Income Taxation Reviewer

TAXATION I REVIEWER ATTY. C. VILLENA

PART I – TAXATION IN GENERAL CHAPTER I – GENERAL PRINCIPLES OF TAXATON

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I. TAXATION TAXATION DEFINED 

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The power by which the sovereign raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the costs of government among those who in some measures are privileged to enjoy its benefits and must bear its burdens. It is the inherent power of the state to demand and enforced contributions for public purposes. Taxation is described as a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government (Paseo Realty & Devt Corp v. CA, 2004)

NATURE OF INTERNAL REVENUE LAWS a) Internal revenue laws are not political in nature. They are deemed to be laws of the occupied territory and not of the occupying enemy. b) Tax law are civil, not subject to expost facto law prohibition and not penal in nature, although there are penalties provided for their violation. The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof. NATURE AND CHARACTERISTICS OF TAXATION  The power of taxation is INHERENT IN SOVEREIGNTY as an incident or attribute thereof, being essential to the existence of an independent government

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The right to tax exists apart from constitutions and without being expressly conferred by the people It is legislative in character It is generally not delegated to executive or judicial department. EXCEPTIONS: i. To LGUs in respect to matters of local concern to be exercised by LG bodies thereof (Sec 5, Art X, 1987 Constitution) ii. When allowed by the Constitution (Sec 28(2), Art VI, 1987 Constitution) iii. When the delegation relates merely to administrative implementation that may call for some degree of discretionary powers under a set of sufficient standards expressed by law (Cervantes v. Auditor General, 91 PHIL 359), or implied from the policy and purpose of the Act (Maceda v. Macaraig, 197 SCRA 771) It is subject to constitutional and inherent limitations It must be used for public purposes – It has been held that tax has been utilized for public purpose if the welfare of the nation or the greater portion of its population has benefited for use (Gomez v. Palomar, 25 SCRA 827; Phil Guaranty Co v. Commissioner, 13 SCRA 775) It is the strongest of all the inherent powers of the government (Sison v. Ancheta, 130 SCRA 654) It is territorial in operation – The power to tax can only be exercised within the territorial jurisdiction of a taxing authority (51 AM JUR 88) except when there exists privity of relationship between the taxing State and the object of tax It is an enforced charged and contribution Generally pecuniary in nature (payable in money)

HILADO V. CIR 100 PHIL 288 Internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. Income tax returns were filed during that period and income tax payment

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

were effected and considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy. Furthermore, it is a legal maxim, that except that of a political nature, ‘Law once established continues until changed by some competent legislative power. It is not changed merely by change of sovereignty.

PURPOSES AND OBJECTIVES A. REVENUE – To raise funds or property to enable the State to promote the general welfare and protection of its citizens B. NON-REVENUE/SUMPTUARY PURPOSES (PR2EP) 1. PROMOTION of general welfare – Taxation may be used as an implement of police power in order to promote the general welfare of the people 2. REGULATION 3. REDUCTION of social inequality – The progressive system of taxation in the Philippines prevents the undue concentration of wealth in the hands of few individuals. Progressivity is based on the principle that those who are able to pay more should shoulder the bigger portion of the tax burden 4. ENCOURAGE economic growth – The grant of incentives or exemptions encourage investment 5. PROTECTIONISM – In case of foreign importations, protective tariffs and customs are imposed for the benefit of local industries

SCOPE OF TAXATION

It is comprehensive, unlimited, supreme and plenary, but subject to constitutional and inherent limitations.

Article VI Constitution, Section 28:

1. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. 2. The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other

duties or imposts within the framework of the national development program of the Government. 3. Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, for religious, charitable, or educational purposes shall be exempt from taxation. INHERENT ATTRIBUTE OF SOVEREIGNTY – The moment the state exist, the power to tax automatically exists. The power can be exercised even without the Constitution or any law expressly conferring such power. A. Basis: The LIFEBLOOD DOCTRINE – Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Hence, despite the natural reluctance to surrender one part of one’s earned income to the taxing authorities, every person who is able must contribute his share in the running of the government (CIR v. Algue, supra) B. Manifestations 1. Imposition even in the absence of constitutional grant 2. State’s right to select objects and subjects of taxation 3. No injunction to enjoin collection of taxes 4. Taxes could not be the subject of set-off or compensation 5. Taxation is an unlimited or plenary power C. Distinction between National Government and Local Government Unit (LGU) 1. National government – inherent power 2. Local Government Unit (LGU) – not inherent since it is merely an agency instituted by the State for the purpose of carrying out in detail the objects of the government; can only impose taxes when there is: a. Constitutional grant b. Legislative grant D. Grant of Taxing Power of LGU o Constitutional grant o Power is derived from Art X Sec 5 of the 1987 Constitution

LEGISLATIVE IN CHARACTER Page | 2

TAXATION I REVIEWER ATTY. C. VILLENA A. Basis: Taxes are a grant of the people who are taxed and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must be exercised (Cooley). The power can only be exercised by the law-making body, not by the executive or the judicial branch of the government, except when delegated by the national legislative body to a local legislative body, or to the executive branch, subject to limitations as may be provided by law. B. Scope of Legislative Power (SM PARKS) 1. SUBJECTS of taxation (Persons, property, occupation, excises or privileges to be taxed, provided they are within the taxing jurisdiction) 2. Amount or RATE of tax 3. PURPOSES for which taxes shall be levied provided they are for public purposes 4. KIND of tax to be collected 5. APPORTIONMENT of the tax (whether the tax shall be of general application or limited to a particular locality, or partly general and partly local) 6. SITUS of taxation 7. METHOD of collection

IS THE POWER TO TAX THE POWER TO DESTROY? 

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Power to tax INCLUDES the power to destroy. Chief Justice Marshall in McCulloch v. Maryland (4 Wheat, 316 4L ed. 570, 607) opined that the power to tax involves the power to destroy. Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government Power to tax is NOT the power to destroy. According to Justice Holmes in Panhandle Oil Co v. Mississippi (277 US 218). The power to tax is not the power to destroy while this court sits Reconciliation of the two views:

The imposition of a valid tax could not be judicially restrained merely because it would prejudice taxpayers’ property o An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer’s property According to Justice Isagani Cruz, the power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare, but where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy The power to tax is sometimes called the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of the taxpayer (Roxas et al v. CTA, G.R. no L-25043, April 26, 1968) o

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CHAMBER OF REAL ESTATE AND BUILDERS’ASSOCIATION (CREBA) V. ROMULO, AMATONG AND PARAYNO (2010) The taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from singling out a particular class for taxation, or exemption, infringe no constitutional limitation.

SISON V. ANCHETA 130 SCRA 654 The power to tax, an inherent prerogative of the State, has to be availed to assure the performance of vital state functions. It is the source of the bulk of public funds. Taxes, being the lifeblood of the government, their prompt and certain availability is of the essence. According to Justice Malcolm, “The power to tax is an attribute of sovereignty. It is the strongest of all the powers of government. It is, of course, to be admitted that for all its plenitude, the power to tax is not unconfined. There are restrictions which the Constitution sets

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

forth. Adversely affecting as it invalidate in appropriate cases a revenue measures since the power to tax is not the power to destroy. The SC held that it is inherent in the power to tax that a State be free to select the subjects of taxation, and that inequalities which result from singling out one particular class for taxation, or exemption, does not infringe constitutional limitation. Equity and uniformitu in taxation, as required by the Constitution, means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. The differentiation complained conformes to the practical dictates of justice and equity and is not therefore discriminatory. The standard then is that the tax applies equally to all persons firms and corporations placed in similar situation.

SARASOLA V. TRINIDAD, 40 PHIL 259 Taxation is an attribute of sovereignty. It is the strongest of all the powers of the government. It involves, as Chief Justice Marshall said, the power to destroy. The right of taxation where it exits, is necessarily unlimited in its nature. It carries with it inherently the power to embarrass and destroy. Public policy decrees that, since upon the prompt collection of revenue there depends the very existence of government itself, whatever determination shall be arrived at by the Legislature should not be interfered with unless there be a clear violation of some constitutional inhibition. It is upon the taxation that several states chiefly rely to obtain the means to carry on their respective governments, and it is of the utmost importance to all of them that the modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes, may derange the operations of government, and thereby cause serious detriment to the public. The Government may fix the conditions upon which it will consent to litigate the validity of its original taxes. The proper of taxation being legislative, all the incidents are within the control of the Legislature.

The people of a state give to their government a right of taxing themselves and their property, and as the exigencies of the Government cannot be limited, they prescribed no limit to the exercise of this right, resting confidently on the interest of the legislator and on the influence of the constituents over their representatives, to guard themselves against its abuse.

UNDERLYING THEORY AND BASIS 1.

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PRINCIPLE OF NECESSITY (Theory of Taxation) – The existence of the government is a necessity; the main source of revenue of the government is taxes. These are the life-blood of the government. The government therefore will not be able to survive and continue to perform its functions without taxes. BENEFITS RECEIVED PRINCIPLE (Basis or Rationale for Taxation) In return for the enforced contribution of the citizens, the latter receive general protection and enjoyment of benefits in an organized society. The power of taxation is therefore founded on the reciprocal duties of protection ad support between the state and its inhabitants. This does not mean, however, that only those who pays their taxes to the government are entitled to protection and benefits, because these are the primary duty owed by the State to every citizen. Moreover, the taxpayer should not expect a definite, specific commodity, service or benefit in return for the contributions he has made.

CIR V. ALGUE It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and

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TAXATION I REVIEWER ATTY. C. VILLENA should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Collection should be made in accordance with the law as any to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of common good, may be achieved.

COMPARISON WITH POLICE POWER AND EMINENT DOMAIN TAX POLICE EMINENT POWER DOMAIN EXERCISING Government Government May be AUTHORITY or Political or Political granted to

PURPOSE

Subdivision

Subdivision

Raises revenue

Exercise to promote public welfare through regulation Limited to the cost of regulation, issuance of license of surveillance

Principles of a Sound Tax System 1. 2. 3. 4.

FISCAL ADEQUACY – The sources of revenue should be sufficient and elastic to meet the demands of public expenditure. EQUALITY OR THEORETICAL JUSTICE – The tax burden should be in proportion to the taxpayer’s ability to pay. ADMINISTRATIVE FEASIBILITY – Tax laws must be capable of convenient, just and effective administration on the part of both the government and the taxpayer. Consistency or compatibility with economic goals.

ABAKADA GURO PARTY LIST OFFICERS V.ERMITA (2005) The increase the VAT collection does not render it unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly to raise revenue. In fact fiscal adequacy dictate the need for a raise in revenue. The principle of fiscal adequacy as a characteristic of a sound tax system. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. It simply means that sources of revenue must be adequate to meet government expenditures and their variations.

AMOUNT OF IMPOSITION

No limit

EFFECT

Becomes part of the public funds

PERSONS AFFECTED

Applies to all persons, property and excises that may be subject thereto Contract may not be impaired

SUPERIORITY OF CONTRACTS

Restraint on the injurious use of property Applies to all person, property and excises that may be subject thereto Contracts may be impaired

public service companies or public utilities The taking of property for public use

No limit imposed, but the amount should be based on the market value of the property Transfer of right to the property Only particular property is comprehended

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

BENEFITS RECEIVED

RELATIONSHI P TO CONSTITUTIO N

unless a government is property to contract granting; or involves franchise Protection and general from the government

Subject of certain constitutional limitations

Since the enactment of the Local Autonomy Act, a liberal rule has been followed by this Court in construing municipal ordinances enacted pursuant to the taxing power granted under Section 2 of said law. This Court has construed the grant of power to tax under the provision as sufficiently plenary to cover “everything, excepting those which are mentioned” therein subject only to the limitation that the tax so levied is for public purposes, just and uniform. No direct or immediate benefit such as may arise from the maintenance of a healthy economic standard of society Relatively free from constitutional limitations

Market value of the property

The SC agreed with the trial court that the amount collected under the ordinance in question partakes of the nature of a tax, although denominated as “police inspection fee” since its undeniable purpose is to raise revenue. According to Section 2 of Local Autonomy Act, the tax levied must be for public purpose, just and uniform. As correctly held by the trial court, the so-called “police inspection fee” levied by the ordinances is unjust and unreasonable.”

LUTZ V. ARANETA, 98 PHIL 48 Subject to certain constitutional limitations.

GEROCHI V. DOE (2007) If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax. The taxing power may be used as an implement of police power. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.

MATALIN COCONUT CO. INC. V. MUNICIPAL COUNCIL OF MALABANG

The basic defect in the plaintiff’s position is his assumption that the tax provided for in Commonwealth Act. No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power. The Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; that it gives employment to thousand of laborers in fields and factories; that it is a great source of the state’s wealth, is one of the important sources of foreign exchange needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits there from be readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain.

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TAXATION I REVIEWER ATTY. C. VILLENA NTC V. CA

The power to tax is a legislative power which under the Constitution only Congress can exercise through the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.

It bears stressing that it is not the NTC that imposed such a fee. It is the legislature itself. Since Congress has the power to exercise the State inherent powers of police power, eminent domain, and taxation, the distinction between police power and the power to tax which could be significant if the exercising authority were mere political subdivisions (since delegation by it to such political subdivision of one power does not necessarily include the other), would not be of any moment when, as in the case under consideration, Congress itself exercises the power. All that is to be done would be to apply and enforce the law when sufficiently definitive and not constitutional infirm

II.

TAXES TAXES DEFINED Taxes are the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of government and for public needs.

REPUBLIC V. PHILIPPINE RABBIT BUS LINE INC. (1970) A tax refers to a financial obligation imposed by a state on persons, whether natural or juridical, within its jurisdiction, for property owned, income earned, business or profession engaged in, or any such activity analogous in character for raising the necessary revenue to take care of the responsibilities of government. A tax is neither a penalty that must be satisfied nor a liability arising from contract. Much less can it be confused or identified with a license or a fee as a manifestation of an exercise of the police power.

ESSENTIAL CHARACTERISTIC OF TAXES 1. It is levied by the law-making body of the State

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It is an enforced contribution A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive acts of the government. 3.

It is generally payable in money Tax is a pecuniary burden – an exaction to be discharged alone in the form of money which must be in legal tender, unless qualified by law such as RA 304 which allows backpay certificates as payment of taxes. 4.

It is proportionate in character – It is ordinarily based on the taxpayer’s ability to pay. 5.

It is levied n persons or property – A tax may also be imposed on acts, transaction, rights or privileges.

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It is levied for public purpose or purposes – Taxation involves, and a tax constitutes, a burden to provide income for public purposes.

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It is levied by the State which has jurisdiction over the persons or property – The persons, property or services to be taxed must be subject to the jurisdiction of the taxing state.

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It is paid at regular periods or intervals.

TAXES VS. DEBT DEBT – is based upon juridical tie, created by law, contracts, delicts or quasi-delicts between parties for their private interest or resulting from their own acts or omissions.

TAXES

DEBT

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

BASIS

Law

FAILURE TO PAY

Failure to pay tax (other than poll tax) may result in imprisonment Generally payable in money Not assignable Not subject to compensation or set-off Tax does not draw interest unless delinquent Imposed by public authority

MODE OF PAYMENT ASSIGNABILITY PAYMENT INTEREST AUTHORITY

Contract or judgment No imprisonment for nonpayment of debt

Payable in money, property or service Assignable May be subject to compensation or set-off Debt draws interest if stipulated or delayed Imposed by public individuals

Caltex Philippines v. COA A taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract, or judgment as is allowed to be set-off

FRANCIA V. IAC, 162 SCRA 753 There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statures of set-off, which are construed uniformly in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. The general rule based on grounds of public policy is well settled that no set-off

admissible against demands for taxes levied for general or local government purposes. The reason for this is that taxes are not in the nature of contract between the party but grow out of duty to and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required.

PHILEX MINING CORP. V. CIR AND CTA (1998) Tax cannot be the subject for compensation for simple reason that the government and the taxpayer are not mutual creditors and debtors of each other. Debts are due in the government in its corporate capacity while taxes are due to the government in its sovereign capacity. A taxpayer cannot refuse to pay his taxes when they fall dues simply because he has a claim against the government that the collection of the tax is contingent on the result of the lawsuit it filed against the government. A person cannot refuse to pay tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

TAXES VS. LICENSE FEE LICENSE OR PERMIT FEE – is a charge imposed under the police power for the purpose of regulation.

