231426066 law summer reviewer
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TAXATION LAW
BAR REVIEWER
FACULTY ADVISERS ATTY. MICHAEL DANA MONTEROATTY. FRANCISCO GONZALES
ACADEMICS HEAD PIERRE MARTIN REYES
SUBJECT HEADS SHERYL CHRISTINE LAGROSAS
ELLIE CHRIS NAVARRA
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ATENEO CENTRAL BAR OPERATIONS 2012
ACADEMICS COMMITTEE
Academics Head: Pierre Martin Reyes;
Understudy: Clariesse Jami Mari Chan
REVIEW COMMITTEE
Head: Yla Gloria Marie Paras;
Understudy: Ken Koga;
Members: Catherine Dela Rosa, Eric Lavadia, Le Iris Lucido,
Pearl Charisse Baustista; Mina Reyes
TAXATION LAW COMMITTEE
Heads: Sheryl Christine Lagrosas; Ellie Chris Navarra
Understudies: Abigail Bernandino; Philip Marion Ortal; Hailin Quintos
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TAXATION LAW
Table of Contents
I. GENERAL PRINCIPLES OF TAXATION ......................... 5
A. Definition and concept of Taxation ...................5
B. Nature and Characteristics of Taxation ..............5
D. Purpose of Taxation ...........................................6
E. Principles of Sound Tax System (FAT) ................6
F. Theory and Basis of Taxation (JBL) .....................7
G. Doctrines in Taxation .........................................7
1. Prospectivity of tax laws ................................. 7
2. Imprescriptibility ............................................ 7
3. Double Taxation (DT) ...................................... 7
4. Escape from Taxation ..................................... 8
5. Exemption from taxation ............................... 86. Compensation and Set-off.............................. 9
7. Compromise ................................................... 9
8. Tax Amnesty ................................................... 9
9. Construction and Interpretation of: ............. 10
H. Scope and Limitation of Taxation ....................11
1. Inherent Limitations ..................................... 11
2. Constitutional Limitations ............................. 12
I. Stages of Taxation (LAPR) .................................14
K. Requisites of a valid tax ....................................14
a. Must be for a public purpose ........................14
b. It should be uniform and equitable ..............14
c. That either the person or property taxed is
within the jurisdiction of the taxing authority ...14d. That it complies with the requirements of due
process ...............................................................14
e. That it does not infringe any constitutional
limitations ..........................................................14
L. Tax as distinguished from other forms of
exactions ...............................................................14
M. Kinds of Taxes .................................................15
II. NATIONAL INTERNAL REVENUE CODE ................... 17
A. Income Taxation ...............................................17
1. Income Tax Systems .................................... 17
2. Features of the Philippine Income Tax Law .. 17
3. Criteria in Imposing Philippine Tax Law .........18
4. Types of Philippine Income Tax .................... 185. Taxable Period ............................................. 18
6. Kinds of Taxpayers ........................................ 18
7. Income Taxation .......................................... 21
8. Income .......................................................... 21
9. Gross Income ................................................. 23
10. Taxation of Resident Citizens, Non-resident
Citizens and Resident Aliens ...............................51
11. Taxation of Non-resident Aliens Engaged in
Trade or Business ...............................................54
12. Exclude Non-resident Aliens Not Engaged in
Trade or Business ...............................................54
13. Individual Taxpayers Exempt from Income Tax54
14. Taxation of Domestic Corporations .............54
15. Taxation of Resident Foreign Corporations57
16. Taxation of Non-resident Foreign
Corporations .......................................................59
17. Improperly Accumulated Earnings Tax ....60
18. Exemption from Tax on Corporations ......61
19. Taxation of Partnerships ..........................61
20. Taxation of General Professional
Partnership (GPP) ...............................................6121. Taxation of Estates and Trusts.................62
22. Withholding Tax ......................................63
B. Estate Tax..........................................................68
C. Donors Tax .......................................................74
D. Value-Added Tax ..............................................78
1. NATURE AND CHARACTERISTIC ..................... 78
2. IMPACT OF TAX ............................................. 78
3. INCIDENCE OF TAX ........................................ 78
4. DESTINATION PRINCIPLE ............................... 78
5. PERSONS LIABLE (Sec. 105) ........................... 79
6. VAT ON SALE OF GOOD OR PROPERTIES (Sec.
106) ................................................................... 79
7. ZERO-RATED SALES OF GOODS ORPROPERTIES, AND EFFECTIVELY ZERO RATED
SALES OF GOODS OR PROPERTIES ..................... 80
8. TRANSACTIONS DEEMED SALE (IN EFFECT
SUBJECT TO 12% VAT) ....................................... 81
9. CHANGES IN OR CESSATION OF STATUS OF A
VAT .................................................................... 82
10. VAT ON IMPORTATION OF GOODS (Sec. 107)
........................................................................... 82
11. VAT ON SALE OF SERVICES AND USE OR LEASE
OF PROPERTIES .................................................. 83
12. ZERO-RATED SALES OF SERVICE .................. 83
13. VAT EXEMPT TRANSACTIONS (Sec. 109) ..... 84
14. INPUT VAT AND OUTPUT VAT DEFINED ...... 8715. SOURCES OF INPUT TAX .............................. 87
16. PERSONS WHO CAN AVAIL OF THE INPUT TAX
........................................................................... 87
17. DETERMINATION OF THE INPUT/OUTPUT
TAX; VAT ............................................................ 88
Credits for Input Tax .......................................... 88
18. SUBSTANTIATION REQUIREMENTS OF INPUT
TAX CREDITS ...................................................... 89
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19. CLAIMS FOR REFUND/TAX CREDIT
CERTIFICATE OF INPUT TAX ............................... 90
20. INVOICING REQUIREMENTS ........................ 90
21. FILING OF RETURN AND PAYMENT ............. 91
22. WITHHOLDING OF VAT ................................ 91
E. Percentage Tax ..................................................95
F. Compliance Requirements ................................98
G. Tax remedies under the NIRC .........................108
III. LOCAL GOVERNMENT CODE OF 1991, as amended
............................................................................... 121
1. Fundamental Principles ............................... 121
2. Nature and Source of Taxing Power (CITE LAW)
121
3. Local Taxing Authority ................................. 122
4. Residual Taxing Powers of the LGU (Sec. 186
LGC) ................................................................. 122
5. Specific Taxing Power of Local Government
Unit (LGU) ........................................................ 123
6. Common Limitations on the Taxing Powers of
LGUs and common revenue ............................ 128
7. Collection of Business Taxes ........................ 128
8. Taxpayers Remedies................................... 129
a) Periods of assessment and collection of
local taxes, fees or charges ........................ 129
b) Protest of assessment (Sec. 195, LGC) ... 129
c) Claim for refund of tax credit for
erroneously or illegally collected tax, free or
charge ......................................................... 129
9. Civil Remedies by the LGU for the Collection of
Revenues ......................................................... 129
1. Fundamental Principles in Assessment of
Real Property Taxes (Sec. 198) [CUANE] .... 1312. Nature of Real Property Tax ................... 131
3. Imposition of Real Property Tax ............. 132
4. Appraisal and Assessment of Real Property
Tax ...............................................................133
Actual Use of Property as Basis for
Assessment (LGC Sec. 217) .................... 133
Types of Real Property Tax .................... 133
5. Collection of Real Property Tax ...............133
Steps in the Assessment and Collection of RPT
.................................................................... 133
Remedies of LGUs for the Collection of Real
Property Tax ............................................... 134
6. Claim for Tax Refund or Credit (LGC Sec253) .............................................................135
7. Taxpayers Remedies ...............................135
IV. TARIFF AND CUSTOMS CODE OF 1978, as amended
............................................................................... 137
A. Definitions ......................................................137
B. General Rule ...................................................137
C. Purpose for Imposition ...................................137
LIABILITY FOR CUSTOMS DUTIES ........................137
D. Flexible Tariff ..................................................138
E. Requirements for Importation ........................138
F. Importation in Violation of TCC.......................139
G. Goods Conditionally-free from Tariff and
Customs Duties ...................................................139
H. Classification of Duties ...................................143
1. Ordinary/ Regular Duties ............................. 143
2. Special Duties .............................................. 144
I. Drawback .........................................................145
J. Tax Remedies under the TCC ...........................145
1. Government ................................................ 145
2. Taxpayer ...................................................... 145
V.Judicial Remedies; Republic Act 1125 The Act that
Created the Court of Tax Appeals (CTA), as amended,
and the Revised Rules of the Court of Tax Appeals .. 150
A. Jurisdiction of the Court of Tax Appeals .........150
B. Judicial Procedures .........................................150
1. Judicial action for collection of taxes .........150
C. Taxpayers Suit Impugning the Validity of Tax
Measures ............................................................152
1. TAX PAYERS SUIT................................... 152
2. DISTINGUISHED FROM CITIZENS SUIT... 153
..........................................................................................
