tax-notes-deductions.interests-to-rr-17-2011.pdf

TAXATION.rbg [DEDUCTIONS]

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DEDUCTIONS: (B) Interest. Requisites for deductibility, as implemented by Rev. Reg. 13-2000 (a) there must be an indebtedness (b) there should be an interest expense paid or

incurred upon such indebtedness (c) indebtedness must be that of the taxpayer (d) indebtedness must be connected with the

taxpayer’s trade, business or exercise of profession

(e) interest expense must have been paid or incurred during the taxable year

(f) interest must have been stipulated in writing (g) interest must be legally due (h) interest payment arrangement must not be

between related taxpayers (i) interest must not be incurred to finance

petroleum operations (j) in case of interest incurred to acquire

property used in trade, business or exercise of profession, the same was not treated as a capital expenditure

(k) the interest id not expressly disallowed by law to be deducted from gross income of the taxpayer.

GENERAL RULE ON DEDUCTION - The amount of interest expense paid or incurred within a taxable year of indebtedness in connection with the taxpayer’s trade, business, or exercise of profession shall be allowed as a deduction from the taxpayer’s gross income. LIMITATION ON DEDUCTION Interest expense shall be reduced by an amt. equal to the ff. % of interest income subjected to FT: beginning 01/01/2000 38%

01/01/2005 42% 01/01/2009 33%

The objective of the limitation is to discourage tax arbitrage on back to back loans, the proceeds of which are invested in income earning interest that is subject to 20% final tax. Tax arbitrage- is a method of borrowing without entering into a debtor/creditor relationship, often to resolve financing and exchange control problems. In tax cases, back-to-back loan is used to take advantage of the lower

rate of tax on interest income and a higher rate of tax on interest expense deduction. DEDUCTIBLE INTEREST EXPENSE: 1. interest on taxes, such as those paid for

deficiency or delinquency, since taxes are considered indebtedness (provided that the tax is a deductible tax, except in the case of income tax). However, fines, penalties, and surcharges on account of taxes are not deductible. The interest on unpaid business tax shall not be subjected to the limitation on deduction.

2. Interest paid by a corporation on scrip dividends.

3. Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown that the tax on such interest was withheld.

4. Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of which the said corporation is the legal or equitable owner, even though it is not directly liable for the indebtedness.

NON-DEDUCTIBLE INTEREST (a) interest paid in advance through discount or

otherwise(in case of cash basis taxpayer) allowed as deduction in the year the

debt is paid if indebtedness is payable in periodic

amortizations, int. is deducted in proportion of the amt. of the principal paid.

(b) payments made: 1. between members of a family (include

only brothers & sisters, spouse, ancestors, & lineal descendants)

2. between an individual & a corp. more than 50% in value of outstanding stock is owned by such individual (except in case of distributions in liquidation)

3. between 2 corps. more than 50% in value of outstanding stock owned by same individual, if either one is a personal holding co. or a foreign holding co. during the taxable yr. preceding the date of sale/exchange

4. between grantor & fiduciary of any trust 5. between Fiduciary of a trust & the

fiduciary of another if same person is a grantor to each trust

6. between Fiduciary & a beneficiary of a trust

7. indebtedness is incurred by a service contractor to finance petroleum corp.


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8. interest on preferred stock which in reality is dividend

9. interest on unpaid salaries and bonuses 10. interest calculated for cost keeping on

account of capital or surplus invested in business which does not represent charges arising under interest-bearing obligation

11. interest paid when there is no stipulation for the payment thereof

OPTIONAL TREATMENT OF INTEREST EXPENSE - at the option of taxpayer, interest incurred to acquire property used in trade or business may be allowed as:

(a) as expense (deduction) (b) as capital expenditure

PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP) versus CA,

CIR and CTA G.R. Nos. 106949-50 and G.R. Nos. 106984-85

December 1, 1995

Facts: The Paper Industries Corporation of the Philippines ("Picop"), petitioner in G.R. Nos. 106949-50 and private respondent in G.R. Nos. 106984-85, received from the Commissioner of Internal Revenue ("CIR") two (2) letters of assessment and demand both: (a) one for deficiency transaction tax and for documentary and science stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate amount of P88, 763,255.00. Picop protested the assessment but were not formally acted upon by respondent CIR. On 26 September 1984, the CIR issued a warrant of distrain on personal property and a warrant of levy on real property against Picop, to enforce collection of the contested assessments; in effect, the CIR denied Picop's protests. Thereupon, Picop went before the CTA appealing the assessments and held that Picop is liable for the reduced aggregate amount of P20,133,762.33. Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA but SC referred the said to CA in which further reduced the liability of Picop to P6,338,354.70 and denied the appeal of the CIR. Issues: 1. Whether Picop is liable:

a) for the transaction tax,

b) for interest and surcharge on unpaid transaction tax and

c) for Documentary and Science Stamp Taxes.

2. Whether Picop are entitled to deductions:

a) Deduction against current income interest payments on loans for the purchase of machinery and equipment,

b) Deduction against current income net operating losses incurred by Rustan Pulp and Paper Mills, Inc. and

c) Deduct against current income certain claimed financial guarantee expenses.

3. Whether PICOP is liable for deficiency

income tax. Held: 1.A) YES. Both the CTA and the Court of Appeals sustained the assessment of transaction tax. We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. 5186, as amended, does not include exemption from the thirty-five percent (35%) transaction tax. In Western Minolco Corporation v. Commissioner of Internal Revenue this Court held: The 35% transaction tax is an income tax on

interest earnings to the lenders or placers. The latter are actually the taxpayers. Therefore, the tax cannot be a tax imposed upon the petitioner. In other words, the petitioner who borrowed funds from several financial institutions by issuing commercial papers merely withheld the 35% transaction tax before paying to the financial institutions the interests earned by them and later remitted the same to the respondent Commissioner of Internal Revenue. The tax could have been collected by a different procedure but the statute chose this method. Whatever collecting procedure is adopted does not change the nature of the tax.

It is thus clear that the transaction tax is an income tax and as such, in any event, falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended. Picop was the withholding agent, obliged to withhold thirty-five percent (35%) of the interest payable to its lenders and to remit the amounts so withheld to


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the Bureau of Internal Revenue ("BIR"). As a withholding agent, Picop is made personally liable for the thirty-five percent (35%) transaction tax 10 and if it did not actually withhold thirty-five percent (35%) of the interest monies it had paid to its lenders, Picop had only itself to blame. B) NO. P.D. No. 1154 did not itself impose, nor did it expressly authorize the imposition of, a surcharge and penalty interest in case of failure to pay the thirty-five percent (35%) transaction tax when due. Neither did Section 210 (b) of the 1977 Tax Code which re-enacted Section 195-C inserted into the Tax Code by P.D. No. 1154. C) Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption. The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations. But no one contends that issuance of bonds was a principal or regular business activity of Picop; only banks or other financial institutions are in the regular business of raising money by issuing bonds or other instruments to the general public. We consider that the actual dedication of the proceeds of the bonds to the carrying out of Picop's registered operations constituted a sufficient nexus with such registered operations so as to exempt Picop from stamp taxes ordinarily imposed upon or in connection with issuance of such bonds. We agree, therefore, with the Court of Appeals on this matter that the CTA and the CIR had erred in rejecting Picop's claim for exemption from stamp taxes. 2. A) YES. Interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the NIRC as deductions against the taxpayer's gross income. The general rule is that interest expenses are deductible against gross income and this certainly includes interest paid under loans incurred in connection with the carrying on of the business of the taxpayer. 20 In the instant case, the CIR does not dispute that the interest payments were made by Picop on loans incurred in connection with the carrying on of the registered operations of Picop, i.e., the financing of the purchase of machinery and equipment actually used in the registered operations of Picop. Neither does the CIR deny

that such interest payments were legally due and demandable under the terms of such loans, and in fact paid by Picop during the tax year 1977. We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied. B) NO. R.A. No. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations. The statutory purpose can be served only if the accumulated operating losses are carried over and charged off against income subsequently earned and accumulated by the same enterprise engaged in the same registered operations. To allow the deduction claimed by Picop would be to permit one corporation or enterprise, Picop, to benefit from the operating losses accumulated by another corporation or enterprise, RPPM. To grant Picop's claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective which Picop had from the very beginning) which had not been earned by the registered enterprise which had suffered the accumulated losses. In effect, to grant would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses. Under the CTA and Court of Appeals decisions, Picop would benefit by immunizing P44,196,106.00 of its income from taxation thereof although Picop had not run the risks and incurred the losses which had been encountered and suffered by RPPM. Conversely, the income that would be shielded from taxation is not income that was, after much effort, eventually generated by the same registered operations which earlier had sustained losses. We consider and so hold that there is nothing in Section 7 (c) of R.A. No. 5186 which either requires or permits such a result. Indeed, that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c), R.A. No. 5186.


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C) NO. A taxpayer has the burden of proving entitlement to a claimed deduction. 36 In the instant case, even Picop's own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them. Moreover, cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof. 37 The best evidence that Picop should have presented to support its claimed deduction were the invoices and official receipts issued by the Register of Deeds. Picop not only failed to present such documents; it also failed to explain the loss thereof, assuming they had existed before. 38 Under the best evidence rule, 39 therefore, the testimony of Picop's employee was inadmissible and was in any case entitled to very little, if any, credence. 3.Picop did not deny the existence of the discrepancies in their Books of Account and Income Tax Returns, accordingly PICOP's procedure of recording its export sales (reckoned in U.S. dollars) on the basis of a fixed rate, day to day and month to month, regardless of the actual exchange rate and without waiting when the actual proceeds are received. In other words, PICOP recorded its export sales at a pre-determined fixed exchange rate. That pre-determined rate was decided upon at the beginning of the year and continued to be used throughout the year and as a result the CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return. For the CIR has a right to assume that Picop's Books of Accounts speak the truth in this case since, as already noted, they embody what must appear to be admissions against Picop's own interest.

THE COMMISSIONER OF INTERNAL REVENUE vs. CONSUELO L. VDA. DE

PRIETO

This is an appeal from a decision of the Court of tax Appeals reversing the decision of the Commissioner of Internal Revenue which held herein respondent Consuelo L. Vda. dePrieto liable for the payment of the sum of P21,410.38 as deficiency income tax, plus penalties and monthly interest. On December 4, 1945, the respondent conveyed by way of gifts to her four children, namely - Antonio, Benito, Carmen and Mauro, all

surnamed Prieto, real property with a total assessed value of P892,497.50. After the filing of the gift tax returns, CIR appraised the real property donated for gift tax purposes at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on account of deliquency. This sum of P55,978.65 was claimed as deduction, among others, by respondent in her 1954 income tax return. Petitioner, however, disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest up to March 31, 1957, surcharge and compromise for the late payment. Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to be declared. To sustain the proposition that the interest payment in question is not deductible for the purpose of computing respondent's net income, CIR relies heavily on section 80 of Revenue Regulation No. 2 (known as Income Tax Regulation) promulgated by the Department of Finance, which provides that "the word `taxes' means taxes proper and no deductions should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency." ISSUES: 1. Whether or not such interest was paid upon

an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code.

