2012 up bar reviewer intaxation

8/12/2019 2012 UP Bar Reviewer InTaxation

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I. General Principles

A. Definition and Concept of Taxation

As a process, it is a means by which the sovereign, through its law-making body,

raises revenue to defray the necessary expenses of the government. It is merely a way ofapportioning the costs of government among those who in some measures are privileged toenjoy its benefits and must bear its burdens.

As a power, taxation refers to the inherent power of the state to demand enforcedcontributions for public purpose or purposes.

Taxation is a symbiotic relationship, whereby in exchange for the protection that thecitizens get from the government, taxes are paid.1

B. Nature of Taxation

1. It is an inherent attribute of sovereignty

2. It is legislative in character

C. Characteristics of Taxation

1. The power of taxation is an incident of sovereignty as it is inherent in the State,belonging as a matter of right to every independent government. It does need constitutionalconferment. Constitutional provisions do not give rise to the power to tax but merelyimpose limitations on what would otherwise be an invincible power. No attribute ofsovereignty is more pervading, and at no point does the power of government affect moreconstantly and intimately all the relations of life than through the exactions made under it.2

2. The power to tax is inherent in the State, and the State is free to select the objectof taxation, such power being exclusively vested in the legislature, except where theConstitution provides otherwise.3

The Congress may by law authorize the President to fix within specified limits, andsubject to such limitations and restrictions as it may impose, tariff rates, import and exportquotas, tonnage and wharfage dues, and other duties or imposts within the framework of thenational development program of the Government.

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 theCongress may provide, consistent with the basic policy of local autonomy. Such taxes, fees,and charges shall accrue exclusively to the local governments.4

1Commissioner of Internal Revenue vs. Allegre, Inc., et al., L-28896, Feb. 17, 1988

2Churchill and Tait v. Concepcion, 34 Phil 969

3Art. VI, Sec, 28 (2); Art. X, Sec. 5; Art. VI, Sec. 28. par. 2.

4Art. X, Sec. 5


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3. It is subject to Constitutional and inherent limitations; hence, it is not an absolutepower that can be exercised by the legislature anyway it pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power2. Power of Eminent Domain

Taxation Police Power Eminent DomainPurpose

Raising revenue Promote public welfarethru regulations

Taking of property forpublic use

Amount of exaction

No limit Limited to the cost of regulations, issuance ofthe license or surveillance

No exaction,compensation paid by thegovernment

Benefits received

No special or direct benefitsreceived but the enjoyment of theprivileges of living in an organizedsociety

No direct benefits but ahealthy economic standardof society or damnumabsque injuriais attained

Direct benefit results inthe form of justcompensation

Non-impairment of contracts

The impairment rule subsist Contracts may beimpaired

Contracts may beimpaired

Transfer of property rights

Taxes paid become part of publicfunds

No transfer but onlyrestraint on the exercise ofproperty right exists

Property is taken by thegovt upon payment ofjust compensation

Scope

Affects all persons, property andexcise

Affects all persons,property, privileges, andeven rights

Affects only the particularproperty comprehended


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Basis

Public necessity Public necessity and theright of the state and thepublic to self-protection

and self-preservation

Public necessity, privateproperty is taken forpublic use

Authority which exercises the power

Only by the government orits political subdivisions

Only by the government orits political subdivisions

May be granted to publicservice, companies, or publicutilities

E. Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the general welfare andprotection of its citizens.

2. Non-revenue/special or regulatory

Promotion of General Welfare Taxation may be used as an implement of police power inorder to promote the general welfare of the people.5

Regulation As in the case of taxes levied on excises and privileges likethose imposed in tobacco or alcoholic products oramusement places like night clubs, cabarets, cockpits, etc.6

Reduction of Social Inequality This is made possible through the progressive system oftaxation where the objective is to prevent the under-concentration of wealth in the hands of few individuals.

Encourage Economic Growth In the realm of tax exemptions and tax reliefs, forinstance, the purpose is to grant incentives or exemptionsin order to encourage investments and thereby promote

5see Lutz vs. Araneta, 98 Phil 148 and Osmea vs. Orbos, G.R. No. 99886, Mar. 31, 1993

6In the case ofCaltex Phils. Inc. vs. COA (G.R. No. 92585, May 8, 1992), it was held that taxes may also be

imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened

industry which is affected with public industry like the oil industry.


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the countrys economic growth.

e. Protectionism In some important sectors of the economy, as in the caseof foreign importations, taxes sometimes provide

protection to local industries like protective tariffs andcustoms

F. Principles of Sound Tax System

1. Fiscal Adequacy

The sources of tax revenue should coincide with, and approximate the needs ofgovernment expenditure. Neither an excess nor a deficiency of revenue vis--vis the needs ofgovernment would be in keeping with the principle.

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective administration

3. Theoretical Justice

The tax burden should be in proportion to the taxpayers ability to pay7. The 1987Constitution requires taxation to be equitable and uniform.

G. Theory and Basis of Taxation

1. Lifeblood Theory

Taxes are the lifeblood of the government, being such, their prompt and certainavailability is an imperious need.8Without taxes, the government would be paralyzed for lackof motive power to activate and operate it.

2. Necessity Theory

Taxes proceed upon the theory that the existence of the government is a necessity;that it cannot continue without the means to pay its expenses; and that for those means, ithas the right to compel all citizens and properties within its limits to contribute. 9

7ability-to-pay principle

8Collector of Internal Revenue vs. Goodrich International Rubber Co ., Sept. 6, 1965

9In a case, the Supreme Court held that:

Taxation is a power emanating from necessity. It is a necessary burden to preserve the States

sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores

from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the

citizenry and those which come with the States territory and facilities, and protection which a


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3. Benefits-Protection Theory10

The basis of taxation is the reciprocal duty of protection between the state and itsinhabitants. In return for the contributions, the taxpayer receives the general advantages and

protection which the government affords the taxpayer and his property.

4. Jurisdiction over subject and objects

Rules:

a) Tax laws cannot operate beyond a States territorial limits.

b) The government cannot tax a particular object of taxation which is not within itsterritorial jurisdiction.

c) Property outside ones jurisdiction does not receive any protection of the State.

d) If a law is passed by Congress, it must always see to it that the object or subject oftaxation is within the territorial jurisdiction of the taxing authority.

H. Doctrines in Taxation

1. Prospectivity of tax laws

General Rule:

Taxes must only be imposed prospectively.

Exception:

The language of the statute clearly demands or express that it shall have aretroactive effect.

2. Imprescriptibility

General Rule:

Taxes are imprescriptible.

Exception:

When provided otherwise by the tax law itself.11

government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA

775)10

Symbiotic Relationship11

Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein

imposed.


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3. Double taxation

a. Strict sense

Referred to as direct duplicate taxation, it means:

1. Taxing twice;

2. by the same taxing authority;

3. within the same jurisdiction or taxing district;

4. for the same purpose;

5. in the same year or taxing period;

6. some of the property in the territory

b. Broad sense

Referred to as indirect double taxation, it is taxation other than direct duplicatetaxation. It extends to all cases in which there is a burden of two or more impositions.

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does not prohibit doubletaxation.

However, while it is not forbidden, it is something not favored. Such taxationshould, whenever possible, be avoided and prevented.

