Taxation Law Pre-Bar Notes 2015-A

7/23/2019 Taxation Law Pre-Bar Notes 2015-A

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GENERAL PRINCIPLES OF TAXATION

Taxation is the power by which the sovereign, through its law-making body, raises revenue to

defray the necessary expenses of the government. It is merely a way of apportioning the costs of

government among those who in some measure are privileged to enjoy its benefits and must bear its

burdens.

Taxation is the inherent power of the sovereign, exercised through the legislature, to impose

burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry

out the legitimate objects of government.

It is also defined as the act of levying a tax, i.e. the process or means by which the sovereign,

through its law-making body, raises income to defray the necessary expenses of government. It is a

method of apportioning the cost of government among those who, in some measure, are privileged to

enjoy its benefits and must therefore bear its burdens.

E s s e n t i a l e l e m e n t s o f a ta x

1. It is an enforced contribution.

2. It is generally payable in money.

3. It is proportionate in character.

4. It is levied on persons, property, or the exercise of a right or privilege.

5. It is levied by the State which has jurisdiction over the subject or object of taxation.

6. It is levied by the law-making body of the State.

7. It is levied for public purpose or purposes.

PURPOSES OF TAXATION:

REVENUE OR FISCAL

The primary purpose of taxation on the part of the government is to provide funds or property with

which to promote the general welfare and the protection of its citizens and to enable it to finance its

multifarious activities.

SUMPTUARY PURPOSE OF TAXATION

More popularly known as the non-revenue or regulatory purpose of taxation. While the primary

purpose of taxation is to raise revenue for the support of the government, taxation is often employed

as a devise for regulation by means of which certain effects or conditions envisioned by the

government may be achieved.

For example, government may provide tax incentives to protect and promote new and pioneer

industries. The imposition of special duties, like dumping duty, marking duty, retaliatory duty, and

countervailing duty, promote the non-revenue or sumptuary purpose of taxation.

R e g u l a t i o n - Taxation has a regulatory purpose as in the case of taxes levied on excises or privileges

like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets,

cockpits, etc.



(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

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P r o m o t i o n o f G e n e r a l W e l f a re - Taxation can be used as an implement of police power in order to

promote the general welfare of the people.

Lutz v. Araneta (98 Phil 148) - 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 isundeniably vital to the economy - the sugar industry.

Osmeña v. Orbos (G.R. No. 99886, March 31, 1993) - While the funds collected under the

OPSF are referred to as taxes, they are extracted in the exercise of the police power of the

State. From such fund, amounts are drawn to reimburse oil companies when appropriate

situations arise for increases in, as well as under-recovery of, the cost of crude oil importation.

R e d u c t i o n o f S o c i a l i n e q u i ty - This is made possible through the progressive system of taxation

where the objective is to prevent the undue concentration of wealth in the hands of few individuals.

Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger

portion of the tax burden. Examples - income tax, donor's tax and estate tax.

E n c o u r a g e E c o n o m i c G r o w t h - The law, at times, grants incentives or exemptions in order to

encourage investments and thereby promote the country's economic growth.

P r o t e c t i o n i s m - It protects local industries from foreign competition i.e. protective tariffs and customs

duties.

S o u t h e r n C r o s s C e m e n t C o r p . , v . S e c r e t a r y o f F i n a n c e e t . a l . ( G . R . N o . 1 5 8 5 4 0 ,

J u l y 8 , 2 0 0 4 )

- The Safeguard Measures Act (SMA [RA No. 8800]) allows the imposition of emergency

measures, including tariffs, to protect domestic industries and producers from increased imports

which inflict or could inflict serious injury on them. The power to impose general safeguardmeasure is vested with the DTI Secretary upon compliance with two conditions, viz:

1. there must be a positive final determination by the Tariff Commission that a product

is being imported into the country in increased quantities, as to be substantial cause

of serious injury or threat to the domestic injury, and;

2. the Secretary must establish that the application of such safeguard measures is in

the public interest.

Note: in the case of imported agricultural products, it is the Secretary of Agriculture who may

impose the protective tariff.

P A L v . E d u , 1 6 4 S C R A 3 2 0

The legislative intent and purpose behind the law requiring owners of vehicles to pay for their

registration is mainly to raise funds for the construction and maintenance of highways and, to a much

lesser degree, pay for the operating expenses of the administering agency. It is possible for an




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exaction to be both a tax and a regulation. License fees are charges, looked to as a source of revenue

as well as a means of regulation. The fees may properly be regarded as taxes even though they also

serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of

the real and substantial purposes, then the exaction is properly called a tax.

T i o v . V i d e o g ra m , 1 5 1 S C R A 2 0 8

PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax on the gross

receipts payable to the local government. SC upheld the validity of the law ruling that the tax imposed

is not only a regulatory, but also a revenue, measure prompted by the realization that earnings of

videogram establishments of around P600 million annually have not been subjected to tax, thereby

depriving the government of an additional source of revenue. It is a user tax imposed on retailers for

every video they make available for public viewing. The 30% tax also served a regulatory purpose: to

answer the need for regulating the video industry, particularly the rampant film piracy, the flagrant

violation of intellectual property rights, and the proliferation of pornographic video tapes.

C a l t e x v . C o m m i s s i o n e r , 2 0 8 S C R A 7 5 5

Taxation is no longer a measure merely to raise revenue to support the existence of government.

Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization

of a threatened industry which is affected with public interest as to be within the police power of the

State. The oil industry is greatly imbued with public interest as it vitally affects the general welfare.

THEORY AND BASIS OF TAXATION:

1. Necessity theory - the existence of the government is a necessity; that it cannot continue

without the means to pay its expenses; and that for those means it has the right to compel all citizens

and property within its limits to contribute (51 Am. Jur. 42)

L i f e b l o o d o r n e c e s s i t y t h e o r y

The life blood theory constitutes the theory of taxation, which provides that the existence of

government is a necessity; that government cannot continue without means to pay its expenses; and

that for these means it has a right to compel its citizens and property within its limits to contribute.

In C o m m i s s io n e r v . A l g u e , the Supreme Court said that taxes are the lifeblood of the government

and should be collected without unnecessary hindrance. They are what we pay for a civilized

society. Without taxes, the government would be paralyzed for lack of motive power to activate and

operate it. 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 moral and material values.




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2. Benefi ts-protection theory

- the State demands and receives taxes from the subjects of

taxation within its jurisdiction so that it may be enable to carry its mandate into effect and perform the

functions of government, and the citizens pay from his property the portion demanded in order that he

may, by means thereof, be secured in the enjoyment of the benefits of organized society. (51 Am. Jur.

43)

B e n e f i t - r e c e i v e d p r i n c i p l e

This principle serves as the basis of taxation and is founded on the reciprocal duties of protection and

support between the State and its inhabitants. Also called “ s y m b i o t i c r e l a t i o n ” between the State

and its citizens.

In return for his contribution, the taxpayer receives the general advantages and protection which the

government affords the taxpayer and his property. One is compensation or consideration for the

other; protection for support and support for protection. However, it does not mean that only those

who are able to and do pay taxes can enjoy the privileges and protection given to a citizen by thegovernment.

In fact, from the contribution received, the government renders no special or commensurate benefit to

any particular property or person. The only benefit to which the taxpayer is entitled is that derived

from the enjoyment of the privileges of living in an organized society established and safeguarded by

the devotion of taxes to public purpose. The government promises nothing to the person taxed

beyond what may be anticipated from an administration of the laws for the general good. [

L o r e n z o v .

P o s a d a s ,

G.R. No. L-43082 (64 PHIL 353) June 18, 1937]

Taxes are essential to the existence of the government. The obligation to pay taxes rests not upon the

privileges enjoyed by or the protection afforded to the citizen by the government, but upon the

necessity of money for the support of the State. For this reason, no one is allowed to object to or

resist payment of taxes solely because no personal benefit to him can be pointed out as arising from

the tax. [

L o r e n z o v . P o s a d a s ,

G.R. No. L-43082 (64 PHIL 353) June 18, 1937]

“THE POWER TO TAX INVOLVES THE POWER TO DESTROY”

Chief Justice Marshall declared that the power to tax is also called the power to destroy.

Therefore, it should be exercised with caution to minimize injury to the proprietary rights of the

taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kills the “hen that lays

the golden egg.” And in order to maintain the general public’s trust and confidence in the government,

this power must be used justly and not treacherously. [Chief Justice Marshall in M c C u l l o c h v .

M a r y l a n d , reiterated in R o x a s v . C T A , 23 SCRA 276]

Justice Holmes

seemingly contradicted the Marshallian view by declaring in P a n h a n d l e O i l

C o m p a n y v . M i s s i s s i p p i that “the power to tax is not the power to destroy while this court sits.”




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D o m o n d o n ’ s r e c o n c i li a t io n o f M a r s h a l l a n d H o l m e s

The imposition of a valid tax could not be judicially restrained merely because it would prejudice

taxpayer’s property.

An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer’s

property.

Marshall’s view refers to a valid tax while Holmes’ view refers to an invalid tax.

NATURE OF TAXING POWER

Two-fold power. The nature of the state’s power to tax is two-fold. It is both inherent and legislative

power. It is inherent in nature being an attribute of sovereignty. This is so because without the taxesthe state’s existence would be affronted. It is legislative in nature because it is subject to

constitutional limitations.

Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. 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 things within its jurisdiction. In other words, the legislature wields the power to

define what tax shall be imposed, why it should be imposed, how much shall be imposed, against

whom (or what) it shall be imposed and where it shall be imposed. (CREBA vs. Executive Secretary

Romulo, GR No. 160756, March 9, 2010)

As a general rule, the power to tax is plenary and unlimited in its rage, acknowledging in its very

nature no limits, so that the principal check against its abuse is to be found only in the responsibility of

the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is

circumscribed by constitutional limitation. At the same time, like any other statute,tax legislation

carries a presumption of constitutionality

. (Ibid .)




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TAXATION

distinguished fromPOLICE POWER

andEMINENT DOMAIN

TAXATION POLICE POWER EMINENT DOMAIN

DEFINITION

Power of the State to

demand enforced

contributions for public

purposes

Power of the State to

enact such laws inrelation to persons and

property as may promote

public health, safety,

morals, and the general

welfare of the public

Power of the State to take

private property for public

use upon paying to the

owner a just compensation

to be ascertained according

to law

Authority

Exercising the

Power

Only the government or

its political subdivisions

Only the government or

its political subdivisions

May be granted to public

service companies of public

utilities

PURPOSE

Enforced contribution is

demanded for the supportof the government

Use of property is

regulated for the purpose

of promoting the general

welfare

Property is taken for public

use

Persons

Affected

Operates upon a

community or class of

individuals

Operates upon a

community or class of

individuals (usually)

Operates on an individual

as the owner of a particular

property

EFFECT

Money contributed in the

concept of taxes

becomes part of public

funds

No transfer of title, at

most, there is restraint on

injurious use of the

property

Transfer of the right to

property whether it be

ownership or a lesser right

BENEFITS

RECEIVED

Assumed that the

individual receives the

equivalent of the tax in

the form of protection,

and benefits received

from the government as

such

Person affected receives

no direct and immediate

benefit but only such as

may arise from the

maintenance of a healthy

economic standard of

society

Person affected receives

the market value of the

property taken from him

AMOUNT OF

IMPOSITION

Generally no limit on the

amount of tax that may

be imposed

Amount imposed should

not be more than that

sufficient to cover the

cost of the license and

the necessary expenses

of regulation

No amount imposed but

rather the owner is paid the

market value of the property

taken

Relationship to

the

Constitution

Subject to certain

Constitutional limitations

Relatively free from


and is superior to the

impairment provisions

Subject to certain


(e.g. inferior to impairment

of contracts clause)




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1. Police Power

The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue

generation. The "lawful subjects" and "lawful means" tests are used to determine the validity of a law

enacted under the police power. The power of taxation, on the other hand, is circumscribed byinherent and constitutional limitations. ( P L A N T E R S P R O D U C T S , I N C . v . F E R T I P H I L

C O R P O R A T I O N , G . R . N o . 1 6 6 0 0 6 , M a r c h 1 4 , 2 0 0 8 )

The motivation behind many taxation measures is the implementation of police power goals.

Progressive income taxes alleviate the margin between rich and poor; the so-called "sin taxes" on

alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these

potentially harmful products. ( S O U T H E R N C R O S S C E M E N T C O R P O R A T I O N v . C E M E N T

M A N U F A C T U R E R S A S S O C I A T I O N O F T H E P H I L I P P I N E S , G . R . N o . 1 5 8 5 4 0 , A u g u s t

3 , 2 0 0 5 )

Taxation is distinguishable from police power as to the means employed to implement these public

good goals. Those doctrines that are unique to taxation arose from peculiar considerations such as

those especially punitive effects of taxation, and the belief that taxes are the lifeblood of the state yet

at the same time, it has been recognized that taxation may be made the implement of the state's

police power. ( S O U T H E R N C R O S S C E M E N T C O R P O R A T I O N v . C E M E N T


3 , 2 0 0 5 )

Unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the government's

general funds but to provide means for the rehabilitation and stabilization of a threatened industry, the

coconut industry, which is so affected with public interest as to be within the police power of the State.