TAXES

LICENSE FEE

Based on the power of Taxation Purpose is revenue Amount is unlimited

Based on police power Purpose is regulation Amount is limited to the cost of: 1. Issuance of license 2. Inspection and surveillance Normally paid before the commencement of business License fee may be with or without consideration

Normally paid at the start of business Taxes being the lifeblood of the State, cannot be surrendered except for lawful consideration

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TAXATION I REVIEWER ATTY. C. VILLENA Nonpayment does not make the business illegal but may be a ground for criminal prosecution

TAXES

Nonpayment makes the business illegal

PROGRESSIVE DEVELOPMENT CORPORATION V. QC, 172 SCRA 629 To be considered a license fee, the imposition must relate to an occupation or activity that so engages the public interest in health, morals, safety and development as to require regulations for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of the regulations, taking into account not only when the costs of direct regulations but also its incidental consequences as well. The gross receipts from stall rentals have been used only as a basis by computing the fees or taxes due to the city to cover the latter’s administrative expenses. The use of the gross amount if stall rentals, as basis for the determination of the collectible amount of license tax, does not by itself convert or render the license tax into a prohibited city tax on income. The aggregate volume of foodstuffs and related items sold in such market, the greater extent and frequency of inspection and supervision that may be reasonably required in the interest of the buying public.

PAL ESSO V. CIR, 175 SCRA 149 A tax is levied to provide revenue for government operations, while the proceeds of the margin fee is reapplied to strengthen our country’s international reserves. The margin fee was imposed by the State in the exercise of its police power and not the power of taxation.

TAX VS. SPECIAL ASSESSMENT

SPECIAL ASSESSMENT – an enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements

SUBJECT

LIABILITY BASIS APPLICATION

Taxes are levied on land, persons, property, income, business etc. Personal liability of the taxpayer Based on necessity and partially on benefits General application

SPECIAL ASSESSMENT Levied on land

Cannot be made a personal liability of the person assessed Based solely on benefits Special application only as to particular time and place

APOSTOLIC PREFECT V. TREASURER OF BAGUIO, 71 PHIL 547 While the word "tax" in its broad meaning, includes both general taxes and special assessments, and in a general sense a tax is an assessment, and an assessment is a tax, yet there is a recognized distinction between them in that assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with reference to special benefits to the property assessed. The differences between a special assessment and a tax are that (1) a special assessment can be levied only on land; (2) a special assessment cannot (at least in most states) be made a personal liability of the person assessed; (3) a special assessment is based wholly on benefits; and (4) a special assessment is exceptional both as to time and locality. The imposition of a charge on all property, real and personal, in a prescribed area, is a tax and not an assessment, although the purpose is to make a local improvement on a street or highway. A charge imposed only on property owners benefited is a special assessment rather than a tax notwithstanding the statute calls it a tax. Page | 9

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

TAX VS. TOLLS

TOLL – sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge of the like of a public nature.

TAXES

TOLL

Taxes are levied for the support of the government The amount of tax is determined by the sovereign

Tolls are compensation for the use of another’s property The amount of the toll is determined by the cost of the property or of the improvement Imposed by the government or private individuals

May only be imposed by the State

DIAZ AND TIMBOL V. THE SECRETARY OF FINANCE ET AL. (2011) Toll way fees are not taxes. They are not assessed and collected by the BIR and do not go to the general coffers of the government. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees on the other hand, are collected by private toll way operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the toll ways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership.

Enforced proportional contribution from persons and property

Intended to raise revenue May be imposed only by the government

Sanction imposed as a punishment for violation of law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty Designed to regulate conduct May be imposed by the government or private individuals or entities.

NDC V. CIR, 151 SCRA 472 The Japanese shipbuilders were liable on the interest remitted to them under Section 37 of the Tax Code. The NDC is not the one taxed. The imposition of deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53 (c) of the Tax Code. NDC was remiss in the discharge of its obligation as the withholding agent of the government and so should be liable for its omission.

TAX VS. CUSTOM DUTY TARIFF – as duties payable on goods imported or exported (PD No. 230); as the system or principle of imposing duties on the importation/exportation of goods.

TAX All-embracing term to include various kinds of enforced contributions upon persons for the attainment of public purposes

CUSTOM DUTY/TARIFF A kind of tax imposed on articles which are traded internationally.

TAX VS. PENALTY

PENALTY – any sanctions imposed as a punishment for violation of laws or acts deemed injurious.

TAX

PENALTY

II. CLASSIFICATION OF TAXES A.

AS TO SUBJECT MATTER Page | 10

TAXATION I REVIEWER ATTY. C. VILLENA 1.

2. 3.

PERSONAL, POLL OR CAPITATION – tax of a fixed amount imposed upon persons residing within a specified territory, whether citizens or not, without regard to their property, occupation or business in which they may be engaged (e.g. community tax) PROPERTY – tax imposed on property, whether personal or real, in proportion either to its value of some other reasonable rule of apportionment (e.g. real property tax) EXCISE OR PRIVILEGE – charge imposed upon performance of an act, the enjoyment of a privilege or engaging in an occupation, profession or business (e.g. donor’s tax, estate tax, VAT, income tax)

on strict interpretation does not apply in the case of exemptions in favor of government political subdivision or instrumentality. In the case of property owned by the state or a city or other public corporations, the express exception should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property exception is the rule and taxation the exception.´

C. AS TO HOW AMOUNT IS DETERMINED 1.

B. AS TO WHO BEARS THE BURDEN AND INCIDENCE 1.

2.

DIRECT - tax which is exacted from the very persons primarily liable to pay them; the taxpayer cannot shift the burden of its payment to another. The liability for the payment of the tax (incidence) as well as the impact (or burden) of the tax falls on the same person (e.g. income tax, community tax) INDIRECT – tax wherein the incidence or liability for the nonpayment falls on one person but the burden case be shifted or passed on to another (e.g. VAT, percentage tax) a. The Constitution has been interpreted to mean simply that direct taxes are to be preferred and as much as possible, indirect taxes should be minimized. The imposition of indirect taxes is not a violation of the principle that taxes are personal liabilities, the payment of which cannot be transferred to another person. When the seller passes on the tax to his buyer, he is only shifting the tax burden (not the liability to pay it) to the purchaser as part of the costs of the goods sold or services rendered.

MACEDA V. MACARAIG (1993) NAPOCOR is a non-profit public corporation created for the general good and welfare, and wholly owned by the government of the Republic of the Philippines. It is recognized principle that the rule

2.

D.

1. 2.

SPECIFIC TAXES sec. 129 - tax of a fixed amount imposed by the head or number or by some standard of weight or measurement; it requires no valuation other than a listing or classification of the objects to be taxed (e.g. tax on fermented liquors, cigars, distilled spirits) AD VALOREM TAXES sec. 129 – tax of a fixed portion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined (e.g. real property tax)

AS TO PURPOSE

GENERAL, FISCAL OR REVENUE - tax imposed for the general or ordinary purposes of the government, to raise revenue for the governmental needs (e.g. income tax) SPECIAL, REGULATORY, OR SUMPTUARY – tax imposed for a special purpose, to achieve some social or economic ends irrespective of whether revenue is actually raised or not (e.g. countervailing and dumping duties under the TCC.

E. AS TO SCOPE 1. 2.

NATIONAL – levied by the National government (e.g. NIRC taxes, custom duties)  SENATE LOCAL TAXES – levied by the local government (e.g. real property tax, occupation tax)  city council

F. As to graduation or

rate

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong 1.

PROGRESSIVE OR GRADUATED – the tax rate increases as the tax base or bracket increases (e.g. income tax on individuals, estate tax and donor’s tax) REGRESSIVE – the tax rate decreases as the tax base increases  not prohibited PROPORTIONATE – the tax rate is bases on a fixed percentage of the amount of the property, receipts or other bases to be taxed (e.g. real property tax, VAT and 3% percentage tax)

2. 3.

IV. DOCTRINES IN TAXATION 1. PROSPECTIVITY OF LAWS  

This principle provides that a tax bill must only be applicable and operative after becoming a law. EX POST FACTO LAW is NOT applicable for tax purposes. However, when it comes to civil penalties like fines and forfeiture (except interest), tax laws may be applied retroactively unless it produces harsh and oppressive consequences which violate the taxpayer’s constitutional rights regarding equity and due process.

HYDRO RESOURCES V. CA (1990) In general, tax laws are not retroactive in nature. Taxing authorities must be applied prospectively, EXCEPT, by express provision of the law

2.

IMPRESCRIPTIBILITY OF TAXES  

Unless otherwise provided by the tax law itself, taxes in general are not cancelable Although the NIRC provides for the limitation in the assessment and collection of taxes imposed, such prescriptive period will only be applicable to those taxes that where returnable. The prescriptive period shall start from the time the taxpayer files the tax return and declares his liability

CIR V. AYALA SECURITIES CORP. (1980) In the absence of express statutory provision, the right of the government to assess unpaid taxes is imprescriptible.

3.

Double Taxation is the imposition by the same taxing body of two taxes on what is essentially the same thing; the imposition of two taxes on the same property during the same period and for the same taxing purpose.

VILLANUEVA V. ILOILO CITY (1968) The rule does not require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. So long as the burden of tax falls equally and impartially on all owners or operators of tenement houses similarly classified or situated, equality and uniformity is accomplished. The presumption that tax statutes are intended to operate uniformly and equally were not overthrown herein.

SANCHEZ V. CIR (1955) Separated tax levied upon a business or occupation and the property used therein does not amount to double taxation. – A license tax may be levied upon a business or occupation although the land or property used therein is subject to property tax; and the State may collect an ad valorem tax on property used in a calling, and at the same time imposes a license tax on the pursuit of that calling, the imposition of the latter kind of tax being in no sense a double tax.

PUNSALAN V. MUNICIPAL BOARD OF MANILA 95 PHIL 46 The Legislature may select what occupations shall be taxed , and in the exercise of that discretion it may tax all, or it may select for taxation certain classes and leave the others untaxed. It is not for the courts to judge what particular cities or municipalities should be empowered to impose occupation taxes in addition to those imposed by the National Government. The argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect

DOUBLE TAXATION Page | 12

TAXATION I REVIEWER ATTY. C. VILLENA to the same occupation, calling or activity by both the state and the political subdivision thereof.

that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable.

THE CITY OF MANILA V. COCA-COLA BOTTLERS PHILIPPINES (2009)

b.

When a municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, said municipality or city may no longer subject the same manufacturers, etc. to a business tax of the same Code.

4.

METHODS OF AVOIDING THE OCCURRENCE OF DOUBLE TAXATION a.

Tax treaty – formally known as convention or agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (and on capital) could be defined in terms of its purpose. First, a tax treaty is intended to promote international trade and investment in several ways, the most important of which is by allocating taxing jurisdiction between the Contracting States so as to eliminate or mitigate double taxation of income. Second, a tax treaty is intended to permit the Contracting States to better enforce their domestic laws so as to reduce tax evasion. These purposes are in fact incorporated in the title and the preamble

CIR V. SC JOHNSON & SONS (1999) In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country If the rates of tax are lowered by the state of source (Philippines), there should be a concomitant commitment on the part of the state of residence (US) to grant some form of tax relief, whether this be in the form of tax credit or exemption. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided

TAX CREDIT -- An amount allowed as a deduction of the Philippine Income tax on account of income taxes paid or incurred to foreign countries. It is given to a taxpayer in order to provide a relief from too onerous a burden of taxation in case where the same income is subject to a foreign income tax and the Philippine Income tax.

WHO CAN CLAIM TAX CREDIT 1) Citizens of the Philippines 2) Domestic corporations

CIR V. LEDNICKY (1964) The law’s intent is that the right to deduct income taxes paid to foreign government from the taxpayer’s gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes; so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from gross income and by tax credit.

CHAPTER II – LIMITATION TO THE POWER OF TAXATION I.

INHERENT LIMITATIONS – Proceed from the very nature of the taxing power itself. They are otherwise known as the elements or characteristics of taxation (SPINE) 1. Territoriality or SITUS 2. PUBLIC purpose 3. INTERNATIONAL comity 4. NON-DELEGABILITY of the taxing power 5. EXEMPTION of the government Page | 13

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong 1. A violation of the inherent limitations constitutes taking without due process of law (Vitug and Acosta, Tax Law and Jurisprudence, p. 4, citing Pepsi Cola v. Municipality of Tanauan, 69 SCRA 460) A.

PUBLIC PURPOSE – The proceeds of the tax must be used

for: (1) The support of the State; or (2) Some recognized object of government or directly to promote the welfare of the community (Vitug and Acosta, Tax Law and Jurisprudence, p. 5) o The legislature is without power to appropriate public revenues for anything but a public purpose (Sababan, Tax Law Review, p. 5) o It is the essential character of the direct object of the expenditure which must determine its validity. Incidental advantage to the public or the State, which results from the promotion of private interests, does not justify their aid by the use of public money (Pascual v. Secretary of Public Works et al, G.R. no L-10405, December 29, 1960) o Congress determines the public purpose for which a tax law is enacted. However, this will not prevent the court from questioning the propriety of such statute on the ground that the law enacted is not for a public purpose; but once it is settled that the law is for a public purpose, the court may no longer inquire into the wisdom, expediency or necessity of such tax measure.

NOTE: if the tax measure if not for public purpose, the act amounts to confiscation of property. TAX IS CONSIDERED FOR PUBLIC PURPOSES WHEN 1. It is for the welfare of the nation and/or for greater portion of the population 2. It affects the area as a community rather than as individuals 3. It is designed to support the services of the government for some of its recognized objects

TESTS TO DETERMINE PUBLIC PURPOSE

DUTY TEST – Whether the thing to be furthered by the

appropriation of public revenue is something which is the duty of the state as government to provide

NOTE: The term “public purpose” is not defined. It is an elastic

concept that can be hammered to fit modern standards. Jurisprudence states that “public purpose” should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and agrarian reform (Planters Products Inc v. Fertiphil Corp, G.R. no 166006, March 14, 2008) 2.

PROMOTION OF GENERAL WELFARE TEST – whether the proceeds of the tax will directly promote the welfare of the community in equal measure (Aban, Law of Basic Taxation, P. 53-54)

PRINCIPLES RELATIVE TO PUBLIC PURPOSE 1. 2.

Tax revenue must not be used for purely private purposes or for the exclusive benefit of private persons Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no constitutional limitation because the legislature is free to select the subjects of taxation.

NOTE: Legislature is not required to adopt a policy of “all or none” for the Congress has the power to select the object of taxation (Lutz v. Araneta, G.R. no L-7859, December 22, 1955) 3. 4.

An individual taxpayer need not derive direct benefits from tax Public purpose is continually expanding. Areas formerly left to private initiative now lose their boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times Page | 14

TAXATION I REVIEWER ATTY. C. VILLENA 5.

The public purpose of law must exist at the time of its enactment. (Pascual v. Secretary of Public Works, G.R. no L10405, December 29, 1960)

PASCUAL V. SECRETARY OF PUBLIC WORKS, 110 PHIL 331 (1960) The right of the legislature to appropriate funds is correlative with its right to tax, under constitutional provisions against taxation except for public purposes and prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose, no appropriation of state funds can be made for other than a public purpose. The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon events occupying, or acts performed, subsequently thereto, unless the latter consist of an amendment of the organic law, removing, with retrospective operation, the constitutional limitation infringed by said statute. Herein, inasmuch as the land on which the projected feeder roads were to be constructed belonged to Senator Zulueta at the time RA 920 was passed by Congress, or approved by the President, and the disbursement of said sum became effective on 20 June 1953 pursuant to Section 13 of the Act, the result is that the appropriating sough a private purpose and hence, null and void.

TIO V. VIDEOGRAM REGULATORY BOARD, 151 SCRA 208 (1987) Taxation has been made the implement of the state's police power. The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. And while it was also an objective of the DECREE to protect the movie industry, the tax remains a valid imposition. We find no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No. 1987 as unconstitutional and void. While the underlying objective of the DECREE is to protect the moribund movie industry, there is no question that public welfare is at

bottom of its enactment, considering "the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government revenues due to the drop in theatrical attendance, not to mention the fact that the activities of video establishments are virtually untaxed since mere payment of Mayor's permit and municipal license fees are required to engage in business."

TAXING POWER IS INHERENTLY LEGISLATIVE GENERAL RULE: The power to tax is exclusively vested in the B.

legislative body; hence, it may not be delegated (Delegata potestas non potest delegari).  The power to tax is inherently legislative; this is based on the principle that “taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives  The Congress contemplates the power to determine the kind, object, extent, amount, coverage and situs of tax

EXCEPTIONS: 1. DELEGATION TO LOCAL GOVERNMENT – Refers to the

power of local units to create its own sources of revenue and to levy taxes, fees and charges (Art X, Sec 5, 1987 Constitution)

QUEZON CITY V. BAYANTEL, G.R. NO 162015 (2006) The power to tax is primarily vested in the Congress. However, it may be delegated to the local government units subject to the guidelines and limitation as the Congress may provide, consistent with the basic policy of local autonomy. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass.

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. 2.

