired by the end of 1999, leaving BPI free to again take another option as regards its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability rule. The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping 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 flip-flopping to the end of each succeeding taxable period.Commissioner of Internal Revenue vs. BPI, G.R. No. 178490, July 7, 2009

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 Philam, recognized the two options offered by Section 76 of the NIRC of 1997 to a taxable corporation whose total quarterly income tax payments in a given taxable year exceeds its total income tax due. These options are: (1) filing for a tax refund or (2) availing of a tax credit. The Court further explained:The Court categorically declared in Philam that: "Section 76 remains clear and unequivocal. Once the carry-over option is taken, actually or constructively, it becomes irrevocable." It mentioned no exception or qualification to the irrevocability rule.Commissioner of Internal Revenue vs. BPI, G.R. No. 178490, July 7, 2009Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, December 14, 2005

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 make another one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 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 Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters 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 acquired by the taxpayer. In the present case, the excess income tax credit, which BPI opted to carry over, was acquired by the said bank during the taxable year 1998. The option of BPI to carry over its 1998 excess income tax credit is irrevocable; it cannot later on opt to apply for a refund of the very same 1998 excess income tax credit. Commissioner of Internal Revenue vs. BPI, G.R. No. 178490, July 7, 2009

Option to carry-over excess creditable tax extends to the next succeeding taxable year.

Under Section 76 of the NIRC of 1997, the application of the option to carry-over 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 Section 76 is to make the option, once exercised, irrevocable for the "succeeding taxable years." Thus, once the taxpayer opts to carry-over 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 unutilized 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 utilized. Asiaworld Properties Phil. Corp. vs. Commissioner of Internal Revenue, G.R. No. 171766, July 29, 2010

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 utilized in succeeding taxable years, as provided in Section 76 of the NIRC of 1997. It is worthy to note that unlike the option for refund of excess income tax, which prescribes

after two years from the filing of the FAR, there is no prescriptive period for the carrying over of the same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted to carry over, may be repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or credited to a tax liability of BPI.Under Section 69 (now Section 76) 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 year.The Court of Appeals mistakenly 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 acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the option to carry over expired by the end of 1999, leaving BPI free to again take another option as regards its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability rule. The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping 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 flip-flopping to the end of each succeeding taxable period.

Commissioner of Internal Revenue vs. BPI, G.R. No. 178490, July 7, 2009

Final Adjustment ReturnSection 69(now Sec 76) Final Adjustment Return. — Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation shall either:(a) Pay the excess tax still due; or(b) Be refunded the excess amount paid, as the case may be.In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.It is well-defined from the said provision that if the total tax due is less than the quarterly tax payments made during the year, a taxpayer is entitled to a refund or credit for the excess amount paid. Petitioner's 1997 income tax due amounted to P9,703,165.54. After applying its tax excess credits for 1996 in the amount of P9,289,084.00, the net income tax payable for 1997 was only P414,081.54. However, based on the quarterly income tax payments of petitioner, the total creditable withholding tax for the year 1997 amounted to P14,343,875.05. Thus, the amount of overpayment of tax as of 1997 was P13,929,793.51 (after deducting P414,081.54 from P14,343,875.05). 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 1998, not 1999. There still remains a considerable excess payment in the amount of P9,742,270.51 after petitioner’s payment of tax due for the year 1998 in the sum of P4,187,523.00. Section 69 (now Sec 76) clearly provides that a taxable corporation is entitled to a tax refund when the sum of the quarterly income taxes it paid during a taxable year exceeds its total income tax due also for that year. Consequently, the refundable amount that is shown on its final adjustment return may be credited, at its option, against its quarterly income tax liabilities for the next taxable year. Excess 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 quarterly 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.State Land Investment Corp. vs. Commissioner of Internal Revenue, G.R. No. 171956, January 18, 2008

Without 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, i.e., that the facts stated therein are true and correct. Without 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, like tax exemptions, are construed strictly against the taxpayer.Paseo Realty & Development Corp. vs. Court of Appeals, et al., G.R. No. 119286, October 13, 2004

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 quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters 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.Paseo Realty & Development Corp. vs. Court of Appeals, et al., G.R. No. 119286, October 13, 2004

IRREVOCABILITY RULEFacts: For the taxable year ending Dec. 31, 1998, respondent BPI 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 1998 and computed an overpayment of income taxes to the BIR. This excess tax credit was carried over by BPI to the succeeding taxable year.

