Last Minute Tips Tax Final

8/18/2019 Last Minute Tips Tax Final

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I. GENERAL PRINCIPLES

DISCUSS THE MARSHALL DICTUM “THE POWER TO TAX IS THE POWER TODESTROY”

Taxation is a destructive power which interferes with the personal and propertyrights of the people and takes from them a portion of their property for the supportof the government. (McCulloch vs. Maryland, 4 Wheat, 316 4 L ed. 579, 607)

Note: It is more reasonable to say that the maxim “the power to tax is the power todestroy” is to describe not the purposes for which the taxing power may be usedbut the degree of vigor with which the taxing power may be employed in order toraise revenue. (Cooley).

Q: Just!e Ho"#es o$!e s%&: “T'e (o)e* to T%+ s $ot t'e (o)e* to&est*o, )'"e t's !ou*t -Su(*e#e Cou*t sts”. E+("%$.

A: While taxation is said to be the power to destroy, it is by no means unlimited.When a legislative body having the power to tax a certain subect matter actuallyimposes such a burdensome tax as e!ectually to destroy the right to perform theact or to use the property subect to the tax, the validity of the enactment dependsupon the nature and character of the right destroyed. If so great an abuse is

manifested as to destroy natural and fundamental rights which no free governmentconsistently violate, it is the duty of the udiciary to hold such an actunconstitutional.

Re!o$!"e t'e t)o &!t%

The power to tax involves the power to destroy since the power to tax includes thepower to regulate even to the extent of prohibition or destruction, as when thepower to tax is used validly as an implement of police power in discouraging andprohibiting certain things or enterprises inimical to the public welfare.

While the power to tax is so unlimited in force and so searching in extent that thecourts scarcely venture to declare that it is subect to any restrictions whatever, it issubect to the inherent and constitutional limitations which are intended to preventabuse on the exercise of the otherwise plenary and unlimited powers. It is thecourt"s role to see to it that the exercise of the power does not transgress theselimitations.

The power to tax therefore, must not be exercised in an arbitrary manner. It shouldbe exercised with caution to minimi#e inury to proprietary rights of a taxpayer. It

must be exercised fairly, e$ually and uniformly, lest the tax collector kill the henthat lays the golden egg. (o!as et. al vs. C"# et. al, L$%5043, #&r'l %6, 196)

Taxpayers may seek redress before the courts in case of illegal imposition of taxesand irregularities. The %onstitution, as the fundamental law, overrides anylegislative or executive act that runs counter to it. In any case, therefore, where itcan be demonstrated that the challenged statutory provision fails to abide by its


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command, then the court must declare and adudge it null. & 'son *r. v. #ncheta,+.. o. L$59431, *uly %5, 194)

Note: 'arshall"s view refers to a valid tax while (olmes" view refers to an invalid

tax.LI/E0LOOD DOCTRINE

The phrase expresses the underlying basis of taxation which is governmentalnecessity, for indeed, without taxation, a government can neither exist nor endure.

Taxation is a principal attribute of sovereignty. The exercise of the taxing powerderives its source from the very existence of the )tate whose social contract with itsciti#ens obliges it to promote public interest and the public good.

In the case of -alley "rad'n Co. v. C/ +.. o. 4955%9, March 31, 199, the)upreme %ourt ruled that the damages that may be caused a taxpayer by being

made to pay the taxes cannot be said to be as irreparable as it would negate the*overnment ability to collect taxes.

There are 1 *e!e$t &e!so$s o2 t'e SC citing this famous doctrine, lifeblood asone of the reasons, basis for the following rulings+

. The -/day prescribed period for appealing that 0I1 decision on 23T involvingrefund of 2alue/3dded Tax is MANDATORY.

4. These payment re$uired under )ec. 454 is likewise MANDATORY , which ispayment under protest in regard to real property tax.

-. Taxation cannot be the subect of stipulation.

H,(ot'et!%" P*o3"e#: 0I1 agree that you will pay a certain amount. This cannotbe done.

It is basic that the power to tax cannot be delegated. What are asked are these twoconstitutional provisions+ 3rt 6 )ec 47 8ar 4+ Tari! power of the president.

