Taxation Law Green Notes 2015

7/26/2019 Taxation Law Green Notes 2015

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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega

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ESSENTIAL NOTATIONS IN TAXATION:

A PRE-BAR REVIEW GUIDE

I.

GENERAL PRINCIPLES

Q. Define Taxation

Taxation is the inherent power of the

sovereign exercised through the legislature to

impose burdens upon subjects and objectswithin its jurisdiction for the purpose of raising

revenues to carry out the legitimate objects of

government.

It is the power by which the sovereignraises revenue to defray the expenses of

government. It is a way of apportioning the

cost of government among those who in some

measure are privileged to enjoy its benefits and

must bear its burden.

Q. What is the nature of the power of

taxation

The power of taxation is inherent insovereignty as an incident or attribute

thereof, being essential to the existenceof independent government.

It is legislative in character.

It is generally not delegated toexecutive or judicial department.

Exceptions:

i.

To LGUs in respect to

matters of local concern to

be exercised by the LGbodies thereof [Sec. 5, Art.X, 1987 Constitution];

ii.

When allowed by the

Constitution [Sec. 28[2], Art.VI, 1987 Constitution];

iii.

When the delegation relates

merely to administrative

implementation that may

call for some degree of

discretionary powers under aset of sufficient standardsexpressed by law Cervantes

v. Auditor General, [91 Phil.

359], or implied from thepolicy and purpose of theAct Maceda v. Macaraig,

[197 SCRA 771].

It is subject to constitutional and

inherent limitations.

Q. Explain briefly the theory and basis of

taxation

The power to tax is an attribute of

sovereignty emanating from necessity (Phil.

Guaranty Co. Inc. Vs. Commissioner of

Internal Revenue, G.R. No. L-22074).Taxation is described as a symbiotic

relationship whereby in exchange of the

benefits and protection that the citizens get

from the government, taxes are paid (CIR vs.

Algue, Inc., G.R. No. L-28896).

Q. Explain the pronouncement of the

Supreme Court that the power of

taxation is purely leg islative

Essentially, this means that in the

legislature primarily lies the discretion to

determine the nature (kind), object (purpose),extent (rate), coverage (subjects) and situs

(place) of taxation. It has the authority to

prescribe a certain tax at a specific rate for a

particular public purpose on persons or thingswithin its jurisdiction. In other words, the

legislature wields the power to define what tax

shall be imposed, why it should be imposed,how much tax shall be imposed, against whom

(or what) it shall be imposed and where it

shall be imposed (CREBA v. Romulo, 614SCRA 605, 626).

Q. Expound on the theory that the power

of taxation is considered as a principal

attribute of sovereignty.

A principal attribute of sovereignty,

the exercise of taxing power derives its source

from the very existence of the state whosesocial contract with its citizens obliges it to

promote public interest and common good.

The theory behind the exercise of the power

to tax emanates from necessity; without taxes,

government cannot fulfil its mandate of

promoting the general welfare and well-beingof the people (CIR v. BPI,521 SCRA 373, 387-

388).

Q. Briefly discuss the dictum that the

power to tax involves the power to

destroy.

In Mactan Cebu International Airport

Authority v. Marcos, 261 SCRA 667, 679 , the

Supreme Court stressed that taxation is a


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destructive power which interferes with the

personal and property rights of the people and

takes from them a portion of their propertyfor the support of the government.

The power to tax includes the power

to destroy if it is used validly as an implement

of the police power in discouraging and in

effect, ultimately prohibiting certain things or

enterprises inimical to the public welfare xxx(Cruz, Constitutional Law, 2000 Ed., p. 87).

Q. Describe the Scope of the Power to

Tax

The power of taxation is the most

absolute of all powers of the government

(Sison v. Ancheta, 130 SCRA 654).It has thebroadest scope of all the powers of

government because in the absence of

limitations, it is considered as unlimited,

plenary, comprehensive and supreme.

However, the power of taxation

should be exercised with caution to minimize

injury to the proprietary rights of the taxpayer.

It must be exercised fairly, equally anduniformly, lest the tax collector kill the hen

that lays the golden egg (Roxas v. CTA, 23

SCRA 276).

Q.

Discuss the meaning an implication of

the LIFEBLOOD D OCTRINE.

1.

By enforcing the tax lien, the BIR

availed itself of the most

expeditious way to collect the tax.Taxes are the lifeblood of the

government and their prompt andcertain availability is an imperious

need (CIR v. Pineda, 21 SCRA 105).

2.

The government is not bound by

the errors committed by its agents.

In the performance of itsgovernment functions, the State

cannot be estopped by the neglect

of its agents and officers. Taxes are

the lifeblood of the nation through

which the government agencies

continue to operate and with

which the state effects its functions

for the welfare of its constituents.

The errors of certain administrative

officers should never be allowed to

jeopardize the governments

financial position (CIR v. CTA, 234SCRA 348).

3.

The BIR is authorized to collect

estate tax deficiency through the

summary remedy of levying uponthe sale of real properties of a

decedent, without the cognition

and authority of the court sitting in

probate over the supposed will of

the decedent, because the

collection of the estate tax is

executive in character. As such, theestate tax is exempted from the

application of the statute of non-

claims, and this is justified by the

necessity of government funding,

immortalized in the maximTaxesare the lifeblood of the

government and should be

collected without unnecessary

hindrance. However, such

collection should be made in

accordance with law as any

arbitrariness will negate the very

reason for government itself(MARCOS II v. CA, 273 SCRA 47).

4.

Taxes are the lifeblood of the

government and so should becollected without unnecessary

hindrance. Philexs claim that it

had no obligation to pay the excisetax liabilities within the prescribed

period since it still has pending

claims for VAT input credit/refund

with the BIR is UNTENABLE

(Philex Mining Corporation v. CIR,294 SCRA 687).

Q. It has been said that the State can

never be in estoppel, and this is

particularly true in matters involving

taxation. Explain the philosophy

behind the government

s exception, as

a general rule, from the operation of

the principle of estoppel

Taxes are the lifeblood of theGovernment and their prompt and certain

availability are imperious need. Upon taxation

depends the Government's ability to serve the

people for whose benefit taxes are collected.

To safeguard such interest, neglect or omissionof government officials entrusted with the

collection of taxes should not be allowed to

bring harm or detriment to the people, in thesame manner as private persons may be made

to suffer individually on account of his own

negligence, the presumption being that they

take good care of their personal affair. This


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should not hold true to government officials

with respect to matters not of their own

personal concern.

Q. State the DOCTRINE OF SYMBIOTIC

RELATIONSHIP.

This doctrine is enunciated in the case of

CIR v. ALGUE, INC.,158 SCRA 9, which states

that: Taxes are what we pay for civilizedsociety. Without taxes, the government would

be paralyzed for lack of the motive power to

activate and operate it. Hence, despite the

natural reluctance to surrender part of ones

hard-earned income to the taxing authorities,every person who is able to must contribute

his share in the burden of running the

government. The government, for its part, is

expected to respond in the form of tangible

and intangible benefits intended to improve

the lives of the people and enhance their

material and moral values.

Q. When is Taxation considered an

implement of Police Power?

1.

In Walter Lutz v. J. AntonioAraneta, 98 Phil. 148,

the SC

upheld the validity of the tax law

increasing the existing tax on themanufacture of sugar. The

protection and promotion of the

sugar industry is a matter of public

concern; the legislature may

determine within reasonablebounds what is necessary for its

protection and expedient for its

promotion. If objective and

methods alike are constitutionallyvalid, there is no reason why the

state may not levy taxes to raise

funds for their prosecution and

attainment. Taxation may bemade the implement of the States

police power.

2.

InTio v. Videogram Regulatory

Board, 151 SCRA 208,

the levy of a

30% tax under PD 1987, was

imposed primarily for answering

the need for regulating the videoindustry, particularly because of

the rampant film piracy, the

flagrant violation of intellectualproperty rights, and the

proliferation of pornographic

videotapes, and therefore VALID.

While the direct beneficiary of the

said decree is the movie industry,

the citizens are held to be its

indirect beneficiaries.

Q. May the power of taxation be used as

an implement of the power of eminent

domain?