However, for 1999, BPI ended up with a net loss; its still unapplied excess tax credit carried over from 1998; and more excess tax credit acquired in 1999. Thus, the total excess tax credits of BPI increased to P46,922,851.00 in 1999, which it chose again to carry over to the following taxable year.

For the taxable year ending Dec. 31, 2000, BPI declared in its Corporate Annual ITR: (1) zero taxable income; (2) excess tax credit carried over from 1998 and 1999; and (3) even more excess tax credit, gained in 2000. This time, BPI 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. BPI then filed a claim for refund in the amount of P33,947,101.00, representing its excess creditable income tax for 1998. When the petitioner CIR failed to act on its claim, BPI filed a Petition for Review before the CTA. Relying on the irrevocability rule, the CTA ruled that BPI was barred from filing a claim for refund because it had opted to carry over its 1998 excess tax credit to 1999 and 2000. After its Motion for Reconsideration was denied by the CTA, BPI filed an appeal with the Court of Appeals which reversed the CTA’s decision based on BPI-Family Savings Bank, Inc. v. CA, 386 Phil. 719 (2000). The CIR then filed a Motion for Reconsideration which was denied; hence, this Petition for Review.

ISSUE: Whether the irrevocability rule under Sec. 76 of the Tax Code bars petitioner from asking for a tax refund.

RULING: BPI’s choice to carry over its 1998 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 BPI of the carry over option in its ITR for 1999 was already a superfluity, as far as its 1998 excess income tax credit was concerned, given the irrevocability of the initial choice made by the bank to carry over the said amount. The Court categorically declared in Philam Asset Management, Inc. v. CIR (G.R. Nos. 156637 and 162004, Dec. 14, 2005) that: "Section 76 remains clear and unequivocal. Once the carry-over option is taken, actually or constructively, it becomes irrevocable." It mentioned no exception or qualification to the irrevocability rule. The Court of Appeals erred in relying on BPI-Family Savings Bank, 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 acquired by the bank in 1989, which it initially opted to carry over to 1990. The prevailing tax law then was the NIRC of 1985, Sec. 79, later reproduced as Sec. 76 of the NIRC of 1997, with the addition of one important sentence, which laid down the irrevocability rule.

The Court of Appeals mistakenly 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 acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the option to carry over expired by the end of 1999, leaving BPI free to again take another option as regards its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability rule. The evident intent of the legislature, in adding the last sentence to Sec. 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and complication as regards said taxpayer's excess tax credit.COMMISSIONER OF INTERNAL REVENUE vs. BPI [G.R. No. 178490.July 7, 2009.]

Option to carry-over excess creditable tax extends to the next succeeding taxable year.

Under Section 76 of the NIRC of 1997, the application of the option to carry-over 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 Section 76 is to make the option, once exercised, irrevocable for the "succeeding taxable years." Thus, once the taxpayer opts to carry-over 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 unutilized 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 utilized. Asiaworld Properties Phil. Corp. vs. Commissioner of Internal Revenue, G.R. No. 171766, July 29, 2010

Two alternative options of a corporate taxpayer

In Philam Asset Management, Inc. v. Commissioner of Internal Revenue, the Court expounds on the two alternative options of a corporate taxpayer whose total quarterly income tax payments exceed its tax liability, and on how the choice of one option precludes the other, viz.:

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 works by applying the refundable amount, as shown on the FAR of a given taxable year, against the estimated quarterly income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice of one precludes the other. Indeed, in Philippine Bank of Communications v. Commissioner of Internal Revenue, the Court ruled that a corporation must signify its intention — whether to request a tax refund or claim a tax credit — by marking the corresponding option box provided in the FAR. While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax collection.

