national internal revenue code - review manual

8/13/2019 National Internal Revenue Code - Review Manual

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NATIONAL INTERNAL REVENUE CODE

REVIEW MANUAL FOR UV TAX CLASS

Sec. 2 - Powers and D!"es o# !$e %rea o# In!erna& Re'ene

The Bureau of Internal Revenue shall be under the supervision and control of theDepartment of Finance and its powers and duties shall comprehend theassessment and collection of all national internal revenue taxes, fees, andcharges, and the enforcement of all forfeitures, penalties, and fines connectedtherewith, including the execution of judgments in all cases decided in its favorby the ourt of Tax !ppeals and the ordinary courts" The Bureau shall give effectto and administer the supervisory and police powers conferred to it by this odeor other laws"

Letters of referral/complaints filed by BIR Commissioner constituted approval of the filingof the cases in court.

It is not quite correct to claim that the BIR Commissioner referred the matter tothe Department of Justice for preliminary investigation only. The three letters ofreferral/complaints she wrote and filed with the Department of Justice and theffice of the City !rosecutor all stated "I here#y recommend the prosecution ofthe following for violations of the provisions of the $ational Internal RevenueCode% as amended&. 'ence% the same clearly constituted approval of the filing ofthe cases in court. The fact% moreover% is that the cases had #een filed in courtand were already under the court(s control. By merely echoing the findings of theBIR% the )eTC a#dicated its duty as a court of law% and su#*ugated itself to theadministrative agency. In #a"&"n( !o )a*e an "nde+enden! #"nd"n( o# !$e )er"!s

o# !$e case and )ere&, anc$or"n( !$e d"s)"ssa& on !$e +os"!"on o# !$e %IR!$e !r"a& cor! re&"n"s$ed !$e d"scre!"on "! was o/&"(ed !o e0erc"se "n'"o&a!"on o# !$e r&"n( "n Cres+o '. Mo(&.

!eople of the !hils. vs. +ucio C. Tan% et al.% ,.R. $o. -0% July -1% 200

Sec. 1 - Power o# Co))"ss"oner !o In!er+re! Ta0 Laws

The power to interpret the provisions of this Code and other tax laws shallbe under the exclusive and original urisdiction of the Commissioner!subect to review by the "ecretary of #inance.

The power to decide disputed assessments! refunds of internal revenuetaxes! fees or other charges! penalties imposed in relation thereto! or othermatters arising under this Code or other laws or portions thereofadministered by the Bureau of Internal Revenue is vested in theCommissioner! subect to the exclusive appellate urisdiction of the Courtof Tax $ppeals.


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The Commissioner of Internal Revenue is not bound by the ruling of hispredecessors.That previous Commissioners considered copra as an 3agricultural food product3%is not reason for holding that the present interpretation is wrong. TheCommissioner of Internal Revenue is not #ound #y the ruling of hispredecessors. To the contrary% the overruling of decisions is inherent in the

interpretation of laws.

)isamis riental 4ssociation of Coco Traders% Inc. vs. Dept. of 5inance6ecretary% et al.% ,.R. $o. -0782% $ovem#er -0% -99

Conclusions and opinions of the Court of Tax $ppeals are extended dueconsideration.It has #een a long standing policy and practice of the 6upreme Court to respectthe conclusions of quasi:*udicial agencies such as the Court of Ta; 4ppeals% ahighly speciali% Inc.% ,.R. $o.-1?2% 4pril 2% 2001

Sec. - Power o# Co))"ss"oner !o Ma*e Assess)en!s

#!$ %xamination of Returns and Determination of Tax Due" : 4fter a return has#een filed as required under the provisions of this Code% the Commissioner or hisduly authori


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may #e used as the #asis for assessing the ta;es for the other months orquarters of the same or different ta;a#le years and such assessment shall #edeemedprima facie correct.

hen it is found that a person has failed to issue receipts and invoices inviolation of the requirements of 6ections --1 and 21 of this Code% or when there

is reason to #elieve that the #ooAs of accounts or other records do not correctlyreflect the declarations made or to #e made in a return required to #e filed underthe provisions of this Code% the Commissioner% after taAing into account thesales% receipts% income or other ta;a#le #ase of other persons engaged in similar#usinesses under similar situations or circumstances or after considering otherrelevant information may prescri#e a minimum amount of such gross receipts%sales and ta;a#le #ase% and such amount so prescri#ed shall #e prima faciecorrect for purposes of determining the internal revenue ta; lia#ilities of suchperson.

=D>!uthority to Terminate Taxable &eriod": hen it shall come to the Anowledge

of the Commissioner that a !a0+a,er "s re!"r"n( #ro) /s"ness s/3ec! !o !a0%or is "n!end"n( !o &ea'e !$e P$"&"++"nes or !o re)o'e $"s +ro+er!, !$ere#ro)or to $"de or concea& $"s +ro+er!,% or is +er#or)"n( an, ac! !end"n( !oo/s!rc! !$e +roceed"n(s #or !$e co&&ec!"on o# !$e !a0 for the past or currentquarter or year or to render the same totally or partly ineffective unless suchproceedings are #egun immediately% the Commissioner shall declare the ta;period of such ta;payer terminated at any time and shall send the ta;payer anotice of such decision% together with a request for the immediate payment of theta; for the period so declared terminated and the ta; for the preceding year orquarter% or such portion thereof as may #e unpaid% and said ta;es shall #e dueand paya#le immediately and shall #e su#*ect to all the penalties hereafter

prescri#ed% unless paid within the time fi;ed in the demand made #y theCommissioner.

=> !uthority of the ommissioner to &rescribe Real &roperty /alues" : TheCommissioner is here#y authori!uthority of the ommissioner to in0uire into Ban) Deposit !ccounts":$otwithstanding any contrary provision of Repu#lic 4ct $o. -08 and othergeneral or special laws% the Commissioner is here#y authori


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=-> a decedent to determine his gross estate and=2> any ta;payer who has filed an application for compromise of his ta; lia#ilityunder 6ec. 20 =4> =2> of this Code #y reason of financial incapacity to pay hista; lia#ility.

In case a ta;payer files an application to compromise the payment of his ta;

lia#ilities on his claim that his financial position demonstrates a clear ina#ility topay the ta; assessed% his application shall not #e considered unless and until hewa"'es "n wr"!"n( $"s +r"'"&e(e nder Re+/&"c Ac! No. 4156 or under othergeneral or special laws% and such waiver shall constitute the a!$or"!, o# !$eCo))"ss"oner !o "n"re "n!o !$e /an* de+os"!s o# !$e !a0+a,er.

=,> !uthority to !ccredit and Register Tax !gents" : The Commissioner shallaccredit and register% #ased on their professional competence% integrity andmoral fitness% individuals and general professional partnerships and theirrepresentatives who prepare and file ta; returns% statements% reports% protests%and other papers with or who appear #efore% the Bureau for ta;payers. ithin

one hundred twenty =-20> days from January -% -997% the Commissioner shallcreate national and regional accreditation #oards% the mem#ers of which shallserve for three =1> years% and shall designate from among the senior officials ofthe Bureau% one =-> chairman and two =2> mem#ers for each #oard% su#*ect tosuch rules and regulations as the 6ecretary of 5inance shall promulgate upon therecommendation of the Commissioner.

Individuals and general professional partnerships and their representatives whoare denied accreditation #y the Commissioner and/or the national and regionalaccreditation #oards may appeal such denial to the 6ecretary of 5inance% whoshall rule on the appeal within si;ty =?0> days from receipt of such appeal. 5ailure

of the 6ecretary of 5inance to rule on the 4ppeal within the prescri#ed periodshall #e deemed as approval of the application for accreditation of the appellant.

='> !uthority of the ommissioner to &rescribe !dditional &rocedural orDocumentaryRe0uirements": The Commissioner may prescri#e the manner ofcompliance with any documentary or procedural requirement in connection withthe su#mission or preparation of financial statements accompanying the ta;returns.

%andamus may not lie against the Commissioner to compel him to impose a taxassessment.

6ince the office of the Commissioner of Internal Revenue is charged with theadministration of revenue laws% which is the primary responsi#ility of thee;ecutive #ranch of the government% )anda)s )a, no! &"e a(a"ns! !$eCo))"ss"oner !o co)+e& $") !o ")+ose a !a0 assess)en! no! #ond /, $")!o /e de or +ro+er #or !$a! wo&d /e !an!a)on! !o a sr+a!"on o#e0ec!"'e #nc!"ons. 6uch discretionary power vested in the proper e;ecutiveofficial% in the a#sence of ar#itrariness or grave a#use so as to go #eyond thestatutory authority% is not su#*ect to the contrary *udgment or control of others.