SEC. 30 Deductions from gross income. — In computing net income there shall be allowed as deductions — x xxxxxxxx (b) Interest:

(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on indebtedness


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incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as income under this Title.

2. Whether or not petitioner is correct when it

relies heavily on section 80 of Revenue Regulation No. 2.

HELD: 1. Yes. The term "indebtedness" as used in the

Tax Code of the United States has been defined as an unconditional and legally enforceable obligation for the payment of money.1Within the meaning of that definition, it is apparent that a tax may be considered an indebtedness.

As stated by this Court in the case of Santiago Sambrano vs. CTA and CIR (101 Phil., 1; 53 Off. Gaz., 4839) — Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may be considered as such. The term "debt" is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another, either for contract, or the requirement of the law. (Camben vs. Fink Coule and Coke Co. 61 LRA 584) Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. (Idem). A tax is a debt for which a creditor's bill may be brought in a proper case. (State vs. Georgia Co., 19 LRA 485). It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income under section 30(b) of the Tax Code above quoted. The above conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned. Thus, under sec. 23(b) of the Internal Revenue Code of 1939, as amended 1 , which contains similarly worded provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest on taxes is interest on indebtedness and is deductible. The rule applies even though the tax is nondeductible.

2. No. The court below, however, held section 80 as inapplicable to the instant case because while it implements sections 30(c) of the Tax Code governing deduction of taxes, the respondent taxpayer seeks to come under section 30(b) of the same Code providing for deduction of interest on indebtedness. We find the lower court's ruling to be correct. Contrary to petitioner's belief, the portion of section 80 of Revenue Regulation No. 2 under consideration has been part and parcel of the development to the law on deduction of taxes in the United States. Thus, Mertens in his treatise says: "Penalties are to be distinguished from taxes and they are not deductible under the heading of taxs." . . . Interest on state taxes is not deductible as taxes." This notwithstanding, courts in that jurisdiction, however, have invariably held that interest on deficiency taxes are deductible, not as taxes, but as interest. Section 80 of Revenue Regulation No. 2, therefore, merely incorporated the established application of the tax deduction statute in the United States, where deduction of "taxes" has always been limited to taxes proper and has never included interest on delinquent taxes, penalties and surcharges.

To give to the quoted portion of section 80 of our Income Tax Regulations the meaning that the petitioner gives it would run counter to the provision of section 30(b) of the Tax Code and the construction given to it by courts in the United States. Such effect would thus make the regulation invalid for a "regulation which operates to create a rule out of harmony with the statute, is a mere nullity." (Lynch vs. Tilden Produce Co., 265 U.S. 315; Miller vs. U.S., 294 U.S. 435.) As already stated, section 80 implements only section 30(c) of the Tax Code, or the provision allowing deduction of taxes, while herein respondent seeks to be allowed deduction under section 30(b), which provides for deduction of interest on indebtedness. In conclusion, we are of the opinion and so hold that although interest payment for delinquent taxes is not deductible as tax under Section 30(c) of the Tax Code and section 80 of the Income Tax Regulations, the taxpayer is not precluded thereby from claiming said interest payment as deduction under section 30(b) of the same Code. RR 13-2000 (November 20, 2000)


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BIR Ruling No. 006-00 (January 5, 2000)

Philippine National Bank PNB Financial Center Roxas Boulevard, Metro Manila Attention: Atty. Julian B. Soriano Gentlemen : This refers to your letter dated November 6, 1998 stating that with reference to Section 34(B) of the Tax Reform Act of 1997 disallowing as a deduction a portion of Bank's interest expense representing 41% of interest income subjected to final tax, you are of the understanding that the said provision was introduced to mitigate the effects of the so-called tax arbitrage scheme where taxpayers save approximately 14% on taxes by placing their excess funds in government securities and pay only a 20% tax on the interest derived therefrom instead of the 34% corporate tax that will be imposed had such excess been used for other income-generating activities not subject to final tax; that as a result of the Codal provision, taxpayers will no longer enjoy the tax benefit/savings that otherwise may be derived from the tax arbitrage; that the 12-year treasury bonds were given by the Government as payment for its liabilities to PNB as embodied in the Memorandum of Agreement (MOA) dated August 14, 1995 executed between the National Government, as represented by the Department of Finance, and PNB; and that PNB, therefore, has not engaged in a tax arbitrage scheme. Based on the foregoing representations and documents submitted, you are now requesting for a ruling that interest income derived by PNB from the treasury bonds be excluded in the determination of the interest expense not allowable as deduction from gross income. In reply, please be informed that pursuant to Section 34(B) of the Tax Code of 1997, although as a general rule, the amount of interest expense paid or incurred by a taxpayer within a taxable year on indebtedness in connection with his trade, business or exercise of profession shall be allowed as a deduction from his gross income, the said interest expense, however, shall be reduced if the taxpayer has Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 derived certain interest income which had been subjected to final withholding tax.

The said reduction shall be equal to the following percentages of the interest income earned depending on the year when the interest income was earned, viz: (41%) beginning January 1, 1998; (39%) beginning January 1, 1999; and (38%) beginning January 1, 2000 and thereafter. This limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date of the interest-bearing loan and the date when the investment was made, for as long as, during the taxable year, there is an interest expense incurred on one side and an interest income earned on the other side, which interest income had been subjected to final withholding tax. Accordingly, your request that your interest income derived from the said treasury bonds be excluded in the determination of the interest expense not allowable as deduction from gross income is hereby denied pursuant to Section 34(B) of the Tax Code of 1997. (C) Taxes. - the term ―taxes‖ refers to national and local taxes, and means TAXES PROPER, hence, no deductions are allowed for:

1. Interests 2. Surcharges 3. penalties or fines incident to 4. delinquency (sec. 80, Rev. Reg. 2)

DEDUCTIBLE TAXES - All taxes, national, or local, paid or incurred during the taxable year in connection with the taxpayer’s profession, trade or business, are deductible from gross income. REQUISITES FOR DEDUCTIBILITY: a. it must be paid or incurred within the taxable

year b. it must be paid or incurred in connection

with the taxpayer’s trade, profession or business

c. it must be imposed directly on the taxpayer d. it must not be specifically excluded by law

from being deducted from the taxpayer’s gross income

NON-DEDUCTIBLE TAXES (a) Philippine income tax (but FBT can be

deducted from gross income RR 8-98))


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(b) income tax imposed by authority of any foreign country (except when the taxpayer signifies his desire to avail of the tax credit for taxes of foreign countries)

(c) estate & donor’s taxes (d) taxes assessed against local benefits of a kind

tending to increase the value of the property assessed

(e) final taxes, being in the nature of income tax (f) special assessments Taxes, when refunded or credited, shall be included as part of GI in the year of receipt to the extent of income tax benefit of said deduction. (Tax Benefit Rule) For NRAETB and RFC, taxes paid or incurred are allowed as deductions only if and to the extent that they are connected from income within the Philippines. Exceptions to the rule that only such persons on whom the tax is imposed by law can claim deduction thereof: a. taxes of shareholder upon his interest as such

and paid by the corporation without reimbursement from him, can be claimed by the corporation as deduction.

b. A corporation paying the tax for the holder its bonds or other obligation containing a tax-free covenant clause cannot claim deduction for such taxes paid by it pursuant to such covenant.

LIMITATIONS ON DEDUCTIONS In case of a nonresident alien individual engaged in trade/business in the Philippines, taxes to be deducted shall be allowed only if & to the extent that they are connected with income from sources w/in the Philippines Tax Credit: a right of an income taxpayer to deduct from income tax payable the foreign income tax he has paid to his foreign country subject to limitation. WHO CAN CLAIM?

1. Citizen 2. Domestic Corp 3. Member of GPP 4. Beneficiary of an estate or trust

WHO CANNOT CLAIM? 1. Alien individual (except resident aliens

deriving income from within & without the Phils., if there is reciprocity)

2. Foreign Corp.

Limitation of Credit (Substantiation Requirements) The tax credit shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:

a. The total amount of the income derived from sources without the Philippines;

b. The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and

c. All other information necessary for the verification and computation of such credits.

What amount may be taken as tax credit: The amount of tax credit allowed is equivalent to the tax paid or incurred to a foreign country during the taxable year but NOT TO EXCEED THE FOLLOWING LIMITS: Per Country Limitation – Amount of credit to tax paid/incurred to any country shall not exceed same proportion of the tax against which such credit is taken Income from outside the Phils (per country) Divided by Phil. Income Subtotal Multiplied by: TOTAL income from ALL sources Limitation per country Global Limitation – Total amount of credit shall not exceed same proportion of tax which such credit is taken Total income from OUTSIDE the Phils. Divided by total income from ALL sources Subtotal Multiplied by Philippine Income Global Limitation


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WHEN CREDIT FOR TAXES MAY BE TAKEN: The credit for taxes provided by Section 34(C)(3) to (7) may ordinarily be taken either in the return for the year in which the taxes accrued or on which the taxes were paid, dependent upon whether the accounts of the taxpayer are kept and his returns filed upon the accrual basis or upon cash receipts and disbursements. DIFFERENCES: Deduction: included in the gross income but later deducted. Exclusion: not included in the computation of gross income. Refers to income received or earned but is not taxable as income because of exemption by virtue of a law or treaty. Tax Credit: paid beforehand and is deducted from the tax liability of the taxpayer.

