129722381-63062602-sababan-tax-notes

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TAXATION LAW REVIEW NOTES- ATTY. FRANCIS J. SABABAN -

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COVERAGE OF TAXATION LAW REVIEW

I. Basic Principles of ConstitutionalLimitations

a) Due process clause which

could be either substantivedue process andprocedural due processclause

b) Equal protection clauseRead:

Ormoc Sugar Central vs.City Treasurer 22 SCRA603

Tiu vs. CA 301 SCRA 178c) Article III sec. 1 of the

1987 Constitution non-impairment clause

d)

Article III sec. 5 freedomof religion

e) Article III sec. 20 non-payment of poll tax

f) Article VI sec. 28 par. 2 flexible tariff clause

g) Article VI sec. 28 par. 3 exemption from realproperty taxRead:

Herrera vs. Quezon City 3SCRA 186

Abra vs. Hernando 107 SCRA104

Abra Valley vs. Aquino 52SCRA 106

Philippine Lung Center vs.Quezon City 433 SCRA 119

h) Article VI sec. 28 par. 4 qualified majority in taxexemption

i) International doubletaxation

CIR vs. Johnson 309 SCRA87

j) Doctrine of equitable recoupmentk) Doctrine of Set-off or compensation in

taxation Republic vs. Mambulao 4 SCRA 622 Domingo vs. Garlitos 8 SCRA 443 Francia vs. IAC 162 SCRA 753 Caltex vs. COA 208 SCRA 726 Philex vs. CIR 294 SCRA 687

II. Income Tax Law

Section 22-26 of the National InternalRevenue Codea) Read in the commentaries or magicnotes the different kinds of:

1. Income Taxpayers

2. Income Taxes3. Sources of Income sec. 42 of NIRC- Income Taxpayersa) Individualsb) Corporationc) Estates and Trusts -Individuals are classified Resident Citizens sec. 23 (A), sec

24 (A) (a) Non-Resident Citizens sec 23 (B),

24 (A) (b) 22 (E) Overseas Contract Workers Sec.

23 (C), 24 (A) (b)

Resident Aliens Rev. Reg. sec 5,23 (D), 24 (A) (c)

Non-Resident Aliens Engaged intrade or business sections 25 (A)(1)

Non-Resident Aliens Not Engagedin trade or business sec. 25 (B)

Aliens Employed in Multi-National Corporations sec. 25 (C)and Rev. Reg. 12-2001

Aliens Employed in OffshoreBanking Units sec 25 (D)

Aliens Employed in petroleumService Contractors &Subcontractors sec. 25 (E)

-Corporate Income Taxpayers Domestic Corporations sec. 23 (E),

and sec 27 of NIRC Resident Foreign Corporations sec. 22

(H) and (28)A Non-Resident Foreign Corporations

sec. 22 (1) and 28 (B)-Estates and Trusts sec. 60-66 of NIRC

Different Kinds of Income Tax

1.

Net Income Tax secs. 24 (A), 25(A) (1), 26, 27 (A) (B) (C), 28 (A) upto 3rd par. 31 and 32 (A)

2. Gross Income Tax secs. 25 (B) firstpart and 28 (B) (1)

3. Final Income Taxes sec. 57 (A)4. Minimum Corporate Income Tax

of 2% of the Gross Income secs.27 (E), 28 (A) (2)


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5. Improperly Accumulated EarningsTax of 10% of its taxable incomesec. 29 NIRC Rev. Reg. 2-2001

Optional Corporate Income Tax of15% of its gross income sections

27 (A) 4th to 10th par. And 28 A(1)but only up to the 4 th paragraph

-Proceed to section 42 and 23 of theNIRC NDC vs. Comm 151 SCRA 472 Comm. Vs. IAC 127 SCRA 9-Then go to sec. 39 of NIRC Calazans vs. Comm. 144 SCRA

664 RR 7-2003-Then proceed to sec. 24 (A), 25 (A)(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),28 (A) (6) and sec 51 (D)-Then continue to sec 24 B 1, 25B,C,D,E; 27 (D) (1)-Then go to se. 24 (B) (2) sec. 73 Comm. Vs. Manning 66 SCRA 14 Anscor vs. Comm. 301 SCRA 152

-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4);28 (A) (7) (D); 32 B (7) (a)

- Then you go to sec. 24 C, 25A (3); 25 B,C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5)(C) RA 7717 sec. 127 NIRC

- Then you go to sec. 24 D (1); 25 (A) (3);25 (B) last par. 27 (D) (5)

China Bank vs. Court of Appeals 336SCRA ___; RR 7-2003

-Upon reading sec. 24 (D) (2) read RR 13-1999

-Upon reading sec. 27 (A) go to sec. 22 (B) Batangas vs. Collector 102 Phil. 822 Evangelista vs. Collector 102 Phil 140 Reyes vs. Comm. 24 SCRA 198 Ona vs. Bautista 45 SCRA 74 Obillos vs. Comm 139 SCRA 436 Pascua vs. Comm. 166 SCRA 560

Afisco vs. Comm. 302 SCRA 1

-Upon reading sec. 27 (C) of NIRC see RA9337 then go to sec. 32 (B) (7) (b) of NIRC,sec. 133 par (o) of LGC, sec. 154 of the LGC.Pagcor vs. Basco 197 SCRA 52Mactan vs. Cebu 261 SCRA 667LRT vs. City of Manila 342 SCRA 692

-Proceed to sections 27 (D) (1), 27 (D) (2),27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B)

(5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5)(b) Marubeni vs. CIR 177 SCRA 500 Proctor & Gamble vs. Comm 160 SCRA

560

Same case Proctor and Gamble on theMotion for Reconsideration 204 SCRA377

Wonder vs. Comm 160 SCRA 573

-Proceed to sec. 27(D) (5)then sections 27 (E) and 28 (A) (2)-Go to sec. 28 (A) (3) read RR 15-2002-Go to sec. 28 (A) (4) see RA 9337-Then see sec 28 (A) (5) see Marubeni vs.Comm 177 SCRA 500-Proceed to sec. 28(B) (5) (a) and sec 32 (B)(7) (a)

Read Mitsubishi vs. Comm 181 SCRA214

-Then go to sec. 29 and Rev. Reg. 2-2001-Upon reading sec. 32 (B) 1 and 2, read sec.85 par (e), sec. 108A and sec. 123 of theNIRC-Proceed to sec. 33 read Rev. Reg. 3-98-then go to sec. 34 (A) (1) (a) see Aguinaldovs. Comm. 112 SCRA 136, RR 10-2002-Under Sec. 34 (B) read RR 13-2000-Upon reading sec. 49 read Banas vs. CA325 SCRA 259 and Filipina vs. Comm. 316SCRA 480-Upon reading sec. 60-66, read Ona vs.Bautista 45 SCRA 74

III. Estate Tax-Sections 84-97 see sec. 104-Upon reading sec. 85 (B) read Vidalde Roces vs. Posadas 58 Phil. 108Dizon vs. Posadas 57 Phil 465-Sec. 85 (G) compare with sec. 100-sec. 85 (H) compare with sec. 86 (C)-Upon reading sec. 86 see RR 2-2003-Upon reading sec. 94 see Marcos vs.Sandiganbayan 273 SCRA 47

IV. Donors Tax Law- Sections 98-104- G and Cumulative methods of filing

donors tax returns sections 99 (A), 103(A) (1) and RR 2-2003

- Sections 100 and 85 (9)

V. Value Added Tax- Sections 105-115


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Rules in the Classroom:1. do not be absent

if you are absent, you have totranscribe what happened in class whenyou were out.

The next meeting you attend class,consider yourself a resident of balic-balic,babalikbalikan ka sa recit. Exception: if you get married.

2. read the assignment. Wag zapote angaral.3. holiday make up class probably on aSunday4. allowed to glance at your notes, wag langpahalata/garapal5. materials:

codal commentaries (any author will do)

magic notes (Sababan Lecture andQ&A)

Book stand

Coverage of Taxation Law Review:1. Basic Principles including ConstitutionalProvisions2. Income Tax3. Estate Tax4. Donors Tax5. Remedies6. Local Tax7. Real Property Tax

8.

Tariff and Customs Code9. Court of Tax Appeals10.VAT (although not part of the coverage ofthe Bar Exams, questions have been askedsince 1999)

Title 5,6 and 7 are always included in thecoverage

No computations in the bar There are only 1 or 2 questions in the Bar

about Basic Principles What are the favorite topics in the Bar? 12 questions on Income Tax

8-10 questions on remedies 8-10 questions allocated to the 7 topics

BASIC PRINCIPLES:

Taxation is an inherent power of the

State.

Q: What do you mean by INHERENT?

A: The power to tax is not provided for inthe law, statute or constitution; it depends onthe existence of the state. No law orlegislation for the exercise of the power totax by the national government.

Q: Do local governments exercise thisinherent power?A: No. Only the National Governmentexercises the inherent power to imposetaxes.

Q: The taxing power of local governments isa DELAGATED power. Delegated by whom?A: Delegated by Congress through law incase of autonomous regions, and delegatedby the constitution in case of LGUs notconsidered an autonomous region.

Cities, provinces and municipalities power granted under Art. X Sec. 5&6 of theConstitution

Autonomous Regions power conferredby Congress through law. Art. X Sec. 20 #2of the Constitution is a non-self-executingprovision. Thus the power is granted byCongress because said provision requires anenabling law.

Article X, Section 5 is self-executing thus

the power is granted by the constitution.

CONSTITUTIONAL LIMITATIONS

Due Process Clause

Q: why is it a limitation to the power to tax?A: The due process clause as a limitation tothe power to tax refers both to substantiveand procedural due process. Substantive dueprocess requires that a tax statute must bewithin the constitutional authority ofCongress to pass and that it be reasonable,

fair and just.Procedural due process, on the other

hand, requires notice and hearing or at leastthe opportunity to be heard.