LIMITATIONS O/ TAXATION

. Inherent limitationsa. 8ublic 8urposeb. Inherently 9egislativec. Territoriald. International %omitye. :xemption of government entities, agencies and instrumentalities

4. %onstitutional 9imitationsa. 8rovisions directly a!ecting taxation

i. 8rohibition against imprisonment for non/payment of poll taxii. ;niformity and e$uality of taxationiii. *rant by %ongress of authority to the president to impose tari! rates

iv. 8rohibition against taxation of religious, charitable entities, andeducational entitiesv. 8rohibition against taxation of non/stock, non/pro


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x. *rant of power to the local government units to create its own sources of revenue

xi. >lexible tari! clausexii. :xemption from real property taxesxiii. =o appropriation or use of public money for religious purposes

0ASIC PRINCIPLES O/ A SOUND TAX SYSTEM -CANONS O/ TAXATION

1. F'scal adeuacy a. 1evenue raised must be su4!e$t to meet government?public

expenditures and other public needs. (Chave2 v. n&'n, +.. o. 7677, *une 6, 1990) =either an excess nor a de


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Tax Eistinguished from other forms of exactions

0uilding 8ermit according to the recent case, is a regulatory fee is not a tax.

;niversal %harge imposed under :8I13 law that is imposed in the exercise of the

police power of the state, and thus, not a tax. It is in e!ect a license.

'arket )tore >ees / the amount that may be imposed should be based on the costof regulation and is a license.

RULES GO8ERNING COMPENSATION OR SET9O// AS APPLIED IN TAXATION

GR: =o set/o! is admissible against the demands for taxes levied for general orlocal governmental purposes.

Note: The prevalent rule in our urisdiction disfavors set/o! or legal compensation

of tax obligations for the following reasons+ &A taxes are of a distinct kind, essenceand nature, and these impositions cannot be so classed in merely the samecategory as ordinary obligationsJ &4A the applicable laws and principles governingeach are peculiar, not necessarily common to each and &-A public policy isbetter subserved if the integrity and independence of taxes be maintained&lifeblood doctrineA. The collection of a tax cannot await the results of a lawsuitagainst the government. (/ranc'a v. #C, #.M. o. 310,/ranc'a v. ntered'ate

#&&ellate Court and /ernande2 , *.1. =o. 9/6G6CF, 47 Hune F77 *une %9, 19, Calte! ;h'l'&&'nes, nc. v. Co'ss'on on #ud't, et al., *.1. =o. F4575, 7 'ay FF4 )

XPN: Where both the claims of the government and the taxpayer against eachother have already become due, demandable, and fully li$uidated, compensationtakes place by operation of law and both obligations are extinguished to theirconcurrent amounts. In the case of the taxpayer"s claim against the government,the government must have appropriated the amount thereto &o'no v. +arl'tos,+.. o. L$1994, *une %9, 1963A.

Q: C%$ %$ %ssess#e$t 2o* % "o!%" t%+ 3e t'e su3e!t o2 set9o; o*!o#(e$s%to$ %


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=ote+ The )upreme %ourt, re:ected this doctrine in Collector v. ?" (+.. o. L$11%74, ov. %, 195A, since it may work to tempt both parties to delay and neglecttheir respective pursuits of legal action within the period set by law.

RULES ON TAXATION O/ NON9STOCB CORPORATIONS /OR CHARITA0LE ANDRELIGIOUS PURPOSES

1. /or &ur&oses o 'ncoe ta!at'ona. The income of non/stock corporations operating exclusively for

charitable and religious purposes, no part of which inures to thebene


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RE8ENUE 0ILLS MUST ORIGINATE /ROM THE HOUSE O/ REPRESENTATI8ES

W'%t s *eu*e& to o*e$ue o* t%*; 3""s o*


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former is credited against the tax levied in the latter. The basic di!erence betweenthe two methods is that in the exemption method, the focus is on the income orcapital itself, whereas the credit method focuses upon the tax &%I1 vs. )% Hohnsonand )ons *.1. =o. 4G5. Hune 45, FFFA

TAX E8ASION 8IS998IS TAX A8OIDANCE

It is the scheme where the taxpayer uses illegal or fraudulent means to defeat orlessen payment of a tax.

Note: Tax evasion is a scheme used outside of those lawful means and whenavailed of, it usually subects the taxpayer to further or additional civil or criminalliabilities (Co'ss'oner v. state o en'no "oda *r. +.. o. 30554, /e8. %,193). Tax evasion is sometimes referred to as T%+ Do&


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I=T:1=39 1:2:=;: T3R T(3T 31: I'81:)%1I8TI09: + I3:T of M %annot applythe prescriptive period under )ec. 4-

WhyQ 0ecause the law cannot compel such corporation to report an unreasonable orimproper accumulation of corporate remedies. In e!ect imprescriptible.

II. INCOME TAX

RATIONALE /OR THE TAXA0ILITY O/ RESIDENT CITIFENS AND DOMESTICCORPORATIONS /OR INCOME EARNED WITHOUT THE PHILIPPINES:

81LT:%TIL= T(:L1S/ wherever you go you enoy the protection of the 8hilippinegovernment. The %orporations former organi#ed under 8hilippine laws ac$uired8hilippine nationality.