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)eralco 6ecurities Corp. vs. Eictorino 6avellano% et al.% ,.R. $o. +:1?-7-%cto#er 21% -972

The power to collect forest charges rests with BIR! not with Bureau of #orestry.

5orest charges are internal revenue ta;es and the sole power and duty to collect

the same is lodged with the Bureau of Internal Revenue and not with the Bureauof 5orestry. The computation and/or assessment of forest charges made #y theBureau of 5orestry may or may not #e adopted #y the Commissioner of InternalRevenue and such computation made #y the Bureau of 5orestry is notappeala#le to the Court of Ta; 4ppeals.

)am#ulao +um#er Company vs. Repu#lic of the !hil.% ,.R. $o. +:10?-%6eptem#er 8% -97

Sec. 7%8 - Fa"&re !o S/)"! Re"red Re!rns

=B> Failure to +ubmit Re0uired Returns, +tatements, Reports and otherDocuments": hen a report required #y law as a #asis for the assessment of

any national internal revenue ta; shall not #e forthcoming within the time fi;ed #ylaws or rules and regulations or when there is reason to #elieve that any suchreport is false% incomplete or erroneous% the Commissioner shall assess theproper ta; on the #est evidence o#taina#le.

In case a person fails to file a required return or other document at the timeprescri#ed #y law% or willfully or otherwise files a false or fraudulent return orother document% the Commissioner shall maAe or amend the return from his ownAnowledge and from such information as he can o#tain through testimony orotherwise% which shall #e prima facie correct and sufficient for all legal purposes.

&hen the rule on 'best evidence obtainable' applies.The law is specific and clear. The rule on the 3#est evidence o#taina#le3 appliesw$en a !a0 re+or! re"red /, &aw #or !$e +r+ose o# assess)en! "s no!a'a"&a/&e or w$en !$e !a0 re+or! "s "nco)+&e!e or #rad&en!. Thus% thepersistent failure of the decedent and the ta;payer to present their #ooAs ofaccounts for e;amination for the ta;a#le years involved left the Commissioner ofInternal Revenue no other legal option e;cept to report to the power conferredupon him under 6ection -? of the Ta; Code.

Bonifacia 6y !o vs. Court of Ta; 4ppeals% et al.% ,.R. $o. +:7-?% 4ugust -7%-977

Sec. 22 - De#"n"!"ons 7%8 - 9cor+ora!"on:

The term 'corporation'shall include +ar!ners$"+s% no matter how created ororgani%assoc"a!"on% or "nsrancecompanies% #ut does not include general professionalpartnerships and a *oint venture or consortium formed for the purpose ofundertaAing construction pro*ects or engaging in petroleum% coal% geothermal and

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other energy operations pursuant to an operating consortium agreement under aservice contract with the ,overnment.

4*eneral professional partnerships5 are partnerships formed #y persons for thesole purpose of e;ercising their common profession% no part of the income ofwhich is derived from engaging in any trade or #usiness.

To #e ta;ed% a *oint venture need not #e constituted in accordance with usuallegal requirements.

&hat constitutes a (partnership) under $merican law.

Fnder 4merican law% the term GpartnershipG includes a syndicate% group% pool%*oint venture or other unincorporated organi and associations% none of which has a legal personality of its own%independent of that of its mem#ers. The lawmaAers could not have regardedpersonality as a condition precedent to the e;istence of partnerships referred totherein.

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5lorencio Reyes% et al. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:2020:2-% July 29% -9?7

Sec. 22 7T8 - 9Secr"!"es:The term 'securities'means shares of stoc) in a corporation and rights to subscribe for or to receive such shares" Theterm includes bonds, debentures, notes or certificates, or other evidence or indebtedness, issued by any corporation,including those issued by a government or political subdivision thereof, with interest coupons or in registered form"

"hares of stoc, are ordinary assets only to a dealer in securities.6hares of stocA% liAe the other securities defined in the $IRC% would #e ordinary assets only to adealer in securities or a person engaged in the purchase and sale of% or an active trader =for hisown account> in% securities. In the hands% however% of another who holds the shares of stocA #yway of an investment% the shares to him would #e capital assets. hen the shares held #y suchinvestor #ecome worthless% the loss is deemed to #e a loss from the sale or e;change of capitalassets.

China BanAing Corp. vs. Court of 4ppeals% et al.% ,.R. $o. -28807% July -9% 2000

Sec. 22 7U8 - 9Dea&er "n secr"!"es:The term 'dealer in securities' means a merchant of stoc)s or securities, whether an individual, partnership orcorporation, 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 andprofits that may be derived therefrom"

-uity investment is capital! not ordinary! asset.4n equity investment is a capital% not ordinary% asset of the investor the sale or e;change of whichresults in either a capital gain or a capital loss. The gain or the loss is ordinary when the propertysold or e;changed is not a capital asset. Thus% shares of stocA% liAe the other securities defined in6ection 20=t> of the $IRC% would #e ordinary assets only to a dealer in securities or a personengaged in the purchase and sale of% or an active trader =for his own account> in% securities.


Sec. 22 7;8 - 9Ord"nar, &oss:The term 5ordinary income5 includes any gain from the sale or exchange of property which is not a capital asset or

property described in +ection 16#!$#7$" !ny gain from the sale or exchange of property which is treated or considered,under other provisions of this Title, as 8ordinary income8 shall be treated as gain from the sale or exchange of propertywhich is not a capital asset as defined in +ection 16#!$#7$" The term 8ordinary loss8 includes any loss from the sale orexchange of property which is not a capital asset" !ny loss from the sale or exchange of property which is treated orconsidered, under other provisions of this Title, as 8ordinary loss8 shall be treated as loss from the sale or exchange of

property which is not a capital asset"

4n equity investment is a capital% not ordinary% asset of the investor the sale or e;change of whichresults in either a capital gain or a capital loss. The gain or the loss is ordinary when the propertysold or e;changed is not a capital asset.


Sec. 2< - =enera& Pr"nc"+&es o# Inco)e Ta0a!"on%xcept when otherwise provided in this ode9

#!$ ! citi:en of the &hilippines residing therein is taxable on all income derived from sources within and withoutthe &hilippines'

#B$ ! nonresident citi:en is taxable only on income derived from sources within the &hilippines'

#$ !n individual citi:en of the &hilippines who is wor)ing and deriving income from abroad as an overseascontract wor)er is taxable only on income derived from sources within the &hilippines9 &rovided, That a seamanwho is a citi:en of the &hilippines and who receives compensation for services rendered abroad as a memberof the complement of a vessel engaged exclusively in international trade shall be treated as an overseascontract wor)er'

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#D$ !n alien individual, whether a resident or not of the &hilippines, is taxable only on income derived fromsources within the &hilippines'

#%$ ! domestic corporation is taxable on all income derived from sources within and without the &hilippines' and

#F$ ! foreign corporation, whether engaged or not in trade or business in the &hilippines, is taxable only onincome derived from sources within the &hilippines"

!rinciple of estoppel does not operate against the government for neglect or omission of itsofficials tasAed to collect ta;es.

Taxes are the lifeblood of the government.Ta;es are the life#lood of the government and so should #e collected without unnecessaryhindrance. n the other hand% such collection should #e made in accordance with law as anyar#itrariness will negate the very reason for government itself. It is therefore necessary toreconcile the apparently conflicting interests of the authorities and the ta;payers so that the realpurpose of ta;ation% which is the promotion of the common good% may #e achieved.

Commissioner of Internal Revenue% et al. vs. Court of 4ppeals% et al.% ,.R. $o. --9122% June %-99?

"ymbiotic relationship between government and people is the rationale of taxation.

It is said that ta;es are what we pay for civili


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It is said that ta;es are what we pay for civili


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a> The settled rule in this *urisdiction is that laws granting e;emption from ta; are construedstrictissimi *uris against the ta;payer and li#erally in favor of the ta;ing power. Ta;ation is the ruleand e;emption is the e;ception. The effect of an e;emption is equivalent to an appropriation.'ence% a claim for e;emption from ta; payments must #e clearly shown and #ased on languagein the law too plain to #e mistaAen.