CIR v Lednicky July 31, 1964

Facts: The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and wife, respectively, both American citizens residing in the Philippines, and have derived all their income from Philippine sources for the taxable years in question. In compliance with local law, the aforesaid respondents, on 27 March 1957, filed their income tax return for 1956, reporting therein a gross income of P1,017,287. 65 and a net income of P733,809.44 on which the amount of P317,395.4 was assessed after deducting P4,805.59 as withholding tax. Pursuant to the petitioner's assessment notice, the respondents paid the total amount of P326,247.41, inclusive of the withheld taxes, on 15 April 1957. On 17 March 1959, the respondents Lednickys filed an amended income tax return for 1956. The amendment consists in a claimed deduction of P205,939.24 paid in 1956 to the United States government as federal income tax for 1956. Simultaneously with the filing of the amended return, the respondents requested the refund of P112,437.90. When the petitioner Commissioner of Internal Revenue failed to answer the claim for refund,

the respondents filed their petition with the Tax Court on 11 April 1959. The Tax Court held that they may be deducted because of the undenied fact that the respondent spouses did not "signify" in their income tax return a desire to avail themselves of the benefits of paragraph 3 (B) of the subsection, which reads:

SEC. 30.Deduction from gross income. — In computing net income there shall be allowed as deductions — (c) Taxes: (1) In general. — Taxes paid or accrued within the taxable year, except — (A) The income tax provided for under this Title; (B) Income, war-profits, and excess profits taxes imposed by the authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for foreign countries);

Par. (c) (3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with — (A) ...; (B) Alien resident of the Philippines. — In the case of an alien resident of the Philippines, the amount of any such taxes paid or accrued during the taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the Philippines residing in such country

ISSUE: WON a citizen of the US residing in Phil who derives income wholly from sources within the Phil may deduct from his gross income the income taxes he has paid to US gov’t for the taxable year? RULING: No. The Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an alternative or


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substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries), the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and waive the deduction; otherwise, the foreign taxes would always be deductible, and their mention in the list of non-deductible items in Section 30(c) might as well have been omitted, or at least expressly limited to taxes on income from sources outside the Philippine Islands. Petitioners admit in their brief that the purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from gross income (subs. c-1) and by tax credit (subs. c-3). This danger of double credit certainly cannot exist if the taxpayer cannot claim benefit under either of these headings at his option, so that he must be entitled to a tax credit (respondent taxpayers admittedly are not so entitled because all their income is derived from Philippine sources), or the option to deduct from gross income disappears altogether. (D) Losses. - SEC. 38.Losses from Wash Sales of Stock or Securities. - (B) In the case of any loss claimed to have been

sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contact or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34 unless the claim is made by a dealer in stock or securities and with respect to a transaction

made in the ordinary course of the business of such dealer.

(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is lessthan the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss from the sale or other disposition of which is not deductible, shall be determinedunder rules and regulations prescribed by the Secretary of Finance, upon recommendation of theCommissioner.

(D) If the amount of stock or securities acquired (or covered by the contract or option to acquire which)resulted in the non-deductibility of the loss, shall be determined under rules and regulations prescribedby the Secretary of Finance, upon recommendation of the Commissioner.

RR 12-77 (October 6, 1977) RMO-31-2009 (October 16, 2009) NOLCO RR 14-01 (August 27, 2001) BIR Ruling 30-00 (August 10, 2000) BIR Ruling 206-90)October 30, 1990) BIR Ruling No. 144-85 (August 26, 1985) Requisites for deductibility of ordinary loss (a) loss must be of the taxpayer (b) actually sustained during the taxable year (c) not compensated for by insurance or other

forms of indemnity (d) incurred in trade, business or profession OR

property connected w/ trade, business or profession lost through fires, storm, shipwreck, or other casualties OR from robbery, theft or embezzlement

(e) evidenced by a completed transaction (f) not claimed as a deduction for estate tax

purposes (g) notice of loss must be filed with the BIR

within 45 days from the date of discovery of the casualty or robbery, theft or embezzlement

• No loss shall be allowed as a deduction for

income tax purposes if such loss has been claimed as a deduction for estate tax purposes.

• The taxpayer’s failure to record in his books the alleged loss proves that the loss had not been suffered, hence, not deductible. (City


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Lumber Vs. Domingo and CA, January 30, 1964).

Category and Types of Losses 1. Ordinary Losses

a. incurred in trade or business, or practice of profession

NET OPERATING LOSS CARRY-OVER (NOLCO) - Refers to the excess of allowable deductions over gross income of the business for any taxable year, which has not been previously offset as deduction from gross income. REQUIREMENTS: 1. the taxpayer was not exempt from income tax

in the year of such net operating loss; 2. the loss was not incurred in a taxable year

during which the taxpayer was exempt from income tax, and

3. there has been no substantial change in the ownership of the business or enterprise.

There is no substantial change in the ownership of the business when: a. not < 75% in nominal value of outstanding

issued shares is held by same persons b. not < 75% of paid up capital of corp. is held

by same persons

(a) Net operating loss of a business shall be carried over as deduction from GI for the next 3 consecutive taxable yrs. immediately ff. the yr. of such loss the 3 year period shall continue to run

notwithstanding that the corporation paid its taxes under MCIT, or that the individual availed of the 10% Optional Standard Deduction

(b) Net Operating Loss = excess of allowable deduction over the GI

(c) For mines other than oil & gas wells, if loss incurred in any of the 1st 10 yrs. Of operation, carry-over for the next 5 yrs.

b. of property connected with the trade,

business, or profession, if the loss arises from fires, storms, shipwreck or other casualties, or from robbery, theft or embezzlement

Total Destruction - the replacement cost to restore the property to its normal operating

condition, but in no case shall the deductible loss be more than the net book value of the property as a whole, immediately before casualty. Partial Destruction - the excess over the net book value immediately before the casualty should be capitalized, subject to depreciation over the remaining useful life of the property. 2. Special Types of Losses

(a) Capital Losses – deductions allowed only to the extent of the gains from such sales or exchanges of capital assets (does not apply to banks and trust companies)

a. losses from sale or exchange of capital assets

b. losses resulting from securities becoming worthless and which are capital assets

c. losses from short sales of property

d. losses due to failure to exercise privilege or option to buy or sell property

(b) Losses from wash sales of stock or securities

30 days before and after the date of the sale, the taxpayer has acquired or has entered into a contract or option so as to acquire, substantially identical stock/securities

General rule: not deductible unless claim is made by a dealer in stock/securities & made in ordinary course of business

(c) Wagering Losses - allowed only to the extent of the gains from such losses

(d) Abandonment Losses

In case of abandoned petroleum operations, accumulated expenditures incurred prior to 1/1/79 allowed as deduction only from income derived from same contract area; notice of abandonment shall be filed with Commissioner

In case of abandoned producing well, unamortized cost & undepreciated costs of equipment directly used, allowed as deduction in the yr. of abandonment


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(e) Losses from Illegal Transactions – not deductible

(f) Losses due to voluntary removal of building incident to renewal or replacements – deductible expense from gross income

(g) Loss of useful value of capital assets due to charges in business conditions – deductible expense only to the extent of actual loss sustained (after adjustment for improvement, depreciation, and salvage value)

(h) Losses from sales or exchanges of property between related taxpayers – Not deductible as provided under Section 36 of the NIRC but the gains are taxable

(i) Losses of Farmers – deductible if incurred in the operation of farm business

(j) Loss in shrinkage in value of stock – if the stocks of the corporation become worthless, the cost or other basis may be deducted by the owner in the taxable year in which the stocks became worthless. Any amount claimed as a loss on account of shrinkage in value of the stock through fluctuation in the market or otherwise cannot be deducted from gross income

(E) Bad Debts. - debts due to the taxpayer actually ascertained to be worthless and charged off during the year. “Actually ascertained to be worthless”- Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness must depend upon the particular facts and circumstances of the case. It must be uncollectible even in the future. (Collector v. Goodrich International Rubber Co., 21 SCRA 1336) REQUISITES FOR DEDUCTIBILITY: 1. Existing indebtedness due to the taxpayer

which must be valid and legally demandable, 2. Connected with the taxpayer’s trade, business

or practice of profession, 3. Must not be sustained in a transaction

entered into between related parties,

4. Actually ascertained to be worthless and uncollectible as of the end of the taxable year, and

5. Actually charged off in the books of accounts of the taxpayer as of the end of the taxable year.

Recovery of bad debts previously allowed as deduction in the preceding yrs. shall be included as part of gross income in the yr. of recovery to the extent of the income tax benefit of such deduction (Tax Benefit Rule)

Ascertainment of Worthlessness:

Proof of two facts: a. taxpayer did in fact ascertain the debt to

be worthless in the year for which the deduction was sought;

b. that in so doing, he acted in good faith (Collector Vs. Goodrich, December 22, 1967)

depends upon the facts and the circumstances of the case

good faith does not require that the taxpayer be an incorrigible optimist but on the other hand, he may not be unduly pessimistic

Philex Mining Corp vs. CIR

FACTS: On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement[4] with Baguio Gold Mining Company (‖Baguio Gold‖) for the former to manage and operate the latter’s mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet Province. The parties’ agreement was denominated as ―Power of Attorney." Philex Mining made advances of cash and advances however, the mine suffered continuing losses over the years which resulted to petitioner’s withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of mine operations on February 20, 1982. Thereafter, the parties executed a ―Compromise with Dation in Payment‖ wherein Baguio Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio Gold’s tangible assets to petitioner, transferring to the latter Baguio Gold’s equitable


12

title in its Philodrill assets and finally settling the remaining liability through properties that Baguio Gold may acquire in the future. In 1982, the parties executed an ―Amendment to Compromise with Dation in Payment" where Baguio Gold undertook to pay petitioner in two segments by first assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00. Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982 operations. In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as ―loss on settlement of receivables from Baguio Gold against reserves and allowances.‖ However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39. Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it was charged off within the taxable year when it was determined to be worthless. BIR- denied petitioner’s protest for lack of legal and factual basis. It held that the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the management contract, petitioner was to be paid fifty percent (50%) of the project’s net profit. CTA- Petition for Review was DENIED. The CTA rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were in the nature of a loan. It instead characterized the advances as petitioner’s investment in a partnership with Baguio Gold for the development and

exploitation of the Sto. Nino mine. The CTA held that the ―Power of Attorney‖ executed by petitioner and Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the nature of an investment, it could not be deducted as a bad debt from petitioner’s gross income. CA- affirmed the decision of the CTA. ISSUE: WON the advances as investments were bad debts. HELD: NO. The lower courts did not err in treating petitioner’s advances as investments in a partnership known as the Sto. Nino mine. The advances were not ―debts‖ of Baguio Gold to petitioner inasmuch as the latter was under no unconditional obligation to return the same to the former under the ―Power of Attorney‖. As for the amounts that petitioner paid as guarantor to Baguio Gold’s creditors, we find no reason to depart from the tax court’s factual finding that Baguio Gold’s debts were not yet due and demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s outstanding loans to its bank creditors and this conclusion is supported by the evidence on record. Petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed. In this case, petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction. Petition DENIED.

PHILIPPINE REFINING COMPANY (now known as “UNILEVER PHILIPPINES

[PRC], INC.”), petitioner, vs. CA

FACTS: This is an appeal by certiorari from the decision of respondent Court of Appeals affirming the decision of the Court of Tax Appeals which


13

disallowed petitioner’s claim for deduction as bad debts of several accounts in the total sum of P395,324.27, and imposing a 25% surcharge and 20% annual delinquency interest on the alleged deficiency income tax liability of petitioner. Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00. The assessment was based on the erroneous disallowances of ―bad debts‖ and ―interest expense‖ although the same are both allowable and legal deductions. Respondent Commissioner issued a warrant of garnishment against the deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter considered as a denial of its protest. Petitioner filed a petition for review with the CTA on the same assignment of error, that is, that the ―bad debts‖ and ―interest expense‖ are legal and allowable deductions. In its decision, the CTA modified the findings of the Commissioner by reducing the deficiency income tax assessment to P237,381.26, with surcharge and interest incident to delinquency. In said decision, the Tax Court reversed and set aside the Commissioner’s disallowance of the supposed interest expense but maintained the disallowance of the bad debts of thirteen (13) debtors. Petitioner elevated the case to respondent CA which denied petition for review and dismissed the same. Out of the sixteen (16) accounts alleged as bad debts, CA find that only three (3) accounts have met the requirements of the worthlessness of the accounts, hence were properly written off as bad debts. Mere testimony of the Financial Accountant of the petitioner explaining the worthlessness of said debts is seen by this Court as nothing more than a self-serving exercise which lacks probative value. There was no iota of documentary evidence to give support to the testimony of an employee of the petitioner. Mere allegations cannot prove the worthlessness of such debts in 1985. Hence, the claim for deduction of these thirteen (13) debts should be rejected.