Ex: On Substantive Due Process- when theCongress passes a law exempting the 13thmonth pay from tax but with the concurrenceonly of the majority of the quorum lawwould be invalid because the Constitutionprovides that any grant of tax exemption


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shall be passed with the concurrence of themajority of all the members of the Congress.

Q: Does it follow that the adverse party mustalways be notified?

A: No. As a rule, notice and hearing or theopportunity to be heard is necessary onlywhen expressly required by law. Where thereis no such requirement, notice and theopportunity to be heard are dispensable.

Ex. Before Oct. 1, 1995, you can secure aTRO without notifying the adverse party. Ifyou are a suspect in a criminal case, you havethe right to have an opportunity to be heard(if there is a law).

Before July 1, 1998, no notice need begiven to a party declared in default. After theamendment, the party declared in default has

to be notified of subsequent proceedingsalbeit without the right to participate therein.

In the case of a search warrant, theperson to be searched was not notified. Theperson searched cannot claim that there wasa violation of due process because there is nolaw requiring that the person to be searchedshould be notified.

Regarding delinquent tax payers,before levy, there must be notice.

REASON:No provision of law requires notice to the

adverse party. If the adverse party is notified,he may abscond. Thus, in adversarialproceedings, in connection with proceduraldue process, the adverse party need not benotified all the time.

Equal Protection Clause

As a rule, taxpayers of the same footing

are treated alike, both as to privilegesconferred and liabilities imposed. Differencein treatment is allowed only when based onsubstantial distinction. Difference in

treatment not based on substantialdistinction is frowned upon as classlegislation. This is violated when taxpayersbelonging to the same classification aretreated differently form one another; andtaxpayers belonging different classificationsare treated alike.

Requirements of Reasonable Classification:

1) There must be substantial distinctionsthat make a real difference.

2) It must be germane or relevant to thepurpose of the law.

3) The distinction or classification must

apply not only to the present but alsoto future situations.

4) The distinction must apply topersons, things and transactionsbelonging to the same class.

Ex: In one case, a tax ordinance wasassailed on the ground that the ordinancefailed to distinguish a worker form casual,permanent or temporary. The SC said thatthe ordinance was invalid because of thefailure to state the said classification.

In PEOPLE v. CAYAT the Supreme Courtmandated the requisites for a validclassification.

TIU v. COURT OF APPEALS (301 SCRA 278)Q: what happened in the city of Olonggapo?A: The Congress, with the approval of the

President, passed RA 7227, an actcreating the conversion of the militarybases into other productive uses.

Q: Who was the President at that time?A: President RamosQ: What were signed?

A: RA 7227, EO 97 and EO 97-A The first led to the creation of the

Subic Special Economic Zone (SSEZ). Thelatter set the limitations and boundariesof the application of the incentives (notaxes, local and national, shall beimposed within SSEZ. In lieu thereof, 3%of the Gross Income shall be remitted tothe national govt) to those operatingtheir businesses within the said area.

Q: Who are the petitioners and what wastheir contention?

A: The petitioners are Filipino businessmen

who are operating their business outsidethe secured area. The petitionerscontended that the law in question wasviolative of their right to equal protectionof laws since they are also Filipinobusinessmen.

H: The Supreme Court ruled that therewas no violation since the classificationwas based on a substantial distinction.


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The element invoked here is element#1 that there must be substantialdistinction in the classification oftaxpayers on whom the tax will beimposed.

The Court observed that those foreignbusinessmen operating within thesecured area have to give a larger capitalto operate in the secured area (to spureconomic growth and guaranteeemployment).

ORMOC SUGAR CENTRAL vs. CIRQ: What did the municipality of Ormoc do?A: The City Council of Ormoc passed a

Municipal Ordinance No.4 imposing uponany and all centrifugal sugar milled at theOrmoc Sugar Central a municipal tax on

the net sale of the same to the UnitedStates and other foreign countries.

Q: Did the owner accept this imposition?A: No. the tax due was paid under protest,

then filed a complaint against the City ofOrmoc.

H: The Supreme Court said there was aviolation of the equal protection clause.The element invoked here was element#3, that it must be applicable to bothpresent and future circumstances. TheSupreme Court said that one must go tothe provision itself, in the case at bar,

there was a violation of element #3because the law was worded in such away that it only applies to Ormoc SugarCentral alone and to the exclusion of allother sugar centrals to be established inthe future.

TAKE NOTE: People vs. Cayat

Freedom of Religion

It Involves 3 Things:1. freedom to choose religion2. freedom to exercise ones religion

3.

prohibition upon the nationalgovernment to establish a national religion

Q: Which one limits the power to tax?A: Prohibition upon the national governmentto establish a national religion because thiswill require a special appropriation of moneycoming from the national treasury which isfunded by the taxes paid by the people.

Non-impairment Clause

Q: What are the sources of obligation in theCivil Code?A: Law, Contracts, Quasi-Contracts, Delict,

Quasi-Delict.

Q: What is the obligation contemplated inthis limitation?A: Those obligations arising from contracts.

General Rule: The power to tax is pursuantto law, therefore, the obligation to pay taxesis imposed by law, thus the non-impairmentclause does not apply.

You have to determine first the source of

obligation:

1.

If the law merely provides for thefulfillment of the obligation then the law isnot the source of the obligation.

2. When the law merely recognizes oracknowledges the existence of an obligationcreated by an act which may constitute acontract, quasi-contract, delict, and quasi-delict, and its only purpose is to regulatesuch obligation, then the act itself is thesource of the obligation, not the law.

When the law establishes the obligationand also provides for its fulfillment, then thelaw itself is the source of the obligation

Q: So, in what instance does the non-impairment of contracts clause becomes alimitation to the power to tax?A: it is when the taxpayer enters into acompromise agreement with the government.In this instance, the obligation to pay the taxis now based on the contract between thetaxpayer and the government pursuant totheir compromise agreement.

Take Note: the requirement for itsapplication: the parties are the government

and private individual.

Poll Tax

Q: What is a poll tax?A: It is a tax of a fixed amount on individualsresiding within a particular territory, whethercitizens or not, without regard to theirproperty or to the occupation in which theymay be engaged.


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It is a tax imposed on persons withoutany qualifications. persons may be allowed topay even if they are not qualified as to age orproperty ownership.

Example of Poll Tax: Community TaxCertificate under Section 162 of the LocalGovernment Code.

Q: Why is it a limitation to the power to tax?A: It is a limitation to the power to taxbecause Congress is prohibited from passinga law penalizing with imprisonment a personwho does not pay poll tax. (funds for sendinga person to jail is taken from the nationaltreasury which is funded by the taxes paid bythe people)

Exemption from payment of Real EstateTax

Q: What is the requirement for exemptionfrom payment of real property tax under the1935, 1973 and 1987 Constitution?A: Art. 6, Sec 22 (3), 1935 Constitution Cemeteries, churches and parsonages orconvents appurtenant thereto, and all lands,buildings and improvements usedEXCLUSIVELY for RELIGIOUS, CHARITABLE orEDUCATIONAL purposes shall be exempt fortaxation.

Art. 8, Sec. 17 (3), 1973 Constitution charitable institutions, churches, parsonagesor convents appurtenant thereto, mosque,and non-profit cemeteries, and all lands,buildings, and improvements ACTUALLY,DIRECTLY, and EXCLUSIVELY used forRELIGIOUS and CHARITABLE purposes shallbe exempt from taxation.

Art. 6, Sec. 28 (3), 1987 Constitution charitable institutions, churches, andparsonages or convents appurtenant thereto,mosque, non-profit cemeteries, and all lands,buildings, and improvements ACTUALLY,

DIRECTLY and EXCLUSIVELY used forRELIGIOUS, EDUCATIONAL and CHARITABLEpurposes shall be exempt from taxation.

HERRERA v. QC-BOARD OF ASSESSMENT(1935 Constitution)Q: What is involved in this case?A: A charitable institution, St.

Catherines Hospital. The hospital waspreviously exempt from taxation until it

was reclassified and subsequentlyassessed for the payment of real propertytax.

The contention of the respondent isthat the hospital was no longer a

charitable institution because it acceptspay-patients, it also operates a school formidwifery and nursing, and a dormitory.Since it is not exclusively used forcharitable purposes it is not exempt fromtaxation.

H: The Court ruled that petitioner is notliable for the payment of real estatetaxes. It is a charitable institution, thusexempt from the payment of such tax.

The hospital, schools and dormitoryare all exempt fro taxation because theyare incidental to the primary purpose of

the hospital.NOTE: this arose during the 1935Constitution.

Exempted by virtue of incidentalpurpose was merely coined by the SupremeCourt. Thus, it does not apply to other taxesexcept Real Estate Tax.

PROVINCE OF ABRA v. HERNANDOQ: What is involved in this case?A A religious institution was involved in

this case, the Roman Catholic Bishop ofBangued, Inc. (bishop filed declaratory

relief after assessed for payment of tax).The respondent judge granted theexemption from taxes of said churchbased only on the allegations of thecomplaint without conducting ahearing/trial. The assistant prosecutorfiled a complaint contending thatpetitioner was deprived of its right to dueprocess.

SC: the Court ordered that the case beremanded to the lower court for furtherproceedings. The Court observed that the

cause action arose under the 1973Constitution, not under the 1935Constitution (note the difference). Taxexemption is not presumed. It must bestrictly construed against the taxpayer andliberally construed in favor of thegovernment.

ABRA VALLEY COLLEGE INC. v. AQUINOQ: What is involved in this case?