The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388, and the oil price

stabilization funds under P.D. 1956, as amended by E.O. 137. (PAMBANSANG KOALISYON NG

MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE

SECRETARY G.R. Nos. 147036-37 April 10, 2012)

If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a

tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make

the imposition a tax. ( G E R O C H I v . D E P A R T M E N T O F E N E R G Y , 5 2 7 S C R A 6 9 6 ( 2 0 0 7 )

While it is true that the power of taxation can be used as an implement of police power, the primary

purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least,

one of the real and substantial purposes, then the exaction is properly called a tax. ( P L A N T E R S

P R O D U C T S , I N C . v . F E R T I P H I L C O R P O R A T I O N , G . R . N o . 1 6 6 0 0 6 , M a r c h 1 4 , 2 0 0 8 )

It has been the settled law that municipal license fees could be classified into those imposed for

regulating occupations or regular enterprises, for the regulation or restriction of non-useful occupations

or enterprises and for revenue purposes only. Licenses for non-useful occupations are also incidental

to the police power and the right to exact a fee may be implied from the power to license and regulate,

but in fixing the amount of the license fees the municipal corporations are allowed a much wider

discretion in this class of cases. ( E R M I T A - M A L A T E H O T E L A N D M O T E L O P E R A T O R S




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A S S O C I A T I O N , IN C . , H O T E L D E L M A R I N C . a n d G O C H I U v . T H E H O N O R A B L E C I T Y

M A Y O R O F M A N I L A , G . R . N o . L - 2 4 6 9 3 , J u ly 3 1 , 1 9 6 7 )

2. Power of Eminent Domain

Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but

rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these

establishments can be deemed as their just compensation for private property taken by the State for

public use. ( C O M M I S S I O N E R O F I N T E R N A L R E V E N U E v . C E N T R A L L U Z O N D R U G

C O R P O R A T I O N G . R . N o . 1 5 9 6 4 7 A p r i l 1 5 , 2 0 0 5 )

Besides, the taxation power can also be used as an implement for the exercise of the power of

eminent domain. 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 to realize social justice, public welfare, and the equitable distribution of wealth.

( C O M M I S S I O N E R O F I N T E R N A L R E V E N U E v . C E N T R A L L U Z O N D R U G

C O R P O R A T I O N G . R . N o . 1 5 9 6 4 7 A p r i l 1 5 , 2 0 0 5 )

TAXATION AS AN IMPLEMENT OF POLICE POWER

In W a l t e r L u t z v s . J . A n t o n i o A r a n e t a , 9 8 P h i l . 1 4 8 , the SC upheld the validity of the tax law

increasing the existing tax on the manufacture of sugar. “The protection and promotion of the sugar

industry is a matter of public concern; the legislature may determine within reasonable bounds what isnecessary for its protection and expedient for tis promotion. If objective and methods alike are

constitutionally valid, there is no reason why the state may not levy taxes to raise funds for their

prosecution and attainment. Taxation may be made the implement of the State’s police power.”

In T i o v s . V i d e o g r a m R e g u l a t o r y B o a r d , 1 5 1 S C R A 2 0 8 , the levy of a 30% tax under PD

1987, was imposed primarily for answering the need for regulating the video industry, particularly

because of the rampant film piracy, the flagrant violation of intellectual property rights, and the

proliferation of pornographic videotapes, and therefore VALID. While the direct beneficiaries of the

said decree is the movie industry, the citizens are held to be its indirect beneficiaries.

Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the

government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and

stabilization of a threatened industry which is affected with public interest s to be within the police

power of the state. (

C A L T E X P H I L I P P I N E S , I N C . v . C O M M I S S I O N O N A U D I T G . R . N O .

9 2 5 8 5 , M A Y 8 , 1 9 9 2 )




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TAXATION AS AN IMPLEMENT OF EMINENT DOMAIN

In C I R v s . C e n t r a l L u z o n D r u g C o r p . ( G R N o . 1 5 9 6 4 7 , A p r i l 1 5 , 2 0 0 5 ) , the SC held that as

a result of the 20% discount imposed by RA 7432, respondent becomes entitled to a just

compensation . The taxation power can also be used as an implement for the exercise of the power of

eminent domain. T a x m e a s u r e s a r e b u t “ e n f o r c e d c o n t r ib u t i o n s e x a c t e d o n p a i n o f p e n a l

s a n c t i o n s ” a n d “ c l e a r l y i m p o s e d f o r a p u b l i c p u r p o s e . ” In recent years, the power to tax has

indeed become a most effective tool to realize social justice, public welfare, and the equitable

distribution of wealth.

While it is a 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 social justice consecrated in our constitution is not intended to take away rights from a

person and give them to another who is not entitle thereto.” For this reason, a just compensation for

income that is taken away from respondent becomes necessary. It is in t a x c r e d i t that our legislators

find support to realize social justice, and no administrative body can alter that fact.

It is noteworthy, however, that RA 9257 specifically provides that the senior citizen’s

discount should now be treated as a deductible expense. In other words, if previously

(

C I R v s . C e n t r a l L u z o n D r u g C o r p . c a s e

) the treatment is a tax deduction by way of

tax credit, with the advent of RA 9257, the said discount is now considered an allowed

deduction, that is, to be deducted from gross income.

CONSTITUTIONAL PROVISIONS ON TAXATION

The following are provisions of the 1987 Constitution concerning taxation:

A r t i c l e V I –

Section 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,

bills of local application, and private bills shall originate exclusively in the House of Representatives,

but the Senate may propose or concur with amendments.

Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve

a progressive system of taxation.

(2) The Congress may, by law, authorize the President to fix within specified limits, and

subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas,

tonnage and wharfage dues, and other duties or imposts within the framework of the national

development program of the Government.

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and

exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.




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(4) No law granting any tax exemption shall be passed without the concurrence of a majority

of all the Members of the Congress.

Section 29. (3) All money collected on any tax levied for a special purpose shall be treated as

a special fund and paid out for such purpose only. If the purpose for which a special fund was created

has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of theGovernment.

A r t i c l e X –

Section 5. Each local government unit shall have the power to create its own sources of

revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the

Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and

charges shall accrue exclusively to the local governments.

ASPECTS OF TAXATION

1. Levy – the power of taxation is vested on and exercised by the legislative department. The

determination of what should be taxed, when, how, or where lies in the legislative department.

The power to tax is primarily vested in the Congress; however, it may exercised by local legislative

bodies pursuant to direct authority conferred by Sec. 5, Art. X of the Constitution. Under the said

provision, the exercise of the power may be subject to such guidelines and limitations as the Congress

may provide which, however, must be consistent with the basic policy of local autonomy. ( M A C T A N

C E B U I N T E R N A T I O N A L A I R P O R T A U T H O R I T Y V S . M A R C O S , 2 6 1 S C R A 6 6 7 )

2. Assessment and Collection – exercised by the Executive Department. The agency in charge

of the collection of internal revenue taxes is the BIR. For the most part of the lifeblood of the nations,

the duty to collect rests with the BIR.

Taxes may be classified into two as to the manner of collection:

A. Internal revenue taxes imposed under the NIRC

1. Income tax

2. Transfer taxes

a. Estate Tax

b. Donor’s Tax

3. Percentage taxes

a. Value Added Tax

b. Other Percentage Taxes

4. Excise taxes




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5. Documentary stamp tax

B. Local/Municipal Taxes

C. Tariff and Customs Duties

D. Taxes/Tax incentives under special laws

3.Payment and/or Exercise of Remedies

– compliance and/or resistance by the taxpayer. The

exercise of remedy is initially either through the Executive or Legislative Department and ultimately

through the Judiciary.

THREE BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal Adequacy – sources of revenue must be adequate to meet expenditures. Violation of this

principle will make the law unsound but still valid and not unconstitutional.

2. Theoretical Justice – Taxes must be based on the taxpayer’s ability to pay and proportional to the

relative value of the property. Violation of this principle will make the law unsound,

invalid and unconstitutional.

3. Administrative Feasibility – The taxes should be capable of being effectively enforced. Violation of

this principle will make the law unsound but still valid and not unconstitutional.

TAXES NOT SUBJECT TO COMPENSATION

There is a material and fundamental distinction between a tax and a debt. Debts are due to the

Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. A debt is a sum of money due upon contract, express or implied, or one which is evidenced by

judgment. Taxes are imposts levied by the Government for its support or some special purpose,

which the Government has recognized. However, tax in a broad sense may be a debt, so that interest

on estate and inheritance taxes may be deducted as interest on indebtedness.

General rule: A tax delinquency cannot be extinguished by legal compensation. This is so because

the government and the tax delinquent are not mutually creditors and debtors. Neither is a tax

obligation an ordinary debt. Moreover, the collection of a tax cannot await the results of a lawsuit

against the government. Finally, taxes are not in the nature of contracts but grow out of a duty to, and

are the positive acts of the, government to the making and enforcing of which the personal consent of

the taxpayer is not required. [F r a n c i a v . I A C , 162 SCRA 754 and R e p u b l i c v . M a m b u l a o

L u m b e r , 4 SCRA 622]

Exception : SC allowed set off in the case of D o m i n g o v . G a r l i t o s [8 SCRA 443] re. claim for

payment of unpaid services of a government employee vis-a-vis the estate taxes due from his estate.

The fact that the court having jurisdiction of the estate had found that the claim of the estate against

the government has been appropriated for the purpose by a corresponding law shows that both the

claim of the government for inheritance taxes and the claim of the intestate for services rendered have




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already become overdue and demandable as well as fully liquidated. Compensation therefore takes

place by operation of law.

P h i l e x M i n i n g C o r p o r a t io n v . C o m m i s s i o n e r , 2 9 4 S C R A 6 8 7 ( 1 9 9 8 )

Philex Mining Corporation wants to set off its claims for VAT input credit/refund for the excise taxesdue from it. The Supreme Court disallowed such set off or compensation.

Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer

are not creditors and debtors of each other. There is a material distinction between a tax and a debt.

Debts are due to the government in its corporate capacity, while taxes are due to the government in its

sovereign capacity.

LIMITS OF TAXATION

!

Inherent limitation! Constitutional limitation

INHERENT LIMITATIONS

1. Levied for public purpose

2. Non-delegability of taxing power

3. Territoriality or situs of taxation

4. Tax exemption of government entities

5. Recognition of international comity

6. Prohibition on double taxation (some authorities do not consider this as inherent limitation )

1. Public Purpose

Tests to determine public purpose, broad interpretation. The proceeds of the tax will directly promote

the welfare of the community in equal measure. Public purpose is now given the broadest

interpretation so as to include even indirect public advantage or benefit. The mere fact that the tax will

be directly enjoyed by a private individual does not make it invalid so long as some link to the public

welfare is established.

Examples of Public Purpose:

1. Tax on sugar for rehabilitation and upliftment of the sugar industry. (Lutz vs. Araneta);

2. Semi-postal stamp on mail matter to raise funds for the eradication of tuberculosis. (Gomez

vs. Palomar);

3.

Pensions paid to war veterans because they will encourage emulation of their services byothers assured that their patriotism will be acknowledged and rewarded;

4. Unemployment relief, support for the handicapped and care of the aged;

5. Scholarships for poor but deserving students;

PRESUMPTION OF PUBLIC PURPOSE

: Where the purpose of the tax is not specifically stated,

there is a presumption that it is created for a public purpose. (Mendoza Santos & Co. vs. Municipality

of Meycauayan, 94 Phil 1047)




13

2. Non-delegability of taxing power

GENERAL RULE

The power of taxation is exclusively legislative. The power of taxation, being purely legislative,Congress cannot delegate such power. Note, however, that the power of the legislature is itself a

delegated power given by the people.

EXCEPTIONS (Delegable Powers)

( a ) D e l e g a t i o n t o t h e P r e s i d e n t ( T a r i f f P o w e r s )

Congress may authorize the President to fix within the specified limits and subject to such limitations

and restrictions as it may impose:

1. tariff rates;

2. import and export quotas;

3. tonnage and wharfage dues; and

4. other duties or imposts within the framework of the national development program

of the Government.

The reason for this delegation is the necessity, not to say expediency, of giving the chief executive the

authority to act immediately on certain matters affecting the national economy lest delay result in

hardship to the people. It is recognized that the legislative process is much too cumbersome for the

speedy solution of some economic problems, especially those relating to foreign trade.