In addition, where there is direct double taxation, there may be a violation of theconstitutional precepts of equal protection and uniformity in taxation.12

The law on prescription, being a remedial measure, should be liberally construed to afford protection as

a corollary, the exceptions to the law on prescription be strictly construed. (CIR vs CA. G.R. No. 104171,

Feb. 24, 1999)12

The argument against double taxation may not be invoked where one tax is imposed by the State and

the 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

question, there is no infringement of the rule on equality (City of Baguio v. De Leon, 25 SCRA 938)


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d. Modes of eliminating double taxation

Two (2) methods of relief:13

Exemption method The income or capital which is taxable at the state of source orsitus is exempted at the state of residence, although in someinstances it may be taken into account in determining the rateof tax applicable to the taxpayers remaining income or capital

Credit method Although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid inthe former is credited against the tax levied in the latter. Thebasic difference between the two methods is that in theexemption method, the focus is on the income or capital,

whereas the credit method focuses upon the tax.

13A tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of

source or situs and of the state of residence with re ga rd to ce rta in cla sse s o f i nco me or cap ita l. In

some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other

items of income or capital, both states are given the right to tax, although the amount of tax that may be

imposed by the state of source is limited. The second method for the elimination of double taxation

applies whenever the state of so urce is gi ven a full or li mited righ t to ta x tog ethe r with the

sta te of re sid en ce . In th is case, the treaties make it incumbent upon the state of residence to allow

relief on order to avoid double taxation.


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4. Escape from taxation

a. Shifting of tax burden14

1) Ways of shifting the tax burden

a. Forward shifting When the burden of the tax is transferred from a factor ofproduction through the factors of distribution until it finallysettles on the ultimate purchaser or consumer.15

b. Backward shifting When the burden of the tax is transferred from the consumeror purchaser through the factors of distribution to the factorsof production.16

c. Onward shifting When the tax is shifted two or more times either forward orbackward.17

2) Taxes that can be shifted

Only indirect taxes may be shifted;18 direct taxes19 cannot be shifted.

14The transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or

imposed to someone else.

Process by which such tax burden is transferred from statutory taxpayer to another without violating

the law.

What is transferred is not the payment of the tax, but the burden of the tax15

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 consumer16 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, or finally to the manufacturer or producer17

Example:

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 by the

retailer, we have three shifts in all.18

e.g. VAT19

e.g. Income tax


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3) Meaning of impact and incidence of taxation

Impact of taxation Incidence of taxation

The point on which a tax is originallyimposed. In so far as the law is concerned,the taxpayer is the person who must pay thetax to the government. He is also termed asthe statutory taxpayer-the one on whom thetax is formally assessed. He is the subject ofthe tax.

The point on which the tax burden finallyrests or settle down. It takes place whenshifting has been effected from the statutorytaxpayer to another.

b. Tax avoidance20

The exploitation of the taxpayer of legally permissible alternative tax rates ormethods of assessing taxable property or income in order to avoid or reduce tax liabilit

c. Tax evasion21

The use by the taxpayer of illegal or fraudulent means to defeat or lessen thepayment of tax.

20also known as tax minimization; it is not punished by law

21also known as tax dodging; it is punishable by law

Elements of tax evasion:

1. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or

paying no tax when it is shown that tax is due

2. An accompanying state of mind which is described as being evil, in bad faith, willful, or

deliberate and not accidental

3. A course of action (or failure of action) which is unlawful

Indicia of fraud in tax evasion:

1. Failure to declare for taxation purposes true and actual income derived from business for two (2)

consecutive years; or

2. Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive years

coupled with unintentional overstatement of deductions

Evidence to prove tax evasion:

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.

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 of

its due taxes. (Republic vs. Gonzales, 13 SCRA 638)


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5. Exemption from taxation

a. Meaning of exemption from taxation

It is the grant of immunity to particular persons or corporations or to persons orcorporations of a particular class from a tax which persons and corporations generally withinthe same state or taxing district are obliged to pay. It is an immunity or privilege; it isfreedom from a financial charge or burden to which others are subjected. 22

b. Nature of tax exemption

1) It is a mere personal privilege of the grantee.

2) It is generally revocable by the government unless the exemption is founded on acontract which is contract which is protected from impairment.

3) It implies a waiver on the part of the government of its right to collect what

otherwise would be due to it, and so is prejudicial thereto.

4) It is not necessarily discriminatory so long as the exemption has a reasonablefoundation or rational basis.

5) It is not transferable except if the law expressly provides so.

c. Kinds of tax exemption

1) Express23

When certain persons, property or transactions are, by express provision, exempted

from all certain taxes, either entirely or in part.

2) Implied24

When a tax is levied on certain classes of persons, properties, or transactions withoutmentioning the other classes.25

22 Exemption is allowed only if there is a clear provision therefor.

It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.

Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation

is the exemption.23

or affirmative exemption24

or exemption by omission

No tax exemption by implication

It must be expressed in clear and unmistakable language25

Every tax statute makes exemptions because of omissions.


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3) Contractual

Agreed to by the taxing authority in contracts lawfully entered into by them underenabling laws.

d. Rationale/grounds for exemption

Rationale for granting tax exemptions Grounds for granting tax exemptions

Its avowed purpose is some public benefit orinterests which the lawmaking body considerssufficient to offset the monetary loss entailed inthe grant of the exemption.

The theory behind the grant of tax exemptionsis that such act will benefit the body of the

people. It is not based on the idea of lesseningthe burden of the individual owners ofproperty.

1) May be based on contract.26

2) May be based on some ground ofpublic policy.27

3) May be based on grounds of

reciprocity or to lessen the rigors ofinternational double or multipletaxation.28

e. Revocation of tax exemption

It is an act of liberality which could be taken back by the government unless thereare restrictions. Since taxation is the rule and taxation therefrom is the exception, theexemption may be withdrawn by the taxing authority.29

26In such a case, the public, which is represented by the government is supposed to receive a full

equivalent therefor, i.e. charter of a corporation.27

i.e., to encourage new industries or to foster charitable institutions. Here, the government need not

receive any consideration in return for the tax exemption.28

Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.29

Mactan Cebu International Airport Authority vs., Marcos, 261 SCRA 667.


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6. Compensation and Set-off30

General Rule:

Taxes are not subject to set-off or legal compensation. The government and the

taxpayer are not creditors and debtors or each other. Obligations in the nature of debts aredue to the government in its corporate capacity, while taxes are due to the government in itssovereign capacity.31

Exception:

Where both the claims of the government and the taxpayer against each other havealready become due and demandable as well as fully liquated.32

7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid litigation or put an

end to one already commenced.33

8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its authority to imposepenalties on persons otherwise guilty of evasion or violation of a revenue to collect whatotherwise would be due it and, in this sense, prejudicial thereto.34

30

Requisites of Compensation in taxation1. The tax assessed and the claim against the government be fully liquidated.

2. The tax assessed and the claim against the government is due and demandable, and

3. The government had already appropriated funds for the payment of the claim ( Domingo v. Garlitos,

L-18904, June 29, 1963)31

Philex Mining Corp. vs. CIR, 294 SCRA 687; Republic vs. Mambulao Lumber Co., 6 SCRA 62232

see Domingo vs. Garlitos, supra33

Art. 2028, New Civil Code

Requisites:

1. Taxpayer must have a tax liability.

2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer.