+ung Center of the !hil. vs. ue This Court has laid down the rule that 3as the power of ta;ation is a high prerogative ofsovereignty% the relinquishment is never presumed and any reduction or diminution thereof withrespect to its mode or its rate% must #e strictly construed% and the same must #e couched in clearand unmistaAa#le terms in order that it may #e applied.3 )ore specifically stated% the general ruleis that any claim for e;emption from the ta; statute should #e strictly construed against theta;payer

+u


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thus privileged must *ustify it #y words too plain to #e mistaAen and too categorical to #emisinterpreted.3

Commissioner of Internal Revenue vs. !. J. Kiener Co.% +td.% et al.% ,.R. $o. +:28% July -7%-98

Reuisites for availment of tax exemption under R+2*" %ilitary Bases $greement.

In order to avail oneself of the ta; e;emption under the R!:F6 )ilitary Bases 4greement@ hemust #e a national of the Fnited 6tates employed in connection with the construction%maintenance% operation or defense of the #ases% residing in the !hilippines #y reason of suchemployment% and the income derived is from the F.6. ,overnment

Commissioner of Internal Revenue vs. 5ranA Ro#ertson% et al.% ,.R. $os. +:0--?:-9% 4ugust -2%-97?

-mployees3 claims prevail over government3s claims only in case of ban,ruptcy or udicialliuidation of the employer.There is no merit in the contention of the $+RC that ta;es are a#solutely preferred claims onlywith respect to mova#le or immova#le properties on which they are due and that since the ta;essought to #e collected in the case are not due on the #arges in question% the governmentGs claim

cannot prevail over the claims of employees of the )aritime Company of the !hilippines which%pursuant to 4rt. --0 of the +a#or Code% 3en*oy first preference.3 4rt. --0 of the +a#or Code onworAer preference in case of #anAruptcy applies only in case of #anAruptcy or *udicial liquidationof the employer. This is clear from the te;t of the law. This case does not involve the liquidation ofthe employerGs #usiness.

Commissioner of Internal Revenue vs. $+RC% et al.% ,.R. $o. 9?8% $ovem#er 9% -99

"tate3s underta,ing to guarantee promissory notes does not diminish its taxing power.4n undertaAing of the Repu#lic of the !hilippines signed #y the 6ecretary of 5inance in each ofthe promissory notes merely guaranteed the o#ligations of the $DC #ut without diminution of itsta;ing power under e;isting laws.

$ational Development Company vs. Commissioner of Internal Revenue% ,.R. $o. +:819?-% June10% -97

%ere filing of tax amnesty does not ipso facto shield taxpayer from immunity againstprosecution.The mere filing of ta; amnesty return under !.D. -0 and -70 does not ipso facto shieldta;payer from immunity against prosecution. Ta; amnesty is a general pardon to ta;payers whowant to start a clean ta; slate. It also gives the government a chance to collect uncollected ta;from ta; evaders without having to go through the tedious process of a ta; case. To avail of a ta;amnesty granted #y the government% and to #e immune from suit on its delinquencies% theta;payer must have voluntarily disclosed his previously unta;ed income and must have paid thecorresponding ta; on such previously unta;ed income.

Bi#iano E. Baas% Jr. vs. Court of 4ppeals% et al.% ,.R. $o. -029?% 5e#ruary -0% 2000

+rinciple of estoppel does not operate against the government for neglect or omission ofits officials tas,ed to collect taxes.Ta;es are the life#lood of the ,overnment and their prompt and certain availa#ility are imperiousneed. Fpon ta;ation depends the ,overnmentGs a#ility to serve the people for whose #enefitta;es are collected. To safeguard such interest% neglect or omission of government officialsentrusted with the collection of ta;es should not #e allowed to #ring harm or detriment to thepeople% in the same manner as private persons may #e made to suffer individually on account ofhis own negligence% the presumption #eing that they taAe good care of their personal affair. Thisshould not hold true to government officials with respect to matters not of their own personal

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concern. This is the philosophy #ehind the governmentGs e;ception% as a general rule% from theoperation of the principle of estoppel.

)isael !. Eera% et al. vs. Jose 5. 5ernandeor Pro+er!, D"'"dendsCas$ and>or Pro+er!, D"'"dends: 4 final ta; at the following rates shall #e imposed upon the cash and/orproperty dividends actually or constructively received #y an individual from a domestic corporation or from a

*oint stocA company% insurance or mutual fund companies and regional operating headquarters of multinationalcompanies% or on the share of an individual in the distri#uta#le net income after ta; of a partnership =e;cept ageneral professional partnership> of which he is a partner% or on the share of an individual in the net incomeafter ta; of an association% a *oint account% or a *oint venture or consortium ta;a#le as a corporation of which heis a mem#er or co:venturer@

6i; percent =?M> #eginning January -% -997ight percent =7M> #eginning January -% -999 andTen percent =-0M #eginning January -% 2000.

!rovided% however% that the ta; on dividends shall apply only on income earned on or after January -% -997.Income forming part of retained earnings as of Decem#er 1-% -99 shall not% even if declared or distri#uted onor after January -% -997% #e su#*ect to this ta;.

rdinary dividends distinguished from liuidated dividends.The determining element therefore is whether the distri#ution was in the ordinary course of#usiness and with intent to maintain the corporation as a going concern% or after deciding to quitwith intent to liquidate the #usiness. The distinction #etween a distri#ution in liquidation and anordinary dividend is factual the result in each case depending on the particular circumstances ofthe case and the intent of the parties. If the distri#ution is in the nature of a recurring return onstocA it is an ordinary dividend. 'owever% if the corporation is really winding up its #usiness orrecapitali


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The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, orinstrumentalities owned or controlled by the *overnment, except the *overnment +ervice Insurance +ystem #*+I+$, the+ocial +ecurity +ystem #+++$, the &hilippine =ealth Insurance orporation #&=I$, the &hilippine harity +weepsta)es>ffice #&+>$ and the &hilippine !musement and *aming orporation #&!*>R$, shall pay such rate of tax upon theirtaxable income as are imposed by this +ection upon corporations or associations engaged in similar business, industry,or activity"

Tax exemptions should be strictly construed against those claiming to be ualified

thereto.The !hilippine Casino perators Corporation =!CC> is not e;empt from the payment of duties%ta;es and other imposts on importations despite its concessionaireGs contract with the !hilippine

4musement and ,aming Corporation =!4,CR>. Fnder B.!. Blg. -0?:B% as amended% fulle;emption from the payment of importation:related ta;es is granted to !4,CR H and no otherH irrespective of the type of article imported. hile it grants e;emption not only to !4,CR #utalso to 3any corporation having e;isting contractual arrangements with it%3 the e;emption coversonly the importation of vessels and/or accessory ferry #oats. It is settled that ta; e;emptionsshould #e strictly construed against those claiming to #e qualified thereto.

Commissioner of Customs vs. Court of Ta; 4ppeal% et al.% ,.R. $o. -12929% )arch 2% 2000

+$0CR is exempt from local taxes.!4,CR has a dual role% to operate and to regulate gam#ling casinos. The latter role isgovernmental% which places it in the category of an agency or instrumentality of the ,overnment.Being an instrumentality of the ,overnment% !4,CR should #e and actually is e;empt fromlocal ta;es. therwise% its operation might #e #urdened% impeded or su#*ected to control #y amere local government.

'um#erto Basco% et al. vs. !4,CR% ,.R. $o. 9-?9% )ay -% -99-

Sec. 2@ 7A8 748 - Ta0 on Res"den! Fore"(n Cor+ora!"on

Tax on Resident Foreign orporations" (

#7$ In *eneral" ( %xcept as otherwise provided in this ode, a corporation organi:ed, authori:ed, or existingunder the laws of any foreign country, engaged in trade or business within the &hilippines, shall be subject to

an income tax e0uivalent to thirty(five percent #13?$ of the taxable income derived in the preceding taxableyear from all sources within the &hilippines9 &rovided, That effective @anuary 7, 766;, the rate of income taxshall be thirty(four percent #12?$' effective @anuary 7, 7666, the rate shall be thirty(three percent #11?$, andeffective @anuary 7,


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Commissioner of Internal Revenue vs. British verseas 4irways Corp.% et al.% ,.R. $os. +:?81:% 4pril 10% -97

Business transactions of a foreign corporation must be continuous.In order that a foreign corporation may #e considered engaged in trade or #usiness% its #usinesstransactions must #e continuous. 4 casual #usiness activity in the !hilippines #y a foreigncorporation% as in the present case% does not amount to engaging in trade or #usiness in the

!hilippines for income ta; purposes.