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TAXATION LAW
I. GENERAL PRINCIPLES OF TAXATION
======================================TOPICS UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
A. Definition and concept of Taxation
B. Nature and Characteristics of Taxation
C. Power of Taxation Compared with Other Powers
D. Purpose of Taxation
E. Principles of Sound Tax System (FAT)
F. Theory and Basis of Taxation (JBL)
G. Doctrines in Taxation
H. Scope and Limitation of Taxation
I. Stages of Taxation (LAPR)
J. Definition, Nature, and Characteristics of Taxes
K. Requisites of a valid tax
L. Tax as distinguished from other forms of
exactions
M. Kinds of Taxes
======================================
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
A. Definition and concept of Taxation
======================================
Power inherent in every sovereign State to impose a
charge or burden upon persons, properties, or rights to
raise revenues for the use and support of the
government to enable it to discharge its appropriate
functions.
Power by which an Independent State, through its
lawmaking body, raises and accumulates revenue from
its inhabitants to pay the necessary expenses of the
government. [51 AM JUR 341]
Process or act of imposing a charge by governmental
authority on property, individuals or transactions to
raise money for public purposes. *Blacks Law
Dictionary]
Taxation is merely a way of apportioning the cost of
government among those who in some measure are
privileged to enjoy its benefits and must bear its
burdens. [71 AM JUR 2ND
342]
Taxation is described as a destructive power which
interferes with the personal and property rights of the
people and takes from them a portion of their property
for the support of the government. Paseo Realty &
Development Corporation v.CA, [2004]
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
B. Nature and Characteristics of Taxation
======================================
The power of taxation is inherent in sovereigntyas an
incident or attribute thereof, being essential to the
existence of independent government.
The right to tax exists apart from Constitutions and
without being expressly conferred by the people.
It islegislative in character.
It is generally not delegated to executive or judicial
department. Exceptions:i. To LGUs in respect to matters of local concern to
be exercised by the LG bodies thereof [Sec. 5, Art.
X, 1987 Constitution];
ii. When allowed by the Constitution [Sec. 28[2], Art.
VI, 1987 Constitution];
iii. When the delegation relates merely to admin
implementation that may call for some degree of
discretionary powers under a set of sufficient
standards expressed by law Cervantes v. Auditor
General, [91 Phil. 359], or implied from the policy
and purpose of the Act Maceda v. Macaraig, [197
SCRA 771].
It is subject to constitutional and inherent limitations. It must be used for public purposes It has been held
that tax has been utilized for public purpose if the
welfare of the nation or the greater portion of its
population has benefited for use Gomez v. Palomar,
[25 SCRA 827]; Phil Guaranty Co., Inc. v.
Commissioner, [13 SCRA 775].
It is the strongest of all the inherent powers of the
government Sison v. Ancheta, [130 SCRA 654].
It is territorialin operationThe power to tax can only
be exercised within the territorial jurisdiction of a
taxing authority [51 Am Jur 88], except when there
exists privity of relationship between the taxing State
and the object of tax. It is an enforced charge and contribution.
Generally pecuniary in nature (payable in money).
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======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
C. Power of Taxation Compared with Other Powers
======================================
TAX
POLICE POWER
(in the form of a
FEE)
EMINENT
DOMAIN
Concept
Power to enforce
contribution to
raise government
funds
Power to make
and implement
laws for the
general welfare
Power to take
private property
for public use
with just
compensation
Scope
Plenary,
comprehensiveand supreme
Broader in
applicationGeneral power to
make and
implement laws
Merely a power
to take privateproperty for
public use
Exercising Authority
Government or
political
subdivisions
Government or
political
subdivisions
Maybe granted to
public service
companies or
public utilities
Purpose
Raise revenue Exercise to
promote public
welfare through
regulation
The taking of
property for
public use
Amount of Imposition
No limit Limited to the
cost of
regulation,
issuance of
license, or
surveillance
No limit imposed,
but the amount
should be based
on the market
value of the
property
Effect
Becomes part of
public funds
Restraint on the
injurious use of
property
Transfer of right
to the property
Persons Affected
Applies to allpersons, property
and excises that
may be subject
thereto
Applies to allpersons, property
and excises that
may be subject
thereto
Only particularproperty is
comprehended
Superiority of Contracts
Contracts may be
impaired unless (a)
government is
party to contract
Contracts may be
impaired
TAX
POLICE POWER
(in the form of a
FEE)
EMINENT
DOMAIN
granting
exemption; or (b)
involves franchiseBenefits Received
Protection and
general benefits
from the
government
No direct or
immediate
benefit but only
such as may arise
from the
maintenance of a
healthy economic
standard of
society
Market Value of
the property
Relationship to Constitution
Subject to certain
constitutionallimitations
Relatively free
fromconstitutional
limitations
Subject to certain
constitutionallimitations
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
D. Purpose of Taxation
========================================
1. Revenue-raising
Taxation is the power by which the sovereign raises
revenue to defray the necessary expenses ofgovernment.
It is to provide funds or property with which to
promote the general welfare and protection of the
whole citizenry.
It is raised to serve as a means to provide public
improvements designed for the enjoyment of the
citizenry within the States territory.
2. Non-revenue/special or regulatory
Taxation is also used for regulatory purposes; it is used
to attain non-revenue objectives and pursue policy
decisions.
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
E. Principles of Sound Tax System (FAT)
======================================
1. Fiscal Adequacy - the sources of tax revenue should
coincide with and approximate the needs of the
government expenditures
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2. Administrative Feasibility - the tax system should be
capable of being properly and efficiently administered
by the government and enforced with the least
inconvenience to the taxpayer
3. Theoretical Justice - the tax system should be fair to
the average taxpayer and basedupon the ability to pay
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
F. Theory and Basis of Taxation (JBL)
======================================
1. Jurisdiction over subject & objects
2. Benefits-Protection Theory (Symbiotic relationship)
The basis of taxation is found in the reciprocal duties of
protection and support between the state and its
inhabitants. In return for this contribution, the taxpayerreceives thegeneral advantagesand protection which
the government affords the taxpayer and his property.
3. Lifeblood/Necessity Theory - The power of taxation
proceeds upon the theory that the existence of
government is a necessity; that it cannot continue
without 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.
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
G. Doctrines in Taxation======================================
1. Prospectivity of tax laws
This principle provides that a tax bill must only be
applicable and operative after becoming a law.
As a general rule, taxing authorities must be applied
prospectively, except by express provision of the law.
Ex post facto is not applicable for tax purposes.
However when it comes to civil penalties like fines and
forfeiture (except interest), tax laws may be applied
retroactively unless it produces harsh and oppressive
consequences w/c violate the taxpayers constitutional
rights regarding equity and due process Fernandez v.
Fernandez, [99 Phil. 934]; Commissioner v. Filipinas
Cia de Seguros, [107 Phil. 1055].
2. Imprescriptibility
Unless otherwise provided by the tax law itself, taxes in
general are not cancelable Commissioner v. Ayala
Securities Corporation, [101 SCRA 231].
