taxation 2015 up pre-week

8/19/2019 Taxation 2015 UP Pre-week

1/216


2/216


3/216

UP LAW BOC TAXATION 1 TAXATION LAW

TAXATION LAW

TAXATION LAW 1


4/216


I. General Principles ofTaxation

DEFINITION AND CONCEPT OFTAXATION

Taxationis a mode by which governments makeexactions for revenue in order to support theirexistence and carry out their legitimateobjectives.

Taxesare enforced proportional contributions from

persons and property levied by the law-makingbody of the State by virtue of its sovereignty forthe support of the government and all publicneeds.

The power of taxation proceeds upon thetheory that the existence of government is anecessity; that it cannot continue withoutmeans to pay its expenses; and that for thosemeans it has the right to compel all citizensand property within its limits to contribute.

NATURE OF THE POWER OF TAXATION(1) Inherent in sovereignty(2) Essentially a legislative function(3) Subject to constitutional and inherent

limitations

SCOPE OF TAXATIONSubject to constitutional and inherentrestrictions, the power of taxation is regardedas supreme, unlimited and comprehensive.

The principal check on its abuse rests only onthe responsibility of the members of thelegislature to their constituents.

EXTENT OF THE LEGISLATIVE POWER TOTAXSubject to constitutional and inherentrestrictions, the legislature has discretion todetermine the incidence of the power to tax.

ESSENTIAL CHARACTERISTICS OFTAX(1) an enforced contribution(2) generally payable in the form of money(3) proportionate in character or is laid by

some rule of apportionment which isusually based on ability to pay;

(4) levied on persons, property, rights, acts,privileges, or transactions.

(5) levied by the State which has jurisdiction orcontrol over the subject to be taxed.

(6) levied by the law-making body of theState; and;(7) levied for public purpose.


5/216


POWER OF TAXATION COMPARED WITH OTHER POWERS

Taxation Police Power Eminent Domain1. As to concept Power to enforce

contribution to raise

government funds

Power to make andimplement laws for the

general welfare

Power to take privateproperty for public use

with just compensation2. As to scope Plenary, comprehensiveand supreme

Broader in application.General power to makeand implement laws.

Merely a power to takeprivate property forpublic use

3. As to authority Exercised only bygovernment or itspolitical subdivisions

Exercised only bygovernment or itspolitical subdivisions

May be granted to publicservice or public utilitycompanies

4. As to purpose Money is taken tosupport the government

Property is taken ordestroyed to promotegeneral welfare

Private property is takenfor public use

5. As to necessity

of delegation

The power to make taxlaws cannot bedelegated

Can be expresslydelegated to the localgovernment units by thelaw making body

Can be expresslydelegated to the localgovernment units by thelaw making body

6. As to personaffected

Operates on acommunity or a class ofindividual

Operates on acommunity or a class ofindividual

Operates on theparticular privateproperty of an individual

7. As to benefits Continuous protectionand organized society

Healthy economicstandard of society

Market value of theproperty expropriated

8. As to amount ofimposition

Generally no limit Cost of regulation,license and othernecessary expenses

No imposition

9. As toimportance

Inseparable for theexistence of a nation – itsupports police powerand eminent domain

Protection, safety andwelfare of society

Common necessities andinterest of thecommunity transcendindividual rights inproperty

10. As torelationship toConstitution

Subject to Constitutionaland Inherent limitations.Inferior to non-impairment clause.

Relatively free fromConstitutionallimitations.Superior to non-impairment clause.

Superior to and mayoverride Constitutionalimpairment provisionbecause the welfare ofthe State is superior to

any private contract11. As to limitation Constraints by

Constitutional andInherent limitations

Limited by the demandfor public interest anddue process

Bounded by publicpurpose and justcompensation

[Valencia and Roxas, Income Taxation 6 th Edition (2013-2014), Valencia Educational Supply, pp. 9-10]


6/216


PURPOSE OF TAXATION1. Revenue-raisingPrimary purpose of taxation is to provide fundsor property with which to promote the general

welfare and protection it its citizens.

2. Non-revenue/Special or RegulatoryTaxation is often employed as a device forregulation by means of which certain effects orconditions envisioned by governments may beachieved. These regulatory purposes are alsoknown as Sumptuary .

PRINCIPLES OF SOUND TAX SYSTEM(1) fiscal adequacy(2) administrative feasibility(3) theoretical justice or equality

Note: The non-observance of the aboveprinciples will not necessarily render the taximposed invalid except to the extent thosespecific constitutional limitations are violated.(De Leon)

THEORY AND BASIS OF TAXATION

Lifeblood TheoryTaxes are the lifeblood of the government andtheir prompt and certain availability is animperious need. [CIR v. Pineda]

Necessity TheoryThe power of taxation proceeds upon theorythat the existence of government is a necessity;that is cannot continue without means to payits expenses; and that for those means it hasthe right to compel all citizens and property

within its limits to contribute.

Benefits-Protection Theory (SymbioticRelationship)This principle serves as the basis of taxationand is founded on the reciprocal duties ofprotection and support between the State andits inhabitants.

Jurisdiction Over Subject and ObjectsThe limited powers of sovereignty are confinedto objects within the respective spheres of

governmental control. These objects are theproper subjects or objects of taxation and noneelse.

DOCTRINES IN TAXATIONProspectivity of Tax LawsGeneral rule - Tax laws are prospective inoperation. Reason: Nature and amount of thetax could not be foreseen and understood bythe taxpayer at the time the transaction.Exception - Tax laws may be applied

retroactively provided it is expressly declaredor clearly the legislative intent.(e.g increasetaxes on income already earned)when retroactive application would be soharsh and oppressive [Republic v. Fernandez,G.R. No. L-9141. September 25, 1956]. Exception to the exception - Collection ofinterest in tax cases is not penal in nature; it isbut a just compensation to the State. Theconstitutional prohibition against ex post factolaws is not applicable to the collection ofinterest on back taxes. [Central Azucarerav.CTA]

Non-retroactivity of Rulings (sec. 246)General rule - Any revocation, modification orreversal of rules and regulations promulgatedin accordance with Sections 244 and 245 ofthe Tax Code and rulings or circularspromulgated by the CIR, that is prejudicial tothe taxpayer, shall NOT be given retroactiveeffect.Exceptions:(1) Where the taxpayer deliberately misstates

or omits material facts from his return orany document required of him by BIR;

(2) Where the facts subsequently gathered bythe BIR are materially different from thefacts on which the ruling is based; OR


7/216


7

(3) Where the taxpayer acted in bad faith. (Sec.246, NIRC)

ImprescriptibilityUnless otherwise provided by the tax itself,

taxes are imprescriptible. [CIR v. AyalaSecurities Corporation]

Double TaxationMeans taxing twice the same taxpayer for thesame tax period upon the same thing oractivity, when it should be taxed but once, forthe same purpose and with the same kind ofcharacter of tax.

Constitutionality of Double Taxation

There is no constitutional prohibition againstdouble taxation in the Philippines. It issomething not favored, but is permissible,provided some other constitutionalrequirement is not thereby violated. [Villanuevav. City of Iloilo, G.R. No. L-26521, December 28,1968]

Double taxation in its narrow sense isundoubtedly unconstitutional but that in thebroader sense is not necessarily so. [De Leon,

citing 26 R.C.L 264-265]. Where doubletaxation (in its narrow sense) occurs, thetaxpayer may seek relief under the uniformityrule or the equal protection guarantee. [DeLeon, citing 84 C.J.S.138].

ESCAPE FROM TAXATIONShifting of tax burdenShifting - the transfer of the burden of a tax bythe original payer or the one on whom the taxwas assessed or imposed to someone else.What is transferred is not the payment of thetax but the burden of the tax.

All indirect taxes may be shifted; direct taxescannot be shifted.

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

concerned, the taxpayer, the subject of tax, isthe person who must pay the tax to thegovernment.

Incidence of taxation is that point on which the

tax burden finally rests or settles down. It takesplace when shifting has been effected from thestatutory taxpayer to another.

Tax Avoidance (Tax Minimization) The exploitation by the taxpayer of legallypermissible alternative tax rates or methods ofassessing taxable property or income in orderto avoid or reduce tax liability. It is politelycalled “tax minimization” and is notpunishable by law.

TransformationTransformation – method of escape in taxationwhereby the manufacturer or producer uponwhom the tax has been imposed pays the taxand endeavors to recoup himself by improvinghis process of production thereby turning outhis units of products at a lower cost. Thetaxpayer escapes by a transformation of thetax into a gain through the medium ofproduction.

Tax Evasion (Tax Dodging)Tax Evasion - is the use by the taxpayer ofillegal or fraudulent means to defeat or lessenthe payment of a tax. It is also known as “taxdodging.” It is punishable by law.

Elements of Tax Evasion(1) The end to be achieved.(2) An accompanying state of mind described

as being “evil,” “in bad faith,” “willful” or

“deliberate and not accidental.” (3) A course of action (or failure of action)which is unlawful.

EXEMPTION FROM TAXATIONNature of tax exemption(1) Mere personal privilege - cannot be

assigned or transferred without the


8/216


8

consent of the Legislature. The legislativeconsent to the transfer may be given eitherin the original act granting the exemptionor in a subsequent law

(2) General rule : revocable by the government.