ISSUE: Whether or not all bad debts should be treated as deductions. HELD: No. Both the CTA and CA relied on the case of Collector vs. Goodrich International, which laid down the requisites for ―worthlessness of a debt‖ to wit: In said case, we held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz.: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. On the foregoing considerations, CA held that petitioner did not satisfy the requirements of ―worthlessness of a debt‖ as to the thirteen (13) accounts disallowed as deductions. It appears that the only evidentiary support given by PRC for its aforesaid claimed deductions was the explanation or justification posited by its financial adviser or accountant. Guia D. Masagana. Her allegations were not supported by any documentary evidence, hence, both the CA and the CTA ruled that said contentions per se cannot prove that the debts were indeed uncollectible and can be considered as bad debts as to make them deductible. The SC said that PRC failed to exercise due diligence in order to ascertain that these debts were uncollectible. In fact, PRC did not even show the demand letters they allegedly gave to some of their debtors. The petition at bar is DENIED and the judgment of respondent Court of Appeals is hereby AFFIRMED, with treble costs against petitioner.


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Fernandez vs CIR

Petitioner, Fernandez HermanosInc, a domestic corporation engaged in the business of investment and has a main office in Manila, was assessed the sums of 13,414, 19,613 11, 698 6,887 and 14, 451 as alleged deficiency income tax for the years 1950, 1951, 1952, 1953, 1954 respectively. Said Discrepancies were a result of the examination of the ITR submitted for the said year. The tax Court sustained the CIR disallowance of the losses declared in Palawan Manganese Mines and Hacienda Samal but overruled the CIR disallowance of losses in the other items. As summarized by the CIR the following are its tax returns: 1. Losses —

e. Losses in Mati Lumber Co. (1950) P 8,050.00

a. Losses in or bad debts of Palawan Manganese Mines, Inc. (1951) 353,134.25

b. Losses in Balamban Coal Mines —

1950 8,989.76

1951 27,732.66

c. Losses in Hacienda Dalupiri —

1950 17,418.95

1951 29,125.82

1952 26,744.81

1953 21,932.62

1954 42,938.56

d. Losses in Hacienda Samal —

1951 8,380.25

1952 7,621.73

2. Excessive depreciation of Houses —

1950 P 8,180.40

1951 8,768.11

1952 18,002.16

1953 13,655.25

1954 29,314.98

3. Taxable increase in net worth —

1950 P 30,050.00

1951 1,382.85

4. Gain realized from sale of real property in 1950 P 11,147.2611 Both parties appealed the decision of the CTA to the SC, hence this appeal.

Issues: Whether or not the allowance or disallowance of losses were proper? Ruling: The court held that the disallowance of the losses in Mati Lumber was proper. There was adequate basis for the writing off of the stock as worthless securities. Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment, which were still existing as claimed by the Commissioner, and that such proceeds would later be distributed to its stockholders such as the taxpayer, the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received. The Court held that in the case of the Palawan Manganese Mining the losses declared cannot be allowed because the corporate fiction of petitioner and Palawan could be pierced, under the doctrine of piercing the corporate veil. It held that the advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were investments and not loans. 5 The evidence on record shows that the board of directors of the two companies since August, 1945, were identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered in the taxpayer's balance sheet as its investment in its subsidiary company. The court upheld the disallowance of the loss in Balamban Coal. It held that Some definite event must fix the time when the loss is sustained, and here it was the event of actual abandonment of the mines in 1952. The Tax Court held that the losses, totalling P36,722.42 were properly deductible in 1952, but the appealed judgment does not show that the taxpayer was credited therefor in the determination of its tax liability for said year. This additional deduction of P36,722.42 from the taxpayer's taxable income in 1952 would result in the elimination of the deficiency tax liability for said year in the sum of P3,600.00 as determined by the Tax Court in the appealed judgment The Court upheld the deductions in Hacienda Dalipari. It was convinced that the farm was used for business and not for pleasure and as such it was entitled to deduct expenses and losses in connection with the operation of said farm.


15

Whether or not capital investments may be deducted The court held in the negative. The alleged "capital investment" method invoked by the taxpayer is not a method of depletion, but the Tax Code provision, prior to its amendment by Section 1, of Republic Act No. 2698, which took effect on June 18, 1960, expressly provided that "when the allowances shall equal the capital invested ... no further allowances shall be made WHEREFORE appealed Decision is MODIFIED RR 5-99 (F) Depreciation. – gradual diminution in the service or useful value of tangible property due from exhaustion, wear and tear and normal obsolescence. also applies to amortization of intangible

assets, the use of which in trade or business is of limited duration.

A reasonable allowance for the exhaustion, wear & tear of property used in the trade or business; to cause plant elements or the plant as a whole to suffer diminution in value (a) In case of property held by one person for life

w/ remainder to another person, deduction is computed as if the life tenant were the absolute owner of the property & allowed to life tenant

(b) In case of property held in trust, deduction apportioned between the income beneficiaries & trustees

REQUISITES FOR DEDUCTIBILITY: a. The allowance for depreciation must be

reasonable. b. It must be for property used for employment

in trade or business or out of its not being used temporarily during the year.

c. The allowance must be charged off. d. Schedule on the allowance must be attached

to the return. 1) Methods of Depreciation

(a) straight-line method: cost - salvage value estimated life

(b) declining balance method:

cost - accumulated depreciation X

rate

estimated life

(c) sum of years digits method:

nth period x (cost - salvage value) sum of the years digits

2) Special Types of Depreciation

(a) Petroleum operations i. Depreciation of all properties directly

related to production of petroleum shall be allowed under straight-line or declining-balance (DB) method

ii. May shift from DB method to SL method

iii. Useful life: 10 yrs. or shorter life as may be permitted by Commissioner

iv. Useful life of prop. not used directly: 5 yrs. under straight-line method

(b) Mining operations i. depreciation on all properties in

mining operations other than petroleum operations at the normal rate if expected life is 10 yrs or less.

ii. if expected life is > 10 yrs., depreciate over any no. of yrs. bet. 5 yrs. & the expected life

Depreciation deductible by non-

resident aliens engaged in trade/business or non-resident corporation only when such property is located in the Philippines

The BIR and the taxpayer may agree in writing on the useful life of the property to be depreciated. The agreed rate may be modified if justified by facts or circumstances. The change shall not be effective before the taxable year on which notice in writing by certified mail or registered mail is served by the party initiating.


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Basilan vs. CIR

A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal offices in Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of P8,028. On February 26, 1959, the Commissioner of Internal Revenue, per examiners' report of February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25 of the Tax Code. On non-payment of the assessed amount, a warrant of distraint and levy was issued but the same was not executed because Basilan Estates, Inc. succeeded in getting the Deputy Commissioner of Internal Revenue to order the Director of the district in Zamboanga City to hold execution and maintain constructive embargo instead. Because of its refusal to waive the period of prescription, the corporation's request for reinvestigation was not given due course, and on December 2, 1960, notice was served the corporation that the warrant of distraint and levy would be executed. On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a petition for review of the Commissioner's assessment, alleging prescription of the period for assessment and collection; error in disallowing claimed depreciations, travelling and miscellaneous expenses; and error in finding the existence of unreasonably accumulated profits and the imposition of 25% surtax thereon. On October 31, 1963, the Court of Tax Appeals found that there was no prescription and affirmed the deficiency assessment in toto. Issues: 1. Has the Commissioner's right to collect

deficiency income tax prescribed 2. Was the disallowance of items claimed as

deductible proper? Ruling: PRESCRIPTION There is no dispute that the assessment of the deficiency tax was made on February 26, 1959; but the petitioner claims that it never received notice of such assessment or if it did, it received the notice beyond the five-year prescriptive period. To show prescription, the annotation on the notice (Exhibit 10, No. 52, ACR, p. 54-A of the BIR records) "No accompanying letter 11/25/" is

advanced as indicative of the fact that receipt of the notice was after March 24, 1959, the last date of the five-year period within which to assess deficiency tax, since the original returns were filed on March 24, 1954. Although the evidence is not clear on this point, We cannot accept this interpretation of the petitioner, considering the presence of circumstances that lead Us to presume regularity in the performance of official functions. The notice of assessment shows the assessment to have been made on February 26, 1959, well within the five-year period. On the right side of the notice is also stamped "Feb. 26, 1959" — denoting the date of release, according to Bureau of Internal Revenue practice. The Commissioner himself in his letter (Exh. H, p. 84 of BIR records) answering petitioner's request to lift, the warrant of distraint and levy, asserts that notice had been sent to petitioner. In the letter of the Regional Director forwarding the case to the Chief of the Investigation Division which the latter received on March 10, 1959 (p. 71 of the BIR records), notice of assessment was said to have been sent to petitioner. Subsequently, the Chief of the Investigation Division indorsed on March 18, 1959 (p. 24 of the BIR records) the case to the Chief of the Law Division. There it was alleged that notice was already sent to petitioner on February 26, 1959. These circumstances pointing to official performance of duty must necessarily prevail over petitioner's contrary interpretation. Besides, even granting that notice had been received by the petitioner late, as alleged, under Section 331 of the Tax Code requiring five years within which to assess deficiency taxes, the assessment is deemed made when notice to this effect is released, mailed or sent by the Collector to the taxpayer and it is not required that the notice be received by the taxpayer within the aforementioned five-year period. DEDUCTIONS A. Depreciation. — Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation computed on the reappraised value.


17

In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction: Reappraised assets P47,342.53 New assets consisting of hospital building and equipment 3,910.45 Total depreciation P51,252.98 Upon investigation and examination of taxpayer's books and papers, the Commissioner of Internal Revenue found that the reappraised assets depreciated in 1953 were the same ones upon which depreciation was claimed in 1952. And for the year 1952, the Commissioner had already determined, with taxpayer's concurrence, the depreciation allowable on said assets to be P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the deductible depreciation for 1953 on the same old assets at P36,842.04 and disallowed the excess thereof in the amount of P10,500.49. The question for resolution therefore is whether depreciation shall be determined on the acquisition cost or on the reappraised value of the assets. Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration.2 Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years, the original investment remains as it was in the beginning. It is not only the right of a company to make such a provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation, at least, its plain duty to the public.3 Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax.4 Precisely, Section 30 (f) (1) which states:

(1)In general. — A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or

out of its not being used: Provided, That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . .

allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated. The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges,5 not matters of right.6 They are not created by implication but upon clear expression in the law. Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation. Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no justification in the law. The determination, therefore, of the Commissioner of Internal Revenue disallowing said amount, affirmed by the Court of Tax Appeals, is sustained. B. Expenses. — The next item involves disallowed expenses incurred in 1953, broken as follows: Miscellaneous expenses P6,759.17 Officer's travelling expenses 2,300.40 Total P9,059.57 These were disallowed on the ground that the nature of these expenses could not be satisfactorily explained nor could the same be supported by appropriate papers.