YES. The Supreme Court in the case of

CIR v. Central Luzon Drug Corp ., 456 SCRA414, 445 held: Tax measures are but

enforced contributions exacted on pain of

penal sanctions and clearly imposed for a

public purpose. In recent years, the power to

tax has indeed become a most effective tool torealize social justice, public welfare, and the

equitable distribution of wealth.

While it is declared commitment under

Section 1 of RA 7432, social justice cannot be

invoked to trample on the rights of property

owners who under our Constitution and laws

are also entitled to protection. The socialjustice consecrated in our [C]onstitution [is]

not intended to take away rights from a

person and give them to another who is not

entitled thereto. For this reason, a justcompensation for income that is taken away

from respondent (Central Luzon Drug Corp.)

becomes necessary. It is in the tax credit (nowtax deduction) that our legislators find support

to realize social justice, and no administrative

body can alter that fact.

PURPOSE OF TAXATION

i.

Revenue Basically, the purpose of

taxation is to provide funds or property

with which the State promotes the generalwelfare and protection of its citizens. (51

Am. Jur. 71-73) The conservative and

pivotal distinction between police power

and power of taxation rests in the purposefor which the charge is made. If generation

of revenue is the primary purpose andregulation is merely incidental, theimposition is a tax; but if regulation is the

primary purpose, the fact that revenue is

incidentally raised does not make the

imposition a tax. (Gerochi v. DOE) While

it is true that the power of taxation can beused as an implement of police power, the

primary purpose of levy is revenue

generation. If the purpose is primarilyrevenue, or if revenue is, at least, one of

the real and substantial purposes, then the

exaction is properly called a tax (Planters

Products, Inc. v. Fertiphil Corporation).


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ii.

Non-Revenue

a.

RegulationTaxes may also beimposed for a regulatory purpose

as, for instance, in the

rehabilitation of a threatened

industry which is affected with

public interest, like the oil industry.

(Caltex Phils. V. COA)

b.

Promotion of General Welfare

Taxation may be used as an

implement of the police power in

order to promote the general

welfare of the people. Thus, in thecase of Lutz v. Araneta, the SC

upheld the validity of the Sugar

Adjustment Act, which imposed a

tax on milled sugar since the

purpose of the law was to

strengthen an industry that is so

undeniably vital to the economy

the sugar industry.

c.

Reduction of Social Inequality

This is made possible through the

progressive system of taxationwhere the object is to prevent the

undue concentration of wealth in

the hands of a few individuals.Progressivity is keystoned on the

principle that those who are able

to pay should shoulder the bigger

portion of the tax burden.

d.

Encouragement of Economic

GrowthTaxation does not only

raise public revenue, but in the

realm of tax exemptions and taxreliefs, for instance, the purpose is

to grant incentives or exemptions

in order to encourage investments

and thereby promote the countryseconomic growth.

e.

Protectionism

Q. What are the essentials of the principle

of administrative feasibility?

It requires that (a) each tax should beclear and plain to the taxpayers; (b) capable of

enforcement by an adequate and well-trained

staff of officials; (c) convenient as to time andmanner of payment; and (d) not duly

burdensome upon or discouraging to business

activity.

Q. What does the principle of Fiscal

Adequacy as a characteristic of a sound

tax system require?

It requires that the sources of revenues

must be adequate to meet government

expenditures and their variations (Abakada

Guro, et al. v. Ermita, 469 SCRA 1; Chavez vs

Ongpin, 186 SCRA 331).

Q. What does the principle of theoretical

justice or equality entail?

A good tax system must be based on

the taxpayers ability to pay. This suggests thattaxation must be progressive conformably with

the constitutional mandate that Congress shall

evolve a progressive system of taxation. (Sec.

28[1], Art. VI, 1987 Constitution) It holds that

similarly situated taxpayers should pay equal

taxes, while those who have more should pay

more.

Q. Are taxes subject of set-off?

1. The income tax liability of

Francia cannot be compensated with theamount owed by the government as

compensation for his expropriated property. A

taxpayer may not set-off taxes due from claimshe may have against the government. Taxes

cannot be the subject of compensation because

the government and taxpayer are not mutually

creditors and debtors of each other and a

claim for taxes is not such debt, demand,contract or judgment as is allowed to be set-

off. The collection of a tax cannot await the

results of a lawsuit against the government

(Francia v. IAC, 162 SCRA 753).

2. The claim of Philex for VAT

refund is still pending litigation, and still has to

be determined by the CTA. A fortiori, theliquidated debt of Philex to the government

cannot, therefore, be set off against theunliquidated claim which Philex conceived asexisting in its favor. Debts are due to the

government in its corporate capacity, while

taxes are due to the government in its

sovereign capacity (Philex v. CIR, 294 SCRA

687).

Q. Distinguish direct tax from indirect tax.

Direct tax refers to one assessed upon

the property, person, business income, etc., of

those who pay them, whereas indirect tax

includes those levied on commodities before


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they reach the consumer, and are paid by

those upon whom they ultimately fall, not as

taxes, but as part of the market price of thecommodity (Cooley, Tax. 61).

INHERENT LIMITATIONS ON THE POWER

TO TAX

Q.

What is meant by public purpose as

an inherent limitation on the power of

taxation?

The term public purpose is not

defined. It is an elastic concept that can be

hammered to fit modern standards.Jurisprudence states that public purpose

should be given a broad interpretation. It does

not only pertain to those purposes which are

traditionally viewed as essentially government

functions, such as building roads and delivery

of basic services, but also includes those

purposes designed to promote social justice.

Thus, public money may now be used for therelocation of illegal settlers, low-cost housing

and urban or agrarian reform (Planters

Products, Inc. v. Fertiphil Corporation,

548

SCRA 485 [2008]).

Public v. Private interest

In the case of Pascual v. Secretary of

Public Works, 110 PHIL 331, the SC held that

the appropriation for construction of feeder

roads on land belonging to a private person is

not valid, and donation to the government ofthe said land 5 months after the approval and

effectivity of the Act for the purpose of giving

a semblance of legality to the appropriation

does not cure the basic defect. Incidentaladvantage to the public or to the State, which

results from the promotion of private

enterprises, does not justify the use of public

funds.

Tax Situs of Shares of Stock

The SC held that the actual situs of the

shares of stock left by non-resident alien

decedent is in the Philippines. The owner

residing in California has extended activities

here with respect to her intangibles so as toavail herself of the protection and benefit of

the Philippine laws. Accordingly, the

Philippine government had the jurisdiction totax the same (Wells Fargo Bank v. Collector,

70 Phil. 235).

Exemption from Taxation of Government

Agencies

The Constitution is silent on whether

Congress is prohibited from taxing the

properties of the agencies of the government.

In MCIAA v. Marcos, 261 SCRA 667, the

Supreme Court held that nothing can prevent

Congress from decreeing that even

instrumentalities or agencies of thegovernment performing governmental

functions may be subject to tax.

Tax exemption of property owned by

the Republic of the Philippines refers toproperty owned by the government and its

agencies which to do not have separate and

distinct personalities. The government does

not part with its title by reserving them, but

simply gives notice to the world that it desires

them for a certain purpose. As its title

remains with the Republic, the reserved land is

clearly covered by tax exemption.

However, the exemption does not

extend to improvements on the public land.

Consequently, the warehouse constructed onthe reserved land by NDC should properly be

assessed real estate tax as such improvement

does not appear to belong to the public (NDCv. Cebu City, 215 SCRA 382).

Q. Is Manila International Airport

Authority considered an

instrumentality of the National

Government exempt from local

taxation?

YES. In Manila International AirportAuthority v. Court of Appeals (495 SCRA 591,

615), the Supreme Court held that the real

properties of MIAA are owned by the Republic

of the Philippines and thus exempt from realestate tax. A government instrumentality like

MIAA falls under Section 133(o) of the LocalGovernment Code,exercise of the taxing powers of provinces,

cities, municipalities, and barangays shall not

extend to the levy of the following: xxx (o)

Taxes, fees or charges of any kind on the

National Government, its agencies andinstrumentalities and local government units.

This has been echoed in the recent caseof Philippine Fisheries Development Authority

v. The Municipality of Navotas, 534 SCRA

490, wherein the Supreme Court ruled that

PFDA, being an instrumentality of the national


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government, is exempt from real property tax

but the exemption does not extend to the

portions of the Navotas Fishing Port Complex(NFPC) that were leased to taxable or private

persons and entities for their beneficial use.