$.E. Reederi* 34msterdam3% et al. vs. Commissioner of Internal Revenue% ,.R. $o. +:?029% June21% -977

$ single corporation cannot be both a resident and a non2resident corporation.4 single corporate entity cannot #e #oth a resident and a non:resident corporation depending onthe nature of the particular transaction involved. 4ccordingly% whether the dividends are paiddirectly to the head office or coursed through its local #ranch is of no moment for after all% thehead office and the office #ranch constitute #ut one corporate entity% the )aru#eni Corporation%which% under #oth !hilippine ta; and corporate laws% is a resident foreign corporation #ecause itis transacting #usiness in the !hilippines.

)aru#eni Corp. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. ?81% 6eptem#er -%-979

#oreign airline company selling tic,et in the +hilippines through local agent is considereda resident foreign corporation doing business in the +hilippines.There #eing no dispute that J4+ constituted !4+ as local agent to sell its airline ticAets% there can#e no conclusion other than that J4+ is a resident foreign corporation% doing #usiness in the!hilippines. Indeed% the sale of ticAets is the very life#lood of the airline #usiness% the generationof sales #eing the paramount o#*ective.

Commissioner of Internal Revenue vs. Japan 4ir +ines% et al.% ,.R. $o. ?0-% cto#er % -99-

0rant 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 #usiness in this country thatmaAes it a resident the license merely gives legitimacy to its doing #usiness here. hateffectively maAes such a foreign corporation a resident corporation in the !hilippines is itsactually #eing in the !hilippines and licitly doing #usiness here.

6tate Investment 'ouse% Inc.% et al. vs. Citi#anA% et al.% ,.R. $os. 992?:2% cto#er -% -99-

&hat constitutes (residence) of a corporation.The same principle is recogni


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+lace of activity prevails over place of business of the foreign corporation.Business implies continuity and progression of transactions while activity may consist of only asingle transaction. 4n activity may occur outside the place of #usiness. 6ection 2 of the Ta;Code does not require a foreign corporation to engage in #usiness in the !hilippines in su#*ectingits income to ta;. It suffices that the activity creating the income is performed or done in the!hilippines. hat is controlling% therefore% is not the place of #usiness #ut the place of activity that

created an income.

The !hilippine ,uaranty Co.% Inc. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:220% 4pril 10% -9?8

Sec. 2@ 7A8 7


16/67

Commissioner of Internal Revenue vs. 4merican 4irlines% Inc.% et al.% ,.R. $o. ?917% Decem#er-9% -979

Sec. 2@ 7A8 7


17/67

Touchstone of liability is the purpose behind the accumulation of the income and not theconseuences of the accumulation.

4 prerequisite to the imposition of the ta; has #een that the corporation #e formed or availed offor the purpose of avoiding the income ta; =or surta;> on its shareholders% or on the shareholdersof any other corporation #y permitting the earnings and profits of the corporation to accumulateinstead of dividing them among or distri#uting them to the shareholders. If the earnings and

profits were distri#uted% the shareholders would #e required to pay an income ta; thereonwhereas% if the distri#ution were not made to them% they would incur no ta; in respect to theundistri#uted earnings and profits of the corporation. The touchstone of lia#ility is the purpose#ehind the accumulation of the income and not the consequences of the accumulation. Thus% ifthe failure to pay dividends is due to some other cause% such as the use of undistri#uted earningsand profits for the reasona#le needs of the #usiness% such purpose does not fall within theinterdiction of the statute.

)anila ine )erchants% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. +:2?-8% 5e#ruary20% -97

Taxpayer3s intention at the time of accumulation is controlling.In order to determine whether profits are accumulated for the reasona#le needs of the #usiness

as to avoid the surta; upon shareholders% the controlling intention of the ta;payer is that which ismanifested at the time of accumulation not su#sequently declared intentions% which are merelythe product of afterthought. 4 speculative and indefinite purpose will not suffice. The mererecognition of a future pro#lem and the discussion of possi#le and alternative solutions is notsufficient. Definiteness of plan coupled with action taAen towards its consummation are essential.

)anila ine )erchants% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. +:2?-8% 5e#ruary20% -97

*ndistributed earnings or profits of prior years are ta,en into consideration in determiningunreasonable accumulation for purposes of surtax.!revious accumulations should #e considered in determining unreasona#le accumulation for theyear concerned. In determining whether accumulations of earnings or profits in a particular yearare within the reasona#le needs of a corporation% it is necessary to taAe into account prioraccumulations% since accumulations prior to the year involved may have #een sufficient to coverthe #usiness needs and additional accumulations during the year involved would not reasona#ly#e necessary

Basilan states% Inc. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:2292% 6eptem#er8% -9?

Sec. 2 7C8 748 - Pr")a Fac"e E'"dence o# Pr+ose !o A'o"d Inco)e Ta0#$ %vidence of &urpose to !void Income Tax" (

#7$ &rima Facie %vidence" ( the fact that any corporation is a mere holding company or investment companyshall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members"

Rationale for imposition of improperly accumulated earnings tax.

The underlying purpose of the additional ta; on a corporationGs improperly accumulated profits orsurplus is to avoid the situation where a corporation unduly retains its surplus earnings instead ofdeclaring and paying dividends to its shareholders or mem#ers who would then have to pay theincome ta; due on such dividends received #y them.

Commissioner of Internal Revenue vs. 4yala 6ecurities Corp.% et al.% ,.R. $o. +:2978%$ovem#er 2-% -970

+resumption of tax avoidance applies where corporation is a mere holding company.

&age 7. of -.


18/67

The prima facie evidence and presumption set up #y law is applica#le where the record showsthat respondent corporation is a mere holding company of its shareholders through its mothercompany% a registered co:partnership then set up #y the individual shareholders #elonging to thesame family

Commissioner of Internal Revenue vs. 4yala 6ecurities Corp.% et al.% ,.R. $o. +:2978%$ovem#er 2-% -970

Sec.


19/67

=g> and =h> providing for the ta; e;emptions of the income of said organi it falls under the classification non:stocA% non:profit educational institution and =2> theincome it seeAs to #e e;empted from ta;ation is used actually% directly% and e;clusively foreducational purposes.

Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. -201% cto#er -%

-997

9efinition of (educational institution).The term 3educational institution 3 or 3institution of learning3 refers to schools. The school systemis synonymous with formal education% which 3refers to the hierarchically structured andchronologically graded learnings organi


20/67

term 3educational institution%3 when used in laws granting ta; e;emptions% refers to a 3. . . schoolseminary% college or educational esta#lishment . . .3

Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. -201% cto#er -%-997

Sec.


21/67

(a) n eneral+ - .here shall be allowed as deduction from gross income all the ordinary and necessary expenses paid orincurred 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, including0

(i) " reasonable allowance for salaries, wages, and other forms of compensation for personal services actuallyrendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to theemployee0 1rovided, .hat the final tax imposed under Section 22 hereof has been paid#

(ii) " reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade,business or profession#

(iii) " reasonable allowance for rentals and/or other payments which are re3uired as a condition for thecontinued use or possession, for purposes of the trade, business or profession, of property to which thetaxpayer has not ta4en or is not ta4ing title or in which he has no e3uity other than that of a lessee, user orpossessor#

(iv) " 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 professionof the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business orexercise of a profession not to exceed such ceilings as the Secretary of 5inance may, by rules and regulationsprescribe, upon recommendation of the ommissioner, ta4ing into account the needs as well as the specialcircumstances, nature and character of the industry, trade, business, or profession of the taxpayer0 1rovided,.hat any expense incurred for entertainment, amusement or recreation that is contrary to law, morals publicpolicy or public order shall in no case be allowed as a deduction+

(b) Substantiation 6e3uirements+ - 7o deduction from gross income shall be allowed under Subsection (") hereof unlessthe taxpayer shall substantiate with sufficient evidence, such as official receipts or other ade3uate records0 (i) the amount ofthe 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+

(c) 'ribes, 8ic4bac4s and 9ther Similar 1ayments+ - 7o deduction from gross income shall be allowed under Subsection(") hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an officialor 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 professionalpartnership, or a similar entity, if the payment constitutes a bribe or 4ic4bac4+

