Introduction7/2/09 5:00 PM

Favorite Bar Exam Topics (1999-2008):

Excluded: NIRC Sec. 116-201

Percentage Taxes (Title V, NIRC; Sec. 116-128)

Except:

Exempt Transactions (S.109 a, b, c, d, e)

Excise Tax (Sec. 129-172)

Documentary Stamp Tax (Sec. 173-201)

Tax Pyramiding (Ppl v. Sandiganbayan) Sources of Bar Exam Questions in Tax

1. Income Tax (8.4% ( 8 Qs)

2. Tax Remedies (6% ( 7 Qs)

3. General Principles (3% ( 4 Qs)

4. Estate Tax (1.1%)

5. Donors Tax (1.1%)

6. Local Government Taxation (1.2%)

7. Real Property Taxation (0.8%)

8. TCCP / Customs Duties (1.5%)

9. Value Added Tax (0.5%)

Sources of Income Tax Law

1. 1997 Tax Reform Act (NIRC): Secs 22-83

favorite: Secs 22-42 50 new rules

10 Salient Features of The Present Income Tax System:

1. Schedular

2. Global

3. Gross Income Taxation

4. Net Income Taxation

5. Income tax Situs

6. Test of Income taxation7. Basis8. Income Tax Rates9. Pay as you file system10. Substituted Filing Basic/Salient Features of the Present Income Tax System in the light of amendments introduced by RA 8424 (p.70 Mamalateo) Also the same as: Systems of income taxation / methods / tax treatment Features of a Schedular Tax System: 12 Systems of Income Taxation Method of taxation to which the NIRC belongs How does the tax code tax income? Answer: Schedular Tax System / Treatment system in law, where the income tax rules / treatment varies and made to depend on the kind / category of taxable income of the tax payer (Tan v. del Rosario). It operates under the following characteristics: (p.1 Dimaampao IT)1. Categorizes/classifies income: Sec. 32a (memorize!) cf: Secs 24, 25 & 26 (imposes different tax rates) categorizes income of individual taxpayers (11 types)

2. Provides for different tax treatment3. Imposes different tax rates Global Tax System / Treatment a system or tax treatment which views, indifferently the tax base, and generally treats in common all categories of taxable income of the taxpayer (Tan v. del Rosario) (p.2 Dimaampao IT) Provides for uniform tax rules / tax rates Income Tax of Corporations (Secs 27 & 28) - generally does not categorize/classify income Imposes uniform corporate tax rates Covers: i. Domestic Corporations (Sec 27)ii. Resident Foreign Corporations (Sec. 28A)iii. Non-resident Foreign Corporations (Sec. 28B) As amended by RA 9337: corporate rate = 30% effective Jan 1, 2009 Distinguish: Schedular Tax System v. Global Tax System (p.15 UP Bar Ops Reviewer) As to Schedular Global

Tax Treatment Different tax treatment / rules Uniform tax treatment / rules

Classification of Income Categorizes / classifies income Does not generally classify / categorize income

Tax Rates Imposes different tax rates Imposes uniform tax rates

Applicability Applies to individual income taxation Applies to corporate income taxation

Net / Gross Income Taxation

What is the method of income taxation that allows deductions and grants personal exemptions? (Allows Taxpayers to claim allowable deductions (Sec 34) & Grants personal exemptions (Sec 35)) (2000 Q.10)

A: Net income taxation - characteristics

Allows taxpayers to claim deductions and personal exemptions

The tax base / the basis of the tax rates is net / taxable income What is taxable /net income? (Sec. 31) [1977] A: gross income less allowable deductions and personal exemptions T/F: Our tax system does not use the gross income taxation Under exceptional cases, we have adopted gross income taxation w/c applies to: Non-resident aliens not ETB (Sec. 25: B, C, E) Non-resident foreign corporations or NRFCs (Sec 28, B 1, 2, 3 & 4)

What is meant / discuss gross income taxation / what is gross income for purposes of income tax? (Sec. 32A: enumerate 11 different kinds of income; p. 11 Dimaampao IT) Gross income does not allow deductions and grants no exemptions.

The tax base is gross income

Distinction between gross income taxation and net income taxation: (p. 13 Dimaampao IT) As to Gross Income Taxation Net Income Taxation

Taxpayers claim for deduction / exemption Allows no deductions, grants no exemptions Allows deductions, grants exemptions

Tax base Gross income Net / taxable income

Applicability1. NRA not ETB

2. NRFCs Applies to the following individual & corporate taxpayers:

Individual taxpayers

1. RC: Resident Citizen

2. NRC: Non-resident Citizen

3. RA: Resident Alien individual

4. NRA ETB

Corporate taxpayers

1. DC: Domestic Corporations

2. RFCs: Resident Foreign Corporations

What is your opinion on the advantages / disadvantages of GI / NI Taxation? (p.13 Dimaampao IT) GIT

minimize of source of graft & corruption (margin of discretion exercised by Revenue District Officers)

simplifies income tax system NIT

Just, fair & reasonable (RA 8424 Sec 2) = equitable relief to taxpayers, improve levels of disposable income & increase economic activities

Equitable relief = deductions and exemptions

Taxpayers encouraged to engage in income-generating activities More revenues to the government Minimizes fraud in claiming deductions Counter-checking by the BIR Income Situs (Tan v. del Rosario) = Comprehensive income tax situs (RPN)

1. Residence (Sec. 23)

a. Resident citizen

b. Resident alien individual

c. Resident corporation

2. Place / source of income

a. Could only be taxed from sources within:

i. Non-resident citizen (Sec. 23 b & c)

ii. NRA

iii. RA (amendment)

b. Could be taxed from income sources without:

i. RC

ii. DC Basis: nationality / citizenship State-Partnership Theory (Comm v. Liglig) state shall provide PRIC: protection, resources, incentives, climate for production of income

Emanates between the partnership between the State & its inhabitants

Protection Theory - Sources of income: PAS - Property, Activity, Service (British Overseas Airways Corp v. Commissioner)

BOAC was an Offline international airline but due to transfers, enjoyed protection of Philippine law (place of sale) ( not applicable due to modified meaning of GROSS PHILIPPINE BILLINGS (p.34 UP Bar Ops reviewer) Origin of passengers (basis of tax) as per Sec 28A3, as implemented by RR 25-2002

3. Nationality / citizenship of taxpayerTest of Taxable IncomeIts not the actual receipt, it is the right to receive, that determines when to include an amount in the gross income. (Filipinas Synthetic Fiber Corp v. CA)

Doctrine of Constructive Receipt (RR 2, Sec 52) p.8-9 Dimaampao I.T. The right to receive must be unconditional, valid and enforceable.

Such amount must be credited to the account of the taxpayer. If subject to legal restriction not considered as constructively realized: E.g. Interest income of bank deposits (Sec. 53, RR 2) Examples of income constructively realized: Cash / Property Dividends received by RC, NRC, RA (Sec. 24B item 2)

Cash / Property Dividends received by NRA ETB (Sec. 25 A 2)

Share of a partner from the NI of a GPP (Sec 26 last par) Share of a partner from a taxable / business partnership (Sec. 73 D) Rent income deposited in court by the lessee of the property in view of the unjustified refusal of the lessor (Limpian Investment Corp v. Commissioner) cf: Art. 1261 NCC

Basis of the computation of Taxable Income (Sec. 43) Taxable income shall be computed on the basis of taxpayers annual accounting period. 2 Accounting Periods:

a. Calendar Year an accounting period of 12 months that starts on Jan 1 and ends on Dec 31 May be adopted by individual and corporate taxpayersb. Fiscal Year an accounting period of 12 months, ending on the last day of any month other than December (Sec. 22q)

Can only be adopted by corporate taxpayers

Relevance of accounting periods: Tax Remedies (Sec. 229, Sec. 43 & 77b): Prescriptive period for filing of tax refund is 2 yrs from the date of payment.

As far as corporate taxpayers are concerned, the 2yr period commences to run from the filing of the final adjustment corporate tax return. April 15 if calendar year (TMX Inc) If a corporate taxpayer filing tax refund has adopted the fiscal year period, the deadline for the filing of the final adjustment corporate tax return is on / before the 15th day of the 4th month following the close of the fiscal year period. (Sec. 77b)

E.g. accounting period ended on June 30, 2005. The deadline of the filing of the final adjustment tax return is on October 15, 2005. The 2yr period / deadline for filing of claim of refund is on October 15, 2007. Income Tax Rates

Individual Progressive Rates (Sec. 28) tax rate increases as the tax base increases Equitable tax (Art. VI Sec 28 par 1, 2nd sentence 1987 Consti) Re: VAT & the constitutional provision that Congress shall provide for a progressive tax system: direct taxes should be preferred, and indirect taxes should be minimized as much as possible. The mandate of Congress is not to prescribe, but merely a directive. Thus the VAT law has been sustained. (Abakada Guro) Tax Pyramiding (People v. Sandiganbayan) a tax on tax; it does not have basis in law and has been rejected by Congress. Corporate Uniform Corporate Rate of 30% as applied to DC, RFCs (Sec. 27 & 28) 2 Systems

1. Final withholding tax system (Sec 57)2. Creditable withholding tax system (Sec. 78)As toFinal withholding tax system Creditable withholding tax system

Items of income28 items of income subject to FWT (focus on 6: RPWIDS)

1. Royalties

2. Prizes - amount more than P10K (if less: regular income, subject to regular income tax, not subject to final tax)3. Winnings except PCSO & lotto4. Interests Income on Bank deposits5. Dividends received from domestic corporations - If received by a DC or RFC ( tax exempt

Received by individual taxpayers

Received by NRFC

6. Share of a partner from the NIAT of a business partnership

If received from a GPP: part of GI

Compensation for services rendered e.g. compensation income (salaries, wages, commissions)

Tax WithheldCannot be claimed as a tax credit- final, complete payment of TPs tax liabilityCan be claimed as tax credit to income tax due / payable- withholding agent: employer