One 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. PL Management International Phil., Inc., et al., G.R. No. 160949, April 4, 2011

Availment of one remedy still precludes the other.

Under the new law (Section 76 of the 1997 NIRC), in case of overpayment of income taxes, the remedies are still the same; and the availment of one remedy still precludes the other. But unlike Section 69 of the old NIRC, the carry-over of excess income tax payments is no longer limited to the succeeding taxable year. Unutilized excess income tax payments may now be carried over to the succeeding taxable years until fully utilized. In addition, the option to carry-over excess income tax payments is now irrevocable. Hence, unutilized excess income tax payments may no longer be refunded. To repeat, under the new law, once the option to carry-over excess income tax payments to the succeeding years has been made, it becomes irrevocable. Thus, applications for refund of the unutilized excess income tax payments may no longer be allowed.Belle Corp. vs. Commissioner of Internal Revenue, G.R. No. 181298, January 10, 2011

SECTION 77 Place and Time of Filing and Payment of Quarterly Corporate Income Tax —

(A) Place of Filing — Except as the Commissioner otherwise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required in Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept.

(B) Time of Filing the Income Tax Return — The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.

(C) Time of Payment of the Income Tax — The income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner.

CHAPTER XIII Withholding on Wages

SECTION 78 Definitions. — As used in this Chapter:

(A) Wages — The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid:

(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or

(2) For domestic service in a private home, or

(3) For casual labor not in the course of the employer's trade or business, or

(4) For services by a citizen or resident of the Philippines for a foreign government or an international organization.

If the remuneration paid by an employer to an employee for services performed during one-half (½) or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one-half (½) of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages.

(B) Payroll Period — The term 'payroll period' means a period for which payment of wages is ordinarily made to the employee by his employer, and the term 'miscellaneous payroll period' means a payroll period other than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period.

(C) Employee — The term 'employee' refers to any individual who is the recipient of wages and includes an officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term 'employee' also includes an officer of a corporation.

(D) Employer — The term 'employer' means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that:

(1) If the person for whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term 'employer' (except for the purpose of Subsection A) means the person having control of the payment of such wages; and

(2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the Philippines, the term 'employer' (except for the purpose of Subsection A) means such person.

SECTION 79 Income Tax Collected at Source —

(A) Requirement of Withholding — Except in the case of a minimum wage earner as defined in Section 22(HH) of this Code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

BIR ISSUANCES

REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as

The National Internal Revenue Code" Relative to the Withholding of Income Tax on Compensation and Other Concerns

Exemptions from Withholding Tax on Compensation. — The following income payments are exempted from the requirements of withholding tax on compensation:

XXX XXXXXXCompensation income of Minimum Wage Earners (MWEs) who work in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB 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.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise be covered by the above exemption. Provided, however, that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt form income tax, and consequently, from withholding tax.

MWEs 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 SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax and consequently, to withholding tax.

XXX XXXXXX

Facilities and privileges of relatively small value — Ordinarily, facilities, and privileges (such as entertainment, medical services, or so-called "courtesy" discounts on purchases), otherwise known as "de minimis benefits," furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently 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 rank and file employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees;

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;

(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,500.00;

(d) Uniforms and clothing allowance not exceeding P4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;

(f) Laundry allowance not exceeding P300.00 per month;

(g) Employees achievement awards, e.g., 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 P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from gross income under Section 32 (b) (7) (e) of the Code. Provided 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 P30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the SMW.

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.

Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Bureau of Internal Revenue.

(B) Tax Paid by Recipient — If the employer, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsection shall in no case relieve the employer from liability for any penalty or addition to the tax otherwise applicable in respect of such failure to deduct and withhold.

(C) Refunds or Credits —

(1) Employer — When there has been an overpayment of tax under this Section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer.