Exception : if founded on a contract which isprotected from impairment. But thecontract must contain the essentialelements of other contracts. An exemptionprovided for in a franchise, however, maybe repealed or amended pursuant to theConstitution (see Sec. 11, Art. XII). Alegislative franchise is in the nature of acontract.

(3) Implies a waiver on the part of thegovernment of its right to collect taxes due

to it, and, in this sense, is prejudicialthereto. Hence, it exists only by virtue of anexpress grant and must be strictlyconstrued.

(4) Not necessarily discriminatory , provided ithas reasonable foundation or rationalbasis. Where, however, no valid distinctionexists, the exemption may be challengedas violative of the equal protection

REVOCATION OF TAX EXEMPTIONGeneral Rule - revocable by the government.Exception - Contractual tax exemptions maynot be unilaterally so revoked by the taxingauthority without thereby violating the non-impairment clause of the Constitution.

COMPENSATION AND SET-OFFGeneral Rule - Internal revenue taxes cannotbe the subject of set-off or compensation[Republic v. Mambulao Lumber, G.R. No. L-

17725, February 28, 1962]. Exception - If the claims against thegovernment have been recognized and anamount has already been appropriated for thatpurpose. Where both claims have alreadybecome due and demandable as well as fullyliquidated, compensation takes place byoperation of law under Art. 1200 in relation to

Articles 1279 and 1290 of the NCC, and bothdebts are extinguished to the concurrentamount. [Domingo v. Garlitos, G.R. No. L-18994, June 29, 1963]

COMPROMISE(a) A contract whereby the parties, by making

reciprocal concessions avoid litigation orput an end to one already commenced.(Art. 2028, Civil Code). It involves areduction of the taxpayer’s liability.

(b) Requisites of a tax compromise:(1) The taxpayer must have a tax liability.(2) There must be an offer (by the taxpayer

or Commissioner) of an amount to be

paid by the taxpayer.(3) There must be acceptance (by the

Commissioner or the taxpayer, as thecase may be) of the offer in settlementof the original claim.

TAX AMNESTYA tax amnesty partakes of an absoluteforgiveness or waiver by the Government of itsright to collect what otherwise would be due it,and in this sense, prejudicial thereto,particularly to give tax evaders, who wish torelent and are willing to reform a chance to doso and become a part of the new society with aclean slate. [Republic v. IAC (1991)]

Tax Amnesty is immunity from all criminal andcivil obligations arising from non-payment oftaxes. It is a general pardon given to alltaxpayers. It applies to past tax periods, henceof retroactive application. [People v. Castañeda,

G.R. No. L-46881, September 15, 1988].

Tax Exemption is an immunity from all civilliability only. It is an immunity or privilege, afreedom from a charge or burden of whichothers are subjected. [Greenfield v. Meer, 77 Phil. 394 (1946)] . It is generally prospective inapplication. [Dimaampao, 2005, p. 111]


9/216


9

CONSTRUCTION AND INTERPRETATIONOF:Tax LawsGeneral Rule - Tax laws are construed strictly

against the government and liberally in favorof the taxpayer. [Manila Railroad Co. v. Coll. ofCustoms, 52 Phil. 950 (1929)] .Exceptions(1) The rule of strict construction as against

the government is not applicable wherethe language of the statute is plain andthere is no doubt as to the legislative intent.(see 51 Am.Jur.368). In such case, thewords employed are to be given theirordinary meaning. Ex. Word “individual”

was changed by the law to “person”. Thisclearly indicates that the tax applies toboth natural and juridical persons, unlessotherwise expressly provided.

(2) The rule does not apply where the taxpayerclaims exemption from the tax.

Tax Exemption and ExclusionGeneral Rule - In the construction of taxstatutes, exemptions are not favored and areconstrued strictissimi juris against the taxpayer.

[Republic Flour Mills v. Comm. & CTA, 31 SCRA520 (1970)]. Exceptions:(a) When the law itself expressly provides for a

liberal construction, that is, in case ofdoubt, it shall be resolved in favor ofexemption; and

(b) When the exemption is in favor of thegovernment itself or its agencies, or ofreligious, charitable, and educationalinstitutions because the general rule is thatthey are exempt from tax.

(c) When the exemption is granted underspecial circumstances to special classes ofpersons.

(d) If there is an express mention or if thetaxpayer falls within the purview of theexemption by clear legislative intent, the

rule on strict construction does not apply.[Comm. V. Arnoldus Carpentry Shop, Inc.,159 SCRA 19 (1988)].

Tax Rules and RegulationsThe Secretary of Finance, uponrecommendation of the CIR, shall promulgateall needful rules and regulations for theeffective enforcement of the provisions of theNIRC. (Sec. 244 )

The power to interpret the provisions of the TaxCode and other tax laws is under the exclusiveand original jurisdiction of the Commissionerof Internal Revenue subject to review by theSecretary of Finance ( Sec. 4 , par.1, NIRC).

Decisions of the Supreme Court and Court ofTax AppealsDecisions of the Supreme Court applying orinterpreting existing tax laws are binding on allsubordinate courts and have the force andeffect of law. As provided for in Article 8 of theCivil Code, they “form part of the law of theland”. They constitute evidence of what thelaw means. (People v. Licera, 65 SCRA 270

[1975]).

Penal Provisions Of Tax LawsPenal provisions of tax laws must be strictlyconstrued. It is not legitimate to stretch thelanguage of a rule, however beneficent itsintention, beyond the fair and ordinarymeaning of its language.

Non-Retroactive Application Of Tax Laws ToTaxpayers

General rule - Tax laws are prospective inoperation. The reason is that the nature andamount of the tax could not be foreseen andunderstood by the taxpayer at the time thetransaction which the law seeks to tax wascompleted.


10/216


10

Exception - Tax laws may be appliedretroactively provided it is expressly declaredor clearly the legislative intent. (Lorenzo v.Posadas, 64 Phil. 353 [1937]).

Exception to the Exception - a tax law shouldnot be given retroactive application when itwould be so harsh and oppressive for in suchcase, the constitutional limitation of dueprocess would be violated (Republic v.Fernandez,[1956]).

SCOPE AND LIMITATION OFTAXATIONInherent Limitations1. Public Purpose The proceeds of the tax must be used (a) forthe support of the State or (b) for somerecognized objects of government or directly topromote the welfare of the community.

2. Inherently LegislativeStated in another way, taxation mayexceptionally be delegated, subject to suchwell-settled limitations as – (1) The delegation shall not contravene any

constitutional provision or the inherentlimitations of taxation;

(2) The delegation is effected either by theConstitution or by validly enactedlegislative measures or statute; and

(3) The delegated levy power, except whenthe delegation is by an express provisionof the Constitution itself, should only be infavor of the local legislative body of thelocal or municipal government concerned.[Vitug and Acosta]

General Rule - Delegata potestas non potestdelegari. The power to tax is exclusively vestedin the legislative body and it may not be re-delegated.Exceptions(1) Delegation to local governments - Under

the new Constitution, however, LGUs are

now expressly given the power to create itsown sources of revenue and to levy taxes,fees and charges, subject to suchguidelines and limitations as the Congressmay provide which must be consistent with

the basic policy of local autonomy. [Art X,Sec 5, 1987 Constitution]

(2) Delegation to the President(a) to enter into Executive agreements,

and(b) to ratify treaties which grant tax

exemption subject to Senateconcurrence.

(c) The Congress may, by law, authorizethe President to fix within specified

limits, and subject to such limitationsand restrictions as it may impose, tariffrates, import and export quotas,tonnage and wharfage dues, and otherduties or imposts within the frameworkof the national development programof the Government. [Art. 6, Sec. 28 (2),1987 Consti]

(3) Delegation to administrative agencies -Limited to the administrative

implementation that calls for some degreeof discretionary powers under sufficientstandards expressed by law or impliedfrom the policy and purposes of the Act.

3. TerritorialRule - A state may not tax property lyingoutside its borders or lay an excise or privilegetax upon the exercise or enjoyment of a right orprivilege derived from the laws of another stateand therein exercise and enjoyed. (51 Am.Jur.87-88).

4. International Comity Comity - respect accorded by nations to eachother because they are sovereign equals. Thus,the property or income of a foreign state orgovernment may not be the subject of taxationby another state.


11/216


11

Exemption of Government Entities, Agencies,and Instrumentalities

(a) If the taxing authority is the NationalGovernment:

General Rule - Agencies andinstrumentalities of the governmentare exempt from tax.Exception - When it chooses to taxitself. Nothing can prevent Congressfrom decreeing that eveninstrumentalities or agencies of thegovernment performing governmentalfunctions may be subject to tax.(Mactan Cebu Airport v Marcos, 1996)

(b) If the taxing authority is the localgovernment unit:RA 7160 expressly prohibits LGUs fromlevying tax on the NationalGovernment, its agencies andinstrumentalities and other LGUs.

(c) Situs of TaxationWithin the territorial jurisdiction, thetaxing authority may determine thesitus. Situs of taxation literally means

the place of taxation. The basic rule isthat the state where the subject to betaxed has a situs may rightfully levyand collect the tax; and the situs isnecessarily in the state which has jurisdiction or which exercisesdominion over the subject in question.