Q. Is Philippine Reclamation Authority

(PRA) exempt from real property tax?

YES. It is exempt from real propertytax. First.PRA is not a government-owned or

controlled corporation but an instrumentality

of the National Government vested with

corporate powers and performing an essential

public service pursuant to Section 2(10) of theIntroductory Provisions of the Administrative

Code. Second. Real properties of PRA are

owned by the Republic of the Philippines.

Section 234(a) of the Local Government Code

exempts from real estate tax any [r]eal

property owned by the Republic of the

Philippines. [Republic v. City of Paraaque,

677 SCRA 246 (2012)]

Q. Explicate the Destination Principle in

the imposition of value added tax.

According to the Destination Principle,

goods and services are taxed only in the

country where these are consumed. Inconnection with the said principle, the Cross

Border Doctrine mandates that no VAT shall

be imposed to form part of the cost of the

goods destined for consumption outside the

territorial border of the taxing authority.Hence, actual export of goods and services

from the Philippines to a foreign country must

be free of VAT while those destined for use or

consumption within the Philippines shall beimposed with 10% VAT (Now 12% under R.A.

No. 9337). Export processing zones are to be

managed as a separate customs territory from

the rest of the Philippines and, thus, for taxpurposes, are effectively considered as foreign

territory. For this reason, sales by persons fromthe Philippine customs territory to those insidethe export processing zones are already taxed

as exports (Atlas Consolidated Mining and

Development Corporation v. CIR, 524 SCRA

73, 103).

Q. Distinguish tax from license fee

Tax may be distinguished from licensefee as follows:

Tax License Fee

Levied for revenue Imposed for

regulations

Involves exercise of

taxing power

Involves an

exercise of police

power

Amount is generally

not limited

Amount is

usually limited tothe necessary

expenses of

regulation

Imposed on the right

to exercise a privilege

as well as to persons

and property

Imposed on the

right to exercise

a privilege

Enforced contribution

assessed by sovereignauthority to defray

public expenses

Legal

compensation orreward of an

officer for public

services

Failure to pay does not

necessarily make the

business illegal

Failure to pay

makes the act or

business illegal

Q. Are toll fees considered taxes?

A tax is imposed under the taxing

power of the government principally for the

purpose of raising revenues to fund public

expenditures.Toll fees, on the other hand, are

collected by private tollway operators asreimbursement for the costs and expenses

incurred in the construction, maintenance and

operation of the tollways, as well as to assure

them a reasonable margin of income. Although

toll fees are charged for the use of public

facilities, therefore, they are not government

exactions that can be properly treated as atax. Taxes may be imposed only by the

government under its sovereign authority, tollfees may be demanded by either the

government or private individuals or entities,

as an attribute of ownership (Renato V. Diaz,

et al. vs. Sec. of Finance, et al., G.R. No.193007).

Q. Give the sources of tax law

The sources of tax law are: (a)

Constitution; (b) statutes or laws; (c)

presidential decrees; (d) revenue regulation;

(e) administrative rulings and opinions; (f)judicial decisions; (g) provincial, city, municipaland barangay ordinances; and (h) treaties or

international agreements.


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Q. What is meant by progressive taxation

and what is its basis?

Progressive taxation is built on the

principle of the taxpayers ability to pay

taxation is progressive when its rate goes up

depending on the resources of the person

affected.

CONSTITUTIONAL LIMITATIONS ON THE

TAXING POWER

Q. When does the power of taxation

impinge the due process clause?

The due process clause may be

invoked where a taxing statute is so arbitrary

that it finds no support in the Constitution, as

where it can be shown to amount to a

confiscation of property (Reyes v. Almanzor,

196 SCRA 322).

There is a need for proof of persuasivecharacter as would lead to a violation thereof.

Absent such a showing, the presumption of

validity must prevail.

Q. Is classification allowed in taxation?

The taxing power has the authority tomake reasonable and natural classification for

purposes of taxation, but the governments act

must not be prompted by a spirit of hostility,

or at the very least discrimination that finds no

support in reason. It suffices then that the lawsoperate equally and uniformly on all persons

under similar circumstances or that all persons

must be treated in the same manner, the

conditions not being different both in theprivileges conferred and the liabilities imposed

(Sison v. Ancheta, 130 SCRA 654).

The equal protection clause appliesonly to persons or things identically situated

and does not bar a reasonable classification ofthe subject of taxation, and a classification isreasonable where: (1) it is based on substantial

distinctions which make real differences; (2)

these are germane to the purposes of the law;

(3) the classification applies not only to

present conditions but also to futureconditions; (4) the classification applies only to

those who belong to the same class. In the case

of Ormoc Sugar Company, Inc. v. the

Treasurer of Ormoc C ity

, 22 SCRA 603, the SC

held an ordinance unconstitutional for taxing

only sugar produced and exported by the

Ormoc Sugar Co., Inc.. The classification, to be

reasonable, should be in terms applicable to

future conditions as well. The taxing

ordinance should not be singular and exclusiveas to exclude any substantially established

sugar central, of the same class as plaintiff,

from the coverage of the tax.

The equal protection clause does not

require universal application of the laws on all

persons or things without distinction. Whatthe clause requires is equality among equals as

determined according to a valid classification.

By classification is meant the group of persons

or things similar to each other in certain

particulars and different from all others inthese same particulars (Abakada Guro Party

List v. Ermita, supra).

Q. A law withdrawing the exemption

granted to the press was challenged as

discriminatory by giving broadcast

media favored treatment.

IT IS NOT DISCRIMINATORY. If the

press is now required to pay VAT, it is not

because it is being singled out but only because

of the removal of the exemption previouslygranted by law. Further, the press is taxed on

its transactions involving printing and

publication, which are different from thetransactions of broadcast media. There is a

reasonable basis for the classification

(Tolentino v. Secretary of Finance, 235 SCRA

630).

Q. What is the controlling doctrine on

exemption from taxation of real

property of religious, charitable and

educational institutions?

In the case of Lung Center of the

Philippines v. Quezon City and Constantino P.

Rosas, City Assessor of Quezon City, 433 SCRA119, the prevailing rule on the application of

tax exemption to properties incidentally usedfor religious, charitable and educationalpurposes, as enunciated in the case of Herrera

v. QC-BAA, 3 SCRA 187, has now been

abandoned. In resolving the issue of whether

or not the portions of the real property of

Lung Center that are leased to private entitiesare exempt from real property taxes, the

Supreme Court reexamined the intent of the

constitutional provision granting taxexemption of properties ACTUALLY,

DIRECTLY AND EXCLUSIVELY USED FOR

RELIGIOUS, CHARITABLE AND

EDUCATIONAL PURPOSES.


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Thus, the records of the Constitutional

Commission reveal that what is exempted is

not the institution itself; those exempted fromreal estate taxes are lands, buildings and

improvements actually, directly and exclusively

used for religious, charitable or educational

purposes.

Citing the case of St. Louis Young

Mens Christian Association v. Gehner, 47S.W.2d 776which held that if real property is

used for one or more commercial purposes, it

is not exclusively used for the exempted

purposes but is subject to taxation, the

Supreme Court explained that What is meantby actual, direct and exclusive use of the

property for charitable institutions is the direct

and immediate and actual application of the

property itself to the purposes for which the

charitable institution is organized. It is not the

use of the income from the real property that

is determinative of whether the property is

used for tax-exempt purposes.

In sum, the Court ruled that the

portions of the land leased to private entities

as well as those parts of the hospital leased toprivate individuals are not exempt from taxes.

In the most recent case of CIR v. St.Luke's Medical Center, Inc., 682 SCRA 66, the

Supreme Court held that St. Luke's is not

automatically exempt from real property tax

even if it meets the test of charity. To be

exempt, Section 28(3), Article VI of theConstitution requires that a charitable

institutions use the property actually, directly

and exclusively for charitable purposes.

Q. What is the requisite proof for

exemption from realty taxation?

To be exempt from realty taxation,there must be proof of actual and direct and

exclusive use of the lands, buildings andimprovements for religious or charitablepurposes (Province of Abra v. Hernando, 107

SCRA 104).

DOUBLE TAXATION

Q.

What is double taxation? When does it

arise? How is it prevented? Is it

unconstitutional?