Effect on the Subject IncomeExtinguishes taxpayers tax liability- need not be reported as part of the gross income of the taxpayerDoes not extinguish the taxpayers liability- has to be reported as part of the gross income of the taxpayer (thru the ITR)

Filing of IT ReturnTP is no longer required to file IT Return if the only sources of income are those subjected to FWT under Sec. 57 (Sec. 51A2c)e.g. 1. NRA not ETB (Sec. 25 B, C, D, E cf: Sec. 51A2c)2. NRFCs (Sec. 28B items 1, 2, 3, 4) explains the following concept: ( Sec. 52F Every corporation except NRFCs are required to file quarterly corporate income tax return Taxpayers are required to file IT returns

Deductible Tax v. Creditable TaxDeductible Tax Creditable Tax

may be deducted from gross income (one of the allowable deductions) deducted, credited against taxpayers income tax due / payable

Pay as You File System (Sec. 56A1) payment is done when you file your income tax

1. Individuals and Estates (Sec. 62) annual payment on or before Apr 15 (Sec 51c1)

2. Corporate Domestic corporations file their IT quarterly (Secs 75 & 76) ( qualify by:

For the 1st, 2nd, and 3rd quarters, it must file the summary of its gross income and expenses, which shall be reported on a cumulative basis. Thereafter, it shall file its final adjustment return, showing the entire income for the whole taxable year. Rationale for quarterly payment & filing: Ensures timeliness of collection of the corporate income tax

Payment in installment eases burden on domestic corporations Improve the liquidity / cash flow of the government (cf: consistent with Administrative Feasibility) Fundamental Principles of a Sound Tax System (FAT)

1. Fiscal Adequacy sources of revenue must be adequate to meet government expenditures

2. Administrative Feasibility3. Theoretical Justice Any violation of the first 2 principles will not render the law invalid, because they have no constitutional basis (unlike the principle of theoretical justice) Determination of the wisdom, expediency, necessity of the tax-measure belongs to the law-making body of the StateSubstituted Filing of Income Tax Return (RR 3-2002) if an individual taxpayer has complied with the following conditions, he is no longer required to file income tax return:

1. Only source of income is compensation income (purely compensation income earner)

2. One employer in the Philippines

3. The tax withheld by the employer should be equal or the same as the income tax due If income tax due is more than tax withheld: required to file ITR

A compensation owner whose annual income is not more than P60K. (RR 3-2002) ( mere BIR regulation The tax law, however, imposes no limitation (cf: Sec 51A2b)

BIR Regulations are valid if they are consistent / in harmony with the tax code4. Employer must file BIR form 1604 showing tax withheld on employees compensation income

Such tax withheld is tantamount to a subsequent filing of an income tax return. General Principles of Income Taxation

Sources: Only provides rules on sources within & without (Sec 23) Tax base (WON you could claim deductions) (Secs 24 & 25: Individual, 27, 28: Corporate) answers if a taxpayer could claim allowable deductions Accounting periods that may be adopted TPs annual accounting period: Calendar year / fiscal year (Sec 43) Tax rates (Sec 24, 25, 27, 28) Income Tax Due / Payable Filing of ITR (Sec 51, 51, 75, 76) Classification of Taxpayers Sources of income Tax base Annual Accounting Period Tax Rates Filing of IT Return

Individual: Sec 23 a, b, c, d cf: Sec 22 Sec 23 Secs 24, 25 Sec 43 Secs 24, 25, 27, 28 Secs 51, 52, 75 & 76

RC W/n & w/o (Sec 23A) GI

Less: AD (Sec 24A1a) Taxable Inc Less: PE IT Payable Calendar Year 5-32% Progressive Rates (Sec 24A1c) Required (Sec 51A1a)

NRC W/n (Sec 23B & C) GI

Less: AD (Sec 24A1b)

Taxable Inc Less: PE IT Payable

Calendar Year 5-32% Progressive Rates (Sec 24A1c) Required (Sec 51A1b)

RA W/n GI

Less: AD (Sec 24A1c)

Taxable Inc Less: PE IT PayableCalendar Year 5-32% Progressive Rates (Sec 24A1c) Required (Sec 51A1c)

NRA ETB

W/n (Sec 23D) GI

Less: AD (Sec 25A1)

Taxable Inc Less: PE

IT PayableCalendar Year 5-32% Progressive Rates (Sec 24A1c) Required

NRA not ETB W/n GI (no AD/PE)Calendar Year FIT:

25%

Not required (Sec 51A1c)

Special NRA Not ETB

1. Offshore Banking Units

2. Regional HQ of MNCs

3. Employees of petroleum contractors/subcon 15% (b)

Corporate:

Sec 23 e, f cf: Sec 22 Secs 27, 28

DC W/n & w/o (Sec 23) GI

Less: AD

Taxable Inc (Sec 27a) CY/FY (Sec 23) Uniform Corporate IT Rate 30%

Required (Sec 52A cf: 72 & 76)

RFC

W/n (Sec 23F) GI

Less: AD Taxable Inc (Sec 28A1) CY/FY Uniform Corporate IT Rate 30%

Required (Sec 52A)

NRFC W/n (Sec 23F) GI CY/FY FIT: 30% (Sec 28B1) Required

Special NRFCs (Sec 28B2)

1. NR Dist of Cinematographic Films

2. NR Lessor of Vessels Chartered to Phil Citizens

3. NR Lessor of Aircraft, Mach & Equipment GI FIT: 25%

FIT: 4.5%

FIT: 7.5% Not Required

NRA ETB v. NRA not ETB

NRA ETBNRA not ETB

SourcesNo distinction: only taxable on income from sources within

Tax BaseCan claim deductions, PE subject to the rule on recipCannot claim deductions

Tax RatesProgressive Rates: 5-32%FIT (25%, 15%)

Filing of ITRRequiredNot required

Tests to determine WON a foreign corp is doing business in the Phils:

1. Transactions must be in line with its Ordinary business

2. Continuity of Commercial Transactions (Mentholatum case)

3. Intention to carry out the body / substance of the foreign corporation

4. Actual specific, commercial transaction consummated in the Phils. Therefore, mere exporting of goods does not result in ETB, pursuant to RA 7042 Sec 3B. (Val. Brothers v. GBTL Mfg Corp)

RA 7742?: Opening of offices, branches, performance of, continuity of commercial transactions, perfection of contract, entering into a dealership agreement, management, supervision of businessRequisites for Validity of BIR Regulations1. Consistent in harmony with the Tax Code

2. Reasonable

3. Useful & necessary

4. Published in the OG / NGC mere interpretive rules should not change / modify the tax code. Memorize: Sec 32AWhat is GI for purposes of IT? Codal

1. Compensation for services rendered

2. Business / Trade, Professional Income

3. Property Income

4. Interests

5. Rents

6. Royalties

7. Dividend Income*

8. Annuities

9. Prizes, winnings

10. Pensions

11. Partners Share from NI of GPPPBC-PRP-WPD-PARI

1. Professional income

2. Business / Trade Income

3. Compensation Income

4. Property Income

5. Rent Income

6. Prizes

7. Winnings

8. Pensions

9. Dividend Income*10. Partners Distributive Share from NI of GPP

11. Annuities

12. Royalties

13. Interests*

Income

1. Gross Compensation Income compensation for services in whatever form paid, may include salaries, commissions & similar items (NIRC)

Gross Compensation income refers to all renumeration for services rendered or performed by an employee for his employer, arising under an employer-employee relationship, unless specifically excluded by the Tax Code (RR 2-98 Sec. 2.78.1)

Determinative Test: Presence of the employer-employee relationship (SPDC) Selection

Payment - compensation

Dismissal

Control Payment made by a contractor to a contractee, in the absence of an ER-EE relationship is business / trade income

Payment made to a professional for services rendered, in the absence of an ER-EE relationship should be taxed as professional income

Importance (Sec. 34 cf: Sec. 35): Allowable Deductions

Personal exemptions Premiums on life / hospital insurance (Sec 34 m)

P2400/yr

Gross Annual income P250,000

Claimed by spouse who will claim additional AD Taxable compensation income is not only limited to payment made in cash; payment may be made in kind. (Sec 32A1: in whatever form paid) Life Insurance premiums on the life of the insurance policy of the EE Cancellation / forgiveness of indebtedness 2 Tax Implications of Payment made for services rendered (tax implication = tax effect = tax consequence = tax incidents):

EE: Income Tax (Sec 32A1)

ER: Ordinary, unnecessary Expense (Sec 34A1) reasonable allowance for salaries and wages, and other compensation for personal services actual rendered

How much can be treated as compensation? ( Reasonable, and FV of services rendered (Sec 34A1a.i.) P30K (ER)

P30K compensation income and P20K income derived from whatever source (EE)

Claim of Right Doctrine illegal / unlawful income, profit / gain is subject to tax Death Benefit for the EE from the ER (Sec 32B qualifies Sec 32A) enumerates exclusions from gross income

No income there

Rules on Life Insurance Premiums ER:

ER who pays insurance premiums on the LIP of his manager / supervisor ( Taxable Fringe Benefit subject to FT (Sec 33B 10) When insured is a rank & file EE ( compensation income: in whatever form paid (Sec 32E.A1)

LIP paid by the taxpayer - May not be claimed as a deductible expense by the ER if it is designated as the beneficiary (Sec 36A4 Non-deductible items ) Tax treatment of LIP paid by the ERBeneficiary DesignatedER (expense)EE (Income)

Executor, Administrator, EstateDeductible ordinary & necessary expense (Sec 34 A 1: other forms of compensation for personal services actual rendered)1. Mgr/Sup: subject to FBT, which is a FT (Sec 33 B 10)

2. R&F: taxable comp inc (Sec 32 A 1)

ERNon-deductible expense whether the ER is directly/indirectly designated as the beneficiary (Sec 36 A 4)Rationale: mere return on capitalNo taxable income