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A: An educational institution is involvedin this case. The ground floor of theschool was leased to Northern MarketingCorp., a domestic corporation. The 2ndfloor thereof was used as the residence of

the school director and his family.The Province of Abra now contends

that since the school is not exclusivelyused for educational purposes, the schoolis now liable to pay real estate tax.

H: The Court held that the school isPARTIALLY liable for real estate tax.1. Residence exempt by virtue of

incidental purpose; justified becauseit is necessary.

2. Commercial not exempt because itis not pursuant to the primarypurpose; not for educational

purposes.

Q: is the doctrine in the case of Herrera thesame with this case?A: NO. in the Herrera case, the exemptionwas granted to all the real property (hospital,school and dorm). But in this case, theSupreme Court made a qualification. TheSupreme Court said it depends.

NOTE: both cases arose under the 1935Constitution despite having been decided in1988.

Q: At present, do we still apply theexemption from tax by virtue of the Doctrineof Incidental Purpose?A: Not anymore. The cause of action in saidcase arose under the 1935 Constitution andit does not apply to the provisions of the1987 Constitution.

PHILIPPINE LUNG CENTER v. QUEZON CITYQ: What is involved in this case?A: A charitable institution, a hospital. It

is provided in the charter of the Lung

Center of the Philippines is a charitableinstitution. However, part of its buildingwas leased to private individuals and thevacant portion of its lot was rented out toElliptical Orchids. Respondent contendsthat since the hospital is not usedactually, directly, an d exclusively forcharitable purposes, it is liable to pay realestate taxes.

H: The Supreme Court held that thepetitioner is liable to pay tax for thoseparts leased to private individuals forcommercial purposes. For the part of thehospital used for charitable purposes

(whether for pay or non-pay patients),petitioner is exempt from payment of realestate tax.

NOTE: petitioner contended that the profitsderived from the lease of its premises wereused for the operation of the hospital. TheCourt held that the use of the profits doesnot determine exemption, rather it is the useof the property that determines exemption.

The case of Herrera does not applybecause said case arose under the 1935Constitution and the present case arose

under the 1987 Constitution. Therequirements for exemption are different. Inthe 1935 Constitution, the property must beEXCLUSIVELY used for religious, educationalor charitable purposes. Under the 1987Constitution, the property must be usedACTUALLY, DIRECTLY, and EXCLUSIVELY forreligious, educational and charitablepurposes.

Q: Was the doctrine laid down in Abra Valleyaffirmed in the Lung Center case?A: Yes. The Supreme Court unconsciously

applied a doctrine laid down by the 1935Constitution. The Supreme Court reiteratedthe ruling in the Abra Valley case which aroseunder the 1935 Constitution. The SupremeCourt made a qualification, it held that itdepends on whether or not the use isincidental to the primary purpose of theinstitution.

NOTE: at present, exemption from tax byvirtue of incidental purpose is not applicableto all taxes including real estate tax.

COMM v. SC JOHNSON and SONS, INC.Important :

1. international double taxation2. importance of international tax treaty3. implication of most favored nation

clauseQ: What is the corporation involved in this

case?A: A domestic corporation (DC).


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SC Johnson and Sons, Inc. enteredinto a license agreement with SC Johnsonand Sons U.S.A (Non-Resident ForeignCorp, NRFC) whereby the former wasallowed to use the latters trademark and

facilities to manufacture its products. Inreturn, the DC will pay the NRFC royaltiesas well as payment of withholding tax.

A case for refund of overpaidwithholding tax was filed. Apparently, theDC should have paid only 10% under themost favored nation clause.

H: The Supreme Court coined the termInternational Double Taxation orInternational Juridical Double Taxation.

Q: What prompted the SC to coin suchterm?

A: Because a single income (tax royalties

paid by a DC) was subjected to tax by twocountries, the Philippines income tax andthe U.S. tax.

International Juridical Double Taxationapplies only to countries where the taxliabilities of its nationals are imposed onincome derived from sources comingfrom within and without.

Q: Is there an instance whereinternational double taxation does notapply?

A: Yes. If it involves nationals ofcountries wherein the tax liability is

imposed only from income derive fromsources within and not including thosederived from sources without.(Ex: Switzerland) The controversy in the case at bar

involves the income tax paid in thePhilippines.

After paying 25%, the US firmdiscovered that they are entitled to 10%under the most favored nation clause.The question is: was the tax paid undersimilar circumstances with that of the RP-West Germany Treaty?

The CTA and Court of Appeals ruledthat it was paid under similarcircumstances. The phrase referred to theroyalties in payment of income tax. TheSupreme Court ruled that the lowercourts interpretation of the phrase waserroneous. Rather, the phrase applies tothe application of matching credit.

Q: What is matching tax credit?

A: RP-Germany Treaty provides for that20% of the tax paid in the Philippinesshall be credited to their tax due to bepaid in Germany.

The 10% does not apply because there

is no matching credit. Thus, there is nosimilarity in the circumstances.

EQUITABLE RECOUPMENT AND DOCTRINEOF SET-OFF

Equitable Recoupment

This doctrine provides that a claim forrefund barred by prescription may be allowedto offset unsettled tax liabilities. This is notallowed in this jurisdiction, because ofcommon law origin. If allowed, both the

collecting agency and the taxpayer might betempted to delay and neglect the pursuit oftheir respective claims within the periodprescribed by law.

Q: What is the doctrine of EquitableRecoupment?A: When the claim for refund is barred byprescription, the same is allowed to becredited to unsettled tax liabilities.

(Sir gives an illustration found in page 3 ofmagic notes)

Q: Is the rule absolute? ReasonA: Yes, the rule is absolute. The rationalebehind this is to prevent the taxpayer andgovernment official from being negligent inthe payment and collection of taxes.(furthermore, you have to be honest for thisto work, hence, the government is preventingcorruption)

There is no exception at all otherwise, theBIR would be flooded with so many claims.

Set-off

Presupposes mutual obligation betweenthe parties. In taxation, the concept of set-off arises where a taxpayer is liable to paytax but the government, for one reason oranother, is indebted to the said taxpayer.

Q: What do you mean by SET-OFF?A: This presupposes mutual obligationsbetween the parties, and that they are mutual


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creditors and debtors of each other. Intaxation, the concept of taxation arises wherea taxpayer is liable to pay taxes but thegovernment, for one reason or another, isINDEBTED to said taxpayer.

REPUBLIC v. MAMBULAO LUMBER CO.Q: What is the liability of Mambulao?A: They are liable to pay forest charges

(under the old tax code).NOTE: under our present tax code, the NIRC,

we do not have forest charges as thesame was abolished by President Aquino.

Q: What did the lumber company do?A: The lumber company claimed that

since the government did not use thereforestation charges it paid forreforestation of the denuded land covered

by its license, the amount paid should bereimbursed to them or at leastcompensated or applied to their liabilityto pay forest charges.

H: The Court ruled that the reforestationcharges paid is in the nature of taxes.

The principle of compensation doesnot apply in this case because the partiesare not mutually creditors and debtors ofeach other. A claim for taxes is not adebt, demand, contract or judgment as isallowed to be set-off under the statute ofset-off which is construed uniformly, in

the light of public policy, to exclude theremedy in connection or anyindebtedness of the State or anymunicipality to one who is liable fortaxes. Neither are they a proper subjectfor recoupment since they do not ariseout of contract or the same transactionsued on.

General Rule: no set-off is admissible againstdemands for taxes levied in general or localgovernmental purposes.

Reason: Taxes are not in the nature ofcontracts or debts between the taxpayer andthe government, but arises out of a duty to,and are positive acts of the government tothe making and enforcing of which, theconsent of the individual is not required.Taxes cannot be the subject matter ofcompensation.

DOMINGO v. GARLITOS

Q: What is being collected in this case?A: Estate and inheritance taxes.NOTE: we do not have inheritance taxes

anymore because the same was abolishedby Lolo Macoy.

Q: Who is the administratrix?A: The surviving spouse.Q: What did the surviving spouse do?A: The surviving spouse suggested that

the compensation to which the decedentwas entitled to as an employee of theBureau of Lands be set-off from the estateand inheritance taxes imposed upon theestate of the deceased.

H: Both the claim of the government forestate and inheritance taxes and theclaim of the (intestate) for the servicesrendered have already become overdue

hence demandable as well as fullyliquidated, compensation therefore takesplace by operation of law, in accordancewith Art. 1279 and 1290 of the Civil Codeand both debts are extinguished to theconcurrent amount.

Compelling Reason: Congress hasenacted RA 2700, allocating a certain sumof money to the estate of the deceased.

FRANCIA v. IACQ: This happened in what city?

A: Pasay CityQ: What is the tax being collected? Who is

collecting the same?A: Payment for real estate taxes for the

property of Francia. It appears thatpetitioner was delinquent in the paymentof his real estate tax liability. The same isbeing collected by the Treasurer of Pasay.

Q: What is the suggestion of petitioner?A: Suggested that the just compensation

for the payment of his expropriatedproperty be set-off from his unpaid realestate taxes. (the other part of his

property was sold at a public auction)H: The factual milieu of the case does

not justify legal compensation.The Court has consistently ruled that

there can be no off-setting of taxesagainst the claims that the taxpayer mayhave against the government. A taxpayercannot refuse to pay a tax on the groundthat the government owes him anamount.


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Internal Revenue taxes cannot be thesubject of compensation because thegovernment and the taxpayer are notmutually creditors and debtors of eachother, and a claim for taxes is not a debt,

demand, contract or judgment as isallowed to be compensated or set-off.