DELEGATION TO THE PRESIDENT – The authority of the President to fix tax tariff rates, import or export quotas, tonnage and wharfage dues, or other duties and imposts (Art VI, Sec 28(2), 1987 Constitution)

3.

DELEGATION TO ADMINISTRATIVE AGENCIES –

When the delegation relates merely to administrative implementation that calls for some degree of discretionary powers under sufficient standards expressed by law or implied from the policy and purposes of the Act. a. Authority of the Secretary of Finance to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the law (Sec 244, RA 8424) b. The Secretary of Finance may upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable (Sec 57, RA 8424) NOTE: Technically, this does not amount to a delegation of the powers to tax because the questions which should be determined by Congress area already answered by Congress before the tax law leaves Congress.

PHIL COMM SATELLITE CORP V. ALCUAZ, 180 SCRA 218 (1989) Fundamental is the rule that delegation of legislative power may be sustained only upon the ground that some standard for its exercise is provided and that the legislature in making the delegation has prescribed the manner of the exercise of the delegated power. Therefore, when the administrative agency concerned, respondent NTC in this case, establishes a rate, its act must both be non-

confiscatory and must have been established in the manner prescribed by the legislature; otherwise, in the absence of a fixed standard, the delegation of power becomes unconstitutional. In case of a delegation of rate-fixing power, the only standard which the legislature is required to prescribe for the guidance of the administrative authority is that the rate be reasonable and just. However, it has been held that even in the absence of an express requirement as to reasonableness, this standard may be implied.

NTC, in the exercise of its rate-fixing power, is limited by the requirements of public safety, public interest, reasonable feasibility and reasonable rates, which conjointly more than satisfy the requirements of a valid delegation of legislative power, as provided for in the provisions of EO 546 and 196.

SMITH BELL & CO V. CIR, G.R. NO L28271 (1975) There can be no uncertainty that the purpose of the provision is to impose a specific tax on wines and imitation wines. The first clause of Section 134 states so in plain language. The sole object of the sub-enumeration that follows is in turn unmistakably to prescribe the amount of the tax specifically to be paid for each type of wine and/or imitation wine so classified and described. The section therefore clearly and indubitably discloses the legislative will, leaving to the officers charged with implementation and execution thereof no more than the administrative function of determining whether a particular kind of wine or imitation wine falls in one class or another. In the performance of this function, the internal revenue officers are demonstrably guided by the sound established practices and technology of the wine industry, an industry as aged and widely dispersed as one can care to know.

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TAXATION I REVIEWER ATTY. C. VILLENA In the case at bar, the Commissioner had the petitioner's wine examined and analyzed. The petitioner, on the other hand, does not appear to have made a similar effort. On the bases of the test thus made and the authoritative and published work on the subject of wines, the Commissioner ordered the corresponding deficiency assessment to be issued. Having chosen to engage in the wine trading business, the petitioner is duty bound to know the kinds of wine it deals in, particularly insofar as such knowledge may be relevant to the proper appreciation of its tax liabilities, and cannot take comfort in its pretended ignorance of what sparkling wine is.

C.

taxation is the place or authority that has the right to impose and collect taxes (CIR v. Marubeni Corp, G.R. no 137377, December 18, 2001)

GENERAL RULE: A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised or enjoyed (51 AM JUR 87-88)

REASONS FOR THE RULE: 1.

SCOPE OF LEGISLATIVE POWER IN TAXATION 1.

2. 3.

The determination of: (SAP-MAKS) a. SUBJECTS of taxation (persons, property, occupation, excises or privileges to be taxed, provided they are within the taxing jurisdiction b. AMOUNT or rate of tax c. PURPOSES for which taxes shall be levied provided they are public purposes d. METHOD of collection e. APPORTIONMENT of the tax (Whether the tax shall be of general application or limited to a particular locality, or partly general and partly local) f. KIND of tax to be collected g. SITUS of taxation The grant of tax exemptions and condonations The power to specify or provide for administrative as well as judicial remedies (Phil Petroleum Corp v. Municaplity of Pililla, G.R. no 85318, June 3, 1991)

NON-DELEGABLE LEGISLATIVE POWERS (SuPuRSiK) 1. 2. 3. 4. 5.

Selection of SUBJECT to be taxed Determination of PURPOSES for which taxes shall be levied Fixing the RATE or amount of taxation SITUS of tax Kind of tax

TERRITORIALITY or SITUS OF TAXATION – Situs of

2.

Taxation is an act of sovereignty which could only be exercised within a country’s territorial limits This is the result of the concept that taxes are paid for the protection and services provided by the taxing authority which could not be provided outside the territorial boundaries of the taxing State

FACTORS THAT DETERMINE SITUS (K-PRICE) 1. 2. 3. 4. 5. 6.

KIND or classification of the tax being levied Situs of the thing or PROPERTY being taxed CITIZENSHIP of the taxpayer RESIDENCE of the taxpayer Source of the INCOME taxed Situs of the EXCISE, privilege, business, or occupation being taxed

SITUS OF SUBJECTS OF TAX 1. PERSONS – poll, capitation or community taxes are based upon the residence of the taxpayer, regardless of the source of income or location of the property of the taxpayer

2. PROPERTY a.

b. c.

Real property – lex rei sitae or lex situs (where the property is located) Tangible personal property – where the property is physically located although the owner resides in another jurisdiction (51 AM JUR 467) Intangible personal property

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

GENERAL RULE: Mobilia sequuntur personam (movables follow the person). The situs is the domicile of the owner.

EXCEPTIONS:

d.

e.

f.

(1) When the property has acquired a business situs in another jurisdiction; or (2) When the law provides for the situs of the subject of tax (e.g., see Sec 104 NIRC) Income – factors that determine the situs of income tax (See Sec 23 NIRC) (1) Nationality or citizenship of the taxpayer (2) Residence or domicile of the taxpayer; and (3) Source of the income Excise or privilege (upon performance of an act or the engaging in an occupation) – depends upon the place where the act is performed or occupation is engaged in —not upon the domicile of the person subject to the excise nor upon the physical location of the property and in connection with the act or occupation taxed (Allied Thread v. City Mayor of Manila, G.R. no 40296, November 21, 1984) Gratuitous transfer – the transmission of property from a donor to a donee, or from a decedent to his heirs may be subject to taxation in the state where the transferor is(was) a citizen or resident, or where the property is located in case of a non-resident

APPLICATION OF SITUS OF TAXATION KIND OF TAX SITUS Personal or Community tax

Residence or domicile of the taxpayer

Real property tax

Location of property (Lex rei sitae)

Personal property tax

-tangible: where it is physically located or permanently kept (Lex rei sitae) -intangible: subject to Sec. 104 of the NIRC and the principle of mobilia sequuntur personam

Business tax

Place of business

Excise or Privilege tax

Where the act is performed or where occupation is pursued

Sales tax

Where the sale is consummated

Income Tax

Consider (1) citizenship, (2) residence, and (3) source of income (Sec. 42, 1997 NIRC)

Transfer tax

Residence or citizenship of the taxpayer or location of property

Franchise Tax

State which granted the franchise

SITUS OF TAXATON OF INTANGIBLE PERSONAL PROPERTY GENERAL RULE: Domicile of the owner pursuant to the principle of the mobilia sequuntur personam or movables follow the person.

EXCEPTIONS: 1.

When the property has acquired a business situs in another jurisdiction; 2. When an express provision of the statute provide for another rule. Illustration: For purposes of estate and donor’s taxes, the following intangible properties are deemed with a situs in the Philippines: (1) franchise which must be exercised in the Philippines; (2) shares, obligations or bonds issued by any corporation organized or constituted in the Philippines in accordance with its laws; (3) shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines;

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TAXATION I REVIEWER ATTY. C. VILLENA (4) shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and (5) shares or rights in any partnership, business or industry established in the Philippines. (Sec. 104, 1997 NIRC).

SITUS OF PERSONS 1) COMMUNITY TAX – place where the person resides 2) INCOME TAX – a) CITIZENSHIP, or the country of which he is a citizen (National theory) – applied to RC, DC on sources of income derived within and without the Philippines b) LEGAL RESIDENCE (Domicillary theory) – applied to NRC, NRA, NRFC on sources derived within the Philippines c) Place where the income is derived (Source) – applied to RA, RFC on sources of income derived within the Philippines i. INTEREST – Interest on sources derived from the Philippines (Sec 42.A.1 NIRC) EXCEPTION: Other than those in Sec 42.A.1 NIRC – Sources derived outside of the Philippines ii. DIVIDENDS – Dividends from DC and FCs – on sources derived within the Philippines iii. SERVICES – Compensation for services personally performed in the Philippines (Sec 42.A.3 NIRC) EXCEPT: those performed outside of the Philippines (Sec 42.C.3 NIRC)

CIR V. BAIER-NICKEL, G.R. NO 153793 (2006) The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioner’s interpretation which equates source of income in labor or personal

service with the residence of the payor or the place of payment of the income. The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency of evidence to prove that the services she rendered were performed in Germany.

CIR V. MARUBENI CORP, G.R. NO 137377 (2001)

Marubeni was able to prove that not all its work was performed in the Philippines because some of them were completed in Japan in accordance with the provisions of the contracts. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside Philippines’ taxing jurisdiction and are therefore not subject to contractor’s tax. iv.

3)

RENTALS AND ROYALTIES – rentals and royalties from properties located in the Philippines EXCEPTION: rentals and royalties from properties located outside the Philippines

BUSINESS, OCCUPATION, TRANSACTION – Where the business is done, or the occupation is engaged in

MANILA ELECTRIC CO V. YATCO, 69 PHIL 89 (1939) Where the insured against also within the Philippines, the risk insured against also within the Philippines, and certain incidents of the contract are to be attended to in the Philippines, such as, payment of dividends when received in cash, sending of an unjuster into the Philippines in case of dispute, or making of proof of loss, the Commonwealth of the Philippines has the power to impose the tax upon the insured, regardless of whether the contract is executed in a foreign country and with a foreign corporation. Under such

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

circumstances, substantial elements of the contract may be said to be so situated in the Philippines as to give its government the power to tax. And, even if it be assumed that the tax imposed upon the insured will ultimately be passed on the insurer, thus constituting an indirect tax upon the foreign corporation, it would still be valid, because the foreign corporation, by the stipulations of its contract, has subjected itself to the taxing jurisdiction of the Philippines. After all, Commonwealth of the Philippines, by protecting the properties insured, benefits the foreign corporation, and it is but reasonable that the latter should pay a just contribution therefor. It would certainly be a discrimination against domestic corporations to hold the tax valid when the policy is given by them and invalid when issued by

foreign corporations. 4) TRANSFER OF PROPERTY BY DEATH OR GIFT a. b.

ESTATE TAX – residence of the decedent at the time of his death DONOR’S TAX – residence of the donor at the time of the donation

WELLS FARGO BANK V. COLLECTOR, 70 PHIL 325 (1940) Inheritance tax is not a tax on property, but upon transmission by inheritance. Originally, the settled law is that intangibles have only the domicile of the decedent at the time of his death as the situs for the purpose of inheritance tax (mobilia sequuntur personam). However, such doctrine has been decreed as a mere "fiction of law having its origin in considerations of general convenience and public policy, and cannot be applied to limit or control the right of the state to tax property within its jurisdiction," and must "yield to established fact of legal ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in inescapable and patent injustice."

certificates of stock have remained in this country up to the time when the deceased died in California, and they were in possession of one Syrena McKee, secretary of the Benguet Consolidated Mining Company, to whom they have been delivered and indorsed in blank. This endorsement gave Syrena McKee the right to vote the certificates at the general meetings of the stockholders, to collect dividends, and dispose of the shares in the manner she may deem fit, without prejudice to her liability to the owner for violation of instructions. For all practical purposes, then, Syrena McKee had the legal title to the certificates of stock held in trust for the true owner thereof. In other words, the owner residing in California has extended here her activities with respect to her intangibles so as to avail herself of the protection and benefit of the Philippine laws. Accordingly, the jurisdiction of the Philippine Government to tax must be upheld 5)

SALE OF PERSONAL PROPERTY – Where the sale is consummated or perfected

MULTIPLICITY OF SITUS – Multiplicity of situs, or the taxation of the same income or intangible subjects in several taxing jurisdictions, arises from various factors: 1. The variance in the concept of domicile for tax purposes; 2. Multiple distinct relationships that may arise with respect to intangible personal property; or 3. The use to which the property may have been devoted all of which may receive the protection of the laws of jurisdictions other than the domicile of the owner thereto.

REMEDIES AGAINST MULTIPLICITY OF SITUS Tax laws and treaties with other States may: 1. Exempt foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity 2. Credit foreign taxes paid from local taxes due 3. Allow foreign taxes as deduction from gross income; or 4. Reduce the Philippine income tax rate

In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled therein. And besides, the

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TAXATION I REVIEWER ATTY. C. VILLENA D.

INTERNATIONAL COMITY – The respect accorded by nations to each other because they are sovereign equals. It refers to the respect. Thus, the property or income of a foreign state may not be the subject of taxation by another state.

NOTE: RA 7160 expressly prohibits the LGUs from levying tax from the national government, its agencies and instrumentalities and other LGUs (see Basco v. PAGCOR, G.R. no 91649, May 14, 1991)

BASIS: Sec 2, Art II of the 1987 Constitution which provides that the Philippines adopts the generally accepted principle of international law as part of the land of the land

REASONS:

(1) In par parem non habet imperium, or as between equals there is no sovereign (Doctrine of Sovereign Equality) (2) The rule of international law that foreign government may not be sued without its consent. Thus, it would be useless to imposed a tax which could not be collected (3) The concept that when a foreign sovereign enters the territorial jurisdiction of another, it does not subject itself to the jurisdiction of the other

E. EXEMPTION OF THE GOVERNMENT GENERAL RULE: Properties of the national government as well as those of the local government units are NOT subject to tax, otherwise, it will result in the absurd situation of the government taking money from one pocket and putting it in another (Cooley on Taxation, Sec 621, 4th ed, as cited in Board of Assessment Appeals of Laguna v. CTA, G.R. no L-18125, May 31, 1963) As a matter of PUBLIC POLICY, property of the State and its municipal subdivisions devoted to government uses and purposes is generally deemed to be exempt from taxation although no express provision in the law is made therefor (51 AM JUR 503)

OTHER REASONS FOR THE RULE: (1) So that the functions of the government shall not be unduly impeded (51 AM JUR 550-51) (2) To reduce the amount of money that has to be handled by the government in the course of its operations (Maceda v. Macaraig, G.R. no 88291, June 8, 1963)

HOWEVER, the Constitution is silent on whether the Congress is prohibited from taxing the properties of the agencies of the government. Therefore, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax (MCIAA v. Marcos, G.R. no 120082, September 11, 1996)  Pursuant to the provisions of the NIRC, the national government may levy income tax upon corporations, agencies and instrumentalities owned or controlled by the government subject to exceptions provided therein (Sec 27(c) NIRC). However, under Sec 32(B)(7)(b) of the NIRC, income derived by the government from any public utility and from the exercise of any essential governmental functions are exempt from income tax  UNLESS OTHERWISE PROVIDED BY LAW, the exemption applies only to government entities through which the government immediately and directly exercises its government powers (Infantry Post Exchange v. Posadas, G.R. no 33403, September 4, 1930)

II.

CONSTITUTIONAL LIMITATIONS

CONSTITUTIONAL LIMITATIONS – restrictions imposed by the Constitution A. General or indirect B. Specific or direct

1. DUE PROCESS CLAUSE Page | 21

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong b.

ARTICLE III CONSTITUTION, SECTION 1: “No person shall be deprived of life, liberty or property without due process of law, x x x.” 

Any deprivation of life, liberty or property is with due process if it is done under the authority of a valid law and after compliance with fair and reasonable methods or procedures prescribed. The power to tax can be exercised only for a constitutionally valid public purpose and the subject of taxation must be within the taxing jurisdiction of the state.

REQUISITES: 1. 2. 3. 4.

The interest of the public generally as distinguished from those of a particular class require the intervention of the state; The means employed must be reasonably necessary to the accomplishment for the purpose and not duly oppressive; The deprivation was done under the authority of a valid law or of the constitution; and The deprivation was done after compliance with fair and reasonable method of procedure prescribed by law.

Due process in taxation REQUIRES: a. Tax must be for a public purpose; b. Imposed within territorial jurisdiction; c. No arbitrariness or oppression in assessment or collection.

Due process in taxation DOES NOT REQUIRE:

a. Determination through judicial inquiry of the property subject to tax or the amount of tax to be imposed; b. Notice and hearing as of amount of the tax or the manner of apportionment.

Any deprivation is with due process if it is done: a.

