POWERS OF THE BIR

COMMISSIONER and
INCOME TAXATION (Part 1)

Syllabus for the

 2020-2021 Bar
Examination (Taxation
Law)
Powers and Duties of the
Bureau of Internal
Revenue (BIR)
 Powers and Duties of the BIR
1. Assessment and collection of all
national internal revenue taxes, fees,
and charges
2. Enforcement of all forfeitures, penalties,
and fines connected therewith
3. Execution of judgments in all cases decided
in its favor by the Court of Tax Appeals and
the ordinary courts
4. Give effect to and administer the supervisory
and police powers conferred to it by the
NIRC and other laws
 Powers of the
Commissioner of Internal
Revenue
 Powers of the BIR Commissioner
1. Power to interpret tax laws
2. Power to decide tax cases
3. Power to obtain information, and to
summon/examine and take
testimony of persons
4. Power to make assessments and
prescribe additional requirements
for tax administration and
enforcement
 Quasi-Legislative Power vs. Quasi-Judicial Power

Quasi-Legislative Power of the BIR Commissioner

 The power to interpret the provisions of the NIRC and
other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner of Internal Revenue,
subject to review by the Secretary of Finance.
Quasi-Judicial Power of the BIR Commissioner
 The power to decide disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under
the NIRC or other tax laws or portions thereof
administered by the BIR is vested in the Commissioner of
Internal Revenue, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals.
Power of the BIR Commissioner to Make Assessments

 Examination of returns and determination of tax due

 Authority to make assessments based on the best
evidence obtainable
 Authority to conduct inventory-taking, surveillance and
to prescribe presumptive gross sales and receipts
 Authority to terminate taxable period
 Authority to prescribe real property values
 Authority to inquire into bank deposits
 Authority to accredit and register tax agents
 Authority to prescribe additional procedural
and documentary requirements
 Inquiry into Bank Deposits of Taxpayers

The Commissioner of Internal Revenue is authorized to inquire

into the bank deposits of:
1. A decedent to determine his gross estate;
2. Any taxpayer who has filed an application for
compromise of his tax liability by reason of financial
incapacity to pay his/her tax liability;
3. Under Republic Act No. 10021 (“Exchange of Information
on Tax Matters Act”), the BIR is authorized to inquire into
bank deposits and other related information held by
financial institutions, and supply such information to a
requesting foreign tax authority pursuant to an
international convention or agreement on tax matters
entered into by the Philippines with its tax treaty
partners.
 Non-Delegable Powers of the BIR Commissioner

1. Power to recommend the promulgation of rules

or regulations by the Secretary of Finance
2. Power to issue rulings of first impressions or to
reverse, revoke, modify any existing ruling of the BIR
3. Power to assign or re-assign internal revenue officers
to establishments where articles subject to excise tax
are produced or kept
4. Power to compromise or abate any tax liability
[Exceptions: Assessments issued by the regional offices
involving basic deficiency taxes of P500,000 or less,
and
minor criminal violations discovered by regional and
district officials which may be compromised by the
Regional Evaluation Board]
Rule-Making Authority
of the Secretary of
Finance
 Secretary of Finance (Rule-Making Authority)

The Secretary of Finance, upon

recommendation of the
Commissioner of Internal Revenue,
shall promulgate all needful rules
and regulations for the effective
enforcement of the provisions of the
National Internal Revenue Code
(NIRC).
INCOME TAXATION
Income vs. Capital
 Definition of Income
 Income means all wealth which flows into
the taxpayer other than as a mere return of
capital.