Furthermore, the payment of justcompensation was already deposited withPNB Pasay, and the taxes were collectedby a local government, the property wasexpropriated by the national government.(diff parties, not mutual creditors anddebtors of each other.)

CALTEX PHIL v. COAQ: What is being collected?A: Caltexs contribution to the Oil Price

Stabilization Fund (OPSF).COA sent a letter to Caltex asking the

latter to settle its unremitted collectionstating that until the same is paid, itsclaim for reimbursement from the OPSFwill be held in abeyance.

Q: Why is Caltex entitled to reimbursement?A: Because of the fluctuation of the oil

prices in the Middle East and Europe.Caltex wanted to off-set its unremittedcollection from its reimbursements.

H: The Court did not allow the set-off,and reiterated its ruling in the case of

Mambulao and Francia. Furthermore, RA6952 expressly prohibits set-off from thecollection of contributions to the OPSF.The Court likewise stated that Caltexmerely acted as agent of the governmentin collecting contributions for the OPSFbecause such is being shouldered by theconsumers when they purchasepetroleum products of oil companies,such as Caltex.

Taxation is no longer envisioned as ameasure merely to raise revenues tosupport the existence of the government.

Taxes may be levied for regulatorypurposes such as to provide means forthe rehabilitation and stabilization of athreatened industry which is vested withpublic interest, a concern which is withinthe police power of the State to address.

PHILEX MINING CORP v. COMMThe petitioner is liable for the payment of

excise taxes, which it wanted to be set-off

from its pending claim for a VAT Inputcredit/refund.

The Court did not allow set-off. Taxescannot be the subject of compensation forthe simple reason that the government and

taxpayer are not mutual creditors anddebtors of each other. Taxes are not debts.

Furthermore, in the instant case, theclaim for VAT refund is still pending. Thecollection of a tax cannot await the results ofa lawsuit against the government.

DOUBLE TAXATION

Double taxation is allowed because thereis no prohibition in the Constitution orstatute.

Obnoxious double taxation is thesynonym of double taxation.

Elements of Double Taxation:1) Levied by the same taxing authority2) For the same subject matter3) For the same taxing period and4) For the same purpose

There is no double taxation if the tax islevied by the LGU and another by the nationalgovernment. The two (2) are different taxingauthorities.

LGUs are expressly prohibited by theprovisions of RA 7160 or the LGC of 1991from levying tax upon: (1) the NationalGovernment; (2) its agencies andinstrumentalities; (3) LGUs (sec.113(o)).

The National Government, pursuant tothe provisions of RA 8424 of the Tax ReformAct of 1997, can levy tax upon GOCCs,agencies and instrumentalities (Section 27c)), although income received by theGovernment form:

1) any public utility or

2)

the exercise of any essentialgovernmental function

is exempt from tax.

KINDS OF INCOME TAXPAYERS

Q: Generally, how many kinds of incometaxpayers are there?A: Under section 22A of NIRC, there arethree (3), namely:


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1. individual;2. corporate;3. estate and trust.

I. INDIVIDUAL TAXPAYER

Q: How many kinds of individual taxpayersare there?A: There are seven (7). Namely:

1. Resident Citizen (23A and 24A);2. Nonresident Citizen (23B and 24A);3. OCW and Seaman (23C and 24A);4. Resident Alien (22F, 23D and 24A);5. Nonresident Alien Engaged in Trade

or Business (22G, 23D and 25A)6. Nonresident Alien NOT Engaged in

Trade or Business (22G, 23D and25B)

7.

Aliens Engaged in MultinationalCompanies, Offshore Banking Units,Petroleum Service Contractors(25C,D and E)

Resident Citizen (RC)

Q: How many types of RC?A: There are two (2), namely:

1. RC residing in the Philippines; and2. Filipino living abroad with no

intention to reside permanentlytherein.

Q: If you are abroad, and you have theintention to permanently reside therein, canyou still be considered a RC?A: Yes. If such intention to permanentlyreside therein was not manifested to theCommissioner and the fact of your physicalpresence therein, you may still be considereda RC.

OCW and Seamen

OCW was used and not OFW in the CTRP,

because the classification shall cover onlythose Filipino citizens working abroad with acontract. TNTs are not covered.

A Filipino seaman is deemed to be anOCW for purposes of taxation if he receivescompensation for services rendered abroadas a member of the complement of a vesselengaged exclusively in international trade.

Consequently, if he is not a member ofthe complement or even if he is but thevessel where he works is not exclusivelyengaged in international trade, said seamanis not deemed to be an OCW. He is either a

RC or a NRC depending on where he staysmost of the time during the taxable year.

If he stays in the Philippines most of thetime during the taxable year, he isconsidered a RC, otherwise, a NCR.

If you are a seaman in the US Navy, youare not the one being referred to.

The importance of ascertaining whetheror not a seaman is a RC or a NRC, is that if heis a RCm he is taxable on ALL income derivedfrom all sources within and without. If he is a

NRC, he is taxable only on income derivedform sources within the Philippines.

Q: What is the significance of using OCW?A: It only covers Filipinos who works abroadwith a contract. It does not cover TNTs.

Q: What is the status of a TNT?A: Since they are not covered by thisclassification, they are considered RCbecause they work abroad without a contractand they have not manifested their intention

to permanently reside abroad. (distinguishfrom an immigrant)

Requirements for a seaman to be consideredan OCW:1. must be a member of the compliment of

a vessel;2. the vessel must be exclusively engaged in

international trade or commerce.

Resident Alien (RA)

An individual whose residence is within

the Philippines and who is not a citizenthereof.

Intention to reside permanently in thePhilippines is not a requirement on the partof the alien.

The requirement under RR#2 is that he isactually present in the Philippines, neither asojourner, a traveler, not a tourist.


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Whether hes a transient or not isdetermined by his intent as to the nature andlength of his stay.

Q: Is the intention to permanently reside in

the Philippines necessary?A: No, so long as he is not a sojourner,tourist or a traveler.

Non-Resident Alien Engaged in Trade orBusiness (NRAETB)

A foreigner not residing in the Philippinesbut who is engaged in trade or business here.

RR 2-98 has expanded the coverage ofthe term, engaged in trade or business toinclude the exercise of a profession.

Furthermore, by the express provision of thelaw, a NRA who is neither a businessman nora professional but who come to and stays inthe Philippines for an aggregate period ofmore than 180 days during any calendar yearis deemed to a NRAETB in the Philippines.

Q: How many types?A: There are three (3) types, namely:

1. NRA engaged in trade or business(25a1);

2. NRA who practices a profession(Revenue Regulation 2-98);

3.

foreigner who comes and stays in thePhilippines for an aggregate period ofMORE THAN 180 days during anycalendar year.

Q: What is the status of a Chinese who stayshere for 200 days in 2001?A: NRAETB

Q: Suppose he stayed here for 100 days in2000 and another 100 days in 2001?A: He is not a NRAETB. To be considered assuch, he must stay for an aggregate period of

more than 180 days during a calendar year.

Q: What is the income tax applicable to saidtaxpayer?A: Net Income Tax (NIT) on all its incomederived form sources within the Philippines.

Non-Resident Alien Not Engaged inTrade or Business

Q: How many kinds?A: Only one.

The reason why the NRANETB areincluded in any income tax law is because

they may be deriving income form sourceswithin the Philippines.

They are subject to tax based on theirGROSS INCOME received form all sourceswithin the Philippines.

Aliens Employed by Regional or AreaHeadquarters & Regional OperatingHeadquarters of MultinationalCompanies/ Aliens Employed byOffshore Banking Units (AliensEmployed by MOP)

Status: either a RA or NRA depending ontheir stay here in the Philippines.

Their status may either be RA or NRA

because Section 25 C and D does notdistinguish.

Liable to pay 15% from Gross Income

received from their employer

Income earned from all OTHER sources

shall be subject to the pertinent income tax,as the case may be.

Aliens Employed in Multinational andOffshore Banking Units

Q: How are they classified?A: If they derived income from other sourcesaside from their employer, you may classifythem either as RA, NRAETB, or NRANETB.

Aliens Employed in Petroleum ServiceContractors and Subcontractors

Status: ALWAYS NRA. If they derive

income from other sources, such incomeshall be subject to the pertinent income tax,as the case may be.

Income derived or coming from their

employer shall be subject to a tax of 15% ofthe gross.

II. CORPORATE TAXPAYER


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1. Domestic Corporation (DC) createdor organized under Philippine laws.

2. Resident Foreign Corporation (RFC) corporation created under foreignlaw, and engaged in trade or

business.3. Nonresident Foreign Corporation

(NRFC) created under foreign law,and NOT engaged in trade orbusiness.

Q: What are deemed corporations under theNIRC?A: The term corporation shall includepartnerships, no matter how created ororganized, joint stock companies, jointaccounts, associations, or insurancecompanies, but DOES NOT includes general

professional partnerships and a joint ventureor consortium formed of the purpose ofundertaking construction projects oroperations pursuant to or engaging inpetroleum, coal, geothermal or consortiumagreement under a service contract with theGovernment.

1. Partnerships and others no matter howcreated

2. Joint Stock Companies3. Joint Accounts4. Associations5. Insurance Companies

CIR v. COURT OF APPEALSThe phrase no matter how created or

organized was interpreted.Even if the partnership was pursuant to

law or not, whether nonstick, nonprofit, it isstill deemed a corporation.

Reason: because of the possibility ofearning profits form sources within thePhilippines.

Q: Are partnerships always considered

corporations? Is there no exception?A: General Rule: a partnership is acorporation.