No benefits received since basis for IT is benefit/gain

Cancellation / forgiveness of indebtedness (RR 2, 1940 Sec 50)1. May result in taxable compensation income for services rendered

2. May constitute a taxable donation3. May also be considered as a taxable capital transaction

Tax Treatment of Cancellation / Forgiveness of IndebtednessSituationCRDR

ER-CrEE-Dr

Consideration: services renderedAllowable deduction

(Sec 34A1a.i.: Other forms of compensation for personal services rendered)Taxable compensation income

(Sec 32A1: Compensation for services in whatever form paid)

ER-Cr EE-Dr

Consideration: Liberality (Donation)Subject to donors tax on a direct / indirect donation;

May be claimed as a bad debts expense(Sec 34 e)

Not subject to income tax

(Sec 32B item 3: donation / gifts are excluded from GI)

No more donors tax

Unpaid obligation of P100K; Dr declared insolvent, Cr agreed to accept payment through dacion en pagoThe transaction is a taxable capital transaction

Cr-corporation condoned the debt of the Dr-SH- must be condoned / renounced w/o prejudice to the Trust Fund doctrineInterest on capital / preferred shares of stock is a non-deductible interest. No exceptions. (RMC 17-71, Jul 12, 1971)Taxable as dividend income

(taxable as dividend)

Compensation Income (Sec 32A) v. Fringe Benefits (Sec 33) Compensation Income Fringe Benefits*

Rates Progressive Rates of 5-32% Final Tax

Reporting Must be reported by the compensation earner Need not be reported by the manager / supervisor

Except:

Sec 33C item 3:

FB given to R&F EEs not taxable subject to final tax (but should be reported as part of gross compensation income)

Bar Qs

2001 # 1

2003 # 3

2004 # 5

2007 #

Definition of FB: *Memorize Sec 33B

Form: cash, goods, services, other benefits

Recipient: mgrl, supervisory EEs (RR 3-98 adopted Labor Code defns), except R&F EEs

Source: ER

10 Taxable FBs: (HEV-HIM-EHEL)i. Housing*

ii. Expense Account

iii. Vehicle

iv. Household personnel

v. Interest on Loan**vi. Membership benefit in social / other athletic clubs

vii. Expenses for foreign travel***viii. Holiday & vacation expenses

ix. Educational benefit****x. Life / health / non-life / accident Insurance Premiums******Housing Benefit: Employers Convenience Rule (RR 3-98) tax-exempt (MTB):1. Housing unit situated w/n ERs Business premises

Housing unit outside the business premises as long as adjacent (w/n a 50m perimeter) from the business premises of the ER (RR 3-98)

2. Temporary Housing Unit (RR 3-98)

3 mos or less

3. Military Housing unit - Traditionally exempt housing benefit

**Actual rate of interest must be less than the market rate

Market Rate: 12% (RR 3-98)

Examples: ER granted loan. Will this result in taxable interest benefit if interest rate is:

14% - no

12% - no

0-11.99% - yes***Expenses for foreign travel Requisites / Conditions / Situations under w/c expenses for foreign travel may not be subject to FBT (RR 3-98):a. Must be paid / incurred in connection with the business of the ER (business expense) e.g. conventions, seminars, business meetingsb. Must be supported by receipts / documents (Substantiation)

c. Exempt only up to $300d. Cost of airplane ticket: i. Economic class: exempt

ii. First class: exempt up to 70% ****Educational Benefit 2 categories:

1. Granted to the Mgrl / Supervisory EE in the nature of a scholarship grant; requisites:

Agreement between mgr / supervisor that the EE will stay in the employ of the ER within a certain period of time, as an expression of gratitude

2. Dependent of the EE ER may adopt competitive exams to be administered by the ER

******Life / health / non-life / accident Insurance Premiums:

1. SSS

2. GSIS

De Minimis Benefits Implication; Definition & 2 Characteristics:

1. Minimum amount relatively of small amount

2. Purpose/s for grant: Promote CHEG

Contentment

Health

Efficiency

Goodwill Tax Exempted De Minimis Benefits Amount Type of FB

P125 Medical Cash Benefits Given to the dependent of the EE

300 Laundry Allowance

1,500 (NEW!) Rice Subsidy / Allowance (increased from P1000 by RR 5-2008, RR 10-2008)

4,000 (NEW!) Clothing / uniform benefit (increased from P3000 by RR 5-2008, 10-2008)

5,000 Christmas / Anniversary gift (cf: Sec 32 B 7 e lump sum limitation of P30K to Christmas bonus / productivity allowance)

10,000 Employees achievement award

Medical benefit granted to EEs (cf: P125 limit if granted to dependents)

No minimum amount (RR 3-98 as amended by RR 5-2008, RR 10-2008) Commuted value / monetized of unused VL / SL

1. Govt exempt from receipt of commuted value of unused VL / SL (no more 10-day rule)

2. Private Apply the 10-day rule

VL unused up to the 10 day VL credits; in excess: taxable

SL taxable (applying strictissimi juris)

Retiree exempt from receipt of all monetized VL / SL benefits (Zialcita case)

Zialcita (190 SCRA 851) monetized value of unused VL credits may form part of terminal leave pay, which is exempt ( received by the EE on account / cause beyond his control

(compulsory retirement)

Fruits, books & cars, gifts on account of occasions of the EE

Reasonable

Overtime pay - not more than 25% of the basic minimum wage

Also considered as taxable FBs (Goods, services or other benefits)

1. Laptop

2. Motor vehicle

3. Courtesy discount

Sec 32 (Prof income, Business / Trade Income) cf: Sec 74 define self-employment income; what are considered as self-employment income?1. Business / Trade Income Is business / trade income the same as gross income from gross sales / receipts? NO.

Formula:

Gross sales/ receipts:

Less: SD, SRA

Net Sales

Less: CGS & mfgd/ Cost of SalesGross Income from conduct of trade / business 1) Gross income from conduct of trade or business (32.A.2) - to come up with this start with GROSS SALES or RECEIPTS (2) Gross sales or receipts -. apply to sale of services. Deduct the COST OF INVESTMENT. If manufacturing, cost of goods sold and manufactured. If merchandising, cost of sales. And also deduct sales discounts, sales returns and allowances.2. Professional Income

3. Share of a partner from the income of partnershipGains Derived from Dealings in Property (Sec 32A) / Property Income cf: Secs 39 & 40

Ordinary v. Capital Asset (Memorize Sec 39A1)

Ordinary asset Ordinary assets are limited to the following

4 Kinds of Ordinary Assets (Expressio unios est exlusio alterius) SOUR:

Stock in trade inventoriable assets (e.g. Mfg) Raw materials

Finished Goods

Work-in-process Goods

Ordinary course of trade / business property primarily held for sale to customers in the ordinary course of trade / business (e.g. Real Estate dealers) Used in trade / business depreciable assets used in trade / business (e.g. machinery, furniture / fixture in Mfg / Service) Real Property used in trade / business if not, it will be a capital asset Capital assets property held by the TP WON connected to his trade / business but does not include SOUR (defined by way of exclusion)

Exercises:

All properties held by the TP in connection with his trade / business are ordinary assets ( FALSE. The definition of a capital asset includes properties held by a TP in connection to his trade / business, but not covered by SOUR

E.g. Think other assets in B/S: Accounts receivable, collectibles, marketable securities, investment in stocks, goodwill in business, other intangible assets from which extra-ordinary gain will be derived if sold, etc)

Capital assets are always capital assets ( FALSE. Capital assets may also become ordinary assets in certain situations. E.g. Real estate assets of a real estate dealer inherited by heirs, property w/c was formerly not used in business but improved to be used in business

Property primarily held for sale to customers in the ordinary course of trade / business TEST: Substantial Improvement: When a property has been substantially improved / actively sold, it may be a property primarily held for sale in the ordinary course of business. The improvement is substantial if the amount of the improvement is double the original cost of the property. (Calazans v. Commissioner, 144 SCRA 664) Valuable improvement: The improvement is considered valuable if there is an unmistakable intention of the TP, not only to liquidate the estate of the decedent, but also to make the property saleable to the general public. (Tuazon Jr v. Lingad, 58 SCRA 170) Valuable improvements include: (BASIC) Broker relationship established between the seller & the broker did he really engage in the business of buy & sell?

Area improved e.g. 7ha of land in the Tuazon case

Subdivision were the lots subdivided? And the subdivided lots SOLD to the general public?

Improvement there must be an unmistakable intention of making the lots attractive to the general public

Continuity of the business Conversely, ordinary assets may also be converted into capital assets. Factors to consider when an ordinary asset may still be considered as an ordinary asset (RR 7-2003) FENCIA inconsistent with Sec 39 A1 Failed business of a real estate business (real estate developer)* Engaged in R/E business (developer, lessor) No longer engaged in the business of real estate Change in business

Involuntary Transfer of Property may include expropriation or foreclosure of property

Abandoned, Idle Property Special Rules (that apply to capital transactions):

1. Holding Period 12months (Sec 39B) a form of tax avoidance Reduces taxpayers taxable capital gain by 50% if capital asset is sold after the 12month holding period (Statute of Partial Exemption) If sold within the 12month holding period, it will be completely taxable Only applies to capital assets and individual taxpayers.