3. There must be acceptance of the offer in settlement of the original claim.

When taxes may be compromised:

1. A reasonable doubt as to the validity if the claim against the taxpayer exists;

2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

3. Criminal violations, except:

a. Those already filed in court

b. Those involving fraud.34

Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by statute must

be construed strictly against the taxpayer, who must show compliance with the law.

The government is not estoppedfrom questioning the tax liability even if amnesty tax payments were

already received


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b. Distinguished from tax exemption

Tax amnesty Tax exemption

Partakes of an absolute forgiveness or waiver

by the Government of its right to collectwhat otherwise would be due it and, in thissense, prejudicial thereto, particularly to taxevaders who wish to relent and are willing toreform are given a chance to do so andtherefore become a part of the society with aclean slate.

The grant of immunity to particular persons

or corporations of a particular class from atax of which persons and corporationsgenerally within the same state or taxingdistrict are obliged to pay.

Immunity from all criminal, civil andadministrative liabilities arising from non-payment of taxes

Immunity from civil liability only

Applies only to past tax periods, henceretroactive application

Prospective application

There is revenue loss since there was actuallytaxes due but collection was waived by thegovernment.

None, because there was no actual taxes dueas the person or transaction is protected bytax exemption.

Never favored nor presumed in law, and is granted by statute. The terms of the amnesty orexemption must be strictly construed against the taxpayer and liberally in favor of thegovernment.

Erroneous application and enforcement of the law by public officers do not block subsequent correct

application of the statute. The government is never estoppedby mistakes or errors by its agents.


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9. Construction and Interpretation of:

a. Tax laws

1) General Rule

Tax laws are liberally interpreted in favor of the taxpayer and strictly against thegovernment.

2) Exception

Liberal interpretation does not apply to tax exemptions which should be construedin strictissimi jurisagainst the taxpayer.35

b. Tax exemption and exclusion

1) General Rule

In the construction of tax statutes, exemptions are not favored and are construedstrictissimi juris against the taxpayer.36 The fundamental theory is that all taxable propertyshould bear its share in the cost and expense of the government.

Taxation is the rule and exemption. He who claims exemption must be able to justifyhis claim or right thereto by a grant express in terms too plain to be mistaken and toocategorical to be misinterpreted. If not expressly mentioned in the law, it must be at least

within its purview by clear legislative intent.

2) Exceptions

1. The law itself expressly provides for a liberal construction thereof.

2. In cases of exemptions granted to religious, charitable and educational institutionsor to the government or its agencies or to public property because the general rule is thatthey are exempted from tax.

35Reason: Lifeblood doctrine

36Strict interpretation does not apply to the government and its agencies

Petitioner cannot invoke the rule ofstrictissimi juris with respect to the interpretation of statutes

granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of

exemptions in favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]


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c. Tax rules and regulations

1) General rule only

They shall not be given retroactive application if the revocation, modification or

reversal will be prejudicial to the taxpayers.

37

d. Penal provisions of tax laws

Tax laws are civil and not penal in nature, although there are penalties provided fortheir violation.

The purpose of tax laws in imposing penalties for delinquencies is to compel thetimely payment of taxes or to punish evasion or neglect of duty in respect thereof.

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly declared or is clearly thelegislative intent. But a tax law should not be given retroactive application when it would beharsh and oppressive.

I. Scope and Limitation of Taxation

1. Inherent Limitations

a. Public Purpose38

The tax must be used:

1) for the support of the state or

2) for some recognized objects of governments or

3) directly to promote the welfare of the community39

37Sec. 246

38Test in determining Public Purposes in tax:

a. Duty Test whether the thing to be threatened by the appropriation of public revenue is something

which is the duty of the State, as a government.

b. Promotion of General Welfare Test whether the law providing the tax directly promotes the

welfare of the community in equal measure.

The term public purpose is synonymous with governmental purpose; a purpose affecting the

inhabitants of the state or taxing district as a community and not merely as individuals.

A tax levied for a private purpose constitutes a taking of property without due process of law.

The purposes to be accomplished by taxation need not be exclusively public. Although private

individuals are directly benefited, the tax would still be valid provided such benefit is only incidental.


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b. Inherently Legislative

1) General Rule

Taxation is purely legislative, Congress cannot delegate the power to others. This

limitation arises from the doctrine of separation of powers among the three branches ofgovernment.

2) Exceptions

a) Delegation to local governments40

The power of local government units to impose taxes and fees is always subject tothe limitations which the Congress may provide, the former having no inherent power totax.41

The power to tax is primarily vested in the Congress, however, in our jurisdiction, it

may be exercised by local legislative bodies, no longer merely by virtue of a valid delegationbut pursuant to direct authority conferred by Section 5,42Article X of the1987 Constitution,subject to guidelines and limitations which Congress may provide which must be consistent

with the basic policy of local autonomy.43

b) Delegation to the President44

The power granted to Congress under this constitutional provision to authorize thePresident to fix within specified limits and subject to such limitations and restrictions as itmay impose, tariff rates and other duties and imposts include tariffs rates even for revenuepurposes only. Customs duties which are assessed at the prescribed tariff rates are very much

like taxes which are frequently imposed for both revenue-raising and regulatory purposes.45

c) Delegation to administrative agencies

With respect to aspects of taxation not legislative in character.46

The test is not as to who receives the money, but the character of the purpose for which it is expended;

not the immediate result of the expenditure but rather the ultimate.

In the imposition of taxes, public purpose is presumed.39

taxation as an implement of police power40

Art. X. Sec. 541 Basco v. PAGCOR42

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.43

MCIAA v. Marcos, 261 SCRA 66744

Art.VI, Sec. 28(2)45

Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 199246

Example: assessment and collection


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c. Territorial

1) Situs of Taxation47

a) Meaning

Literally means the place of taxation.

The place or the authority that has the right to impose and collect taxes.48 It ispremised upon the symbiotic relation between the taxpayer and the State.

b) Situs of Income Tax

1) From sources within thePhilippines

2) From sources without thePhilippines

Determined by the nationality, residence of the taxpayer and source of income.49

3) Income partly within and partlywithout the Philippines

Allocated or apportioned to sources within or without the Philippines.50

Certain aspects of the taxing process that are not really legislative in nature are vested in

administrative agencies. In these cases, there really is no delegation, to wit:

a) power to value property

b) power to assess and collect taxesc) power to perform details of computation, appraisement or adjustments.

For the delegation to be constitutionally valid, the law must be complete in itself and must set forth

sufficient standards.47

It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise

within the territory of the taxing power because:

1. Tax laws do not operate beyond a countrys territorial limit.

2. Property which is wholly and exclusively within the jurisdiction of another state receives none of

the protection for which a tax is supposed to be compensation.