Exception: General Professional Partnerships(GPP)

Q: What is a GPP?A: It is a partnership formed by persons forthe sole purpose of exercising their

profession, no part of the income of which inderived from any trade or business. (what if apartner has other businesses not related tothe GPP? > read section 26 quoted hereunder)

Two (2) Kinds of GPP formed for:1) Exercise of a profession not a

corporation; exempt from CorporateIncome Tax (CIT)

2) Exercise of a profession and engagedin trade or business a corporation;subject to CIT

TAN v. DEL ROSARIOgeneral rule: a partnership is a

corporationexception: GPPexception to the exception: if the GPP

derives income from other sources, it isconsidered a corporation, thus liable to paycorporate income tax.

Rule:1. if the income is derived from other

sources and such income is subject to NETINCOME TAX, it is not exempt and it isconsidered a corporation.

2. if the income is derived from othersources and such income is subject to FINALINCOME TAX, it is still EXEMPT and it is notdeemed a corporation. ( separate return for

this. It will not reflect in the GPPs ITR) This is pursuant to the fact that FIT willnot reflect in the ITR of the GPP since thewithholding agent is liable for the payment ofthe FIT.

Q: What is the importance of knowingwhether the corporation is exempt or not?A: To determine their tax liability. This isimportant to determine the tax liability of theindividual partners of the GPP.

Section 26 (1st paragraph) provides: a

GPP as such shall not be subject to the NetIncome Tax however, persons engagingin business as partners in a GPP shall beliable for income tax only in their separateand individual capacities.

In short, each partner will be paying NIT,and the distributive shares they will bereceiving from the net income of the GPP willbe included in the gross income of thepartner.


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Q: If the GPP is deemed a corporation, will thepartners have to pay for the income tax?A: No. as far as the share of the GPP isconcerned, it is considered a taxable dividend

which is subject to FIT.

Q: Is a joint venture a corporation?A: Generally, yes, it is a corporation.

Q: Corporation X and Corporation Y joinedtogether. How many corporations do wehave?A: Three, namely Corporation X, Y, and X+Y.the joint venture has a separate and distinctpersonality from the two corporations.

Q: When is a joint venture not considered a

corporation?A: It is not deemed a corporation when it isformed for the purpose of undertaking a(construction?) project or engaging inpetroleum, gas, and other energy operationspursuant to ? or consortium agreementunder a service contract with thegovernment.

Domestic Corporation

Is one created or organized in thePhilippines or under its laws.

Taxable on all income derived fromsources within or without the Philippines.

Resident Foreign Corporation

Foreign corporations engaged in trade orbusiness in the Philippines.

Taxable for income derived within thePhilippines.

Non-Resident Foreign Corporation

Foreign corporations not engaged intrade or business in the Philippines.

Taxable for income derived within thePhilippines.

Both DC and RFC are liable for thepayment of the following:

1) NIT Net Income Tax

2) FIT Final Income Tax3) 10% income tax on corporations with

properly accumulated earnings.4) MCIT (Minimum Corporate Income

Tax) of 2% of the Gross Income

5)

Optional Corporate Income Tax of15% of the Gross Income

A NRFC is liable for payment of the ff:1) GIT- Gross Income Tax2) FIT Final Income Tax

III. TRUST AND ESTATE

Q: How many for each?A: Seven (7) kinds for each because the trustor estate will be determined by the status ofthe trustor, grantor, or creator, or of the

decedent.

The status of the estate is determined bythe status of the decedent at the time of hisdeath; so an estate, as an income taxpayercan be a citizen or an alien.

When a person who owns property dies,the following taxes are payable under theprovision of income tax law:

1) Income Tax for Individuals to coverthe period beginning January tothe time of death.

2)

Estate Income Tax if the property istransferred to the heirs.

3) If no partition is made, Individual orCorporate Income Tax, dependingon whether there is or there is nosettlement of the estate. If thereis, depending on whether thesettlement is judicial orextrajudicial.

Judicial Settlement

1) During the pendency of the

settlement, the estate through theexecutor, administrator, or heirs isliable for the payment of ESTATEINCOME TAX (Sex, 60 (3)).

2) If upon the termination of the judicialsettlement, when the decision of thecourt shall have become final andexecutory, the heirs still do not dividethe property, the followingpossibilities may arise:


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a) If the heirs contribute to theestate money, property or industrywith the intention to divide theprofits between and amongthemselves, an UNREGISTERED

PARTNERSHIP is created and theestate becomes liable for paymentof CIT (Evangelista vs. Collector(102 Phil 140))

b) If the heirs without contributingmoney, property or industry toimprove the estate, simply dividethe fruits thereof between andamong themselves, a CO-OWNERSHIP is created andIndividual Income Tax (IIC) isimposed on the income derived byeach of the heirs, payable in their

separate and individual capacity(Pascual vs. COMM (165 scra 560)and Obillos vs. COMM (139 SCRA436))

Extrajudicial Settlement and if NO Settlement

Some possibilities may arise. The incometax liability depends on whether or not theunregistered partnership or co-ownership iscreated.

Trust

Trusts can be created by will, by contractor by agreement. The status of a trustdepends upon the status of the grantor ortrustor or creator of the trust. Hence, a trustcan also be a citizen or an alien.

Q: Where the trust earns income and suchincome is not passive, who among the partiesmentioned is liable for payment of incometax thereon?A: The TRUST itself, through the trustee orfiduciary but only if the trust is irrevocable.

If it is revocable, or for the benefit of thegrantor, the liability for the payment ofincome tax devolves upon the trustor himselfin his capacity as individual taxpayer.

KINDS OF INCOME TAX

Q: How many kinds of income tax?A: There are Six (6), namely:

1. Net Income Tax (NIT);2. Gross Income Tax (GIT);3. Final Income Tax (FIT);4. Minimum Corporate Income Tax of

2% of the Gross Income (MCIT)

5.

Income Tax on ImproperlyAccumulated Earnings subject to 10%of the Taxable Income;

6. Optional Corporate Income Tax of15% on the Gross Income

I. NET INCOME TAX

Q: what is the formula?A: Gross Income Deductions and PersonalExemptions = Taxable Income

Taxable Income x Tax Rate = Net

Income

Taxable Net Income Tax Credit =Taxable Net Income Due

Net Income means Gross Income lessdeductions and

Formula:GI- deductionsNet Incomex Tax RateIncome Tax Due

Q: What is the rate?A: Individual: 32%

Corporation: 35%

NOTE: the formula allows for deduction,personal exemptions and tax credit.

Q: What are the other terms for NIT?A: NIRC:

a. taxable incomeb. gross income (wlang kasunod)

only income tax from improperly

accumulated earnings does not use this term.

1. CFA: to be included in the grossincome

2. Revenue Regulations and Statutes:a. ordinary way of paying income

tax;b. normal way of paying income tax .

Characteristics:


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Q: Who are not liable to pay NIT?A: 1. NRANETB (liable for GIT);

2. NRFC (GIT also);3. With certain modifications, AEMOP, if

they derive income from othersources;

Q: Is the taxable net income subject towithholding tax?A: It is subject to withholding tax if the lawsays so.

Q: What if the law is silent?A: If the law is silent, it is not subject towithholding tax.

Q: What is another term for withholding tax?

A: It is also known as the creditablewithholding tax system under the income taxlaw.

Q: Do we have to determine if there is anactual gain or loss?A: Yes because the formula for deductions,etc.

Q: If you fail to pay, will you be held liable?A: Yes, you will be held liable.

II. GROSS INCOME TAX (GIT)

Q: What is the formula?A: Gross Income x Rate

Q: How many taxpayers pay by way of thegross?A: There are two (2)

individual - NRANETBcorporation - NRFC

NOTE: the formula does not allow anydeduction, personal exemptions and taxcredit.

Characteristics:

NRANETB and NRFC, though not engaged

in trade or business, are liable to pay by wayof the gross for any income derived in thePhilippines. While not engaged in trade orbusiness, there is a possibility that they mayearn income in the Philippines.

Q: Is this subject to withholding tax?A: Yes, it is subject to withholding taxbecause the persons liable are foreigners.This rule is ABSOLUTE

NOTE: there are two (2) ways of paying taxesdepending on which side of the bench youare.

III. FINAL INCOME TAX (FIT)

Q: What is the formula?A: (Each Income) x (Particular Rate)

Unlike in the gross income tax where youadd all the income from all the sources andmultiply the sum thereof by the rate of 25%or 35%, as the case may be, in final incometax, you cannot join all the income in one

group because each income has a particularrate.

Q: What is the rate?A: 35% as the case may be.

NOTE: like GIT, the formula does not allowdeductions, personal exemptions, and taxcredit.

Characteristics:

Q: Who are liable to pay FIT?A: All taxpayers are liable to pay FITprovided the requisites for its application arepresent.

Q: Do you still have to pay NIT?A: No. if you are liable for FIT, no need topay NIT or else there will be double taxation.

NOTE: as time passed by, the number of FITincreased.

before 1979 proceeds from the sale of

real property not exempt, it is subject to NITor GIT, as the case may be.

after 1979 capital gains tax. Proceedsfrom the sale of real property is exempt.

Q: If you fail to pay, will you be liable?A: No. the withholding agent is liable to payFIT.

Case of Juday, Richard and Regine


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For one to be liable for the payment of

NIT, the income must be derived on the basisof an employer employee relationship.

Employer Employee Relationship(3 Cs):1. contract;2. control;3. compensation;

However, in the case of celebrities, there

is no employer employee relationship, theyare merely receiving royalties. Royalties aresubject to final withholding tax, thus theagent is liable to pay. (so, distinguish natureof income, whether royalty or compensation)

RULE:1. for NIT, whether or not subject to

Creditable Withholding Tax (CWT), thetaxpayer is always liable if he fails topay.

2. for GIT and FIT, absolute liability topay is upon the withholding agent.