When Congress tasks the President or his/her alter egos to impose safeguard measures under the

delineated conditions, the President or the alter egos may be properly deemed as agents of Congress

to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law

that the agent may not act beyond the specifically delegated powers or disregard the restrictions

imposed by the principal. ( S O U T H E R N C R O S S C E M E N T C O R P O R A T I O N v . C E M E N T


3 , 2 0 0 5 )

F l e x i b l e t a r i f f c l a u s e

In the interest of national economy, general welfare and/or national security, the President, upon

recommendation of the National Economic and Development Authority, is empowered:

1. To increase, reduce, or remove existing protective rates of import duty, provided that the

increase should not be higher than 100% ad valorem ;

2. To establish import quota or to ban imports of any commodity; and

3. To impose additional duty on all imports not exceeding 10% ad valorem .

( b ) D e l e g a t i o n t o l o c a l g o v e r n m e n t s ( L o c a l T a x i n g p o w e r )

The theory of non-delegation of legislative power does not apply in matters of local concern. Each

local government unit shall have the power to create its own sources of revenues and to levy taxes,

fees and charges subject to such guidelines and limitations as the Congress may provide, consistent

with the basic policy of local autonomy.




14

Section 5, Article X of the Constitution does not change the doctrine that municipal corporations do not

possess inherent powers of taxation; what it does is to confer municipal corporations a general power

to levy taxes and otherwise create sources of revenue and they no longer have to wait for a statutory

grant of these powers and the power of the legislative authority relative to the fiscal powers of local

governments has been reduced to the authority to impose limitations on municipal powers. Theimportant legal effect of Section 5 is thus to reverse the principle that doubts are resolved against

municipal corporations; henceforth, in interpreting statutory provisions on municipal fiscal powers,

doubts will be resolved in favor of municipal corporations. ( Q U E Z O N C I T Y , e t a l. v . A B S - C B N

B R O A D C A S T I N G C O R P O R A T I O N , G . R . N o . 1 6 2 0 1 5 , M a r c h 6 , 2 0 0 6 )

( c ) D e l e g a t i o n t o a d m i n i s t r a t i v e a g e n c i e s ( A d m i n i s t r a t i v e M a t t e r s )

Valuation of property pursuant to fixed rules; equalization of assessment by a central body; collection

of taxes.

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain

facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its

terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations

on their authority. While the power to tax cannot be delegated to executive agencies, details as to the

enforcement and administration of an exercise of such power may be left to them, including the power

to determine the existence of facts on which its operation depends. ( A B A K A D A G U R O P A R T Y

L I S T ( F o r m e r l y A A S J A S ) O F F I C E R S S A M S O N S . A L C A N T A R A a n d E D V I N C E N T S .

A L B A N O v . T H E H O N O R A B L E E X E C U T I V E S E C R E T A R Y G . R . N o . 1 6 8 05 6 S e p t e m b e r

1 , 2 0 0 5 )

NON-DELEGABLE POWERS:

1. Selection of property or transaction to be taxed;2. Determination of purposes;

3. Rate of taxation;

4. Rules of taxation.

3. Territoriali ty or situs of taxation

The important factor therefore which determines the source of income of personal services is not the

residence of the payor, or the place where the contract for service is entered into, or the place of

payment, but the place where the services were actually rendered. ( C O M M I S S I O N E R O F

I N T E R N A L R E V E N U E v . J U L I A N E B A I E R - N I C K E L , G . R . N o . 1 5 3 7 9 3 , A u g u s t 2 9 , 2 0 0 6 )

From sources within the Philippines

The "sale of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC

should pay income tax in the Philippines because it undertook an income producing activity in the

country. The tickets exchanged hands here and payments for fares were also made here in Philippine

currency; thus, the situs of the source of payments is the Philippines. ( C o m m i s s i o n e r o f I n t e r n a l




15

R e v e n u e v . B r i t i s h O v e r s e a s A i r w a y s C o r p o r a ti o n ( B O A C ) a s c i t e d i n C O M M I S S I O N E R

O F I N T E R N A L R E V E N U E v . J U L I A N E B A I E R - N I C K E L , G . R . N o . 1 5 3 7 9 3 , A u g u s t 2 9 ,

2 0 0 6 )

For the source of income to be considered as coming from the Philippines, it is sufficient that the

income is derived from activities within this country regardless of the absence of flight operationswithin Philippine territory. Indeed, the sale of tickets is the very lifeblood of the airline business, the

generation of sales being the paramount objective. ( C O M M I S S I O N E R O F I N T E R N A L

R E V E N U E v . J A P A N A I R L I N E S , I N C . , G . R . N o . 6 0 7 1 4 , M a r c h 6 , 1 9 9 1 )

Sale of personal property

It is not the place where the contract was perfected, but the place of delivery which determines the

taxable situs of the property sought to be taxed. In the cases of Soriano y Cia. v. Collector of Internal

Revenue, 51 O.G. 4548; Vegetable Oil Corporation v. Trinidad, 45 Phil. 822; and Earnshaw Docks

and Honolulu Iron Works vs. Collector of Internal Revenue, 54 Phil. 696, it has been ruled that for a sale

to be taxed in the Philippines it must be consummated there; thus indicating that the place of

consummation (associated with the delivery of the things subject matter of the contract) is the

accepted criterion in determining the situs of the contract for purposes of taxation, and not merely the

place of the perfection of the contract. (THE MUNICIPALITY OF JOSE PANGANIBAN, PROVINCE

OF CAMARINES NORTE, ETC. v. THE SHELL COM PANY O F THE PHILIPPINES, LTD., G.R. No.

L-18349, July 30, 1966)

Value-Added Tax (VAT)

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictionalreach of the tax. Goods and services are taxed only in the country where they are consumed; thus,

exports are zero-rated, while imports are taxed. (COMMISSIONER OF INTERNAL REVENUE v .

AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June

29, 2005)

Consumption is "the use of a thing in a way that thereby exhausts it," and applied to services, the term

means the performance or "successful completion of a contractual duty, usually resulting in the

performer's release from any past or future liability." The services rendered by respondent are

performed or successfully completed upon its sending to its foreign client the drafts and bills it has

gathered from service establishments here; thus, its services, having been performed in the Philippines,

are also consumed in the Philippines. ( C O M M I S S IO N E R O F I N T E R N A L R E V E N U E v .

A M E R I C A N E X P R E S S I N T E R N A T I O N A L , I N C . ( P H I L I P P I N E B R A N C H ) , G . R . N o .

1 5 2 6 0 9 , J u n e 2 9 , 2 0 0 5 )

4. Tax exemption of government entities

The property of the state, its agencies and subdivisions devoted to government uses and purposes is

generally exempt from taxation even in the absence of an express provision of law.




16

The constitution does not contain any provision granting tax exemption to the government. It is a

matter of public policy and no constitutional grant is necessary.

The following Government-owned or –controlled Corporations, Agencies, or Instrumentalities are

EXEMPT from payment of income tax:a. Government Service Insurance System (GSIS);

b. Social Security System (SSS);

c. Philippine Health Insurance Corporation (PhilHealth);

d. Philippine Charity Sweepstakes Office (PCSO); and

e. Local Water Districts (LWD)

Under RA 10026 (March 11, 2011), Local Water Districts were added as government-exempt

corporations. PAGCOR was previously exempt from payment of income tax, but said exemption was

withdrawn by RA 9337 (November 1, 2005).

PAGCOR subject to income tax, exempt from VAT.

With the passage of Republic Act No.

(RA) 9337, the Philippine Amusement and Gaming Corporation (PAGCOR) has been excluded from

the list of government-owned and –controlled corporations (GOCCs) that are exempt from tax under

Section 27(c) of the Tax Code; PAGCOR is now subject to corporate income tax.

According to the SC, RA 9337 does not contain any provision that subjects PAGCOR to VAT. Instead,

the SC finds support to the VAT exemption of PAGCOR under Section 109(k) of the Tax Code, which

provides that transactions exempt under international agreements to which the Philippines is a

signatory or under special laws [except Presidential Decree No. (PD) 529] are exempt from VAT.

Considering that PAGCOR’s charter, i.e., PD 1869 — which grants PAGCOR exemption from taxes —

is a special law, it is exempt from payment of VAT.

5. Recognition of International Comity

International obligations concomitant with our acceptance of the principles of international law as part

of our law demand that certain representatives of foreign states stationed and property of such foreign

states found within our territory be exempted from taxation.

6. Double Taxation

Double taxation simply means taxing the same subject twice for the same taxable year, for the same

tax under the same taxing authority, and within the same taxable territory. It is not a constitutional

limitation, there is no constitutional prohibition against double taxation but is not allowed in this

jurisdiction.

Two types of Double Taxation:

1. Direct (strict sense); and

2. Indirect (broad sense)

In strict sense , double taxation means direct double taxation . This means the same property is

taxed twice when it should be taxed only once and that both taxes are imposed on the same subject




17

matter for the same purpose, by the same taxing authority within the same jurisdiction during the same

taxing period and covering the same kind of tax.

In its broad sense , referred to as indirect double taxation , double taxation is taxation other

than direct duplicate taxation. It extends to all cases in which there is a burden of two or more

impositions.

C o n s t i t u t io n a l i t y o f d o u b l e t a x a t i o n

Unlike the United States Constitution, our Constitution does not prohibit double taxation. However,

while it is not forbidden, it is something not favored. Such taxation should, whenever possible, be

avoided and prevented.

In addition, where there is direct double taxation, there may be a violation of the constitutional

precepts of equal protection and uniformity in taxation.

The argument against double taxation may not be invoked where one tax is imposed by the State andthe other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in

the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or

activity by both the State and a political subdivision thereof. And where the statute or ordinance in

questions applies equally to all persons, firms and corporations placed in a similar situation, there is no

infringement of the rule on equality. [C i t y o f B a g u i o v . D e L e o n , 25 SCRA 938]

V I L L A N U E V A V . C I T Y O F IL O I L O , 2 6 5 S C R A 5 2 8

An ordinance imposing a municipal tax on tenement houses was challenged because the owners

already pay real estate taxes and also income taxes under the NIRC. The Supreme Court held that

there was no double taxation. The same tax may be imposed by the National Government as well as

the local government. There is nothing inherently obnoxious in the exaction of license fees or taxeswith respect to the same occupation, calling, or activity by both the State and a political subdivision

thereof. Further, a license tax may be levied upon a business or occupation although the land used in

connection therewith is subject to property tax.

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. The apparent rationale for doing away with double

taxation is to encourage the free flow of goods and services and the movement of capital, technology

and persons between countries, conditions deemed vital in creating robust and dynamic economies.

Foreign investments will only thrive in a fairly predictable and reasonable international investmentclimate and the protection against double taxation is crucial in creating such a climate. ( C I R V S .

S . C . J O H N S O N A N D S O N , I N C . , 3 0 9 S C R A 8 7 )

REMEDIES AGAINST DOUBLE TAXATION

1. Reciprocity clause – e.g. Sec. 104 of the NIRC, on intangibles personal properties of a non-

resident alien decedent or donor;




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2. Tax sparing rule – e.g. Sec. 28 (5)(b), intercorporate dividends received by an non-resident

foreign corporation from a domestic corporation;

3. Tax credit method – e.g. Sec. 34 (C)(3), credit against taxes paid for taxes of foreign countries

by citizen and domestic corporations; tax credit for estate taxes paid to foreign country by

citizens or resident alien decedent under Sec. 86 (E); tax credits for donor’s taxes paid by

citizens or resident alien donors to a foreign country under Sec. 101 (C);4. Exemption method – e.g. Sec. 35 (D), personal exemption allowable to non-resident alien

individual;

5. Tax treaties – e.g. The RP-US Tax Treaty, RP-Japan Tax Treaty, RP-Netherlands Tax Treaty,

etc.

CONSTITUTIONAL LIMITATIONS

1. Due process clause

2. Equal protection clause

3. Freedom of the speech and of press

4.