 To be taxable, the income must be realized,

and must not be exempt from tax under
any law or treaty.
 Tests to determine whether income is
earned
Claim of Right Doctrine
 A taxable gain is conditioned upon the presence of a
claim of right to the alleged gain and the absence of a
definite unconditional obligation to return or repay that
which would otherwise constitute a gain.
Realization or Severance Test
 There is no taxable income until there is a separation
from capital of something of exchangeable value, thereby
supplying the realization or transmutation which would
result in the receipt of income. The essence of the test is
that in order for income to be taxed, it is to be severed
from the property from which it was derived.
 Tests to determine whether income is
earned
Economic Benefit Test or Doctrine of Proprietary Interest
 Any economic benefit to the taxpayer that increases his
net worth, whatever may have been the mode by
which it is effected, is taxable.
Control Test
 The power to dispose of income is the equivalent of
ownership of it. The exercise of that power to procure
the payment of income to another is the enjoyment,
and hence the realization, of the income by him who
exercises it.
 Income Tax Systems
1. Global Tax System
2. Schedular Tax System
3. Semi-Global, Semi-Schedular
Tax System
 Kinds of Taxpayers (Income Tax)
Individual Taxpayers
 Resident Citizens (RC)
 Non-resident Citizens (NRC)
 Resident Aliens (RA)
 Non-Resident Aliens Engaged in Trade or
Business (NRAETB)
 Non-Resident Aliens Not Engaged in Trade or
Business (NRANETB)
Corporate Taxpayers
 Domestic Corporations (DC)
 Resident Foreign Corporations (RFC)
 Non-Resident Foreign Corporations (NRFC)
General Principles of Income Taxation
Taxpayer Income from Sources Income from Sources Tax Base
Within the Philippines Outside the Philippines
RC Taxable Taxable Net
NRC Taxable Not Taxable Net
RA Taxable Not Taxable Net
NRAETB Taxable Not Taxable Net
NRANETB Taxable Not Taxable Gross
DC Taxable Taxable Net
RFC Taxable Not Taxable Net
NRFC Taxable Not Taxable Gross
 Situs or Place of Taxation

It is the place or authority that has

the right to impose and collect
taxes.
Principle of Mobilia Sequuntur Personam

 “Movables follow the person”

 The situs is the domicile or residence of the
owner
 Generally applies to intangible personal
properties
Exceptions:
1) When the law expressly provides for the situs
of the intangible personal property;
2) When the intangible personal property has
acquired situs in another jurisdiction
 Situs
Interest Income
 Residence of the
debtor Dividends
 Place of incorporation of the corporation which
declared the dividends
Compensation for Services Rendered
 Place where the services are
performed Rental Income
 Place where the property is
located Royalty Income
 Place where the intangible personal property is used
 Situs
Sale of Real Property
 Place where the property is
located Sale of Personal Property
(Purchased)
 Place where the property is
sold Sale of Personal Property
(Produced)
 Gross income derived from the sale of personal
property produced (in whole or in part) by the taxpayer
within the Philippines and sold within a foreign country,
or produced (in whole or in part) by the taxpayer within
a foreign country and sold within the Philippines, shall
be considered as “income from sources partly within
 Situs
and partly outside the Philippines.”
 Sample Bar Exam Question No. 1

Triple Star, a domestic corporation, entered into a

Management Service Contract with Single Star,
a non-resident foreign corporation with no
property in the Philippines. Under the contract,
Single Star shall provide managerial services for
Triple Star’s Hongkong branch. All said services
shall be performed in Hongkong.
Is the compensation for the services of Single Star
taxable as income from sources within the
Philippines? Explain.
 Sample Bar Exam Question No. 2

Alain Descartes, a French citizen permanently residing in the

Philippines, received several items during the taxable year. Which
among the following is NOT subject to Philippine income taxation?
A) Consultancy fees received for designing a computer program
and installing the same in the Shanghai facility of a Chinese firm
B) Interests from his deposits in a local bank of foreign
currency earned abroad converted to Philippine pesos
C) Dividends received from an American corporation which
derived 60% of its annual gross receipts from Philippine sources
for the past 7 years
D) Gains derived from the sale of his condominium unit located
in The Fort, Taguig City to another resident alien
 Income Tax Computation
Gross Income P xxx
Less: Allowable Deductions xxx
Taxable Income P xxx
Multiply by: Tax rate x%
Income Tax Due P xxx
Less: Tax Credits (if any) P xxx
Income Tax Payable P xxx
 TAX-EXEMPT
CORPORATIONS
Section 30 of the NIRC, as amended
 Tax-Exempt Charitable Institution
1. The entity must be a non-stock,
non- profit corporation
2. The entity must be organized
exclusively for charitable purposes
3. The entity must be operated
exclusively for charitable purposes
4. No part of the income shall inure to
the benefit of the directors, officers,
members, or trustees of the entity.
Commissioner of Internal
Revenue vs. De La Salle
University, Inc.
G.R. No. 196596, November 9, 2016
Article XIV, Section 4(3), 1987 Constitution
 All revenues and assets of non-stock, non-profit
educational institutions used actually, directly and
exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution
or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the
manner provided by law.
 Proprietary educational institutions, including
those cooperatively owned, may likewise be entitled
to such exemptions subject to the limitations
provided by law including restrictions on dividends
and provisions for reinvestment.
 Section 30, last paragraph, NIRC