However, the fundamental basis of the right to tax is the capacity of the government to provide

benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing

state, where there is between him and the taxing state, a privity of relationship justifying the levy.48

Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 200149 Sec. 42

Theories:

1. Domicillary theory - the location where the income earner resides is the situs of taxation

2. Nationality theory - the country where the income earner is a citizen is the situs of taxation

3. Source rule - the country which is the source of the income or where the activity that produced the

income took place is the situs of taxation.50

For the purpose of computing the taxable income therefrom, where items of gross income are

separately allocated to sources within the Philippines, there shall be deducted:

(a) the expenses, losses and other deductions properly apportioned or allocated thereto, and


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c) Situs of Property Taxes

(1) Taxes on Real Property

The place where the property is located. The applicable concept is lex situsor lex rei

sitae.

51

(2) Taxes on Personal Property

Tangible personal property Intangible personal property

Where the property is physically locatedalthough the owner resides in anotherjurisdiction.52

The place where the owner is located. Theapplicable concept is mobilia sequunturpersonam.53

d) Situs of Excise Tax

(1) Estate Tax(2) Donors Tax

Determined by the nationality and residence of the taxpayer and the place where theproperty is located.

(b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to

some items or classes of gross income. The remainder, if any, shall be included in full as taxable income

from sources within the Philippines.51

We can only impose property tax on the properties of a person whose residence is in the Philippines.52

51 Am Jur. 46753

movables follow the owner or domicile of the owner

Exceptions:

1. When the property has acquired a business situs in another jurisdiction;

2. When an express provision of the statute provide for another rule.


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e) Situs of Business Tax

The place where the act or business is performed or occupation is engaged in.54

(1) Sale of Real Property

The place or location of the real property.55

(2) Sale of Personal Property

The place of sale.

(3) VAT

Where the goods, property or services are destined, used or consumed.

d. International Comity56

The property of a foreign state or government may not be taxed by another.57

54where the transaction is performed because it is that place that gives protection

The power to levy an excise upon the performance of an act or the engaging in an occupation does not

depend upon the domicile of the person subject to the exercise, nor upon the physical location of the

property or in connection with the act or occupation taxed, but depends upon the place on which the act

is performed or occupation engaged in.

Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place

where the respective transaction is perfected and consummated (Hopewell vs. Com. of Customs)55

So, if the property sold is situated within the Phils., the income derived from such sale is considered as

income within.56 Comity is the respect accorded to other sovereign nations.57

The grounds for the above are:

1. sovereign equality among states

2. usage among states that when one enter into the territory of another, there is an implied

understanding that the power does not intend to degrade its dignity by placing itself under the

jurisdiction of the latter

3. foreign government may not be sued without its consent so that it is useless to assess the tax since it

cannot be collected

4. reciprocity among states


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e. Exemption of Government Entities, Agencies, andInstrumentalities

i. Agencies performing governmental functions - tax exempt58

ii. Agencies performing proprietary functions - subject to tax.

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation

1) Prohibition against imprisonment for non-payment of polltax

No person shall be imprisoned for debt or non-payment of poll tax. 59

2) Uniformity and equality of taxation

The rule of taxation shall be uniform and equitable. The Congress shall evolve aprogressive system of taxation.60

58The exemption applies only to governmental entities through which the government immediately and

directly exercises its sovereign powers.

Tax exemption of property owned by the Republic of the Philippines refers to the property owned by

the government and its agencies which do not have separate and distinct personality (NDC vs. Cebu City)Those created by special charter (incorporated agencies) are not covered by the exemption

59Sec. 20, Art. III

The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the

rate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec.

161, LGC)

The prohibition is against imprisonment for non-payment of poll tax. Thus, a person is subject to

imprisonment for violation of the community tax law other than for non-payment of the tax and for non-

payment of other taxes as prescribed by law.

The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge,

but not to other violations like falsification of community tax certificate or non-payment of other taxes.60

Sec. 28(1), Art. VI

Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property of

the same class shall be taxed at the same rate. A tax is uniform when the same force and effect in every

place where the subject of it is found.

Equitable means fair, just, reasonable and proportionate to ones ability to pay.

Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers

ability to pay

Inequality which results in singling out one particular class for taxation or exemption infringes no

constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27)

The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly

attainable.


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3) Grant by Congress of authority to the President to imposetariff rates

The Congress may, by law, authorize the President to fix tariff rates, import andexport quotas, tonnage and wharfage dues, and other duties or imposts within the

framework of the national development program of the government.

61

4) Prohibition against taxation of religious, charitable entities,and educational entities

Subject to the conditions prescribed by law, all grants, endowments, donations orcontributions used actually, directly and exclusively for educational purposes shall be exemptfrom tax.62

5) Prohibition against taxation of non-stock, non-profitinstitutions

All revenues and assets of non-stock, non-profit educational institutions used

actually, directly, and exclusively for educational purposes shall be exempt from taxes andduties.63

6) Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of amajority of all the members of the Congress.64

61Art. 28 (2), Art. VI

62Sec. 4(4), Art. XIV.

The exemption granted to non-stock, non-profit educational institution covers income, property, and

donors taxes, and custom duties.To be exempt from tax or duty, the revenue, assets, property or donation must be used actually,

directly and exclusively for educational purpose.

In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to

property tax.

The said constitutional provision granting tax exemption to non-stock, non-profit educational institution

is self-executing.

Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative

implementation. Their tax exemption is not self-executing.

Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed

are exempt from property tax, whether the educational institution is proprietary or non-profit63

Sec. 4 (3), Art. XIV

Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax because

the transaction was an isolated one (Manila Polo Club vs. CTA)

Income derived from the hospital pharmacy, dormitory and canteen was exempt from income tax

because the operation of those entities was merely incidental to the primary purpose of the exempt

corporation (St. Paul Hospital of Iloilo vs. CIR)

Where the educational institution is private and non-profit (but a stock corporation), it is subject to

income tax but at the preferential rate of ten percent (10%)64

Sec. 28(4), Art. VI

The provision requires the concurrence of a majority, not of attendees constituting a quorum, but of all

members of the Congress.


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7) Prohibition on use of tax levied for special purpose

All money collected or any tax levied for a special purpose shall be treated as aspecial 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 generalfunds of the government.65

8) Presidents veto power on appropriation, revenue, tariffbills

The President shall have the power to veto any particular item or items in anAppropriation, Revenue or Tariff bill but the veto shall not affect the item or items to whichhe does not object.66

9) Non-impairment of jurisdiction of the Supreme Court

The Congress shall have the power to define, prescribe, and apportion thejurisdiction of the various courts but may not deprive the Supreme Court of its jurisdictionover cases enumerated in Sec. 567 hereof.

65Sec. 29(3), Art. VI

An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of

imported crude oil. In a decide case, it was held that where under an executive order of the President, this

special fund is transferred from the general fund to a trust liability account, the constitutional mandate

is not violated. The OPSF, according to the court, remains as a special fund subject to COA audit ( Osmea

vs Orbos, et al., G.R. No. 99886, Mar. 31, 1993)66

Sec. 27(2), Art. VI67

The Supreme Court shall have the following powers:1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls,

and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.

2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may

provide, final judgments and orders of lower courts in:

a. All cases in which the constitutionality or validity of any treaty, international or executive

agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in

question.

b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in

relation thereto.

c. All cases in which the jurisdiction of any lower court is in issue.

d. All criminal cases in which the penalty imposed is reclusion perpetua or higher.

e. All cases in which only an error or question of law is involved.