Under the authority of a law that is valid or under the Constitution itself, and that it must be reasonable, fair and just (Substantive Due Process)



After compliance with fair and reasonable methods of procedure prescribed by law, with notice or hearing, or at least an opportunity to be heard whenever necessary. (Procedural Due Process)

In a string of cases, the SC held that in order that due process of law must not be done in an arbitrary, despotic, capricious or whimsical manner.

COM. OF CUSTOMS V. CTA & CAMPOS RUEDA CO., 152 SCRA 603 Appraisers of the Bureau of Customs are given ample leeway in determining the correct customs duties under Section 1405 of the Tariff and Customs Code, Section 201 of the same Code, which prescribes the criteria for the determination of the dutiable values of imported articles, has not been complied with. What is more, administrative proceedings are not exempt from the operation of due process requirements one of which is that a finding by an administrative tribunal should be supported by substantial evidence presented at the hearing or at least contained in the records or disclosed to the parties affected. In this case the "Alert Notices" on which petitioner based its re-appraisal were not disclosed during the proceedings before the Bureau of Customs nor presented in evidence before respondent Court. The re-appraisal made by petitioner, therefore, can be faulted with arbitrariness in disregard of the standard of due process to which all governmental action should conform to impress upon it the stamp of validity. 2. EQUAL PROTECTION CLAUSE

ARTICLE III CONSTITUTION, SECTION 1:

“x x x Nor shall any person be denied the equal protection of the laws.”

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TAXATION I REVIEWER ATTY. C. VILLENA 

Persons and properties to be taxed shall be grouped, and all the same class shall be subject to the same rate, and the tax shall be administered impartially upon them. a) Equal protection of the laws signifies that all persons subject to legislation shall be treated under circumstances and conditions both in the privileges conferred and liabilities imposed. b) This doctrine prohibits class legislation which discriminates against some and favors others.

TWO WAYS EQUAL PROTECTION CLAUSE CAN BE VIOLATED IN TWO WAYS: a. b.

When classification is made where there should be none (i.e. where classification deos not rest ipon substantial differences) When classification is called for (i.e. when substantial distinctions exists but not corresponding classification is made on the basis thereof.)

Requisites for a Valid Classification 1) 2) 3) 4)

Must Must Must Must

not be arbitrary be germane to the purpose of law not be limited to existing conditions only apply equally to all members of the same class

Vertical Equity vs. Horizontal Equity VERTICAL EQUITY connotes a difference in the tax treatment between those who are financially well-off and those who have relatively less.

Equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of legislation, and a classification of the subject of legislation, and a classification is reasonable where (1) it is based upon substantial distinction; (2) these are germane to the purpose of the law; (3) the classification applies not only to present conditions, but also to future conditions substantially identical to those present; and (4) the classification applies only to those who belong to the same class. If the ordinance is intended to supply to a specific taxpayer and to no one else regardless of whether or not other entities belonging to the same class are established in the future, it is a violation of the equal protection clause, but if it is intended to apply also to similar establishments which maybe established in the future, then the tax ordinance is valid even if in the meantime, it applies to only one entity or taxpayer for the simple reason that there is so far only one member of the class subject of the tax measure.

TIU V. CA 301 SCRA 279 The Constitution does not require absolute equality among residents. A classification based on valid and reasonable standards does not violate the equal protection clause. A classification based on valid and reasonable standards does not violate the equal protection clause. 3. RULE OF TAXATION SHALL BE UNIFORM AND

EQUITABLE

ARTICLE VI CONSTITUTION, SECTION 28(1):

HORIZONTAL EQUITY implies that those who are similarly situated in life should be taxed similarly.

“The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.”

ORMOC SUGAR CO. V. TREASURER OF ORMOC CITY, 22 SCRA 603

a. UNIFORMITY (Equality or equal protection of the laws) – means all taxable articles or kinds or property of the same class shall be taxed at the same rate. A tax is uniform

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong when the same force and effect in every place where the subject of it is found. It implies equality in the burden not in amount.

b. EQUITABLE – means fair, just, reasonable and proportionate to one’s ability to pay. It requires that the apportionment of the tax burden be more or less just in the light of the taxpayer’s ability to bear the tax burden..

c.

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

d. The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable. PROGRESSIVE SYSTEM OF TAXATION  It means that as the resources of the taxpayer become higher, his rate likewise increases. It places stress on direct rather than indirect taxes or on the taxpayer’s ability to pay. It is based on the ability to pay and in implementation of the social justice principle that the more affluent should contribute more for the community’s benefit, and is best exemplified by the increase of income tax rate as net taxable income increases. 

The Constitution does not really prohibit regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation. This is a mere directive upon Congress, not a justiciable right. (Tolentino v.Secretary of Finance, G.R. No. 115455, 1994)

CITY OF BAGUIO V. DE LEON, 25 SCRA 938 Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Where the statute or

ordinance in question applies equally to all persons, firms and corporations placed in a similar situation, there is no infringement of the rule on equality. Inequality which result from a singling out of one particular class for taxation or exemption, infringe no constitutional limitation.

EASTERN THEATRICAL CO. V. ALFONSO Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Thus, the fact that some place of amusements are taxed while others like theatre and cinematographs are not does not violate uniformity and equality in taxation.

BRITISH AMERICAN TOBACCO V. CAMACHO AND PARAYNO The classification freeze provision does not violate the equal protection and uniformity of taxation. It meets the standards for valid classification: rests on a substantial distinction, is germane to the purpose of the law, applies to present and future conditions and applies equally to all those belonging to the same class. The second condition, was not fully satisfied as it failed to promote fair competition among the players in the industry. However, it does not make the assailed law unconstitutional. The classification freeze provision could hardly be considered biased toward older brands over newer brands. The provision was the result of Congress’ earnest efforts to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with other State interests. Uniformity of taxation requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. In the instant case, the CFP meets the geographical uniformity requirement because the assailed law applies to all cigarette brands in the Philippines.

Page | 24

TAXATION I REVIEWER ATTY. C. VILLENA The excise tax imposed on cigarettes is an indirect tax, and thus, regressive in character. HOWEVER, this does not mean that the law may be declared unconstitutional because the Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress shall evolve a progressive system of taxation.

by a later taxing statute, the said law shall not be valid, because it will impair the obligation of contract. 

A law which changes the terms of the contract by making new conditions, or changing those in the contract, or dispenses with those expressed, impairs the obligation.



When the State grants an exemption on the basis of a contract, consideration is presumed to be paid to the State, and the public is supposed to receive the whole equivalent there from



The non-impairment clause applies to the power of taxation but not to police power and eminent domain.



The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires. It applies only where one party is the Government and the other party, a private individual.



When an exemption is bilaterally agreed upon between the government and the taxpayer – it cannot be withdrawn without violating the non-impairment clause.



When it is unilaterally granted by law and the same is withdrawn by virtue of another law – no violation.

4. NON-IMPAIRMENT OF OBLIGATION AND CONTRACTS

ARTICLE III CONSTITUTION, SECTION 10:

“No law impairing the obligation of contract shall be passed.”

ARTICLE XII CONSTITUTION, SECTION 11:

“No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporation or association organized under the laws of the Philippines, at least 60% of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than 50 yrs. Neither shall any such franchise or right be granted except under the conditions that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.” 

The obligation of a contract is impaired when its terms and conditions are changed by law or by a party without the consent of the other, thereby weakening the position or the rights of the latter.



If a tax exemption granted by law and of the nature of a contract between the taxpayer and the government is revoked

IMUS ELECTRIC CO. V. CTA AND CIR (1967) The status of petitioner’s municipal franchises as property and property right is dependent upon or qualified by the nature and limitations of the authority under which said franchises were granted by the municipal corporations concerned. Such authority shall be subject to the power of Congress to alter, modify or repeal the same. In effecting such alteration, our legislative department has merely exercised a power expressly reserved thereto by said franchises, and has acted in conformity therewith not in violation of the provisions thereof or to the detriment of the rights thereby vested in petitioner herein. Page | 25

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong which shall be added to the unpaid amount from due date until it is paid. (Sec. 161 LGC)

PHIL. RURAL ELECTRIC COOPERATIVES ASSOCIATION INC. ET AL. V. DILG AND DOF (2003)

PROHIBITION AGAINST TAXATION OF REAL PROPERTY OF CHARITABLE INSTITUTIONS, CHURCHES, PARSONAGES, OR CONVENTS, MOSQUES AND NON-PROFIT CEMETERIES

It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligation of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change must not only impair the obligation of the existing contract, but the impairment must be substantial.

6.

A law which changes the terms of a legal contract between parties, either in the time or mode of performance, or imposes new conditions, or dispenses with those expressed, or authorizes for its satisfaction something different from that provided in its terms, is law which impairs the obligation of a contract and is therefore null and void.

“Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.

Moreover, to constitute impairment, the law must affect a change in the rights of the parties with reference to each other and not with respect to non-parties.

ARTICLE VI CONSTITUTION, SECTION 28(3):

   

5. NON-IMPRISONMENT FOR NON PAYMENT OF POLL

TAX

ARTICLE III CONSTITUTION, SECTION 20:

“No person shall be imprisoned for debt or non-payment of poll tax.” POLL TAX – tax imposed on a per head basis. The present “poll tax” is the “community tax.”

 

Lest of the tax exemption: the use and not ownership of the property To be tax-exempt, the property must be actually, directly and exclusively used for the purposes mentioned. The word “exclusively” means “primarily”. The exemption is not limited to property actually indispensable but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes. The constitutional exemption applies only to property tax. However, it would seem that under existing law, gifts made in favor or religious charitable and educational organizations would nevertheless qualify for donor’s gift tax exemption (Sec. 101(9)(3), NIRC)

ABRA VALLEY COLLEGE V. AQUINO, 162 SCRA 106



A person cannot be imprisoned for non-payment of basic community tax because payment thereof is not mandatory, but may be imprisoned for other violations of the Community Tax Law, such as falsification of the community tax certificate, or for failure to pay other taxes.

The lot which not used for commercial purposes but serves solely as a sort of lodging place, also qualifies for exemption because this constitutes incidental use in religious functions. Exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.



The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the rate of 24% per annum

The TEST OF EXEMPTION from taxation is the use of the property for purposes mentioned in the Constitution. Page | 26

TAXATION I REVIEWER ATTY. C. VILLENA institutions, their assets shall be disposed of in the manner provided by law.

LUNG CENTER V. QC (2004) Under the Constitution, for lands, building and improvements of the charitable institution to be considered exempt, the same should not only be exclusively used for charitable purposes – it is required that such property be used actually and directly for such purposes. Portions of the land leased to private entities as well as those parts of Lung Center leased to private individuals are not exempt from taxes but portions of the land occupied by the hospital used for its patients, whether paying or non-paying, are exempt from paying real property tax. Since taxation is the rule and exemption is the exception, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. Thus, “exclusively” means SOLELY. What is meant by actual, direct and exclusive used of the property for charitable purposes is the DIRECT, IMMEDIATE, ACTUAL, application of the PROPERTY itself to the purposes for which the charitable institution is organized. It is NOT the use of INCOME of the property which is the controlling factor (to exempt) 7. PROHIBITION AGAINST TAXATION OF NON-STOCK

NON-PROFIT EDUCATIONAL INSTITUTIONS ARTICLE XIV CONSTITUTION, SECTION 4(3):

“All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subkect to the limitations provided by law, including restrictions on dividends and provisions for reinvestment.”

ARTICLE XIV CONSTITUTION, SECTION 4(3): “All grants, endowments, donations or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax.”

SECTION 30, NIRC: EXEMPTIONS FROM TAX ON CORPORATIONS (H) A nonstick and nonprofit educational institution.

Constitutional and Statutory Provisions  Section 30 NIRC last paragraph note that its provisions,





particularly the phrase “regardless of dispositions made of such income” is in conflict with Article XIV, Section 4(3), Constitution. The conflict, however, has already been settled. Section 1 of DOF Order No. 149-95, which amended DOF Order No. 92-88 and DOF Order No. 137-87, provides that these non-stock, non-profit educational institutions shall be subject to internal revenue taxes on income from trade, business or other activity the conduct of which is not related to the exercise or performance by such educational institution of its educational purpose of function. Proprietary educational institutions including those cooperatively owned MAY likewise be entitled to such exemptions subject to limitation: a. Provided by law b. Provisions for reinvestments

CIR V. CA & YMCA 298 SCRA 83

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

Under the NIRC, while Section 27 of the NIRC provides that nonprofit organizations and clubs shall not be taxed on their income, it also provides that this exemption will NOT apply to income derived from (1) properties. Real or personal, and (2) any other activities conducted for profit shall be subject to tax Under the Constitution, Article VI, Section 28 exempts “charitable institutions” from the payment not only of taxes. However according to Constitutional framers, the exemption does not pertain to income tax but only to property taxes. For the YMCA o be granted the exemption as an “educational institution” under the Constitution Article XIV Section 4, it must prove with substantial evidence that: a. It falls under the classification non-stock, non-profit educational institution; and b. The income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes.

“All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills, shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.”   

Bill should embrace only one subject expressed in the title thereof Three readings on three separate days Printed copies in final form distributed three days before the passage

TOLENTINO V. SECRETARY OF FINANCE 249 SCRA 628 What the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House can be expected to be more sensitive to the local needs and problems. The Senator’s power is not only to “only to concur with amendments” but also to propose amendments.

CIR V. CA AND ATENEO DE MANILA (1997) In case of doubt, statutes on tax imposition are to be construed strongly against the government and in favor of citizens, because the burdens are NOT to be imposed nor presumed beyond what is expressed. Ateneo’s IPC never sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Funds received by Ateneo are technically not a fee. They may however fall as gifts or donations which are “tax-exempt” as shown by Ateneo’s compliance with the NIRC requirement provided for the exemption of such gifts to an educational institutions. 8. PASSAGE OF TAX BILLS

9. GRANTING OF TAX EXEMPTION

ARTICLE VI CONSTITUTION, SECTION 28(4):

“No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.” 

It requires the concurrence of a majority not of attendees constituting a quorum but of all members of the Congress.

JOHN HAY PEOPLES ALTERNATIVE COALITION, ET AL. V. LIM ET AL. (2003) It is the legislature, unless limited by a provision of the state constitution that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may

ARTICLE VI CONSTITUTION, SECTION 24: Page | 28

TAXATION I REVIEWER ATTY. C. VILLENA same state or taxing district are obliged to pay. Laws granting tax exemption is strictly construed against the taxpayer and liberally in favor of the taxing power

itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. The challenged grant of tax exemption would circumvent the Constitution’s imposition that a law granting any tax exemption must have the concurrence of a majority of all the member of Congress. 10. VETO POWER OF THE PRESIDENT

B.

“The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object. Shall not affect item or items to which he does not object

11.

JUDICIAL POERT TO REVIEW LEGALITY OF TAX

EXPRESS OR AFFIRMATIVE – expressly provided the Constitution, statutes, treaties, ordinance, franchise or contract. IMPLIED OR EXEMPTION BY OMISSION – the exemption applies to all those who are not expressly mentioned in the law as subject to tax. CONTRACTUAL – tax exemption is consideration of a contractual agreement with the government.

2.

ARTICLE VI CONSTITUTION, SECTION 27(2):



KINDS OF EXEMPTION 1.

3.

C.

NATURE OF POWER TO GRANT TAX EXEMPTION a) A presumption that the public interest will be subserved by the exemption allowed. Grant of exemption rests upon that such will benefit the body of the people and not upon any idea of lessening the burden of the individual owners of property b) Purpose is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of exemptions. c) Created in a treaty on grounds of reciprocity or to lessen the rigors of the international double or multiple taxation. d) Equity is not a ground for tax exemption

ARTICLE VIII CONSTITUTION, SECTION 5:

The Supreme Court shall have the following powers: xxx (2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rues of Court may provide, final judgements and orders of lowers court: xxx (b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto

D.

CONSTITUTIONAL EXEMPTION 

CHAPTER III – EXEMPTIONS FROM TAXATION I. IN GENERAL A.

DEFINITION TAX EXEMPTION is a grant of immunity to particular class, from a tax which persons or corporation generally within the

E.

No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

LEGISLATIVE GRANT OF EXEMPTION 

Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements used exclusively for religious, charitable or educational

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong purposes shall be exempt from taxation. (section 28 (3), Art. VI, 1987 Constitution)

CIR V. BOTELHO (1967) No tax exemption — like any other legal exemption or exception — is given without any reason therefor. In much the same way as other statutory commands, its avowed purpose is some public benefit or interest, which the law-making body considers sufficient to offset the monetary loss entitled in the grant of the exemption It should be noted, however, that there is no constitutional injunction against granting tax exemptions to particular persons. In fact, it is not unusual to grant legislative franchises to specific individuals or entities, conferring tax exemptions thereto. What the fundamental law forbids is the denial of equal protection, such as through unreasonable discrimination or classification.