18

LIMPAN INVESTMENT CORPORATION vs. COMMISSIONER OF INTERNAL

REVENUE, ET AL.

FACTS: Petitioner Limpan Investment Corporation, a domestic corporation, is engaged in the business of leasing real properties. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the same Isabelo P. Lim. Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim. Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of P657.00 and P2,220.00. Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these findings, respondent Commissioner of Internal Revenue issued its letter-assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation. Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the assessment but the latter denied said request and reiterated its original assessment and demand. Hence, the corporation filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the above assessment of respondent Commissioner of Internal Revenue. It disclaimed having received or collected the amount of P20,199.00, as unreported rental income for 1956, or any part thereof and denied having received or collected the amount of P81,690.00, as unreported rental

income for 1957, or any part thereof, explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income. With regard to the depreciation which respondent disallowed and deducted from the returns filed by petitioner, the same witness tried to establish that some of its buildings are old and out of style; hence, they are entitled to higher rates of depreciation than those adopted by respondent in his assessment. On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he personally interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not declared in the corresponding returns. The Tax Court upheld respondent Commissioner's assessment and demand for deficiency income tax which, as above stated in the beginning of this opinion, petitioner has appealed to this Court. ISSUE: Whether or not the respondent Court erred in holding that the petitioner had an unreported rental income of P20,199.00 for the year 1956, and that it erred in holding that the petitioner had an unreported rental income of P81,690.00 for the year 1957, and in holding that the depreciation in the amount of P20,598.00 claimed by petitioner for the years 1956 and 1957 was excessive. RULING: The decision appealed from is affirmed. This appeal is manifestly unmeritorious. With respect to the balance, which petitioner denied having unreported in the disputed tax


19

returns, the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and only later transferred or disposed of the ownership of the buildings existing thereon to petitioner corporation, so as to justify the alleged verbal agreement whereby they would turn over to petitioner corporation six percent (6%) of the value of its properties to be applied to the rentals of the land and in exchange for whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged transferors, or by any document or unbiased evidence. Petitioner's denial and explanation of the non-receipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein. The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source. It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for having been the result of scientific studies and observation for a long period in the United States, after whose Income Tax Law ours is patterned, the depreciation in the amount of P20,598.00 claimed by petitioner for the years 1956 and 1957 was not excessive. RR 12-2012

(G) Depletion of Oil and Gas Wells and Mines. - The reduction of cost or value of natural resources such as oil & gas wells, & mines as the resources are converted into inventories. No further allowance is granted if the

allowance for depletion = the capital invested (1) Intangible exploration & development

drilling costs: a) deduct in the yr. incurred if incurred for

non-producing wells & mines b) deduct in full OR capitalize & amortize of

incurred for producing wells & mines in same contract area

(2) Intangible costs in petroleum operations: no

salvage value & incidental to & necessary for dwelling of wells & preparation of wells for the production of petroleum

(3) Election to deduct exploration & development expenditures for mining corps. (a) deduct as cost (b) deduct as adjusted basis provided, total

amt. deductible shall not exceed 25% of NI

actual exploration & development

expenditures net of 25% of NI shall be carried forward to succeeding yrs. until fully deducted

exploration expenditures = pd/incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore/other mineral & pd/incurred before the beginning of the development stage of the mine/deposit

development expenditures = paid/incurred during development stage of the mine or other natural deposits

(4) Depletion of Oil and Gas wells and mines

deductible by a non-resident alien or foreign corporation only in respect of oil and gas wells or mines located in the Phils.


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Consolidated Mines, Inc. vs CIR

FACTS The company, a domestic corporation engaged in mining, had filed its income tax returns for 1951, 1952, 1953, and 1956. In 1957 examiners of BIR investigated the income tax return filed by the company because its auditor, Felipe Ollada, claimed the refund of the sum of P107,472.00 representing alleged overpayments of income taxes for the year 1951. After the investigation the examiners reported that (A) for the years 1951 to 1954, (1) the company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Company's mines, although for income tax purposes for the Company had reported income and expenses on the accrual basis; (2) depletion and depreciation expenses had been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated; and that (B) for the year 1956 (1) the Company had overstated its claim for depletion, and (2) certain claims for miscellaneous expenses were not duly supported by evidence. In view of said reports the CIR sent the Company a letter of demand requiring it to pay certain deficiency income taxes for the years 1951 - 1954, inclusive, and for the year 1956. Deficiency income tax assessment notices for said years were also sent to the Company. The Company requested a reconsideration of the assessment but the Commissioner refused to reconsider, hence the Company appealed to the CTA. On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of P107,846.56, P134,033.01, and P71,392.82 as deficiency income taxes for the years 1953, 1954, and 1956, respectively. However on Aug 7, 1961, upon motion of the Company, the tax Court reconsidered its decision and further reduced the deficiency income tax liabilities of the Company to P79,812.93, P51,528.24, and P71,382.82 for the years 1953, 1954, and 1956, respectively. Both the Company and the Commissioner appealed to this Court. The Company questions the rate of mine depletion adapted by the Court of Tax Appeals and the disallowance of depreciation charges and certain miscellaneous.

ISSUE Whether the CTA erred with respect to the rate of mine depletion RULING The Tax Code provides that in computing net income, there shall be allowed as deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made. The formula for computing the rate of depletion is: Cost of Mine Property ---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and sold The Commissioner and the Company do not agree as to the figures corresponding to either factor that affects the rate of depletion per unit. The figures according to the Commissioner are: P2,646,878.44 (mine cost) P0.59189 (rate of ------------------------- = depletion per ton) 4,471,892 tons (estimated ore deposit) while the Company insists they are: P4,238,974.57 (mine cost) P1.0197 (rate of ------------------------- - = depletion per ton) 4,156,888 tons (estimated ore deposit) They agree, however, that the "cost of mine property" consist of (1) mine cost, and (2) expenses of development before production. As an income tax concept, depletion is wholly a creation of the statute -- "solely a matter of legislative grace." Hence, the taxpayer has the burden of justifying the allowance if any deduction claimed. As in the connection with all other controversies, the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer, and this is true with respect to the value of the property constituting the basis of the deduction. This burden of proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence .


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The Company's balance sheet for Dec 31, 1947 lists the "mine cost" of P2,500,00.00 as "development cost" and the amount of P1,738,974.37 as suspense account (meaning properties subject to war losses). "The Company claims that its accountant, Mr. Calpo, made these errors because he was then new at the job. Granting that was what had happened, it does not affect the fact that the, evidence on hand is insufficient to prove the cost of development alleged by the Company. Nor, can we rely on the statements of Eligio Garcia, who was the Company's treasurer and assistant secretary at the time he testified on Aug 14, 1959. He admitted that he did not know how the figure P4,238,974.57 was arrived at, explaining "I only know that it is the figure appearing on the balance sheet as of Dec 31, 1946 as certified by the Company's auditors; and this we made as the basis of the valuation of the depletable value of the mine." We therefore, have to rely on the Commissioner's assertion that the "development cost" was P131,871.44, broken down as follows: assessment, P34,092.12; development, P61,484.63; exploration P13,966.62; and diamond drilling, P22,355.07. The question as to which figure should properly correspond to "mine cost" is one of the fact. The findings of the fact of the Tax Court, where reasonably supported by evidence, are conclusive upon the Supreme Court. (H) Charitable and Other Contributions. - (a) Contributions subject to limitations

i. Contributions or gifts actually paid or made w/in the taxable yr.:

ii. to or for the use of the govt. or its agencies or any political subdivision, exclusively for public purpose

iii. or, to accredited domestic corps./associations organized & operated exclusively for: (1) religious (2) charitable (3) scientific (4) youth & sports development (5) cultural or educational purposes (6) for the rehabilitation of veterans (7) to social welfare institutions (8) to NGOs

iv. no part of NI inures to the benefit of any private stockholder or individual

for individual: not > 10% of taxable income

before deducting the charitable contributions

for corporation: not > 5 % of taxable income before deducting the charitable contributions

(b) Contributions deductible in full

i. Donations to the govt. – to finance, to provide for, or to be used in undertaking priority activities in education, health, youth & sports development, human settlements, science & culture & in economic development according to National Priority Plan determined by NEDA

If not in accordance w/ annual

priority plan, donation is subject to limitations in (1) above

ii. Donations to certain foreign institutions

or international organizations - in pursuance or compliance with agreements, treaties, or commitments entered into by Phil. govt. & foreign institutions/international organizations

iii. Donations to accredited NGOs

Organized & operated exclusively for scientific, educational, character-building & youth & sports development, health, social welfare, cultural or charitable purposes or combination thereof (no part of NI inures to the benefit of any private individual)

W/in 15th of the 3rd month after the close of the taxable yr., makes utilization directly for the active conduct of activities constituting the purpose/function of the org., unless pd. is extended

Administrative expense should not be >30% of total expenses

Upon dissolution, assets would be distributed to another nonprofit domestic corp. organized for similar purpose or to the state for public


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purpose or to another org. to be used in same purpose as the dissolved corp.

REQUISITES FOR DEDUCTIBILITY: a. the contribution or gift must be actually paid. b. it must be given to the organizations specified

in the code. c. the net income of the institution must not

inure to the benefit of any private stockholder or individual.

(c) VALUATION of property donated other

than money: acquisition cost BIR Ruling 19-01 (May 10, 2001) (I) Research and Development.- Paid or incurred by a taxpayer during the taxable yr. in connection w/ his trade, business or profession as ordinary & necessary expenses w/c are not chargeable to capital account; allowed as deduction during the taxable yr. when pd./incurred REQUISITES FOR DEDUCTIBILITY AS EXPENSE: a. paid or incurred during the taxable year b. ordinary and necessary expenses in

connection with trade business or profession c. not chargeable to capital account Requisites for amortization of certain R&D expenditures (treated as deferred expenses): (1) paid/incurred by the taxpayer in connection

w/ his trade/business (2) not treated as expense (3) chargeable to capital acct. but not chargeable

to property of a character w/c is subject to depreciation/depletion

(4) amortized over a period of not < 60 months as may be elected by the taxpayer

LIMITATIONS ON DEDUCTIONS – not applicable to, EXCLUSIONS: (1) Any expenditure for the acquisition or

improvement of land, or for the important of prop. to be used in connection w/ R&D of a character subject to depreciation & depletion

(2) Any expenditure paid/ incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of

ore or other mineral, including oil or gas (exploration exp.)