Double taxation means taxing the

same thing or activity twice during the same

tax period (Villanueva v. City of Iloilo, 26

SCRA 578). It takes place when a person is a

resident of a contracting state and derives

income from, or owns capital in, the othercontracting state, and both states impose tax

on that income or capital.

Tax conventions such as the RP-US Tax

Treaty are drafted with a view towards the

elimination of international juridical double

taxation. In CIR v. S.C. Johnson and Sons, Inc.,309 SCRA 87, however, it was held that since

the RP-US Tax treaty does not give a matching

credit of 20% for the taxes paid to the

Philippines on royalties as allowed under the

RP-West Germany Tax Treaty, S.C. Johnson(Phils.) is not entitled to the 10% rate granted

under the latter treaty for the reason that there

is no payment of taxes on royalties under

similar circumstances.

Moreover, double taxation, in general,

is not forbidden by our fundamental law, so

that double taxation becomes obnoxious onlywhere the taxpayer is taxed twice for the

benefit of the same governmental entity or by

the same jurisdiction for the same purpose, but

not in a case where one tax is imposed by theState and the other by the city or municipality

(Pepsi-Cola Bottling Company of

thePhilippines v. Municipality of Tanauan,Leyte, 69 SCRA 460).

Q. Define international juridical double

taxation.

It is the imposition of comparable

taxes in two or more states on the same

taxpayer in respect of the same subject matter

and for identical periods. (P. Baker, DoubleTaxation Conventions and International Law

[1994], p. 11, citing the Committee on Fiscal

Affairs of the Organization for Economic

Cooperation and Development [OECD]).

Q. What are the modes of eliminating

double taxation?

The usual methods of avoiding the

occurrence of double taxation are:

5.

Allowing reciprocal exemptioneither by law or by treaty

6.

Allowance of tax credit for foreign

taxes paid7.

Allowance of deduction for foreign

taxes paid; and

8.

Reduction of the Philippine tax rate


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Q:

What is meant by shifting the tax

burden?

Shifting of tax burden is the process by

which the burden of a tax is transferred from

the statutory taxpayer or the one whom the

tax was assessed or imposed to another

without violating the law.

Q: Enumerate the ways of shifting the tax

burden and define each.

1.

Forward shiftingWhen the burden of

the tax is transferred from a factor of

production through the factors ofdistribution until it finally settles on the

ultimate purchaser or consumer.

2.

Backward shiftingWhen the burden

of the tax is transferred from the

consumer or purchaser through the

factors of distribution to the factors of

production.

3.

Onward shiftingWhen the tax is

shifted two or more times either

forward or backward.

TAX EVASION

Q.

Does an affidavit executed by revenue

officers constitute a tax assessment?

An affidavit executed by revenue

officers stating the tax liabilities of a taxpayerand attached to a criminal complaint for tax

evasion, is not an assessment that can be

questioned before the CTA. An assessment

contains not only a computation of taxliabilities, but also a demand for payment

within a prescribed period (CIR v. PASCOR

Realty and Development Corp., 309 SCRA

402).

Q. Is prior assessment necessary before a

taxpayer may be charged with tax

evasion?

NO. In case of failure to file a return,

the tax may be assessed or a proceeding in

court may be begun without an assessment. Anassessment is not necessary before a taxpayer

may be prosecuted if there is a prima facie

showing of a willful and deliberate attempt tofile a fraudulent return with the intent to

evade and defeat tax. A criminal complaint is

instituted not to demand payment, but to

penalize the taxpayer for violation of the Tax

Code (Ungab v. Cusi, 97 SCRA 877; CIR v.

PASCOR Realty and Development Corp.,

supra).

Q. How are statutory provisions granting

tax exemptions or deductions

construed? State the basis for the rule.

It is an elementary rule in taxation that

exemptions are strictly construed against thetaxpayer and liberally in favor of the taxing

authority. It is the taxpayers duty to justify the

exemption by words too plain to be mistaken

and too categorical to be misinterpreted

(Radio Communications of the Phil. vsProvincial Assessor of South Cotabato, 456

SCRA 1).

The basis for the rule on strict

construction to statutory provisions granting

tax exemptions or deductions is to minimize

differential treatment and foster impartiality,

fairness and equality of treatment amongtaxpayers (Quezon City vs. ABS-CBN

Broadcasting Corporation).

TAX EVASION AND TAX AVOIDANCE

DISTINGUISHED

Tax evasion connotes fraud throughthe use of pretenses and forbidden devices to

lessen or defeat taxes. On the other hand, tax

avoidance is a legal means used by the

taxpayer to reduce taxes (Benny v. Commr.,

25 T.Cl.78).

The intention to minimize taxes, when

used in the context of fraud, must be proven

by clear and convincing evidence amountingto more than mere preponderance. Mere

understatement of tax in itself does not prove

fraud (Yutivo Sons Hardware Co. v. CTA, 1

SCRA 160).

A taxpayer has the legal right todecrease the amount of what otherwise wouldbe his taxes or altogether avoid them by

means which the law permits. Therefore, a

man may perform an act that he honestly

believes to be sufficient to exempt him from

taxes. He does not incur fraud thereby even ifthe act is thereafter found to be insufficient

(Court Holding Co. v. Commr., 2 T.Cl. 531).

Tax evasion connotes the integration

of three factors: (1) the end to be achieved,

i.e., the payment of less than that known by

taxpayer to be legally due, or the non-


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payment of tax when it is shown that a tax is

due; (2) an accompanying state of mind which

is described as being evil, in bad faith,willful, or deliberate and not accidental;

and (3) a course of action or failure of action

which is unlawful (Commissioner of Internal

Revenue v. The Estate of Benigno P. Toda, Jr.,

G.R. No. 147188, September 14, 2004, 438

SCRA 290).

T XP YERS SUIT

Q. What is a taxpayers suit? When is it

proper?

Ataxpayers suit

requires illegal

expenditure of taxpayers money.

Jurisprudence dictates that a taxpayer may be

allowed to sue where there is a claim that

public funds are illegally disbursed or that

public money is being deflected to any

improper purpose, or that public funds are

wasted through the enforcement of an invalidor unconstitutional law or ordinance.

(Remulla

v. Maliksi, 706 SCRA 35, 18 September 2013)

In Maceda v. Macaraig, 197 SCRA 771,the SC sustained the right of Sen. Maceda as

taxpayer to file a petition questioning the

legality of the tax refund to NPC by way oftax credit certificates, and the use of tax

certificates by oil companies to pay for their

tax and duty liabilities to the BIR and Bureau

of Customs.

However, in Gonzales v. Marcos, 65

SCRA 624, the SC held that the taxpayer had

no legal personality to assail the validity of

E.O. 30 creating the Cultural Center of thePhilippines as the assailed order does not

involve the use of public funds. The funds

came by way of donations and contributions,

not by taxation.

Q. Are governm ent contracts covered by

the taxpayers suit?

YES. In the recent case of Abaya v.

Ebdane, Jr. (515 SCRA 720, 757-758), the

Supreme Court stressed that the prevailing

doctrine in the taxpayers suits is to allowtaxpayers to question contracts entered into by

the national government or government-

owned and controlled corporations allegedlyin contravention of law. A taxpayer is allowed

to sue where there is a claim that public funds

are illegally disbursed, or that public money is

being deflected to any improper purpose, or

that there is a wastage of public funds through

the enforcement of an invalid or unconditional

law. Significantly, a taxpayer need not be aparty to the contract to challenge its validity.

Q. How is the plaintiff in a taxpayers suit

differentiated from the plaintiff in a

citizens suit?

The plaintiff in a taxpayers suit is in adifferent category from the plaintiff in a

citizens suitin the former, the plaintiff is

affected by the expenditure of public funds,

while in the latter, he is but the mere

instrument of the public concern (David vs.Macapagal-Arroyo, 489 SCRA 160).

DECISIONAL RULINGS ON REFORMED EVAT

LAW (RA 9337)

No undue delegation of legislative

power

The case before the Court is not adelegation of legislative power. It is simply

a delegation of ascertainment of facts upon

which enforcement and administration ofthe increase rate under the law is

contingent. The legislature has made the

operation of the 12% rate effectiveJanuary 1, 2006, contingent upon a

specified fact or condition. It leaves the

entire operation or non-operation of the12% rate upon factual maters outside ofthe control of the executive. No discretion

would be exercised by the President.

Highlighting the absence of discretion is

the fact that the word

shall

is used in the

common

proviso.