CIR V. GCL RETIREMENT PLAN (1992) Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose. The tax advantage was conceived in order to encourage the formation and establishment of such private Plans for the benefit of laborers and employees outside of the Social Security Act.

F.

EXEMPTION CREATED BY TREATY 

G.

Exemption is on grounds of reciprocity or to lessen the rigors of the international double or multiple taxation.

EXEMPTION OF GOVERNMENT AGENCIES 1. Sec 27(C) – Exempt FROM INCOME TAX: (1) GSIS (2) SSS (3) Phil Health Insurance Corp (PHIC) (4) PCSO

2. 3.

Sec 30(I) – Government Educational Institution = EXEMPT Sec 32 (B) (7) (b) – Income from public utility or exercise of governmental functions = EXEMPT

PHIL PORTS AUTHORITY V. CITY OF ILOILO (2003) Any income or profit generated by an entity, even of a corporation organized without any intention of realizing profit in the conduct of its activities, is subject to tax. What matters is the established fact that it leased out its building to ten private entities from which it regularly earned substantial income. Thus, in the absence of any proof of exemption therefrom, petitioner is liable for the assessed business taxes.

PHIL FISHERIES DEV’T AUTHORITY V. CA (2007) The Authority is an instrumentality of the national government. It is liable to pay real property taxes with respect to those portions which are leased to private entities. Instrumentalities of the national government are exempt from local taxes except with respect to real property taxes.

II. TAX AMNESTY A. DEFINITION AND SAMPLE TAX AMNESTY PROGRAM a. RA No. 9480 When the case is not final and executory, the corporation may apply for tax amnesty. The BIR will check if they could apply tax amnesty.

PHIL BANKING CORP V. CIR (2009) A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violation of a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. Page | 30

TAXATION I REVIEWER ATTY. C. VILLENA 12 months from date of acquisition you can reduce the tax on the capital gain by 50%.

Metrobank is a qualified tax amnesty applicant, having complied with the requirements enumerated in RA 9480. The completion of these requirements shall be deemed full compliance with the tax amnesty program, the law mandates that the taxpayer shall thereafter be immune from the payment of taxes, as well as the appurtenant civil, criminal or administrative penalties arising from the failure to pay any and all internal revenue taxes for taxable year and prior years.

B. VOLUNTARY ASSESSMENT PROGRAM/LAST PRIORITY IN AUDIT CIR V. ARIETE (2010) VAP is in the nature of a tax amnesty and must be strictly construed against the taxpayer-applicant. The essence of the program is voluntariness. However, the language of the law is clear and unequivocal. Therefore, it must be given its literal application and applied without interpretation.

CIR V. GONZALES (2010) Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. A tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority.

III. TAX AVOIDANCE V. TAX EVASION TAX AVOIDANCE is also known as “tax minimization”. It is the use of legally permissible alternative tax rates to avoid or reduce tax liability Ex: Following the “holding period rule” in capital asset transactions, by postponing the sale of a capital asset until after

TAX EVASION is also known as “tax dodging”. It is the use of illegal means to defeat or lessen the payment of the tax

Ex: deliberate padding expenses, understatement of income, etc.

1. 2. 3.

ELEMENTS OF TAX EVASION

The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying no tax when it is shown that tax is due An accompanying state of mind which is described as being “evil”, “in bad faith”, “willful”, or “deliberate” and not “accidental” A course of action (or failure of action) which is unlawful

CIR V. ESTATE OF BENIGNO TODA JR. (2004) Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.

CHAPTER IV – SOURCES AND CONSTRUCTION OF TAX LAWS I. SOURCES OF TAX LAW 1. STATUTES Existing laws

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong i. ii. iii. iv. v. vi.

National – National Internal Revenue Code of 1997 Local – Book II, 1991 Local Government Code Tariff and Customs Code BCDA Law PEZA law Omnibus Investment Law

2. REVENUE REGULATIONS a. b. c.

Authority to Promulgate – Secretary of Finance shall promulgate all needful rules and regulations for effective enforcement of NIRC (Sec 244 NIRC) Specific provisions to be contained in Revenue Regulation (Sec 245 NIRC) Force and Effect of Revenue Regulation – shall be valid only when they are not contrary to laws and the Constitution

ASTIRUAS SUGAR CENTRAL V. COMMISSIONER, 29 SCRA 617 (1969) The one-year period prescribed in the Philippine Tariff Act of 1909

is non-extendible and compliance therewith is mandatory.

The provisions invoked by the petitioner (to sustain his claim for refund) offer two options to an importer. The first, under sec. 105 (x), gives him the privilege of importing, free from import duties, the containers mentioned therein as long as he exports them within one year from the date of acceptance of the import entry, which period as shown above, is not extendible. The second, presented by sec. 106 (b), contemplates a case where import duties are first paid, subject to refund to the extent of 99% of the amount paid, provided the articles mentioned therein are exported within three years from importation.

Customs Code as long as it is assured, by the filing of a bond, that the same shall be exported within the relatively short period of one year from the date of acceptance of the import entry. Where an importer cannot provide such assurance, then the Government, under sec. 106(b) of said Code, would require payment of the corresponding duties first.

BPI LEASINGCORP V. CA AND CIR, G.R. NO 127624 (2003) The questioned revenue regulation is legislative in nature. Administrative issuances may be distinguished according to their nature and substance: legislative and interpretative. A legislative rule is in the matter of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing. The questioned revenue regulation to be legislative in nature. Sec 1 of Revenue Regulation 19-86 plainly states that it was promulgated pursuant to Sec 277 NIRC. Sec 277 (now Section 244) is an express grant of authority to the Secretary of Finance to promulgate all needful rules and regulations for the effective enforcement of the provisions of the NIRC. It is prospective in nature. The principle is well entrenched that statutes, including administrative rules and regulations, operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or by necessary implication. 1 In the present case, there is no indication that the revenue regulation may operate retroactively. Furthermore, there is an express provision stating that it "shall take effect on January 1, 1987," and that it "shall be applicable to all leases written on or after the said date." Being clear on its prospective application, it must be given its literal meaning and applied without further interpretation. Thus, BLC is not in a position to invoke the provisions of Revenue Regulation 19-86 for lease rentals it received prior to January 1, 1987.

It would seem then that the Government would forego collecting duties on the articles mentioned in section 105(x) of Tariff and Page | 32

TAXATION I REVIEWER ATTY. C. VILLENA 3.

BIR ISSUANCES: BIR REVENUE ADMINISTRATIVE ORDER (RAO) NO 2-2001 – This RAO shall, in general, apply to all revenue rulings and issuances of the Bureau of Internal Revenue that pertain to the implementation of the provisions of the Tax Code and other tax laws a) RULINGS OF FIRST IMPRESSION - These refer to the rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws without established precedent, and which are issued in response to a specific request for ruling filed by a taxpayer with the Bureau of Internal Revenue. Provided, however, that the term shall include reversal, modification or revocation of any existing ruling. b) RULINGS WITH ESTABLISHED PRECEDENTS - These refer to mere reiteration of previous rulings, opinions and interpretations of the Commissioner, as delegated to duly authorized internal revenue officers (i.e., Deputy Commissioner, Legal and Inspection Group; Assistant Commissioner, Legal Service; Regional Directors)that are issued in response to a specific request for ruling filed by a taxpayer with the Bureau of Internal Revenue. c) REVENUE MEMORANDUM RULINGS (RMR) - These refer to the rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. d) REVENUE TRAVEL ASSIGNMENT ORDERS (RTAO) These orders assign revenue personnel to specific functions in specific units. Travel assignment orders specifically mention the names of revenue personnel concerned. e) REVENUE SPECIAL ORDERS (RSO) - Instructions or directives for the accomplishment of special

assignments or missions of significance which are temporary in nature or for a definite period of time. These issuances specifically mention the personnel or units of organization concerned. f) REVENUE MEMORANDUM CIRCULARS (RMC) - These issuances shall disseminate and embody pertinent and applicable portions, as well as amplifications of the rules, precedents, laws, regulations, opinions and other orders and directives issued by or administered by the Commissioner of Internal Revenue, and by offices and agencies other than the Bureau of Internal Revenue, for the information, guidance or compliance of revenue personnel. g) REVENUE MEMORANDUM ORDERS (RMO) - These are directives or instructions outlining procedures, techniques, methods, processes, operations, activities, work flow, and the like, which are necessary to carry out programs or to achieve policy goals and objectives. These issuances may be of general or of limited scope yet in any case require definite compliance by those concerned. They are not addressed to any particular group of employees or offices because they are for general information, but those directly concerned with the compliance of these provisions are either definitely stated, or unmistakably implied thereat. h) REVENUE AUDIT MEMORANDUM ORDERS (RAMO) These refer to the uniform audit procedures to be observed by revenue officers in the conduct of audit of tax cases and in their submission of reports of investigation. i) REVENUE DELEGATION OF AUTHORITY ORDERS (RDAO) - These refer to the functions delegated by the Commissioner to revenue officers in accordance with law. j) REVENUE ADMINISTRATIVE ORDERS (RAO) - These refer to matters that deal strictly with more or less permanent administrative set-up of the Bureau. Delineation of organizational structures, statements of functions and/or responsibilities, definitions and delegations of authority, staffing and personnel

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong requirements, standards of performance, establishment of Bureau-wide programs, installation of systems, and the like, are most likely subject matter of Revenue Administrative Orders. These issuances are for general guidance, compliance and/or information.

POWER OF CIR TO INTERPRET TAX LAWS (SEC 4 NIRC) 1. 2.

3. 4. 5. 6. 7. 8.

SUMMON persons on certain cases pending investigation Inquire into bank deposits – Only to determine the gross estate of decedent and not to determine the income Except: Secrecy of bank deposits law EXAMINE books of the accounts of the taxpayer and other documents OBTAIN information Take TESTIMONY of persons ADMINISTER oaths ARREST persons who have violated the provisions of the tax code (should have warrant of arrest first) Take INVENTORY

RETROACTIVITY OF RULINGS (SEC 246 NIRC) – Not retroactive if the revocation, modification or reversal shall be prejudicial to the taxpayer

EXCEPTIONS: 1. 2. 3.

Where the taxpayer deliberately misstates or omits material facs from his return or in any document required of him by the BIR Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based Where the taxpayer acted in bad faith

CIR V. BURROUGHS LTD, G.R. NO L-66653 (1986) Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shag not be given retroactive application if the revocation,

modification, or reversal will be prejudicial to the taxpayer except in the following cases (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (c) where the taxpayer acted in bad faith.

CIR V. PHILIPPINE HEALTH CARE PROVIDERS, G.R. NO 168129 (2007) Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars, rules and regulations promulgated by the Commissioner of Internal Revenue have no retroactive application if to apply them would prejudice the taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (2) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith. There is no showing that respondent "deliberately committed mistakes or omitted material facts" when it obtained VAT Ruling No. 231-88 from the BIR. The CTA held that respondent's letter which served as the basis for the VAT ruling "sufficiently described" its business and "there is no way the BIR could be misled by the said representation as to the real nature" of said business. “The failure of respondent to refer to itself as a health maintenance organization is not an indication of bad faith or a deliberate attempt to make false representations."

PBCOM V. CIR 302 SCRA 241 (1999) When the Acting Commissioner of Internal Revenue issued RMC 785, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular

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TAXATION I REVIEWER ATTY. C. VILLENA created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. As pointed out by the respondent courts, the nullification of RMC No. 785 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC,for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.

Revenue laws imposing taxes on business must be strictly construed in favor of the citizen. In construing a word or expression in the statute susceptible of two or more meanings, the court will adopt that interpretation most in accord with the manifest purpose of the statute as gathered from the context. Where a particular word is obscure or of doubtful meaning, taken by itself, its obscurity or doubt may be removed by reference to associate words.

OPINIONS OF THE SECRETARY OF JUSTICE –

If the question presented in the interpretation of a tariff law is one of doubt, the doubt would be resolved in favor of the importer, as duties are never imposed upon citizens upon vague and doubtful interpretation.

LEGISLATIVE MATERIALS

PHIL HEALTH CARE PROVIDERS INC V. CIR, G.R. NO 167330 (2009)

Administrative rules and regulations, rulings and opinions of tax officials particularly the CIR, including opinions of the Secretary of Justice.

COURT DECISION – Decision of the Supreme Court applying or interpreting existing tax laws binding on all subordinates courts and have the force and effect of law. They form part of the legal system of the Philippines (Art. 8 NCC). They constitute evidence of what the law means.

II. CONSTRUCTION OF TAX LAWS, EXEMPTIONS AND REFUNDS 1. GENERAL RULES OF CONSTRUCTION OF TAX LAWS LUZON STEVEDORING V. TRINIDAD, 43 PHIL 803 (1922)

There was no legislative intent to impose DST on health care agreements of HMOs. When the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an HMO. Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements were never, at any time, recognized as insurance

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong contracts or deemed engaged in the business of insurance within the context of the provision. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."

The settled rule is that good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax laws are sufficient justification to delete the imposition of surcharges and interest. In refuting liability for the local franchise and business taxes, we do not believe SMART relied in good faith in the findings and conclusion of the Bureau of Local Government and Finance (BLGF).

RODRIGUEZ INC V. COLLECTOR, 28 SCRA 119 (1969) 2. CONSTRUCTION OF TAX EXEMPTIONS CITY OF ILOILO V. SMART, G.R. NO 167260 (2009) The term "exemption" in Section 23 of the Public Telecoms Act does not mean tax exemption; rather, it refers to exemption from certain regulatory or reporting requirements imposed by government agencies such as the National Telecommunications Commission. The thrust of the Public Telecoms Act is to promote the gradual deregulation of entry, pricing, and operations of all public telecommunications entities, and thus to level the playing field in the telecommunications industry. The language of Section 23 and the proceedings of both Houses of Congress are bereft of anything that would signify the grant of tax exemptions to all telecommunications entities. Intent to grant tax exemption cannot therefore be discerned from the law; the term "exemption" is too general to include tax exemption and runs counter to the requirement that the grant of tax exemption should be stated in clear and unequivocal language too plain to be beyond doubt or mistake. Since SMART cannot validly claim any tax exemption based either on Section 9 of its franchise or Section 23 of the Public Telecoms Act, it follows that petitioner can impose and collect the local franchise and business taxes amounting to P764,545.29 it assessed against SMART. Aside from these, SMART should also be made to pay surcharge and interests on the taxes due.

It has been the constant and uniform holding of the Supreme Court that exemption from taxation is not favored and is never presumed; in fact, if it is granted, the grant must be strictly construed against the taxpayer. Affirmatively put, the law requires courts to frown on alleged exemptions from taxation, hence, an exempting provision in a legislative enactment should be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. This should be applied to the case at bar where the law invoked (Section 9 of Republic Act No. 333) does not make any reference whatsoever to exemption of income derived from sale of expropriated property there under.

WONDER MECHANICAL ENGINEERING V. CTA, 64 SCRA 555 (1975) An industry to be entitled to a tax exemption under RA 35 must be "new and necessary" and that the tax exemption was granted to new and necessary industries as an incentive to greater and adequate production of products made scarce by the second world war which wrought havoc on our national economy, a production "sufficient to meet local demand or consumption"; that will contribute "to the attainment of a stable and balanced national economy"; an industry that "will make its products available to the general public in quantities and at prices which will justify its operation."

Viewed in the light of the foregoing reasons for the State grant of tax exemption, We are firmly convinced that petitioner was granted tax Page | 36

TAXATION I REVIEWER ATTY. C. VILLENA exemption in the manufacture and sale "of machines for making cigarette paper, pails, lead washers, nails, rivets, candies, etc.", as explicitly stated in the Certificate of Exemption. But it is quite difficult for us to believe that the manufacture of steel chairs, jeep parts, and other articles not constituting machines for making certain products would fall under the classification of "new and necessary" industries envisioned in Republic Acts 35 and 901 as to entitle the petitioner to tax exemption.

There is no way to dispute the "cardinal rule in taxation that exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right thereto by the dearest grant of organic or statute law".

Tax exemption must be clearly expressed and cannot be established by implication. Exemption from a common burden cannot be permitted to exist upon vague implication.

REPUBLIC FLOUR MILLS V. CIR 31 SCRA 148 (1970) It is true that in the construction of tax statutes tax exemptions are not favored in the law, and are construed strictissimi juris against the taxpayer. However, it is equally a recognized principle that where the provision of the law is clear and unambiguous, so that there is no occasion for the court’s seeking the legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction.

In this case, we find the provision of Section 186-A – “whenever a tax free product is utilized, etc.” – all encompassing to comprehend taxfree raw materials, even if imported. Where the law provided no qualification for the granting of the privilege, the court is not at liberty to supply any.

3.