3M Philippines v C.I.R.

Facts: 3M Philippines, Inc. is a subsidiary of the Minnesota Mining and Manufacturing Company (or "3M-St. Paul") a non-resident foreign corporation with principal office in St. Paul, Minnesota, U.S.A. It is the exclusive importer, manufacturer, wholesaler, and distributor in the Philippines of all products of 3M-St. Paul. To enable it to manufacture, package, promote, market, sell and install the highly specialized products of its parent company, and render the necessary post-sales service and maintenance to its customers, 3M Phils. entered into a "Service Information and Technical Assistance Agreement" and a "Patent and Trademark License Agreement" with the latter under which the 3m Phils. agreed to pay to 3M-St. Paul a technical service fee of 3% and a royalty of 2% of its net sales. Both agreements were submitted to, and approved by, the Central Bank of the Philippines. the petitioner claimed the following deductions as business expenses:

a) royalties and technical service fees of P 3,050,646.00; and

a) pre-operational cost of tape coater of P97,485.08.

On the first item, the Commissioner of Internal Revenue allowed a deduction of P797,046.09 only as technical service fee and royalty for locally manufactured products, but disallowed the sum of P2,323,599.02 alleged to have been paid by the petitioner to 3M-St. Paul as technical service fee and royalty on P46,471,998.00 worth of finished products imported by the petitioner from the parent company, on the ground that the fee and royalty should be based only on locally manufactured goods. On the second item, the CIR only allowed P19,544.77 or one-fifth (1/5) of 3M Phils. capital expenditure of P97,046.09 for its tape coater which was installed in 1973 because such expenditure should be amortized for a period of five (5) years, hence, payment of the disallowed balance of P77,740.38 should be spread over the next four (4) years. The CIR ordered 3M Phil. to pay P840,540 as deficiency income tax on its 1974 return, plus P353,026.80 as 14% interest


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per annum from February 15, 1975 to February 15, 1976, or a total of P1,193,566.80. 3M Phils. protested the CIR’s assessment but it did not answer the protest, instead he issued a warrant of levy. The CTA affirmed the assessment on appeal. Issue: Whether or not 3M Phils. is entitled for the deductions, due to royalties? Ruling: No. CB Circular No. 393 (Regulations Governing Royalties/Rentals) was promulgated by the Central Bank as an exchange control regulation to conserve foreign exchange and avoid unnecessary drain on the country's international reserves. Section 3-C of the circular provides that royalties shall be paid only on commodities manufactured by the licensee under the royalty agreement:

Section 3. Requirements for Approval and Registration. — The requirements for approval and registration as provided for in Section 2 above include, but are not limited to the following:

c. The royalty/rental contracts involving manufacturing' royalty, e.g., actual transfers of technological services such as secret formula/processes, technical know-how and the like shall not exceed five (5) per cent of the wholesale price of the commodity/ties manufactured under the royalty agreement. For contracts involving 'marketing' services such as the use of foreign brands or trade names or trademarks, the royalty/rental rate shall not exceed two (2) per cent of the wholesale price of the commodity/ties manufactured under the royalty agreement. The producer's or foreign licensor's share in the proceeds from the distribution/exhibition of the films shall not exceed sixty (60) per cent of the net proceeds (gross proceeds less local expenses) from the exhibition/distribution of the films. ...

Clearly, no royalty is payable on the wholesale price of finished products imported by the licensee from the licensor. However, petitioner argues that the law applicable to its case is only

Section 29(a)(1) of the Tax Code which provides: (a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; travelling expenses while away from home in the pursuit of a trade, profession or business, rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade, profession or business, for property to which the taxpayer has not taken or is not taking title or in which he has no equity. Petitioner points out that the Central bank "has no say in the assessment and collection of internal revenue taxes as such power is lodged in the Bureau of Internal Revenue," that the Tax Code "never mentions Circular 393 and there is no law or regulation governing deduction of business expenses that refers to said circular The argument is specious, for, although the Tax Code allows payments of royalty to be deducted from gross income as business expenses, it is CB Circular No. 393 that defines what royalty payments are proper. Hence, improper payments of royalty are not deductible as legitimate business expenses. WHEREFORE, finding no reversible error in the decision of the Court of Tax Appeals, the petition for review is denied. Costs against the petitioner. (J) Pension Trusts (Past Service Cost) Pension Trust Contributions – a deduction applicable only to the employer on account of its contribution to a private pension plan for the benefit of its employee. This deduction is purely business in character. Established or maintained by employer to provide for the payment of reasonable pensions to his employees. • Normal Cost – the contributions during the

taxable year to cover the pension liability accruing during the taxable year. Allowed as a deduction under Sec. 34(A)(1) as ―expenses in general‖.


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• Past Service Cost – amount in excess of the above contribution (covering pension liability pertaining to old employees which accrued during the years previous to the establishment of the pension trust); allowed as deduction only if:

(a) such amount not been allowed as a

deduction (b) apportioned in equal parts over 10

consecutive years beginning w/ the yr. in w/c the transfer/payment is made (Sec. 34[J])

REQUISITES FOR DEDUCTIBILITY: a. The employer must have established a

pension or retirement plan to provide for the payment of reasonable pensions to his employees;

b. The pension plan is reasonable and actuarially sound;

c. It must be funded by the employer; d. The amount contributed must be no longer

subject to the control and disposition of the employer;

e. The payment has not yet been allowed as a deduction; and

f. The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer of payment is made.

Summary rules on Retirement Benefits Plan/Pension Trust 1. EXEMPT FROM INCOME TAX – employees’

trust under Sec. 60(B) 2. EXCLUSION FROM GROSS INCOME –

amount received by the employee from the fund upon compliance of certain conditions under Sec. 32(B)(6)

3. DEDUCTION FROM GROSS INCOME – a. amounts contributed by the employer

during the taxable year into the pension plan to cover the pension liability accruing during the year – considered as ordinary and necessary expenses under Sec. 34(A)(1).

b. 1/10 of the reasonable amount paid by the employer to cover pension liability applicable to the years prior to the taxable year, or so paid to place the trust in a sound financial basis – deductible under Sec. 34 (J).

(K) Additional Requirements for Deductibility of Certain Payments.- Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code. RMO 38-83 (November 14, 1983) RR 12-2013 (July 11, 2013) RMC 63-2013 (September 26, 2013) (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross income during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Republic Act No. 9504 June 17, 2008

Amending RA 8424 AN ACT AMENDING SECTION 22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT NO. 8424, AS AMENDED OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE OF 1997 SEC. 3. Section 34(L) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows:

http://www.lawphil.net/statutes/repacts/ra1997/ra_8424_1997.html


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"SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M)hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B), (C); and 28(A)(1), there shall be allowed the following deductions from the gross income: "(A) Expenses. - "x x x. "(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. "(M) x x x."

"x x x." RR 2-2010 (February 18, 2010) RR 16-2008 (Nov. 26, 2008 (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2) effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law.

Non-Deductible Expenses: SEC. 36.Items Not Deductible.- (A) General Rule. - In computing net income,

no deduction shall in any case be allowed in respect to –

1) Personal, living or family expenses; 2) Any amount paid out for new buildings or

for permanent improvements, or betterments made to increase the value of any property or estate;


26

This Subsection shall not apply to intangible drilling and development costs incurred inpetroleum operations which are deductible under Subsection (G) (1) of Section 34 of this Code.

3) Any amount expended in restoring property or in making good the exhaustionthereof for which an allowance is or has been made; or

4) Premiums paid on any life insurance policy covering the life of any officer oremployee, or of any person financially interested in any trade or business carried on bythe taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy.

(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall inany case be allowed in respect of losses from sales or exchanges of property directly or indirectly –

(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants; or

(2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and beneficiary of such trust.

• A person is said to be ―financially interested‖

in the taxpayer’s business if he is a stockholder thereof or he is to receive as his compensation a share of the profits of the business.

ESSO Standard Eastern Inc vs CIR

Facts: Esso deducted from its 1959 income the amount it had spent for drilling and exploration of its petroleum concessions, as part of its ordinary and necessary expenses. This was disallowed by CIR, contending that said amount shall be a loss only if a dryhole results in their operations. ESSO then filed an amended return, claiming for refund by reason of abandonment of several of its oil wells due to dry holes, and claimed ordinary and necessary expenses, representing the margin fees it had paid to Central Bank on its profit remittances to its NY head office. CIR allowed a tax credit in the amount of P221,033 but disallowed the claimed deduction for margin fees. CIR assessed ESSO for deficiency income tax for the year 1960, plus 18% interest arising from the disallowance of the margin fees ESSO paid to Central Bank on its profit remittances to its NY head office. ESSO settled the assessment by applying the tax credit of P221,033, representing the overpayment of its income tax on 1959 by reason of its abandonment, and paid under protest the remaining amount. ESSO argues that margin fees are deductible from gross income either as a tax or as an ordinary and necessary business expense. It is a necessary business expense because the margin fees were paid for the remittance by ESSO part of its profits to the NY head office, therefore, such remittance was necessary and proper for the conduct of its corporate affairs. Issue: Whether or not margin fees are deductible from gross income Held: No, margin fees are not deductible either as a tax or as an ordinary and necessary business expense. Margin fees are not taxes, but an exaction designed to curb the excessive demands upon


27

international reserve. It is a margin levy in the form of exchange control or restriction designed to discourage imports and encourage exports to stabilize currency. Tax is levied to provide revenue for government operations, while margin fees are applied to strengthen our countries international reserves. Margin fees are imposed by the State in the exercise of its police power and not the power of taxation. It is also not an ordinary and necessary business expense. In the case of Atlas Consolidated Mining vs CIR, the court laid down the rules on deductability of business expenses, thus: The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. The statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law,otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term 'ordinary' does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected. There is no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the

expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. Margin fees are not deductible as necessary and ordinary business expense because ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. ESSO merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. The CIR is correct when it stated that: Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in the Philippines.

REVENUE REGULATIONS NO. 02-40 SECTION 119.Personal, living, and family expenses. — Personal,living, and family expenses are not deductible. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a professional man who rents a property for residential purposes, but incidentally receives his clients, patients, or callers in connection with his professional work (his place of business being elsewhere), no part of the rent is deductible as a business expense. If however, he uses part of the house for his office, such portion of the rent as is properly attributable to such office is deductible. Where the father is legally entitled to the services of his minor children, any allowances which he gives them, whether said to be in consideration of services or otherwise, are not allowable deductions in his return of income. Alimony, and an allowance paid under a separation agreement are not deductible from gross income.