Religious freedom

5. Non-impairment clause

6. No imprisonment for debt or non-payment of poll tax

7. All appropriations, revenue or tariff bills shall originate exclusively in the House of

Representatives, but the Senate may propose or concur with amendments

8. The President shall have the veto power to any particular item or items in an appropriation,

revenue or tariff bill, but the veto shall not affect the item or items to which he does not object

9. Taxation shall be uniform, equitable. The Congress shall evolve a progressive system of

taxation

10. Limited power of the congress to delegate taxing power to the President

11. Delegated authority of President to impose tariff rates, import and export quotas, tonnage and

wharfage dues and other duties or imposts within the framework of the national developmentprogram of the Government

12. No tax exemption without concurrence of the majority of all the members of the Congress

13. Subject to exception no public money or property shall be appropriated, applied, paid, or

employed, directly, or indirectly for religious purposes

14. Money collected on tax levied for special purpose to be treated as a special fund and paid for

such purpose only

15. Supreme Court’s power to review judgments or orders of lower courts

16. Authority of LGUs to create its own sources of revenues and to levy taxes, fees, and charges

subject to the limitations as the Congress may provide

17. Actually, directly and exclusively clause

PROVISIONS DIRECTLY AFFECTING TAXATION

" Prohibition against imprisonment for non-payment of poll tax

" Uniformity and equality of taxation

Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class

shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural




19

classifications for purposes of taxation; inequalities which result from a singling out of one particular

class for taxation or exemption infringe no constitutional limitation. ( K A P A T I R A N N G M G A

N A G L I L I N G K O D S A P A M A H A L A A N N G P I L I P I N A S , I N C . v . H O N . B I E N V E N I D O T A N ,

G . R . N o . 8 1 3 1 1 , J u n e 3 0 , 1 9 8 8 )

" Grant by Congress of authority to the president to impose tariff rates

It is Congress which authorizes the President to impose tariff rates, import and export quotas, tonnage

and wharfage dues, and other duties or imposts. Thus, the authority cannot come from the Finance

Department, the National Economic Development Authority, or the World Trade Organization, no

matter how insistent or persistent these bodies may be. ( S O U T H E R N C R O S S C E M E N T

C O R P O R A T I O N v . C E M E N T M A N U F A C T U R E R S A S S O C I A T I O N O F T H E

P H I L I P P I N E S , G . R . N o . 1 5 8 5 4 0 , A u g u s t 3 , 2 0 0 5 )

The authorization granted to the President must be embodied in a law. Hence, the justification cannot

be supplied simply by inherent executive powers. ( S O U T H E R N C R O S S C E M E N T

C O R P O R A T I O N v . C E M E N T M A N U F A C T U R E R S A S S O C I A T I O N O F T H E

P H I L I P P I N E S , G . R . N o . 1 5 8 5 4 0 , A u g u s t 3 , 2 0 0 5 )

The authorization to the President can be exercised only within the specified limits set in the law and is

further subject to limitations and restrictions which Congress may impose. Consequently, if Congress

specifies that the tariff rates should not exceed a given amount, the President cannot impose a tariff

rate that exceeds such amount. ( S O U T H E R N C R O S S C E M E N T C O R P O R A T I O N v .

C E M E N T M A N U F A C T U R E R S A S S O C I A T I O N O F T H E P H I L I P P I N E S , G .R . N o . 1 5 8 5 4 0 ,

A u g u s t 3 , 2 0 0 5 )

Assuming there is a conflict between the specific limitation in Section 28 (2), Article VI of the

Constitution and the general executive power of control and supervision, the former prevails in the

specific instance of safeguard measures such as tariffs and imposts, and would thus serve to qualifythe general grant to the President of the power to exercise control and supervision over his/her

subalterns. ( S O U T H E R N C R O S S C E M E N T C O R P O R A T I O N v . C E M E N T


3 , 2 0 0 5 )

" Prohibition against taxation of religious, charitable entities, and educational

entities

The test of exemption is the use of the property. Actual use is necessary, “use” takes precedence

over “ownership.” If the property owned by religious, charitable or educational institutions is actually

used for a non-exempt purpose, the exemption is withdrawn. Thus, the lease of a portion of school to

a commercial establishment is subject to tax. ( A B R A V A L L E Y C O L L E G E , I N C . v . A Q U I N O , L -

3 9 0 8 6 , J u n e 1 5 , 1 9 8 8 ) . C o n v e r s e l y , a p r o p e r t y o w n e d b y a c r i m i n a l b u t a c t u a l l y u s e d

b y r e l i g i o u s , c h a r i t a b l e o r e d u c a t i o n a l i n s t i t u t io n s i s e x e m p t f r o m t a x .

Incidental use is also covered by the exemption. Examples: a vegetable garden of a parish priest

adjacent to a convent and lodging place for religious functions are exempted; training school for

nurses, facilities for interns, doctors and staff of a hospital are exempt from taxes; canteen and




20

drugstore in a charitable hospital; and income of charitable hospital from admission of pay patients if

the income is dedicated to charitable purposes.

The word "charitable" is not restricted to relief of the poor or sick. The test whether an enterprise is

charitable or not is whether it exists to carry out a purpose recognized in law as charitable or whether it

is maintained for gain, profit, or private advantage. ( L U N G C E N T E R O F T H E P H I L I P P I N E S v .

Q U E Z O N C I T Y , G . R . N o . 1 4 4 1 0 4 , J u n e 2 9 , 2 0 0 4 )

Even as we find that the petitioner is a charitable institution, we hold that those portions of its real

property that are leased to private entities are not exempt from real property taxes as these are not

actually, directly and exclusively used for charitable purposes. On the other hand, the portions of the

land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-

paying, are exempt from real property taxes. ( L U N G C E N T E R O F T H E P H I L I P P I N E S v .

Q U E Z O N C I T Y , G . R . N o . 1 4 4 1 0 4 , J u n e 2 9 , 2 0 0 4 )

To be a charitable institution, however, an organization must meet the substantive test of charity in

Lung Center. Charity is essentially a gift to an indefinite number of persons which lessens the burden

of government. In other words, charitable institutions provide for free goods and services to the public

which would otherwise fall on the shoulders of government. ( C O M M I S S I O N E R O F I N T E R N A L

R E V E N U E v . S T . L U K E S M E D I C A L C E N T E R , I N C . G . R . N o . 1 9 5 9 0 9 S e p t e m b e r 2 6 ,

2 0 1 2 )

In Lung Center, this Court declared: "exclusive" is defined as possessed and enjoyed to the exclusion

of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to

exclude; as enjoying a privilege exclusively." The words "dominant use" or "principal use" cannot be

substituted for the words "used exclusively" without doing violence to the Constitution and the law.

Solely is synonymous with exclusively. ( C O M M I S S IO N E R O F I N T E R N A L R E V E N U E v . S T .

L U K E S M E D I C A L C E N T E R , I N C . G . R . N o . 1 9 5 9 0 9 S e p t e m b e r 2 6 , 2 0 1 2 )

Services to paying patients are activities conducted for profit. There is a "purpose to make profit over

and above the cost" of services. ( C O M M I S S IO N E R O F I N T E R N A L R E V E N U E v . S T . L U K E S

M E D I C A L C E N T E R , I N C . G .R . N o . 1 9 5 9 0 9 S e p t e m b e r 2 6 , 2 0 1 2 )

Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable

or social welfare purposes to be completely exempt from income tax. An institution under Section

30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income

from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax,

previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section

27(B). ( C O M M I S S I O N E R O F I N T E R N A L R E V E N U E v . S T . L U K E S M E D I C A L C E N T E R ,

I N C . G . R . N o . 1 9 5 9 0 9 S e p t e m b e r 2 6 , 2 0 1 2 )

A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter

vivos, the imposition of which on property used exclusively for religious purposes, does not constitute

an impairment of the Constitution. The phrase "exempt from taxation," as employed in the Constitution

should not be interpreted to mean exemption from all kinds of taxes. ( R E V . F R . C A S I M I R O

L L A D O C v . C O M M I S S I O N E R O F I N T E R N A L R E V E N U E , G . R . N o . L - 1 9 2 0 1 , J u n e 1 6 ,

1 9 6 5 )




21

" Prohibition against taxation of non-stock, non-profit institutions

An organization may be considered as non-profit if it does not distribute any part of its income to

stockholders or members. However, despite its being a tax exempt institution, any income such

institution earns from activities conducted for profit is taxable, as expressly provided in the lastparagraph of Section 30. ( C O M M I S S I O N E R O F I N T E R N A L R E V E N U E v . S T . L U K E S

M E D I C A L C E N T E R , I N C . G .R . N o . 1 9 5 9 0 9 S e p t e m b e r 2 6 , 2 0 1 2 )

" Majority vote of Congress for grant of tax exemption

The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the

same to the John Hay SEZ finds no support therein. The challenged grant of tax exemption would

circumvent the Constitution's imposition that a law granting any tax exemption must have the

concurrence of a majority of all the members of Congress. ( J O H N H A Y P E O P L E S

A L T E R N A T I V E C O A L I T I O N , e t a l . v . V I C T O R L I M , e t a l . , G . R . N o . 1 1 9 7 7 5 , O c t o b e r

2 4 , 2 0 0 3 )

" Prohibition on use of tax levied for special purpose

The coco-levy funds, on the other hand, belong to the government and are subject to its administration

and disposition. Thus, these funds, including its incomes, interests, proceeds, or profits, as well as all

its assets, properties, and shares of stocks procured with such funds must be treated, used,

administered, and managed as public funds; the coco-levy funds are evidently special funds.

( P A M B A N S A N G K O A L I S Y O N N G M G A S A M A H A N G M A G S A S A K A A T M A N G G A G A W A

S A N I Y U G A N v . E X E C U T I V E S E C R E T A R Y G . R . N o s . 1 4 7 0 3 6 - 3 7 A p r i l 1 0 , 2 0 1 2 )

" President's veto power on appropriation, revenue, tariff bil ls

An "item" in a revenue bill does not refer to an entire section imposing a particular kind of tax, but

rather to the subject of the tax and the tax rate; thus, in the portion of a revenue bill which actually

imposes a tax, a section identifies the tax and enumerates the persons liable therefor with the

corresponding tax rate. To construe the word "item" as referring to the whole section would tie the

President's hand in choosing either to approve the whole section at the expense of also approving a

provision therein which he deems unacceptable or veto the entire section at the expense of foregoing

the collection of the kind of tax altogether. ( C O M M I S S I O N E R O F I N T E R N A L R E V E N U E v .

H O N . C O U R T O F T A X A P P E A L S , G . R . N o . L - 4 7 4 2 1 , M a y 1 4 , 1 9 9 0 )

" Non-impairment of jurisdiction of the Supreme Court

" Grant of power to the local government units to create its own sources of

revenue

For a long time, the country's highly centralized government structure has bred a culture of

dependence among local government leaders upon the national leadership. The only way to shatter

this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer

them sufficient powers to generate their own sources for the purpose. ( N A T I O N A L P O W E R

C O R P O R A T I O N v . C I T Y O F C A B A N A T U A N G . R . N o . 1 4 9 1 1 0 A p r il 9 , 2 0 0 3 )




22

Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the

payment of local franchise tax; it merely replaced the national franchise tax that was previously paid by

telecommunications franchise holders and in its stead VAT. The imposition of local franchise tax is not

inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the

national government for VAT inures to the benefit of the national government, while a local franchisetax is a revenue of the local government unit. ( S M A R T C O M M U N I C A T I O N S , I N C . v . T H E C I T Y

O F D A V A O , G . R . N o . 1 5 5 4 9 1 , J u l y 2 1 , 2 0 0 9 )

" Flexible tariff clause

" Exemption from real property taxes

For real property taxes, the incidental generation of income is permissible because the test of

exemption is the use of the property and this test requires that the institution use the property in a

certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines

did not lose its charitable character when it used a portion of its lot for commercial purposes since the

effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of

the property not devoted to charity. ( C O M M I S S I O N E R O F I N T E R N A L R E V E N U E v . S T .

L U K E S M E D I C A L C E N T E R , I N C . G . R . N o . 1 9 5 9 0 9 S e p t e m b e r 2 6 , 2 0 1 2 )

The Constitution exempts charitable institutions only from real property taxes while the NIRC extends

the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is

materially different from Section 28(3), Article VI of the Constitution: Section 30(E) of the NIRC defines

the corporation or association that is exempt from income tax while Section 28(3), Article VI of the

Constitution does not define a charitable institution, but requires that the institution "actually, directly

and exclusively" use the property for a charitable purpose. ( C O M M I S S IO N E R O F I N T E R N A L


2 0 1 2 )

To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a

charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be

exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be

"organized and operated exclusively" for charitable purposes. ( C O M M I S S I O N E R O F I N T E R N A L


2 0 1 2 )

" No appropriation or use of public money for religious purposes

PROVISIONS INDIRECTLY AFFECTING TAXATION

" Due process

In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to

invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But

in the same case, we also explained that we will not strike down a revenue measure as

unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness




23

by the taxpayer. ( C H A M B E R O F R E A L E S T A T E A N D B U I L D E R S A S S O C I A T IO N , IN C . V .