CONSTRUCTION OF TAX REFUNDS – Tax refunds are in the nature of TAX EXEMPTIONS. They are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statue law.

RESINS INC V. AUDITOR GENERAL, 25 SCRA 754 (1968) Tax refund undoubtedly partakes of a nature of an exemption, it cannot be allowed unless granted in the most explicit and categorical language. In Esso Standard Eastern Inc v. Acting Commissioner of Customs, has been the constant and uniform holding that exemption from taxation is not favored and is never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi juris."

KEPCO PHILS CORP V. CIR, G.R. NO 179356 (2009) It is settled that tax refunds are in the nature of tax exemptions. Laws granting exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Where the taxpayer claims a refund, the CTA as a court of record is required to conduct a formal trial (trial de novo) to prove every minute aspect of the claim.

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

CONSTRUCTION OF TAX LAWS 1.

2. 3. 4.

5.

6. 7. 8.

When legislative intent is clear – Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent o They should not be construed as to permit the taxpayer easily to evade the payment of taxes. Tax laws are PROSPECTIVE in operation (subject to exceptions) LEGISLATIVE INTENTION must be considered – Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent (51 Am Jur 361) Where there is DOUBT – In every case of doubt, in tax statutes imposing payment of tax, laws are construed strictly against the government and liberally in favor of the tax payer (Manila Railroad v. Collector of Customs, G.R. no 10214, November 4, 1915) o No person or property is subject to taxation unless within the terms or plain import of a taxing statute. In every case of doubt, tax statutes are construed strictly against the government and liberally in favor of the taxpayer. o Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. Where the language is PLAIN – Rule of strict construction against the government does not apply where the language of the tax is plain and there is no doubt as to the legislative intent (51 Am Jur 368). The words employed are to be given their ordinary meaning Where the taxpayer claims EXEMPTION – Exemption are construed strictly against the one who asserts the clam of exemption. Public purpose is always presumed Provisions of the taxing act are not to extended by implication Tax laws are special laws and prevail over general laws

APPLICATION OF TAX LAWS GENERAL RULE: Tax laws are prospective in operation

EXCEPTION: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly

the legislative intent (Cebu Portland Cement v. Collector, G.R. no 18649, February 24, 1965)

EXCEPTION TO NON-RETROACTIVE APPLICATION OF TAX RULINGS TO TAXPAYERS 1. 2. 3.

Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or Where the taxpayer acted in bad faith (Aban, Law on Basic Taxation in the Philippines)

KINDS OF PROVISIONS OF TAX 1.

2.

MANDATORY – Those provisions intended for the security of the citizens which are designed to insure equality of taxation or certainty as to the nature and amount of each person’s tax DIRECTORY – Those provisions designed merely for the information or direction of officers to secure methodical and systematic modes of proceedings

IMPORTANCE OF DISTINCTION – The omission to follow mandatory provisions renders invalid the act or proceeding to which it relates while omission to follow directory provisions does not involve such consequence

PART II – INCOME TAXATION CHAPTER I – GENERAL PRINCIPLES I. OVERVIEW OF INCOME TAXATION 1. INCOME TAX – is a tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on a

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TAXATION I REVIEWER ATTY. C. VILLENA person’s income, emoluments, profits and the like. Income tax is a direct tax on actual or presumed income (gross or net) of taxpayers during the taxable year.





c) Semi-Schedular or Semi-Global Tax System It is a tax on the net income or the entire income realized in one taxable year, levied upon corporate an individual’s income in excess of specified amounts, net of certain deductions and exemptions provided by law. A final income tax may also be imposed on certain onetime transactions like the sale of real property classified as capital assets

FISHER V. TRINIDAD, 43 PHIL 973 An income tax on the yearly profits arising from property, salary, private revenue, capital invested, and all other sources of income. What is taxed is the profit, not the source. 2. PHILIPPINE INCOME TAX LAW 

3.

It is embodied in Title II (Tax on Income) of the NIRC as well as in numerous: (a) revenue regulations promulgated by the Secretary of Finance upon recommendation of CIR; and (b) BIR rulings and other administrative issuances signed by the CIR to implement and interpret various provisions of the tax law.

INCOME TAX SYSTEM a) Global Tax System – (prevailing until 1981) All items of gross income, deductions, and personal and additional exemptions, if any, were declared in one income tax return, and one set of tax rates were applied on the net taxable income. b)

deductions) or net income. i.e. Gross Income less allowable deductions)

Schedular Tax System - (introduced by BP 135) Different types of income are subject to different rates, whether graduated or flat income tax rates. Tax rates will depend on the classification of the taxable income (without

– Global, in sense that, all compensation income, business or professional income, capital gain, passive income, and other income not subject to final tax are added together to arrive at the gross income and after deducting the sum allowable deductions from business or professional income, capital gain and passive income and other income not subject to final tax, in the case of corporation, as well as personal and additional exemptions in the case of individual taxpayer, the taxable income i.e. Gross income less allowable deductions and exemptions) if subjected to one set of graduated tax rates (if individual) or normal corporate income tax rate (if corporation) – Schedular, in the sense that, passive investment incomes subject to final tax and capital gains from the sale or transfer of shares of stocks of a domestic corporation and real properties remain subject to different sets of tax rates covered by different tax returns.

d) Progressive System – The tax rate increases as the tax base increases.

e) Regressive System – The tax rate increases as the tax base increases.

4. FEATURES OF PHILIPPINE INCOME TAXATION a) Direct Tax – the tax burden is borne by the income recipient upon whom the tax is imposed. It is a tax demanded from the very person who, it is intended or desired, should pay it.

b) Progressive Tax – the tax base increases as the tax

rate increases. It is founded on the “ability to pay principle (those who receive more income and thus have more capacity to pay shall pay more in taxes)” and is consistent

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong with the Constitutional provision that “Congress shall evolve a progressive system of taxation.”

he qualifies as a non-resident citizen; hence, his foreignsource income shall be exempt from Philippine income tax.

b) Residence or Domicile Principle – An alien is

c) Comprehensive System of imposing Income

subject to Philippine income tax because his residence in the Philippines. Thus, a resident alien is liable to pay Philippine income tax only on his income from sources within the Philippines but is exempt from tax on his income from sources outside the Philippines.

Tax – by adopting the citizenship principle, the residence principle, and the source principle.

d) Semi-Schedular or Semi-Global System – taxable income (i.e. gross income less allowable deductions and exemptions) is subjected to one graduated tax rates (if an individual) or normal corporate income tax rate (if a corporation). Passive investment incomes subject to final tax and capital gains from sales of shares of stocks of a domestic corporation and real properties remain subject to different sets of tax rates and covered by different tax returns

c) Source of Income Principle – An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines, such as dividend, interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.

e) American Origin – the authoritative decisions of the

US courts and officials charged with enforcing US Internal Revenue Code have peculiar force and persuasive effect for the Philippines. Great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution.

5. CRITERIA IN IMPOSING INCOME TAX 

The income tax law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of resident citizen and domestic corporations that subject them to income tax liability on their income from all sources within and without the Philippines, while the law adopts the source rule with respect to income received by taxpayers, other than resident citizen and domestic corporations. (Tan v. Del Rosario, 237 SCRA 324, 334)

II.

GENERAL PRINCIPLES OF INCOME TAXATION SECTION 23, NIRC 1. RESIDENT FILIPINO CITIZEN - A citizen of the 2.

3.

OVERSEAS FILIPINO CONTRACT WORKER OR SEAMAN - An individual citizen of the Philippines who is

working and deriving income from abroad such as an overseas contract worker is taxable only on income from sources within the Philippines: provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker.

a) Citizenship or Nationality Principle – A citizen of the Philippines is subject to Philippine income tax (a) on his worldwide income, if he resides in the Philippines, or (b) only in his Philippine-source income, if

Philippines residing therein is taxable on all income derived from sources within and without the Philippines. NONRESIDENT FILIPINO CITIZEN - A nonresident citizen is taxable only on income derived from sources within the Philippines

4.

RESIDENT OR NONRESIDENT ALIEN INDIVIDUAL – As an alien individual, whether a resident or not of the

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TAXATION I REVIEWER ATTY. C. VILLENA

5.

6.

Philippines, is taxable only on income derived from sources within the Philippines DOMESTIC CORPORATION – A domestic corporation is taxable on all income derived from sources within and without the Philippines. FOREIGN CORPORATION – A foreign corporation, whether engaged or ot in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

taxable on all income derived from sources within and without the Philippines. a. Those who are citizens of the Philippines at the time of adoption of the new Constitution (Feb. 2, 1987) b. Those who fathers or mothers are citizens of the Philippines c. Those born before Jan. 17, 1973 of Filipino mothers, who upon reaching the age of majority, elected Philippine citizenship d. Those who are naturalized in accordance with law.

CHAPTER II – CLASSIFICATION OF INCOME TAXPAYERS

2.

I. SCOPE OF INCOME TAXATION 1.

DEFINITION OF TAXPAYER sec. 22 (N) – any person subject to tax imposed by THE TAX CODE

2.

DEFINITION OF PERSON sec 22 (A) – means an individual, a trust, estate or corporation

3.

WHO IS A PERSON LIABLE TO TAX

CIR V. PROCTER & GAMBLE (1991) A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax.

NON-RESIDENT CITIZEN OF THE PHILIPPINES sec. 22 (E) Filipino citizens who are physically present abroad for an uninterrupted period covering an entire taxable year. a.

A non-resident citizen is one who establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein, including an immigrant, permanent employee and contract worker or seaman. Such Filipino shall be considered a nonresident citizen for such taxable year with respect to the income he derived from foreign sources from the date he actually departed from the Philippines.

b.

A Filipino citizen who has been previously considered as a non-resident citizen, and who arrives in the Philippines at any time during the taxable year to reside therein permanently shall also be considered a nonresident citizen for the taxable year in which he arrived in the Philippines, with respect to this income derived from sources abroad until the date of his arrival in the Philippines

SILK AIR PTE V. CIR (2010) The proper party to seek a refund of an indirect tax is the STATUTORY TAXPAYER, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden to another.

II. INDIVIDUAL TAXPAYERS A.

CITIZENS sec 1-2, Art IV 1987 CONSTITUTION 1.

RESIDENT CITIZEN – Resident of the Philippines who are residing in the Philippines. A resident Filipino citizen is

B.

ALIEN 1.

RESIDENT ALIEN sec 22 (F) An individual whose residence is within the Philippines and who is not a citizen thereof.

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

RR NO. 2, LAST PARAGRAPH a. Aliens actually present in the Philippines who are not mere transients or sojourners; b. Aliens who live in the Philippines and have no definite intention as to the time of return to their country or their stay in the Philippines. c. Aliens who come to the Philippines and whose extended stay may be necessary t accomplish the purpose of their coming. d. Aliens who have acquired residence in the Philippine retain their status as such until they abandon the same and actually depart from the Philippines. 2.

c.

C.

Engaged in trade or business (NRA-ETB) Sec. 25 (A) – Include those performing personal services in the Philippines, those who come and stay in the Philippines, those who come and stay in the Philippines for an aggregate period of more than 180 days during any calendar year; and foreign technicians on a job contract for one year.

b.

Not engaged in trade or business (NRA-NETB) Sec. 25 (B) – Include non-resident aliens whose stay in the Philippines is 180 days or less. Aliens employed by regional or area headquarters and regional operating headquarters of multinational companies in the Philippines, which are engaged in international trade with affiliates and subsidiary branch offices in the Asia Pacific Region.

d.

Aliens employed by offshore banking units

e.

Aliens by petroleum contractors and subcontractors

Sec. 22

NIRC Sec 22(B): General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

TAN V. DEL ROSARIO (1994) A general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to corporate income tax) IS NOT itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their INDIVIDUAL capacity computed on their distributive shares of partnership profits.

NON-RESIDENT ALIEN sec 22 (G) Individuals who are neither citizens nor residence of the Philippines. a.

GENERAL PROFESSIONAL PARTNERSHIP (B)

There is no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership with others in the exercise of a common profession. The Congress did not intend SNIT to cover corporations and partnerships which are independent subject to the payment of income tax.

KINDS OF PARTNERSHIPS UNDER THE TAX CODE 1.

TAXABLE PARTNERSHIPS – No matter how created or organized, they are subject to income tax which, for purposes of the categorization, are by law assimilated to be within the context of (and legally contemplated as) corporations

2.

EXEMPT PARTNERSHIPS – are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. An example of such is a general professional partnership. Here, the partners themselves, and not the partnership, are liable for the payment of income tax in their INDIVIDUAL CAPACITY computed on their respective and distributive shares of profits.

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TAXATION I REVIEWER ATTY. C. VILLENA III. ESTATES AND TRUSTS A.

ESTATE – refers to the mass of properties left by a deceased person.

SUBJECT TO INCOME TAX: 1. Income tax for individuals: From January to the time of Death (Sec 24 and 25) 2. Income tax of the estate: If the estate is under administration or judicial settlement (Sec 60) B.

TRUST – Right to property, whether real or personal, held by one person for the benefit of another

CLASSIFICATION OF TRUSTS FOR TAX PURPOSES: 1. Taxable and Tax-exempt trusts 2. Irrevocable and revocable trusts 3. Trust administered in the Philippines and trust administered in a foreign country – Only trusts administered in the Philippines are subject to tax REVOCABLE TRUST – A kind of trust where the power to revert to grantor title to any part of the corpus (body) of the trust is vested: a. In the grantor, either alone or in conjunction with any person having substantial adverse interest in the disposition of the corpus or the income therefrom; or b. In any person not having a substantial adverse interest in the disposition of the corpus or the income therefrom IRREVOCABLE TRUST – A kind of trust which cannot be altered without the consent of the beneficiary

NOTE: The income of a revocable trust is included in computing the taxable income of the grantor without any of the deductions allowed for estates while the income of an irrevocable trust is a separate taxable entity subject to tax as income after deducting the allowable deductions

C. APPLICATION OF TAX

Sec 60: The tax imposed by this title upon individuals shall apply to the income of estates or any kind of property held in trust, including (1) Income accumulated in trust for the benefit of unborn or unascertained persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust (2) Income to be distributed by the fiduciary to the beneficiaries and collected by the guardian of an infant (3) Income derived by estates of deceased persons during the period of administration or settlement of the estate (4) Income which, in the discretion of the fiduciary, may be distributed to the beneficiaries or accumulated EXCEPTIONS: This shall not apply to employee’s trust which forms part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of his employees

CIR V. VISAYAS ELECTRIC 23 SCRA 715 To qualify for exemption, the employees’ trust (pension) fund must refer to a definite program, scheme, or plan. It must be set up in good, actuarially sound, and not to be used or controlled in any way by the company. It must extend retirement and pension benefits for the employees

CIR V. CA, CTA AND GCL RETIREMENT PLAN 207 SCRA 715 The tax law has singled out employees' trusts for tax exemption. Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose.

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

IV. CORPORATIONS A. DEFINITON OF A CORPORATION sec. 22 (B) Corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. 1. PARTNERSHIPS (Art 1767-1769 NCC) Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. Art. 1768. The partnership has a judicial personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772, first paragraph. (n) Art. 1769. In determining whether a partnership exists, these rules shall apply: 1. Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons; 2. Co-ownership or co-possession does not of itself establish a partnership, whether such-co-owners or co-possessors do or do not share any profits made by the use of the property; 3. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived; 4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: (a) As a debt by installments or otherwise;

(b) (c) (d) (e)

As wages of an employee or rent to a landlord; As an annuity to a widow or representative of a deceased partner; As interest on a loan, though the amount of payment vary with the profits of the business; As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.

ONA V. CIR 45 SCRA 74 (1972) For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed.

EVANGELISTA V. COLLECTOR 102 PHIL 140 (1957) The term corporation includes partnerships, no matter how created or organized. This expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Partnership has been defined in the Civil Code refers to two or more persons who bind themselves to contribute money, property, or industry to a common fund, with the intention of Page | 44

TAXATION I REVIEWER ATTY. C. VILLENA dividing the profits among themselves. Thus, petitioners, being engaged in real estate transactions for monetary gain and dividing the same among themselves constitute a partnership so far as the Code is concerned and are subject to income tax for corporation.

AFISCO INSURANCE CORP V. CIR 302 SCRA 1 (1999)

NIRC Sec 22(D): A foreign corporation is one which is not domestic

C. RESIDENT FOREIGN CORPORATION NIRC Sec 22(H): Resident foreign corporation is a foreign corporation engaged in trade or business within the Philippines

The term “partnership” includes a syndicate group, pool, joint venture or other unincorporated organization, through or by means of which any business financial operation or venture is carried on.