Although the NIRC provides for the limitation in the
assessment and collection of taxes imposed, such
prescriptive period will only be applicable to those
taxes that were returnable. The prescriptive period
shall start from the time the taxpayer files the tax
return and declares his liability Collector v. Bisaya LandTransportation Co., [1958]
As to IAET, the court held that there is no time limit on
the right of the BIR Commissioner to assess this type of
tax [Sec. 25, NIRC].
The law on prescription being a remedial measure
should be interpreted liberally in order to protect the
taxpayer. Republic vs. Ablaza, [108 Phil 1105]
3. Double Taxation (DT)
a.Direct Duplicate Taxation (Strict sense)To constitute
double taxation in the objectionable or prohibited
sense:
The same property must be taxed twice when it
should be taxed once;
Both taxes must be imposed:
i. On the same property or subject matter;
ii. For the same purpose;
iii. By the same State Government or taxing authority;
iv. Within the same jurisdiction or taxing district;
v. during the same period; and
vi. they must be the same kind or character of tax
Villanueva v. City of Iloilo, [26 SCRA 578]
b.
Indirect Duplicate Taxation (Broad sense) It meansindirect duplicate taxation. It extends to all cases in w/c
there are two or more pecuniary impositions. The
Constitution does not prohibit the imposition of double
taxation in the broad sense
c.Constitutionality of DT The SC held that there is no
constitutional prohibition against double taxation in the
Phils. Villanueva v. City of Iloilo, [26 SCRA 578],
therefore it is not a valid defense against the validity of
a tax measure Pepsi Cola v. Tanauan, [69 SCRA 460].
i. There is no double taxation in the following cases:
i. By taxing corporate income and stockholdersdividends from the same corporation
ii. Tax imposed by the State and the local
government upon the same occupation, calling or
activity
iii. Real estate tax and income tax collected on the
same real estate property leased for earning
purposes. Villanueva vs. City of Iloilo, [26 SCRA
578]
iv. Taxes are imposed on taxpayers final product and
the storage of raw materials used in the
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production of the final product. Procter and
Gamble Philippines vs. Municipality of Jana, [94
SCRA 894]
d.Modes of eliminating DT
(1) Provide for exemptions or allowance of deductionor tax credit for foreign taxes
(2) Enter into treaties with other states [like the
former Phil-Am Military Bases Agreements as to
income tax]
(3) Application of the Principle of Reciprocity
4. Escape from Taxation
a.Shifting of tax burden The imposition of tax is
transferred from the statutory taxpayer to another
without violating the law.
(1) Ways of shifting the tax burden (FBO)i. Forward shiftingthe transfer of burden from the
producer to distributor until it finally reaches the
ultimate purchasers or consumers
ii. Backward shiftingthe reverse of forward shifting,
e.g. the manufacturer has agreed to buy the
suppliers product only if the price is reduced by
the amount of tax.
iii. Onward shiftingthe tax burden is shifted twice or
more either forward or backward
(2) Taxes that can be shifted
i. VAT
ii. Percentage taxiii. Excise tax on excisable articles
iv. Ad valorem taxes that oil companies pay to BIR
upon removal of petroleum products from its
refinery
(3) Meaning of impact and incidence of taxation
i. Impact of Taxation point on which the tax is
originally imposed or the one on whom the tax is
formally assessed.
ii. Incidence of Taxation point on which the tax
burden finally rests or settles down.
Example: VAT is originally assessed against theseller who is required to pay the said tax, but the
burden is actually shifted or passed on to the
buyer.
b.Tax avoidance also called Tax Minimization; tax
saving device that is legally permissible
c.Tax evasion connotes fraud through the use of
pretenses and forbidden devices to lessen or defeat
taxes; must be willful and intentional
It connotes the integration of three factors:
End to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax
is due; Accompanying state of mind which is described as
being "evil," in "bad faith," "willful," or "deliberate
and not accidental"; and
Course of action or failure of action which is
unlawful. Benigno vs. Toda, [G.R. Nos. 78583-4
March 26, 1990]
TAX EVASION TAX AVOIDANCE
Other
Name
Tax Dodging Tax Minimization
Means Use illegal means Use legal means
Penalty Punishable by law Not punishable by law
Object To entirely escapepayment of taxes
To merely minimizepayment of taxes
5. Exemption from taxation
a. MeaningThe grant of immunityto particular persons
or corporations or to persons 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.
i.
It is an immunity or privilege; it is freedom from a
financial charge or burden to which others are
subjected. Greenfield v. Meer, [77 Phil 394]
b. Nature
Exemption from taxes is personal in nature and
covers only taxes for which the taxpayer-grantee is
directly liable. In any case, it cannot be transferred or
assigned by the person to whom it is given without
the consent of the State.
Tax exemptions are strictly construed against the
taxpayer because such provisions are highly
disfavored and may almost be said to be odious to
the law Manila Electric Company v. Vera, [67 SCRA
351].
Exemptions are not presumed, but when public
property is involved, exemption is the rule, andtaxation, the exception.
There can be no simultaneous exemptions under 2
laws, one partial and the other total.
c. Kinds (ICE)
(1) Express (or affirmative) when certain persons,
property or transactions are, by express provision,
exempted from all or certain taxes, either entirely
or in part.
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Examples of Statutory Tax Exemptions:
i. Inter-corporate dividends by a domestic
corporation from another domestic
corporation [Sec. 27 D [4], NIRC]
ii. Section 105 of the Tariff and Customs Code
iii. Section 234 of the Local Government Codeiv. Other special laws such as Omnibus
Investment Code of 1987, Philippine Overseas
Shipping Act
(2) Implied (or by omission) when a tax is levied on
certain classes of person, properties or
transactions without mentioning the other classes.
Every tax statute makes exemptions since all those
not mentioned are deemed exempted. The
omission may either be accidental or intentional.
(3) Contractual those lawfully entered into by the
government in contracts under existing laws.
These exemptions must not be confused with the
tax exemptions granted under franchises, whichare not contracts within the context of non-
impairment clause of the Constitution. Cagayan
Electronic Co. v. Commissioner, [138 SCRA 629]
d. Rationale/grounds for exemption
A presumption that the public interest will be
subserved by the exemption allowed. Grant of
exemption rests upon that such will benefit the body
of the people and not upon any idea of lessening the
burden of the individual owners of property.
Purpose is some public benefit or interest, which the
law-making body considers sufficient to offset the
monetary loss entailed in the grant of exemptions. Created in a treaty on grounds of reciprocity or to
lessen the rigors of the international double or
multiple taxation.
Equity is not a ground for tax exemption
e. Revocation
Tax exemption is generally revocable.
The congressional power to grant an exemption
necessarily carries with it the consequent power to
revoke the same.
In order to be irrevocable, the tax exemption must be
founded on a contract or granted by the
Constitution. Revocations are constitutional even though the
corporate do not have to perform a reciprocal duty
for them to avail of tax exemptions.
6. Compensation and Set-off
This doctrine states that taxes are not subject to set-off
or legal compensation because the government and
the taxpayer are not mutual creditor and debtor of
each other Republic v. Mambulao Lumber Co., [6 SCRA
622]; Caltex Phils. V. COA, [208 SCRA 726].
Not subject to set-off or compensation for the following
reasons:
i. Taxes are of distinct kind, essence and nature, andthese impositions cannot be classed in merely the
same category as ordinary obligations;
ii. The applicable laws and principles governing each
are peculiar, not necessarily common, to each; and
iii. Public policy is better subserved if the integrity and
independence of taxes are maintained Republic v.
Mambulao Lumber Co., [6 SCRA 622].
A person cannot refuse to pay tax on the basis that the
government owes him an amount equal to or greater
than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the
government. Philex Mining Corp. v. Commissioner,
[1998]; Francia v. Intermediate Court, [162 SCRA 753] An exception to the rule is where both the claims of the
government and the taxpayer against each other have
already become due, demandable and fully liquidated.