Q: Why is it that the rate of withholding isalways lower, and why is it that the rate ofGIT and FIT is always equal?A:

1. NIT allows deductions;

2.

GIT and FIT do not allow deductions.

Q: Do you have to determine whether thereis an actual loss or gain?A: No need to determine because theformula does not allow deductions. Gain ispresumed. No liability for final withholdingtax except for the sale of shares of stock. (?)

IV. MINIMUM CORPORATE INCOME TAX(MCIT)

Q: What is the formula?

A: Gross Income x 2%

Q: Who pays this tax?A: DC and RFC only.

Q: May it be applied simultaneous with NIT?A: No. there must be a computation of theNIT first then apply which ever is higher. TheMCIT is paid in lieu of the NIT.

Reason: to discourage corporations fromclaiming too many deductions.

V. OPTIONAL CORPORATE INCOME TAX

Q: Under what section is this found?A: Section 27A 4th paragraph and Section 28A(1) 4th paragraph.

Q: Is this applicable now?A: No. this is not yet implemented.

Q: To what kind of taxpayer does this apply?A: To DC and RFC.

Q: What kind of taxes are applicable orimposed upon the 1st five individualtaxpayers?

A: Only two (2) kinds are applicable out ofthe six (6) kinds of income taxes.

1. NIT;2. FIT;

Q: What kind of income tax will apply toAEMOP?A: Generally, only one kind, 15% FIT withrespect to income derived from theiremployer.

Income from other sources:1. Determine the status of the AEMOP;

a. NITb. FIT

2. NRANETBa. GITb. FIT

Q: What kind of income tax applies to DC?A: Only four (4) kinds will apply out of thesix (6)

1. NIT2. FIT3. MCIT4. Improperly Accumulated Earnings

Q: May all of these be appliedsimultaneously?A: No. only the NIT, FIT and ImproperlyAccumulated Earnings be appliedsimultaneously. NIT and MCIT cannot beapplied simultaneously. Only one will apply,whichever is higher between the two.

Q: What kind of tax will apply to NRFC?


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A: Out of the six (6) kinds, only two (2) willapply:

1. GIT2. FIT

Q: What is the significance of knowing theclassification of these taxpayers?A:

1. to determine the kind of income taxapplicable to them;

2. to determine their tax liability.

Q: Under Section 23, who are liable forincome within and income without?A: Only

1. RC2. DC

The rest of the taxpayers will be liable for

income coming from sources within.

Income from sources without, no liability,

therefore exempt.

NOTE: The income taxpayer is not a RC or aDC. Determine if the income came fromsources within or without to know thetaxpayers liability.

If the facts are specific, do not qualify

your answer. Answers must be responsive tothe question.

Q: Is section 42 relevant to all the taxpayers?A: NO. SECTION 42 IS NOT MATERIAL TOALL taxpayers, particularly the RC and DCbecause these two are liable for both incomewithin and without.

Section 42 is applicable only to taxpayers

who are liable for income within, the rest ofthe taxpayers are otherwise exempt.

Q: Section 42(A)(1) provides for how manykinds of interests?A: It establishes two (2) kinds of interests,namely:

1. interest derived from sources withinthe Philippines.

2. interest on bonds, notes or otherinterest bearing obligations ofresidents, corporate or otherwise.

Q: What is the determining factor in order toknow if the income is from within?

A:1. location if the bank is from within the

Philippines (pursuant to a RevenueReg.)

2. residence of the obligor (whether anindividual or a corp.) contract ofloan with respect to the interestearned thereon.

For example the borrower is a NRAETB,

he borrowed money from a RA. The interestearned by the loan will be considered as anincome without. RA is not liable to pay taxsince RA is liable only for income within,therefore exempt from paying the tax.

NATIONAL DEVELOPMENT CO. v. CIRF: The National Development Company

(NDC) entered into a contract with severalJapanese shipbuilding companies for theconstruction of 12 ocean-going vessels.The contract was made and executed inTokyo.

The payments were initially in cashand irrevocable letters of credit.Subsequently, four promissory notes weresigned by NDC guaranteed by theGovernment.

Later on, since no tax was withheldfrom the interest on the amount due, theBIR was collecting the amount from NDC.

The NDC contended that the incomewas not derived from sources within thePhilippines, and thus they are not liableto withhold anything. NDC said that sincethe contract was entered into and wasexecuted in Japan, it is an incomewithout.

H: The governments right to levy andcollect income tax on interest received bya foreign corporation not engaged in

trade or business within the Philippines isnot planted upon the condition that theactivity or labor and the sale from whichthe income flowed had its situs in thePhilippines. Nothing in the law (Section42(1)) speaks of the act or activity ofnonresident corporations in thePhilippines, or place where the contract issigned. The residence of the obligor whopays the interest rather than the physical


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location of the securities, bonds or notesor the place of payment is thedetermining factor of the source of theincome. Accordingly, if the obligor is aresident of the Philippines, the interest

paid by him can have no other sourcethan within the Philippines.

Q: Suppose a NRFC, an Indonesian firm,becomes a stockholder of two corporations, aDC and a RFC, and both corporationsdeclared dividends, what is the liability of theIndonesian firm if the same received thedividends?A:

1. Dividends received from DC: theIndonesian firm is liable to pay taxes.NRFC, under the law, is liable if the

income is derived from sourceswithin. (Sec 42a)

2. Dividends received from RFC: theIndonesian firms liability will dependon amount of gross income fromsources within the Philippines.

The NRFC will be liable to pay income tax ifthe following requisites are present:

1. at least 50% is income from sourceswithin;

2. the 1st requisite is for the three (3)preceding taxable years from the time

of declaration of the dividends.

In the absence of any or both

requisites, the income will be consideredfrom sources without, thus exempting theIndonesian firm from payment of income tax.

Q: Same scenario, but this time the shares ofstock of the two corporations were beingdisposed off. What is the tax liability of theIndonesian firm?A:

1. sale of shares of stock of DC: the

Indonesian firm will be liable for thepayment of taxes because the incomeis from sources within.

2. sale of shares of stock of RFC: theliability will depend on where theshares of stock were sold. (mejoMalabo sa notes, please be guidedaccordingly)

Q: Filipino Executive, assigned to HongKong, receiving two salaries, one from thePhilippines, the other from HK. Theperformance of the job was in HK. Is he liablefor both salaries?

A: No, he is not liable for the two incomes.His status is an OCW (note facts: working inHK under contract). The compensation hereceived is not subject to tax pursuant toSection 42(c). Compensation for labor orpersonal services performed in thePhilippines is considered an income within.When it comes to services, it is the placewhere the same is rendered which iscontrolling. In the case at bar, the serviceswere rendered abroad, thus it is an incomederived from sources without, irrespective ofthe place of payment.

Q: Suppose a DC hired a NRFC to advertiseits products abroad. What is the liability ofthe NRFC? Will there be a withholding taximposed?A: The income is derived from sourceswithout since the services in this case wereperformed abroad. As such, the NRFC is notliable and therefore exempt from thepayment of tax. If the NRFC is not subject toNIT, then it is not also subject to withholdingtax.

Q: What is the controlling factor?A: The controlling factor is the place wherethe services were performed and not wherethe compensation therefore was received.

RENTALS AND ROYALTIESincome from sources within

Q: Granted by who?A: NRFC

Q: Suppose you are the franchise holder, howmuch is the withholding?A: 35% (GIT)

Q: if the franchise is granted by RFC, howmuch is the withholding?A: 10% (NIT) and in some cases 15%

Section 42(4) MEMORIZE FOR RECIT(CEKSTTM)

a. right of, or the right to usecopyright, patents, etc


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b. industrial, commercial,scientific equipment

c. supply of knowledged. supply of services by

nonresident

e.

supply of technical assistancef. supply of technical adviceg. right to use: motion picture

films, etc.

Q: What is the rule as regards the sale of realproperty?A: Gains, profits, and income from the saleof real property located within the Philippinesconsidered income within.

Q: What about the sale of personal property,what is the rule?

A: Determine first if the property isproduced or merely purchased.

1. it the property is manufactured in thePhilippines and sold abroad, or vice-versa, it is an income partly withinand partly without.

2. if the property is purchased,considered derived entirely from thesources within the country where it issold.

EXCEPTION: shares of stock of domestic

corporation, it is an income within whereverit is sold.

COMMISSIONER v. IACQ: What is the issue here?A: They cannot determine if the business

expense was incurred in the Philippines.Q: if you are the BIR, and the taxpayer is not

sure, will you disallow the deduction?A: No. determine it pro rata.Formula: GI from within

GI from without

Example: 100,0001,000,000= 10%

Hence, 10% is the ratable share in the

deduction. If the deduction being asked is100,000 not all of it will be allowed. Only10,000 or 10% of 100,000 will be allowedas deduction.

CAPITAL GAINS AND LOSSES

Section 39

Q: What is capital asset?A: Capital asset is an asset held by ataxpayer which is not an ordinary asset.

The following are ordinary assets:1. stock in trade of the taxpayer or other

property of a kind which wouldproperly be included in the inventoryof the taxpayer if on hand at the closeof the taxable year;

2. property held by the taxpayerprimarily for sale to customers in theordinary course of trade or business;

3. property used in trade or business ofa character which is subject to theallowance for depreciation provided in

subsection 1.4. real property used in trade or

business of the taxpayer.

All other property not mentioned in theforegoing are considered capital assets.

Q: What is a capital gain? What is a capitalloss?A: Capital gains are gains incurred orreceived from transactions involving propertywhich are capital assets. Capital losses arelosses incurred from transactions involving

capital assets.

Q: What is ordinary gain? Ordinary loss?A: Ordinary gains are those received fromtransactions involving ordinary assets.Capital losses are losses incurred intransactions involving ordinary assets.