D. NON-RESIDENT CORPORATION

The ceding companies entered into a pool agreement or an association clearly indicates a partnership or association since: a. The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool b. The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies c. While the pool itself is not a reinsurer and does not issue any insurance policy, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich. The ceding companies share “in the business ceded to the pool” and in the “expenses” according to a Rules of Distribution annexed to the pool agreement. Profit motive or business is, therefore, the primordial reason for the pool’s formation.

CHAPTER III – TAX BASE AND TAX RATES

A. CO-OWNERSHIP

Art 484 NCC: Art. 484. There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons.

B. DOMESTIC CORPORATION

NIRC Sec 22(C): A domestic corporation is one which is created or organized in the Philippines or under its laws

B. FOREIGN CORPORATION

NIRC Sec 22(I): Non-resident Corporation is a foreign corporation not engaged in trade or business within the Philippines

TAXABLE INCOME – Gross income less deductions and/or personal and additional exemptions, if any authorized by NIRC or other special laws

I. INDIVIDUALS D. CITIZENS 1. RESIDENT CITIZEN (RC) TAXABLE INCOME TAX SOURCE: All sources within and without Philippines (WIWO) (Sec 24.A.1.a) TAX BASE: Taxable Income (Sec 24.A.1.a) TAX RATE: Graduated Rates 5-32% (Sec 24.A.2) PASSIVE INCOME BANK DEPOSITS: Final Tax rate 20% (Sec 24.B.1) FDCU/OBU: 7.5% (Sec 24.B.1) LONG-TERM DEPOSIT: Exempt (Sec 24.B.1) However, should the holder pre-terminate before the 5th year: 4 yrs to less than 5 yrs = 5% 3 yrs to less than 4 yrs = 12% Less than 3 yrs = 20% ROYALTIES: 20% (Sec 24.B.1) EXCEPT: Books, literary works and musical Page | 45

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong Compositions = 10% PRIZES & WINNINGS: 20% (Sec 24.B.1) EXCEPT: If 10K or less = Graduated rates PCSO & LOTTO = Exempt CASH/PROPERTY DIVIDENDS: Final tax 10% (Sec 24.B.2) CAPITAL GAINS TAX (CGT) REAL PROPERTY: Final tax 6% on GSP or FMV whichever is higher (Sec 24.D.1) However, Sale of real property to government/GOCC may be taxed based 6% or graduated rates at the option of the taxpayer EXCEPTIONS (Sec 24.D.2): Proceeds from sale of principal residence by natural persons used to construct or acquire new principal residence = Exempt if: (1) Historical cost or adjusted basis of real property sold shall be carried over to the new principal residence (2) CIR shall be informed within 30 days from sale of intent to avail of tax exemption (3) Tax exemption can only be availed once every 10 yrs (4) If no full utilization of sale proceeds, unutilized portion is subject to CGT (computed at GSP/FMV at the time of sale multiplied by fraction of unutilized portion) SHARES OF STOCK NOT LISTED/TRADED IN PSE (Sec 24.C): Not over 100K = 5% In excess of 100K = 10%

2. NON-RESIDENT CITIZEN (NRC) TAXABLE INCOME TAX SOURCE: All sources within the Philippines (Sec 24.A.1.a; Sec 23.C) TAX BASE: Taxable Income (Sec 24.A.1.b)

TAX RATE: Graduated Rates 5-32% (Sec 24.A.2) PASSIVE INCOME BANK DEPOSITS: Final Tax rate 20% (Sec 24.B.1) FCDU/OBU: Exempt (Sec 24.B.1; Sec 27.D.3; Sec 28.A.7.b) LONG-TERM DEPOSIT: Exempt (Sec 24.B.1) However, should the holder pre-terminate before the 5th year: 4 yrs to less than 5 yrs = 5% 3 yrs to less than 4 yrs = 12% Less than 3 yrs = 20% ROYALTIES: 20% (Sec 24.B.1) EXCEPT: Books, literary works and musical Compositions = 10% PRIZES & WINNINGS: 20% (Sec 24.B.1) EXCEPT: If 10K or less = Graduated rates PCSO & LOTTO = Exempt CASH/PROPERTY DIVIDENDS: Final Tax 10% (Sec 24.B.2) CAPITAL GAINS TAX (CGT) REAL PROPERTY: Final tax 6% on GSP or FMV whichever is higher (Sec 24.D.1) However, Sale of real property to government/GOCC may be taxed based 6% or graduated rates at the option of the taxpayer EXCEPTIONS (Sec 24.D.2): Proceeds from sale of principal residence by natural persons used to construct or acquire new principal residence = Exempt if: (1) Historical cost or adjusted basis of real property sold shall be carried over to the new principal residence (2) CIR shall be informed within 30 days from sale of intent to avail of tax exemption (3) Tax exemption can only be availed once every 10 yrs

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TAXATION I REVIEWER ATTY. C. VILLENA (4) If no full utilization of sale proceeds, unutilized portion is subject to CGT (computed at GSP/FMV at the time of sale multiplied by fraction of unutilized portion) SHARES OF STOCK NOT LISTED/TRADED IN PSE (Sec 24.C): Not over 100K = 5% In excess of 100K = 10%

E. ALIENS 1. RESIDENT ALIEN (RA) TAXABLE INCOME TAX SOURCE: All sources within the Philippines (Sec 24.A.1.c) TAX BASE: Taxable Income (Sec 24.A.1.c) TAX RATE: Graduated Rates 5-32% (Sec 24.A.2) PASSIVE INCOME BANK DEPOSITS: Final Tax rate 20% (Sec 24.B.1) FCDU/OBU: 7.5% (sec 24.B.1) LONG-TERM DEPOSIT: Exempt (Sec 24.B.1) However, should the holder pre-terminate before the 5th year: 4 yrs to less than 5 yrs = 5% 3 yrs to less than 4 yrs = 12% Less than 3 yrs = 20% ROYALTIES: 20% (Sec 24.B.1) EXCEPT: Books, literary works and musical Compositions = 10% PRIZES & WINNINGS: 20% (Sec 24.B.1) EXCEPT: If 10K or less = Graduated rates PCSO & LOTTO = Exempt CASH/PROPERTY DIVIDENDS: Final tax 10% (Sec 24.B.2) CAPITAL GAINS TAX (CGT)

REAL PROPERTY: Final tax 6% on GSP or FMV whichever is higher (Sec 24.D.1) However, Sale of real property to government/GOCC may be taxed based 6% or graduated rates at the option of the taxpayer EXCEPTIONS (Sec 24.D.2): Proceeds from sale of principal residence by natural persons used to construct or acquire new principal residence = Exempt if: (1) Historical cost or adjusted basis of real property sold shall be carried over to the new principal residence (2) CIR shall be informed within 30 days from sale of intent to avail of tax exemption (3) Tax exemption can only be availed once every 10 yrs (4) If no full utilization of sale proceeds, unutilized portion is subject to CGT (computed at GSP/FMV at the time of sale multiplied by fraction of unutilized portion) SHARES OF STOCK NOT LISTED/TRADED IN PSE: Not over 100K = 5% In excess of 100K = 10%

2. NON-RESIDENT ALIEN b. NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-ETB) TAXABLE INCOME TAX SOURCE: All sources within the Philippines (Sec 25.A.1) TAX BASE: Taxable Income (Sec 25.A.1) TAX RATE: Graduated Rates 5-32% (Sec 25.A.1) PASSIVE INCOME: BANK DEPOSITS: Final Tax rate 20%(Sec 25.A.2) FCDU/OBU: Exempt (Sec 24.B.1; Sec 27.D.3; Sec 28.A.7.b) Page | 47

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong LONG-TERM DEPOSIT: Exempt (Sec 25.A.2) However, should the holder pre-terminate the deposit before the 5th year: 4 yrs to less than 5 yrs = 5% 3 yrs to less than 4 yrs = 12% Less than 3 yrs = 20% ROYALTIES: 20% on total amount (Sec 25.A.2) EXCEPT: Books, literary works & musical compositions = 10% PRIZES & WINNINGS: 20% (Sec 25.A.2) EXCEPT: If 10K or less = 10% PCSO & LOTTO = Exempt CASH/PROPERTY DIVIDENDS: 20% CINEMATOGRAPHIC FILMS: 25% gross income CAPITAL GAINS TAX (CGT) REAL PROPERTY: Applicable only to all properties located in the Philippines Final tax 6% on GSP or FMV whichever is higher (Sec 24.D.1 & D.2 in relation to Sec 25.A.1) However, Sale of real property to government/GOCC may be taxed based 6% or graduated rates at the option of the taxpayer EXCEPTIONS: Proceeds from sale of principal residence by natural persons used to construct or acquire new principal residence = Exempt if: (1) Historical cost or adjusted basis of real property sold shall be carried over to the new principal residence (2) CIR shall be informed within 30 days from sale of intent to avail of tax exemption (3) Tax exemption can only be availed once every 10 yrs (4) If no full utilization of sale proceeds, unutilized portion is subject to CGT (computed at GSP/FMV at the time of sale multiplied by fraction of unutilized portion)

SHARES OF STOCK NOT LISTED/TRADED IN PSE (sec 24.C in relation to Sec 25.A.2): Not over 100K = 5% In excess of 100K = 10%

c. NON-RESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS (NRA-NETB) TAX SOURCE: All sources within the Philippines (Sec 25.B) TAX BASE: Gross Income (Sec 25.B) TAX RATE: 25% (Sec 25.B) PASSIVE INCOME FCDU/OBU: Exempt (Sec 24.B.1; Sec 27.D.3; Sec 28.A.7.b)

3. SPECIAL ALIENS a. REGIONAL OR AREA HEADQUARTERS (RHQ) TAX BASE: Gross Income TAX RATE: 15% NOTE: Applicable to also Filipinos holding the same position as those of aliens in Multinational Companies (MCs)

b. OFFSHORE BANKING UNITS (OBU) TAX BASE: Gross Income TAX RATE:15% NOTE: Applicable also to Filipinos holding the same position as those of aliens in MCs

c. PETROLEUM SERVICE CONTRACTORS (PSC) TAX BASE: Gross Income TAX RATE: 15% NOTE: Applicable also to Filipinos holding the same position as those of aliens in MCs

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TAXATION I REVIEWER ATTY. C. VILLENA MINIMUM WAGE EARNERS (MWE) MINIMUM WAGE EARNERS – Workers in the private sector paid the statutory minimum wage (SMW)  Or employee in the public sector with compensation not more than the SMW in the non-agricultural sector where he is assigned TAX RATE: Exempt including Holiday pay, OT pay, Night Diff pay; and hazard pay (Sec 24 last par) EXEMPTIONS: Additional compensation in excess of the allowable statutory amount of 30K, taxable allowances and other taxable income other than SMW, holiday pay, OT pay, hazard pay and Night diff pay shall not be exempt from income tax.

MEMBERS OF GENERAL PROFESSIONAL PARTNERSHIP (GPP)  

GPP as such shall not be subject to income tax Persons engaged in business as partners in GPP shall be liable for income tax only in their separate and individual capacities For purposes of computing the distributive share of partners, the net income of the partnership shall be computed in the same manner as a corporation



II. CORPORATIONS 1. DOMESTIC CORPORATIONS a. b. c. d.

2.

In general Special Corporations i. Propriety educational institutions and Hospitals ii. GOCCs Passive income i. Interest, royalties ii. Dividends Capital gains i. Real property classified as capital asset ii. Shares of stock

RESIDENT FOREIGN CORPORATIONS

a. IN GENERAL N.V. REEDERIJ AMSTERDAM V. COMMISSIONER 162 SCRA 487 (1988) Petitioner N.V. Reederij “AMSTERDAM” is a foreign corporation not authorized or licensed to do business in the Philippines and it made only two calls in Philippine ports (1963 and 1964). In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. Casual business activity in the Philippines by a foreign corporation as in the case at bar, does not amount to engaging in trade or business in the Philippines for income tax purposes.

a. SPECIAL FOREIGN CORPORATIONS 1) 2) 3)

International carriers Offshore banking units Regional or area headquarters and regional operating headquarters

b. PASSIVE INCOME 1) 2)

Interest Dividends

c. CAPITAL GAINS d. SUBSIDIARY V. BRACH OF A FOREIGN CORPORATION e. BRANCH PROFIT REMITTANCE TAX MARUBENI CORP V. COMMISSIONER 177 SCRA 500 (1989) The said dividends that were remitted directly to Japan are not considered branch profits for purposes of the 15% profit remittance tax. The investment was made by Marubeni Japan and the dividends were remitted to it directly. The Philippine branch had no participation Page | 49

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

or invention, directly or indirectly. Marubeni Japan cannot now claim that the investment is a consequence of its trade or business in the Philippines and avail of the lower tax rate. Being a non-resident foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines.

BANK OF AMERICA NT V. CA 234 SCRA 302 (1994) In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law calls for nothing further. The taxpayer is a single entity, and it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government. Rationale of 15%: To equalize/ share the burden of income taxation with foreign corporations.

3. NON-RESIDENT CORPORATION (NRC) d. IN GENERAL e. SPECIAL NON-RESIDENT FOREIGN CORPORATIONS f. PASSIVE INCOME (1) INTEREST (2) DIVIDENDS COMMISSIONER V. PROCTER & GAMBLE PMC, 203 SCRA 377 (1991) The ordinary 35% tax rate applicable to dividend remittances to nonresident corporate stockholders of a Philippine corporation goes down to 15% if the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. Such tax credit for taxes deemed paid in the Philippines must, as a minimum, reach an amount equivalent to 20 percentage points which

represents the difference between the regular 35% dividend tax rate and the preferred 15% tax rate. Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a tax credit of both (i) the Philippine dividend ax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines but deemed paid by P&G USA. With Respect to Taxes on Income, the Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of the gross amount of dividends paid to US parent corporations, and established a treaty obligation on the part of the United States that it shall allow to a US parent corporation receiving dividends from its Philippine subsidiary a[tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary].

COMMISSIONER V. WANDER PHILS, 160 SCRA 573 (1988) Switzerland does not impose any tax on dividends received by Swiss corporation from corporations domiciled in foreign countries. While Sec. 24 of the Tax Code stipulates a 35% tax on gross income received from all sources within the Philippines, an exception can be made that the tax can be reduced to 15% subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20%. This represents the difference between the regular tax of 35% and the 15% tax on dividends.

g. CAPITAL GAINS 4. MINIMUM CORPORATE INCOME TAX (MCIT) a. TAX RATE & TAX BASE (Sec 27.E.1) TAX BASE: Gross Income as of the end of the taxable year beginning on the 4th taxable year, when the minimum income tax is greater than NCIT TAX RATE: 2%

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TAXATION I REVIEWER ATTY. C. VILLENA b. CARRY FORWARD EXCESS MINIMUM TAX (Sec 27.E.2) o

Excess of MCIT over the NCIT shall be carried forward and credited against the NCIT for the next 3 yrs

c. GROSS INCOME (Sec 27.E.4) o o o

Gross sales less sales returns, discounts and allowances and cost of goods sold Cost of goods sold – all business expenses directly incurred to produce merchandise For sale f service, gross income is gross receipts less sales returns, allowances, discounts and cost of services

CREBA V. ROMULO, G.R. NO 160756 (2010) The MCIT is not a tax on capital because MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. The MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income. Besides, there is no legal objection to a broader tax based or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate.

MANILA BANKING CORP V. CIR, G.R. 168118 (2006) The intent of Congress relative to the minimum corporate income tax is to grant a four (4)-year suspension of tax payment to newly formed corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as a surprise then when many companies reported losses in their initial years of operations.

Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the minimum corporate income tax on corporations, provides that for purposes of this tax, the date when business operations commence is the year in which the domestic corporation registered with the BIR. However, under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks, such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later.

5. IMPROPERLY ACCUMULATED EARNINGS (TAX (IAET) a. DEFINITION AND TAX RATE (Sec 29.A and B.1) IMPROPERLY ACCUMULATED EARNINGS TAX – surtax imposed on corporations formed or availed for the purpose or the shareholders of another corporation, by permitting earnings and profits to accumulate instead of being divided or distributed TAX RATE: 10% of improperly accumulated taxable income

b. CORPORATION SUBJECT TO IAET (Sec 29.B.1)

APPLICABLE TO: Corporations formed or availed of to evade tax by permitting earnings and profit to accumulate instead of being divided or distributed

c. EXCEPTIONS (Sec 29.B.2)

(1) Publicly-held corporations (2) Banks and other non-bank financial intermediaries (3) Insurance companies Page | 51

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

d. EVIDENCE TO AVOID INCOME TAX (Sec 29.C) The fact that a company is merely a holding company is PRIMA FACIE evidence of a purpose to evade tax

e. IMPROPERLY ACCUMULATED TAXABLE INCOME (Sec 29.D)

Computed by adding to the taxable income: (1) Income exempt from tax (2) Income excluded from gross income (3) Income subject to final tax; and the amount of net operating loss carry-over deducted And deducting: (1) Dividends actually or constructively paid (2) Income tax paid for the taxable year

CIR V. TUASON, 173 SCRA 397 In this case, Tuason Inc, a mere holding company for the corporation did not involve itself in the development of subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends, and rentals realized from the sale of realty.