In this case, compensation takes place by operation of
law and both obligations are extinguished to their
concurrent amounts. Domingo v. Garlitos, [8 SCRA
443]
7. Compromise
Compromises are generally allowed and enforceable
when the subject matter thereof is not prohibited from
being compromised and the person entering suchcompromise is duly authorized to do so.
The law allows the ff: persons to do compromise in
behalf of the government:
i. BIR Commissioner as expressly authorized by the
NIRC subject to certain conditions [Sec. 204, NIRC];
ii. Collector of Customs with respect to customs duties
limited to cases where the legitimate authority is
specifically granted such as in the remission of
duties [Sec. 709, TCC]; and
iii. Customs Commissioner subject to the approval of
the Secretary of Finance, in cases involving the
imposition of fines, surcharges, and forfeitures [Sec.
2316, TCC].
8. Tax Amnesty
a.
Meaning It is the general 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.
It partakes of an absolute forgiveness or waiver of
the Government of its right to collect.
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It is a way to give tax evaders, who wish to relent &
are willing to reform a chance to do so.
b. Distinguished from tax exemption:
AMNESTY EXEMPTIONScope of
immunity
Immunity from all
criminal, civil and
administrative
liabilities from non-
payment of taxes
Immunity from civil
liability only
To whom
granted
General pardon given
to all taxpayers
A freedom from a
charge or burden to
which others are
subjected
Application Applies only to past
tax periods hence
retroactive
application
Generally,
prospective in
application
Presence of
Actual
Revenue
Loss
Yes, there is revenue
loss since there was
actually taxes due but
collection was waived
by the government
None, because
there was no actual
taxes due as the
person or
transaction is
protected by tax
exemption
9. Construction and Interpretation of:
a. Tax Laws
(1) General rule:
No person or property is subject to taxation unlesswithin the terms or plain import of a taxing
statute.
In case of doubt, tax statutes are construed strictly
against the government and liberally in favor of the
taxpayer.
Taxes being burdens, they are not to be presumed
beyond what the statute expressly and clearly
declares.
Tax statutes offering rewards are liberally
construed in favor of informers.
(2) Exception:
The rule of strict construction as against thegovernment is not applicable where the language
of the tax statute is plain and there is no doubt as
to the legislative intent. In such case, the words
employed are to be given their ordinary meaning.
Tax statutes are to receive a reasonable
construction with a view to carrying out their
purpose and intent. They should not be construed
as to permit the taxpayer to easily evade the
payment of tax. Thus, good faith of the taxpayer is
not a sufficient justification for exemption from
the payment of surcharges imposed by the law for
failing to pay tax within the period required.
A tax statute should be construed to avoid the
possibilities of tax evasion.
b. Tax Exemption and Exclusion
(1) General rule:
Exemptions are not favored and are construed
strictissimi juris [by the most strict right or law]
against the taxpayer.
An exemption from the common burden cannot be
permitted to exist upon vague implication or
inference
The fundamental theory is that all taxable property
should bear its share of the cost and expense of
government.
Applying the rule of strict construction to statutoryprovisions granting tax exemptions [or deductions]
would minimize differential treatment and foster
fairness and equality of treatment among
taxpayers.
Taxation is the rule and exemption, the exception.
Therefore, whoever 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.
If not expressly mentioned by law, it must at least
be within its purview by clear legislative intent.
Claims for refund partake of the nature of tax
exemptions and will not be allowed unless grantedin the most explicit and categorical language.
(2) Exception:
When the law itself expressly provides for a liberal
construction, that is, in case of doubt, it shall be
resolved in favor of exemption
When the exemption is in favor of the government
itself or its agencies because the gen. rule is that
they are exempt from tax.
When the exemption refers to religious, charitable
and educational institutions.
If there is an express mention or if the taxpayer
falls within the purview of the exemption by clearlegislative intent, the rule on strict construction
does not apply.
c. Tax Rules and Regulations
(1) General rule onlyThe construction placed by the
office charged with implementing and enforcing
the provisions of a Code should be given
controlling weight unless such interpretation is
clearly erroneous.
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d. Penal provisions of tax laws
Strict construction so as not to extend the plain
terms thereof that might create offenses by mere
implication not so intended by the legislative body
RP v. Martin, [G.R. No. L-38019, May 16, 1980].
e. Non-retroactive application to taxpayers
The (tax) law cannot be given retroactive effect. It
is established that tax laws are prospective in
application, unless it is expressly provided to apply
retroactively. Carmelino F. Pansacola v. CIR, [G.R.
No. 159991, November 16, 2006]
A tax law should not be given retroactive
application when it would be harsh and
oppressive, for in such case, the constitutional
limitation of due process would be violated.
Sec. 246 of the NIRCprovides that any revocation,
modification or reversal of any of the rules and
regulations promulgated in accordance with Secs.244 and 255 or any of the rulings or circulars
promulgated by the Commissioner shall not be
given retroactive application if the revocation,
modification or reversal will be prejudicial to the
taxpayers.
(1) Exceptions:
While it is not favored, a statute may nevertheless
operate retroactively provided it is expressly
declared or is clearly the legislative intent. For
instance: the universal practice of increasing taxes
on income already earned.
The rules and regulations promulgated by the CIRshall be retroactive in the following cases:
i. Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the Bureau of
Internal Revenue;
ii. Where the facts subsequently gathered by the
Bureau of Internal Revenue are materially
different from the facts on which the ruling is
based; or
iii. Where the taxpayer acted in bad faith.
======================================TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
H. Scope and Limitation of Taxation
======================================
1. Inherent Limitations
a. Public Purpose
Test:whether the proceeds will be used for something
which is the duty of the State to provide.
The public purpose of the tax law must exist at the
time of its enactment. Pascual v. Secretary of
Public Works, [G.R. No. L-10405, December 29,
1960]
Legislature is not required to adopt a policy of all
or none for the Congress has the power to select
the object of taxation. Lutz v. Araneta, [G.R. No. L-7859, December 22, 1955]
A special benefit to specific individual does not
diminish the nature of tax being for public purpose
as long as it is incidental.
b. Inherently Legislative
(1) General rule power of taxation cannot be
delegated.
Contemplates the power to determine kind,
object, extent, amount, coverage, and situs of tax;
Distinguish from power to assess and collect
(2) Exceptions:(a) Delegation to local governments It is in line
with the principle that the power to create
municipal corporations for purposes of local self-
government carries with it the power to confer
the power to tax on such local governments.
(b) Delegation to the President Certain aspects of
the taxing process that are not legislative in
character may be vested to him.
(c) Delegation to administrative agenciesThey are
authorized to fix within specified limits, Tariff
rates, import or export quotas, tonnage and
wharfage dues and other duties or imposts.
c. Territorial
(1) Situs of Taxation
(a) Meaning place of taxation; power to tax is
limited to the territorial jurisdiction of the taxing
state.
EXCEPT where privity of relationship exists, the
State can exercise its taxing powers over its
citizen outside its territory.
(b) Situs of Income Tax
(1) From sources within the Philippines
Interests derived from sources within thePhilippines
Dividends from domestic and foreign
corporations
Compensation for services performed within
the Philippines
Rentals and royalties from properties located
in the Philippines or any interest in such
property including rentals or royalties for the
use of or for the privilege of using within the
Philippines, patents, copyrights and other like
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properties.
Sale of Real property located in the Philippines
Sale of Personal property Gains, profit, and
income derived from the purchase within and
its sale without the Phil, or from the purchase
without and its sale within shall be treated asderived entirely from sources within the
country in which the personal property is sold.
Except: the gain from the sale of shares of
stock in a domestic corporation shall be
treated as derived entirely from sources
within the Phils. regardless where the said
shares are sold.
(2) From sources without the Philippines
Interest other than those derived from
sources within the Philippines
Dividends other than those derived from
sources within the Philippines Compensation for services performed without
the Philippines
Rentals and royalties from property located
without the Philippines or from any interest in
such property including rentals or royalties for
the use of or for the privilege of using without
the Philippines, patents, copyrights and other
like properties.