(2) Employees — The amount deducted and withheld under this Chapter during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24(A) of this Title. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations

promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) months from the fifteenth (15th) day of April. Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund of credit is made.

Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of counter-signature by the Chairman, Commission on Audit or the latter's duly authorized representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title I of Book V of Executive Order No. 292, otherwise known as the Administrative Code of 1987.

(D) Personal Exemptions —

(1) In General — Unless otherwise provided by this Chapter, the personal and additional exemptions applicable under this Chapter shall be determined in accordance with the main provisions of this Title.

(2) Exemption Certificates. —

(a) When to File — On or before the date of commencement of employment with an employer, the employee shall furnish the employer with a signed withholding exemption certificate relating to the personal and additional exemptions to which he is entitled.

(b) Change of Status — In case of change of status of an employee as a result of which he would be entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days from such change, file with the employer a new withholding exemption certificate reflecting the change.

(c) Use of Certificates. — The certificates filed hereunder shall be used by the employer in the determination of the amount of taxes to be withheld.

(d) Failure to Furnish Certificate. — Where an employee, in violation of this Chapter, either fails or refuses to file a withholding exemption certificate, the

employer shall withhold the taxes prescribed under the schedule for zero exemption of the withholding tax table determined pursuant to Subsection (A) hereof.

(E) Withholding on Basis of Average Wages — The Commissioner may, under rules and regulations promulgated by the Secretary of Finance, authorize employers to:

(1) estimate the wages which will be paid to an employee in any quarter of the calendar year;

(2) determine the amount to be deducted and withheld upon each payment of wages to such employee during such quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and

(3) deduct and withhold upon any payment of wages to such employee during such quarter such amount as may be required to be deducted and withheld during such quarter without regard to this Subsection.

(F) Husband and Wife. — When a husband and wife each are recipients of wages, whether from the same or from different employers, taxes to be withheld shall be determined on the following bases:

(1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholding exemption certificate.

(2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero exemption of the withholding tax table prescribed in Subsection (D)(2)(d) hereof.

(G) Nonresident Aliens. — Wages paid to nonresident alien individuals engaged in trade or business in the Philippines shall be subject to the provisions of this Chapter.

(H) Year-end Adjustment. — On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the

tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year.

SECTION 80 Liability for Tax. —

(A) Employer — The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit.

(B) Employee — Where an employee fails or refuses to file the withholding exemption certificate or willfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment. On the other hand, excess taxes withheld made by the employer due to:

(1) failure or refusal to file the withholding exemption certificate; or

(2) false and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of the Government.

SECTION 81 Filing of Return and Payment of Taxes Withheld — Except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an authorized agent bank, Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located.

The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the employers to pay or

deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government.

The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers.

SECTION 82 Return and Payment in Case of Government Employees - If the employer is the Government of the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose.

SECTION 83 Statements and Returns —

(A) Requirements. — Every employer required to deduct and withhold a tax shall furnish to each such employee in respect of his employment during the calendar year, on or before January thirty-first (31st) of the succeeding year, or if his employment is terminated before the close of such calendar year, on the same day of which the last payment of wages is made, a written statement confirming the wages paid by the employer to such employee during the calendar year, and the amount of tax deducted and withheld under this Chapter in respect of such wages. The statement required to be furnished by this Section in respect of any wage shall contain such other information, and shall be furnished at such other time and in such form as the Secretary of Finance, upon the recommendation of the Commissioner may, by rules and regulations, prescribe.

(B) Annual Information Returns — Every employer required to deduct and withhold the taxes in respect of the wages of his employees shall, on or before January thirty-first (31st) of the succeeding year, submit to the Commissioner an annual information return containing a list of employees, the total amount of compensation income of each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies of the statement referred to in the preceding paragraph, and such other information as may be deemed necessary. This return, if made and filed in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect of such wages.

(C) Extension of Time — The Commissioner, under such rules and regulations as may be promulgated by the Secretary of Finance, may grant to any employer a reasonable extension of time to furnish and submit the statements and returns required under this Section.