If the asset were an ordinary asset, the 12month holding period would not be applicable If the taxpayer were a corporate taxpayer, it would not be applicable.2. Capital Loss Limitation (Sec 39C) Principles:

Capital loss is deductible only from capital gain. Capital loss cannot be deducted from ordinary gain. Ordinary Loss may be deductible from capital Gain no prohibition in the tax code

Rationale: Matching (of costs against revenues) principle - Capital loss is a non-business connected expense, which is not an allowable deduction in Sec 34. Only business expenses are deductible from ordinary income. Application:

Individual

Corporate

Except trust bank & trust companies

3. Net Capital Loss Carry-over (NELCO) (Sec 39D) NELCO Sec 39DNOLCO Sec 34D

Net Capital Loss Carry OverNet Operating Loss Carry Over

ScopeCapital assets / transactionsOrdinary asset / transaction

Applies toTPIndividualIndividual / Corporate

Period (when Loss deductible)1 yr (only in the succeeding year)3 yr period (X: mining companies 5 yrs)

Net Capital Loss (definition in Sec 39A3) - the excess of the capital loss over capital gain. (if the capital loss is more than the capital gain)Statute of Partial Exemption - Long-term capital asset which may result in the reduction of capital gain (held for more than 12 months)

How do you construe provisions of the Tax Code re: capital transactions? A: Strictly construed against taxpayer holding the capital asset (partakes the nature of exemptions. Therefore strictissimi juris)

Not all capital transactions are covered / subject to Special Rules, but are subject to other certain special rules (Sec 24, 25, 26, 27):

1. Sale of shares of stock considered as a capital transaction (applies to individual & corporate taxpayers alike) Listed considered as capital asset (Title V, Sec 127a): of 1% of the gross selling price (GSP) Not listed considered as income tax (FIT)

P100K & below - 5% (before: 10%) Any amount in excess of P100K 10% (before: 20%)2. (Sec 24D vs Sec 27D sec 5)

Sale / disposition of real property not used in trade / business Sec 24DSec 27D5

ApplicabilityIndividual TaxpayersDomestic Corporations

CoverageReal Property (except machinery cf: Sec 199, RA 7160)Land and building

Tax BaseHigher amount between: GSP & zonal value

Tax Rate6% (before 5%)

Option of applying tax rateOption granted to the individual seller

If the buyer is the govt buyer may apply progressive rates of 5-32%No option granted to domestic corporations

Tax Avoidance SchemeTax avoidance Scheme in Sec 24D2: Principal Residence is the subject of sale

5 Conditions for Exemption under Sec 24D2 (1-4) and RR17-03 (5):

1. Proceeds of the sale must be used to construct / purchase a new principal residence Dwelling characterized by the element of permanency: animus revertendi (RR 13-99)

2. 30-day notice to the BIR3. Comply with the 18th month period within which to construct / purchase a new principal residence

4. 10 yr limitation can only be availed of once every 10yrs

5. RDO & authorized agent bank should execute an ESCROW AGREEMENT with the seller

the 6% CGT should be deposited under the ESCROW ACCOUNT

within 30 days from the lapse of the 18th month period, the seller could withdraw the amount.Presumptive Gain Principle (presumed gain) a.k.a. Gain by Legal Fiction (Sec 24D1) even if the seller incurred a loss, he can still be made to pay the 6% CGT

remember: the tax base is the higher of the GSP / zonal value; cost not deductible applies only to sale of real property considered as capital asset; does not take into account the costs / loss sustained by the seller because as far as the law is concerned, there is a presumption that the seller acquired gain exception to the rule that cost is allowed as deduction to the amount realized (GR: Formula in Sec 40A)Formula in Determining Taxable Gain from Deductible Loss from Sale of an Asset / Property (Sec. 40A)

Selling Price / Amount Received or Realized

Less: Cost / Adjusted Basis - (determined by mode of acquisition)Taxable Gain / Deductible LossHow did you acquire the property that you disposed of? (to determine Cost / Adjusted Basis): PIDI Purchase (its really the cost)

Inheritance FMV of property at time of death of decedent Donation FMV of property at time of donation (same basis for the donor) Insufficient / inadequate Consideration same basis in the hands of the 1st transferor of the property If property was acquired way below its FMV Alternative Tax Treatment: No Gain / Loss Recognized (Sec 40C2, an exeption to Sec 40A) gain from initial sale is tax-exempt, but the subsequent sale is taxable Exempt exchanges of property, shares of stock and securities

Situations covered: ( In accordance with a plan of merger / consolidation =another form of tax-avoidance! Corporate control (Sec 40C6c) 51% (same definition as corporate control under the Corpo Code) acquired by 5 people (max: a person, alone or together with others, not exceeding 4 persons in Sec 40C2 last paragraph) Transactions solely in kind: no cash given

Property for stock

Stock for Stock

Security for Stock Effect: ( Gain = tax-exempt; loss = non-deductible Transaction not solely in kind - If additional cash is given Effect: Gain = recognized; loss = not recognized Merger / consolidation includes the ordinary meaning of merger / consolidation and expanded to cover the acquisition / transfer of all assets in exchange solely for shares of stock (Sec 40C6b) ( even if no PLAN of merger/consolidation Recap: Examples of Tax-Avoidance:

1. Holding Period Rule

2. Sale of Real Property considered as capital asset in Sec 24D

3. Exchange of property/ shares of stock / securities in line with a plan of merger / consolidation4. Exchange of property/ shares of stock / securities by maximum of 5 people to gain controlGain Recognized, Loss Not Recognized applicable tax treatment to:1. Transactions not solely in kind

2. Illegal transaction (e.g. income from bribery) Illegal / unlawful (Sec 32A) Income derived from whatever source in accordance with the CLAIM OF RIGHT DOCTRINE (US v. Ratkin)

Illegal loss is non-deductible 3. Related taxpayers (Sec 36B) non-arms length transactions 4 Groups:

Members of the same family

Stockholder & corporation factor: corporate control

Sister corporations: 2 corporations who are owned & controlled by same stockholders

Parties to a trust (Trustor, Trustee, Fiduciary, Beneficiary)

Cf: concept / definition of Stranger (in Donors Tax) (Sec 99B)4. Wash sale transaction (Sec 38) Subject:

Shares of stock

Securities

Stock options

Seller: must NOT be a dealer in securities

Period:

30 days before the sale till 30 days after the sale a.k.a. 61-day sale seller acquires substantially identical securities Tax treatment: Gain from wash sale = taxable; Loss = non-deductible Rationale: Loss from wash sale is artificial loss. It is not actually sustained or incurred. Sec 34D prescribes requisites for a deduction of a loss

Actually sustained or incurredWash Sale (Sec 38) v. Short Sale (Sec 39F1)Wash SaleShort Sale

Gain TaxableTreated as capital gain

Loss Not deductibleTreated as capital loss, which is deductible from capital gain

Concept of a Short Sale Transaction represents an obligation payable in kind / goodsSeller merely speculates that on this day the price of the security or share will increase. If the price decreases, he earns an income. If the price increases, he incurs loss. Hence there is a short sale, He just borrowed the security or share of another person and he may promise to buy them in goods / securities. Failure to Exercise Option to Buy / Sell - Additional Capital Transactions (in addition to Sec 39 of NIRC)1. Adjustment of partners interest in a partnership (Secs 142 & 142 of RR-3)2. Liquidation of a corporation (Secs 143 of RR-3)Item 4: Interest Income

GR: Taxable

X: (Sec 32B7a)

1. Foreign government

2. Financial institution financed / controlled by foreign government

3. International / regional foreign institution established by foreign government

Interest income on deposits made in the Philippines

Interest income from loans extended

Interest income on long-term debentures

4. Income derived from long-term deposits / investment / management account (Sec 22w)

Term: 5yrs

Denomination: P10K

Subject to BSP Regulations

Provisions on exemption

If depositor is a RC, NRC, RA - exempt (Sec 24B1)

If depositor is a NRA (Sec 25A2)

ETB exempt

NETB not exempt (Sec 25B) If depositor is a corporate taxpayer not exempt5. Interest income from FCDA system same whether individual / corporate taxpayer

If depositor is a non-resident - exempt

If depositors is a resident non-exempt (7.5%) *Interest income from government securities is taxable. (Sec 32B)

Items 5 & 6: Rent Income v. Royalties

Rent Income Royalties

Tax Treatment Subject to regular tax Subject to FIT

Reporting Must be reported Need not be reported

Additional Taxable Rent Income (in addition to Lease Income)

1. Obligations of the lessor assumed paid by the lessee

E.g. Real Property Tax on lease premises Lessee pays interest of Lessors debt

Insurance Premiums of Lessors property paid by the lessee2. Value of permanent improvement

long-term contract of lease may contain stipulation that ownership of lease shall pass to the lessee at the end of the lease contract 2 methods of reporting of value of permanent improvements

Outright method upon the completion of such permanent improvement, such FMV of the same shall be reported as additional rent income of the lessor in addition to the regular rentals Spread-out method the depreciated value of the permanent improvement upon the expiration of the contract of lease; aliquot portion reported as rent income throughout the remaining period of leaseItem 7: Dividend Income Type of DividendSourceRecipientTax Treatment

Cash, Property Dividend Domestic Corporation RC, NRC, RA FIT: 10% (Sec 24B2)

NRA ETB FIT: 20% (Sec 25B2)

NRA NETBFIT: 25% (Sec 25B3)

Domestic Corporation Tax-exempt (Sec 27D)

RFC Tax-exempt (Sec 28Ad)

NRFC FIT: 15% (Sec. 28B5b)

FC:

Income derived from sources w/n = at least 50% of the NI must be derived from Phil sources for the last 3 preceding taxable yrs (Sec 42A2b)Any

Stock tax exempt

rationale: no flow of wealth so no realized gain: Transfer from surplus account to capital (Sec 73Bb)

Exeption re: Redemption of Shares of stock may or may not result in taxable stock dividend

Source: original capital investment / initial capital subscription redemption does not result in a taxable gain, as it is merely a return on capital

Source: stock dividend declarations taxable since it may result in a flow of wealth, in such time and manner essentially equivalent to the declaration of taxable dividend

There has to be flow of wealth so stock redemption may result into taxable income. (Commissioner v. Andres Soriano Corp 301 SCRA 152)

Is stock dividend received by usufructuary taxable? 2 Views:

Massachusetts view: Tax-exempt

Pennsylvania view: Taxable ( in accord with Art 566 of the NCC: Usufructruary shall be entitled to all natural, industrial & civil fruits of the usufruct. Stock dividends are fruits of the thing in usufruct. (Basrach v. SEIFERT 87 Phil Rep)Disguised dividends in Income taxation ( Taxable

Board declared stock dividends declared not in accordance with the Corporation Law, requiring presence of unrestricted R/E. But they made it appear that dividends declared were stock dividends so they could evade the payment of tax on dividends.