R O M U L O , 6 1 4 S C R A 6 0 5 ( 2 0 1 0 ) )

The support for the poor is generally recognized as a public duty and has long been an accepted

exercise of police power in the promotion of the common good but, in the instant case, the

declarations do not distinguish between wealthy coconut farmers and the impoverished ones.Consequently, such declarations are void since they appropriate public funds for private purpose and,

therefore, violate the citizens' right to substantive due process. ( P A M B A N S A N G K O A L I S Y O N N G

M G A S A M A H A N G M A G S A S A K A A T M A N G G A G A W A S A N I Y U G A N v . E X E C U T I V E

S E C R E T A R Y G . R . N o s . 1 4 7 0 3 6 - 3 7 A p r il 1 0 , 2 0 1 2 )

" Equal protection

The real estate industry is, by itself, a class and can be validly treated differently from other business

enterprises. What distinguishes the real estate business from other manufacturing enterprises, for

purposes of the imposition of the CWT, is not their production processes but the prices of their goods

sold and the number of transactions involved. ( C H A M B E R O F R E A L E S T A T E A N D

B U I L D E R S A S S O C I A T I O N , I N C . V . R O M U L O , 6 1 4 S C R A 6 0 5 ( 2 0 1 0 ))

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative

records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and

Means, show that PAGCOR's exemption from payment of corporate income tax, as provided in

Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made

pursuant to a valid classification based on substantial distinctions. The legislative records show that

the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCOR's own

request to be exempted. ( P H IL I P P IN E A M U S E M E N T A N D G A M I N G C O R P O R A T I O N

( P A G C O R ) v . T H E B U R E A U O F I N T E R N A L R E V E N U E G . R . N o . 1 7 2 0 8 7 M a r c h 1 5 ,

2 0 1 1 )

" Religious freedom

The constitutional guaranty of the free exercise and enjoyment of religious profession and worship

carries with it the right to disseminate religious information. Any restraints of such right can only be

justified l ike other restraints of freedom of expression on the grounds that there is a clear and present

danger of any substantive evil which the State has the right to prevent. ( A M E R I C A N B I B L E

S O C I E T Y v . C I T Y O F M A N I L A , G . R . N o . L - 9 6 3 7 , A p r i l 3 0 , 1 9 5 7 )

It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was

in some instances a little bit higher than the actual cost of the same but this cannot mean that

appellant was engaged in the business or occupation of selling said "merchandise" for profit. For this

reason We believe that the City of Manila Ordinance No. 2529 requiring the payment of license fee

cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its

religious profession and worship as well as its rights of dissemination of religious beliefs.

( A M E R I C A N B I B L E S O C I E T Y v . C I T Y O F M A N I L A , G . R . N o . L - 9 6 3 7 , A p r i l 3 0 , 1 9 5 7 )




24

The Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the

sales are used to subsidize the cost of printing copies which are given free to those who cannot afford

to pay so that to tax the sales would be to increase the price, while reducing the volume of sale.

Granting that to be the case, the resulting burden on the exercise of religious freedom is so incidental

as to make it difficult to differentiate it from any other economic imposition that might make the right todisseminate religious doctrines costly. ( A R T U R O M . T O L E N T I N O v . T H E S E C R E T A R Y O F

F I N A N C E a n d T H E C O M M I S S I O N E R O F I N T E R N A L R E V E N U E , G . R . N o . 1 1 5 4 5 5 ,

O c t o b e r 3 0 , 1 9 9 5 )

On the other hand the registration fee of P1,000.00 imposed by Sec. 107 of the NIRC, as amended by

Sec. 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration

and enforcement of provisions such as those relating to accounting in Sec. 108 of the NIRC. That the

PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the

payment of this fee because it also sells some copies. ( A R T U R O M . T O L E N T I N O v . T H E

S E C R E T A R Y O F F I N A N C E a n d T H E C O M M I S S I O N E R O F I N T E R N A L R E V E N U E , G . R .

N o . 1 1 5 4 5 5 , O c t o b e r 3 0 , 1 9 9 5 )

The withdrawal of the exemption did not also violate freedom of religion as regards the activities of

PBS on religious articles, as the Free Exercise of Religious clause does not prohibit imposing a

generally applicable sale and use tax on the sale of religious materials by a religious organization as

held by the US Supreme Court in Jimmy Swaggart Ministries v. Board of Equalization (1990). The VAT

registration fee does not constitute censorship of such freedom as held in the American Bible Society

case. The fee is a mere administrative fee and not imposed on the exercise of a privilege, much less a

constitutional right. But for the purpose of defraying cost of registration which is a requirement and a

central feature in the VAT system so as to provide record of tax credits of the taxpayer. ( A R T U R O

M . T O L E N T I N O v . T H E S E C R E T A R Y O F F I N A N C E a n d T H E C O M M I S S IO N E R O F

I N T E R N A L R E V E N U E , G . R . N o . 1 1 5 4 5 5 , O c t o b e r 3 0 , 1 9 9 5 )

" Non-impairment of obligations of contracts

The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt GOCCs by

RA 9337 does not violate the right to equal protection of the laws under Section 1, Article III of the

Constitution, because PAGCOR’s exemption from payment of corporate income tax was not based on

classification showing substantial distinctions; rather, it was granted upon the corporation’s own

request to be exempted from corporate income tax. Legislative records likewise reveal that the

legislative intention is to require PAGCOR to pay corporate income tax.

With regard to the issue that the removal of PAGCOR from the exempted list violates the non-

impairment clause contained in Section 10, Article III of the Constitution — which provides that no law

impairing the obligation of contracts shall be passed. Franchises such as that granted to PAGCOR

partake of the nature of a grant, and is thus beyond the purview of the non-impairment clause of the

Constitution. ( P H I L I P P I N E A M U S E M E N T A N D G A M I N G C O R P O R A T I O N ( P A G C O R ) v .

T H E B U R E A U O F I N T E R N A L R E V E N U E G . R . N o . 1 7 2 0 8 7 M a r c h 1 5 , 2 0 1 1 )

Even though such taxation may affect particular contracts, as it may increase the debt of one person

and lessen the security of another, or may impose additional burdens upon one class and release the




25

burdens of another, still the tax must be paid unless prohibited by the Constitution, nor can it be said

that it impairs the obligation of any existing contract in its true legal sense." Indeed not only existing

laws but also "the reservation of the essential attributes of sovereignty, is read into contracts as a

postulate of the legal order." ( A R T U R O M . T O L E N T I N O v . T H E S E C R E T A R Y O F F I N A N C E

a n d T H E C O M M I S S I O N E R O F I N T E R N A L R E V E N U E , G . R . N o . 1 1 5 4 5 5 , O c t o b e r 3 0 ,

1 9 9 5 )

ESCAPE FROM TAXATION

1. Shifting

2. Capitalization

3. Transformation

4. Evasion

5. Avoidance – or Tax Planning.

6. Exemption

SHIFTING – the transfer of the burden of a tax by the original payer or the one whom the tax was

assessed or imposed to another or someone else.

It should be borne in mind that what is transferred is not the payment of the tax but the burden of the

tax.

T a x e s t h a t c a n b e s h i f te d

Only indirect taxes may be shifted; direct taxes cannot be shifted.

W a y s o f s h i f ti n g t h e t a x b u r d e n

1. Forward shifting

When the burden of the tax is transferred from a factor of production through factors

of distribution until it finally settles on the ultimate purchaser or consumer.

Example : Manufacturer or producer may shift tax assessed to wholesaler, who in

turn shifts it to the retailer, who also shifts it to the final purchaser or consumer.

2. Backward shifting

When the burden of the tax is transferred from the consumer or purchaser through the

factors of distribution to the factor of production.

Example : Consumer or purchaser may shift tax imposed on him to retailer by

purchasing only after the price is reduced, and from the latter to the wholesaler, and finally to

the manufacturer or producer.




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3. Onward shifting

When the tax is shifted two or more times either forward or backward.

Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the

wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser bythe retailer, we have three shifts in all.

I m p a c t a n d i n c i d e n c e o f t a x a t i o n

Impact of taxation is the point on which a tax is originally imposed. In so far as the law is

concerned, the taxpayer is the person who must pay the tax to the government. He is also

termed as the statutory taxpayer – the one on whom the tax is formally assessed. He is the

subject of the tax.

Incidence of taxation is that point on which the tax burden finally rests or settle down. Ittakes place when shifting has been effected from the statutory taxpayer to another.

S t a t u t o r y t a x p a y e r

The statutory taxpayer is the person required by law to pay the tax or the one on whom the

tax is formally assessed. In short, he or she is the subject of the tax.

In direct taxes, the statutory taxpayer is the one who shoulders the burden of the tax while in

indirect taxes, the statutory taxpayer is the one who pay the tax to the government but the

burden can be passed to another person or entity.

R e l a t i o n s h i p b e t w e e n i m p a c t , s h i f t i n g , a n d i n c i d e n c e o f a t a x

The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence

is the result. Thus, the impact in a sales tax (i.e. VAT) is on the seller (manufacturer) who

shifts the burden to the customer who finally bears the incidence of the tax.

Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the

setting or coming to rest of the tax.

CAPITALIZATION – reduction in the price of the taxed object equal to the capitalized value of futuretaxes which the purchaser expects to be called upon to pay.

TRANSFORMATION – the manufacturer or producer upon whom the tax has been imposed, fearing

the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup

himself by improving his process of production thereby turning out his units of products at a lower cost.




27

EVASION

– use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a

tax. It is also known as “ T A X D O D G I N G . ”

It is punishable by law.

Tax evasion is a term that connotes fraud through the use of pretenses or forbidden devices to

lessen or defeat taxes. [Y u t i v o v . C o u r t o f T a x A p p e a l s , 1 SCRA 160]

Example

: Deliberate failure to report a taxable income or property; deliberate reduction of

income that has been received.

E v i d e n c e t o p r o v e e v a s i o n

Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from

the circumstances of the case.

I n R e p u b l i c v . G o n z a l e s [13 SCRA 633], the Supreme Court affirmed the assessment of a

deficiency tax against Gonzales, a private concessionaire engaged in the manufacturer of furnitureinside the Clark Air Base, for underdeclaration of his income. SC held that the failure of the taxpayer to

declare for taxation purposes his true and actual income derived from his business for two (2)

consecutive years is an indication of his fraudulent intent to cheat the government if its due taxes.

AVOIDANCE – OR TAX PLANNING . It is the use by the taxpayer of legally permissible

alternative tax rates or methods to avoid or reduce tax liability. The taxpayer uses tax saving device or

means sanctioned or allowed by law. Politely called “TAX MINIMIZATION”

In D E L P H E R S T R A D E R S C O R P . V . I N T E R M E D I A T E A P P E L L A T E C O U R T

[157

SCRA 349] , the Supreme Court upheld the estate planning scheme resorted to by the Pacheco

family in converting their property to shares of stock in a corporation which they themselves owned

and controlled. By virtue of the deed of exchange, the Pacheco co-owners saved on inheritance taxes.

The Supreme Court said the records do not point to anything wrong and objectionable about this

estate planning scheme resorted to. The legal right of the taxpayer to decrease the amount of what

otherwise could be his taxes or altogether avoid them by means which the law permits cannot be

doubted.

EXEMPTION – grant of immunity from tax. Taxation is the rule and exemption is the

exception , and therefore, he who claims exemption must be able to justify his claim or right thereto,

by a grant expressed in terms “too plain to be mistaken and too categorical to be

misinterpreted.”

Exemption from taxation

Taxation is the rule and exemption is the exception. ( F E L S E N E R G Y , I N C . v . P R O V I N C E O F

B A T A N G A S , 5 1 6 S C R A 1 8 6 ( 2 0 0 7 ))

Since the power to tax includes the power to exempt thereof which is essentially a legislative

prerogative, it follows that a municipal mayor who is an executive officer may not unilaterally withdraw




28

such an expression of a policy thru the enactment of a tax. ( P H I L I P P I N E P E T R O L E U M

C O R P O R A T I O N v . M U N I C I P A L I T Y O F P I L I L L A , G . R . N o . 9 0 7 7 6 , J u n e 3 , 1 9 9 1 )

A tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the

manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax

imposed on petroleum products under Section 148 is the direct liability of the manufacturer whocannot thus invoke the excise tax exemption granted to its buyers who are international carriers;

nevertheless, the manufacturer, as the statutory taxpayer who is directly liable to pay the excise tax on

its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum products

sold to international carriers ( C O M M I S S I O N E R O F I N T E R N A L R E V E N U E v . P I L I P IN A S

S H E L L P E T R O L E U M C O R P O R A T I O N , G . R . N o . 1 8 8 4 9 7 , F e b r u a ry 1 9 , 2 0 1 4 )

In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, the issue that the

Court had to resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna in

view of the "in lieu of all taxes" clause in its franchise and Section 23 of RA 7925. Applying the rule of

strict construction of laws granting tax exemptions and the rule that doubts are resolved in favor of

municipal corporations in interpreting statutory provisions on municipal taxing powers, the Court held

that Section 23 of RA 7925 could not be considered as having amended petitioner's franchise so as to

entitle it to exemption from the imposition of local franchise taxes. ( S M A R T C O M M U N I C A T I O N S ,

I N C . v . T H E C I T Y O F D A V A O , G . R . N o . 1 5 5 4 9 1 , J u l y 2 1 , 2 0 0 9 )

The "in lieu of all taxes" clause in a legislative franchise should categorically state that the exemption

applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed

against the taxpayer and liberally in favor of the taxing authority. ( S M A R T C O M M U N I C A T I O N S ,

I N C . v . T H E C I T Y O F D A V A O , G . R . N o . 1 5 5 4 9 1 , J u l y 2 1 , 2 0 0 9 )

PLDT's contention that the "in-lieu-of-all-taxes" clause does not refer to "tax exemption" but to "tax

exclusion" and hence, the strictissimi juris rule does not apply. The Supreme Court explains that these

two terms actually mean the same thing, such that the rule that tax exemption should be applied instrictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax

exclusions ( P H IL I P P IN E L O N G D I S T A N C E T E L E P H O N E C O M P A N Y v s P R O V I N C E O F

L A G U N A G . R . N o . 1 5 1 8 9 9 , A u g u s t 1 6 , 2 0 0 5 )

T a x r e m i s s i o n o r t a x c o n d o n a t i o n

The word “remit” means to desist or refrain from exacting, inflicting or enforcing something as well as

to restore what has already been taken. The remission of taxes due and payable to the exclusion of

taxes already collected does not constitute unfair discrimination. Such a set of taxes is a class by itself

and the law would be open to attack as class legislation only if all taxpayers belonging to one classwere not treated alike. [J u a n L u n a S u b d . V . S a r m i e n t o , 91 Phil 370]

The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it

should be sustained only when expressly provided in the law. [S u r i g a o C o n s o l i d a t e d M i n i n g v .