 Notwithstanding the provisions in

the preceding paragraphs (Section
30),
the income of whatever kind and character of
the foregoing organizations (including a non-
stock non-profit educational institution) from
any of their properties, real or personal,
or from any of their activities conducted for
profit, regardless of the disposition made of
such income, shall be subject to the 30%
regular corporate income tax.
 Supreme Court’s
 The constitutional provision refers to two kinds of
educational institutions: (1) non-stock, non-profit
educational institutions and (2) proprietary educational
institutions. In addition, there is a marked distinction
between the treatment of non-stock, non-profit
educational institutions and proprietary educational
institutions. The tax exemption granted to non-stock,
non- profit educational institutions is conditioned only on
the actual, direct and exclusive use of their revenues and
assets for educational purposes. While tax exemptions
may also be granted to proprietary educational
institutions, these exemptions may be subject to
limitations imposed by Congress (such as Section 30, last
paragraph of the NIRC).
 Ruling of the Supreme
 Section 30, last paragraph of the NIRC did not qualify the
tax exemption constitutionally granted to non-stock
non- profit educational institutions. The last paragraph
of Section 30 of the NIRC is without force and effect
with respect to non-stock, non-profit educational
institutions, provided, that the non-stock, non-profit
educational institutions prove that their assets and
revenues are used actually, directly and exclusively for
educational purposes.
 Moreover, the tax exemption constitutionally-granted
to non-stock, non- profit educational institutions is not
subject to limitations imposed by law.
 Ruling of the Supreme
 Therefore, the tax exemption granted by the Constitution
to non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive use
of their assets, revenues and income for educational
purposes. The last paragraph of Section 30 of the NIRC,
however, is still applicable to proprietary educational
institutions.
 The Supreme Court ruled that the revenues and assets
of non-stock, non-profit educational institutions (like De
La Salle University, Inc.) proved to have been used
actually, directly, and exclusively for educational
purposes are exempt from duties and taxes.
 Ruling of the Supreme
 Parenthetically, income and revenues of non-stock, non-
profit educational institution not used actually, directly
and exclusively for educational purposes are not exempt
from duties and taxes. To avail of the exemption, the
taxpayer must factually prove that it used actually, directly
and exclusively for educational purposes the revenues or
income sought to be exempted.
 The crucial point of inquiry then is on the use of the
assets or on the use of the revenues. These are two things
that must be viewed and treated separately. But so long
as the assets or revenues are used actually, directly and
exclusively for educational purposes, they are exempt from
duties and taxes.
 Ordinary
Asset vs.
Capital Asset
 Ordinary Asset vs. Capital
The term “capital asset” means property held
by the taxpayer (whether or not connected
with his trade or business), but DOES NOT
INCLUDE the following:

1) Stock in trade of the taxpayer

2) Other property of a kind which would
properly be included in the inventory of
the taxpayer
 Ordinary Asset vs. Capital
3) Property held by the taxpayer primarily for
sale to customers in the ordinary course
of his trade or business
4) Property used in the trade or business, of a
character which is subject to the
allowance for depreciation
5) Real property used in trade or business
(In other words, the enumerated items are the
“ordinary assets”)
 Capital Asset Transactions
1. Sale of shares of stocks of a
domestic corporation held
as capital asset and not
traded through the stock
exchange
2. Sale of real property held as
capital asset located in the
Philippines
3. Other capital asset transactions
15% Capital Gains Tax
 15% Capital Gains Tax
 Sale, barter, exchange or other disposition of
shares of stocks in a domestic corporation
held as capital asset, and not sold or
disposed of through the stock exchange
 Subject to the 15% capital gains tax
(imposed on the net capital gain)

Net Capital Gain = Selling Price minus Cost

6% Capital Gains Tax
 6% Capital Gains Tax
 Sale, exchange or other disposition of
real property located in the Philippines
and classified as capital asset
 Subject to 6% capital gains tax (based on the
gross selling price or zonal value or fair
market value, whichever is higher)
 Imposed based on the “presumptive
gain principle”
Other Income Items with
Special Tax Rates
 Passive Income subject to Final Tax