The use of the word

shall connote a mandatory order.Its use in

a statute denotes an imperative obligation

and is inconsistent with the idea ofdiscretion. Where the law is clear and

unambiguous, it must be taken to mean

exactly what it says, and courts have no

choice but to see to it that the mandate is

obeyed. Thus, it is the ministerial duty of

the President to immediately impose the12% rate upon the existence of any of the

conditions specified by Congress. This is a

duty which cannot be evaded by thePresident. Inasmuch as the law specifically

uses the word shall, the exercise of

discretion by the President does not comeinto play. It is a clear directive to impose

the 12% VAT rate when the specified

conditions are present. The time of taking

into effect of the 12% VAT rate is based on


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the happening of a certain specified

contingency, or upon the ascertainment of

certain facts or conditions by a person orbody other than the legislature itself.

The Secretary of Finance is an agent of

Congress in making his

recommendation to the President on

the existence of either of the

conditions

In making his recommendation to thePresident on the existence of either of the

two conditions, in the present case, the

Secretary of Finance is not acting as thealter ego of the President or even her

subordinate. In such instance, he is not

subject to the power of control anddirection of the President. He is acting as

the agent of the legislative department, to

determine and declare the event upon

which its expressed will is to take effect.

The Secretary of Finance becomes themeans or tool by which legislative policy is

determined and implemented, considering

that he possesses all the facilities to gather

data and information and has a muchbroader perspective to properly evaluate

them. His function is to gather and collate

statistical data and other pertinentinformation and verify if any of the two

conditions laid out by Congress is present.

His personality in such instance is in realitybut a projection of that of Congress. Thus,being the agent of Congress and not of the

President, the President cannot alter or

modify or nullify, or set aside the findings

of the Secretary of Finance and to

substitute the judgment of the former forthat of the latter.

VAT rates are uniform

Uniformity in taxation means that alltaxable articles or kinds of property of the

same class shall be taxed at the same rate.

Different articles may be taxed at different

amounts provided that the rate is uniform

on the same class everywhere with all

people at all times. In this case, the tax

law is uniform as it provides a standardrate of 0% or 10% (or 12%) on all goodsand services. Section 4, 5 and 6 of R.A.

No. 9337, amending Sections 106, 107 and108, respectively, of the NIRC, provide for

a rate of 10% (or 12%) on sale of goods

and properties, importation of goods, and

sale of services and use or lease of

properties. These same sections also

provide for a 0% rate on certain sales and

transaction. Neither does the law makeany distinction as to the type of industry

or trade that will bear the 5-year

amortization of input tax paid on purchase

of capital goods or the 5% final

withholding tax by the government. It

must be stressed that the rule of uniform

taxation does not deprive Congress of thepower to classify subjects of taxation, and

only demands uniformity within the

particular class.

VAT rates are equitable

R.A. No. 9337 is also equitable. The law

is equipped with a threshold margin. TheVAT rate of 0% or 10% (or 12%) does not

apply to sales of goods or services with

gross annual sales or receipts not exceeding

P1,500,000.00. Also, basic marine and

agricultural food products in their originalstate are still not subject to the tax, thus

ensuring that prices at the grassroots level

will remain accessible.

Creditable input tax is a mere statutory

privilege

The input tax is not a property or aproperty right within the constitutional

purview of the due process clause. A VAT-

registered persons entitlement to the

creditable input tax is a mere statutory

privilege. The distinction between

statutory privileges and vested rights mustbe borne in mind for persons have no

vested rights in statutory privileges. Thestate may change or take away rights,

which were created by the law of the

state, although it may not take awayproperty, which was vested by virtue of

such rights. Under the previous system of

single-stage taxation, taxes paid at every

level of distribution are not recoverable

from the taxes payable, although it

becomes part of the cost, which is

deductible from the gross revenue. x x x

It is worth mentioning that Congress

admitted that the spread-out of thecreditable input tax in this case amounts toa 4-year interest-free loan to the

government. In the same breath, Congressalso justified its move by saying that the

provision was designed to raise an annual

revenue of 22.6 billion. The legislature

also dispelled the fear that the provision


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will fend off foreign investments, saying

that foreign investors have other tax

incentives provided by law, and citing thecase of China, where despite a 17.5% non-

creditable VAT, foreign investments were

not deterred. Again, for whatever is the

purpose of the 60-month amortization,

this involves executive economic policy

and legislative wisdom in which the Court

cannot intervene.

5 creditable withholding tax is a

method of collection

With regard to the 5% creditablewithholding tax imposed on payments

made by the government for taxable

transactions, Section 12 of R.A. No. 9337,which amended Section 114 of the NIRC,

reads: ***Section 114(C) merely provides a

method of collection, or as stated by

respondents, a more simplified VAT

withholding system. The government inthis case is constituted as a withholding

agent with respect to their payments for

goods and services. x x x The Court

observes, however, that the law used theword final. In tax usage, final, as opposed

to creditable, means full. Thus, it is

provided in Section 114(C): final value-added tax at the rate of five percent

(5%).

VAT is by its nature, regressive

The VAT is an antithesis of progressive

taxation. By its very nature, it is regressive.The principle of progressive taxation has

no relation with the VAT system inasmuchas the VAT paid by the consumer or

business for every goods bought or services

enjoyed is the same regardless of income.In other words, the VAT paid eats the

same portion of an income, whether big or

small. The disparity lies in the income

earned by a person or profit margin

marked by a business, such that the higher

the income or profit margin, the smaller

the portion of the income or profit that is

eaten by VAT. A converso, the lower the

income or profit margin, the bigger thepart that the VAT eats away. At the endof the day, it is really the lower income

group or businesses with low-profitmargins that is always hardest hit.

Imposition of regressive tax like VAT is

not constitutionally prohibited

The Constitution does not really prohibitthe imposition of indirect taxes, like the

VAT. What it simply provides is that

Congress shall evolve a progressive

system of taxation. The Court stated in

the Tolentino case, thus: The Constitution

does not really prohibit the imposition of

indirect taxes which, like the VAT, areregressive. What it simply provides is that

Congress shall evolve a progressive system

of taxation. The constitutional provision

has been interpreted to mean simply that

direct taxes are to be preferred [and] asmuch as possible, indirect taxes should be

minimized. (E. FERNANDO, THE

CONSTITUTION OF THE PHILIPPINES221 [Second ed. 1977]) Indeed, the

mandate to Congress is not to prescribe,

but to evolve, a progressive tax system.

Otherwise, sales taxes, which perhaps are

the oldest form of indirect taxes, wouldhave been prohibited with the

proclamation of Art. VII, 17 (1) of the

1973 Constitution from which the present

Art. VI, 28 (1) was taken. Sales taxes arealso regressive. Resort to indirect taxes

should be minimized but not avoided

entirely because it is difficult, if notimpossible, to avoid them by imposing

such taxes according to the taxpayers

ability to pay. In the case of the VAT, thelaw minimizes the regressive effects of thisimposition by providing for zero rating of

certain transactions (R.A. No. 7716, 3,

amending 102 (b) of the NIRC), while

granting exemptions to other transactions.

II.

INCOME TAXATION

Q. Distinguish Global Tax Treatment from

Schedular System of Income Taxation.

What system of taxation was adopted

under the NIRC on income taxation?

A global system of taxation is onewhere the taxpayer is required to report all

income earned during a taxable period in one

income tax return, which income shall betaxed under the same rule of income taxation.

The schedular system requires a separate return

for each type of income and the tax iscomputed on a per return or per schedule

basis. Schedular system provides for different

tax treatment of different types of income.


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The NIRC adopted a semi-global and

semi-schedulartax system.

Q. What are the features of the Philippine

Income Tax Law?

The features are as follows:

1.

Income tax is a direct taxbecause

the burden is borne by the incomerecipient upon whom the tax is

imposed.

2.

Income tax is a progressive tax

since the tax base increases as thetax rate increases.

3.

The Philippines has adopted the

most comprehensive system of

imposing income tax by adopting

the citizenship principle, resident

principle and the source principle.

4.

The Philippines follows the semi-

schedular or semi-global systemof

income taxation

Q. What are the criteria in imposing

Income Tax in the Ph ilippines?

The criteria are:

1.