C o m m i s s i o n e r o f I n te r n a l R e v e n u e , 9 SCRA 728]




29

T a x a m n e s t y

Tax amnesty, being a general pardon or intentional overlooking by the State of its authority to impose

penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an

absolute forgiveness or waiver by the government of its right to collect what otherwise would be due it

and, in this sense, prejudicial thereto. It is granted particularly to tax evaders who wish to relent andare willing to reform, thus giving them a chance to do so and thereby become a part of the new society

with a clean slate. [R e p u b l i c v . I n t e r m e d i a t e A p p e l l a t e C o u r t , 196 SCRA 335]

Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted by statute. The

terms of the amnesty must also be construed against the taxpayer and liberally in favor of the

government.

T a x a m n e s t y v . T a x c o n d o n a t i o n v . T a x e x e m p t i o n

A tax amnesty, being a general pardon or intentional overlooking by the State of its authority to impose

penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of anabsolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it

and, in this sense, prejudicial thereto, particularly to tax evaders who wish to relent and are willing to

reform are given a chance to do so and therefore become a part of the society with a clean slate.

Like a tax exemption, a tax amnesty is never favored nor presumed in law, and is granted by

statute. The terms of the amnesty must be strictly construed against the taxpayer and liberally in favor

of the government. Unlike a tax exemption, however, a tax amnesty has limited applicability as to

cover a particular taxing period or transaction only.

There is tax condonation or remission when the State desists or refrains from exacting, inflicting or

enforcing something as well as to restore what has already been taken. The condonation of a taxliability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when

expressed in the law.

Tax exemption, on the other hand, is the grant of immunity to particular persons or corporations or to

person or corporations of a particular class from a tax which persons and corporations generally within

the same state or taxing district are obliged to pay. Tax exemption are not favored and are

construed strictissimi juris against the taxpayer.

DOCTRINE OF EQUITABLE RECOUPMENT

This doctrine basically refers to a taxpayer who has a claim for refund against the government, but

was not able to file his written claim for tax refund because the reglementary period within which to file

his valid claim for tax refund has already prescribed. As such, despite the lapse of the period,this

doctrine allows that the tax that should have been refunded be credited instead to his

existing or other tax liabil ity. This doctrine of equitable recoupment is not allowed in

this jurisdiction. It is highly disfavored.




30

INCOME TAXATION

A. Income taxation

Income tax systems

a) Global tax system

Global treatment is a system where the tax treatment views indifferently the tax base

and generally treats in common all categories of taxable income of the taxpayer. (TAN v. DEL

ROSARIO, JR. 237 SCRA 324)

b) Schedular tax system

Schedular approach is a system employed where the income tax treatment varies and

made to depend on the kind or category of taxable income of the taxpayer. (TAN v. DEL

ROSARIO, JR. 237 SCRA 324)

c) Semi-schedular or semi-global tax system

What is Income?

Income refers to “an amount of money coming to a person within a specified time, whether as payment

for services, interest or profit from investment.” I 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 the realization, stock dividends are nothing

but a representation of an interest in the corporate properties. As capital, it is not yet subject to

income 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, 301 SCRA 152)

SOURCES OF REVENUE (Sec. 21, NIRC)

1. Income tax;

2. Estate and donor’s taxes;

3. Value-added taxes;

4. Other percentage taxes;

5. Excise taxes;

6. Documentary stamp taxes; and

7. Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal

Revenue.

Persons Subject to Income Tax

1. Individual

2. Corporation

3. Estates and Trusts

4. Other entities including partnership




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1. Individuals

a. Resident citizen

b. Non-resident citizen

c. Overseas Contract Worker

d. Resident Alien

e. Non-resident alien engaged in trade or businessf. Non-resident alien not engaged in trade or business

2. Corporatons

a. Domestic corporation

b. Resident foreign corporation

c. Non-resident foreign corporation

3. Estates and Trusts

a. Income accumulated in trust for the benefit of unborn or unascertained person or persons

with contingent interests, and income accumulated or held for future distribution under the terms of the

will or trust;

b. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income

collected by a guardian of an infant which is to be held or distributed as the court may direct;

c. Income received by estates of deceased persons during the period of administration or

settlement of the estate; and

d. Income which, in the discretion of the fiduciary, may be either distributed to the

beneficiaries or accumulated.

4. Other Entities including Partnerships

In Sec 22 (B), the term CORPORATION shall include:

a. Partnerships, no matter how created or organized, but does not include:

i.

General Professional Partnershipsii. Joint venture or consortium formed for the purpose of undertaking

construction projects; and

iii. Joint venture or consortium formed for the purpose of engaging in petroleum,

coal, geothermal and other energy operations pursuant to an operating

consortium agreement under a service contract with the Government.

b. Joint-stock companies;

c. Joint accounts (cuentas en participacion);

d. Association; and

e. Insurance companies.

Kinds of Income Tax

1. Net income tax

2. Final income tax

3. Gross income tax

4. Minimum corporate income tax (MCIT)

5. Improperly accumulated income tax (IAET)

6. Optional gross income tax (OGIT)




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CLASSIFICATION OF TAXPAYER

1. Classification of taxpayer and taxable sources of income.

Taxpayer Taxable Sources

a. Resident citizen All sources

b.

Nonresident citizen Withinc. Overseas contract worker/Seaman Within

d. Resident alien Within

e. Nonresident Alien Within

f. Domestic corporation All sources

g. Foreign corporation within

According to the NIRC, a NONRESIDENT CITIZEN may be any of the following:

1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of

his physical presence abroad with a definite intention to reside therein.

2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside

abroad, either as an immigrant or for employment on a permanent basis.

3. A citizen of the Philippines who works and derives income from abroad and whose

employment thereat requires him to be physically present abroad most of the time during the

taxable year.

4. A citizen who has been previously considered as nonresident citizen and who arrives in the

Philippines any time during the taxable year to reside permanently in the Philippines shall

likewise be treated as a nonresident citizen for the taxable year in which he arrives in the

Philippines with respect to his income derived from sources abroad until the date of his arrival

in the Philippines.

5. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the

Philippines to reside permanently abroad or to return to and reside in the Philippines as the

case may be.

Per Revenue Regulation, a citizen of the Philippines who shall have stayed outside the

Philippines for 183 days or more by the end of the year is a nonresident citizen for that

year.

According to BIR Ruling, in order that income derived by overseas contract workers abroad be

exempt from income tax, the time spent abroad is not material. All that is required is for the

employment contract to pass through and registered with the Philippine Overseas

Employment Administration (POEA).

A nonresident alien individual who shall come to the Philippines and stay therein for an

aggregate period of more than 180 days during any calendar year shall be deemed a

nonresident alien doing business in the Philippines.




33

TAX ON INDIVIDUALS

1. Income subject to tax and type of tax

a. Taxable income -Normal tax

b. Passive income -Final tax

c.

Capital gain -Capital gains tax

2. Only passive income derived within the Philippines shall be subject to final tax.

Capital Gain

a. Capital gain from Sale of Shares of Stock not Traded in the Stock Exchange

Not over P100,000 5%

On any amount in excess of P100,000 10%

3.

The capital gain tax on sale of share of stock shall be imposed upon the net capital gains

realized during the taxable year from the sale, barter, exchange or other disposition of share

of stock in a domestic corporation, except shares sold, or disposed of through the stock

exchange.

4. The capital gain tax on sale of real property shall be imposed upon capital gains presumed to

have been realized from the sale, exchange, or other disposition of Real property, classified

as capital assets, including pacto de retro sales and other forms of conditional sales.

For sale of real property to the government, the gain or the presumed gain shall be subject to

capital gain tax or normal tax under Sec. 24-A, at the option of the taxpayer.

5. Capital gain tax shall be imposed on gain or presumed gain arising from transaction involving

capital assets.

Taxation of Income of Resident Citizens

General Rule: Resident Citizen is taxable on ALL income derived from ALL sources WITHIN

and WITHOUT the Philippines subject to the following tax rates:

1. His REGULAR TAXABLE INCOME for each taxable year shall be subject to the schedular

tax rates of 5% to 32% imposed under Section 24 (A)(2) of the NIRC.

2. However, his PASSIVE INCOMES shall be subject to the applicable final withholding taxes

depending on the kind of passive income received by him.

! Estates and trusts are taxable in the same manner as a resident citizen.




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Taxation of Income of Nonresident Citizens

! OCW or OFWs are also considered as nonresident citizens for income tax purposes.

Rule: The income of a nonresident citizen derived fromALL sources WITHIN the Philippines

for each taxable year shall be subject to the following tax rates:



2. However, his PASSIVE INCOMES shall be subject to the applicable final withholding taxes

depending on the kind of passive income received by him.

Taxation of Income of Resident Aliens

! An alien actually present in the Philippines who is not a mere transient or sojourner is a

resident of the Philippines for purposes of income tax. Whether he is a transient or not is

determined by his intentions with regard to the length and nature of his stay.

Rule: The income of a resident alien individual derived during the taxable year from ALL

sources WITHIN the Philippines shall be subject to the following tax rates:



2. However, his PASSIVE INCOMES shall be subject to the applicable final withholding taxesdepending on the kind of passive income received by him.

Taxation of Income of Married Individuals

! Married individuals are required by law to file a consolidated income tax return, but they shall

compute separately their individual income tax on their income from employment based on

their respective total taxable income.

! If the spouses are only physically separated and there is no legal separation, they are still

required by law to file consolidated or joint returns for which they are considered as jointly and

severally liable to the tax.

! Separate computation of tax liabilities of husband and wife - designed to avoid the marriage

penalty tax.




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Taxation of Income of Minimum Wage Earners (MWEs)

! Compensation income of MWEs being paid the Statutory Minimum Wage (SMW) shall be

exempt from income tax.

! A senior citizen whose salary is equivalent to the SMW shall also be considered as MWE

entitled to exemption from income tax.! Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the

aforementioned MWE shall likewise be exempted from income tax. However, an employee

who receives/earns additional compensation such as commissions, honoraria, fringe benefits,

benefits in excess of the allowable statutory amount of P82,000 (starting January 1,

2015) , taxable allowances and other taxable income other than the SMW, his/her entire

earnings are not exempt from income tax and, consequently, from withholding tax.

Taxation of Passive Income of Citizens and Resident Aliens

! Income subject to the final tax refers to an income which tax due is fully collected through the

withholding tax system in the form of final withholding tax. The recipient is N O l o n g e r

r e q u i r e d t o i n c l u d e t h e i t e m o f i n c o m e s u b j e c t t o “ f i n a l t a x ” a s p a r t o f h i s g r o s s

i n c o m e i n h i s i n c o m e t a x r e t u rn s .

! Under the new income tax form, however, individuals are required to report their passive

income in the ITR which had been subjected to the final withholding tax.

Capital Gains from Sale of Shares of Stock

!

Net capital gains from the sale, barter, exchange or other disposition of shares of stock of adomestic corporation NOT LISTED AND NOT TRADED IN THE LOCAL STOCK

EXCHANGE held as capital asset shall be subject to the CAPITAL GAINS TAX of 5% on the

net capital gains not over P100,000 plus 10% on any amount in excess of P100,000.

! In case, however, of sale, barter, exchange or other disposition of shares of stock of a

domestic corporation which are TRADED AND LISTED IN THE LOCAL STOCK

EXCHANGE also held as capital asset, the same shall be subject to the 1/2 of 1% STOCK

TRANSACTION TAX based on the gross selling price or gross value in money of shares of

stock sold or transferred.

! On the other hand, if the sale is made by adealer in securities

, the resulting gain is

considered asordinary income

subject to the scheduler rates of 5%-32% in the case of

individual and the normal corporate tax rate of 30% in the case of corporations.