Dividends deemed stock: Stocks distributed as dividends were sourced from another corporation ( Taxable

Change in SHs interest in a corporation Common Preferred Shares of Stock issued by a corporation (Commissioner v. Marin cf: Q1, 1994)Income Subject to FIT: Interest Income from Bank Deposit (Arroyo case)

Div received from DC by NRFC, NRA RPWADSRPWADS

Royalties

Prizes

More than P10K

Winnings

Exempt:

PCSO

Lotto

Annuities

Dividends ReceivedShare of a partner from the NIAT of a Taxable Partnership (Sec 24B2 & 25A2)Income subject to FIT income governed by the Final W/holding Tax system. Under this system, the w/holding agent shall deduct and w/hold such tax on income. The recipient of such an income is not required to report the same as part of his income because such final tax w/held shall serve as full payment / settlement of the tax liability on income.

Income subject to CWT income governed by the Creditable W/holding Tax System. Under this system, the w/holding agent shall deduct and w/hold such tax on income. The recipient of such an income is required to report the same as part of his gross income. Such tax w/held will not extinguish TPs tax liab on such income. The tax w/held can be claimed by the TP as creditable tax.

Cash dividend received by an RC/RA from a DC is subject to FIT & not progressive rates of 5-32% (Sec 24B2)

Rationale: 1. Ensure collection of tax on dividend, which will immediately go to the coffers of govt. (NIT: no assurance that individual TPs will report dividend income.

2. Easier compliance: By shifting responsibility to the corporations, the BIR could easily monitor the compliance. (NIT: It would be extremely difficult for the BIR to check compliance with individual TP)3. Sure revenue to the government

4. Reportable income which could be offset against a loss5. Lessen the burden on the taxpayerSame reasons why Interest Income from bank deposits is subject to FIT (just qualify individual TPs w/ the term depositors, and substitute banks for corporations)

Exclusions from Gross Income (Sec 32B) LAGCIRM (formerly: LAGICIRM, I = interest income from bank deposits now subject to income tax)

Life Insurance Policy proceeds*

Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be included / excluded from the Gross Estate)

Included:

Beneficiary is estate, executor, administrator (irrevocable / revocable designation)

Third person (may include ER) is revocably designated beneficiary (determine WON revocable) Irrevocable designation will exclude LIP proceeds from the GE

Excluded: Received by any beneficiary Proceeds of group insurance policy

LIP taken on own life

Irrevocable designation will exclude LIP proceeds from the GE Awards & Prizes Gifts, Donations Compensation for injuries / sickness**

I

Retirement Benefits, Exemptions, Etc**

Miscellaneous Items**** Donation: Donor-Donee

Tax Implication of Donation Inter Vivos

1. Donor subject to donors tax

2. Donee not subject to donees tax (abolished by PD 69)

- also not subject to income tax (because donation is excluded from GI)

Tax Implication of Donation Mortis Causa

1. Testator subject to estate tax

2. Heirs not subject to inheritance tax (abolished by PD 69; Jan 1972)

*Life Insurance Policy proceeds Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be included / excluded from the Gross Estate)

Included:

Beneficiary is estate, executor, administrator (irrevocable / revocable designation)

Third person (may include ER) is revocably designated beneficiary (determine WON revocable)

Irrevocable designation will exclude LIP proceeds from the GE

Excluded: Received by any beneficiary

Proceeds of group insurance policy

LIP taken on own life

Irrevocable designation will exclude LIP proceeds from the GE **Compensation for Injuries / Sickness not taxable, no income realized

Q: WON the foregoing damages are taxable:

Hospitalization expenses NOT TAXABLE.

Moral damages 2 views:

Taxable - Sec 32A income derived from whatever source; no exemptions granted; strictissimi juris

NOT TAXABLE In effect, imposing tax on grounds for MD:

Sec 2217 (NCC): 9 grounds for Moral Damages (MBA-SWS-PAF)

Moral shock, Besmirched reputation, mental Anguish, Social humiliation, Wounded feelings, Similar injury, Physical suffering, serious Anxiety, Fright Cf: Art 2219 par 7 was applied in the Filipinas Broadcasting case, awarding moral damages to a corporation for defamation Exemplary damages NOT TAXABLE: Based on sound public policy Cost of repair of damaged car NOT TAXABLE. Indemnification

Lost profit TAXABLE. He could have earned this if he were not hospitalized ***Retirement Benefits, Pensions, etc A. Retirement Benefits

Received from private ER - 4 requisites for exemption:

Source: BIR-approved retirement plan

Age of retiree EE: 50yrs of age

Length of service: at least 10yrs

Limitation: can only be availed of once

All retirement benefits received from the GSIS (given to public / govt EEs) are EXEMPT. B. Separation pay

Must be received on account of causes BEYOND the control of the EE / official Includes termination due to labor-saving devices, losses incurred by the ER

Kinds

Death benefit (Sec 32B6) Physical disability benefit Sickness benefit Compulsory retirement is considered a cause beyond the control of the EE, hence all benefits received, including the so-called terminal leave pay is exempt. The terminal leave pay covers monetized value of unused VL/SL credits. (Zialcita case)

^_^Check out 1999 Bar Qs^_^ Q (1999): A Co., a Philippine corporation, has two divisions manufacturing and construction. Due to the economic situation, it had to close its construction division and layoff the employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer at the time of retirement. There are 2 groups of employees to be laid off: 1) Employees who are at least 50 years of age and has at 10 years of service at the time of termination of employment. 2) Employees who do no meet either the age or length of service A Co. plans to give the following: For category (A) employees - the benefits under the BIR approved plan plus an ex gratia payment of one month of every year of service.

For category (B) employees - one month for every year of service. For both categories, the cash equivalent of unused vacation and sick leave credits.

A Co. seeks your advice as to whether or not it will subject any of these payments to withholding tax. Explain your advice. A: All of the payments are not subject to income tax and should not also be subject to withholding tax. The employees were laid off, hence separated for a cause beyond their control. Consequently, the amounts to be paid by reason of such involuntary separation are excluded from gross income, irrespective of whether the employee at the time of separation has rendered less than ten years of service and/or is below fifty years of age.

(Section 32(B), NIRC) Does it necessary follow that retirement benefits are exempt from estate tax? (Sec 86A7) YES. An allowable deduction from Gross Estate, by virtue of RA 7641 in relation to the LC. RA 7641 cf: RA 4917, 86A7 salient points:

Retirement benefits that may be given to EEs under the CBA or any other agreement are exempt.

If there is no established retirement plan given by the ER, likewise exempt provided:

Tenure: Rendered at least 5yrs of service

Age: 60-65yrs oldQ: What are tax implications of receipt of GSIS benefits and their subsequent deposit in the bank?

A: GSIS benefits are EXEMPT; If deposited in the bank, interest income therefore will be subject to tax. (Same as SSS benefits)

****Miscellaneous Items A. Interest income that derived / may be received by a foreign government, , ,

B. financing institution C. finance controlled by a foreign govt D. regional financial institution established by a foreign government Sources of investment: loans, deposits, stocks, LT cert of indebtedness, dividends, interest income

Case (Commissioner v. Mitsubishi Metal, 1990): EXIM Bank, an international financing institution extended loan to Mitsubishi Metal and used it to extend loan to a Philippine corporation, Atlas Mining Corp. Mitsubishi Metal claimed that the interest income was exempt since the amount likewise came from an exempt institution. Loan P20M Sale Atlas will purchase mining equipment to be sold to Mitsubishi for P50M. BIR: Mitsubishi is taxable. CTA: Mitsubishi is an agent of the EXIM Bank. SC: Interest on the loan is taxable. The source is tax-exempt, therefore the interest should not be taxed. However, there was no clear & convincing evidence that Mitsubishi was indeed an agent of Japan. When the contract between Mitsubishi & EXIM was consummated, the money ceased to belong to EXIM; it was already owned by Mitsubishi. The other contract of loan was executed between Mitsubishi & Atlas. Exemptions should be construed strictly against the TP, hence it could claim no exemption.

Of course, different answer if Mitsubishi were indeed an agent

Income derived by Government / Political Subdivisions

From Public utility

Exercise of essential governmental function

Accruing to:

Government of the Philippines National / Local (does not qualify government as national)

Mactan Cebu Intl Airport Case Govt of the Philippines is synonymous as Republic of the Phils. Republic of the Philippines may include instrumentalities, where GOCCs belong.

Cf: Sec 27C Exempt GOCCs from Corporate Income Tax:

GSIS

SSS

Phil Health Ins Corp

PCSO

Exemption of PAGCOR was withdrawn by RA 9337 (July 1, 2005)

Prizes & Awards (Sec 32B7c & d) (C) (D)

Requisites for Exemption3

Conditions must concur: SCRA-LEC:

Scientific, charitable, religious, artistic, literary, educational, civic achievement Received by an athlete who participated in a competition whether here or abroad

No action on his part to enter the contest Sanctioned by the National Sports Association The Philippine Olympic Committee must approve (Law creating the Philippine Sports Commission)

Unconditional receipt: should not be required to render future services

cf: RA 7549:

The recipient of such an award, exempt from Income Tax.