(&) Expenses A%%o'a%e to $riate Educationa% Institutions+ - n addition to the expenses allowable as deductions under thishapter, a private educational institution, referred to under Section & (') of this ode, may at its option elect either0 (a) to deductexpenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of schoolfacilities or (b) to deduct allowance for depreciation thereof under Subsection (5) hereof+

(#) Interest.*(1) In Genera%+ - .he 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 income0 1rovided, however, .hat the taxpayer:s otherwiseallowable deduction for interest expense shall be reduced by an amount e3ual to the following percentages of the interest incomesubjected to final tax0

5orty-one percent (!*;) beginning #

(&) Exceptions+ - 7o deduction shall be allowed in respect of interest under the succeeding subparagraphs0

(a) f within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which aninterest is paid in advance through discount or otherwise0 1rovided, .hat such interest shall be allowed a a deduction in theyear the indebtedness is paid0 1rovided, further, .hat if the indebtedness is payable in periodic amorti?ations, the amount ofinterest which corresponds to the amount of the principal amorti?ed or paid during the year shall be allowed as deduction insuch taxable year#

(b) f both the taxpayer and the person to whom the payment has been made or is to be made are persons specified underSection 2% (')# or

(c)f the indebtedness is incurred to finance petroleum exploration+

(3) Optiona% !reatment of Interest Expense+ - "t the option of the taxpayer, interest incurred to ac3uire property used in tradebusiness or exercise of a profession may be allowed as a deduction or treated as a capital expenditure+

(C) !axes.*(1) In Genera%+ - .axes paid or incurred within the taxable year in connection with the taxpayer:s profession, trade or business, shall beallowed as deduction, except

(a) .he income tax provided for under this .itle#

&age 7 of -.


22/67

(b) ncome taxes imposed by authority of any foreign country# but this deduction shall be allowed in the case of a taxpayerwho does not signify in his return his desire to have to any extent the benefits of paragraph (2) of this subsection (relating tocredits for taxes of foreign countries)#(c) Estate and donor:s taxes# and(d) .axes assessed against local benefits of a 4ind tending to increase the value of the property assessed+1rovided, .hat taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income inthe year of receipt to the extent of the income tax benefit of said deduction+

(&) +imitations on Deductions+ - n the case of a nonresident alien individual engaged in trade or business in the 1hilippines and a

resident foreign corporation, the deductions for taxes provided in paragraph (*) of this Subsection () shall be allowed only if and to theextent that they are connected with income from sources within the 1hilippines+

(3) Credit A,ainst !ax for !axes of -orei,n Countries + - f the taxpayer signifies in his return his desire to have the benefits of thisparagraph, the tax imposed by this .itle shall be credited with0

(a) iti?en and @omestic orporation+ - n the case of a citi?en of the 1hilippines and of a domestic corporation, the amountof income taxes paid or incurred during the taxable year to any foreign country# and(b) 1artnerships and Estates+ - n the case of any such individual who is a member of a general professional partnership ora beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estateor trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of suchpartnership or trust is reported for taxation under this .itle+"n alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreigncountries allowed under this paragraph+

(4) +imitations on Credit+ - .he amount of the credit ta4en under this Section shall be subject to each of the following limitations0(a) .he amount of the credit in respect to the tax paid or incurred to any country shall not exceed the sameproportion of the tax against which such credit is ta4en, which the taxpayer:s taxable income from sourceswithin such country under this .itle bears to his entire taxable income for the same taxable year# and(b) .he total amount of the credit shall not exceed the same proportion of the tax against which such credit ista4en, which the taxpayer:s taxable income from sources without the 1hilippines taxable under this .itle bearsto his entire taxable income for the same taxable year+

() Ad/ustments on $ayment of Incurred !axes + - f accrued taxes when paid differ from the amounts claimed as credits by thetaxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the ommissioner# who shall redetermine the amountof 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 uponnotice and demand by the ommissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer+ n thecase of such a tax incurred but not paid, the ommissioner as a condition precedent to the allowance of this credit may re3uire thetaxpayer to give a bond with sureties satisfactory to and to be approved by the ommissioner in such sum as he may re3uire,conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination+ .he bond hereinprescribed shall contain such further conditions as the ommissioner may re3uire+

(0) ear in 2ic Credit !aen+ - .he credits provided for in Subsection ()(2) of this Section may, at the option of the taxpayer andirrespective of the method of accounting employed in 4eeping his boo4s, be ta4en in the year which the taxes of the foreign country

were incurred, subject, however, to the conditions prescribed in Subsection ()($) of this Section+ f the taxpayer elects to ta4e suchcredits in the year in which the taxes of the foreign country accrued, the credits for all subse3uent years shall be ta4en upon the samebasis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year+

(5) $roof of Credits+ - .he credits provided in Subsection ()(2) hereof shall be allowed only if the taxpayer establishes to thesatisfaction of the ommissioner the following0

(a) .he total amount of income derived from sources without the 1hilippines#(b) .he amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under saidparagraph, such amount to be determined under rules and regulations prescribed by the Secretary of 5inance# and(c) "ll other information necessary for the verification and computation of such credits+

(D) +osses. *(1) In Genera%+- Aosses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnityshall be allowed as deductions0

(a) f incurred in trade, profession or business#(b) 9f property connected with the trade, business or profession, if the loss arises from fires, storms, shipwrec4, or othercasualties, or from robbery, theft or embe??lement+

.he Secretary of 5inance, upon recommendation of the ommissioner, is hereby authori?ed to promulgate rules andregulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of losssustained from casualty or from robbery, theft or embe??lement during the taxable year0 1rovided, however, .hat the timelimit to be so prescribed in the rules and regulations shall not be less than thirty (2>) days nor more than ninety (=>) daysfrom the date of discovery of the casualty or robbery, theft or embe??lement giving rise to the loss+(c) 7o loss shall be allowed as a deduction under this Subsection if at the t ime of the filing of the return, such loss has beenclaimed as a deduction for estate tax purposes in the estate tax return+

(&) $roof of +oss + - n the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actuallysustained during the year incurred in business, trade or exercise of a profession conducted within the 1hilippines, when such losses arenot compensated for by insurance or other forms of indemnity+ .he Secretary of 5inance, upon recommendation of the ommissioner,is hereby authori?ed to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer

&age of -.


23/67

shall submit a declaration of loss sustained from casualty or from robbery, theft or embe??lement during the taxable year0 1rovided,.hat the time to be so prescribed in the rules and regulations shall not be less than thirty (2>) days nor more than ninety (=>) days fromthe date of discovery of the casualty or robbery, theft or embe??lement giving rise to the loss# and

(3) et Operatin, +oss Carry*Oer+ - .he net operating loss of the business or enterprise for any taxable year immediately precedingthe current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction fromgross income for the next three (2) consecutive taxable years immediately following the year of such loss0 1rovided, however, .hat anynet loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under thisSubsection0 1rovided, further, .hat 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) 7ot less than seventy-five percent (&$;) in nominal value of outstanding issued

shares +, if the business is in the name of a corporation, is held by or on behalf ofthe same persons# or

(ii) 7ot less than seventy-five percent (&$;) of the paid up capital of the corporation, if the business is in the name of acorporation, is held by or on behalf of the same persons+

5or purposes of this subsection, the term Bnot operating lossB shall mean the excess of allowable deduction over grossincome of the business in a taxable year+

1rovided, .hat for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided forunder Executive 9rder 7o+ %, as amended, otherwise 4nown as the 9mnibus nvestments ode of *=&, incurred in anyof the first ten (*>) years of operation may be carried over as a deduction from taxable income for the next five ($) yearsimmediately following the year of such loss+ .he entire amount of the loss shall be carried over to the first of the five ($)taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall bededucted in li4e manner form the taxable income of the next remaining four (!) years+

(4) Capita% +osses. *(a) Aimitation+ - Aoss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 2=+

(b) Securities 'ecoming Corthless+ - f securities as defined in Section (.) become worthless during the taxable yearand are capital assets, the loss resulting therefrom shall, for purposes of this .itle, be considered as a loss from the sale orexchange, on the last day of such taxable year, of capital assets+

() +osses -rom 2as Sa%es of Stoc or Securities+ - Aosses from Bwash salesB of stoc4 or securities as provided in Section 2+

(0) 2a,erin, +osses+ - Aosses from wagering transactions shall b allowed only to the extent of the gains from such transactions+

(5) Aandonment +osses+ -(a) n the event a contract area where petroleum operations are underta4en is partially or wholly abandoned, allaccumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction0 1rovided, .hataccumulated expenditures incurred in that area prior to