3. Assign temporarily judges of lower courts to other stations as public interest may require. Such

temporary assignment shall not exceed six months without the consent of the judge concerned.

4. Order a change of venue or place of trial to avoid a miscarriage of justice.

5. Promulgate rules concerning the protection and enforcement of constitutional rights, pleading,

practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and legal

assistance to the under-privileged. Such rules shall provide a simplified and inexpensive procedure for the

speedy disposition of cases, shall be uniform for all courts of the same grade, and shall not diminish,

increase, or modify substantive rights. Rules of procedure of special courts and quasi-judicial bodies shall

remain effective unless disapproved by the Supreme Court.


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10) Grant of power to the local government units to create itsown sources of revenue

Each local government unit has the power to create its own revenue and to levytaxes, fees and charges subject to such guidelines and limitations as the Congress may

provide.

68

11) Flexible tariff clause

This clause provides the authority given to the President to adjust tariff rates underSection 40169 of the Tariff and Customs Code.70

12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents appurtenant thereto,mosques, non-profit cemeteries, and all lands, building, and improvements actually, directly andexclusively used for religious, charitable or educational purposes shall be exempt from

taxation.71

6. Appoint all officials and employees of the Judiciary in accordance with the Civil Service Law. (Art. VIII)68

Sec 5, Art. X

Local government units have no power to further delegate said constitutional grant to raise revenue,

because what is delegated is not the enactment or the imposition of a tax, it is the administrative

implementation.

The power of local government units to impose taxes and fees is always subject to the limitations

which Congress may provide, the former having no inherent power to tax.

Municipal corporations are mere creatures of Congress which has the power to create and abolish

municipal corporations. Congress therefore has the power to control over local government units. If

Congress can grant to a municipal corporation the power to tax certain matters, it can also provide forexemptions or even take back the power (Basco vs. PAGCOR)69

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

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

3) To impose additional duty on all imports not exceeding 10% ad valorem.70

Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)71

Sec. 28(3), Art. VI

Lest of the tax exemption: the use and not ownership of the property

To be tax-exempt, the property must be actually, directly and exclusively used for the purposes

mentioned.

The word exclusively means primarily.

The exemption is not limited to property actually indispensable but extends to facilities which are

incidental to and reasonably necessary for the accomplishment of said purposes.

The constitutional exemption applies only to property tax.

However, it would seem that under existing law, gifts made in favor or religious charitable and

educational organizations would nevertheless qualify for donors gift tax exemption. (Sec. 101(9)(3), NIRC)

The constitutional tax exemptions refer only to real property that are actually, directly and exclusively

used for religious, charitable or educational purposes, and that the only constitutionally recognized

exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions


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13) No appropriation or use of public money for religiouspurposes

No public money or property shall be appropriated, applied, paid or employed,directly or indirectly for the use, benefit, support of any sect, church, denomination,

sectarian institution, or system of religion or of any priest, preacher, minister, or otherreligious teacher or dignitary as such except when such priest, preacher, minister or dignitaryis assigned to the armed forces or to any penal institution, or government orphanage orleprosarium.72

b. Provisions Indirectly Affecting Taxation

1) Due process

No person shall be deprived of life, liberty or property without due process of law73

x x x.

2) Equal protection

xxx nor shall any person be denied the equal protection of the laws.74

3) Religious freedom

No law shall be made respecting an establishment of religion or prohibiting the freeexercise thereof. The free exercise and enjoyment of religious profession and worship,

without discrimination or preference, shall be forever allowed. 75

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed.76

which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal

Revenue v. Court of Appeals, et al., 298 SCRA 83)72

Sec. 29(2), Art. VI

Public property may be leased to a religious group provided that the lease will be totally under the

same conditions as that to private persons (amount of rent).

Congress is without power to appropriate funds for a private purpose.73

Sec. 1, Art. III74

Ibid.75

Sec. 5 Art. III

License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the

nature of a condition or permit of the exercise of the right.

However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally

applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentino vs

Secretary of Finance, 235 SCRA 630)76

Sec. 10, Art. III

A law which changes the terms of the contract by making new conditions, or changing those in the

contract, or dispenses with those expressed, impairs the obligation.

The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject

to amendment, alteration or repeal by the Congress when the public interest so requires.


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J. Stages of Taxation

1. Levy

Determination of the persons, property or excises to be taxed, the sum or sums to be

raised, the due date thereof and the time and manner of levying and collecting taxes.

2. Assessment and Collection

The manner of enforcement of the obligation on the part of those who are taxed. 77

The two processes together constitute the taxation system.3. Payment

The act of compliance by the taxpayer, including such options, schemes or remediesas may be legally available.

4. Refund

The recovery of any tax alleged to have been erroneously or illegally assessed orcollected, or of any penalty claimed to have been collected without authority, or of any sumalleged to have been excessively, or in any manner wrongfully collected.

K. Definition, Nature, and Characteristics of Taxes

Definition Taxes are the enforced proportional contributions frompersons and property levied by the law-making body of the

State by virtue of its sovereignty for the support ofgovernment and for public needs.

Nature They are not arbitrary exactions but contributions levied by authority of law, and by some rule of proportion which isintended to ensure uniformity of contribution and a justapportionment of the burdens of government.

Characteristics 1. It is levied by the law-making body of the State.78

2. It is an enforced contribution.79

3. It is generally payable in money.80

77This includes payment by the taxpayer and is referred to as tax administration

78The power to tax is a legislative power which under the Constitution only Congress can exercise through

the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.79

A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent,

express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.


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4. It is proportionate in character.81

5. It is levied on persons or property.82

6. It is levied for public purpose or purposes.

83

7. It is levied by the State which has jurisdiction over thepersons or property.84

L. Requisites of a valid tax

1) It should be for a public purpose

2) The rule of taxation should be uniform

3) Either the person or property taxed be within the jurisdiction of the taxingauthority

4) The assessment and collection be in consonance with the due process clause

5) The tax must not infringe on the inherent and constitutional limitations of thepower of taxation.85

M. Tax as distinguished from other forms of exactions

1. Tariff

May be used in three (3) senses:

a. A book of rates drawn usually in alphabetical order containing the names ofseveral kinds of merchandise with the corresponding duties to be paid for the same.

b. Duties payable on goods imported or exported.86

c. The system or principle of imposing duties on the importation/exportation ofgoods.

80Tax is a pecuniary burden an exaction to be discharged alone in the form of money which must be in

legal tender, unless qualified by law, such as RA 304 which allows backpay certificates as payment of

taxes.81

It is ordinarily based on the taxpayers ability to pay.82

A tax may also be imposed on acts, transactions, rights or privileges.83

Taxation involves, and a tax constitutes, a burden to provide income for public purposes.84

The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.85

Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But

their collection should not be tainted with arbitrariness86

P.D. No. 230


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2. Toll

Sum of money for the use of something, generally applied to the consideration whichis paid for the use of a road, bridge of the like, of a public nature.