=on 1esident 3lien =ot :ngaged in Trade or 0usiness

=13/=:T0 &=on/1esident 3lien/ =ot :ngaged in Trade or 0usinessA is taxed using the


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The term ca&'tal asset is de


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. These shares are later redeemed for consideration by the corporation orotherwise conveyed by the stockholder to the extent of such corporation.

4. The recipient is other than the shareholder.1. If the stock dividend issuance resulted in a change in the shareholders"

e$uity.

Note: 3 stock dividend does not constitute taxable income if the new sharesdid not confer new rights nor interests than those previously existing, andthat the recipient owns the same proportionate interest in the net assets ofthe corporation (ec. %5%, o. %)

7. )tock dividends e$uivalent to cash or property resulting in a change of ownership and interest of the shareholders. (ec. %4 =%>F %5 #, F % =5>8, C)

T%+ t*e%t#e$t 2o* 2o*e$ess o2 $&e3te&$ess. When cancellation of debt is 'ncoe. If an individual performs services for a

creditor, who in consideration thereof, cancels the debt, it is income to theextent of the amount reali#ed by the debtor as compensation for his services.

4. When cancellation of debt is a 't . If a creditor merely desires to bene)

Re!o>e*, o2 A!!ou$ts P*e>ous", W*tte$ O; -Re!o>e*, o2 0%& &e3ts

This rule states that the recovery of bad debts previously allowed as deduction inthe preceding year or years shall be included as part of the taxpayer"s gross income

in the year of such recovery to the extent of the income tax bene


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8ension, gratuity, stock bonus or pro


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C. The interest must be paid or incurred during the taxable yearJ5. The indebtedness must be connected with the taxpayer"s trade, business, or

exercise of professionJ6. The interest arrangement must not be between related taxpayers.G. The allowable deduction have been reduced by an amount e$ual to --M of the

interest income subect to tax. &)ec. -CB0DBD, =I1% as amended by 1ep. 6--GA

De&u!t3"e I$te*est E+(e$se:

Interest+

. Ln taxes, such as those paid for de


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Note: ;nder )ec. -4 0 BGD e of the =I1%, -th month pay and other bene"e


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gross returns. 0asic is the rule that partners should share in the net pro


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It means the regular conduct or pursuit of a commercial or an economic activity,including transactions incidental thereto, by any person regardless of whether ornot the person engaged therein is a non/stock, non/proreeport Xoneenterprises.

3 23T/exempt transaction, on the other hand, refers to the sale of goods, properties

or services or the use or lease of properties that is not subect to 23T &output taxAunder )ection F of the Tax %ode of FFG, and the seller?supplier is not allowedany tax credit of 23T &input taxA on purchases related to such exempt transaction.(ev. Meorandu 50$%007)

These reveal the legislative intent not to impose 23T on persons already covered by theamusement tax. This holds true even in the case of cinema?theater operators taxed underthe 9*% of FF precisely because the 23T law was intended to replace the percentagetax on certain services. The mere fact that they are taxed by the local government unitand not by the national government is immaterial. The 9ocal Tax %ode, in transferring thepower to tax gross receipts derived by cinema?theater operators or proprietor fromadmission tickets to the local government, did not intend to treat cinema?theater housesas a separate class. =o distinction must, therefore, be made between the places of amusement taxed by the national government and those taxed by the local government.&%I1 vs. )' 8rime (oldings >ebruary 46, 4 *.1. =o. 7-55A

DEEMED SALE TRANSACTIONS

T'e 2o""o)$< %*e t*%$s%!to$s &ee#e& s%"e %$& t'e*e2o*e su3e!t to 8AT:


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. Transfer, use or consumption not in the course of business of goods or propertieso*


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Note: The concept of transfer in contemplation of death has a technical meaning. This does not constitute any transfers made by a dying person. It is not the meretransfer that constitutes a transfer in contemplation of death but the retention ofsome type of control over the property transferred. In e!ect, there is no full transfer

of all interests in the property 'nter v'vos.

Ot'e* &es!*(to$s 2o* t*%$s2e* $ !o$te#("%to$ o2 &e%t'

. Transfer e$uivalent to testamentary disposition4. nter v'vos in form, Mort's Causa in substance

8ANISHING DEDUCTIONS

8%$s'$< De&u!to$ is the deduction allowed from the gross estate of citi#ens,resident aliens and non/resident estates for properties which were previouslysubect to donors or estate taxes.

Note: The purpose of vanishing deduction is to lessen the harsh e!ects of doubletaxation.