The donor of such an amount, exempt from Donors Tax. (not yet in the Tax Code; not in Sec 101A3)

Such amount can be claimed as a deductible contribution. (not yet in the Tax Code; not in Sec 34H)

Gains from the Sale of Bonds, Debentures or Other Certificates of Indebtedness

Sale/Exhange/Retirement of Bonds, Debentures / Other CIs more than 5yrs: exempted; 5yrs or less: taxable Informers Reward

No longer an exclusion from GI (Sec 32B) Taxable with 10% FIT (Sec 282) FCDA Recipient resident individual / corporate: 7.5%

non-resident: exempt 18 Exempt Associations, JVs, Entities:

Sec 22B Exempts 3

GPPs

Joint venture for purpose of undertaking construction projects

Joint construction for purpose of engaging in petroleum, coal, geothermal & other energy operations in accordance with the consortium agreement with the government Sec 27C Exempts 4 GOCCs GSIS

SSS

Phil Health

PCSO Sec 30 Exempts 11: remember common characteristics

Non-stock, non-profit corporations

No part of the income must inure to the benefit of a particular member/individual

Social welfare, Religious, Charitable and other non-profit purposes

Par E: 6 exempt corporations: CARS

Charitable

Cultural

Athletic

Religious

Rehabilitation of veterans

Scientific Organizations Non-stock, non-profit educational institution (H)

Government educational institution (I)

Memorize Sec 30 last par: income of whatever kind / character from any of their properties, real / personal or any activities conducted for profit, regardless of the disposition made of such an income shall be subject to tax imposed under this code.

YMCA v. Commissioner 298 SCRA 83: YMCA is a religious & charitable institution, but did not qualify as a non-stock, non-profit educational institution. YMCA advanced that it was exempt under Art VI, Sec 28 par 3 of the Constitution & Art XIV, Sec 4, par 3 of the Constitution, contending that it was a non-stock non-profit institution and should not be taxed for the receipt of rent income. Such an income should be used to carry out its religious, charitable and educational purposes.

SC: Rent income from lease of property subject to tax, regardless of purpose for the income. Art VI, Sec 28 par 3 of the Constitution only applies to real property.

Art XIV, Sec 4, par 3 only applied to non-stock non-profit educational institution, to which YMCA does not belong.

Non-stock non-profit educational institution

Exemption of non-stock non-profit education institution is merely a reiteration of Art IV of the Constitution: Actually, Directly & Exclusively used for such purposes ( The use of the amount is the test of exemption.

Interest income from bank Deposits to avail of exemption from 20% FIT, the non-stock, non-profit educational institution Cf: DOF 149-95 Cf: DOF 149-95: requires concurrence of the following conditions for exemption:

Proof in the form of certification, issued by the bank of deposit in that particular bank

Certification re: actual utilization of such amount for educational purposes

Resolution of the BOT that such amount will be used for expansion of educational project Interest on Deposit of bank deposits:

Subject to 20% FIT if depositor: (Sec 30 is categorical: regardless of use / disposition) Government educational institution

private educational institution

charitable institution

religious organization Exempt if depositor is Non-stock, non-profit educational institutions: subject to conditions in the DOF 149-95 (CCP) Rules on Exemption on:

Income Tax (Sec 30 NIRC) Property Tax (Art VI Sec 28 par 3 Consti; Lung Center of the Phils v. Roces) Donors Tax (Sec 101 A3) Estate Tax (Sec 87D) Isexempted from Income Tax (Sec 30 NIRC) Property Tax Donors Tax Estate Tax

Religious YES ADE: Actually, directly, exclusively* used for religious purposes YES. Provided complies with conditions NO

Educational Institution

Private NO.

Subject to 10% preferential corporate rate if income from its unrelated activities is not more than 50% of its income. ADE: Actually, directly, exclusively* used for educational purposes NO NO

Government YES (Sec 30i) May be exempt from donors tax NO

Non-stock, non-profit Yes (Sec 30h, Art XIV Sec 4 par 3 Consti) YES. Provided complies with conditions NO

Charitable YES (Sec 30e, subject to last par) ADE: Actually, directly, exclusively* used for charitable purposes YES. Provided complies with conditions YES, provided the 30% requirement is complied with

*Exclusively is no longer construed as primarily. Now, the court construes the meaning of exclusively as solely. Doctrine of incidental purpose no longer exists. (Lung Center Phils v. Roces) - partial exemption is allowed (Lung Center of the Philippines v. Quezon City)9 Donations Exempt from Donors Tax (QARTIER-CPS) with conditions for exemption Qualified Donees

Accredited Non-government organizations (RA 8424)

Religious organization

Trust foundations

Educational institutions non-stock non-profit

Research institution

Cultural organization

Philanthropic organization

Social welfare organization Conditions for exemption:

Non-stock non-profit

Not more than 30% of the donation shall be used for admin purposes

Trustees receive no compensation

Donations for the achievement of purposes as stated in Articles of Incorporation

Donations Mortis Causa (Sec 87D CSC) subject to condition: Not more than 30% of the donation shall be used for admin purposes Charitable Institution

Social welfare institution

Cultural

Corporations include partnership no matter how created or organized registration with the SEC is not required

JV / Association need not comply with the formal requirements of the law regarding the creation of a partnership. (Collector v. Gatchalian) A taxable partnership is formed for as long as parties have the intention to divide profits among themselves & there is a contribution to a common fund.

Co-ownership not taxable; merely for the enjoyment of the co-owners (not for profits) seemingly conflicting doctrines:

An unregistered taxable partnership was formed between the heirs. (Unya v. Commissioner 45 SCRA 74, 1972) apartments were purchased by heirs and they received rent income therefore.

There was no unregistered taxable partnership formed / organized. (Obillos, 139 SCRA 136, 1985) sold property to divide proceeds only, not for profit

There was no unregistered taxable partnership formed / organized. (Pascual & Dragon, 166 SCRA, 1988) 5 parcels of land were purchased & later on sold by heirs. SC applied test in Art 1769; heirs shared in gross receipts of sale. Mere sharing in the gross receipts does not in itself establish partnership. Significant Rules:

MCIT

IAET

Branch Profits Remittance Tax Tax sparing credit rule (Sec 28B5b) MCIT of 2% of GI applicable to DC (Sec 27E), RFC (Sec 28A2) Rationale / underlying basis: Forestall the prevailing practice of corporations of over-claiming deductions in order to reduce their income tax payments (not stated in RR 9-98) Equitable Provisions of the MCIT: Applies only to a corporation on the commencement of its 4th yr of corporate operations.

Sec 27E par 1 not automatically imposed on a newly-formed corporation; proven fact that corporations often operate at a loss for the 1st 3yrs

Excess of MCIT can be claimed as a tax credit for 3 consecutive taxable years (Carry-Forward Rule)

Suspended for corporations that suffer losses due to:

Prolonged labor dispute strike that has lasted for more than 6months

Force majeure

Serious / Legitimate business reverses Illustration:

Actual NIT Payable: P300,000 v. MCIT of 2% of GI: P450K ( Claim P450K (since more than actual) P150K (P450-P300) can be claimed (carried forward)

Amendment (RR 12-2007)

Now included in the quarterly IT return (new! Before annual reporting) Scope of Application:

Does not apply to NRFCs DCs

X ( but can still be taxed under the 10% Preferential Corporate Rate

Private educational institution (RR 9-98)

Non-profit hospitals

RFCs

X: International carriers exempt from MCIT ( subject to 2.5% FIT

Regional HQ of MNCs, OBUs ( still subject to 10% FIT

Registered under the PEZA (RA 7916) and BCDA (RA 7227) ( still subject to the preferred corporate tax of 5% IAET of 10% (Sec 29) improper accumulation of corporate earnings is taxed Cases when there is improper accumulation of corporate earnings: When the Corporation, despite presence of unrestricted retained earnings in excess of 100% of their paid up capital, did not declare dividends to SH Reserved earnings are invested in unrelated business / activity

Investment in bonds and other long-term securities However, accumulation is proper / justified when: PNP Project: Corporate earnings are used for expansion corporate project Necessary for probable contigencies (p.69 Dimaampao I.T.) enumeration is not exclusive: Allowance for increase in accumulation of earnings up to 100% of paid-up capital as of B/S date inclusive of accumulations taken from other years Definite corporate expansion projects

Earnings reserved for acquisition of equipment, buildings, machinery

Earnings reserved for compliance with loan covenant

Earnings required by law / regulation in respect of which distribution is prohibited

All undistributed earnings reserved for distribution in the Philippines by the subsidiaries of a foreign corporation Prohibited: Dividend declaration is prohibited by a provision in a loan agreement Rationale (RR 2-2001): Regulation IAET of 10% is in the form of penalty to corporations who should declare dividends when warranted by circumstances presence of unrestricted R/E. It is a deterrent to possible tax avoidance on the part of SHs. (Had dividends been distributed, the government could have imposed a FIT of 10% on stockholders) Exclusions from coverage: Bank, other non-bank financial intermediaries

Public corporations

Insurance companies

Scope of application:

Closed corporations not more than 20 stockholders Branch Profits Remittance Tax FIT of 15% (Sec 28A5) Coverage: RFC engaged in trade / business in the Philippines Acts that constitute doing trade / business & make a foreign corporation an RFC RA 7042 Sec 3D (POASA)

Participation in management, supervision, control of a business in the Philippines

Opening of a branch in the Philippines

Appointment of an agent

Soliciting contracts

Any act which will imply the continuity of commercial transactions

Tax Base: Branch Profits

Effectively connected with conduct of trade / business in the Philippines: the amount applied / earmarked for remittance (no longer the amount actually remitted) Tax Rate: 15% FIT Case: Marubeni Doctrine (Marubeni v. Commissioner 177 SCRA 500)

SC: The remittances is not taxable for not being effectively connected with conduct of trade / business in the Philippines. The investment of Marubeni-Japan in a domestic corporation is a business that is different & distinct from the business carried out by Marubeni. Direct investment by the mother company in the company has no direct connection with conduct of trade/business of Marubeni-Philippines. Tax sparing credit rule (Sec 28B5b) 15% of dividends from DCs Contemplated situation: NRFC received cash / property dividend from a domestic corporation Income covered: Dividend income

Tax Rate: 15% FIT

Rationale for reduction of corporate rate from 30% to 15%: To attract / encourage foreign investments by reduction of the income tax rate (P&G v. Commissioner) ( non-revenue purposes of the Philippines

Subject to the condition that the country in which such foreign country is domiciled shall allow credit against the tax due from NRFC, taxes deemed paid in the Philippines (Deemed Paid Tax Credit)

P&G-US (NRFC) established P&G-Phils (DC). Because of such investment made in the Philippines, the rate was reduced so that the dividend declared by P&G Philippines and distributed to P&G-US could be taxed at only 15%. Since P&G established a business in the Philippines, it is deemed to have paid tax under the Philippines (Sec 902 US IRC allows American corporations to claim credit as against taxes deemed paid in other countries). Other cases: Is proof of amount actually granted required?