Tax Toll

Demand of sovereignty Demand of proprietorship

Paid for the support of the government Paid for the use of anothers property

Generally, no limit as to amount imposed Amount depends on the cost of constructionor maintenance of the public improvementused

Imposed only by the government Imposed by the government or privateindividuals or entities

3. License fee

A charge imposed under the police power for the purposes of regulation. 87

Tax License/Permit Fee

Enforced contribution assessed by sovereignauthority to defray public expenses

Legal compensation or reward of an officerfor specific purposes

For revenue purposes For regulation purposes

87Three kinds of licenses are recognized in the law:

1. Licenses for the regulation of useful occupations.

2. Licenses for the regulation or restriction of non-useful occupations or enterprises

3. Licenses for revenue only

Importance of the distinctions between tax and license fee:

1. Some limitations apply only to one and not to the other, and that exemption from taxes may not

include exemption from license fees.

2. The power to regulate as an exercise of police power does not include the power to impose fees for

revenue purposes. (seeAmerican Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases)

3. An extraction, however, maybe considered both a tax and a license fee.

4. But a tax may have only a regulatory purpose.

5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and

regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue

is also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs Quezon

City, 172 SCRA 629)


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An exercise of the taxing power An exercise of the police power

Generally no limit in the amount of tax to bepaid Amount is limited to the necessary expensesof inspection and regulation

Imposed also on persons and property Imposed on the right to exercise privilege

4. Special assessment

An enforced proportional contribution from owners of lands especially or peculiarlybenefited by public improvements.88

Tax Special Assessment

Imposed on persons, property and excise Levied only on land

Personal liability of the person assessed Not a personal liability of the personassessed, i.e. his liability is limited only to theland involved

Based on necessity as well as on benefitsreceived

Based wholly on benefits

General application89 Exceptional both as time and place

88Since special assessments are not taxes within the constitutional or statutory provisions on tax

exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply to

special assessments.

However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties which

are actually, directly and exclusively used for religious, charitable and educational purposes are not

exactly exempt from real property taxes but are exempt from the imposition of special assessments as

well. (see Aban)

The general rule is that an exemption from taxation does not include exemption from special

assessment.89

seeApostolic Prefect vs Treas. Of Baguio, 71 Phil 547


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5. Debt

Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delictsbetween parties for their private interest or resulting from their own acts or omissions.

Tax Debt

Based on law Based on contracts, express or implied

Generally, cannot be assigned Assignable

Generally payable in money May be paid in kind

Generally not subject to set-off orcompensation

May be subject to set-off or compensation

Imprisonment is a sanction for non-paymentof tax except poll tax

No imprisonment for non-payment of debt

Governed by special prescriptive periodsprovided for in the Tax Code

Governed by the ordinary periods ofprescriptions

Does not draw interest except only when

delinquent

Draws interest when so stipulated, or in case

of default

N. Kinds of Taxes

1. As to object

a. Personal, capitation, or poll tax

Tax of a fixed amount imposed on persons residing within a specified territory,

whether citizens or not, without regard to their property or the occupation or business inwhich they may be engaged.90

b. Property tax

Tax imposed on property, real or personal, in proportion to its value or inaccordance with some other reasonable method of apportionment.

90i.e. community tax.


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c. Privilege tax

A charge imposed upon the performance of an act, the enjoyment of privilege, or theengaging in an occupation.

2. As to burden or incidence

a. Direct

Demanded from the person who also shoulders the burden of the tax. It is a taxwhich the taxpayer is directly or primarily liable and which he or she cannot shift to another.

b. Indirect

Demanded from a person in the expectation and intention that he or she shallindemnify himself or herself at the expense of another, falling finally upon the ultimatepurchaser or consumer. A tax which the taxpayer can shift to another.

3. As to tax rates

a. Specific

The computation of the tax or the rates of the tax is already provided for by law.

b.Ad valorem

Tax upon the value of the article or thing subject to taxation; the intervention ofanother party is needed for the computation of the tax.

c. MixedTax rates are partly progressive and partly regressive.

4. As to purposes

a. General or fiscal

Imposed for the purpose of raising public funds for the service of the government.

b. Special, regulatory, or sumptuary

Imposed primarily for the regulation of useful or non-useful occupation orenterprises and secondarily only for the purpose of raising public funds.


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5. As to scope or authority to impose

a. National internal revenue taxes

Imposed by the National Government.

b. Local real property tax, municipal tax

Imposed by the municipal corporations or local government units.

6. As to graduation

a. Progressive

Rate or amount of tax increases as the amount of the income or earning to be taxedincreases.

b. Regressive

Tax rate decreases as the amount of income to be taxed increases.

b. Proportionate

Tax based on a fixed percentage of the amount of the property receipts or otherbasis to be taxed.91

91Example: real estate tax.


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II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

1. Income Tax Systems

a. Global Tax System

All income received by the taxpayer are grouped together, without any distinction asto the type or nature of the income, and after deducting therefrom expenses and otherallowable deductions, are subjected to tax at a fixed rate.

b. Schedular Tax System

The various types or items of income92 are classified accordingly and are accordeddifferent tax treatments, in accordance with schedules characterized by graduated tax rates.Since these types of income are treated separately, the allowable deductions shall likewise

vary for each type of income.

Schedular system Global system

There are different tax rates There is a single tax rate

There are different categories of taxableincome

There is no need for classification as alltaxpayers are subjected to a single tax rate.

Usually used in the income taxation ofindividuals

Usually applied to corporations.

c. Semi-schedular or semi-global tax system93

A system where the compensation, business or professional income, capital gain andpassive income not subject to final tax, and other income are added together to arrive at thegross income, and after deducting the sum of allowable deductions from business orprofessional income, capital gain and passive income not subject to final tax, and otherincome, in the case of corporations, as well as personal and additional exemptions, in the

case of individual taxpayers, the taxable income is subjected to one set of graduated tax rates;method of taxation under the law.

92compensation, business or professional income

93approach used in the Philippines


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2. Features of the Philippine Income Tax Law

a. Direct tax

One assessed upon the property, person, business income, etc. of those who pay

them.

b. Progressive

The tax rates increase as the tax base increases. In certain cases, however, final taxesare imposed on passive income.94

c. Comprehensive

The Philippine Income tax law adopted the so-called comprehensive tax situs comprehensive in the sense that it practically applies all possible rules of tax situs.

d. Semi-schedular or semi-global tax system95

3. Criteria in Imposing Philippine Income Tax

a. Citizenship Principle

A citizen of the Philippines is subject to Philippine income tax

(a) on his worldwide income, if he resides in the Philippines, or

(b) only on his income from sources within the Philippines, if he qualifies as

nonresident citizen.b. Residence Principle

A resident alien is liable to pay income tax on his income from sources within thePhilippines but exempt from tax on his income from sources outside the Philippines.

c. Source Principle

An alien is subject to Philippine income tax because he derives income from sourceswithin the Philippines. Thus, a nonresident alien is liable to pay Philippine income tax on hisincome from sources within the Philippines96 despite the fact that he has not set foot in the

Philippines.

94The individual income tax system, in the main, is progressive in nature

95supra

96such as dividend, interest, rent, or royalty


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4. Types of Philippine Income Tax

a. Presumptive Income Tax A scale of income taxes is imposed in relation to agroup of persons actual expenditure and the presumed income.

b. Composite Tax A tax consisting of a series of separate quasi-personal taxes,assessed on the particular source of income with a superimposed personal tax on the incomeas a whole.

c. Unitary Income Tax Incomes are arranged according to source. The separateitems are added together and the rate applied to the resulting total income.