Kind of Tax SitusProperty Tax

Real property Where it is located

(lexreisitae)TangiblePersonalproperty

Where property is physicallylocated although the ownerresides in another jurisdiction.

Intangiblepersonalproperty(e.g., credits,bills

receivables,bankdeposits,bonds,promissorynotes,mortgageloans, judgmentsandcorporate

stocks)

Gen Rule: Domicile of theowner. Mobilia sequunturpersonam (movables followthe person)

Exceptions:(1) When property hasacquired a business situsin another jurisdiction; or

(2) When the law provides forthe situs of the subject oftax (e.g., Sec 104, NIRC)

Excise TaxIncome Source of the income,

nationality or residence oftaxpayer (Sec. 23, NIRC)

Donor’s Tax Location of property;nationality or residence oftaxpayer

Estate Location of property;nationality or residence oftaxpayer

VAT Where transaction is madeOthers

Poll,Capitation orCommunityTax

Residence of taxpayer,regardless of the source ofincome or location of theproperty of the taxpayer


12/216


12

CONSTITUTIONAL LIMITATIONS(1) Prohibition against imprisonment for non-

payment of poll tax (Art III, Sec 20, 1987Constitution)

(2) Uniformity and equality of taxation (Art VI,Sec 28(1), 1987 Constitution)

(3) Taxation does not require identity orequality under all circumstances, or negatethe authority to classify the objects oftaxation

(4) Grant by Congress of authority to thePresident to impose tariff rates Delegationof Tariff powers to the President under the

flexible tariff clause [Art VI, Sec 28(2), 1987Constitution] , which authorizes thePresident to modify import duties. (Sec. 401,Tariff and Customs Code)

(5) Prohibition against taxation of religious,charitable entities, and educational entities(Art VI, Sec 28(3), 1987 Constitution) The taxexemption under this constitutionalprovision covers property taxes only andnot other taxes (Lladoc v. Commissioner, 14SCRA 292 [1965]).

Test ofExemption

Use of the property, and notthe ownership

Nature of UseActual, direct and exclusiveuse for religious, charitable oreducational purposes.

Scope ofExemption

Real property taxes onfacilities which are(1) actual,

(2) incidental to, or(3) reasonably necessary forthe accomplishment ofsaid purposes such as inthe case of hospitals, aschool for training nurses,a nurses’ home, property toprovide housing facilities

for interns, resident doctorsand other members of thehospital staff, andrecreational facilities forstudent nurses, interns and

residents, such as athleticfields. [ Abra Valley Collegev. Aquino ]

Prohibition against taxation of non-stock, non-profit educational institutions ( ART XIV, SEC 4, 1987 CONSTITUTION) This provision covers only non-stock, non-profiteducational institutions

Lands, buildings, and improvements actually,

directly and exclusively used for educationalpurposes are exempt from property tax ( Sec. 28[3], Art. VI, 1987 Constitution), whether theeducational institution is proprietary or non-profit.

Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3Charitable institutions,churches andparsonages orconvents appurtenant

thereto, mosques, non-profit cemeteries, andall lands, buildings,and improvements,actually, directly, andexclusively used forreligious, charitable, oreducational purposes.

Non-stock, non-profit educationalinstitutions.

Property taxes Income, property,and donor’s taxesand custom duties.

(6) Majority vote of Congress for grant of taxexemption (Art VI, Sec 28, 1987 Constitution)

Exemptions may be created by: (1) the Constitution or(2) statute subject to constitutional limitations


13/216


13

Note:(1) The LGU shall have the authority to grant

local tax exemption privileges. ( Sec. 192 ,LGC)

(2) The President may, when public interest so

requires, condone or reduce real propertytaxes and interest. ( Sec. 277 , LGC)

(7) Prohibition on use of tax levied for specialpurposeAll money collected on any tax levied for aspecial purpose shall be treated as a specialfund and paid out for such purpose only.

8) President’s veto power on appr opriation,revenue, tariff bills (Art VI, Sec 27(2), 1987

Constitution)

(9) Non-impairment of jurisdiction of theSupreme Court (Art VIII, Sec 2; Art VIII, Sec5(2,B); Art VI, Sec 30, 1987 Constitution)

(10) Grant of power to the local governmentunits to create its own sources of revenue [ Art X,Sec 5, 1987 Constitution ]

(11) Flexible tariff clauseDelegation of Tariff powers to the Presidentunder the flexible tariff clause [ Art VI, Sec 28(2), 1987 Constitution ]

Flexible tariff clause: the authority given to thePresident, upon the recommendation of NEDA,to adjust the tariff rates under Sec. 401 of theCode in the interest of national economy,general welfare and/or national security.

(12) Exemption from real property taxes (Art VI,Sec 28(3), 1987 Constitution)

(13) No appropriation or use of public money forreligious purposes (Art VI, Sec 29, 1987Constitution)

PROVISIONS INDIRECTLY AFFECTING TAXATION

(1) Due process (Art III, Sec 1, 1987 Constitution)

(2) Equal protection (Art III, Sec 1, 1987Constitution)

(3) Religious freedom (Art III, Sec 5, 1987Constitution ) The Constitution, however, does not prohibitimposing a generally applicable tax on the saleof religious materials by a religiousorganization. ( Tolentino v. Secretary of Finance, 235 SCRA 630 [1994] )

(4)Non-impairment of obligations of contracts(ART III, SEC 10, 1987 CONSTITUTION)

The Contract Clause has never been thought asa limitation on the exercise of the State'spower of taxation save only where a taxexemption has been granted for a validconsideration. [ Tolentino v. Secretary ofFinance ]

STAGES OR PROCESS OF TAXATIONThe exercise of taxation involves three stages,namely: (1) Levy Or Imposition – This process involves

the passage of tax laws or ordinancesthrough the legislature.

(2) Assessment And Collection – This processinvolves the act of administration andimplementation of tax laws by the executivethrough its administrative agencies such asthe Bureau of Internal Revenue or Bureau ofCustoms.

(3) Payment – this process involves the act ofcompliance by the taxpayer in contributinghis share to pay the expenses of thegovernment.

(4) Refund – A claim for refund must first befiled with the Commissioner of InternalRevenue.

REQUISITES OF A VALID TAX LAW


14/216


14

(1) for a public purpose (2) rule of taxation should be uniform (3) the person or property taxed is within the

jurisdiction of the taxing authority (4) assessment and collection is in consonance

with the due process clause (5) The tax must not infringe on the inherentand constitutional limitations of the powerof taxation

TAX AS DISTINGUISHED FROMOTHER FORMS OF EXACTIONSTariff

Taxes Tariff

All embracing term toinclude various kindsof enforcedcontributions uponpersons for theattainment of publicpurposes

A kind of tax imposedon articles which aretraded internationally

Toll

Taxes Toll

Paid for the supportof the government

Paid for the use ofanother’s property.

Demand ofsovereignty

Demand ofproprietorship

Generally, no limit onthe amount collectedas long as it is notexcessive,unreasonable or

confiscatory

Amount paiddepends upon thecost of constructionor maintenance of thepublic improvement

used.Imposed only by thegovernment

Imposed by thegovernment or byprivate individuals orentities.

License Fee

Taxes License andRegulatory Fee

Imposed under thetaxing power of thestate for purposes of

revenue.

Levied under thepolice power of thestate.

Forced contributionsfor the purpose ofmaintaininggovernmentfunctions.

Exacted primarily toregulate certainbusinesses oroccupations.

Generally, unlimitedas to amount

Should notunreasonably exceedthe expenses ofissuing the licenseand of supervision.

Imposed on persons,property and toexercise a privilege.

Imposed only on theright to exercise aprivilege

Failure to pay doesnot necessarily makethe act or businessillegal.

Penalty for non-payment: surchargesor imprisonment(except poll tax).

Failure to pay makesthe act or businessillegal.

Special Assessment

Taxes Special Assessment

Levied not only onland.

Levied only on land.

Imposed regardlessof public

improvements

Imposed because ofan increase in value

of land benefited bypublic improvement.Contribution of ataxpayer for thesupport of thegovernment.

Contribution of aperson for theconstruction of apublic improvement

It has generalapplication both as to

Exceptional both asto time and locality.


15/216


15

Taxes Special Assessment

time and place.

Debt

Taxes Debt

Based on laws Generally based oncontract, express orimplied.

Generally cannot beassigned

Assignable

Generally paid inmoney

May be paid in kind.

Cannot be a subjectof set off orcompensation

Can be a subject ofset off orcompensation (seeArt. 1279, Civil Code)

A person cannot beimprisoned for non-payment of debt(except when it arisesfrom a crime),

Imprisonment is asanction for non-payment of tax,except poll tax.

Governed by thespecial prescriptiveperiods provided forin the NIRC.

Governed by theordinary periods ofprescription.

Does not drawinterest except onlywhen delinquent

Draws interest whenit is so stipulated orwhere there isdefault.

Imposed only bypublic authority

Can be imposed byprivate individual

Penalty

Taxes Penalty

Violation of tax lawsmay give rise toimposition of penalty.