SC: There must be proof of actual amount granted as tax credit so we could impose the reduced credit of 15%. (P&G v. Commissioner 2nd division) Motion for recon: The Tax Code does not allow actual grant (Sec 28B5b). It merely says, shall adopt. No such word as actual. Nor does any RR provide for this. ( PREVAILING VIEW Proof allowed: enough to prove that there is such a provision under the Revenue Code of the foreign government allowing such tax credit

P&G Phils was the w/holding agent insofar as the dividends was concerned. Does it have legal personality to file a written claim for refund? ( NO legal personality

M/R: ( YES, w/ legal personality. Withholding agent is not only an agent of the government, but also an agent of the taxpayer wrt to filing of return & payment of the tax. Withholding agent is technically considered as taxpayer, therefore has the personality to file a written claim of refund. SC: There is no need of proof of actual amount granted as tax credit so we could impose the reduced credit of 15%. (Wonder v. Commissioner 3rd division) Does the Philippine branch, as w/holding agent of dividends, have legal personality to file a written claim for refund? ( YES. Withholding agent (Sec 22) v. Taxpayer

Withholding agent Taxpayer

Required to deduct & w/hold the tax under S. 57Subject to tax imposed under this title

Can file written claim for refund (S. 204c)

Sec 28A3: Definition of Gross Philippine Billings modified: origin of passengers, cargo & baggages determines situs of income (no longer the place of sale), partially amending rule on situs on sale of personal property (Sec 42A6 provides that situs is place of sale) Therefore an offline international airline may no longer be taxed, even if it sells tickets here, if there is no proof that passengers originated in the Philippines (RR 15-2002)

Come to think of it, an offline international airline has no landing rights in the Philippines in the first place Distinguish Allowable Deductions from Personal Exemptions

Allowable Deductions Personal Exemption

Nature Nature of business expenses (except: deductible contribution) Personal expenses substitute for the disallowance of family, living & personal expenses (Sec 36A1)

Amount Actual business expenses paid / incurred, as proven / substantiated by receipts P50,000 (uniform basic P/E as of Jan, 2008) applies to married individual, head of family, unmarried individual w/ no dependents

( arbitrary amount (may not be enough to cover 1yr family/living/personal expenses)

Claimant Individual & corporate TPs Individual TPs

X:

1. NRA-NETB (Sec 25B: imposes GIT of 25%)

2. NRA-ETB w/ no reciprocity (NRA-ETB may claim based on recip rules but not more than P50K)

Kind / Classification 1. Itemized deductions

2. Optional standard deduction (OSD) ( Amendments by 9504

1. Basic P/E: P50K

2. Additional P/E: P25K/dependent child (not more than 4 children) = max: P100K (prev P8K/child = max: P32K)

Amendments introduced by RA 9504 re OSD:

claimable by corporate TPs

40%, previously 10% in the NIRC

tax base:

for Indiv TPs is now gross sales / receipts (previously gross income)

for corporate TPs is gross income Re: Wisdom behind RA 9504: It has been held valid in a long line of cases, the court cannot question the motive, object, expediency, necessity behind the passage of a tax law.

Allowable Deductions (Sec 34) from Exclusions from GI (Sec 32B):

Allowable Deduction Exclusions from GI

Nature Items of expenses, which are allowed by law as deductions from Gross Income Items of Income, which are excluded by law, constitution or the Tax Code in that they are exempt

Purpose Exclusions are important for purposes of determining Taxable Income Exclusions are important for purposes of determining Gross Income

FAQs on Allowable Deductions

Allowable Deductions under the Tax Code: (LTRB-DBP-CID) Losses (deductible losses) Taxes (deductible taxes)* Research & Devt Expenditures (as introduced by Business expenses ordinary & necessary Depreciation (allowance for depreciation) Bad debts expense** Pension Trust contribution Contribution (deductible contribution) Interest expense*** Depletion expense Determinative Test for Ordinary & Necessary Expenses (Business Expenses): (DOM) Development of the business of the taxpayer

Operation of the taxpayers trade / business (in connection with)

Management of the taxpayers trade / business (in connection with) GR: Capital expenditures are not allowable deductions; they should be capitalized and amortized. X: (Sec 34A2) Capital expenditure incurred by private educational institution during the year when the same was incurred (with option to capitalize & claim allowance for depreciation) Capital asset purchased from proceeds of Interest on loan

Intangible drilling & development costs

Research & development expenditures, subject to certain conditions (NEW!) Tax Benefit Rule applies to tax refund, recovery of bad debts written off Provision on deductible tax (Sec 34C)

Taxes when refunded shall be included in the GI in the year of recovery / receipt to the extent of income tax benefit of said deduction Must be a deductible tax: Must have been claimed as a deduction in the preceding taxable year. Non-deductible taxes: (SIDE)

Special assessment tax

Income tax

Donors tax

Estate tax Must have been actually claimed as a deduction

Illustration: NIBT

Less: Tax ( refund granted the following year NIAT

x Tax Rate

Income Tax Payable

[Tax

X Tax Rate applied

Tax Benefit] Provisions on bad debts expense (Sec 34E) - included in the gross income in the year of receipt or recovery to the extent of income tax benefit of said reduction

Requisites for deductibility of Bad debts expense (PRC v. Commissioner): (CUBANO) Charged off - Amount must be charged off / against the books / accounts of the taxpayer during the taxable year

Uncollectible not only in the current taxable year but also in the future

Business / Trade / Exercise of profession must arise from

Ascertained to be worthless during the taxable year

Not involving related taxpayers (remember: expenses involving related taxpayers are not deductible)

Obligation must be subsisting, valid & enforceable If bad debts were written off during a year when the corporation incurred net loss, subsequent recovery of the bad debt does not result in taxable income, because it will merely be a return on capital. (RR 5-99)

When a Bad Debt may be said to be worthless in accordance with sound business Judgment: BIDS-SAID (RR 5-99)

Bankruptcy of the taxpayer / insolvency

Insufficiency of collaterals

Death of the debtor

Statute of limitations application of the

Success of judicial action

Amount if only P1K & debtor is residing faraway, the cost of collection will be more than the amount

Injury that may be sustained by the debtor

Destruction of properties, documents & the like

Change of Taxpayers Status (Sec 35C): 8 (2 fr 1st par, 2 fr 2nd par, 4 fr last par)

Marriage of the taxpayer during the taxable year ( ineffectual due to the uniform personal exemption

Additional dependent Death of taxpayer ( P/E can be claimed by his estate

Death of spouse ( ineffectual due to the uniform personal exemption Death of dependent ( as if the dependent died at the close of the taxable year, by legal fiction Dependent becoming more than 21yrs of age during the taxable year ( as if the dependent became more than 21yrs old at the close of the taxable year, by legal fiction

Marriage of dependent during the taxable year (NEW!) ( as if the dependent married at the close of the taxable year, by legal fiction (before: automatic disqualification in the old tax code) Gainful employment of dependent during the taxable year (NEW!) ( as if the dependent became gainfully employed at the close of the taxable year, by legal fiction (before: automatic disqualification in the old tax code) Who can claim the P25K additional personal exemptions?

GR: Husband

X: If the husband is jobless, and the wife is the breadwinner BBB (Bantay Bata Brigade) If the husband signs a waiver (made to sign by the wife):

IMUS (I am under the saya), RAM, RAMBO, UHAW (union of husbands afraid of their wives), GHQ (Go Home Quickly),

Sec 42: Income Tax Situs / Location / Place (last asked: 1957) Services - where such services are performed / rendered

Sale of real property location of real property

Sale of personal property place of sale (GR; X: Gross Philippine Billings)

Interest income residence of the debtor (National Development Corporation v Commissioner) GENERAL PRINCIPLES

Scope Local Taxation (2007) / National Taxation The power of taxation may be described as(CUPS) Comprehensive The power to tax reaches to every trade / occupation, to every object of industry, to every space of possession, and in case of failure to discharge the same, may be followed by confiscation / forfeiture of property (e.g. tax is imposable on exercise of profession, possession of property, use / enjoyment of a right) Consequences in case of failure to pay tax - Distrain of personal property, Levy

Unlimited subject to inherent & constitutional limitations Plenary

Supreme

Nature Inherent Simple: The power to tax co-exists with the State. It exists independently of the Constitution. Such Constitutional limitations merely regulate imposed limitations on the exercise of the power to tax. (p.14 footnote 17) Authoritative: The power to tax is inherent in the sovereign state because it is a necessary attribute of sovereignty. Without this power, no state can exist nor enjoy. The power to tax proceeds from the theory that the existence of the government is a necessity.