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SECTION 120.Capital expenditures. — No deduction from gross income may be made for any amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of the taxpayer's property, or for any amount expended in restoring property or in making good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is or has been made. Amounts expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. The amount expended for architect's services is part of the cost of the building. Commissions paid in purchasing securities are a part of the cost of such securities. Commissions paid in selling securities are an offset against the selling price. Expenses of the administration of an estate, such as court costs, attorney's fees, and executor's commissions, are chargeable against the "corpus" of the estate and are not allowable deductions. Amounts to be assessed and paid under an agreement between bondholders or shareholders of a corporation, to be used in a reorganization of the corporation, are investments of capital and not deductible for any purpose in return of income. In the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees and accountants' charges, are ordinarily capital expenditures; but where such expenditures are limited to purely incidental expenses, a taxpayer may charge such items against income in the year in which they are incurred. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing the value of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its net income, but such payments may be added to the cost of its stock in the subsidiary. SECTION 121.Premiums on life insurance of employees. — Any amounts paid for premiums on any life insurance policy covering the life of an

officer or employee or of any person financially interested in the business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy are not deductible. SECTION 122.Losses from sales or exchanges of property. — No deduction is allowed in respect of losses from sales or exchanges of property, directly or indirectly —

(c) Between members of a family. As used in Section 31, the family of an individual shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants;

(d) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;

(e) Except in the case of distributions in liquidation, between two corporations more than 50 per cent in value of the outstanding stock of each ofwhich is owned, directly or indirectly, by or for the same individual, if either one of such corporations with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(f) Between a grantor and a fiduciary of any trust;

(g) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or

(h) Between a fiduciary of a trust and a beneficiary of such trust.


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INDIVIDUALS (RA 9504) SEC. 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended to read as follows:

"SEC. 24. Income Tax Rates. – "(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. - "(1) x x x: "x x x; and "(c) On the taxable income defined in Section 31 of this code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. "(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates established in the following schedule: "Not over P10,000 ........ 5%

"Over P10,000 but not over P30,000

........ P500+10% of the excess over P10,000


........ P2,500+15% of the excess over P30,000







"Over P5000,000 ........ P125,000+32% of the excess over P500,000

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

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

"x x x."

(Tax Code) Section 25. Tax on Nonresident Alien Individual. –

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

(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding. (2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarter of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except


30

a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years -

5%;

Three (3) years to less than four (4) years -

12%; and

Less than three (3) years - 20%.

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax

prescribed under Subsections (C) and (D) of Section 24.

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

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


31

branch offices in the Asia-Pacific Region and other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units.

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

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

PERSONAL EXEMPTION AND OPTIONAL STANDARD DEDUCTION (OSD) Personal Exemption Single Married Individual (or judicially declared as legally separated without any dependent)

P20,000

Head of Family (unmarried or legally separated with qualified dependent/s)

25,000

Each married individual 32,000 Each dependent (not exceeding 4)

8,000

Head of Family 1) an unmarried/legally separated man/woman

with: (a) One or both parent (b) One or more brothers or sister (c) One or more legitimate, recognized

natural/legally adopted children 2) Who are living with & dependent upon him

for their chief support 3) Where such brothers/sisters/children are:

(a) Not more than 21 years old (b) Unmarried, and (c) Not gainfully employed (d) Or, where such children, brothers/sister,

regardless of age, are incapable of self support because of mental or physical defect

• An illegitimate child is within the meaning of a ―recognized natural child.‖

• Under the provision on additional exemption for dependents, illegitimate children are specifically included under the term ―dependents.‖

• A senior citizen, whether relative or not, living with the taxpayer or not, can be classified as a dependent to make a taxpayer a head of a family not exceeding 4 (RA 7432)

• In case of married individuals, where only 1 of the spouses is deriving gross income, only such spouse shall be allowed additional exemption.

• Chief support means more than one half of the requirements for support.

• Parents, brothers, and sisters, who are qualified dependents may entitle the taxpayer to the personal exemption of P25,000 as head of the family but not to the additional exemption of P8,000.


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Note: Personal and additional exemptions are available only to business income and compensation income earners. Non-resident aliens engaged in trade or business (NRAETB) may be entitled to personal exemptions subject to reciprocity: 1. country from which he is a citizen has an

income tax law; and 2. the income tax law of his country allows

personal exemption to citizens of the Philippines not residing therein but deriving income therefrom and not to exceed the amount allowed in NIRC.

3. the personal exemption shall be equal to that allowed by the income tax law of the country to a citizen of the Philippines not residing therein, or the amount provided in the NIRC, whichever is LOWER.

ADDITIONAL EXEMPTION: P8,000 for EACH of the qualified dependent children not exceeding 4 in number. Qualified dependent children – legitimate, recognized natural, illegitimate and legally adopted. The proper claimant of the additional exemption would be the husband, being the head of the family except under the following cases: 1. husband is unemployed 2. husband is working abroad like an OFW or a

seaman 3. husband explicitly waived his right of the

exemption in favor of his wife in the withholding exemption certificate.

Senior Citizen is: 1. any resident citizen of the Philippines 2. at least sixty 60 years old, including those

who have retired from both government offices and private enterprises, and

3. has an income of not more than sixty thousand pesos per annum subject to the review of the National Economic Development Authority(NEDA) every three years.

NRAETB may deduct personal exemption

(but NOT additional exemption), but only to the extent allowed by his country to Filipinos

not residing therein, and shall not exceed the aforementioned amounts.

NRANETB cannot claim any personal or additional exemption.

a. Dependent = legitimate/illegitimate/legally

adopted child chiefly dependent upon & living with the taxpayer if such dependent is not > 21 years old, unmarried & not gainfully employed OR if such dependent regardless of age is incapable of self-support because of mental/physical defect

i. For married individuals, claimed by only

1 of the spouses ii. For legally separated spouses, claimed

only by the spouse who has custody of the children; may be claimed by both as long as they have custody of the children but total amount claimed by both shall not exceed the maximum allowed

b. Change of Status

i. The death of the taxpayer during the

taxable year shall not affect the amount of personal and additional exemptions his estate can claim, as if he died at the end of such year

ii. If the taxpayer got married or should have additional dependent (child born within the year) during the taxable year, he may claim the corresponding personal exemptions in full for such year

iii. If the spouse should die or any of the dependents become twenty one years of age, or become gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if he/she died, or became twenty one years old or became gainfully employed at the close of such year.

NOTE: Individuals not entitled to personal and additional exemptions: a. Non-resident alien NOT engaged in trade or

business b. Alien individual employed by Regional or

Area Headquarters of Multinational Companies

c. Alien Individual employed by Offshore Banking Units


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d. Alien Individual employed by Petroleum Service Contractor and Subcontractor

Deduction for Estate or Trust - P20,000 SPECIAL RULES ON INSURANCE COMPANIES 1. Income & Deductions of Insurance

Companies

a. Special deductions: net additions required by law to reserve funds & the sums other than dividends paid w/in the yr. on policy & annuity contracts; released reserve treated as income for the yr. of release

b. Mutual Insurance Companies Shall not report as income premium

deposits returned to policyholder Report income received from all other

sources plus such portion of premium deposits retained by the companies for purposes other than payment of losses & expenses & reinsurance reserves

c. Mutual Marine Insurance Companies Include in gross income, gross

premiums collected & received by them less amounts paid for reinsurance; include as deductions amounts repaid to policyholders on account of premiums previously paid by them & interest paid upon those amounts between the ascertainment & payment thereof

d. Assessment Insurance Companies Deduct from gross income the actual

deposit of sums w/ the officers of the Phil. government as additions to guarantee or reserve funds

SUPREME TRANSLINER v. BPI

FACTS: Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of P9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot as collateral. Plaintiff was unable to pay the same. The respondent bank

extrajudicially foreclosed the collateral and the property was sold to the bank as the highest bidder in the public auction conducted by the Office of the Provincial Sheriff of Lucena City. A Certificate of Sale was issued in favor of the bank and the same was registered on October 1, 1996. Before the expiration of the one-year redemption period, the mortgagors notified the bank of its intention to redeem the property. Balance of Principal Add: Interest Due Late Payment Charges MRI Fire Insurance Foreclosure Expenses P 9,551,827.64 1,417,761.24 155,546.25 0.00 0.00 155,817.23 Sub-total Less: Unapplied Payment P 11,280,952.36 908,241.01 Total Amount Due As Of 08/07/96 (Auction Date) 10,372,711.35 Add: Attorney’s Fees (15%) 1,555,906.70 Liquidated Damages (15%) 1,555,906.70 Interest on P 10,372,711.35 from 08/07/96 to 04/07/97 (243 days) at 17.25% p.a. 1,207,772.58 x x x x Asset Acquired Expenses: Documentary Stamps 155,595.00 Capital Gains Tax 518,635.57 Foreclosure Fee 207,534.23 Registration and Filing Fee 23,718.00 Add’l. Registration & Filing Fee 660.00 906,142.79 Interest on P 906,142.79 from 08/07/96 to 04/07/97 (243 days) at 17.25% p.a. 105,509.00 Cancellation Fee 300.00 Total Amount Due As Of 04/07/97 (Subject to Audit) P 15,704,249.12 Under the mortgage loan agreement, the mortgagors requested for the elimination of liquidated damages and reduction of attorney’s fees and interest (1% per month) but the bank refused. On May 21, 1997, the mortgagors redeemed the property by paying the sum of P15,704,249.12. and Certificate of Redemption was issued by the bank. The mortgagors filed a complaint against the bank to recover the allegedly unlawful and excessive charges totaling P5,331,237.77, with prayer for damages and attorney’s fees before RTC of Lucena City, Branch 57. The bank asserted that the redemption price reflecting the stipulated interest, charges and/or expenses, is valid, legal and in accordance with documents


34

duly signed by the mortgagors. The claims are deemed waived and the mortgagors are already estopped from questioning the terms and conditions of their contract. The trial court rendered its decision dismissing the complaint and the bank’s counterclaims. The trial court held that plaintiffs-mortgagors are bound by the terms of the mortgage loan documents. The mortgagors appealed to the CA which reversed the trial court’s decision. ISSUE: Whether the mortgagee-bank is liable to pay the capital gains tax upon the execution of the certificate of sale and before the expiry of the redemption period? HELD: NO. It is clear that in foreclosure sale there is no actual transfer of the mortgaged real property until after the expiration of the one-year period and title is consolidated in the name of the mortgagee in case of non-redemption. This is because before the period expires there is yet no transfer of title and no profit or gain is realized by the mortgagor. Under Revenue Regulations No. 13-85 (December 12, 1985), every sale or exchange or other disposition of real property classified as capital asset under the National Internal Revenue Code (NIRC) shall be subject to final capital gains tax. The term ―sale‖ includes pacto de retro and other forms of conditional sale. Section 2.2 of (RMO) No. 29-86, as amended by RMO Nos. 16-88, 27-89 and 6-92, states that these conditional sales ―necessarily includes mortgage foreclosure sales (judicial and extrajudicial foreclosure sales).‖ Further, for real property foreclosed by a bank on or after September 3, 1986, the capital gains tax and documentary stamp tax must be paid before title to the property can be consolidated in favor of the bank. Under Section 63 of P. D. No. 1529, or the Property Registration Decree, if no right of redemption exists, the certificate of title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. But where the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered by brief memorandum thereof made by the Register of

Deeds on the certificate of title. It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year redemption period as provided in Act No. 3135, or An Act or Regulate the Sale of Property Under Special Powers Inserted In or Annexed to Real Estate Mortgages, and title thereto is consolidated in the name of the mortgagee in case of non-redemption. In the interim, the mortgagor is given the option whether or not to redeem the real property. The issuance of the Certificate of Sale does not by itself transfer ownership. RR No. 4-99 (March 16, 1999), further amends RMO No. 6-92 relative to the payment of capital gains tax and documentary stamp tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies. Under this RMO, in case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gain has been derived by the mortgagor and no sale or transfer of real property was realized. Moreover, the transaction will be subject to documentary stamp tax of only PhP 15 because no land or realty was sold or transferred for a consideration. BPI Family Savings Bank, Inc. is hereby ordered to RETURN the amounts representing capital gains and documentary stamp taxes to petitioners Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez, and to retain only the sum provided in RR No. 4-99 as documentary stamps tax due on the foreclosure sale. BPI Family Savings Bank, Inc. is hereby declared entitled to the attorney’s fees and liquidated damages included in the total redemption price paid by Supreme Transliner, Inc.