Any sanction imposedas a punishment forviolation of law or

acts deemed injuriousGenerally intended toraise revenue

Designed to regulateconduct

May be imposed onlyby the government

May be imposed bythe government or

private individuals orentities

Cannot be a subjectof set off orcompensation

Can be a subject ofset off orcompensation (seeArt. 1279, Civil Code)

KINDS OF TAXESAs To Object(1) Personal, Poll or Capitation Tax – tax of a

fixed amount imposed on persons residingwithin a specified territory, whether citizensor not, without regard to their property orthe occupation or business in which theymay be engaged (e.g. community (formerlyresidence) tax).

(2) Property Tax – tax imposed on property, realor personal, in proportion to its value or inaccordance with some other reasonablemethod of apportionment (e.g., real estatetax).

(3) Privilege/Excise Tax – any tax which doesnot fall within the classification of a poll taxor a property tax. Thus, it is said that anexcise tax is a charge imposed upon theperformance of an act, the enjoyment of aprivilege, or the engaging in an occupation,profession, or business. (e.g., income tax,value added tax, estate tax, donor’s tax).

As To Burden Or Incidence(1) Direct Taxes – taxes which are demanded

from persons who also shoulder them; taxesfor which the taxpayer is directly orprimarily liable, or which he cannot shift toanother (eg. Income tax, estate tax, donor’stax, community tax)

(2) Indirect Taxes – taxes which are demandedfrom one person in the expectation and


16/216


16

intention that he shall indemnify himself atthe expense of another, falling finally uponthe ultimate purchaser or consumer; taxeslevied upon transactions or activities beforethe articles subject matter thereof, reach

the consumers who ultimately pay for themnot as taxes but as part of the purchaseprice. (e.g., VAT, percentage tax; excisetaxes on specified goods; customs duties).

As To Tax Rates(1) Specific Tax – a tax of a fixed amount

imposed by the head or number or by someother standard of weight or measurement(e.g., taxes on distilled spirits, wines, andfermented liquors; cigars and cigarettes)

(2) Ad Valorem Tax – a tax of a fixed proportionof the value of the property with respect towhich the tax is assessed (e.g. real estatetax, excise tax on automobiles, non-essential goods such as jewelry andperfumes, customs duties (except oncinematographic films)).

(3) Mixed

As To Purposes(1) General or Fiscal Tax –levied for the general

or ordinary purposes of the Government(e.g. income tax, value added tax, andalmost all taxes).

(2) Special/Regulatory/ Sumptuary Tax –leviedfor special purposes (e.g. protective tariffsor customs duties on imported goods toenable similar products manufacturedlocally to compete with such imports in thedomestic market).

As To Scope (Or Authority Imposing TheTax)(1) National – taxes imposed by the national

government (e.g. national internal revenuetaxes, customs duties, and national taxes

imposed by laws). (2) Municipal or Local – taxes imposed by local

governments (e.g. business taxes that maybe imposed under the Local GovernmentCode; professional tax).

As To Graduation(1) Proportionate – The rate of tax is based on a

fixed percentage of the amount of theproperty, receipts or other basis to be taxed.Example: real estate tax, value added tax,and other percentage taxes.

(2) Progressive – The rate of tax increases asthe tax base or bracket increases.Example: income tax, estate tax, donor’s tax.

(3) Digressive – A fixed rate is imposed on acertain amount and diminishes gradually onsums below it. The tax rate in this case isarbitrary because the increase in tax rate isnot proportionate to the increase of taxbase.

(4) Regressive – The rate of tax decreases as thetax base or bracket increases. There is noregressive tax in the Philippines.

Regressive/Progressive System Of Taxation(1) A regressive tax, must not be confused

with regressive system of taxation.(2) A progressive tax is also different from

a progressive system of taxation.


17/216


17

II. National InternalRevenue Code of 1997 asamended (NIRC)

Income Tax is defined as a tax on all yearlyprofits arising from property, professions,trades, or offices, or as a tax on the person’sincome, emoluments, profits and the like(Fisher v. Trinidad, 43 Phil. 981).

INCOME TAX SYSTEMS

Global Tax System

Under a global tax system, it did not matterwhether the income received by the taxpayer isclassified as compensation income, business orprofessional income, passive investmentincome, capital gain, or other income. All itemsof gross income, deductions, and personal andadditional exemptions, if any, are reported inone income tax return, and one set of tax ratesare applied on the tax base.

Schedular Tax SystemDifferent types of incomes are subject todifferent sets of graduated or flat income taxrates. The applicable tax rate(s) will depend onthe classification of the taxable income and thebasis could be gross income or net income.Separate income tax returns (or other types ofreturn applicable) are filed by the recipient ofincome for the particular types of incomereceived.

Semi-Schedular Or Semi-Global TaxSystemAll compensation income, business orprofessional income, capital gain and passiveincome not subject to final tax, and otherincome are added together to arrive at thegross income, and after deducting the sum ofallowable deductions, the taxable income is

subjected to one set of graduated tax rates ornormal corporate income tax. With respect tosuch income the computation is global.For those other income not mentioned above,they remain subject to different sets of tax

rates and covered by different returns.

Note: The Philippines, under EO 37 (1986) andRA 8424 (1998), follows a semi-schedular andsemi-global tax system.

FEATURES OF THE PHILIPPINEINCOME TAX LAW

1. DIRECT TAXThe tax burden is borne bythe income recipient upon whom thetax is imposed.

2. PROGRESSIVE The tax rate increases asthe tax base increases. It is founded onthe ability to pay principle and isconsistent with Sec. 28, Art. VI, 1987Constitution.

3. COMPREHENSIVE The Philippines hasadopted the most comprehensivesystem of imposing income tax byadopting the citizenship principle, theresidence principle, and the sourceprinciple.

4. SEMI-SCHEDULAR OR SEMI-GLOBAL TAXSYSTEM The Philippines follows thesemi-schedular or semi-global systemof income taxation

5. NATIONAL TAX It is imposed andcollected by the National Governmentthroughout the country.

6. EXCISE TAXIt is imposed on the right orprivilege of a person to receive or earnincome. It is not a personal tax or a

property tax.

CRITERIA IN IMPOSING PHILIPPINEINCOME TAXCitizenship or Nationality PrincipleA citizen of the Philippines is subject toPhilippine income tax


18/216


18

(a) on his worldwide income, if he resides in thePhilippines; or

(b) only on his income from sources within thePhilippines, if he qualifies as a nonresidentcitizen.

Residence PrincipleA resident alien is liable to pay Philippineincome tax on his income from sources withinthe Philippines but is exempt from tax on hisincome from sources outside the Philippines.

Source of Income PrincipleAn alien is subject to Philippine income taxbecause he derives income from sources withinthe Philippines. Thus, a non-resident alien ornon-resident foreign corporation is liable topay Philippine income tax on income fromsources within the Philippines, such asdividend interest, rent, or royalty, despite thefact that he has not set foot in the Philippines.

TYPES OF PHILIPPINE INCOME TAX(1) Graduated income tax on individuals(2) Normal corporate income tax on

corporations

(3)

Minimum corporate income tax oncorporations(4) Special income tax on certain corporations(5) Capital gains tax on sale or exchange of

shares of stock of a domestic corp.classified as capital assets

(6) Capital gains tax on sale or exchange ofreal property classified as capital asset

(7) Final withholding tax on certain passiveinvestment income paid to residents

(8) Final withholding tax on income payments

made to non-residents(9) Fringe benefits tax on fringe benefits of

supervisory or managerial employees(10) Branch profit remittance tax(11) Tax on improperly accumulated earnings

of corporations

TAXABLE PERIODThe accounting periods used in determiningthe taxable income of taxpayers are:(a) Calendar Year - Accounting period of 12

months ending on the last day of December

(b) Fiscal Year - Accounting period of 12 monthsending on the last day of any month otherthan December ( Sec. 22(Q), NIRC ).

(c) Short Period- Accounting period whichstarts after the first month of the tax year orends before the last month of the tax year(less than 12 months).

Instances Whereby Short AccountingPeriod Arises(a) When a corporation is newly organized.(b) When a corporation is dissolved.(c) When a corporation changes accounting

period.(d) When the taxpayer dies.

When Calendar Year Shall Be Used InComputing Taxable Income:(a) If the taxpayer's annual accounting period is

other than a fiscal year; or(b) If the taxpayer has no annual accounting

period; or(c) If the taxpayer does not keep books ofaccounts; or

(d) If the taxpayer is an individual ( Sec. 43,NIRC ).


19/216


19

KINDS OF TAXPAYERS Taxpayer - any person subject to tax imposedby Title II of the Tax Code ( Sec. 22(N), NIRC ).Person- means an individual, a trust, estate orcorporation ( Sec. 22(A), NIRC ).

For income tax purposes, taxpayers areclassified generally as follows:(4) Individuals;(5) Corporations;(6) Partnerships; and(7) Estates and Trusts.

PrimaryClassification

Sub-Classification(s)

Individuals

Citizensof thePhilippines

Residents citizens

Non-residentcitizens

Aliens

Residents

Non-residents

Engagedin TradeorBusinessin thePhilippinesNotEngagedin TradeorBusinessin thePhilippines

Special

Classes ofIndividuals

Minimum WageEarner

Corporations

Domestic Corporations

ForeignCorporations

ResidentCorporationsNon-residentCorporations

Estates andTrusts

PartnershipsGeneral Business PartnershipGeneral Professional Partnership

Co-

ownerships

Individual TaxpayersCitizens(2) Resident Citizens (RC)(3) Non-resident Citizens (NRC)

(a) Citizen of the Philippines whoestablishes to the satisfaction of theCommissioner the fact of his physicalpresence abroad with a definite intentionto reside therein.