(3) Income partly within and partly without the
Philippines
Items other than those specified above in i.
and ii. shall be allocated or apportioned tosources within or without the Philippines
(c) Situs of Property Taxes
(1) Taxes on Real Property Location of the
property
(2) Taxes on Personal Property
i. TangibleLocation of the property
ii.IntangibleDomicile of the owner
(d) Situs of Excise Tax
(1) Estate Tax Domicile of the decedent at the
time of his death(2) Donors Tax Domicile of the donor at the
time of the transfer
(e) Situs of Business TaxPlace where the taxpayer
is registered or required to register
(1) Sale of Real Property
(2) Sale of Personal Property
(3) VAT
SUMMARY:
OBJECT SITUS RULE
Person Residence,
Domicile,
CitizenshipReal Property Location of the property
Tangible
Personal
Property
Physical location although the owner
resides in another jurisdiction
Intangible
Personal
Property
Domicile of the owner (mobilia
sequntur personam)
Income Citizenship
Residence
Source of Income
Transfer of
property
Citizenship
Residence
Location of PropertyBusiness or
Occupation
Where the act/business/occupation is
performed/exercised
d. International Comity
Property of a foreign State of government may not
be taxed by another.
e. Exemption of Government Entities, Agencies, and
Instrumentalities
Taking money from one pocket to the other.
Applies only to entities exercising sovereign
functions (acta jure imperii).
However, it can tax itself if there is a statutoryauthority to do so and no express provision against
such act.
2. Constitutional Limitations
a. Provisions Directly Affecting Taxation
(1) Prohibition against imprisonment of non-payment
of poll tax [Sec. 20, Art. III]
Can still be made to pay fines and penalties for
non-payment.
Taxpayer may be imprisoned for non-payment of
other kinds of taxes where the law so expressly
provides.
(2) Uniformity and equality of taxation [Sec. 28 (1),
Art VI]
Uniform: all articles or properties of the same class
taxed at the same rate
Equity: apportionment must be more or less just in
the light of taxpayers ability to shoulder tax
burden
The equal protection clause refers more to like
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treatment in like circumstances
The uniformity and equity clause refers to the
proper relative treatment for tax purposes of
persons in unlike circumstances
(3) Grant by Congress of authority to the President toimpose tariff rates/Flexible tariff clause [Sec. 28
(2), Art. VI]
Includes import and export quotas, tonnage and
wharfage dues aside from tariff rates
Delegated by Congress
Through a law; the Tariff and Customs Code has
provided for what has been termed as the flexible
tariff clause authorizing the President to modify
import duties [Sec. 401, TCC]
Subject to Congressional limits and restrictions
Within the framework of national development
program
(4) Prohibition against taxation of religious, charitable
and educational entities/Exemption from real
property taxes [Sec. 28 (3), Art. VI of the
Constitution]
Covers charitable institutions, churches, and
parsonages or convents appurtenant thereto,
mosques and non-profit cemeteries and all lands,
buildings and improvements ACTUALLY, DIRECTLY
and EXCLUSIVELY USED for charitable, religious and
educational purposes
Pertains only to real estate tax
Test of exemption:actual use of the property, not
ownership
(5) Prohibition against taxation of non-stock, non-
profit [educational] institutions [Sec. 4(3&4), Art.
XIV]
Exempts from taxes all revenues and assets of non-
stock, non-profit educational institutions used
ACTUALLY, DIRECTLY AND EXCLUSIVELY for
educational purposes
Exemption covers income, real estate, donors tax,
and customs duties (distinguish from the previous
which pertains only to real estate tax)
Income exempt provided it is used for
maintenance or improvement of institution(indispensable or essential).
The exemption is strictly personal. (non-
transferable)
Distinguish from tax treatment of
i. Proprietary educational institutions
(Preferential Tax of 10%);
ii. Government educational institutions (exempt,
ex. UP)
(6) Majority vote of Congress for grant of tax
exemption [Sec. 28 (4), Art. VI]
Includes amnesties, condonations and refunds
Involves majority of all members voting separately
Relative majority (majority of quorum) is sufficientto withdraw exemption.
(7) Prohibition on use of tax levied for special purpose
[Sec. 29 (3), Art. VI]
Revenues derived for a special fund shall be
administered for the purpose intended only.
Once the purpose is achieved, the balance, if any,
is to be transferred to the general funds of the
government.
(8) Presidents veto power on appropriation, revenue,
and tariff bills [Sec. 27 (2), Art. VI]
(9) Non impairment of jurisdiction of the SC [Sec.
5(2)(b), Art. VIII]
(10)Grant of power to the local government units to
create its own sources of revenue [Sec. 5, Art. X]
(11)No appropriation or use of public money for
religious purposes [Sec. 29 (2), Art. VI]
b. Provisions Indirectly Affecting Taxation
(1) Due process [Sec. 1, Art. III]
SUBSTANTIVE PROCEDURALShould not be harsh,
oppressive, or confiscatory
(reasonableness)
No arbitrariness in
assessment and collection
By authority of valid law Right to notice and hearing
Must be for a public purpose
Imposed within territorial
jurisdiction
It can also be invoked by the government. Province
of Abra v. Hernando, [G.R. No. L-49336 August 31,
1981]
(2) Equal protection [Sec. 1, Art. III] All persons subject to legislation shall be treated
alike, under like circumstances and conditions both
in privileges conferred and liabilities imposed.
Sison, Jr. v. Ancheta, [G.R. No. L-59431, 25 July
1984]
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No violation of equal protection when there is
proper classification made; classification to be
valid must:
i. Rest on substantial distinctions
ii. Be germane to the purpose of the law
iii. Not be limited to existing conditions only; andiv. Apply equally to all members of the same class
(3) Religious freedom [Sec. 5, Art III]
The constitutional guaranty of the free exercise
and enjoyment of religious profession and worship
carries with it the right to disseminate religious
information. American Bible Society v. City of
Manila, [G.R. No. L-9637, April 30, 1957].
Activities simply and purely for propagation of
faith are exempt.
Tax is unconstitutional if it operates as a prior
restraint on exercise of religion or favors a certain
religion (non-establishment of religion) Income of religious organizations from any activity
conducted for profit or from any of their property,
real or personal, regardless of disposition of such
income, is taxable
(4) Non-impairment of obligations [Sec. 10, Art. III]
Applies only when government is party to the
contract granting exemption
EXCEPT if Franchise tax-exemption The
Constitution provides that franchise is subject to
amendment, alteration, or repeal by Congress.
======================================TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
I. Stages of Taxation (LAPR)
======================================
1. Levy Refers to the enactment of a law by Congress,
imposing a tax.
2. Assessment The act of administration and
implementation of the tax law by the executive
department through the administrative agencies
3. PaymentAct of compliance by the taxpayer, including
such options, schemes or remedies as may be legally
available to him.4. Refund Recovery of any tax alleged to have been
erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without
authority, or of any sum alleged to have been
excessively, or in any manner wrongfully, collected.
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
J. Definition, Nature, and Characteristics of Taxes
====================================== A burden, charge, exaction, imposition or contribution
assessed in accordance with some reasonable rule of
apportionment by authority of the sovereign state
upon the persons or property within its jurisdiction, to
provide public revenue for the support of the
government, the administration of the law, or the
payment of public expenses. [71 AM JUR 2ND
343-346]
Any payment exacted by the State or its municipal
subdivisions as a contribution toward the cost of
maintaining governmental functions, where the special
benefits derived from the performance is merged in the
general benefit.
Taxes operate in INVITUM and are in no way dependentupon the will or contractual assent, express or implied,
of the person taxed.
(1) Enforced (2) proportional and (3) pecuniary
contributions (4) from persons and property (5) levied
by law-making body of (6) the state having jurisdiction
over the subject of the burden (7) for the support of the
government and all public needs.