The rate o deduct'on depends on the period from the date of transfer to the deathof the decedent, as follows+

PERIOD DEDUCTION

Within year or less M

'ore than year but not more than 4 years 7M

'ore than 4 years but not more than - years 6M

'ore than - years but not more than C years CM

'ore than C years but not more than 5 years 4M

Note: In property previously taxed, there are two &4A transfers of property. Within a

period of 5 years, the same property has been transferred from the


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6. No vanishing deduction was allowed on the same property on the priordecedent"s estate.

In case of a non$res'dent al'en decedent, the property involved must be locatedwithin the 8hilippines and is included in the gross estate.

/UNERAL EXPENSE The amount deductible is the "o)e* between+

. actual funeral expenses or4. 5M of the gross estate

0ut not exceeding 84,.

the decedent 's a on$es'dent #l'enG

3mount of funeral expenses deductible from the gross estate is the proportion

which actual funeral expenses or amount e$ual to 5M of the gross incomewhichever is lower but not to exceed 84,, bears to the value of the entiregross estate whichever situated.

DONORS TAX

W'e$ t'e &o$ee o* 3e$e=!%*, s % st*%$


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exemption claimed should be strictly construed against the taxpayer and liberally infavor of the taxing authority. (art Coun'cat'ons, nc., v. "he C'ty o avao,+.. o. 155491, *ul. %1, %009)

Se!. 51 e$u#e*%tes $sttuto$s t'%t %*e e+e#(t 2*o# "o!%" t%+:

. %ooperatives4. =on/pro


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C. Issuance >ormal 9etter Lf Eemand 3nd >inal 3ssessment =otice &>9E?>3=A 9 The>3= and >9E should always go together. The law re$uires that the factual and?orlegal bases of the assessment must be stated, and this re$uirement is notsatis3= alone, a letter of demand 3=within thirty &-A days from date of receipt thereof.

6. >inal Eecision on a Eisputed 3ssessment &>EE3A / The decision of the%ommissioner or his duly authori#ed representative shall state the &iA facts, theapplicable law, rules and regulations, or urisprudence on which such decision isbased, otherwise, the decision shall be void and &iiA that the same is his or re$uests for *e$>est%$t s%"es)e*e #%&e. &)an 1o$ueA

iii. The only other rule is the 3tlas ruling, which applied only from 7 Hune 4G to 4 )eptember 47. 3tlas states that the two/yearprescriptive period for


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iv. 3s an exception to the general rule, premature e !"%# that must be or example,if there are only days left within such 4/year period, then, the taxpayer hasonly days within which to appeal his claim. Ho)e>e* 2 t'e*e s %$$%!to$ o$ t'e (%*t o2 t'e Co##sso$e* %$& t'e 69,e%* (e*o& s%3out to "%(se t'e *e#e&, s to ="e %$ %((e%" %"so )t' t'e CTA.

COURT O/ TAX APPEALS -RA 66

. T'e Su(*e#e Cou*t !%$ #otu (*o(*o &ete*#$e t'%t t'e CTA '%s u*s&!to$ o>e* % !"%# 2o* *e2u$& as held in the case of CIR >. S"!o$

P'"(($es &'arch 4CA. %T3 is a court of special urisdiction. 3s such, itcan only take cogni#ance of such matters as are clearly within its urisdiction.In view thereof, although the parties have not raised the issue of urisdiction,nevertheless, this %ourt may motu proprio determine whether or not the %T3has urisdiction over respondent"s udicial claim for refund taking intoconsideration, the factual and legal allegations contained in the pleadings


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4. CTA !%$ t%e !o


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iv 2alue of the goods, materials and services used in the production or inconnection with the production and sale of the imported good

v 3mount of royalties and license fees related to the goods being valued thatthe buyer must pay

b 2alue of any of the proceeds of any subse$uent resale, disposal or use of theimported goods that accrues directly or indirectly to the seller

c Transport cost of import goods from port of exportation to port of entry in the8hilippines

d ;nloading and handling charges associated with transport of imported goodse %ost of insurance

4 TRANSACTION 8ALUE O/ IDENTICAL GOODS the dutiable value shall bethe transaction value of &e$t!%" ilipino Workers &L%WA and 0alikbayansJd The purchase abroad of consumables, livelihood tools, personal and

household e!ects by Lverseas >ilipino Workers &L%WA and 0alikbayans at8hilippine duty/free shopsJ and

e 8ersonal and household e!ects of members of 8hilippine diplomatic missionsincluding civil or military attaches.

Note: 1eturning residents for purposes of conditionally/free importation of personaland household e!ect must be those+

a. =ationals &>ilipinoAb. who have stayed in the foreign countryc. for a period of AT LEAST six &6A months


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