(b) Citizen who leaves the Philippines duringthe taxable year to reside abroad, eitheras an immigrant or for employment on apermanent basis.

(c) Citizen of the Philippines who works andderives income from abroad and whoseemployment thereat requires him to bephysically present abroad most of thetime during the taxable year.

(d) Citizen previously considered as non-resident citizen and who arrives in thePhilippines at any time during thetaxable year to reside permanently in thePhilippines Treated as NRC withrespect to his income derived fromsources abroad until the date of hisarrival in the Philippines

Aliens(1) Resident Alien - An alien actually present in

the Philippines who is not a mere transient

or sojourner is a resident for income taxpurposes.

No/Indefinite Intention = RESIDENTDefinite Intention = TRANSIENT:Exception : Definite Intention but such cannotbe promptly accomplished, then he becomesa resident.


20/216


20

(2) Non-resident Alien - Engaged in trade orbusiness within the Philippines - If theaggregate period of his stay in thePhilippines is more than 180 days during

any calendar year.

Not engaged in trade or business within thePhilippines - If the aggregate period of hisstay in the Philippines does not exceed 180days.

Special class of individual employeesMinimum Wage Earner(a) A worker in the private sector paid the

statutory minimum wage;

(b) An employee in the public sector withcompensation income of not more than thestatutory minimum wage in the non-agricultural sector where he/she is assigned.

CorporationsIncludes all types of corporations, partnerships(no matter how created or organized), jointstock companies, joint accounts, associations,or insurance companies, whether or notregistered with the SEC.

Excludes general professional partnerships(GPP), joint venture or consortium formed forthe purpose of undertaking constructionprojects, joint venture or consortium engagingin petroleum, coal, geothermal and otherenergy operations pursuant to an operating orconsortium agreement under a service contractwith the government.

(1) Domestic corporations – A corporationcreated and organized under its laws (thelaw of incorporation test).

(2) Foreign corporations – A corporation whichis not domestic.

(a) Resident foreign corporations – Foreign

corporation engaged in trade or businesswithin the Philippines.

Doing business – The term implies acontinuity of commercial dealings and

arrangements, and contemplates, to thatextent, the performance of acts or works orthe exercise of some of the functions normallyincident to, and in progressive prosecution ofcommercial gain or for the purpose andobject of the business organization. (RA 7042,Foreign Investments Act)

In order that a foreign corporation may beregarded 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 (CIR v.BOAC)

(b) Non-resident foreign corporations – Foreign corporation not engaged in trade orbusiness within the Philippines

(3) Joint venture and consortium – Essentialfactors of a joint venture or consortium:

(a) Each party must make a contribution,not necessarily of capital but by way ofservices, skill, knowledge, material ormoney;

(b) Profits must be shared among theparties;

(c) There must be a joint proprietary interestand right of mutual control over thesubject matter of the enterprise;

(d) There is a single business transaction.

PartnershipThe Tax Code mandates that every other typeof business partnership is subject to incometax in the same manner and at the same rateas an ordinary corporation.

General Professional Partnerships (GPP)


21/216


21

A general professional partnership is apartnership formed by persons for the solepurpose of exercising their common profession,no part of the income of which is derived fromengaging in any trade or business.

Not considered as a taxable entity for incometax purposes. The partners themselves areliable, not the partnership, are liable for thepayment of income tax in their individualcapacities.

Estates and TrustsTaxable estates and trusts are taxed in thesame manner and on the same basis as anindividual. EXCEPT for the exemption: 20,000

for estates and trusts, 50,000 for individuals.

Co-ownershipFor income tax purposes, the co-owners in aco-ownership report their share of the incomefrom the property owned in common by themin their individual tax returns for the year andthe co-ownership is not considered as aseparate taxable entity or a corporation.

INCOME TAXATION

Income Tax is defined as a tax on all yearlyprofits arising from property, professions,trades, or offices, or as a tax on the person’s

income, emoluments, profits and the like(Fisher v. Trinidad ).

General Principles(1) A resident citizen of the Philippines is

taxable on all income derived from sourceswithin and without the Philippines;

(2) A nonresident citizen is taxable only onincome derived from sources within thePhilippines;

(3) An individual citizen of the Philippines whois working and deriving income from abroadas an overseas contract worker is taxableonly on income derived from sources withinthe Philippines:

Provided, That a seaman shall be treated as anoverseas contract worker if he is a:(1) citizen of the Philippines; and (2) receives compensation for services rendered

abroad as a member of the complement ofa vessel engaged exclusively ininternational trade

(1) An alien individual, whether a resident ornot of the Philippines, is taxable only onincome derived from sources within thePhilippines;

(2) A domestic corporation is taxable on allincome derived from sources within andwithout the Philippines; and

(3) A foreign corporation, whether engaged or

not in trade or business in the Philippines, istaxable only on income derived fromsources within the Philippines. ( Sec. 23 )

Taxpayer Within WithoutResident CitizenNon-resident Citizen andOCW

X


22/216


22

Resident and Non-residentAlien

X

Domestic CorporationForeign Corporation X

INCOMEIncome means all wealth which flows to thetaxpayer other than a mere return of capital. Itincludes gain derived from the sale or otherdisposition of capital assets. Income is a gainderived from labor or capital, or both labor andcapital; and includes the gain derived from thesale or exchange of capital assets.

When Income is Taxable

Existence of taxable income(1) There is INCOME, gain or profit(2) RECEIVED or REALIZED during the taxable

year(3) NOT EXEMPT from income tax

When is there INCOME?When there is a FLOW of wealth other thanmere return of capital during the taxableperiod.

Income v. Capital (Madrigal v. Rafferty)

Income Capital

Denotes a flow ofwealth during adefinite period oftime.

Fund or propertyexisting at onedistinct point in time.

Service of wealth Wealth itselfSubject to tax Return of capital is

not subject to taxFruit Tree

Realization of IncomeActual vis-à-vis Constructive receipt

(1) Actual receipt – Income is actually reducedto possession. The realization of gain maytake the form of actual receipt of cash.

(2) Constructive receipt – An income isconsidered constructively received when it is

credited to the account of, or segregated infavour of a person. Examples ofconstructive receipt of income are:(a) Interest credited on savings bank deposit(b) Matured interest coupons not yet

collected by the taxpayer(c) Dividends applied by the corporation

against the indebtedness of astockholder

(d) Share in the profit of a partner in ageneral professional partnership,

although not yet distributed, is regardedas constructively received; or

(e) Intended payment deposited in court(consignation).

Recognition of Income. Methods of accountingin reporting income and expenses

Cash method vis-à-vis Accrual method – Cashmethod generally reports income upon cashcollection and reports expenses upon payment.If earned from rendering of services, income isto be reported in the year when collected,whether earned or unearned. ( Sec. 108, NIRC).

Accrual method generally reports income whenearned and reports expense when incurred. Ifearned from sale of goods, income is to bereported in the year of sale, irrespective ofcollection. ( Sec. 106 , NIRC).

Income realized pertains to the accrual basis ofaccounting , when recognition of income in thebooks is when it is realized and expenses arerecognized when incurred. It is the right toreceive and not the actual receipt thatdetermines the inclusion of the amount ingross income


23/216


23

Examples:(1) interest or rent income earned but not yet

received(2) rent expense accrued but not yet paid(3) wages due to workers but remaining unpaid

Installment method vis-à-vis Deferred methodvis-à-vis Percentage of completion method (inlong- term contracts) Installment Method is a special method ofaccounting whereby income on installmentsales of property during the year is allowed tobe reported in installments in proportion to theinstallment payments actually received in thatyear, which the gross profit realized or to berealized when payment is completed, bears to

the total contract price ( Sec. 49, NIRC).

Income may be reported on the installmentbasis in the following cases:(1) Sales of personal property by a dealer(2) Sales of real property (inventory) and casual

sales of personalty(3) Sales of real property considered as capital

asset by individuals

Change from accrual to installment basisA taxpayer entitled to the benefits of a dealerin personal property may elect for any taxableyear to report his taxable income on theinstallment basis. In computing his income forthe year of change or any subsequent year,amounts actually received during any suchyear on account of sales or other dispositionsof property made in any prior year shall not beexcluded. [ see Sec. 49(D), NIRC ].

Deferred Payment(a) If the initial payments exceed 25% of the

selling price, the gain realized may bereported on a deferred payment method.

(b) The taxable gain or income returnableduring the year of sale is the differencebetween the selling or contract price andthe cost of the property, even though the

entire purchase price has not been actuallyreceived in the year of sale.

(c) The obligations of the purchaser received bythe vendor are to be considered asequivalent of cash.