24/67

(a) .he straight-line method#(b) @eclining-balance method, using a rate not exceeding twice the rate which would have been used had the annualallowance been computed under the method described in Subsection (5) (*)#(c) .he sum-of-the-years-digit method# and(d) any other method which may be prescribed by the Secretary of 5inance upon

recommendation of the ommissioner+

(3) A,reement as to 7sefu% +ife on 2ic Depreciation 6ate is #ased+ - Chere under rules and regulations prescribed by theSecretary of 5inance upon recommendation of the ommissioner, the taxpayer and the ommissioner 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 onboth the taxpayer and the national overnment in the absence of facts and circumstances not ta4en into consideration during theadoption of such agreement+ .he responsibility of establishing the existence of such facts and circumstances shall rest with the partyinitiating the modification+ "ny change in the agreed rate and useful life of the depreciable property as specified in the agreement shallnot be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by theparty initiating such change to the other party to the agreement0

1rovided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed thedepreciation expenses as deduction from his gross income, without any written objection on the part of the ommissioner or his dulyauthori?ed representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciableasset shall be considered binding for purposes of this Subsection+

(4) Depreciation of $roperties 7sed in $etro%eum Operations + - "n allowance for depreciation in respect of all properties directlyrelated to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balancemethod of depreciation at the option of the service contractor+

Dowever, if the service contractor initially elects the declining-balance method, it may at any subse3uent date, shift to the straight-linemethod+

.he useful life of properties used in or related to production of petroleum shall be ten (*>) years of such shorter life as may be permittedby the ommissioner+

1roperties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of anestimated useful life of five ($) years+

() Depreciation of $roperties 7sed in 8inin, Operations. - an allowance for depreciation in respect of all properties used in miningoperations other than petroleum operations, shall be computed as follows0

(a) "t the normal rate of depreciation if the expected life is ten (*>) years or less# or(b) @epreciated over any number of years between five ($) years and the expected life if the latter is more than ten (*>)years, and the depreciation thereon allowed as deduction from taxable income0 1rovided, .hat the contractor notifies theommissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used+

(0) Depreciation Deducti%e y onresident A%iens En,a,ed in !rade or #usiness or 6esident -orei,n Corporations + - n the

case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for thedeterioration of 1roperty arising out of its use or employment or its non-use in the business trade or profession shall be permitted onlywhen such property is located in the 1hilippines+

(G) Dep%etion of Oi% and Gas 2e%%s and 8ines. *(1) In Genera%+ - n the case of oil and gas wells or mines, a reasonable allowance for depletion or amorti?ation computed in accordancewith the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, uponrecommendation of the ommissioner+ 1rovided, .hat when the allowance for depletion shall e3ual the capital invested no furtherallowance shall be granted0 1rovided, further, .hat after production in commercial 3uantities has commenced, certain intangibleexploration and development drilling costs0 (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 becapitali?ed and amorti?ed if such expenditures incurred are for producing wells and/or mines in the same contract area+Bntangible costs in petroleum operationsB refers to any cost incurred in petroleum operations which in itself has no salvage value andwhich is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum0 1rovided, .hat saidcosts shall not pertain to the ac3uisition or improvement of property of a character subject to the allowance for depreciation except thatthe allowances for depreciation on such property shall be deductible under this Subsection+"ny intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall

not be ta4en into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion+

(&) E%ection to Deduct Exp%oration and Dee%opment Expenditures + - n computing taxable income from mining operations, thetaxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletionas of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year0 1rovided, .hatthe amount deductible for exploration and development expenditures shall not exceed twenty-five percent ($;) of the net income frommining operations computed without the benefit of any tax incentives under existing laws+ .he actual exploration and developmentexpenditures minus twenty-five percent ($;) of the net income from mining shall be carried forward to the succeeding years until fullydeducted+

.he election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeedingtaxable years+

&age 2 of -.


25/67

B7et income from mining operationsB, as used in this Subsection, shall mean gross income from operations less Ballowable deductionsBwhich are necessary or related to mining operations+ B"llowable deductionsB shall include mining, milling and mar4eting expenses, anddepreciation of properties directly used in the mining operations+ .his paragraph shall not apply to expenditures for the ac3uisition orimprovement of property of a character which is subject to the allowance for depreciation+

n no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas+

.he term Bexploration expendituresB means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent

or 3uality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine ordeposit+

.he term Bdevelopment expendituresB means expenditures paid or incurred during the development stage of the mine or other naturaldeposits+ .he development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals areshown to exist in sufficient commercial 3uantity and 3uality and shall end upon commencement of actual commercial extraction+

(3) Dep%etion of Oi% and Gas 2e%%s and 8ines Deducti%e y a onresident A%ien indiidua% or -orei,n Corporation + - n the caseof a nonresident alien individual engaged in trade or business in the 1hilippines or a resident foreign corporation, allowance fordepletion of oil and gas wells or mines under paragraph (*) of this Subsection shall be authori?ed only in respect to oil and gas wells ormines located within the 1hilippines+

(9) Carita%e and Oter Contriutions.(1) In Genera%+ - ontributions or gifts actually paid or made within the taxable year to, or for the use of the overnment of the1hilippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domesticcorporation or associations organi?ed 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 non-government organi?ations,in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the ommissioner, no partof the net income of which inures to the benefit of any private stoc4holder or individual in an amount not in excess of ten percent (*>;)in the case of an individual, and five percent (;) 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+

(&) Contriutions Deducti%e in -u%%.- 7otwithstanding the provisions of the preceding subparagraph, donations to the followinginstitutions or entities shall be deductible in full#

(a) Donations to te Goernment. - @onations to the overnment of the 1hilippines or to any of its agencies or politicalsubdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used inunderta4ing priority activities in education, health, youth and sports development, human settlements, science and culture,and in economic development according to a 7ational 1riority 1lan determined by the 7ational Economic and @evelopment"uthority (7E@"), n consultation with appropriate government agencies, including its regional development councils andprivate philantrophic persons and institutions0 1rovided, .hat any donation which is made to the overnment or to any of itsagencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitationsprescribed in paragraph (*) of this Subsection#(b) Donations to Certain -orei,n Institutions or Internationa% Or,ani:ations. - @onations to foreign institutions or

international organi?ations which are fully deductible in pursuance of or in compliance with agreements, treaties, orcommitments entered into by the overnment of the 1hilippines and the foreign institutions or international organi?ations orin pursuance of special laws#(c) Donations to Accredited on,oernment Or,ani:ations.- .he term Bnongovernment organi?ationB means a nonprofit domestic corporation0

(*) 9rgani?ed and operated exclusively for scientific, research, educational, character-building and youth andsports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part ofthe net income of which inures to the benefit of any private individual#() Chich, not later than the *$ thday of the third month after the close of the accredited nongovernmentorgani?ations taxable year in which contributions are received, ma4es utili?ation directly for the active conductof the activities constituting the purpose or function for which it is organi?ed and operated, unless an extendedperiod is granted by the Secretary of 5inance in accordance with the rules and regulations to be promulgated,upon recommendation of the ommissioner#(2) .he level of administrative expense of which shall, on an annual basis, conform with the rules andregulations to be prescribed by the Secretary of 5inance, upon recommendation of the ommissioner, but in nocase to exceed thirty percent (2>;) of the total expenses# and(!) .he assets of which, in the even of dissolution, would be distributed to another nonprofit domestic

corporation organi?ed for similar purpose or purposes, or to the state for public purpose, or would bedistributed by a court to another organi?ation to be used in such manner as in the judgment of said court shallbest accomplish the general purpose for which the dissolved organi?ation was organi?ed+Subject to such terms and conditions as may be prescribed by the Secretary of 5inance, the term Butili?ationBmeans0

(i) "ny amount in cash or in 4ind (including administrative expenses) paid or utili?ed to accomplishone or more purposes for which the accredited nongovernment organi?ation was created ororgani?ed+(ii) "ny amount paid to ac3uire an asset used (or held for use) directly in carrying out one or morepurposes for which the accredited nongovernment organi?ation was created or organi?ed+

&age 3 of -.