Q: What is the relevance of making adistinction?A: It is relevant because Section 39B,C, andD apply to capital assets only.

1. time when property was held (39B)

(holding period applies only toindividuals);

2. limitations on capital losses (39C);3. Net Capital Carry-Over (39D)

I. CAPITAL ASSETS

Q: What is the holding period?


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A: If capital asset is sold or exchanged by anindividual taxpayer, only a certain percentageof the gain is subject to income tax.

It is the length of time or the duration ofthe period by which the taxpayer held the

asset.

Q: What is the requirement?A:

1. the taxpayer must be an individual.Section 39B states in case of ataxpayer, other than a corporation..

2. property is capital in nature.Q: What is the term?A: 100% if the capital asset has been heldfor not more than 12 months; (short term)

50% if the capital asset has been held for

more than 12 months. (long term)

NOTE: the holding period applies to bothgains and losses.

Q: Do you include capital gains in your ITR?A: General rule: yes, include in ITR.

EXCEPT:1. gains in sales of shares of stock not

traded in stock exchange(section 24);2. capital gains from sale of real

property(section 24).

Q: When will the holding period not apply?A:

1. property is an ordinary asset2. taxpayer is a corporation3. sale of real property considered as

ordinary asset

II. LIMITATION ON CAPITAL LOSSESsynonymous to 34D & loss capital rule this applies to individual and corporate

taxpayerQ: What is the loss limitation rule?

A: Pursuant to Section 39 C, losses fromsales or exchange of capital assets may bededucted only from capital gains, but lossesfrom the sale or exchange of ordinary assetsmay be deducted from capital or ordinarygains. (applies to individual and corporation)

Q: In connection with 34 D, Losses inAllowable Deduction, what is the rationalebehind this rule?

A: If it is otherwise, it will run counter withthe rule that the loss should always beconnected with the trade or business, capitallosses are losses not connected to the tradeor business, thus it is not deductible

Q: what is your remedy?A: 39 D, net capital loss carry-over

Q: What is the rationale in allowing ordinaryloss to be deducted from either thecapital gains or ordinary gains?

A: It is already included in ITR, the grossincome less deductions hence it alreadycarries with it the deduction

TAKE NOTE: Normally if the loss is anordinary loss there is no carry over.

Except: a. 34D3b. if the loss is more than GI

III. NET CAPITAL LOSS CARRY-OVER

Q: What are the requirements?A:

1. taxpayer is an individual;2. paid in the immediately succeeding

year;3. applies only to short term capital

gain;4. capital loss should not exceed net

income in the year that it wasincurred.

Q: How does net capital loss carry-over differfrom net operating loss carry-over underSection 34 D (3)?A: Under the net capital loss carry-over rule,the capital loss can be carried over in theimmediate succeeding year. In net operatingloss carry-over rule, capital loss can becarried over to the next three (3) succeedingcalendar year following the year when theloss was incurred.

NOTE: only 15% of the loss will be carriedover, if the loss is greater than the gains.

In net operating loss carry-over there is

an exception to the 3 year carry-over period.In case of mines other than oil and gas wells,the period is up to 5 years.

Q: What is a short sale?


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A: Sale of property by which the taxpayercannot come into the possession of theproperty. EX: shares

CALAZANS v. CIR

F: The taxpayer inherited the propertyfro her father and at the tie of theinheritance it was considered a capitalasset. In order to liquidate theinheritance, the taxpayer decided todevelop the land to facilitate the sale ofthe lots.

I: Was the property converted toordinary asset?

H: The conversion from capital asset toordinary asset is allowed because Section39 is silent.

Q: Are you allowed to convert ordinary assetto capital asset?A: General rule: it is not allowed. ReadRevenue Regulation 7-2003

The case at bar still applies despite of theissuance of said Revenue Regulation.

Q: What is the conversion prohibited in theRevenue Regulation?A: Conversion of real estate property.

Q: What is the rationale?A: Section 24 D final income tax of 6% if

the real estate is capital asset. If it is anordinary asset, it will be subject to incometax of 32% for individual taxpayer, and 35% ifthe taxpayer is a corporation.

Q: What are the properties involve in the RR7-2003?

A: 1. those property for sale by the realtors2. real property use in trade or businessnot necessary realtors

Q: That is the conversion allowed by theRevenue Regulation? Is there an instance

when an ordinary asset may be converted tocapital asset?A: Yes, provided that the property is anasset other the real property, and it has beenidle for two (2) years.

SECTION 24TAX ON INDIVIDUALS

Q: What is the tax mentioned in section 24?

A: NIT

Q: What is taxable income?A: (memorize section 31) it is the pertinentitems of gross income specified in the NIRC,

less the deductions and/or personal andadditional exemptions, if any, authorized forsuch types of income by the NIRC or otherlaws. It refers to NIT because it allowsdeductions.

Q: What do you mean by the phrase otherthan B, C, and D?A: It means that if the elements of passiveincome are present, the taxpayer has to payFIT.

Q: Who are the taxpayers mentioned in

section 24?A:

1. RC2. NRC3. OCW4. RA

Additionally, under Section 25, NRAETB

Q: What is the tax liability of NRAETB?A: Section 25(1) NRAETB is subject toincome tax in the same manner as thoseindividuals mentioned in Section 24.

Q: What about Domestic Corporations?A:

1. Sec. 27 A,B, and C2. Sec. 26- GPP is not subject to income

tax.

Q: What about Resident ForeignCorporations?A: Sec 28(l) it is subject to 35% Net IncomeTax

Q: What about Non Resident foreign

Corporation and Non Resident Alien notengaged in Trade or Business?A: Not Subject to Net Income Tax but theyare liable for Gross Income tax.

Q: Do legally married husband and wife needto file separately or jointly?A: It depends if:1. Pure compensation income- separate2. Not Pure compensation income- joint


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Passive IncomeInterest, Royalties, prizes and Other winnings

Interest

Q: Bank Interest, what is the requirement?A: The bank must be located in the Phils.because the income must be derived fromsources w/in.

Q: Do you include this in your ITR?A: No! because it is subject already to FIT.The bank is the one liable for the payment ofthis.

NOTE: Liability for NIT, GIT, and MCIT willdepend on the elements present.

Q: Who are liable for bank interest?A:

1. RC }2. NRC} Sec. 24 B13. RA }4. NRAETB5. NRANETB Sec. 25 (25%)6. AEMOP7. DC8. RFC9. NRFC

Q: What is the rate of interest?A: FIT of 20%

Q: Is there a lower rate?A: 7 % if under EFCDS

Q: What if the depositor is non residentalien?A:

-W/in FIT- W/out- exempt

Q: What is the rule on pre- termination?

A: If it is pre terminated before 5th year a FITshall be imposed on the entire income andshall be deducted and withheld by thedepositary bank from the proceeds of thelong term deposit based on the remainingmaturity thereof

a. 4 yrs to less than 5 yrs 5%b. 3 yrs to less than 4 yrs- 12%c. Less than 3 yrs- 20%

Q: Does it apply to all individuals?A: No! It does not apply to 10 NRFC and NRAand NRAETB because they are liable to GIT.

NOTE: if the depositary is a Non resident it is

exempt

Resident citizen is liable to pay tax for

bank interest earned abroad (NIT)

Q: If the money earns interest in abroad whois liable?A: RC and DC only by NIT, the rest areexempt. No FIT abroad because we do nothave withholding agent abroad.

Q: MCIT applies to DC and RFC in relation tobank interest?

A: If the bank interest is derived abroad, RFCis exempt but DC is liable.

Impose NIT if it is higher than the MCIT,otherwise apply MCIT if its higher than theNIT

Prizes

Requirements:1. Prizes must be derived from sources

w/in the Phils.2. it must be more than P 10,000

Q: Who are liable? (FIT)A:

1. RC2. NRC3. OCW4. RA5. NRAETB6. AEMOP (RC, NRAETB)

Not Liable1. NRANETB- liable for GIT at 25 %2. AEMPOP (NRANETB- GIT)3. DC- NIT 27 D is silent

4.

RFC NIT law is silent 28A7a5. NRFC subject to GIT

Q: When can we apply NIT in Prizes?A: 1. When the taxpayer is RC, RFC and DC

2. For DC and RC it must be derivedfrom income abroad RFC it must bederived from income w/in

3. amount is more than P10,000


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NOTE: If the prize is derived from sourcesw/in but it is below P 10,000 it is not subjectto tax. If derived from sources abroad, mostof them are exempt except for RC and DCwho are liable w/in and w/out.

Q; Is it possible for RC and DC to pay MCIT?A: Yes if MCIT is higher than NIT.

Winnings

Q: Do we apply the P10, 000 req.?A: No, we do not apply it only applies toprizes. It must not pertain to illegalgambling.

Thus, the only requirement is it must be

derived from income w/in.

Q: Who are liable? (FIT)A:

1. RC2. NRC3. OCW4. RA5. NRAETB6. AEMOP (RA, NRAETB)

Not liable to FIT?1 NRANETB- GIT2 AEMOP (NRANETB- GIT)

3 DC- law is silent NIT4 RFC- law is silent5 NRFC- GIT

Q: When does NIT apply to winnings?A:

1. If Taxpayer is DC or RC2. Income is derived abroad3. Taxpayer is RFC and income w/in.

NOTE: If income abroad, most TP are exemptexcept DC and RC

Q: MCIT applies when?A: It is higher than the NIT

Royalties

Requirement: The income is from w/in

Rate? 20%. Lower rate? 10% on books,

literary works and musical compositions.

Q: You are a writer for Snoop Dogg are youliable for FIT? What if for April Boy?A: Liable for NIT if Income abroad like awriter for Snoop. While FIT if for April Boy.