It is an essential and necessary attribute belonging as a matter of right to every independent state or government. No state can exist w/o the means to pay its expenses, hence the power to compel the payment of taxes (Emergence of the power to tax)As a principal attribute of sovereignty, the exercise of the power to tax derives its source from the very existence w/ the State, whose social contract with the citizens obliges it to promote the common good. It emanates from the theory of necessity; without taxes government cannot fulfill its mandate of promoting the general welfare and well-being of the people. (Yuchengco, BPI v. Commissioner) Legislative Why is the power to tax legislative in character: (p.15, footnote 18) Simple: It is legislative because the power to tax is vested exclusively in the law-making body of the State. It is Congress that has the power to enact tax laws. Impressive: It is based on the theory that taxes are a grant of the people, and this grant shall be made by the immediate representatives of the people. And where the people have laid this power, then it shall remain to be exercised. Explain the Symbiotic Relationship Theory between the State & its inhabitants as espoused in Commissioner v. Algue Despite the natural reluctance to surrender part of ones income to the taxing authorities, every person who is able to must contribute his share in the burden of running the government. The government for its part is expected to re-spend in the form of tangible & intangible benefits intended to improve the lives of the people, and enhance their material & moral values.

Ability to Pay

Taxes must be based on taxpayers ability to pay. ( Basis of equitable taxation

Constitutional Basis: Art VI Sec 28 (1)

Uniform & equitable

The government on its part emphasizes the reciprocal duty of the government

Purposes: Primary: Raise Revenue

Secondary: PIER Protect local industries against unfair foreign competition (TCCP) Countervailing and dumping duties

Inequalities (reduce) to promote social justice, it must adopt a system which must impose just, fair & reasonable taxes: progressive system of taxation Encourage the growth of local industries & manufacturers Power to tax includes the power to grant exemptions, tax amnesties, tax condonations Regulatory purposes as an implement of the police power of the State Does the power to tax include the power to destroy? The power to tax does not include the power to destroy as long as the Court sits. Reconcile these seemingly conflicting pronouncements / opinions (see p.20 Dimaampao) Justice Marshall is correct that the power to tax includes the power to destroy if used validly as an implementing

Justice Holmes is also correct. If it is used solely for the purpose of

The power to tax may be used as an implement of the power of eminent domain.

Taking / expropriation of private property

E.g. RA 7432 as amended by RA 9257: Covered establishments are mandated to grant 20% to Senior citizens. It is now a deductible tax, no longer a tax credit.

For public use / purpose Has no concrete definition; Test cited: the ultimate result, general welfare of the people. Special care and attention to Senior Citizens may create social problems. Thus, it will in effect redound to the general benefit of the people. If the beneficiary is any of the following, it within the contemplation of public purpose (Art XIII Sec 11 as cited in Carlos Rach Co. v. Commissioner):

Elderly

Underprivileged

Women

Children

Disabled Payment of just compensation Could be claimed as a deductible tax.

Tax Credit v. Deductible Tax

Tax Credit Deductible Tax

Reduces TPs tax liabReduces TPs taxable income

City Trust v. CA 234 SCRA 348 improved version of the lifeblood doctrine in Commissioner v. Molina, etc

Taxes are the lifeblood of the nation, through which government agencies continue to operate, and which the State continues its functions

Is deficiency assessment a bar to a claim for refund? Deficiency Assessment of a Claim for Refund To avoid multiplicity of suits & prevent absurdity, the claim of the taxpayer that there is tax deficiency must first be settled. Reason: An error / mistake is not binding on the government.

OMEN of government officials, BIR, agents of the government shall not be binding upon it.

Omissions, mistake, error, negligence

City Trust - 499 SCRA 77: different answer no, it will not bar such claim for refund. Claim for refund and protest are governed by different rules. If the government made an assessment, and subsequently the taxpayer files a written claim for refund,

Fundamental Principles of a Sound Tax System (Abakada Guro v. Ermita) FAT Fiscal Adequacy - Administrative Feasibility Art VI Sec 28 par 1 Theoretical Justice / Equality - To be considered sound, legal / constitutional basis does not necessarily follow.

Inherent Limitations on the Exercise of the Power of Taxation (PINET) Public purpose (Senior Citizens Act) International Comity Non-delegation of the power to tax Art VI Sec 28 Par 2: Tariff power of the president Art X Sec 5: Power of LGUs

Exercised thru the local legislative council Subject to guidelines & limitations (Memorize: Fundamental principles of LG / RP Taxation: Sec 130 principles of local govt taxation & Sec 198 fundamental principles of LG taxation, LGC)

Imposes / provides 15 limitations (Sec 133)

Local government units cannot impose national, donors, estate taxes

No tax may be imposed on instrumentality of the NG, its agencies, LGUs

Based on sound public policy that the State may not tax itself (no constitutional prohibition; mere statutory provision in RA 7160, which Congress can repeal)

Mactan Cebu Intl Airport Authority v. Marcos (261 SCRA 667, 1996): MCIAA is subject to RPT

Mla Intl Airport Auth case (495 SCRA): MIAA is exempt from RPT on its airport lands & buildings Distinctions: MCIAA is a GOCC. All exemptions granted to GOCCs are withdrawn upon effectivity of RA 7167 considered as an instrumentality.

MIAA is not an instumentality of the national government is not qualified under Sec 2 Par XIII of the Revised Admin Code.

Meaning of instrumentality v GOCC

MIAA v. Pasay City

Justice Tinga & Justice Nachura:

Adopted the majority view. MIAA is not considered as a GOCC (Sec 2 Title X Definition of instrumentality)

Now: Exempt from R/PT.

Instrumentalities of National Government

Bangko Sentral ng Pilipinas

UP

PPA

MCIAA instrumentality of the government. Therefore, exempt

P Exemption from tax of Government Territoriality Tax Evasion (Estate of Benigno Toda Jr. v. Commissioner) 3 Factors that concurs for tax evasion to arise: Unlawful

State of mind must be coupled with bad faith, evil, deliberate End to be achieved reduce taxpayers liability / evade payment of tax

Double Taxation may either be direct or indirect Direct double taxation is prohibited.

Same

Taxpayer

Taxing authority

Taxable period

Nature of tax Indirect double taxation is allowed. If taxing authorities are different

International Juridical Double Taxation

Different taxing authority

Same

Taxpayer

Taxable period

Subject: e.g. Royalties

Methods to mitigate the harshness of double taxation / avoid its occurrence:

Tax credit method, as embodied in a tax treaty Sec 34C item 3

Exemption method reciprocity

Vanishing deduction - Method under the law on estate tax designed to mitigate the harshness of double taxation ( Requisites:

Death of present decedent must have occurred within 5 yr period from previous decedent

Identity of the property with that inherited from prior decedent

Previous taxation

Inclusion of the property in the prior estate

No previous VD GR: Exemptions are strictly construed against the taxpayer

X: Liberally construed in favor of the TP

Special persons under special circumstances

Agency of the government (Maceda v. Macaraig)

Law provides for liberal interpretation

Traditional exemptees: non-stock, non-profit organizations (e.g. Charitable, Religious, Philanthropic organizations) GR: Taxes are not subject to set-off (Mambulao Doctrine 1961, Francia v. Sia doctrine 1997) Taxes are not subject to set-off / compensation. A pending claim for tax credit / tax refund can not be set off against the tax deficiency of the taxpayer. It may only be allowed if the claim is demandable, due and liquidated. (Phoenix Mining v. Commissioner)

X: There was already a law appropriating an amount in payment of the claim of the TP. [TP and government are not considered Drs-Crs of each other.] (Domingo v. Garlitos, 1962) City Trust Case

Taxpayers Suit (Abaya v. Ebdane Jr)

Requires disbursement / illegal expenditure of public fund derived from taxes

came from contributions (Marcos case 65 SCRA 624)

no need to present proof of direct injury, for as long as evidence of illegal disbursement / expenditure of public fund, TP suit will lie (Maceda case)

illegal contracts which may involve disbursement of public fund (Abaya v. Ebdane)

Provisions of the Constitution Relative to the Power of Taxation: REVENUE-LESS-DAN-PTN Religious privity must be respected free exercise of religious profession & worship (Art III Sec 5) Equal protection clause (Art III Sec 1)

Veto power of the president re: appropriation, revenue & tariff bills (Art VI Sec __, Par 2)

Exemption from property taxation of REC: religious educational charitable institutions, provided actually, directly & exclusively used for REC purposes (Art VI, Sec 28 par 3)

Non-impairment clause (Art III Sec 10)

Uniformity of taxation (Art VI Sec 28 par 1)

Exemption shall be approved by majority of all members of Congress (absolute majority - according to Art VI Sec 28 par 4) Local government units are constitutionally conferred / constitutionally delegated with the power of taxation (Art X Sec 5)

Exemption from income tax, property tax, customs duties of non-stock, non-profit educational institutions (Art XIV, Sec 4 Par 3 of the Constitution)

Special Fund collected, levied under special law shall only be used for such purpose (prevents juggling of funds Art VI Sec 29 par 3)

Supreme Court has the jurisdiction to review, reverse, affirm on appeal decisions of lower courts involving legality, validity of tax, imposts, assessments or penalties (Art VIII Sec 5 (2b))

Due Process must be observed in the imposition of tax (Art III Sec 1)

Appropriation, revenue and tariff bills shall originate exclusively in the house of representatives. (Art VI Sec 24)

No public money / property shall be used directly / indirectly for religious purpose. (Art VI Sec 29 par 2) in line with separation of church and state Press (freedom of) Art III Sec 4

Tariff power of the president (Art VI Sec 28 Par 2)

Non-imprisonment: No person shall be imprisoned for non-payment of poll tax / community tax certificate under Sec 156 RA 7167 (Art III Sec 20) Secs 34 & 35

Effective Jan 1, 1998

Effective Jan 1, 1998

e.g. Mr..., having stayed in the Phils for more than 180 days could only be taxed on income from sources withinmay claim AD & PE, subject to recip, may be taxed for his income earned during the CY, applying progressive rates, required to file ITR.

aggregate stay in the Philippines for more than 180 days (Sec 25A1) e.g. June 15-Dec 15 = 183 days

but may only claim PE subject to the rule on reciprocity (Sec 34)

Effective Jan 1, 2009 (RA 9337)

Tax C