Citizenship or nationality principleA

citizen of the Philippines is subject to

Philippine income tax (a) on hisworldwide income, if he resides in the

Philippines (b) only on his Philippine

source income, if he qualifies as a non-

resident citizen where his foreign-source income shall be tax-exempt.

2.

Residence or domicile principle An

alien is subject to Philippine incometax because of his residence in the

Philippines. A resident alien is liable topay Philippine income tax only fromhis income from Philippine sources but

is tax exempt from foreign-source

income.

3.

Source of income principle An alienis subject to Philippine income tax

because he derives income from

sources within the Philippines. Thus, anon-resident alien or non-resident

foreign corporation is liable to pay

Philippine income tax on income from

sources within the Philippines.

Q. What are the types of Philippine

Income Tax?

The types of Income tax under Title II

of the NIRC are:

1.

Graduated income tax on individuals

2.

Normal corporate income tax on

corporations

3.

Minimum corporate income tax oncorporations

4.

Special income tax on certain

corporations (e.g. private educational

institutions, FCDUs, and international

carriers)5.

Capital gains tax on sale or exchange

of unlisted shares of stock of a

domestic corporation classified as a

capital asset

6.

Capital gains tax on sale or exchange

of real property located in the

Philippines and classified as a capital

asset7.

Final withholding tax on certain

passive investment incomes

8.

Fringe benefit tax

9.

Branch profit remittance tax; and10.

Tax on improperly accumulated

earnings.

Q. What is Income?

Income refers to an amount of money

coming to a person within a specified time,

whether as payment for services, interest orprofit from investment. It means cash or its

equivalent. It is gain derived and severed from

capital, from labor or from both combined.

Stock dividends issued by the

corporation are considered unrealized gains,

and cannot be subjected to income tax until

those gains have been realized. Before therealization, stock dividends are nothing but a

representation of an interest in the corporateproperties. As capital, it is not yet subject toincome tax. Capital is wealth or fund; whereas

income is profit or gain or the flow of wealth.

The determining factor for the imposition of

income tax is whether any gain or profit was

derived from a transaction (CIR v. CA, 301SCRA 152).

Q.

What are the requisites of taxable

income?

For income to be taxable, the

following requisites must exist:


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1.

There must be gain or profit;

2.

That the gain or profit is realized

or received, actually orconstructively;

3.

It is not exempted by law or treaty

from income tax

Q. What are the sources of income?

The sources of income are: theproperty, activity or service that produces the

income. For the source of income to be

considered as coming from the Philippines, it is

sufficient that the income is derived from

activity within the Philippines (CIR v. BOAC,149 SCRA 395).

Q. When is income considered realized?

For income tax purposes, income is

realized when the earning process is complete

or virtually complete and an exchange has

taken place.

Q. What is the source of income

considered from within the

Philippines?

In general, for the source of income to

be considered as coming from the Philippines,it is sufficient that the income is derived from

property, activity or service within the

Philippines.

In CIR vs. BOAC (1987), an off-lineinternational carrier maintained a sales agent

in the Philippines who sold tickets for flights

flown outside the Philippines. The Supreme

Court considered the sale of tickets in thePhilippines as the activity that produced the

income. The test of taxability is the source;

and the source of an income is that activity

which produced the income. Even if the BOACtickets sold covered the transport of

passengers and cargo to and from foreigncities it cannot alter the fact that incomefrom the sale of tickets was derived from the

Philippines. Thus, BOAC was made liable for

revenue derived from the sale of tickets.

Q. What are incomes considered derived

from sources within the Philippines?

Sec. 42(A) of the Tax Code enumeratesthe items of gross income from sources within

the Philippines, namely:

(1)

Interests paid by residents of the

Philippines, corporate or

otherwise;(2)

Dividends paid by domestic

corporations; or foreign

corporations at least 50% of their

gross income in the last three

taxable years coming from sources

within the Philippines;

(3)

Compensation forservices performed in the

Philippines;

(4)

Rentals and royalties from

properties located in the

Philippines;(5)

Gains from sale of real properties

located in the Philippines; and

(6)

Gains from sale of personal

properties, the sale taking place in

the Philippines.

Q. Who are the income taxpayers?

In general, the income taxpayers are

classified into individual, estate, trust and

corporation. (Sec. 22A, NIRC)

ST. LUKE S MEDICAL CENTER, INC.,

ORGANIZED AS A

NON-STOCK AND NON-PROFIT

CHARITABLE INSTITUTION

IS NOT IPSO FACTO ENTITLED TO A TAX

EXEMPTION

There is no dispute that St. Lukes isorganized as a non-stock and non-profit

charitable institution. However, this does not

automatically exempt St. Lukes from paying

taxes. This only refers to the organization ofSt. Lukes. Even if St. Lukes meets the test of

charity, a charitable institution is not ipso facto

tax exempt. To be exempt from income taxes,

Section 30(E) of the NIRC requires that acharitable institution must be organized and

operated exclusively for charitable purposes.Likewise, to be exempt from income taxes,Section 30(G) of the NIRC requires that the

institution be operated exclusively for social

welfare. [Commissioner of Internal Revenue v.

St. Luke's Medical Center, Inc., 682 SCRA 66

(26 September 2012)]

Q.

State the rule on construction of tax

exemptions.

Laws granting exemption from tax are

construed strictissimi juris against the taxpayer

and liberally in favor of the taxing power.


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Taxation is the rule and exemption is the

exception. The burden of proof rests upon the

party claiming exemption to prove that it is infact covered by the exemption so claimed

(Commissioner v. Mitsubishi Metal Corp., 181

SCRA 215).

Q.

Is terminal leave pay taxable?

No. In the case of Re: Request of Atty.Bernardo Zialcita (Adm. Matter No. 90-6-015-

SC, October 18, 1990; 190 SCRA 851), the SC

held that terminal leave pay is the cash value

of an employees accumulated leave credits,

hence, it cannot be considered compensationfor services rendered; it cannot be viewed as

salary. It falls within the enumerated

exclusions from gross income, and is therefore

not subject to tax.

Q.

What are taxable unregistered

partnerships?

The SC in Evangelista v. CIR, 102 Phil.

140, held that Sec. 24 [now Section 22(B)]

covered unregistered partnerships and even

associations or joint accounts which had nolegal personalities apart from their individual

members. xxx Accordingly, a pool of

machinery insurers was a partnership taxableas a corporation (

Afisco Insurance Corp. v. CA

,

302 SCRA 1).

Q. Obillos sold his rights over two parcels

of land to his four children so that they

can build their residence, but the latter

after one (1) year sold them and paid

the capital gains. Acting on the theory

that the children had formed an

unregistered taxable partnership or

joint venture, the BIR required the

brothers to pay corporate income tax.

Resolve.

The children should not be treated ashaving formed an unregistered partnership andtaxed corporate income tax on their shares of

the profits from the sale. Their original

purpose was to divide the lots for residential

purposes. If later on they found it not feasible

to build their residences on the lots because ofthe high cost of construction, then they had no

choice but to resell the same to dissolve the co-

ownership. The division of the profit wasmerely incidental to the dissolution of the co-

ownership which was in the nature of things in

a temporary state (Obillos Jr. v. CIR,

139

SCRA 438, 439).

Q.

May a withholding agent file a written

claim for refund?

YES. In CIR v. Procter and Gamble

PMC , 204 SCRA 377, the SC held that a

withholding agent is subject to and liable for

deficiency assessments, surcharges and

penalties should the amount of the tax

withheld be finally found to be less than the

amount that should have been withheld underthe law. A person liable for tax has been

held to be a person subject to tax and

properly considered a taxpayer x x x By any

reasonable standard, such a person should be

regarded as a party in interest, or as a personhaving sufficient legal interest, to bring a suit

for refund of taxes.

Q. The BIR disallowed PRC s claim for

deduction for failure to prove the

worthlessness of the debts. Is the

disallowance correct?

YES. There was no iota of

documentary evidence (e.g. collection letters,

reports from investigating fieldsman, police

report/affidavit, etc.) to give support to theallegation of worthlessness. For debts to be

considered worthless, and qualify as bad

debts making them deductible, the taxpayershould show that:

a.

There is valid and subsisting

debt;

b.

The debt must be actuallyascertained to be worthless

and uncollectible during the

taxable year;

c.

The debt must be charged offduring the taxable year;

d.

The debt must arise from the

business or trade of the

taxpayer;e.