M.E Holdings vs CIR

Facts: On April 15, 1996, petitioner M.E. Holding Corporation (M.E.) filed its 1995 Corporate Annual Income Tax Return, claiming the 20% sales discount it granted to qualified senior citizens. M.E. treated the discount as deductions from its gross income purportedly in accordance with Revenue Regulation No. (RR) 2-94, Section 2(i) of the Bureau of Internal Revenue (BIR) issued on August 23, 1993. Sec. 2(i) The deductions M.E. claimed amounted to PhP 603,424. However, it filed the return under protest, arguing that the discount to senior


35

citizens should be treated as tax credit under Sec. 4(a) of RA 7432, and not as mere deductions from M.E.'s gross income as provided under RR 2-94.Subsequently, on December 27, 1996, M.E. sent BIR a letter-claim dated December 6, 1996, stating that it overpaid its income tax owing to the BIR's erroneous interpretation of Sec. 4(a) of RA 7432. Due to the inaction of the BIR, and to toll the running of the two-year prescriptive period in filing a claim for refund, M.E. filed an appeal before the Court of Tax Appeals (CTA), reiterating its position that the sales discount should be treated as tax credit, and that RR 2-94, particularly Section 2(i), was without effect for being inconsistent with RA 7432. The CTA ruled that the 20% sales discount granted to qualified senior citizens should be treated as tax credit and not as item deduction from the gross income or sales, Unfortunately, M.E. failed to properly support the claimed discount with corresponding cash slips. Thus, the CTA reduced M.E.'s claim for PhP 603,923.46 sales discount to PhP 362,574.57 after the CTA disallowed PhP 241,348.89 unsupported claims, and consequently lowered the refundable amount to PhP 122,195.74. Aggrieved, M.E. went to the CA on a petition for review, the CA dismissed the petition. Hence this petition Issues: WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND HAS DEVIATED FROM APPLICABLE LAWS AND JURISPRUDENCE IN NOT APPRECIATING OTHER COMPETENT EVIDENCE PROVING THE AMOUNT OF DISCOUNTS GRANTED TO SENIOR CITIZENS AND MERELY RELYING SOLELY ON THE CASH SLIPS. WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND HAS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR IN EXCESS OF JURISDICTION IN AFFIRMING THE COURT OF TAX APPEALS' DENIAL OF PETITIONER'S MOTION TO ORDER AND SUBMIT AS DOCUMENTARY [EVIDENCE] THE CASH SLIPS WHICH THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT

INADVERTENTLY DID NOT TURN OVER TO THE PETITIONER'S COUNSEL. WHETHER OR NOT THE TERM "COST" UNDER PARAGRAPH (A) SECTION 4 OF REPUBLIC ACT 7432 IS EQUIVALENT ONLY TO ACQUISITION COST: Ruling: The petition is partly meritorious. 1. M.E. fails to persuade. The determination of the exact amount M.E. claims as the 20% sales discount it granted to the senior citizens calls for an evaluation of factual matters. The unyielding rule is that the findings of fact of the trial court, particularly when affirmed by the CA, are binding upon this Court, save when the lower courts had overlooked, misunderstood, or misinterpreted certain facts or circumstances of weight, which, if properly considered, would affect the result of the case and warrant a reversal of the decision. The instant case does not fall under the exception; hence, we do not find any justification to review all over again the evidence presented before the CTA, and the factual conclusions deduced therefrom. Lest it be overlooked, the Rules of Court is of suppletory application in quasi-judicial proceedings. Be this as it may, the CTA was correct in disallowing and not considering the belatedly-submitted cash slips to be part of the 20% sales discount for M.E.'s taxable year 1995. This is as it should be in the light of Sec. 34 of Rule 132 prescribing that no evidence shall be considered unless formally offered with a statement of the purpose why it is being offered. In addition, the rule is that the best evidence under the circumstance must be adduced to prove the allegations in a complaint, petition, or protest. Only when the best evidence cannot be submitted may secondary evidence be considered. But, in the instant case, the disallowed cash slips, the best evidence at that time, were not part of M.E.'s offer of evidence. While it may be true that the authenticated special record books yield the same data found in the cash slips, they cannot plausibly be considered by the courts a quo and made to corroborate pieces of evidence that have, in the first place, been disallowed. Recall also that M.E. offered the disallowed cash slips as evidence only after the CTA had rendered its assailed decision. Thus, we cannot accept the excuse of


36

inadvertence of the independent auditor as excusable negligence. As aptly put by the CA, the belatedly-submitted cash slips do not constitute newly-found evidence that may be submitted as basis for a new trial or reconsideration of the decision. We reiterate at this juncture that claims for tax refund/credit, as in the instant case, are in the nature of claims for exemption. Accordingly, the law relied upon is not only construed in strictissimi juris against the taxpayer, but also the proofs presented entitling a taxpayer to an exemption are strictissimi scrutinized. 2. We do not agree with M.E. Grave abuse of discretion connotes capricious, whimsical, arbitrary, or despotic exercise of jurisdiction. The CA surely cannot be guilty of gravely abusing its discretion when it refused to consider, in lieu of the unsubmitted additional cash slips, the special record books which are only secondary evidence. The cash slips were the best evidence. Also, the CA noted that the belatedly-offered cash slips were presented only after the CTA had rendered its decision. All these factors argue against the notion that the CA had, in sustaining the CTA, whimsically and capriciously exercised its discretion. 3. M.E.'s contention is correct. In Bicolandia Drug Corporation (formerly Elmas Drug Corporation) v. Commissioner of Internal Revenue, we interpreted the term "cost" found in Sec. 4(a) of RA 7432 as referring to the amount of the 20% discount extended by a private establishment to senior citizens in their purchase of medicines. There we categorically said that it is the Government that should fully shoulder the cost of the sales discount granted to senior citizens. Thus, we reversed and set aside the CA's Decision in CA-G.R. SP No. 49946, which construed the same word "cost" to mean the theoretical acquisition cost of the medicines purchased by qualified senior citizens. Accordingly, M.E. is entitled to a tax credit equivalent to the actual 20% sales discount it granted to qualified senior citizens. With the disallowance of PhP 241,348.89 for being unsupported, and the net amount of PhP 362,574.57 for the actual 20% sales discount granted to qualified senior citizens properly allowed by the CTA and fully appreciated as tax

credit, the amount due as tax credit in favor of M.E. is PhP 151,201.71. Parenthetically, we note that M.E. originally prayed for a tax refund for its tax overpayment for CY 1995. The CTA and the CA granted the desired refund, albeit at a lower amount due to their interpretation, erroneous as it turned out to be, of the term "cost." However, we cannot agree with the courts a quo on what M.E. is entitled to. RA 7432 expressly provides that the sales discount may be claimed as tax credit, not as tax refund. It ought to be noted, however, that on February 26, 2004, RA 9257, or The Expanded Senior Citizens Act of 2003, amending RA 7432, was signed into law, ushering in, upon its effectivity on March 21, 2004, a new tax treatment for sales discount purchases of qualified senior citizens of medicines. Sec. 4(a) of RA 9257 Conformably, starting taxable year 2004, the 20% sales discount granted by establishments to qualified senior citizens is to be treated as tax deduction, no longer as tax credit

CARMELINO F. PANSACOLA vs. COMMISSIONER OF INTERNAL

REVENUE

FACTS: On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950. He claimed the increased amounts of personal and additional exemptions under Section 35 of the NIRC and thus prayed for a refund with the Bureau of Internal Revenue, which was denied. Later, the Court of Tax Appeals also denied his claim because according to the tax court, "it would be absurd for the law to allow the deduction from a taxpayer’s gross income earned on a certain year of exemptions availing on a different taxable year…" Petitioner sought reconsideration, but the same was denied. On appeal, the Court of Appeals denied his petition for lack of merit. Petitioner, on the other hand, insists that the increased exemptions were already available on April 15, 1998, the deadline for filing income tax returns for taxable year 1997, because the NIRC was already effective. He reasons that by making the said law effective on the 1998 tax period


37

would postpone the availability of the increased exemptions and literally defer the effectivity of the NIRC to January 1, 1999. ISSUE: WON the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997. HELD: NO. Section 31 defines "taxable income" as the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. As defined in Section 22 (P), "taxable year" means the calendar year, upon the basis of which the net income is computed under Title II of the NIRC. Section 43 also supports the rule that the taxable income of an individual shall be computed on the basis of the calendar year. In addition, Section 45 provides that the deductions provided for under Title II of the NIRC shall be taken for the taxable year in which they are "paid or accrued" or "paid or incurred." Clearly from the above quoted provisions, what the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. In the case of petitioner, the availability of the aforementioned deductions if he is thus entitled, would be reflected on his tax return filed on or before the 15th day of April 1999 as mandated by Section 51 (C) (1). Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayer’s gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999. The NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998. There is nothing in the law which shows that any intent to give retroactive effect to Section 35. At the time petitioner filed his 1997 return and paid the tax due thereon in April 1998, the increased amounts of personal and additional exemptions in Section 35 were not yet available. It has not yet accrued as of December 31, 1997, the last day of his taxable year. Petitioner’s taxable income

covers his income for the calendar year 1997. The law cannot be given retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply retroactively. In the NIRC, we note, there is no specific mention that the increased amounts of personal and additional exemptions under Section 35 shall be given retroactive effect. Conformably too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken. They cannot be extended by mere implication or inference. And, where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms. Accordingly, the Court of Appeals and the Court of Tax Appeals were correct in denying petitioner’s claim for refund.

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