Personal Property Real Property

DealerDealer in personalproperty whoregularly sells ininstallment plan:Installment method

*held as ordinaryasset regardless ofamount of percentage of initial payments

Installmentmethod; Provided,initial payments donot exceed 25% ofselling price

If exceeds 25%--Deferred paymentmethod

*held as inventory Casual Sale

Installmentmethod; Provided:

(1) Selling priceexceedsPhp1,000

(2) Initialpayments do not exceed 25% ofselling price

If either of 2 or bothconditions notmet —Deferredpayment method

*personal propertynot consideredinventory

Sale by IndividualsInstallmentmethod; Provided,initial payments do


24/216


24

not exceed 25% ofselling price

*held as capitalasset

Percentage Of Completion (In Long-TermContracts)Income from long-term construction contractsrefers to the earnings derived fromconstruction of a building, installation or otherconstruction contract usually covering a periodin excess of one year. When income is derivedfrom long-term construction contracts, it isgenerally reported on the basis of percentageof completion made every year that will be

evidence by the certificates of engineers orarchitects. The reportable income is calculatedby deducting from the contract price the actualcost of construction.

In recognizing realized revenue for long-termconstruction contracts, accountants usuallyfollow two methods:(a) Completed contract method – requires

recognition of revenue only when thecontract is finally completed; and

(b) Percentage of completion method – requiresrecognition of income based on theprogress of work.

Long-term contracts are no longer allowedto be reported based on the completedcontract method basis beginning January 1,1998 pursuant to RA 8424; hence, all long-term contracts must be reported using thepercentage of completion method.

Tests in determining whether income is earnedfor tax purposes(1) Realization test – no taxable income until

there is a separation from capital ofsomething of exchangeable value, therebysupplying the realization or transmutation

which would result in the receipt of income(Eisner v Macomber ).

(2) Claim of right doctrine (or Doctrine ofOwnership, command, or control) – ataxable gain is conditioned upon the

presence of a claim of right to the allegedgain and the absence of a definiteunconditional obligation to return or repaythat which would otherwise constitute again..

(3) Economic benefit test, Doctrine ofProprietary Interest – any economic benefitto the employee that increases his networth, whatever may have been the modeby which it is effected, is taxable.

(4) Severance Test - Under the doctrine of

severance test of income, in order thatincome may exist, is necessary that therebe a separation from capital of somethingof exchangeable value. The incomerequired a realization of gain.

(5) All Events Test - Under the accrual methodof accounting, expenses are deductible inthe taxable year in which: (1) all eventshave occurred which determine theliability; and (2) the amount of liability canbe determined with reasonable accuracy.


25/216


25

GROSS INCOME Gross Income means the pertinent items ofincome referred to in Section 32(A) of the TaxCode. It includes all income derived fromwhatever source (unless exempt from tax by

law), including, but not limited to, thefollowing items(1) Gross income derived from the conduct of

Trade or business or the exercise of a profession

(2) Rents (3) Interests (4) Prizes and winnings(5) Compensation for services in whatever form

paid, including, but not limited to fees,salaries, wages, commissions, and similaritems

(6) Annuities (7) Royalties (8) Dividends (9) Gains derived from dealings in property (10) Pensions (11) P artner’s distributive share from the net

income of the general professionalpartnership (GPP) [ Sec 32A, NIRC]

Concept of Income from Whatever SourceDerived“Income derived from whatever source” meansinclusion of all income not expressly exemptedwithin the class of taxable income under thelaws irrespective of the voluntary or involuntaryaction of the taxpayer in producing the gains,and whether derived from legal or illegalsources (i.e. gambling, extortion, smuggling,etc.)

Gross Income vis-à-vis Net Income vis-à- vis Taxable Income(a) Gross Income - means income, gain or profit

subject to tax. (b) Net Income – means gross income less

statutory deductions and/or exemptions(Sec. 31, NIRC )

(c) Taxable income – means the pertinent itemsof gross income specified in the Tax Code,less the deductions and/or personal andadditional exemptions, if any, authorized forsuch types of income by the Tax Code or

other special laws ( Sec. 31, NIRC). It issynonymous to the term “net income”[Valencia and Roxas ]

SOURCES OF INCOME SUBJECT TO TAXCompensation IncomeIncome arising from an employer-employee(ER-EE) relationship. It means allremuneration for services performed by an EEfor his ER, including the cash value of allremuneration paid in any medium other than

cash [ Sec. 78(A)], unless specifically excludedby the Tax Code.

General Rule - every form of compensationincome is taxable regardless of how it isearned, by whom it is paid, the label by whichit is designated, the basis upon which it isdetermined, or the form in which it is received.The basis upon which remuneration is paid isimmaterial. It may be paid on the basis of pieceof work, percentage of profits, hourly, weekly,monthly, or annually.Exception - The term wages does NOT includeremuneration paid:(a) For agricultural labor paid entirely in

products of the farm where the labor isperformed, or

(b) For domestic service in a private home, or(c) For casual labor not in the course of the

employer's trade or business, or(d) For services by a citizen or resident of the

Philippines for a foreign government or anint’l organization . [Sec. 78(A)]

Note : Compensation income includingovertime pay, holiday pay, night shiftdifferential pay, and hazard pay, earned byMINIMUM WAGE EARNERS (MWE) who has noother returnable income are NOT taxable and


26/216


26

not subject to withholding tax on wages [ RA9504 ]

Forms Of Compensation And How They AreAssessed

(a) Cash – If compensation is paid in cash, thefull amount received is the measure of theincome subject to tax.

(b) Medium other than money - If services arepaid for in a medium other than money thefair market value (FMV) of the thing taken inpayment is the amount to be included ascompensation subject to tax.If the services are rendered at a stipulatedprice, in the absence of evidence to the

contrary, such price will be presumed to bethe FMV of the remuneration received.

(c) Living quarters or meals -General Rule - The value to the employee ofthe living quarters and meals given by theemployer shall be added to hiscompensation subject to withholding.Exception - If living quarters/meals arefurnished to an employee for theconvenience of the employer the valueneeded NOT be included as part ofcompensation income.

(d) Facilities and privileges of a relatively smallvalue - Facilities and privileges otherwiseknown as “de minimis benefits” furnishedor offered by an employer to his employeesgenerally, are NOT considered ascompensation subject to income tax andtherefore withholding tax if such facilitiesare offered or furnished by the employermerely as means of promoting the health,goodwill, contentment, or efficiency of hisemployees.

Withholding Tax on Compensation IncomeThe income recipient (i.e., EE) is the personliable to pay the tax on income, yet to improve

the collection of compensation income of EEs,the State requires the ER to withhold the taxupon payment of the compensation income.

Fringe Benefits

Persons liable: The Employer (as a withholdingagent), whether individual, professionalpartnership or a corporation, regardless ofwhether the corporation is taxable or not, orthe government and its instrumentalities, isliable to remit the fringe benefit tax to the BIRonce fringe benefit is given to a managerial orsupervisory employee.

The fringe benefit tax (FBT) is a final tax on theemployee’s income to be withheld by the

employer. The withholding and remittance ofFBT shall be made on a calendar quarterlybasis.

Tax Rate and Tax Base(a) Tax base is based on the grossed-up

monetary value (GMV) of fringe benefits.(b) Rate is generally 32%(c) GMV is determined by dividing the actual

monetary value of the fringe benefit by 68%[100% - tax rate of 32%].

Special Cases: Recepient Of Fb Tax Rate Tax Base

NRA-NETB

25% FBTon theGMV ofFB

Monetaryvalue of FBdivided by75%

Alien individualemployed byregional or area HQs

of MNCs or by ROHsof MNCs 15% FBTon theGMV ofFB

Monetaryvalue of FBdivided by85%

Alien individualemployed by OBUsof a foreign bankestablished inPhilippines Alien individual


27/216


27

employed by aforeign servicecontractor orsubcontractorengaged in

petroleumoperations in Phils. Any of their Filipinoindividual employeesemployed andoccupying the same position as those byalien employeesabove

Employees in specialeconomic zones

Subjectto

normalrate ofFBT orspecialrates of25% or15% asprovidedabove

Monetaryvalue of FBdivided by85% or75%

Taxable And Non-Taxable Fringe BenefitsFringe Benefits NOT subject to Tax(1) Fringe benefits not considered as gross

income – (a) if it is required or necessary to the

business of employer(b) if it is for the convenience or advantage

of employer(2) Fringe Benefit that is not taxable under Sec.