The taxpayer must also show

that it is indeed uncollectibleeven in the future (PRC v. CA,256 SCRA 667).

f.

It must not arise from

transactions between related

taxpayers (RR 5-99, RR 25-

2002).Q. Is theoretical interest on capital

deductible?

NO. It is not deductible as it does

not represent a charge arising under an

interest-bearing obligation (Sec. 79, Rev. Reg.


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No. 2, cited in the case of PICOP v. CA,250

SCRA 434).

Q.

How are assets classified for income

taxpayers?

The assets of a taxpayer are classified

for income tax purposes into ordinary and

capital assets. However, there is no rigid rule

or formula by which it can be determined withfinality whether property sold by a taxpayer

was held primarily for sale to costumers in the

ordinary course of his trade or business or

whether it was sold as a capital asset. A

property initially classified as a capital assetmay thereafter be treated as an ordinary asset

if a combination of factors indubitably tend to

show that the activity was in furtherance of or

in the course of the taxpayers trade or

business. Thus, a sale of inherited property

usually gives capital gain or loss even though

the property has to be subdivided or improved

or both to make it saleable. However, if theinherited property is substantially improved or

very actively sold or both, it may be treated as

held primarily for sale to customers in the

ordinary course of the heirs business (Calasanzv. CIR,

144 SCRA 664).

Q. Is an equity investment a capital or

ordinary asset?

An equity investment is a capital, not

ordinary, asset of the investor the sale or

exchange of which results in either a capitalgain or a capital loss. The gain or loss is

ordinary when the property sold or exchanged

is not a capital asset (China Banking

Corporation v. CA, 336 SCRA 178).

Q. Who are the individual income

taxpayers?

They are the resident citizen,

nonresident citizen, OCW and seamen,resident alien (Sec.24A) and non-resident alienengaged in trade/business or exercise of

profession in the Philippines (Sec 25A).

EXCLUDE non-resident alien NOT

engaged in trade/business or exercise ofprofession in the Philippines (Sec. 25A).

Q. How are the incomes of individuals

taxed?

In general, individuals are taxed on the

basis of their taxable income, that is, gross

income less deduction and personal and

additional exemption. This tax is referred to as

ordinary income tax or regular income tax.

(Sec. 24A and 25A in relation to Sec. 31 andSec. 32A, NIRC).

By way of exception, final tax, instead

of ordinary tax, shall be imposed on certain

kinds of passive income. Subject to certain

requisites, these are:

a. Interests, royalties, prizes and

winnings;

b. Cash or property dividends;

c. Capital gains derived from the sale

of shares of stocks; andd. Capital gains derived from the sale

of realty. (Sec. 24B1,

24B2,24C,24D1,25A2 and 25A3,

NIRC)

Other incomes subject to final tax are:

a. Fringe benefits (Sec. 33, NIRC)

b. Informers reward (Sec. 282, NIRC)

Q. Distinguish ordinary tax from final tax

Ordinary tax and final tax are

distinguished as follows:

(a)

In the former, the tax base is

taxable income; in the latter, thetax base is the gross income;

(b)

In the former, deductions and

personal or additional exemptions

are allowed; in the latter, no suchdeductions and personal or

additional exemptions are

allowed;

(c)

The tax base of the former is

computed on the basis of one

taxable year; the tax base of the

latter is usually computed on a pertransaction basis;

(d)

The former is paid at the end ofthe taxable year; the latter is paid

at source;

(e)

In the former, liability for payment

rests on the payee; in the latter,liability for payment rests on the

payor;

(f)

In the former, the payee is

required to file an income tax

return; in the latter, the payee is

no longer required to file the


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return since it is to be made by the

payor;

(g)

Creditable withholding tax is, in

certain cases, imposed on incomes

subject to ordinary tax; final

withholding tax is usually imposed

on incomes subject to final tax.

Q. Distinguish final withholding tax from

creditable withholding tax

FWT CWT

The amount of

income taxwithheld by the

withholding

agent isconstituted as a

full and final

payment of the

income tax due

from the payee

on the said

income.

Taxes withheld

on certainincome

payments are

intended toequal or at least

approximate the

tax due of the

payee on said

income.

The liability for

payment of thetax rests

primarily on the

payor as a

withholding

agent.

Payee of income

is required toreport the

income and/or

pay the

difference

between the tax

withheld and

the tax due onthe income. The

payee also has

the right to askfor a refund if

the tax withheldis more than the

tax due.

The payee is

not required to

file an income

tax return forthe particular

income.

The income

recipient is still

required to file

an income taxreturn, as

prescribed in

Sec. 51 and Sec.

52 of the NIRC,

as amended.

(Revenue Regulation 2-98, Sec. 2.57A; CREBAvs. Romulo, 9 March 2010)

Q. What is passive income?

It is income generated by the

taxpayers assets. The BIR defines passive

income by stating what it is not: if the income

is generated in the active pursuit and

performance of the corporations primarypurposes, the same is not passive income.

(CREBA vs. Romulo, 9 March 2010)

Q. Are all passive incomes subject to

withholding tax?

No. There are only certain kinds ofpassive income that are subject to final tax

and, consequently, to final withholding tax.

These are specifically enumerated in various

provisions of the NIRC (see Sec. 57A, NIRC).

All others are generally considered part ofgross income, and consequently, subject to

ordinary tax wherein creditable withholding

tax is, in particular cases, applicable. Under

present regulations, creditable withholding tax

is usually applied to income payments not

involving passive income.

NOTE: From the above, it is clear that notonly passive incomes may be subject to

withholding tax. Sec. 57 (A) of the NIRC

expressly states that final tax can be imposed

on certain kinds of income and enumeratesthese as passive income. On the other hand,

Section 57 (B) provides that the Secretary (of

Finance) can require a CWT on incomepayable to natural or juridical persons, residing

in the Philippines. There is no requirement

that this income be passive income. If that

were the intent of Congress, it could have

easily said so. (see CREBA vs. Romulo, supra)

Q. Give some example of ordinary

incomes subject to CWT

Some notable income payments that are

subject to CWT are (1) wages; (2) professional

fees; (3) rentals of realty; (4) income payments

to partners of GPPs and (5) income paymentto realtors for the sale of realty. (Sec. 78, NIRC

and Sec. 2.57.2 of RR No. 2-98, as amended)

Q. What is the proper tax treatment of

interest incomes earned by individual?

As a rule, the interests earned by

individuals shall be included in gross incomeand, thus, subject to regular income tax. This

includes interest earned by a resident citizen

from sources abroad.

By way of exception, interest from

bank deposit (or monetary benefits from

deposit substitutes or similar arrangements)


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DERIVED FROM SOURCES WITHIN shall be

subject to final tax and, correspondingly, final

withholding tax. The rate of tax is 20% forPeso currency deposit account and 7.5% for

any foreign currency deposit account.

Q. Instances when the tax on interests

from bank deposits is not applicable

(a)

When derived from sources abroad(the bank is a non-resident), except

those earned by resident citizens;

(b)

When earned by non-residents from

foreign country deposit accounts; and

(c)

When earned from long-term depositor investment.

Q. Instances when final tax on prize is not

applicable

(a)

When earned from sources abroad,

that is, when the competition or

contest was held abroad; however, theprize or award received by a resident

citizen form sources abroad is still

included in gross income subject of

ordinary income taxation;

(b)

When the amount does not exceed

Php10,000.00, in which case, theamount is included in gross income

and thus subject to ordinary tax (Sec.

24B1, Sec. 32A, NIRC);

(c)

When the prize or award is received

primarily in recognition of religious,charitable, educational, artistic,

literary, or civic achievement

PROVIDED (1) the recipient was

selected without any action on his partto enter the contest; and (2) he is not

required to render substantial future

services; This is considered an

EXCLUSION, and hence, exempt fromtax (Sec. 32B7c, NIRC)

(d)

When the prize or award is won by anathlete in a local or international

sports competition (i.e., the

OLYMPICS) sanctioned by a

recognized national sports association;

This is considered an EXCLUSION and,hence exempt from tax (Sec. 32B7d,

NIRC).

Q. What is capital asset? What is capital

gain?

The law defines capital asset in the

negative, such that, any property not falling

under the following enumeration (referred to

as ordinary assets) is capital asset:

(a)

stock in trade or inventoriable asset;

(b)

property primarily held for sale tocustomers in the ordinary course of

trade or business;

(c)

depreciable asset; and

(d)

real property used in trade or business.