26/67

"n amount set aside for a specific project which comes within one or more purposes of the accreditednongovernment organi?ation may be treated as a utili?ation, but only if at the time such amount is set aside,the accredited nongovernment organi?ation has established to the satisfaction of the ommissioner that theamount will be paid for the specific project within a period to be prescribed in rules and regulations to bepromulgated by the Secretary of 5inance, upon recommendation of the ommissioner, but not to exceed five($) years, and the project is one which can be better accomplished by setting aside such amount than byimmediate payment of funds+

(3) ;a%uation.- .he amount of any charitable contribution of property other than money shall be based on the ac3uisition cost of saidproperty+

(4) $roof of Deductions.- ontributions or gifts shall be allowable as deductions only if verified under the rules and regulationsprescribed by the Secretary of 5inance, upon recommendation of the ommissioner+

(I) 6esearc and Dee%opment.*(1) In Genera%.- a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable yearin connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account+.he expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred+(&) Amorti:ation of Certain 6esearc and Dee%opment Expenditures + - "t the election of the taxpayer and in accordance with therules and regulations to be prescribed by the Secretary of 5inance, upon recommendation of the ommissioner, the following researchand development expenditures may be treated as deferred expenses0

(a) 1aid or incurred by the taxpayer in connection with his trade, business or profession#(b) 7ot treated as expenses under paragraph =*) hereof# and(c) hargeable to capital account but not chargeable to property of a character which is subject to depreciation or

depletion+

n computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of notless than sixty (%>) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first reali?esbenefits from such expenditures)+

.he election provided by paragraph () hereof may be made for any taxable year beginning after the effectivity of this ode,but only if made not later than the time prescribed by law for filing the return for such taxable year+ .he method so elected,and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which theelection is made and for all subse3uent taxable years unless with the approval of the ommissioner, a change to a differentmethod is authori?ed with respect to a part or all of such expenditures+ .he election shall not apply to any expenditure paidor incurred during any taxable year for which the taxpayer ma4es the election+

(3) +imitations on Deduction.- .his Subsection shall not apply to0(a) "ny expenditure for the ac3uisition or improvement of land, or for the improvement of property to be used in connectionwith research and development of a character which is subject to depreciation and depletion# and(b) "ny expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or 3uality of any depositof ore or other mineral, including oil or gas+

() consecutive years beginning with the year in which the transfer or payment is made+

(=) Additiona% 6e>uirements for Deductii%ity of Certain $ayments + - "ny amount paid or payable which is otherwise deductible from, or ta4eninto account in computing gross income or for which depreciation or amorti?ation may be allowed under this Section, shall be allowed as a deductiononly if it is shown that the tax re3uired to be deducted and withheld therefrom has been paid to the 'ureau of nternal 6evenue in accordance withthis Section $ and * of this ode+

(+) Optiona% Standard Deduction.- n lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section!, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent (*>;) of his gross income+ nless thetaxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of thedeductions allowed in the preceding Subsections+ Such election when made in the return shall be irrevocable for the taxable year for which thereturn is made0 1rovided, .hat an individual who is entitled to and claimed for the optional standard deduction shall not be re3uired to submit with histax return such financial statements otherwise re3uired under this ode0 1rovided, further, .hat except when the ommissioner otherwise permits,the said individual shall 4eep such records pertaining to his gross income during the taxable year, as may be re3uired by the rules and regulations

promulgated by the Secretary of 5inance, upon recommendation of the ommissioner+

(8) $remium $ayments on 9ea%t and?or 9ospita%i:ation Insurance of an Indiidua% !axpayer+ - .he amount of premiums not to exceed .wothousand four hundred pesos (1,!>>) per family or .wo hundred pesos (1>>) a month paid during the taxable year for health and/orhospitali?ation insurance ta4en by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income0 1rovided,.hat said family has a gross income of not more than .wo hundred fifty thousand pesos (1$>,>>>) for the taxable year0 1rovided, finally, .hat inthe case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction+

7otwithstanding the provision of the preceding Subsections, .he Secretary of 5inance, upon recommendation of the ommissioner, after a publichearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemi?ed deductions underSubsections (") to (


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inflation on expenditure levels0 1rovided, further, .hat no ceilings shall further be imposed on items of expense already subject to ceilings underpresent law+

0uiding principles in determining (ordinary and necessary) expenses.This Court has never attempted to define with precision the terms 3ordinary and necessary.3There are however% certain guiding principles worthy of serious consideration in the properad*udication of conflicting claims. rdinarily% an e;pense will #e considered 3necessary3 wherethe e;penditure is appropriate and helpful in the development of the ta;payers #usiness. It is3ordinary3 when it connotes a payment which is normal in relation to the #usiness of the ta;payerand the surrounding circumstances. The term 3ordinary3 does not require that the payments #eha#itual or normal in the sense that the same ta;payer will have to maAe them often the paymentmay #e unique or non:recurring to the particular ta;payer affected.

4tlas Consolidated )ining L Devt. Corp. vs. Commissioner of Internal Revenue% ,.R. $o. +:2?9--% January 2% -97-

Intention of taxpayer may be the controlling factor in determining deductibility of ordinaryand necessary expenditures.There is no hard and fast rule on the right to a deduction which depends in each case on theparticular facts and the relation of the payment to the type of #usiness in which the ta;payer isengaged. The intention of the ta;payer often may #e the controlling fact in maAing the

determination. 4ssuming that the e;penditure is ordinary and necessary in the operation of theta;payerGs #usiness% the answer to the question as to whether the e;penditure is an allowa#lededuction as a #usiness e;pense must #e determined from the nature of the e;penditure itself%which in turn depends on the e;tent and permanency of the worA accomplished #y thee;penditure.


&hat constitutes capital expenditures.;penses relating to recapitali


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Improper payments of royalty are not deductible as legitimate business expenses.4lthough the Ta; Code allows payments of royalty to #e deducted from gross income as #usinesse;penses% it is CB Circular $o. 191 that defines what royalty payments are proper. Improperpayments of royalty are not deducti#le as legitimate #usiness e;penses.

1) !hilippines% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. 72711% 6eptem#er 2?% -977

Conditions for deductibility of business expense.The statutory test of deducti#ility requires that to #e deducti#le as a #usiness e;pense% threeconditions are imposed% namely@ =-> the e;pense must #e ordinary and necessary% =2> it must #epaid or incurred within the ta;a#le year% and =1> it must #e paid or incurred in carrying on a tradeor #usiness. In addition% not only must the ta;payer meet the #usiness test% he must su#stantiallyprove #y evidence or records the deductions claimed under the law% otherwise% the same will #edisallowed. The mere allegation of the ta;payer that an item of e;pense is ordinary andnecessary does not *ustify its deduction.

sso 6tandard astern% Inc. vs. Commissioner of Internal Revenue% ,.R. $os. 27807:9% July %

-979

Reuisites for deductibility of advertising expense.To #e deducti#le from gross income% advertising e;pense must comply with the followingrequisites@ =a> the e;pense must #e ordinary and necessary =#> it must have #een paid orincurred during the ta;a#le year =c> it must have #een paid or incurred in carrying on the trade or#usiness of the ta;payer and =d> it must #e supported #y receipts% records or other pertinentpapers.

Commissioner of Internal Revenue vs. ,eneral 5oods =!hils.>% Inc.% ,.R. $o. -1?2% 4pril 2%2001

#actors to consider in determining the reasonableness of an advertising expense.There is yet to #e a clear:cut criteria or fi;ed test for determining the reasona#leness of anadvertising e;pense. There #eing no hard and fast rule on the matter% the right to a deductiondepends on a num#er of factors such as #ut not limited to@ the type and si% Inc.% ,.R. $o. -1?2% 4pril 2%2001

Two ,inds of advertising.4dvertising is generally of two Ainds@ =-> advertising to stimulate the current sale of merchandiseor use of services and =2> advertising designed to stimulate the future sale of merchandise or useof services. The second type involves e;penditures incurred% in whole or in part% to create or

maintain some form of goodwill for the ta;payerGs trade or #usiness or for the industry orprofession of which the ta;payer is a mem#er. If the e;penditures are for the advertising of thefirst Aind% then% e;cept as to the question of the reasona#leness of amount% there is no dou#t suche;penditures are deducti#le as #usiness e;penses. If% however% the e;penditures are foradvertising of the second Aind% then normally they should #e spread out over a reasona#le periodof time.


&age ; of -.


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+rotection of brand franchise is a,in to acuisition of capital assets and therefore notbusiness expense.The protection of #rand franchise is analogous to the maintenance of goodwill or title to oneGsproperty. This is a capital e;penditure which should #e spread out over a reasona#le period oftime. Respondent corporationGs venture to protect its #rand franchise was tantamount to efforts toesta#lish a reputation. This was aAin to the acquisition of capital assets and therefore e;pensesrelated thereto were not to #e considered as #usiness e;penses #ut as capital e;penditures.