32 (B) – Exclusions from Gross Income(3) Fringe benefits not subject to Fringe Benefit

Tax:(a) Fringe Benefits which are authorized andexempted from income tax under theCode or under special laws;

(b) Contributions of the employer for thebenefit of the employee for retirement,insurance and hospitalization benefitplans;

(c) Benefits given to the rank-and-fileemployees, whether granted under acollective bargaining agreement or not;and

(d) Fringe benefits granted for the

convenience of the employer;(e) De minimis benefitsDe minimis benefits (exempt from income tax aswell as withholding tax on compensationincome of both managerial and rank and fileEEs) [Revenue Regulation No. 5-2011] :(4) Monetized unused vacation leave credits of

private employees not exceeding ten (10)days during the year;

(5) Monetized value of vacation and sick leavecredits paid to government officials and

employees;(6) Medical cash allowance to dependents of

employees, not exceeding P750 peremployee per semester or P125 per month;

(7) Rice subsidy of P1,500 or one (1) sack of 50kg. rice per month amounting to not morethan P1,500;

(8) Uniform and Clothing allowance notexceeding P5,000 per annum (RR 8-2012)

(9) Actual medical assistance, e.g. medicalallowance to cover medical and healthcareneeds, annual medical/executive check-up,maternity assistance, and routineconsultations, not exceeding P10,000.00per annum;

(10) Laundry allowance not exceeding P300per month;

(11) Employees achievement awards, e.g., forlength of service or safety achievement,which must be in the form of a tangiblepersonal property other than cash or giftcertificate, with an annual monetary valuenot exceeding P10,000 received by theemployee under an established written planwhich does not discriminate in favor ofhighly paid employees;

(12) Gifts given during Christmas and majoranniversary celebrations not exceedingP5,000 per employee per annum; and


28/216


28

(13) Daily meal allowance for overtime workand night/graveyard shift not exceedingtwenty-five percent (25%) of the basicminimum wage on a per region basis;

Professional IncomeRefers to fees received by a professional fromthe practice of his profession, provided thatthere is NO employer-employee relationshipbetween him and his clients.

Income from Business(a) Any income derived from doing business(b) Doing business : The term implies a

continuity of commercial dealings andarrangements, and contemplates, to that

extent, the performance of acts or works orthe exercise of some of the functionsnormally incident to, and in progressiveprosecution of, the purpose and object of itsorganization.

Income from Dealings in PropertyDealings in property such as sales orexchanges may result in gain or loss. The kindof property involved (i.e., whether the propertyis a capital asset or an ordinary asset)determines the tax implication and income taxtreatment , as follows:

TaxableNet

Income=

OrdinaryNet

Income+

Net CapitalGains (otherthan those

subject to finalCGT)

Types of Properties

Capital v. Ordinary Asset

Ordinary Assets Capital Assets

(1)Stock in trade of thetaxpayer or otherproperty of a kind

Property held by thetaxpayer, whether ornot connected with

Ordinary Assets Capital Assets

which wouldproperly be

included in theinventory of thetaxpayer if on handat the close of thetaxable year.

(2) Property held bythe taxpayerprimarily for sale tocustomers in theordinary course ofhis trade or

business.(3) Property used in

the trade orbusiness of acharacter which issubject to theallowance fordepreciation, or

(4) Real property usedin the trade orbusiness of thetaxpayer, includingproperty held forrent.

his trade or businesswhich is not an

ordinary asset.Generally, theyinclude:(1) stocks and

securities held bytaxpayers otherthan dealers insecurities

(2) real property notused in trade orbusiness, such as

residential houseand lot, idle orvacant land orbuilding

(3)investmentproperty, such asinterest in apartnership, stockinvestment

(4)Personal or non-businessproperties, suchas family car,home appliances, jewelry.

Ordinary Asset Capital Asset

Gain from sale, exchange or other dispositionOrdinary Gain (part of

Gross Income)Capital Gain

Loss from sale, exchange, or other dispositionOrdinary Loss (part ofAllowable Deductionsfrom Gross Income)

Capital Loss

Excess of Gains over LossesPart of Gross Income Net Capital Gain

Excess of Losses over Gains


29/216


29

Part of AllowableDeductions fromGross Income

Net Capital Loss

Types of Gains from dealings in property(1) Ordinary income vis-à-vis Capital gain . If the asset involved is classified as ordinary ,the entire amount of the gain from thetransaction shall be included in thecomputation of gross income [ Sec 32(A)], andthe entire amount of the loss shall bedeductible from gross income. [ Sec 34(D)]. (See Allowable Deductions from Gross Income -Losses)

If the asset involved is a capital asset , the ruleson capital gains and losses apply in thedetermination of the amount to be included ingross income . (See Capital Gains and Losses).

These rules do not apply to:(a) real property with a capital gains tax (finaltax), or(b) shares of stock of a domestic corporationwith a capital gains tax (final tax).(c) Also, sale of shares of stock of a domesticcorporation, held as capital assets, through thestock exchange by either individual orcorporate taxpayers, is subject to ½ of 1%percentage tax based on gross selling price.

The tax rules for the gains or losses from salesor exchanges of capital assets over ordinaryassets are as follows:(1) Net capital gain is added to ordinary gain

but net capital loss is not deductible fromordinary gain.

(2) Net ordinary loss is deductible fromordinary gain.

(3) Capital losses are deductible only to theextent of the capital gain.

(4) There is a net capital loss carry-over on thenet capital asset’s loss in a taxable yearwhich may be deducted as a short-term

capital loss from the net capital gain of thesubsequent taxable year; provided that thefollowing conditions shall be observed:

(5) The taxpayer is other than a corporation;(6) The amount of loss does not exceed the

income before exemptions at the year whenthe loss was sustained; and(7) The holding period should not exceed 12

months. ( Valencia )

When a capital gain or capital loss is sustainedby a corporation , the following rules shall beobserved:(2) There is no holding period; hence, there is

no net capital loss carry-over.(3) Capital gains and losses are recognized to

the extent of their full amount.(4) Capital losses are deductible only to the

extent of capital gains.(5) Net capital losses are not deductible from

ordinary gain or income but ordinary lossesare deductible from net capital gains.

(2) Actual gain vis-à-vis Presumed gainPresumed Gain : In the sale of real propertylocated in the Philippines, classified as capitalasset, the tax base is the gross selling price orfair market value, whichever is higher. The lawpresumes that the seller makes a gain fromsuch sale.

Actual Gain : The tax base in the sale of realproperty classified as an ordinary asset is theactual gain. If the seller incurs a loss from thesale, such loss may be deducted from his grossincome during the taxable year. The ordinarygain shall be added to the operating incomeand the net taxable income shall be subject tothe graduated rates from 5% to 32% (if anindividual) or to 30% corporate tax or to 2%MCIT (if a corporation).

Computation of the amount of gain or lossAmount realized from sale or other

disposition of property


30/216


30

Less: Basis or Adjusted BasisNET GAIN (LOSS)

Note: Amount realized from sale or otherdisposition of property = sum of money

received + fair market value of the property(other than money) received

Note: When a taxpayer sells a real or personalproperty, he should deduct its cost from itsselling price to measure the gain or loss fromthe sales transaction ( Sec. 40, NIRC).

(3) Long term capital gain vis-à-vis Short termcapital gain

Long-term capital gain: Capital asset is held for

more than twelve month before it is sold. Only50% of the gain is recognized.

Short-term capital Gain : Capital asset is heldfor less than 12 months. 100% of the gain issubject to tax.

(4) Net Capital Gain vis-à-vis Net Capital Loss

Net Capital Gain is the excess of the gains overthe losses on sales or exchange of capitalassets during the taxable year.

Net Capital Loss means the excess of the lossesover the gains on sales or exchanges of capitalassets during the taxable year. [Sec. 39A,NIRC]

(5) Computation of the amount of Gain or Loss

For income tax purposes the following rules

should be observed regarding the cost andexpenses of the capital assets:(1) the costs and expenses of the acquisition

are to be capitalized, and(2) the expenses of disposition are to be

treated as reduction from the selling price.(Valencia )

(1) Cost or basis of the property sold: Incomputing the gain or loss from the sale orother disposition of property, the BASIS shallbe as follows:(a) Property acquired by purchase – its

acquisition cost , i.e., the purchase price plusexpenses of acquisition.(b) Property which should be included in the

inventory – its latest inventory value [RR-2sec 136 ]

(c) Property acquired by devise, bequest orinheritance – its fair market price or value asof the date of acquisition (inheritance)

(d) Property acquired by gift or donation – thebasis is the same as it would be in the handsof the donor or at the last preceding owner

by whom it was not acquired by gift, or thefair market value at the time the gift wasmade, whichever is lower

(e) Property acquired for less than an adequateconsideration in money’s worth – the amount paid by the transferee for the property

(6) Cost or basis of the property exchanged incorporate reorganizations: Sales orexchanges resulting in non-recognition ofgains or losses:

Exchange Solely in Kind - (1) If in pursuance of a plan of merger or

consolidation, exchanges:(a) Between the corporations which are

parties to the merger or consolidation(property solely for stocks);

(b) Between a stockholder of a corporationparty to a merger or consolidation andthe other corporation, which is a party tothe merger or consolidation (stock in acorporation solely for the stock ofanother corporation);

(c) Between a security holder of acorporation party to a merger orconsolidation and the other corporation,which is a party to the merger or


31/216


31

consolidation (securities solely forsecurities)

(2) Transfer to a controlled corporation – aperson transfers his property to acorporation in exchange for stocks in such a

corporation, resulting in acquisition ofcorporate control by said person, alone ortogether with others not exceeding four (4).

Exchange Not Solely in Kind -Gain, but not theloss, shall be recognized if, in connection withan exchange described in the aboveexceptions: (a) An individual, a shareholder, a security

holder or a corporation receives not onlystock or securities permitted to be received

without the recognition of gain or loss, butalso money and/or property.

The gain, if any, but not the loss, shall berecognized but in an amount not in excessof the sum of the money and the fair marketvalue of such other property received.

As to the shareholder, if the money and/orother property received has the effect of adistribution of a taxable dividend, thereshall be taxed as dividend to theshareholder an amount of the gainrecognized not in excess of hisproportionate share of the undistributedearnings and profits of the corporation.