! Gains from shares of stock in a foreign corporation are not subject to capital gains tax but to

the scheduler rates of 5% to 32% in the case of individual seller and the normal corporate

income tax rate of 30% in the case of corporate-seller.




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Capital Gains from Sale of Real Property

! The sale of real property by an individual will be subject to the capital gains tax if the said

property is considered as his capital asset which is located in the Philippines, including pacto

de retro sales and other forms of conditional sales. The said sale shall be subject to the

capital gains tax of 6% based on the p r e s u m e d g a i n which is the higher value between thecurrent fair market value (i.e., zonal value) or the gross selling price. Actual gain is not

required for the imposition of the tax but it is the p r e s u m e d g a i n by the fiction of law which is

taxable.

! In case the disposition of real property classified as capital asset by individuals to the

government, the tax to be imposed shall be determined either the capital gains shall be added

to the gross income subject to the scheduler rates OR subject to final tax on t h e p r e s u m e d

capital gains form sale of real property of 6%, at the option of the individual taxpayer-seller

.

Sale of Principal Residence

!

If the purpose for the sale of principal residence is not to buy a new principal residence, the

sale, barter, exchange of the said principal residence shall be subject to the capital gains tax

based on the presumed gain on the sale.

What is the nature of personal exemptions?

Personal exemptions are the theoretical personal, living and family expenses of an individual taxpayer.

These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to

the minimum of subsistence, taking into account the personal status and additional qualified

dependents of the taxpayer. (Pansacola v. CIR, G.R. No. 159991, November 16, 2006).

Taxation of Members of a General Professional Partnership (GPP) –

A GPP is a partnership formed by persons for the sole purpose of exercising their common profession,no part of the income of which is derived from engaging in any trade or business.

The net income (distributable net income) of the GPP is computed in the same manner as a

corporation, i.e. Gross income less deductions.

TAX ON CORPORATIONS

1. Classification of corporate taxpayers

a. Domestic corporation

b. Resident foreign corporation

c. Nonresident foreign corporation

2. Income tax subject to tax and type of tax

a. Taxable income - Normal tax (NT) – 30%




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- Gross income tax (GIT) – 15%

- Minimum corporate income tax (MCIT) – 2%

b. Passive income - Final tax(FT)

c. Capital gain - Capital gain tax (CGT)

Passive income shall include income derived from sources within the Philippines.

Income derived by a depository bank under the expanded foreign currency deposit system from

foreign currency transactions with local commercial banks and interest income from foreign currency

loans granted by such depository banks under said expanded foreign currency deposit system to

residents are subject to final income tax at the rate of 10%

Any income of nonresidents, whether individuals or corporations, from transactions with depository

banks under the expanded system is exempt from income tax.

F o r C a p i t a l g a i n

a. Capital gain from Sale of Shares of stock not Traded in the Stock Exchange

Not over P100,000 5%

On any amount in excess of P100,000 10%

b. Capital gain from sale of real property

6% of gross selling price or the fair market value, whichever is higher

S p e c i a l R u l e s f o r s p e c i a l c o r p o r a t i o n s

TAXPAYER TAX BASE RATE

a. Proprietary educational institution taxable income 10%

b. Hospitals which are nonprofit taxable income 10%

c. Government owned or controlled

Corporations

1. If the gross income from unrelated trade, business or other activity of a proprietary educational

institution or nonprofit hospital exceeds 50% of the total gross income derived by such

educational institutions or hospitals from all sources, the tax prescribed on ordinary

corporations shall be imposed on the entire taxable income.

The term unrelated trade, business or other activity’ means any trade, business or other

activity, the conduct of which is not substantially related to the exercise or performance by

such educational institution or hospital of its primary purpose or function.

2. Government owned or controlled corporations are subject to the same tax imposed on

ordinary corporation engaged in similar business or industry.




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The following government owned or controlled corporations are exempt from income tax:

a) Government service insurance system (GSIS)

b) Social security system (SSS)

c) Philippine health insurance corporation (PHIC)

d)

Philippine charity sweepstakes office (PCSO)e) Local Water District (LWD)

3. Resident foreign corporation and applicable income taxes

TYPE OF TAX TAX BASE TAX RATE

a) Normal tax taxable income 30%

b) Gross income tax gross income 15%

c) Minimum corporate income tax gross income 2%

Taxable income shall include income derived from sources within

Rules on GIT applicable to domestic corporations are also applicable to resident foreign corporations.

Rules on MCIT applicable to domestic corporations are also applicable to resident foreign

corporations.

Branch profit remittance tax – any profit remitted by a branch to its head office shall be subject to a tax

of 15% which shall be based on the total profits applied or earmarked for remittance without any

deduction for the tax component thereof.

Interest, dividends, rents, royalties, including remuneration for technical services, salaries, wages

premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains,

profits. Income and capital gains received by a foreign corporation during each taxable year from allsources within the Philippines shall not be treated as branch profits unless the same are effectively

connected with the conduct of its trade or business in the Philippines.

S p e c i a l r u l e s fo r s p e c i a l c o r p o r a t i o n s

TAXPAYER TAX BASE RATE

a) International carrier doing Gross Philippine

Business in the Philippines Billings 2 ½ %

b) Regional or area headquarters of

Multinational companies exempt exempt

c) Regional operating headquarters

Of multinational companies taxable income 10%

1. Improperly accumulated earnings tax shall be imposed on every corporation formed or availed

for the purpose of avoiding the income tax with respect to its shareholders or the shareholders




39

of any other corporation, by permitting earnings and profits to accumulate instead of being

divided or distributed.

2. The fact that the earnings or profits of a corporation are permitted to accumulate beyond the

reasonable needs of the business shall be determinative of the purpose to avoid the tax upon

its shareholders or members unless the corporation proves to the contrary

3. The term “reasonable needs of the business’ means reasonably anticipated needs of the

business.

4. The fact that any corporation is a mere holding company or investment company shall be

prima facie evidence of a purpose to avoid the tax upon its shareholders or members.

5. The rationale is that if the earnings and profits were distributed, the shareholders would then

be liable to income tax thereon, whereas if the distribution were not made to them, they would

incur not tax in respect to the undistributed earnings and profits of the corporation. Thus a tax

is being imposed in the nature of apenalty

to the corporation.

6. The improperly accumulated earnings tax does not apply to the following corporations:

a) banks and other non-bank financial intermediaries;

b) insurance companies;

c) publicly-held corporations;

d) taxable partnership

e) general professional partnership

f) non-taxable joint ventures;

g) enterprises duly registered with the Philippine economic zone authority (PEZA) under

R.A 7916, and enterprises registered pursuant to the bases conversion and

development act of 1992 under R.A. 7227

MINIMUM CORPORATE INCOME TAX (MCIT)

2% of the gross income as of the end of the taxable year is hereby imposed upon any domestic

corporation beginning on the 4th taxable year immediately following the year in which such corporation

commenced its business operations. The MCIT shall be imposed whenever such corporation has zero

or negative taxable income or whenever the amount of MCIT is greater than the normal income tax

computed due from such corporation.

Any excess of the MCIT over the normal income tax as computed shall be carried forward on an

annual basis and credited against the normal income tax for the three (3) immediately succeeding

taxable years.




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1998 1999 2000

Normal Income Tax (30%) P 50,000 P 60,000 P100,000

MCIT (2% of Gross Income) 75,000 100,000 60,000

Amount of tax payable P 75,000 P100,000 P100,000

1998 (25,000)1999 (40,000)

P35,000

Excess of MCIT over Normal Income Tax25,000 40,000

Domestic corporations which are not subject to MCIT:

a. Proprietary educational institutions subject to tax at 10%

b. Non-profit hospitals subject to tax at 10%

c. Depositary banks under expanded foreign currency deposit system subject to tax at 10%

TAXABLE INCOME – refers to the gross income subject to tax, less deductions, whether itemized

or optional standard deductions, and/or personal and additional exemptions, if any, authorized for

such type of income. In short, this term refers to the “ t a x b a s e . ”

GROSS INCOME – all income from whatever source derived, including, but not limited to the

following items:

a. Compensation for services in whatever form paid, including, but not limited to fees,

salaries, wages, commissions, and similar items

b. Gross income derived from the conduct of trade or business or the exercise of a

professionc. Gains derived from dealings in property

d. Interest

e. Rents

f. Royalties

g. Dividends

h. Annuities

i. Prizes and winnings

j. Pensions

k. Partner’s distributive share from the net income of the general professional

partnership.

Exclusions from gross income

The following items shall not be included in gross income and shall be exempt from income

tax:




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a. Life insurance – the proceeds of life insurance policies paid to the heirs or

beneficiaries upon the death of the insured, whether in a single sum or otherwise, but

if such amounts are held by the insurer under an agreement to pay interest thereon,

the interest payments shall be included in gross income.

b.

Amount received by insured as return of premium – the amount received by theinsured, as a return of premiums paid by him under life insurance, endowment, or

annuity contracts, either during the term or at the maturity of the term mentioned in the

contract or upon surrender of the contract.

c. Gifts, bequests, and devises – the value of property acquired by gift, bequest, devise

or descent, income from such property, as well as gifts, bequest, devise or descent of

income from any property, in case of transfer of divided interest, shall be included in

gross income.

d. Compensation for injuries or sickness – amounts received, through accident or health

insurance, as compensation for personal injuries or sickness, plus the amounts of any

damages received on account of such injuries or sickness

e. Income exempt under treaty

f. Retirement benefits, pensions, gratuities

Conditions:

1. The retiring official or employee has been in the service of the same employer for

at least ten 10 years;

2. Is not less than fifty (50) years of age at the time of his retirement;

3. In accordance with a reasonable private benefit plan maintained by the employer;

4.

The benefits granted may be availed of by an official or employee only once.

Any amount received by an official or employee or by his heirs from the employer as a

consequence of separation of such official or employee from the service of the

employer because of death sickness or other physical disability or for any cause

beyond the control of the said official or employee.

g. Income derived by a foreign government

h. Income derived by the government or its political subdivisions. – income derived from

any public utility or from the exercise of any essential government function accruing to

the government of the Philippines or to any political subdivisions thereof.

i. Prizes and awards

Conditions:

1. In recognition of religious, charitable, scientific, educational, artistic, literary, or

civic achievement;




42

2. The recipient was selected without any action on his part to enter the contest

or proceeding;

3. The recipient is not required to render substantial future services as a

condition to receiving the prizes or ward.

j. Prizes and awards in sports competition – all prizes and awards granted to athletes in

local and international sports competitions and tournaments whether held in the

Philippines or abroad and sanctioned by their national sports associations.

k. Thirteen month pay and other benefits – these benefits shall not exceed P82,000

l. GSIS, SSS, medicare and Pag-ibig contributions, and union dues of individuals

m. Gains realized from the sale or exchange or retirement of bonds, debentures or other

certificate of indebtedness with a maturity of more than five (5) years

NOTES IN ALLOWABLE DEDUCTIONS

AND ITEMS NOT DEDUCTIBLE

ALLOWABLE DEDUCTIONS

1.ordinary and necessary expenses

Only expenses which are directly attributable to, the development, management,

operation and/or conduct of the trade, business or exercise of a profession are

allowed as deductions.

A reasonable allowance for salaries, wages, and other forms of compensation for

personal services actually rendered, including the grossed-up monetary value of

fringe benefit furnished or granted by the employer to the employee.

1. Substantiation requirements- no deduction from gross income shall be allowed unless the

taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate

records.

2.

Bribes, kickbacks and other similar payments are not allowed as deductions from grossincome.

3. Special expenses allowable to private educational institutions – private educational institutions

may at their option elect either:

a. To deduct expenditures, considered as capital outlays of depreciable assets incurred

during the taxable year for the expansion of school facilities; or

b. To deduct allowance for depreciation




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2. interest expense

1. interest expense must be connected with trade or business of the taxpayer in order to be

allowed as deduction from gross income.

If the amount borrowed is momentarily deposited with the bank and earns interest income

subject to final tax, the interest expense deductible from gross income shall be reduced by

33% of the interest income.

2. optional treatment of interest expense – at the option of the taxpayer, interest incurred to

acquire property used in trade business or exercise of a profession may be allowed as a

deduction (outright) or treated as a capital expenditure (depreciation).

3. taxes

Taxes must be connected with the trade or business of the taxpayer in order to be deductible

from gross income.

The following are non-deductible taxes:

a. Income tax

b. Income tax paid to a foreign country claimed as tax credit

c. Estate and donor’s taxes

d. Taxes assessed against local benefits of a kind tending to increase the value of the

property assessed (special assessment)

4. losses

losses actually sustained during the taxable year and not compensated for by insurance or

other forms of indemnity shall be allowed as deductions:

a. If incurred in trade. Profession or business

b. Of property connected with the trade, business or profession, if the loss arises from

fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement

c. No loss shall be allowed as a deduction if at the time of the filling of the tax purposes

in the state tax return

2. net operating loss carry-over – the net operating loss of the business or enterprise for any

taxable year immediately preceding the current taxable year, which had not been previously

offset as deduction from gross income shall be carried over as a deduction from gross income

for the next 3 consecutive taxable years immediately following the year such loss.