1. Interest Income
2. Dividend Income
3. Royalty Income
4. Prizes, Awards, and
Winnings (including PCSO
Winnings)
 Gross Income
(Inclusions and Exclusions)
 Income Tax
Gross Income P xxx
Less: Allowable Deductions xxx
Taxable Income P xxx
Multiply by: Tax rate x%
Income Tax Due P xxx
Less: Tax Credits (if any) P xxx
Income Tax Payable P xxx
 Definition of Gross
All income derived from whatever source (unless expressly
provided by law or tax treaty to be exempt), including
but not limited to the following items:

(1) Compensation for services in whatever form

paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade
or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
 Definition of Gross
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the
net income of the general professional
partnership.
 Exclusions from Gross
 Proceeds of life insurance
 Return of insurance premium
 Gift, bequest, or devise
 Compensation for injuries or sickness (including
damages received, whether by suit or agreement,
on account of such injuries or sickness)
 Retirement benefits, pensions, and gratuities
 Separation pay (if employment termination is due
to death, sickness or other physical disability, or for
any cause beyond the control of the employee)
 Exclusions from Gross
 Income exempt under tax treaty
 13th month pay, Christmas bonus,
productivity incentive bonus (up to
Php90,000)
 Prizes and awards received in recognition of
charitable, artistic, religious, civic,
educational, literary, or scientific
achievement, but only if –
(a) the recipient was selected without any action
on his part to enter the contest or proceeding,
and (b) the recipient is not required to render
substantial future services as a condition to
receiving the prize or award
 Exclusions from Gross
 Prizes and awards granted to athletes in local
and international sports competitions and
tournaments whether held in the Philippines or
abroad and sanctioned by their national sports
associations (Philippine Olympic Committee or
POC)
 GSIS, SSS, PhilHealth, and Pag-IBIG
contributions, and union dues of individuals
 Income derived by foreign government
 Income derived by the government or its
political subdivisions
 Exclusions from Gross
 Gains realized from the sale or exchange or
retirement of bonds, debentures or other
certificate of indebtedness with a maturity
of more than five (5) years
 Gains from redemption of shares in
mutual fund
 Sample Bar Exam Question No. 3
Mr. D, a Filipino amateur boxer, joined an Olympic qualifying
tournament held in Las Vegas, USA, where he won the gold
medal. Pleased with Mr. D’s accomplishment, the
Philippine Government, through the Philippine Olympic
Committee, awarded him a cash prize amounting to
P1,000,000.00. Upon receipt of the funds, he went to a
casino in Pasay City and won the P30,000,000.00 jackpot in
the slot machine. The next day, he went to a nearby Lotto
outlet and bought a Lotto ticket which won him a cash
prize of P5,000.00.
Which of the above sums of money is/are subject to income
tax? Explain.
 Income from Other Sources
 Condonation or cancellation of indebtedness
 Recovery of accounts previously written off
 Receipt of tax refunds or credit

TAX BENEFIT RULE

 The recovery of bad debts previously allowed as
deduction in the preceding year(s) shall be
included as part of the taxpayer’s gross income
in the year of such recovery to the extent of the
income tax benefit of said deduction.
DE MINIMIS BENEFITS
 De Minimis Benefits
 De minimis benefits are facilities or
privileges furnished or offered by an
employer to his employees that are of
relatively small value and offered or
furnished by the employer merely as a
means of promoting the health, goodwill,
contentment, or efficiency of his employees.
 EXEMPT from income tax, withholding tax
on compensation, and fringe benefits tax
 Types of De Minimis
 Monetized unused vacation leave credits of private
employees not exceeding (10) days during the
year;
 Monetized value of vacation and sick leave credits
paid to government officials and employees;
 Medical cash allowance to dependents of employees,
not exceeding P1,500 per semester or P250 per
month;
 Rice subsidy of P2,000.00 or one (1) sack of 50kg.
rice per month amounting to not more than
P2,000.00;
 Uniform and clothing allowance not exceeding P6,000
per annum;
 Types of De Minimis
 Actual medical assistance (e.g., medical allowance to cover
medical and healthcare needs, annual medical/executive
check-up, maternity assistance, and routine consultations)
not exceeding P10,000 per annum;
 Laundry allowance not exceeding P300 per month;
 Employees achievement awards, e.g., for length of service or
safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificate, with an
annual monetary value not exceeding P10,000 received by
the employee under an established written plan which does
not discriminate in favor of highly paid employees;
 Types of De Minimis
 Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee
per annum;
 Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the
basic minimum wage on a per region basis; and
 Benefits received by an employee by virtue of a
Collective Bargaining Agreement (CBA) and
productivity incentive schemes provided the total
annual monetary value received from both CBA
and productivity incentive schemes combined do
not exceed P10,000 per employee per taxable year.
FRINGE BENEFITS TAX
 What is Fringe Benefits Tax (FBT)?