The remainder, if any, of the gainrecognized shall be treated as a capital gain(Sec. 40 (C) (3) (a), NIRC).

(b) The transferor corporation receives not onlystock permitted to be received without therecognition of gain or loss but also moneyand/or other property, then -(i) if the corporation receiving such money

and/or other property distributes it inpursuance of the plan of merger orconsolidation, no gain to the corporation

shall be recognized from the exchange,but

(ii) if the corporation receiving such otherproperty and/or money does notdistribute it in pursuance of the plan of

merger or consolidation, the gain, if any,but not the loss to the corporation shallbe recognized.

The gain shall be recognized in anamount not in excess of the sum of suchmoney and the fair market value of suchother property so received, which is notdistributed ( Sec. 40 (C) (3) (b), NIRC).

If an individual, stockholder, security holder or

corporation receives on the exchange not onlystock or securities but also money and/ orproperty (boot), the gain but not the loss shallbe recognized, in an amount not exceeding thesum of the money and fair market value of theproperty received.

If the money or other property received has theeffect of a distribution of a taxable dividend,there shall be taxed as dividend to thestockholder an amount of the gain recognizednot in excess of his proportionate share of theundistributed earnings and profits of thecorporation.

The remainder, if any, of the gain recognizedshall be treated as a capital gain.

SUBSTITUTED BASIS OF STOCK ORSECURITIES RECEIVED BY TRANSFERORUPON THE EXCHANGE:

Original basis (cost) of the property, stock orsecurities exchanged/transferredLESS: (a) money received, if any; and(b) FMV of the other property received.BalanceADD: (a) the amount treated as dividend of theshareholder; and


32/216


32

(b) the amount of any gain that was recognizedon the exchange.Basis (Cost) of the stock received

Notes:

(a) The property received as “boot” shall haveas basis its FMV

(b) If as part of the consideration to thetransferor, the transferee of propertyassumes a liability of the transferor oracquires from the latter property subject toa liability, such assumption or acquisition(in the amount of liability), shall be treatedas money received by the transferor on theexchange

(c) If the transferor receives several kinds of

stocks or securities, the Commissioner isauthorized to allocate the basis among theseveral classes of stocks or securitiesreceived.

SUBSTITUTED BASIS OF PROPERTYTRANSFERRED:

The basis of the property transferred in the

hands of the transferee shall be the same as itwould be in the hands of the transferorincreased by the amount of the gainrecognized to the transferor on the transfer[Sec. 40 (C)(5), NIRC].

Recognition of gain or loss in exchange ofproperty :General rule : Upon the sale or exchange ofproperty, the ENTIRE amount of the gain orloss shall be recognized.

Exceptions: No gain or loss shall berecognized: (1) If in pursuance of a plan of merger or

consolidation:(a) A corporation, which is a party to a

merger or consolidation, exchangesproperty solely for stock in a corporation,

which is a party to the merger orconsolidation;

(b) A shareholder exchanges stock in acorporation, which is a party to a mergeror consolidation, solely for the stock of

another corporation also a party to themerger or consolidation; or(c) A security holder of a corporation, which

is a party to the merger or consolidation,exchanges his securities in suchcorporation, solely for stock or securitiesin another corporation, a party to themerger or consolidation.

(2) If property is transferred to a corporation bya person in exchange for stock or unit ofparticipation in such a corporation, of which

as a result of such exchange, said person,alone or together with others not exceeding4 persons, gains control of the corporation.- Stocks issued for services shall not be

considered as issued in property.

(7) Income tax treatment of capital loss

(a) Capital loss limitation rule (applicable toboth corporations and individuals)General Rule : Losses from sales or exchangesof capital assets shall be allowed only to theextent of the gains from such sales orexchanges ( Sec. 39(C), NIRC).Exception for Banks and Trust Companies: If abank or trust company incorporated under thelaws of the Philippines, a substantial part ofwhose business is the receipt of deposits, sellsany bond, debenture, note, certificate or otherevidence of indebtedness issued by anycorporation (including one issued by agovernment or political subdivision thereof)with interest coupons or in registered form, anyloss resulting from such sale shall not be subjectto the foregoing limitation and shall not beincluded in determining the applicability ofsuch limitation to other losses ( Sec. 39(C), NIRC).


33/216


33

(b) Net loss carry-over rule (applicable only toindividuals)If an individual sustains in any taxable year anet capital loss, such loss (in an amount not inexcess of the net income for the year) shall be

treated in the succeeding taxable year as a lossfrom the sale or exchange of a capital assetheld for not more than 12 months ( Sec. 39(D), NIRC).

(8) Dealings in real property situated in thePhilippines

Persons Liable and Transactions Affected(a) Individual taxpayers, estates and trusts

(1) Sale or exchange or other disposition of

real property considered as capital assets.(2) Includes "pacto de retro sale " and other

conditional sale.(b) Domestic Corporation

Sale or exchange or disposition of landsand/or building which are not actually usedin business and are treated as capital asset.

Rate and Basis of TaxA final withholding tax of 6% is based on thegross selling price or fair market value or zonalvalue whichever is higher .

Note : Gain or loss is immaterial, there being aconclusive presumption of gain.

(9) Dealings in shares of stock of Philippinecorporations

Persons Liable to the Tax(a) Individual taxpayer, whether citizen or alien;(b) Corporate taxpayer, whether domestic or

foreign; and(c) Other taxpayers not falling under (a) and (b)

above, such as estate, trust, trust funds andpension funds, among others.

Persons not liable(a) Dealers in securities

(b) Investor in shares of stock in a mutual fundcompany

(c) All other persons who are specificallyexempt from national internal revenuetaxes under existing investment incentives

and other special laws.

Shares listed and traded through the stockexchange other than sale by a dealer in securities.

(1) ½ of 1% of the gross selling price of thestock or gross value in money of the sharesof stock sold, bartered, exchanged orotherwise disposed which shall be assumedand paid by the seller or transferor throughthe remittance of the stock transaction tax

by the seller or transferor’s broker. (2) Note: In the nature of percentage tax and

not income tax; exempt from income tax per Section 127 (d):

“Any gain derived from the sale, barter,exchange or other disposition of share ofstock under this section shall be exemptfrom taxes imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of thisCode and from the regular individual orcorporate income tax.”

(3) Note: Percentage tax under Sec. 127 is NOTDEDUCTIBLE for income tax purposes.

Shares not listed and traded through the stockexchangeNet capital gains derived during the taxableyear from sale, exchange, or transfer shall betaxed as follows (on a per transaction basis):

Amount of Capital Gain1. Not over P 100,000 = Tax Rate of 5%2. On any amount in excess of P 100,000 =10%

(10) Sale of principal residencePrincipal residence : the family home of theindividual taxpayer ( RR 14-2000 )


34/216


34

Disposition of principal residence (capitalasset) is exempt from Capital Gains Tax, provided:(a) Sale or disposition of the old principal

residence;(b) By natural persons - citizens or aliens provided that they are residents taxableunder Sec. 24 of the Code (does not includean estate or a trust);

(c) The proceeds of which is fully utilized in (a)acquiring or (b) constructing a new principalresidence within eighteen (18) months fromdate of sale or disposition;

(d) Notify the Commissioner within thirty (30)days from the date of sale or disposition

through a prescribed return of his intentionto avail the tax exemption;

(e) Can only be availed of onlyonce every ten(10) years;

(f) The historical cost or adjusted basis of hisold principal residence shall be carried overto the cost basis of his new principalresidence

(g) If there is no full utilization, the portion ofthe gains presumed to have been realizedshall be subject to capital gains tax.

(h) Portion of presumed gains subject to CGT:(Unutilized/GSP) x (higher of GSP or FMV)

Passive Investment IncomeUnder Sec 24(B), a final tax is imposed upongross passive income of citizen and residentaliens. An income is considered passive if thetaxpayer merely waits for it to be realized.

(a) Interest Income(b) Dividend Income

1. Cash dividend2. Stock dividend Stock dividend is generally exempt fromincome tax, EXCEPT: (a) If a corporation cancels or redeems

stock issued as a dividend at such timeand in such manner as to make thedistribution and cancellation or

redemption, in whole or in part,essentially equivalent to thedistribution of a taxable dividend, theamount so distributed in redemption orcancellation of the stock shall beconsidered as taxable income to theextent that it represents a distributionof earnings or profits ( Sec. 73(B), NIRC);or

(b) Where there is an option that somestockholders could take cash orproperty dividends instead of stockdividends; some stockholdersexercised the option to take cash ofproperty dividends; and the exercise ofoption resulted in a change of thestockholders’ proportionate share inthe outstanding share of thecorporation.

3. Property dividend4. Liquidating dividend

The difference between the cost or other basisof the stock and the amount received inliquidation of the stock is a capital gain or acapital loss.


35/216


35

(c) Royalty IncomeRoyalty is a valuable property that can bedeveloped and sold on a regular basis for aconsideration; in which case, any gainderived therefrom is considered as anactive business income subject to thenormal corporate tax.

(d) Rental IncomeRefers to earnings derived from leasingreal estate as well as personal property.Aside from the regular amount of paymentf

taxation 2015 up pre-week

Documents