5. Taxable Period

a. Calendar Period

A period of twelve (12) months commencing from January 1 and ending December

31.

b. Fiscal Period

An accounting period of 12 months ending on the last day of any month other thanDecember.97

c. Short Period

A period of less than twelve (12) months.

97ex. Feb. 1 to Jan. 31


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6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens98

Citizens of the Philippines who are residing therein.

b) Non-resident citizens99

1. A citizen of the Philippines who establishes to the satisfaction of theCommissioner of Internal Revenue (CIR) the fact of his physical presence abroad with adefinite intention to reside therein.

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

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

3. A citizen of the Phils. who works and derives from abroad and whoseemployment thereat requires him to be physically present abroad most of the time during thetaxable year.

4. A citizen who has been previously considered as non-resident citizen and whoarrives in the Phils. at any time during the taxable year to reside permanently in thecountry.100

5. A citizen who shall have stayed outside the Phils. for 183 days or more by the end

of the year.101

98Taxable for income derived from all sources based on taxable (i.e., net) income

99Taxable for income derived within the Philippines based on taxable (i.e., net) income

100He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his

income derived from sources abroad until the date of his arrival in the Phils.101

Sec. 22 (E)

The continuity of residence abroad is not essential. If physical presence is established, such physical

presence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73,

November 26, 1973)

An overseas contract worker is taxable only on income from sources within the Philippines. (Sec.

23 (c).

A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as

member of the complement of a vessel engaged exclusively in international trade is treated as an

overseas contract worker.

Length of stay is indicative of intention. 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 non-resident citizen. His presence

abroad, however, need not be continuous. [RR1-79]


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2) Aliens102

a) Resident aliens

Those whose residence are within the Philippines but who are not citizens thereof.103

b) Non-resident alien104

Those not residing in the Phils. and who are not citizens thereof.105

(1) Engaged in trade or business

An alien who stays in the Philippines for more than 180 days.106

102What makes an alien a resident or non-resident alien is his intention with regard to the length and

nature of his stay. Thus:

a. One who comes to the Philippines for a definite purpose which in its very nature may

be promptly accomplished is not a resident citizen.

b. One who comes to the Philippines for a definite purpose which in its very nature would

require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a

resident, though it may be his intention at all times to return to his domicile abroad when the purpose

for which he came has been consummated or abandoned. (Sec. 5, RR 2)

Length of stay is indicative of intention.

An alien who shall have stayed in the Philippines for more than one (1) year by the end of the

taxable year is a resident alien

An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred

eighty (180) days during a calendar year shall be considered a non-resident alien in business, or in the

practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180days or less during the calendar year, he shall be deemed a non-resident alien not doing business in the

Philippines, regardless of whether he owns

1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an

inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work

in Process Inventory, Office Supplies Inventory)

2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade

or business (example: Merchandise Inventory)

3. Property used in the trade or business which is subject to the allowance for depreciation

(example: Office Equipment) actually engages in trade or business therein. (Mamalateo)103

Sec. 22 [F], NIRC

A mere floating intention, indefinite as to time, to return to another country is not sufficient to

constitute him a transient.

For tax purposes, a resident alien is;

1. An alien who lives in the Phils. with no definite intention to stay as a resident.

2. One who comes in the Phils. for definite purposes which in its very nature would require an

extended stay and to that end, makes his home temporarily in the Phils.

3. An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils.104

A non-resident alien individual who came to the Phils. and stayed therein for an aggregate period of

more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.105

Sec. 22 (G), id.106

Sec. 25 [A], NIRC


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(2) Not engaged in trade or business

An alien who stays in the Philippines for 180 days or less.107

(3) Special Class of Individual Employees

a) Minimum wage earner

A worker in the private sector paid the statutory minimum wage, or to an employeein the public sector with compensation income of not more than the statutory minimum

wage in the non-agricultural sector where he/she is assigned.108

By virtue of the passage of R.A. 9504, minimum wage earners are exempted from thepayment of the net income tax.109

b) Corporations110

1) Domestic corporations

Created or organized in the Phils. or under its laws.111

2) Foreign corporations

Created, organized or existing under any laws other than those of the Phils.

(1) Resident

Engaged in trade or business112within the Phils.

107Sec. 25 [B], id.

It is the length of stay in the Philippines that determines whether or not he is engaged in trade or

business. The number of transaction he entered into is immaterial.108

Sec. 22 (HH), id. as amended by R.A. 9504109

They are not required to file an income tax return

Thus: xxx, That minimum wage earners shall be exempt from the payment of income tax on their

taxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay and

hazard pay received by such minimum wage earners shall likewise be exempt from income tax.110

The term shall include partnership, no matter how created or organized, joint stock companies, joint

accounts, or insurance companies, but does not include general professional partnerships and a joint

venture or consortium formed for the purpose of undertaking construction projects or engaging in

petroleum, coal, geothermal and other energy operations pursuant to operating or consortium

agreement under a service contract with the government. (Sec. 24(b), id)111

liable for income from sources within and without the Philippines (Sec 22[C], id.)112

The term implies a continuity of commercial dealings and arrangements and contemplates to that

extent, the performance of acts or works or the exercise of some of the functions normally insistent to

and in the progressive prosecution of commercial gain or for the purpose and the object of the business

organization (Comm. vs. British Overseas Airways Corporation BOAC case 149 SCRA 395)


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(2) Non-resident

Not engaged in trade or business within the Phils.

c. Partnerships113

Partnership is a contract whereby two or more persons bind themselves to contributemoney, property, or industry to a common fund with the intention of dividing the profitsamong themselves.114

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their common profession, nopart of the income of which is derived from engaging in any trade & business. 115

e. Estates and Trusts

Estate Trust

The mass of property, rights and obligationsleft behind by the decedent upon his death.116

An arrangement created by will or co-agreement under which title to property ispassed to another for conservation orinvestment with the income therefrom andultimately the corpus117 to be distributed inaccordance with the directions of the creatoras expressed in the governing instrument.118

113An ordinary business partnership is considered as a corporation and is thus subject to tax as such.

Partners are considered stockholders and, therefore, profits distributed to them by the partnership areconsidered as dividends.114

Partnerships, no matter how created or organized, including joint ventures or consortiums, are taxable.

What are taxable unregistered partnerships?

The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even

associations or joint accounts which have no legal personalities apart from their individual members.

Accordingly, a pool of individual real property owners dealing in real estate business was considered a

corporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1]115

Sec. 22 (b)

e. g. Law firm

General professional partnerships are not taxable but partners are taxed on their share of partnership

profits actually or constructively paid during the year.116

Estates may be classified as follows:

1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership.

- The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs

shall include in their respective returns their distributive shares of the net income of the estate.

2. Estates under judicial settlement - are subject to income tax in the same manner as individual.

- Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor,

trustee, and administrator).

- The return should be filed by executor or administrator of the trust.117

principal118

Two (2) Kinds of Trust :


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c. General principles

1. A citizen of the Philippines residing therein is taxable on all income derived fromsources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from sources within thePhilippines.