The Fringe Benefits Tax (FBT) is a tax

imposed on the fringe benefits granted
by the employer to its managers and
supervisors.
 Definition of Fringe Benefits

Fringe Benefits  any good, service, or

other benefit furnished or granted by
an employer (in cash or in kind), in
addition to the basic salaries, to an
individual employee (except a rank-and-
file employee).
 Managerial/Supervisory vs. Rank-and-File

Managerial employees  employees vested with

powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
discipline employees.
Supervisory employees  those who, in the
interest of the employer, effectively recommend
such managerial actions if the exercise of such
authority is not merely routinary or clerical in
nature but requires the use of independent
judgment.
 Managerial/Supervisory vs. Rank-and-File

Rank-and-file employees  all

employees who are holding neither
managerial nor supervisory position
 Taxable Fringe
 Housing privilege
 Expense account
 Motor vehicles
 Household expenses
 Interest on loan at less than market rate
 Membership fees, dues, other expenses in
social and athletic clubs and similar
organizations
 Expenses for foreign travel
 Taxable Fringe
 Holiday and vacation expenses
 Educational assistance
to
employee/dependents
 Life or health insurance and other non-
life insurance premiums
 FBT

Monetary Value of Benefit P xxx

Divided by: 65%
Grossed-up Monetary Value P xxx
Multiplied by: 35%
Fringe Benefits Tax (FBT) P xxx
 Non-Taxable Fringe
 Benefits exempt
th
under the Tax Code and special
laws (e.g., 13 month pay and bonuses which are
covered by the P82,000 threshold amount)
 Employer contributions to retirement, insurance
and hospitalization benefit plans
 Benefits to rank-and-file employees, whether or
not granted under a CBA
 De minimis benefits
 Benefits required by the nature of, or necessary to,
the trade or business
 Benefits granted for the convenience or advantage
of the employer
 Association of Non-Profit
Clubs, Inc.
vs. Commissioner of Internal
Revenue

G.R. No. 228539 dated June 26, 2019

 Membership Fees and Assessment
Dues

ISSUE:
Are the membership fees and
assessment dues collected
by
recreational clubs subject to
income tax and value-added tax
(VAT)?
 Membership Fees and Assessment
Dues
RULING:
The Supreme Court ruled that the
membership fees, assessment dues,
and fees of similar nature collected by
clubs which are organized and
operated exclusively for pleasure,
recreation, and other non-profit
purposes are not subject to income tax
and also not subject to VAT.
 Not Subject to Income
 According to the Supreme Court, the
membership fees, assessment dues, and other
fees of similar nature only constitute
contributions to and/or replenishment of the
funds for the maintenance and operations of
the facilities offered by recreational clubs to
their exclusive members.
 They represent funds “held in trust” by these
recreational clubs to defray their operating and
general costs and hence, only constitute
infusion of capital (and not income).
 Not Subject to Income
 In fine, for as long as these membership fees,
assessment dues, and the like are treated as
collections by recreational clubs from their members
as an inherent consequence of their membership, and
are, by nature, intended for the maintenance,
preservation, and upkeep of the clubs’ general
operations and facilities, then these fees cannot be
classified as “the income of recreational clubs from
whatever source” that are “subject to income tax.”
 Instead, they only form part of capital from which
no income tax may be collected or imposed.
 Not Subject to Value-Added Tax
 According to the Supreme Court, membership fees,
assessment dues, and the like are not subject to VAT
because in collecting such fees, the recreational club
is not selling its service to the members.
 Conversely, the members are not buying services from
the club when dues are paid; hence, there is no
economic or commercial activity to speak of as these
dues are devoted for the operations/maintenance of
the facilities of the organization.
 As such, there could be no “sale, barter or exchange of
goods or properties, or sale of a service” to speak of,
which would then be subject to VAT under the Tax
Code.