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
K. Requisites of a valid tax
======================================
a. Must be for a public purpose
b. It should be uniform and equitable
c. That either the person or property taxed is within the
jurisdiction of the taxing authority
d. That it complies with the requirements of due process
e. That it does not infringe any constitutional limitations
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
L. Tax as distinguished from other forms of
exactions
======================================
1. Customs Duty/Tariff
TAX CUSTOMS DUTY
Coverage More comprehensive than
customs duty
Kind of tax
Object Persons, prop, etc Goods imported
or exported
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2. Toll
TAX TOLL
Kind of
demand
Demand of
sovereignty
Demand of ownership
Purpose support of
government
Collection for the use
of property
Amount No limitdepends
on need of the
government
Fair return of the cost
of the property or
improvement
3. License Fee
TAX LICENSE FEE
Source Exercise of
Taxing power
Emanate from the police
power of the State
Purpose Raise revenue Regulation
Object Persons,
property and
privilege
Right to exercise a privilege
Amount no limit only necessary to carry out
regulation
Distinction lies in theprimary purpose:
License fee primary purpose is to regulate and the
excess of the amount collected from the cost to carry
out the regulation is minimal and incidental.
Taxs primary purpose, or at least one of the real and
substantial purposes is to raise revenue.
If amount is too high for regulation, it would be a tax;
unless imposed on non-useful occupations or
businesses.
Purpose of distinction: limitations and exemptions
apply only to one and not to the other (ex. Exemption
from taxation does not include exemption from fee)
4. Special Assessment
TAX SPECIAL ASSESSMENT
Imposed
on
Persons, properties,
etc.
Only on land
Why
imposed
Regardless of public
improvement
Public improvement
that benefits the land
Purpose Support of
government
Contribution to cost of
public improvement
Whenimposed Regular exaction Exceptional as to timeand locality
Basis Necessity Benefits obtained
5. Debt
TAX DEBT
Source Law; legal obligation Based on contract
Nature Personal Assignable
Right to
set-off
Generally not subject
to compensation/ set-
May be the subject of
compensation/ set-off
off
Effect Imprisonment is
sanction for non-
payment
No imprisonment for
non-payment
======================================
TOPIC UNDER THE SYLLABUS:
I. GENERAL PRINCIPLES
M. Kinds of Taxes
======================================
1. As to subject matter orobject
a. Personal, poll, capitation tax
Fixed amount
Individuals residing within specified territory
Without regard to their property, occupation orbusiness
Ex. Community Tax (Cedula)
b. Property tax
Imposed on property, real or personal
In proportion to its value or other reasonable
method of apportionment
Ex. Real estate tax
c. Excise/Privilege tax- (different from the excise tax
of Title VI of the NIRC)
Imposed upon performance of an act, the
enjoyment of a privilege or the engaging in anoccupation, profession or business
Ex. Income tax, VAT, estate tax, donors tax
2. As to who bears the burden or incidence
a. Directthe tax is imposed on the person who also
bears the burden thereof
Ex. Income tax, community tax, estate tax
b. Indirectimposed on the taxpayer who shifts the
burden of the tax to another
Ex. VAT, specific tax, percentage tax, customs
duties
3. As to tax rates or determinationof amount
a. Specifictax imposed and based on a physical unit
of measurement, as by head, number, weight,
length or volume
Ex. Tax on distilled spirits, fermented liquors,
cigars
b. Ad Valorem - tax of a fixed proportion of the value
of property with respect to which the tax is
assessed; requires intervention of assessor.
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Ex. Real estate tax, excise tax on cars, non-
essential goods
c. Mixed
4. As to purposes
a. General, fiscal or revenue - imposed for the
general purpose of supporting the government
Ex. Income tax, percentage tax
b. Special or regulatory - imposed for a special
purpose, to achieve some social or economic
objectives
Ex. Protective tariffs or customs duties
5. As to scope or authorityto impose
a. National- imposed by the national government
Ex. National internal revenue taxes, custom duties
b. Municipal or local - imposed by the municipal
corporations or local governments
Ex. Real estate tax, occupation tax
6. As to graduationof rate (Three systems of taxation)
a. Proportionate- based on a fixed percentage of the
amount of the property, income or other basis to
be taxed
Ex. Real estate tax, VAT, percentage tax
b. Progressive or graduated - tax rate increases as
the tax base or bracket increasesEx. Income tax, estate tax, donors tax
c. Regressive - tax rate decreases as the tax base
increases
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II.NATIONAL INTERNAL REVENUE CODE======================================
TOPICS UNDER THE SYLLABUS:
A. Income TaxationB. Estate Tax
C. Donors Tax
D. Value-Added Tax (VAT)
E. Compliance Requirements (Internal Revenue
Taxes)
F. Tax Remedies under the NIRC
G. Organization and Function of the Bureau of
Internal Revenue========================================
======================================
TOPIC UNDER THE SYLLABUS:A. Income Taxation========================================
1. Income Tax Systems
a. Global (unitary) Tax System the total allowable
deductions, as well as personal and additional
exemptions, in the case of qualified individuals, or the
total allowable deductions only, in the case of
corporations, are deducted from the gross income (i.e.
sum of all items of taxable income, profit and gain) to
arrive at the net taxable income subject to the
graduated income tax rates, in the case of individuals,
or to the corporate income tax rate, in the case of
corporations.
All items of gross income, deductions, personal and
additional exemptions are reported in one income tax
return and a single tax is imposed on all income
received or earned by a person irrespective of the
activities which produced the income (i.e.
compensation income, net income from business, trade
or profession).
b. Schedular Tax Systemdifferent types of incomes are
subjected to different sets of graduated or flat income
tax rates. The applicable tax rates will depend on the
classification of the taxable income and the basis couldbe gross income or net income (i.e. capital gains tax)
c. Semi-Schedular or Semi-Global Tax System the
compensation income, business or professional income,
capital gain and passive income not subject to final tax,
and other income are added together to arrive at the
gross income and after deducting the sum of allowable
deductions, the taxable income is subjected to one set
of graduated tax rates for an individual or normal
corporate income tax rate for corporations.
With respect to the income, the computation of income
is global while the scheduler tax system applied to the
capital gains and passive income subject to final tax atpreferential tax rates.
NOTE:Philippine income taxation is a combination of both
system but is more schedular for individual while more
global for corporation.
GLOBAL SYSTEM SCHEDULAR SYSTEM
A system which imposes a
personal tax upon the total
income of the taxpayer
A system which imposes
various types of tax on
income producing activities
Emphasizes the burden
allocation aspects
Emphasizes on revenue and
administrative aspects
Most equitable indistributing tax burden, as
burden of an individual is
closely related to his
resources and his ability to
pay
Because of its multiple rates,the tax burden of a person
does not respond to his
income but rather fall
fortuitously on the type of
his income
It serves as a means for
redistributing income and
wealth
This function is alien to
schedular system where in
times of plenty or in times of
need, people pay the same
fixed tax on their income
It serves as a supplementary
devise to accomplish non-
fiscal goals of thegovernment
Schedular system cannot
perform these functions
Administration is not quite
as easy as schedular
because one has to consider
all income from whatever
sources
Administration is simple
being confined to each
transaction or activity
2. Features of the Philippine Income Tax Law
a. Direct tax tax burden us borne by the income tax
recipient upon whom the tax is imposed.
b. Progressive tax tax rate increases as the tax base
increases; direct taxes are to be preferred and as muchas possible, indirect taxes should be minimized.
Tolentino v. Secretary of Finance, [G.R. No. 115455,
October 30, 1995]
c. Comprehensive system adopts the citizenship
principle, residence principle and the source principle
d. Semi-schedular or semi-global tax system certain
passive incomes and capital gains are subject to final
taxes at preferential rates while all other income are
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added together to arrive at the gross income and after
deducting the sum of allowable deductions, the taxable
income is subjected to one set of graduated tax rates
for an individual or normal corporate income tax rate
for corporations.
3. Criteria in Imposing Philippine Tax Law
a. Citizenship principle a citizen taxpayer is subject to
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 non-resident
citizen.
b. Residence principle a resident alien is liable to pay
income tax on his income from sources within the
Philippines but exempt from tax on his income from
sources outside the Philippines.
c.