(Sec. 39A, NIRC)

On the other hand, a capital gain is the

gain, profit or income realized from a sale or

disposition of capital asset.

Q. What is the proper tax treatment on

capital gain derived from dealings in

property?

Generally, a capital gain is included in

gross income subject of ordinary income

taxation (Sec. 32A, NIRC). By way ofexceptions, the capital gains derived from the

sale of shares of stock issued by a domestic

corporation a sale of real property located inthe Philippines are subject to final tax. (Sec.

24C, 24D1, 25A3, NIRC)

Q. In dealings in capital assets, are gains

to be presumed?

No. Gains are not to be presumed

from sale or disposition of capital assets.

However, in case of sale or other dispositionof real property located in the Philippines and

held as capital asset, the gain is presumed and

such gain is equivalent to the amount of the

zonal value or gross selling price, whichever ishigher. (Sec. 24D1, Sec. 25A3, NIRC)

Q. What are the tax base and the tax rate

of the applicable tax imposable on

capital gains?

In general, the tax base of the income

tax on capital gain is the net capital gain or netincome, whereas, the tax rate is the graduated

rate of 5%-32%.

For capital gain derived from the sale

of share of stock in a domestic corporation not

traded through the local stock exchange, the

tax base is NET CAPITAL GAIN and the tax


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rate is 5% for the first Php100,000.00 and

10% on any amount in excess thereof. (NOTE:

If sale is through the local stock exchange, theapplicable tax is the percentage tax, also

referred to as the stock transaction tax, under

Sec. 127 of the NIRC. The basis is the GSP and

the rate is of 1%. The payment of this tax is

in lieu of income tax.)

For capital gain presumed to havebeen realized from the sale of realty, the tax

base is FMV or GSP, whichever is higher, and

the tax rate is 6%.

Q. A dealer in securities sold unlisted

shares of stocks of a domestic

corporation in 2010 and derived a

gain of P1 Million therefrom. Is the

gain taxable at 5 /10 capital gains

tax based on net capital gain OR at

of 1 stock transaction tax based on

the gross selling price or fair market

value, whichever is higher?

Neither. The 5%/10% capital gains tax

is not applicable because he shares are NOT

capital assets. Shares of stock, like othersecurities, would be ordinary assets to a dealer

in securities or a person engaged in the

purchase and sale of, or an active trader (forhis own account) in, securities. (China Banking

Corp. vs. CA, G.R. No. 125508, July 19,

2000).

Likewise, he percentage tax, otherwiseknown as the stock transaction tax, is not

applicable because the seller is a dealer in

securities. In addition, the shares sold are

unlisted shares. The percentage tax applies onsale, barter or exchange of shares of stock

LISTED and TRADED through the local stock

exchange OTHER THAN by a dealer in

securities. (Sec. 127, NIRC, emphasis supplied.)

Q. A resident Filipino citizen (not a dealer

in securities) sold shares of stocks of a

domestic corporation that are listed

and traded in the Philippine Stock

Exchange.

a. The sale is exempt from income tax butsubject to the of 1% stock transaction tax;

b. The sale is subject to income tax computed

at the graduated income tax rates of 5% to32% on net taxable income;

c. The sale is subject to the stock transaction

tax and income tax;

d. The sale is both exempt from the stock

transaction tax and income tax.

Explanation:

Under Section 127 (D) of the NIRC,

any gain derived from the sale, barter,

exchange or other disposition of shares of

stock subject to the percentage tax of of 1%

shall be exempt from the final tax and from

the regular individual or corporate income tax.

Q. May the liability for the 6 capital

gains tax be legally avoided? If in the

affirmative, what are the requirements?

Yes. The 6% capital gains tax may be

legally avoided if the subject matter of the sale

is the PRINCIPAL residence and the proceeds

are to be used in acquiring or establishing a

new principal residence within eighteen (18)

calendar months from the date of sale. The

seller must inform the Commissioner of his

intention to avail of the exemption within 30days from the date of sale. (Sec. 24D2, NIRC).

Additionally, the revenue regulations

require the 6% capital gains tax o bedeposited in an escrow account with an

authorized agent bank and shall only be

released to the transferor if the proceeds of thesale/disposition have, in fact, been utilized in

the acquisition or construction of a new

principal residence. (RR No. 17-2003)

Q. Instances when the 6 capital gains

tax will not apply

a. when the real property is ordinary asset;

b. when the real property, even thoughclassified as capital asset, is not located in the

Philippines;

c. when the real property is a principal

residence and the seller applies for exemptionfrom the tax;

d. when the real property is sold to thegovernment and the seller exercises the optionto be taxed for ordinary tax under Sec. 24A.

(contained in the proviso of Sec.24D1, NIRC)

Q. What is the importance of the

classification of assets into ordinary

and capital?

The importance lies on the application

of the rules on holding period, loss limitation

and carry-over of the net capital loss. These


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rules are relevant only to dealings in capital

assets.

Q. State the rules on holding period, loss

limitation and carry-over of net capital

loss

Pursuant to the rule on holding period,

only fifty percent (50%) of the capital gain, if

any, is taxable; or only 50% of the capital loss,is deductible, where the property sold has

been held for more than twelve (12) months.

If held in the short-term (less than 12 months),

one hundred percent (100%) of the gain or

loss shall be taxable or deductible, as the casemay be. This rule applies to individuals only.

(Sec. 39B, NIRC).

Under the loss limitation rule, the

capital loss shall be deductible only to the

extent of the capital gains derived within the

taxable year. This rule applies to both

individuals and corporations. (Sec. 39C inrelation to Sec.34D4, NIRC).

If during the taxable year, there is

excess of capital losses over capital gains, theexcess (net capital loss) may be carried over to

and deducted from capital gains in the

succeeding taxable year. The privilege of carry-over of net capital loss is available only to

individuals. (Sec. 39D, NIRC)

Q. Are the rules on holding period, loss

limitation and carry-over of net capital

loss applicable in a sale or disposition

of real property located in the

Philippines

No. By express provision under the

law, the holding period is inapplicable to a

sale of real property where the 6% capital

gains tax applies. In this case, the gain ispresumed by law. The loss that may have been

actually incurred, if there be any, is notrecognized. Consequently, the rules on losslimitation and carry-over of net capital loss

also find no application. (see the exception

clause in Sec. 24D1, NIRC)

NOTE: The holding period is also notapplicable to a sale of shares of stock in a

domestic corporation not traded through the

local stock exchange. This is also by expressexclusion under the law. (Sec. 24C and allied

provisions, NIRC)

Q. Who are the corporate taxpayers?

They are classified into domesticcorporation (DC), resident foreign corporation

(RFC) and non-resident foreign corporation

(NRFC).

Q. What is a resident foreign corporation?

Give an example

It is a foreign corporation engaged in

the trade or business in the Philippines (Sec.

22H, NIRC). An example is one organized

under the laws of a foreign country that

engages in business in Makati City, Philippines.

Q. How are the corporations taxed?

In general, domestic corporations and

resident foreign corporations are taxed on

their taxable income, i.e. gross income less

deductions; or in lieu thereof, the Minimum

Corporate Income Tax (MCIT).

By way of exceptions, final tax shall be

imposed on certain kinds of passive income

such as interest on bank deposits, royalties,capital gains form sale or disposition of land or

building located in the Philippines. (Sec. 27D1,

27D2,27D5; Sec. 28A7a,28A7c)

For non-resident corporations, their

income from all sources within the Philippines

are taxed via the final withholding tax. The

rate applied is 30%, except interest on foreignloan (20%), dividend from domestic

corporations (15%, subject to condition) and

capital gain from sale of shares of stock in a

domestic corporation (5% and 10%).

EXCLUDE Non-resident cinematographic film

owner, lessor or distributor (Sec. 28B2, Non-

resident owner or lessor of vessels chartered byPhilippine nationals (Sec. 28B3), and Non-

resident owner or lessor of aircraft machineriesand other equipment (Sec. 28B4)

Q. Under the NIRC, who are the exempt

corporations?

Under, Sec. 27 (C) of the NIRC, thefollowing are absolutely exempted from

income tax:

(a)

SSS

(b)

GSIS

(c)

PHIC

(d)

PCSO


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