To be considered ordinary! an expense must be reasonable in amount.True% it is the ta;payerGs prerogative to determine the amount of advertising e;penses it will incurand where to apply them. 6aid prerogative% however% is su#*ect to certain considerations. The firstrelates to the e;tent to which the e;penditures are actually capital outlays this necessitates aninquiry into the nature or purpose of such e;penditures. The second% which must #e applied inharmony with the first% relates to whether the e;penditures are ordinary and necessary.Concomitantly% for an e;pense to #e considered ordinary% it must #e reasona#le in amount.

Commissioner of Internal Revenue vs. ,eneral 5oods =!hils.>% Inc.% ,.R. $o. -1?2% 4pril 2%

2001

Conditions for deductibility of employee bonuses.It is a general rule that #onuses to employees made in good faith and as additional compensationfor the services actually rendered #y the employees are deducti#le% provided such payments%when added to the stipulated salaries% do not e;ceed a reasona#le compensation for the servicesrendered. The conditions precedent to the deduction of #onuses to employees are@ =-> thepayment of the #onuses is in fact compensation =2> it must #e for personal services actuallyrendered and =1> the #onuses% when added to the salaries% are Greasona#le . . . when measured#y the amount and quality of the services performed with relation to the #usiness of the particularta;payerG

C. ). 'osAins L Co.% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. +:2089% $ovem#er27% -9?9

#actors in determining reasonableness of bonus as compensation.There is no fi;ed test for determining the reasona#leness of a given #onus as compensation. Thisdepends upon many factors% one of them #eing Gthe amount and quality of the services performedwith relation to the #usiness.G ther tests suggested are@ payment must #e Gmade in good faithGGthe character of the ta;payerGs #usiness% the volume and amount of its net earnings% its locality%the type and e;tent of the services rendered% the salary policy of the corporationG Gthe si


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ta; purposes partaAe of the nature of ta; e;emptions hence% if ta; e;emptions are strictlyconstrued% then deductions must also #e strictly construed.


-xpenses to establish reputation are capital expenditures.

4n e;pense incurred to create a favora#le image of the corporation in order to gain or maintainthe pu#lic(s and its stocAholder(s patronage% does not maAe it deducti#le as #usiness e;pense.fforts to esta#lish reputation are aAin to acquisition of capital assets and% therefore% e;pensesrelated thereto are not #usiness e;pense #ut capital e;penditures.


Listing fee is an ordinary and necessary business expense.4 listing fee is an ordinary and necessary #usiness e;pense for the privilege of having its stocAlisted.

4tlas Consolidated )ining L Devt. Corp. vs. Commissioner of Internal Revenue% ,.R. $o. +:

2?9--% January 2% -97-

Litigation expenses incurred in defense or protection of title are capital in nature and notdeductible.It is well settled that litigation e;penses incurred in defense or protection of title are capital innature and not deducti#le% liAewise% it was ruled #y the F.6. Ta; Court that e;penditures indefense of title property constitute a part of the cost of the property% are not deducti#le ase;pense.


-xpenses incurred by charitable institution for handling its dividends and interests are notdeductible as business expenses.

4s the principle of allocating e;penses is grounded on the premise that the ta;a#le income wasderived from carrying on a trade or #usiness% as distinguished from mere receipt of interests anddividends from one(s investments% said income should not share in the allocation of administrativee;penses. Thus% e;penses incurred #y a charita#le institution for handling its funds or incomeconsisting solely of dividends and interests% are not e;penses incurred in 3carrying on any tradeor #usiness%3 hence% not deducti#le as #usiness or administrative e;penses.

'ospital de 6an Juan de Dios% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. 1-108% )ay-0% -990

Sec.


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hile "ta;es& and "de#t& are distinguisha#le legal concepts% in certain cases% on account of theirnature% the distinction #ecomes inconsequential. This qualification is recogni


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capital loss normally requires the concurrence of two conditions for it to result@ =-> There is a saleor e;change and =2> the thing sold or e;changed is a capital asset.


&hen securities become worthless! the law deems the loss as 'a loss from the sale orexchange of capital assets'.

hen securities #ecome worthless% there is strictly no sale or e;change #ut the law deems theloss anyway to #e 3a loss from the sale or e;change of capital assets.3 4 similar Aind of treatmentis given #y the $IRC on the retirement of certificates of inde#tedness with interest coupons or inregistered form% short sales and options to #uy or sell property where no sale or e;change strictlye;ists. In these cases% the $IRC dispenses% in effect% with the standard requirement of a sale ore;change for the application of the capital gain and loss provisions of the code.


Sec. there is a valid and su#sisting de#t =2> the de#tmust #e actually ascertained to #e worthless and uncollecti#le during the ta;a#le year =1> thede#t must #e charged off during the ta;a#le year and => the de#t must arise from the #usinessor trade of the ta;payer. 4dditionally% #efore a de#t can #e considered worthless% the ta;payermust also show that it is indeed uncollecti#le even in the future.

!hilippine Refining Company vs. Court of 4ppeals% et al.% ,.R. $o. --79% )ay 7% -99?

Criteria for ascertaining worthlessness of debts.The requirement of ascertainment of worthlessness requires proof of two facts@ =-> that theta;payer did in fact ascertain the de#t to #e worthless% in the year for which the deduction issought and =2> that% in so doing% he acted in good faith.

Collector of Internal Revenue vs. ,oodrich International Ru##er Co.% ,.R. $o. +:222?8%Decem#er 22% -9?

Sec.


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Basilan states% Inc. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:2292% 6eptem#er8% -9?

The law does not authori8e depreciation of an asset beyond its acuisition cost.The income ta; law does not authori


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9ifferences between (depletion) and (depreciation).Both depletion and depreciation are predicated on the same #asic premise of avoiding a ta; oncapital. The allowance for depletion is #ased on the theory that the e;traction of mineralsgradually e;hausts the capital investment in the mineral deposit. The purpose of the depletiondeduction is to permit the owner of a capital interest in mineral in place to maAe a ta;:freerecovery of that depleting capital asset. 4 depletion is #ased upon the concept of the e;haustion

of a natural resource whereas depreciation is #ased upon the concept of the e;haustion of theproperty% not otherwise a natural resource% used in a trade or #usiness or held for the productionof income. Thus% depletion and depreciation are made applica#le to different types of assets. 4nda ta;payer may not deduct that which the Code allows as a deduction of another. =cited in5ootnote 1?>

Consolidated )ines% Inc. vs. Court of Ta; 4ppeals% et al.% ,.R. $os. +:-771 L -77% 4ugust 29%-9

Sec. % was

conceived in order to encourage the formation and esta#lishment of such private !lans for the#enefit of la#orers and employees outside of the 6ocial 6ecurity 4ct.

Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. 98022% )arch 21% -992

Sec.


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In the hands of another who holds the shares of stocA #y way of an investment% the shares to himwould #e capital assets. hen the shares held #y such investor #ecome worthless% the loss isdeemed to #e a loss from the sale or e;change of capital assets.


Sec.


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constitutes a #usiness and a sale in the ordinary course of such a #usiness and the preferred ta;status is lost.

Tomas Calasan


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lending operations of a financial institution. quity holdings cannot come close to #eing within thepurview of 3evidence of inde#tedness3.Eerily% it is for a liAe thesis that the loss of petitioner #anAin its equity investment in the 'ongAong su#sidiary cannot also #e deducti#le as a #ad de#t. Theshares of stocA in question do not constitute a loan e;tended #y it to its su#sidiary =5irst CBCCapital> or a de#t su#*ect to o#ligatory repayment #y the latter% essential elements to constitute a#ad de#t% #ut a long term investment made #y CBC.


Sec. 15 - De!er)"na!"on o# A)on! and Reco(n"!"on o# =a"n or LossInstances when no recognition of gain or loss is made in sale or exchange of property.The law should #e taAen within the conte;t on the general su#*ect of the determination andrecognition 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 #e made if the sale ore;change is made in pursuance of a plan of corporate merger or consolidation or% if as a result ofan e;change of property for stocAs% the e;changer% alone or together with others not e;ceedingfour% gains control of the corporation.


Sec. 12 7A8 - =ross Inco)e Fro) Sorces W"!$"n !$e P$"&"++"nes

Resi