Source principle a non-resident alien is subject toPhilippine income tax because he derives income from
sources within the Philippines such as dividend,
interest, rent or royalty.
4. Types of Philippine Income Tax
a. Net Income Tax/Taxable Income (GI Deductions
Exemptions)
b. Gross Income Tax
c. Final Income Tax(On passive income and capital gains)
d. Fringe Benefits Tax(amount of benefits to Managerial
and Supervisory Employee paid by Employer; employee
is taxed but burden is on employer)e. Capital Gains Tax(Real property and stocks not traded
in stock market)
f. Optional Corporate Income Tax
g. Minimum Corporate Income Tax(2% of gross income)
h. Improperly Accumulated Earnings Tax
i. Preferential Rates(for special corporations)
j. Branch Profit Remittance Tax
5. Taxable Period
GENERAL RULE: The accounting period of a taxpayer is a
period of twelve (12) months.
a. Calendar Year accounting period from January 1 to
December 31 which is allowed if the:
Taxpayer is an individual
Taxpayer is a partnership
Accounting period is other than a fiscal year
Taxpayer has no accounting period
Taxpayer does not keep books.
b. Fiscal Yearaccounting period of twelve (12) months
ending on the last day of any month other than
December which is allowed ONLY to corporations.
c. Short Perioda taxpayer may have a taxable period of
less than twelve (12) months when:
Taxpayer dies
Corporation is newly organized
Corporation changes its accounting period Corporation is dissolved.
6. Kinds of Taxpayers
TAXPAYER TAX BASE TAXABLE ON INCOME
Resident Citizen Taxable
Income
Within and without the
Philippines
Nonresident
Citizen
Taxable
IncomeWithin the Philippines
Resident AlienTaxable
IncomeWithin the Philippines
Nonresident Alien
engaged in trade
or business (more
than 180 days)
Taxable
Income Within the Philippines
Nonresident Alien
not engaged in
trade or business
(180 days or less)
Gross
IncomeWithin the Philippines
General
Professional
Partnership
Taxable
Income
GPP itself not taxable,
however, individual
partners will be taxed
depending on
classification
Estate and Trust TaxableIncome
Same basis as an
individual (depending
on classification ofdecedent, if estate,
trustor, if trust)
Domestic
Corporation
Taxable
Income
Within and Without
the Philippines
Resident Foreign
Corporation
Taxable
IncomeWithin the Philippines
Non-resident
Foreign
corporation
Gross
IncomeWithin the Philippines
a. Individual Taxpayers
(1) Citizens
(a) Resident Citizen citizen of the Philippinesresiding therein is taxable on all income derived
from sources within and without the Philippines.
(b) Nonresident Citizen citizen of the Philippines
who are taxable only on his income from sources
within the Philippines if he:
i. Establishes the fact of his physical presence
abroad with a definite intention to reside
therein.
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ii. Leaves the Philippines during the taxable year
to reside abroad, as immigrant or for
employment on a permanent basis.
iii. Works & derives income from abroad &
whose employment requires him to be
physically present abroad most of the time(i.e. not less than 183 days) during the taxable
year.
iv. Was previously considered as nonresident
citizen & arrives in the Philippines at any time
during the taxable year to reside permanently
in the Philippines.
v. Examples of non-resident citizens:
a. Immigrant one who leaves the
Philippines to reside abroad as an
immigrant for which a foreign visa has
been secured
b. Permanent employee one who leaves
the Philippines on a more or lesspermanent basis
c. Contract Worker one who leaves the
Philippines on account of a contract of
employment which is renewed from time
to time under such circumstance as to
require him to be physically present
abroad most of the time (not less than
183 days)
NOTE: The taxpayer shall submit proof to the CIR 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.
Non-resident citizens who are exempt from tax with
respect to income derived from sources outside the
Philippines shall no longer be required to file
information returns from sources outside the
Philippines beginning 2001 [RR No. 5-2001]
For Overseas Contract Worker, the time spent abroad is
not material for tax exemption purposes. All that is
required is for the workers employment contract to
pass through and be registered with the POEA [BIR
Ruling 33-2000]
(2)
Aliens
(a) Resident Alien an individual whose residence
is within the Philippines and who is not a citizen
thereof is taxable only on income derived from
sources within the Philippines.
One who comes to the Philippines for a
definite purposes which in its nature would
require an extended stay, and makes his home
temporarily in the country becomes a resident
alien
Length of stay is indicative of intention
An alien actually present in the Philippines
who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the
income tax. Whether he is a transient or not is
determined by his intentions with regard tothe length and nature of his stay.
A mere floating intention indefinite as to time,
to return to another country is not sufficient
to constitute him a transient.
If he lives in the Philippines and has no
definite intention as to his stay, he is a
resident. One who comes to the Philippines
for a definite purpose which in its nature may
be promptly accomplished is a transient.
But if his purpose is of such a nature that an
extended stay may be necessary for its
accomplishment, and to that end the alien
makes his home temporarily in thePhilippines, he 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. [RR No. 2]
Loss of Residence by alien
An alien who has acquired residence in the
Philippines retains his status until he
abandons the same and actually departs from
the Philippines
A mere intention to change his residence does
not change hid status. An alien who has
acquired a residence is taxable as a residentfor the remainder of his stay in the
Philippines. [Sec. 6, RR. No. 2]
(b) Nonresident Alien an individual whose
residence is not within the Philippines and who
is not a citizen thereof but dong business therein
is taxable only on income from sources within.
(1) Engaged in trade or business an alien who
comes and stays in the Philippines for an
aggregate period of more than 180 days
during any calendar year.
(2) Not engaged in trade or business an alien
whose stay in the Philippines is 180 days orless.
(3) Special Class of Individual Employees
(a) Aliens employed by regional or area
headquarters and regional operating
headquarters of multinational companies in the
Philippines.
(b) Aliens employed by offshore banking units.
(c) Aliens employed by petroleum contractors and
subcontractors.
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(d) Minimum Wage Earner
A worker in the private sector paid the
statutory minimum wage, or to an employee
in the public sector with compensation
income of not more than the statutory
minimum wage in the non-agricultural sectorwhere he/she is assigned;
His earnings (i.e. SMW, holiday, overtime,
night shift differential and hazard pay) are
exempt from income tax pursuant to the
provisions of this Code and other laws,
general or special.
b. Corporations
A corporationshall include partnerships, no matter
how created or organized. Joint stock companies,
joint accounts, associations, and insurance
companies
But does not include, for the purpose of imposing
ordinary 30% (starting 2009; 35% 2006 - 2008)
corporate income tax:
i. General professional partnerships
ii. Joint venture or consortium formed for the
purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal & other
energy operations pursuant to an operating or
consortium agreement under a service contract
with the government
(1) Domestic Corporation created or organized in
the Philippines or under its laws and is liable forincome derived from sources within and without.
(2) Foreign Corporation organized and existing
under the laws of a foreign country, which
includes:
(a) Resident foreign corporation foreign
corporation engaged in trade or business within
the Philippines and is liable from sources within.
In the case of CIR v. British Overseas Airways
Corp, [G.R. No. L-65773-74, April 30, 1987], the
Court held that there is no specific criterion as to
what constitutes "doing" or "engaging in" or"transacting" business. Each case must be
judged in the light of its peculiar environmental
circumstances. 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 incident to, and in
progressive prosecution of commercial gain or
for the purpose and object of the business
organization. In order that a foreign corporation
may be regarded as doing business within a
State, there must be continuity of conduct and
intention to establish a continuous business,
such as the appointment of a local agent, and
not one of a temporary character.
(b) Nonresident foreign corporation foreign
corporation not engaged in trade or business
within the Philippines
c. Partnerships. Taxed as a corporation.
d. General Professional Partnerships
Established solely for purpose of exercising
common profession and no part of income derived
from engaging in trade or business.
As an entity, it is not subject to income tax.
i. Partners are liable for income tax on their
distributive share (computed by dividing net
income of GPP).ii. Each partner shall report his distributive share as
part of his gross income.
iii. Individual partners are subject to regular income
tax rate on their taxable income.