3. An individual citizen of the Philippines, who is working and deriving income fromabroad as an overseas contract worker, is taxable only on income derived from sources

within the Philippines. Provided, that a seaman who is a citizen of the Philippines and whoreceives compensation for services rendered abroad as a member of the complement of a

vessel engaged exclusively in international trade shall be treated as an overseas contractworker.

4. An alien individual, whether or not a resident of the Philippines, is taxable only onincome derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within andwithout the Philippines.

6. A foreign corporation, whether engaged or not in trade or business in thePhilippines, is taxable only on income derived from sources within the Philippines.

8. Income

a. Definition

It means cash or its equivalent coming to a person within a specified period, whetheras payment for services, interest or profit from investment. It covers gain derived fromcapital, from labor, or from both combined, including gain from sale or conversion of capitalassets.121

b. Nature

All wealth which flows to the taxpayer other than a mere return of capital.

It is an amount of money coming to a person/corporation within a specified time,whether as payment for services, interest or profit from investment. Unless otherwise

specified, it means cash or its equivalent. Income can also be thought of as a flow of thefruits of one's labor.122

121It denotes the amount of money or property received by a person or corporation within a specified

time, whether as payment for services, interests, or profits from investments ( Fisher vs. Trinidad, 43 Phil

973)

Income is not merely increase in value of property; but a gain, a profit in excess of capital as a result of

exchange transactions.122

Conwi v. Court of Tax Appeals


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Income includes earnings, lawfully or unlawfully acquired, without consensualrecognition, express or implied, of an obligation to repay and without restriction as theirdisposition.

c. When income is taxable

1) Existence of income

There must be gain a value received in the form of cash or its equivalent as a resultof rendition of service or earnings in excess of capital invested. 123

2) Realization of income

a) Tests of Realization

Unless income is deemed realized, then there is no taxable income.

Revenue is generally recognized when both conditions are met:

a. The earning process is complete or virtually complete; and

b. An exchange has taken place.124

b) Actual vis--vis Constructive receipt

Actual receipt Constructive receipt

Income may be actual receipt or physicalreceipt.

When money consideration or its equivalentis placed at the control of the person who

rendered the service without restrictionby the payor.125

123A mere expectation of profits is not an income

A transaction whereby nothing of exchangeable value comes to or is received by the taxpayer does not

give rise to or create taxable income.

Items or amounts received which do not add to the taxpayers net worth or redound to his benefits

such as amounts merely deposited or entrusted to him are not considered as gains ( CIR vs. Tours

Specialist, 183 SCRA 402).

Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of Ts

indebtedness, or gain from exchange of property.124 Manila Mandarin Hotels, Inc. v. CIR125

Sec. 4.108-A, RR 16-2005

Examples of income constructively received:

a. Deposit in banks which are made available to the seller of services without restrictions

b. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the

seller as payment for services rendered

c. Transfer of the amounts retained by the payor to the account of the contractor

d. Interest coupons that have matured and are payable but have not been encashed

e. Undistributed share of a partner in the profits of a general partnership


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3) Recognition of income

a. There is income, gain or profit

b. The income, gain or profit is received or realized during the taxable year

c. The income gain or profit is not exempt from income tax

4) Methods of accounting

a) Cash method vis--vis Accrual method

Cash method Accrual method

Recognition of income and expensedependent on inflow or outflow of cash.126

Gains and profits are included in grossincome when earned whether received or

not, and expenses are allowed as deductionswhen incurred, although not yet paid. It isthe right to receive and not the actual receiptthat determines the inclusion of the amountin gross income

b) Installment payment vis--vis Deferredpayment vis-visPercentage completion127

Installment payment Deferred payment Percentage completion

Appropriate whencollections extend overrelatively long periods oftime and there is a strongpossibility that full collection

will not be made.

Initial payments exceed 25%of the gross selling price andsuch transaction shall betreated as cash sale whichmakes the entire selling pricetaxable in the month of sale.

Persons whose gross incomeis derived from long-termcontracts shall report suchincome upon the basis ofpercentage of completion.

126meaning, you recognize the income when you actually receive the cash payment for the sale, and you

recognize the expense when you actually pay cash for the expense127

in long term contracts


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d. Tests in determining whether income is earned for taxpurposes

1) Realization test

No taxable income until there is a separation from capital of something ofexchangeable value, thereby supplying the realization or transmutation which would result inthe receipt of income.128

2) Claim of right doctrine or Doctrine of ownership,command, or control

A taxable gain is conditioned upon the presence of a claim of right to the allegedgain and the absence of a definite unconditional obligation to return or repay.

The power to dispose of income is the equivalent of ownership of it. The exercise ofthat power to procure the payment of income to another is the enjoyment and hence, the

realization of the income by him who exercises it. The dominant purpose of the revenuelaws is the taxation of income to those who earn or otherwise create the right to receive itand enjoy the benefit of it when paid.

3) Economic benefit test, Doctrine of proprietaryinterest

Income realized is taxable only to the extent that the taxpayer is economicallybenefited.

Any economic benefit to the employee that increases his net worth is taxable.

4) Severance test

There is no taxable income until there is a separation from capital of somethingwhich is of exchangeable value129 thereby supplying the realization or transmutation whichwould result in the receipt of income. Thus, income is not taxable unless separated orsevered from the capital or labor that bore it.

128There must be separation from capital of something of exchangeable value (e.g., sale of asset)

129Eisner vs. Macomer, 252 US 189


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9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from whatever source,

whether legal or illegal,

130

including the following items:

1. Gross income derived from the conduct of trade or business or the exercise of aprofession.

2. Rents

3. Interests

4. Prizes and winnings

5. Compensation for services in whatever form paid, including, but not limitedto fees, salaries, wages, commissions, and similar items

6. Annuities

7. Royalties

8. Dividends

9. Gains derived from dealings in property

10. Pensions

11. Partner's distributive share from the net income of the general professionalpartnership.131

130As such, income includes the following, among others:

1. Treasure found;

2. Punitive damages representing profit lost;

3. Amount received by mistake;

4. Cancellation of the taxpayer indebtedness;

5. Receipt of usurious interest;

6. Illegal gains;

7. Taxes paid and claimed as deduction subsequently refunded;

8. Bad debt recovery.131

The above enumeration can be simplified into five (5) categories:

1. Compensation Income - income derived from rendering of services under an employer-employee

relationship.

2. Professional Income - fees derived from engaging in an endeavor requiring special training as

professional as a means of livelihood, which includes, but not limited to, the fees of CPAs, lawyers,

engineers and the like.

3. Business Income - gains or profits derived from rendering services, selling merchandise,

manufacturing products, farming and long-term contracts.

4. Passive Income - income in which the taxpayer merely waits for the amount to come in, which

includes, but not limited to interest income, royalty income, dividend income, prizes and


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b. Concept of income from whatever source derived

Implies the inclusion of all income under the law, irrespective of the voluntary orinvoluntary action of the taxpayer in producing the gains.132

All income not expressly excluded or exempted from the class of taxable income,irrespective of the voluntary or involuntary action of the taxpayer in producing theincome.133

c. Gross Income vis--vis Net Income vis--vis Taxab

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