44

Any net loss incurred in a taxable year during which the taxpayer was exempt from income

tax shall not be allowed as deduction

Net operating loss carry-over shall be allowed only if there has been no substantial change in

the ownership of the business or enterprise.

Net operating loss carry-over means excess of allowable deduction over gross income of the

business in a taxable year. (gross income less allowable deduction)

3. capital losses – loss from sales or exchanges of capital asset shall be allowed only to the

extent of the gains from such sales and exchanges.

Securities becoming worthless. – if securities become worthless during the taxable year and

are capital asset, the loss resulting therefrom be considered as a loss from the sale or exchange, on

the last day of such taxable year. Of capital assets.

4. losses from wash sales of stock or securities.

In the case of any loss claimed to have been sustained from any sale or other disposition of

shares of stock or securities where it appears that within a period beginning 30 days before the date of

such sale or disposition and ending 30 days after such date, the taxpayer has acquired or has entered

into a contact or option to acquire, substantially identical stock or securities, no deduction for the loss

shall be allowed unless the claim is made by a dealer in stock or securities and with respect to

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

5. wagering losses – losses from wagering transactions shall be allowed only to the extent of

the gains from such transactions.

5. bad debts expenseDebts due to the taxpayer actually ascertained to be worthless and charged off within the

taxable year except:

(1) those not connected with profession, trade or business

(2) those sustained in a transaction entered into between related parties.

Related parties mean:

a. Between members of a family. Family of an individual shall include only his brothers and

sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants;

b. Except in case of distributions in liquidation. Between an individual and corporation more than

50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such

individual;

c. Except in the case of distributions in liquidation, between two coporations more than 50% IN

value of the outstanding stock of which is owned, directly or indirectly, by or for the same

individual;




45

d. Between the grantor and a fiduciary of any trust;

e. Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the

same person is a grantor with respect to each trust;

f. Between a fiduciary of a trust and beneficiary of such trust.

6. depreciation expense

1. Depreciation expense must be connected with trade or business of the taxpayer. It

includes amortization of intangible assets with definite life

.

2. Methods of computing reasonable allowance

a. Straight-line method

b. Declining-balance method

c. Sum-of-the-years-digit method

d.

Any other method which may be prescribed by the secretary of finance upon

recommendation of the commissioner

7. charitable and other contributions

1. Subject to limitation

Contributions to the following institutions or entities are subject to limitation.

(1) government of the Philippines or any of its agencies or any political subdivision

thereof exclusively for public purposes,

(2) to accredited domestic corporation or associations organized and operated

exclusively for religious, charitable, scientific, youth and sports development, cultural

or educational purposes or for the rehabilitation of veterans(3) to social welfare institutions

(4) to non-government organizations,

Limitation: not in excess of 10% in the case of an individual. And 5% in the case of a

corporation, of the taxpayer’s taxable income derived from trade, business or

profession as computed without the benefit of this deduction.

2.deductible in full.

Donations to the following institutions or entities shall be deductible in full:

a. Donations to the government of the Philippines or to any of its agencies or political

subdivisions, including fully-owned government corporations, exclusively to finance, to

provide for, or to be used in undertaking priority activities in education. Health. Youth

and sports development, human settlements, science and culture, and in economic

development




46

b. Donations to certain foreign institutions or international organizations

c. Donations to accredited non-government organizations- organized and operated

exclusively for scientific, research, educational, character-building and youth and

sports development, health, social welfare, cultural or charitable purposes, or a

combination thereof, no part of the net income of which inures to the benefit of anyprivate individual

3.valuation – the amount of any charitable contribution of property other than money shall be

Based on the acquisition cost of said property.

8. Research and development expense

1. Research and development expense incurred or paid by the taxpayer in connection

with trade or business are allowed as deductions from gross income.

2. Capitalized research and development expenditures

Requisites:

a. Paid or incurred by the taxpayer in connection with his trade, business or

profession

b. Not treated as expense under paragraph 1

c. Chargeable to capital account but not chargeable to property of a character

which is subject to depreciation or depletion

In computing taxable income. Such deferred expenses shall be allowed asdeduction ratably distributed over a period of not less than 60 months as me be

elected by the taxpayer (beginning with the month in which the taxpayer first

realizes benefits from such expenditures)

9. Pension trusts

For current services

The contributions of employer to pension trust for the benefit of employees for current services are

deductible from gross income.

For past services

The lump contributions of employer to pension trust for the benefit of employees for past services are

deductible from gross income but are to be distributed over a period of 10 consecutive years.

10.Additional requirements for deductibility of certain payments




47

Any amount paid or payable which otherwise deductible from. Or taken into account in computing

gross income or for which depreciation or amortization, shall be allowed as deduction only if it is

shown that the tax required to be deducted and withheld therefrom has been paid to the bureau of

internal revenue.

11. Optional standard deduction

Optional standard deduction (OSD) may be availed of by individual (self-employed) and corporate

taxpayers in lieu of the itemized deductions.

For individual (self-employed) taxpayer. The OSD is 40% of gross sales or receipts

For corporations, the OSD is 40% of gross income

12. Premium payments on health and/or hospitalization insurance

1. Conditions:

a. The amount of premiums not to exceed P2,400 per family or P200 a month paid

during the taxable year for health and/or hospitalization insurance taken by the

taxpayer for himself, including his family

b. Family has a gross income of not more than P250,000 for the taxable year

c. In case of married taxpayer. Only the spouse claiming the additional exemption for

dependents shall be entitled to this deduction

2. Taxpayer earnings compensation income arising from personal services rendered under anemployer-employee relationship are not allowed any deduction except premium payments on

health and/or hospitalization insurance.

ITEMS NOT DEDUCTIBLE

1. Personal, living or family expenses

2. Any amount paid out for new buildings or for permanent improvement, or betterments

made to increase the value of any property or estate;

3. Any amount expended in restoring property or in making good the exhaustion thereof

for which an allowance is has been made

4. Premiums paid on any life insurance policy covering the life of any officer or

employee, or of any person financially interested in any trade or business carried on

by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a

beneficiary under such policy.




48

5. Losses from sales or exchange of property – in computing net income, no deductions

shall in any case be allowed in respect of losses from sales or exchanges of property

directly or indirectly-

a.

Between members of a family, family of an individual shall include only hisbrothers and sisters (whether by the whole or half-blood), spouse, ancestors,

and lineal descendants;

b. except in case of distributions in liquidation between an individual and

corporation more than 50% in value of the outstanding stock of which is

owned directly or indirectly, by or for such individual.

c. Except in the case of distribution in liquidation , between two corporations

more than 50% in value of the outstanding stock of which is owned directly or

indirectly, by or for the same individual;

d.

Between the grantor and a fiduciary of any trust;

e. Between the fiduciary of end the fiduciary of a trust and the fiduciary of

another trust if the same person is a grantor with respect to each trust;

f. Between a fiduciary of a trust and beneficiary of such trust.

NOTES IN THE ORGANIZATION AND FUNCTIONS OF THE

BUREAU OF INTERNAL REVENUE

1. Power and duties of the Bureau of Internal Revenue

The bureau of the Internal Revenue is under the control and supervision of the Department of

Finance and its powers and duties include the assessment and collection of all national

internal revenue taxes, fees and charges; the enforcement of all forfeitures, penalties, and

fines; and the execution of judgments in all cases decided in its favor by the court of tax

appeals and the ordinary courts.

2. Chief officials of the bureau of internal revenue

The bureau of internal revenue is headed by chief known as the commissioner, with 4

assistants known as deputy commissioners.

3. Powers of the commissioner

a. Power of the commissioner to interpret tax laws and to decide tax cases




49

b. Power of the commissioner to obtain information; and to summon and to take

testimony of persons (authority to administer oath)

c. Power of the commissioner to make assessments and prescribed additional

requirements for tax administration to and enforcement

4.

Power of the commissioner to make assessments and prescribe additional requirements fortax administration to and enforcement, includes:

a. Authority to examine returns and determine tax due

b. Authority to conduct inventory-taking, surveillance and to prescribe presumptive gross

sales and receipts

c. Authority to terminate taxable period

d. Authority to prescribe real property values

e. Authority to inquire into bank deposit accounts

Authority to terminate taxable period

When it comes to the knowledge of the commissioner that a taxpayer is retiring from business

subject to tax; is intending to leave the Philippines; intending to remove his property from the

Philippine; or intending to hide or conceal his property; or his performing any act tending to

obstruct the proceedings for the collection of the tax, the commissioner may declare the tax

period of such taxpayer terminated at any time and shall send the taxpayer a notice of such

decision, together with request for the immediate payment of the tax for the period so declared

terminated and the tax for the preceding year or quarter, and shall be subject to all the

penalties, unless paid within the time fixed in the demand made by the commissioner.

Authority to prescribe real property values

The commissioner is authorized to divide the Philippine into different zones or areas and shalldetermine the fair market value of real properties located in each zone or area

For purposes of computing any internal revenue tax, the value of the property is whichever is

the higher of:

1. The fair market value as determined by the commissioner or

2. The fair market value as shown in the schedule of values of the provincial and city assessors.

Authority to inquire into bank deposit accounts

Notwithstanding any contrary provision of republic act no. 1405 (bank secrecy law) and other

general or special laws, the commissioner is authorized to inquire into bank deposits of:

1. A decedent to determine his gross estate; and

2. Any taxpayer who has filed an application for compromise of his tax liability by reasons of

financial incapacity to pay his tax liability.




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In case a taxpayer files an application to compromise the payment of his tax liabilities on his

claim that his financial position demonstrates a clear inability to pay the tax assessed, his

application shall not be considered unless he waives in writing his privileges under republic act

no. 1405 or under other general or special laws and such waiver shall constitute the authority

of the commissioner to inquire into the bank deposits of the taxpayer.

Issuance and rulings of the bureau of internal revenue

Revenue regulations (RRs) (RMOs) are issuance that provide directives or instructions;

prescribe guidelines; and outline processes, operations, activities, workflows, methods and

procedures necessary in the implementation of stated policies, goals, objectives, plans and

programs of the bureau in all areas of operations, except auditing.

Revenue memorandum rulings (RMRs) are rulings, opinions and interpretations of the

commissioner of internal revenue with respect to the provisions of the tax code and other tax

laws, as applied to a specific set of facts, with or without established precedents, and which

the commissioner may issue from time to time for the purpose of providing taxpayers guidance

on the tax consequence in specific situations. BIR rulings, therefore, cannot contravene duly

issued RMRs; otherwise, the rulings are null and void ab initio.

Revenue memorandum circular (RMCs) are issuance that publish pertinent and applicable

issued by the BIR and other agencies/offices.

Revenue Bulletins (RB) refer to periodic issuances, notice and official announcements of t6he

Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue’s position

on certain specific issues of law or administration in relation to the provisions of the Tax Code,

relevant tax laws and other issuances for the guidance of the public.

BIR Rulings are official position of the bureau to requires raised by taxpayers and other

stakeholders relative to clarification and interpretation of tax laws

5. Delegations of power

The commissioner may delegate the powers vested in him under the tax code to any

or such subordinate officials with the rank equivalent to a division chief or higher. The

following powers of the commissioner may not be delegated:

a. The power to recommend the promulgation of rules and regulations by the secretary

of finance;

b. The power to issue rulings of first impression or to reverse, revoke or modify any

existing ruling of the bureau;

c. The power to compromise or abate any tax liability: provided, however, that

assessment issued by the regional offices involving basic deficiency taxes of

P500,000 or less, and minor criminal violations, discovered by regional and district

officials, may be compromised by a regional evaluation board which shall be




composed of the regional director as chairman, the assistant regional director, the

heads of the legal, assessment and collection divisions and the revenue district officer

having jurisdiction over the taxpayer, as members;

d. The power to assign or reassign internal revenue officers to establishments where

articles subject to excise tax are produced or kept.

6. Authority of internal revenue officers to make arrest and seizures

The commissioner, the deputy commissioners, the revenue regional directors, the revenue

district and other internal revenue officers have the authority to make arrests and seizures for the

violation of any penal law, rule or regulation administered by the bureau revenue.

7. Collection agents (internal revenue taxes)

a. The commissioner of customs and his subordinates with respect to the collection of national

internal revenue taxes on imported goods;

b.

The head of the appropriate government office and his subordinates with respect to the

collection of energy tax:

c. Banks duly accredited by the commissioner with respect to receipt of payments of internal

revenue taxes.

Taxation Law Pre-Bar Notes 2015-A

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