Taxable/Business/Ordinary/General Partnership
i. All other partnerships no matter how created or
organized.
ii. Includes unregistered joint ventures and
business partnerships.
iii. Taxable as an entity ordinary corporate
income tax.
iv. Joint ventures are not taxable as corporationswhen its purpose is: a) undertaking construction
projects; b) engaged in petroleum, coal and
other energy operation under a service contract
with the government.
v. Partners are considered stockholders; therefore,
their distributive share is taxed as dividends,
thus subject to final income tax on their gross
distributive share.
e. Estate and Trusts
Estate: property, rights and obligations of a person
which are not extinguished by his death and those
that accrues thereto; taxed in the same way as anindividual provided it is irrevocable and earns
income; what is taxed is not the property that
constitutes the trust (this was already subject to
donors tax) but the income of such property.
Trust: arrangement created by agreement under
which title to property is passed to another for
conservation or investment with the income and
the corpus/principal distributed in accordance with
the directions of the creator; to be taxable as a
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separate entity, grantor must have absolutely and
irrevocably given up control and benefit over the
trust.
f. Co-ownerships
Exists whenever the ownership of an undividedthing or right belongs to different persons. For
income tax purposes, the individual co-owners are
liable for the taxes due on their respective shares
and the co-ownership itself is not considered as a
separate taxable entity.
There is co-ownership in the following instances:
i. Two or more heirs inherit an undivided property
from a decedent;
ii. A donor makes a gift of an undivided property in
favor of two or more donees.
It is not taxable when the activities are limitedmerely to preservation of the co-owned property
but the co-owners are liable for income tax in their
separate and individual capacities.
It is taxable when the income of the co-ownership
is invested by the co-owners in business creating a
partnership.
7. Income Taxation
a. Definition A tax on all yearly profits arising from
property, professions, trades, or offices, or as a tax on a
persons income, emoluments, profits and the life.
Income tax is a direct tax
b. Nature(same as Features of Philippine Income Tax Law)
(1) Direct Taxtax burden us borne by the income tax
recipient upon whom the tax is imposed.
(2) Progressive Taxtax rate increases as the tax base
increases; direct taxes are to be preferred and as
much as possible, indirect taxes should be
minimized. Tolentino v. Secretary of Finance, [G.R.
No. 115455, October 30, 1995]
(3) Comprehensive System adopts the citizenship
principle, residence principle and the source
principle
(4) Semi-Schedular or Semi-Global Tax System certain passive incomes and capital gains are
subject to final taxes at preferential rates while all
other income are added together to arrive at the
gross income and after deducting the sum of
allowable deductions, the taxable income is
subjected to one set of graduated tax rates for an
individual or normal corporate income tax rate for
corporations.
c. General Principles
TAXPAYER TAX BASE TAXABLE ON INCOME
Resident Citizen Taxable
Income
Within and without
the Philippines
Nonresident Citizen Taxable
Income
Within the Philippines
Resident AlienTaxable
IncomeWithin the Philippines
Nonresident Alien
engaged in trade or
business (more than
180 days)
Taxable
IncomeWithin the Philippines
Nonresident Alien
not engaged in trade
or business (180 days
or less)
Gross
IncomeWithin the Philippines
General ProfessionalPartnership TaxableIncome
GPP itself not taxable,
however, individual
partners will be taxeddepending on
classification
Estate and TrustTaxable
Income
Same basis as an
individual (depending
on classification of
decedent, if estate,
trustor, if trust)
Domestic
Corporation
Taxable
Income
Within and Without
the Philippines
Resident Foreign
Corporation
Taxable
IncomeWithin the Philippines
Non-resident Foreign
corporation
Gross
Income Within the Philippines
8. Income
a. Definition and Nature
Income, in the broad sense, means all wealth
which flows into the taxpayer other than as a mere
return of capital. It includes the forms of income
specifically described as gains and profits, including
gains derived from the sale or other disposition of
capital assets. Income cannot be determined
merely by reckoning cash receipts, for the statute
recognizes as income determining factor other
items, among which are inventories, accounts
receivable, property exhaustion, and accountspayable for expenses incurred. [Sec. 36, RR No. 02-
40 dated 10 February 1940]
b. When income is taxable
(1) Existence of income
For a taxable income to exist, gain or profit is
necessary where there is an exchange of
value received in the form of cash or its
equivalent as a result of rendition of service or
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earnings in excess of capital invested. BIR
Ruling [DA-(C-335) 815-09] dated December
22, 2009
(2) Realization of income
(a) Tests of Realization Under the REALIZATION PRINCIPLE, revenue
is generally recognized when both of the
following conditions are met:
The earning is complete or virtually complete;
and
An exchange has taken place.
This principle requires that revenues must be
earned before they are received. Amounts
received in advance are not treated as
revenue of the period in which they are
received, but as revenue of the future period
or period or periods in which they are earned.These amounts are carried as unearned
revenue, that is, liabilities to transfer goods or
render services in the future until the
earning process is complete. Manila
Mandarin Hotels v. Commissioner, [CTA Case
No. 5046, March. 24, 1997]
(b) Actual v. Constructive Receipt
ACTUAL RECEIPT occurs when there is a
physical transfer of the money consideration
or its equivalent to a person.
CONSTRUCTIVE RECEIPT occurs when themoney consideration or its equivalent is
placed at the control of the person who
rendered the service without restrictions by
the payor. For example:
i. Deposit in banks which are made available
to the seller of service without restrictions;
ii. Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for
services rendered; and
iii. Transfer of amounts retained by the payor
to the account of the contractor. [Section
4.108-411 of RR No. 16-2005]
(3) Recognition of income
(4) Methods of accounting
(a) Cash method v. Accrual method
CASH METHOD recognition of income and
expense dependent on inflow or outflow of
cash (meaning, 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 expense).
ACCRUAL METHOD method under which
income, gains and profits are included in gross
income when earned whether received or not,and expenses are allowed as deductions when
incurred, although not yet paid. It is the right
to receive and not the actual receipt that
determines the inclusion of the amount in
gross income.
(b) Installment payment v. Deferred payment v.
Percentage of completion
INSTALLMENT METHOD the taxpayer may
report income over the several taxable years
in which collections are made based on the
terms of payment.
Generally, the income derived on installment
sale is the proportion of installment collection
actually received during the year in relation to
the gross profit and contract price.
DEFERRED PAYMENT METHOD where the
initial payments on installment sale exceed
25% of the selling price but they may only be
realized in the subsequent year, the taxpayer
is allowed to defer reporting income for
accounting purposes but such sale is to be
considered as the equivalent of "cash" which
will be considered as taxable in the month ofsale. [Sec. 177, RR No. 2 as cited in BIR Ruling
No. 263-92 dated September 16, 1992]
PERCENTAGE OF COMPLETION METHOD a
method of recognizing the earnings derived
from long-term construction contracts. This
method requires recognition of income based
on the progress of work.
c. Tests in determining whether income is earned for tax
purposes
(1) Under the REALIZATION PRINCIPLE, revenue is
generally recognized when both of the followingconditions are met:
(a) the earning is complete or virtually complete;
and
(b) an exchange has taken place.
This principle requires that revenues must be
earned before they are received. Amounts
received in advance are not treated as revenue of
the period in which they are received, but as
revenue of the future period or period or periods
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in which they are earned. These amounts are
carried as unearned revenue, that is, liabilities to
transfer goods or render services in the future
until the earning process is complete. Manila
Mandarin Hotels v. Commissioner, [CTA Case No.
5046, March 24, 1997]
(2) The "CLAIM-OF-RIGHT" DOCTRINE provides that if a
taxpayer receives earnings under a claim of right and
without restriction as to its disposition, he has received
income even though one may claim he is not entitled to
the money. Should it later appear that the taxpayer was
not entitled to keep the money, the taxpayer would be
entitled to a deduction in the year of repayment. North
American Oil Con