Q: Who are liable (FIT)?A:


Not Liable?1. NRANETB2. AEMOP

3.

DC4. RFC5. NRFC

NOTE: Lower rate of 10% applies to all exceptNRANETB

Q: When do we apply NIT to Royalties?A:

1. TP is RC or DC2. Income is from w/out3. TP is RF and income is w/in

If income is from sources abroad all areexempt except RC and DC

Dividends

Confined with cash and/or property

dividends.

Q: What are dividends?A: Any distribution made by Corporation toits stockholders outside of its earnings orprofits and payable to its stockholderswhether in money or in property (Sec. 73)

COMM. vs. MANNINGQ: Where did it come from?A: shares come from another shareholderQ: What are the dividends included?A: Sec. 24 refers to cash or property

dividendH: For stock Dividends to be exempt it must

come from the profit of the corporation.


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Stock Dividends it is the transfer of thesurplus profit from the authorized capitalstocks.

Q: Assuming that there are 5 Incorporators,

the Corporation has a P5 M AuthorizedCapital stock. It distributed 1 M stockdividends, is it taxable?A: NO, the dividends did not go to the Stockholder but to the Auth Capital Stock. Onlycash and Prop Stock go to the Stock holder.

Sec 24 B does not mention stock

dividends because it is not subject to FIT butit is subject to NIT under Section 73.

Q: Is there an exception when stockdividends are not taxable?

A: YES, if the shares of stocks are cancelledand redeemed meaning it was reacquired bythe corp.

ANSCOR CASEthe stockholders cannot escape the

payment of taxes

Requirement:Gen Rule- the dividends must be distributed

by a DC.Except- Regular operating- always a foreign

corp.

What rate: 10% FIT

Q: Who are liable?A:


Not liable?

1.

NRANETB2. AEMOP3. DC4. RFC5. NRFC

Shares of association and partnership is

taxable

Q: Determine the tax liability of thefollowing?A:

1. DC a Stockholder of DC= Exempt2. RFC stockholder of DC= Exempt also

3.

DC stockholder of RF= Liable for NIT.

Capital Gains From Sale of Shares of StockNot Traded (24C)

1. Subj to FIT2. Determine whether there is a loss or a

gain because the tax is impose uponthe net capital gains realized from thesale, barter, or exchange or otherdisposition of the shares of stock in adomestic corp.

3. It is uniformly imposed on all

taxpayer4. not subj to w/holding tax.

Requirements:1. Shares of stock of a DC2. It must be capital asset3. must not be traded in the stock

market

25 R last part: Capital Gains realized by

NRANETB in the Phils. from the sale of sharesof stock in any DC and real prop shall besubj. to the income tax prescribed under Sub

sec (c) and (d) of Sec. 24.

SEC. 24 B 1&2: If the elements are

present NRANETB and NRFC are liable to payGIT.

Except: under 24 C for NRANETB. What doyou mean by the phrase the provisions of39 notwithstanding?

It refers to the holding period. When it

comes to capital gains from sale of shares ofstock not traded and capital gains from the

sale of real prop. The holding period doesnot apply because the basis will be thoseprovided in 24 C & D and not under 39B (GSPor FMV)

ELEMENT #1 The share is a share in DC

Q: What if the share is from foreign corp?A: Determine the income considered. Ifincome w/in read Sec. 42 (E)


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If the shares sold are that of a foreign

corp it is subj to the ff rules:a. sold in the Phils= its income w/inb. sold in abroad= w/out

c.

Shares of stock in a Dc is alwaysconsidered an income w/in regardless whereit was sold.

Q: Shares of Foreign Corp sold in Phils.Whos liable? What tax?A: Not subj to FIT because one of theelements is not present . Shares not beingthat of a DC.

Hence: a) RC, NRC, OCW, NRAETB, AEMOP(RA, NRAETB) will pay NIT. DC and RFC

b) NRANETB and NRFC will pay GIT

Q: Shares of Foreign Corporation soldabroad?A: It will be considered an income w/out.Thus:

most of them will be exemptexcept RC and DC liable to pay NIT

ELEMENT # 2 NOT TRADED OR SOLD INTHE STOCK MARKET

if sold in the stock market- it is not subj

to FIT

if sold in the stock market, it will be subjto percentage tax, in lieu of NIT.

ELEMENT # 3 It must be a capital asset.

Q: When is it considered an ordinary asset?A: 1. When the broker or dealer

a. used it in trade or businessb. held for sale in the ordinary

course of trade or business2. to all other assets, it will be

considered a capital asset

NOTE: if all elements are present it will besubj to FIT

If the shares are ordinary asset

1. Ordinary shares in DC- income w/ina. Most of the taxpayer will pay NIT

except NRFC and NRANETB2. Ordinary assets of foreign corporations

a. Income within if sold in the Phils:most will pay except NRANETBand NRFC

b. Income w/out if sold abroad: mostwill be exempt except RC and DC

MCITQ: When is a RFC subj to NIT?A:

1. Sale of shares of stock of a Foreigncorp in the Phil.

2. sale of shares of stock of DC whichare ordinary asset

DC and RFC are subj to MCIT which may

be imposed if the NIT is lower than theMCIT2% MCIT will be imposed if MCIT ishigher than NIT.

Capital Gains From Sale of Real Property(24D)

In 39 B the holding period does not apply

because the basis of income tax is the grossselling price (GSP) or the Fair market value(FMV) whichever is higher- 6% FIT

Requirements:1. The real prop must be sold w/in the

Phils and located in the Phils.2. It must be a capital asset

3.

The seller must be an individual,estate or trust or a DC

RFC not liable for FIT but liable to pay NIT

if all the elements are present.

NRFC liable to pay GIT and not FIT

NRANETB liable to pay FIT are all

elements are present.

ELEMENT # 3 The real prop must be acapital asset

Q: When considered a capital asset?A: Read R.R. 7- 2003

Q: Ordinary asset- shall refer to all realproperty specifically excluded from thedefinition of capital asset under Sec. 39A: Other property not mentioned are capitalasset.


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Q: What if all the elements are not present?A:

most will be liable to pay NITExcept NRANETB and NRFC liable for GIT

Q: May a RC be liable to pay NIT even if allthe elements are present?A: YES, disposition made to the Govt. Thus,the taxpayer has the option of paying 32%NIT or 6% FIT

Q: Which is more advantageous?A: It depends determine first if theres a lossor a gain.

If theres a gain choose to be taxed at 6%FIT. In this case the gain is always presumed.

If theres a loss choose to be taxed at 32%because losses may be considered an

allowable deduction .

Other transactions are covered:1. sale2. barter3. exchange4. other disposition

NOTE: If the prop is under mortgage contractand the mortgagee is a bank or financial inst,the FIT does not apply because the propertyis not yet transferred because theres aperiod of redemption

If after a year the mortgagor failed toredeem the property that is the only time thatthe FIT will apply because theres now achange of ownership. If redeemed w/in 1 yrperiod FIT will not apply because theres nochange of ownership.

If the mortgagee is an individual the FIT isimposed whether or not there is a transfer ofownership.

Exceptions (24(D2))

Q: What if the prop being sold was a movie

house, can he claim for the exception?A: the prop covered by the exemption is aresidential lot

Q: Who can claim the exemption?A: Only the taxpayer mentioned in Sec. 24

Requirements:1. The purpose of the seller is to acquire

new residential real prop

2. the privilege must be availed of w/in18 mos. From the sale

3. Comm. must be informed w/in 30days from the date of sale with theintention to avail of the exemption

4.

the adjusted basis or historical cost ofthe residence sold shall be carriedover to the new residence.

5. the privilege must be availed onlyonce every 10 yrs

6. Certification of the brgy. Capt wherethe taxpayer resides that indeed theprop sold is the principal residence ofthe tax payer (RR 13- 99)

Q: What if the property is worth 10 M and itwas sold only for 2M, what will happen to theunused portion or profit?

A: If the proceeds are not fully utilized, theportions of the gain is subj to FIT

SEC. 27A RATES OF INCOME TAX

Q: How many income taxes are paid by aDC?A:

1. NIT2. MCIT3. FIT4. 10%Improperly Accumulated

Earnings

5.

Optional corporate income tax of 15%of the gross

DC liable for five, but the optional is not

yet applicable so only 4.

Q: How many can be applied simultaneously?A: ONLY 3

1. NIT, FIT and 10% IAE2. MCIT, FIT, 10% IAE

SEC. 27 (B) PROPRIETARY EDUCATIONALINST. & HOSP.

Who are the taxpayers?1. Non- Profit Proprietary Educl. Inst and2. Non Profit Proprietary Hospital

Q: What if the school or hospital is nonprofit only, is it exempt?A: No, subject to 10% on their taxableincome except those covered by subsection(D)


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PROVIDED that gross income fromunrelated business, trade or activity must notexceed 50% of its total gross income derivedby such educational inst or hospital from allsources

Requirements:1. It is a private school or hospital2. it is stock corp3. it is non profit4. that gross income from unrelated

business, trade or activity must notexceed50% of its total gross incomederived by such educational inst orhospital from all sources

5. has permit to operate from DECS,TESDA, or CHED

Q: What do you mean by unrelated tradebusiness or activity?A: It means any trade, Business, or activitywhich is not substantially related to theexercise or performance by such entity of itsprimary purpose or performance

Q: May a school or hospital be exempt frompaying tax? What are the req?A:

1. It must be non- stock and non- profit2. the assets property and revenues

must be used actually, directly, and

exclusively fro the primary purpose

Q: Under what law? Is it the constitution orthe NIRC which provides fro the exemption?A:

129722381-63062602-sababan-tax-notes

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