Another circumstance supporting that presumption is that 99.99% in value of the outstanding stock of Tuason, Inc., is owned by Antonio Tuason himself. The Commissioner "conclusively presumed" that when the corporation accumulated (instead of distributing to the shareholders) a surplus of over P3 million from its earnings in 1975 to 1978, the purpose was to avoid the imposition of the progressive income tax on its shareholders. Since the company as of the time of the assessment in 1981, had invested in its business operations only P773K out of its accumulated surplus profits of P3.2M for 1975-1978, its remaining accumulated surplus profits of P2.4M are subject to the 25% surtax."

The importance of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using the undistributed earnings & profits for the reasonable needs of the business, that purpose would not fall to overcome the presumption and correctness of CIR.

CYANIAMID V. CA, 322 SCRA 639 (2000) The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does not fall among those exempt classes. Besides, the rule on enumeration is that the express mention of one person, thing, act, or consequence is construed to exclude all others. Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. The burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the exemption so claimed, a burden which petitioner here has failed to discharge. If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of proving the determination wrong, together with the corresponding burden of first going forward with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or investment company and does not have an unreasonable accumulation of earnings or profits. In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable year. Page | 52

TAXATION I REVIEWER ATTY. C. VILLENA In the instant case, petitioner did not establish, by clear and convincing evidence, that such accumulation of profit was for the immediate needs of the business. The burden of proof to establish that the profits accumulated were not beyond the reasonable needs of the company, remained on the taxpayer. Unless rebutted, all presumptions generally are indulged in favor of the correctness of the CIR's assessment against the taxpayer. Petitioner failed to prove the CIR incorrect, hence it is liable for the tax assessed by CIR.

6. EXEMPTION FROM TAX ON CORPORATION a. EDUCATIONAL JESUS SACRED HEART COLLEGE V. CIR, G.R. NO L-6807 (1954) Actual realization of profits is immaterial; what is important is the presence of the purpose to make a profit over and above the cost of instruction. At any rate, the main evidence of the purpose of a corporation should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in the articles of incorporation and the by-laws outline the administrative organization of the corporation which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.

b. COOPERATIVES DUMAGUETE CATHEDRAL CREDIT COOPERATIVE V. CIR, G.R. NO 182722 (2010) Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the creation and growth of cooperative as a practical vehicle for promoting self-reliance and harnessing people towards the attainment of economic development and social justice. Thus, to encourage the formation of cooperatives and to create an

atmosphere conducive to their growth and development, the State extends all forms of assistance to them, one of which is providing cooperatives a preferential tax treatment. The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles 61 and 62 of RA 6938. Cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. Thus, although taxes are the lifeblood of the government, the State’s power to tax must give way to foster the creation and growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: “The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice.”

CORPORATIONS A. DOMESTIC CORPORATION (DC) TAXABLE INCOME TAX SOURCE: All sources within and without the Philippines (Sec 27.A) TAX BASE: Normal Corporate Income Tax or NCIT: Taxable Income (Sec 27.A) GROSS INCOME METHOD: Gross Income provided that the following are met (Sec 27.A): (1) Tax effort ratio (20%) of GNP (2) Ratio of 40% income tax collection to total tax revenues (3) VAT tax effort of 4% of GNP; and (4) 09.% ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP (5) Availing firm must have ratio of cost of sales to gross sales or receipts from all sources not exceeding 55%

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong (6) Election of gross income tax option shall be irrevocable for 3 consecutive taxable years Minimum Corporate Income Tax or MCIT: Gross Income (Sec 27.E.1) TAX RATE: NCIT: 30% GNP: 15% MCIT: 2% PASSIVE INCOME BANK DEPOSIT: Final Tax 20% FCDU/OBU: 7.5% LOANS: NA ROYALTIES: 20% PRIZES & WINNINGS: 30% CASH/PROPERTY DIVIDENDS: 30% CAPITAL GAINS TAX (CGT) REAL PROPERTY: Final Tax 6% on real property not actually used in the business of a corporation and are treated as capital assets, based GSP or FMV whichever is higher SHARES OF STOCK NOT LISTED/TRADED IN PSE: Not over 100K = 5% In excess of 100K = 10%

1. PROPRIETARY EDUCATIONAL INSTITUTIONS AND HOSPITALS APPLICABLE TO: Proprietary education institutions (private school) and hospitals (non-profit) TAX RATE: 10% on taxable income Provided that: (1) If gross income from unrelated trade or business exceeds 50% of total gross income derived from all sources, NCIT (30%) shall be applied (2) Unrelated trade or business – conduct which is not substantially related to the exercise or

performance by such educational or hospital institution

2. GOCCs, AGENCIES & INSTRUMENTALITIES All GOCCs, agencies or instrumentalities shall be subject to pay NCIT/MCIT EXCEPT: GSIS, SSS, Philippine Health Insurance Corp (PHIC) and PCSO

B. FOREIGN CORPORATION 1. RESIDENT FOREIGN CORPORATION (RFC) TAXABLE INCOME TAX SOURCE: All sources within the Philippines (Sec 28.A.1) TAX BASE: NCIT: Taxable Income (Sec 28.A.1) MCIT: Gross Income (Sec 28.A.2) TAX RATE: NCIT: 30% (Sec 28.A.1) MCIT: 2% (Sec 28.A.2) PASSIVE INCOME BANK DEPOSITS: Final tax 20% (sec 28.A.7.a) FDCU/OBU: 7.5% (28.A.7.a) LOANS: NA ROYALTIES: 20% (Sec 28.A.7.a) PRIZES & WINNINGS: 30% (Sec 28.A.1) CASH/PROPERTY DIVIDENDS: Exempt (Sec 28.7.d) CAPITAL GAINS TAX (CGT) REAL PROPERTY: 30% (Sec 28.A.1) SHARES OF STOCK NOT LISTED/TRADED IN PSE (Sec 28.A.7.c): Not over 100K = 5% In excess of 100K = 10% BRANCH PROFIT REMITTANCE TAX (BPRT): 15% imposed on the profit remitted by the Philippine branch to its head office. It shall be based on the total profits applied

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TAXATION I REVIEWER ATTY. C. VILLENA or earmarked for remittance without any deduction for the tax component thereof, such will not be considered as branch profits (Sec 28.A.5) EXCEPTION: It does not apply to activities registered with PEZA. RR 2-98 also exempts enterprises registered with SBMA and Clark Devt Authority (CDA) under RA 7227 Remittances not considered as branch profits: Interest, dividends, rents, royalties including premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits (Sec 28.A.5) Branch profits: When they are effectively connected with the conduct of the branch’s trade or business in the Philippines (Sec 28.A.5) NOTE: If branch, it is subject to BPRT. If it is a subsidiary, the amounts received by RFC will be treated as dividends and becomes part of its gross income taxable at 30%

HOME OFFICE (HO)-BRANCH RELATIONSHIP AND PARENT-SUBSIDIARY RELATIONSHIP DISTINGUISHED HOME OFFICE-BRANCH Branch is classified as RFC HO is classified as RFC HO and Branch are taxed on taxable income within the Philippines

Income repatriation by Branch to HO is referred to as Branch profit remittances

PARENT-SUBSIDIARY Subsidiary is classified as DC Parent company is classified as NRFC Subsidiary is taxed on taxable income within and without the Philippines, while Parent company is taxed on gross income within the Philippines Income repatriation by a Subsidiary to Parent Company is referred to as dividends

Branch profit remittances are subject to 15% tax on remittance of branch profits effectively connected to the conduct of the branch’s trade or business in the Philippines HO and Branch are considered as one and the same corporate entity Tax and other liability of the Branch in the Philippines can be collected from the HO in foreign country as they are one and the same

Dividends paid by DC to NFRC is subject to the preferential rate of 16% condition to the tax sparing condition

Parent Company and Subsidiary are two separate legal entities Tax and other liability of the Subsidiary cannot be collected from the Parent Company in a foreign country as they are considered separate legal entities

2. NON-RESIDENT FOREIGN CORPORATION (NRFC) TAXABLE INCOME TAX SOURCE: All sources within the Philippines (Sec 28.B) TAX BASE: Gross Income (Sec 28.B) TAX RATE: 30% (Sec 28.B) PASSIVE INCOME BANK DEPOSITS: NA FCDU/OBU: Exempt EXCEPTION: Interest income from foreign currency loans shall be subject to 10% (Sec 27.D.3; Sec 28.A.7.b) LOANS: Final Withholding tax 20% on foreign loans (Sec 28.B.5.a) ROYALTIES: 30% (Sec 28.B) PRIZES & WINNINGS: 30% (Sec 28.B) CASH/PROPERTY DIVIDENDS: Dividends: 30% (Sec 28.B) Intercorporate Dividends: Final withholding tax at 15% on cash/property dividends from domestic corporation (Sec 28.B.5.b) Page | 55

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

NOTE: The 15% tax on intercorporate dividends shall be collected and paid subject to the condition that the country in which the NRFC is domiciled shall allow a credit against the tax due from the NRFC taxes deemed to have been paid in the Philippines equivalent to 15%, which represents the difference between the regular income tax of 30% and 15% tax on dividends CAPITAL GAINS TAX (CGT) REAL PROPERTY: 30% (Sec 28.B) SHARES OF STOCK NOT LISTED/TRADED IN PSE: Not over 100K = 5% In excess of 100K = 10%

C. SPECIAL CORPORATIONS 1. INTERNATIONAL CARRIERS (AIR OR SEA) Foreign Airline Corporation doing business in the Philippines having been granted landing rights in any Philippine port to perform international air transportation service/activities or flight operations anywhere in the world (Sec 2, RR 15-2002) TAX RATE: 2.5% on its Gross Philippine billings (Sec 28.A.3) Gross Philippine Billings: (1) As to International Carrier – the amount of gross revenue from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of ticket or passage document, provided: (a) Tickets revalidated, exchanged and/or endorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines; (b) For a flight which originates in the Philippines, but transshipment of

passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to a point of transshipment shall form part of Gross Philippine Billings (2) As to International Shipping – Gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.

2. OFFSHORE BANKING UNITS (OBU) Income derived from OBU from foreign currency transactions with non-residents, other OBU or local commercial banks: Exempt Interest income derived from foreign currency loans granted to residents other than OBU or local banks: Final tax 10%

3. REGIONAL OR AREA HEADQUARTERS (RHQ) RHQ is a branch established in the Philippines by MCs and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates (Sec 22.DD) RQH: Exempt

4. REGIONAL OPERATING HEADQUARTERS (ROHQ) ROHQ is a branch established in the Philippines by MCs which are engaged in general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services; technical support and

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TAXATION I REVIEWER ATTY. C. VILLENA maintenance; data processing and communication; business development (Sec 22.EE) ROHQ: 10% of taxable income

5. NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR (Sec 28.B.2) TAX SOURCE: All sources within the Philippines TAX BASE: Gross Income TAX RATE: 25%

6. NON-RESIDENT OWNER OR LESSOR OF VESSELS (Sec 28.B.3) TAX BASE: Gross rentals, lease or charter fees from leases or charters TAX RATE: 4.5%

7. NON-RESIDENT OWNER OR LESSOR OF AIRCRAFT, MACHINERIES & EQUIPMENT (Sec 28.B.4) TAX BASE: Gross rentals or fees TAX RATE: 7.5%

CHAPTER V – DEDUCTIONS DEDUCTIONS – Items or amounts authorized by law to be

EXCLUSION FROM GROSS INCOME AND ALLOWABLE DEDUCTIONS FROM GROSS INCOME DISTINGUISHED EXCLUSION Refers to flow of wealth which does not form part of the gross income because: 1. It is exempted by the fundamental law 2. It is exempted by the statute 3. It does not come within the definition of income Material to arrive at gross income Something earned or received which do not form part of the gross income

1. 2.

NRA-NETB and NRFC – tax base is gross income RC, NRC and RA – If income is purely compensation income (except for premium payments on health and/or hospitalization insurance)

Necessary to arrive at net or taxable income Something paid or incurred in earning gross income

EXEMPTION AND ALLOWABLE DEDUCTION DISTINGUISHED EXEMPTION An immunity or privilege, a freedom from a charge or burden to which others are subjected Generally receipts which are excluded from taxable income

subtracted from pertinent items of gross income to arrive at the taxable income

WHO ARE NOT ALLOWED TO CLAIL DEDUCTIONS

ALLOWABLE DEDUCTION Refers to amounts which the law allows as deductions from gross income in order to arrive at net income or taxable income

The theoretical personal, family and living expenses of an individual

ALLOWABLE DEDUCTION A subtraction from gross income

Not receipts, but are, expenditures which are permitted to be subtracted from income to determine the amount subject to tax Reduction of wealth which helped earn the income subject to tax

ALLOWABLE DEDUCTION AND PERSONAL EXEMPTION DISTINGUISHED Page | 57

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

AS TO NATURE AS TO PURPOSE

AS TO CLAIMANT

AS TO AMOUNT

ALLOWABLE DEDUCTION In the nature of business expenses To recover or recoup the cost of doing business May be claimed by individual and corporate taxpayers EXCEPT: 1. NRA-NETB 2. NRFC The actual expenses paid or incurred in the conduct of trade, business or activity

PERSONAL EXEMPTIONS

(iii)

In the nature of personal, living or family expenses To recover the personal, living & family expenses paid or incurred during the taxable year Are granted only to individual taxpayer

(iv)

EXCEPT: NRTA-NETB

Arbitrary amounts granted to approximate the personal expenses

I. CONDITIONS FOR DEDUCTIVILITY OF BUSINESS EXPENSES 1. It must be ordinary and necessary. Sec. 34 (A) (1) (a) There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession;

A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction.

a) Test of deductibility

ESSO V. CIR, G.R. NO. L-28508-9 (1989) Test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary; (2) it must be paid or incurred within the taxable year; and (3) it must be paid or incurred in carrying on a trade or business. In addition, the taxpayer must substantially prove by evidence or records the deductions claimed under law, otherwise, the same will be disallowed. An expenses is considered necessary where the expenditure is appropriate and helpful in the development of the taxpayer’s business. It is ordinary when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. Assuming that the expenditure is ordinary and Page | 58

TAXATION I REVIEWER ATTY. C. VILLENA necessary in the operation of the taxpayer’s business; the expenditure, to be an allowable deduction as a business expense, must be determined from the nature of the expenditure itself, and on the extent and permanency of the work accomplished by the expenditure. .

business of the particular taxpayer. Here it is admitted that the bonuses are in fact compensation and were paid for services actually rendered.

ZAMORA V. CIR, G.R. NO L-15290 (1963)

CM HOSKINS & CO. V. CIR G.R. NO. L-24059 (1969)

There shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business. Since promotion expenses constitute one of the deductions in conducting a business, same must testify these requirements. Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurred. That to be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business; that those expenses must also meet the further test of reasonableness in amount; that when some of the representation expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were without vouchers or chits, the court should determine from all available data, the amount properly deductible as representation expenses.

KUENZLE &STREIFF V. CIR G.R.NO. L-18840 (1969) It is a general rule that `Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added to the salaries, are `reasonable ... when measured by the amount and quality of the services performed with relation to the

b) Test of reasonableness

"It is a general rule that 'Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered'. Conditions precedent to the deduction of employees: 1. Payment of the bonuses is in fact compensation 2. Must be for services actually rendered; and 3. Bonuses, when added to the salaries are “reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer”

CIR V. GENERAL FOODS The advertising expense is not an ordinary and necessary expense, but a capital expenditure that should be spread out over a reasonable time. It failed to meet the two conditions: (1) reasonableness of the amount incurred [their advertising expense was almost double the amount of their administrative expense] and (2) not be a capital outlay to create goodwill. Advertising is generally of 2kinds: (1) stimulate current sale of merchandise and (2) stimulate future sale of merchandise. The first kind is allowed, subject to reasonableness of the expenditure. The second is normally spread out over time. The company’s advertising expense falls under the second kind, as the company admitted it is to “protect the brand franchise”. Page | 59

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

2. IT MUST BE PAID OR INCURRED DURING THE TAXABLE YEAR. Sec. 34 (A) (1) (a) CIR V. ISABELA CULTURAL CORPORATION G.R. NO. 172231 (2007) The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: a. The expense must be ordinary and necessary; b. It must have been paid or incurred during the taxable year; c. It must have been paid or incurred in carrying on the trade or business of the taxpayer; and d. It must be supported by receipts, records, or other pertinent papers. Under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. 3.

It must be paid or incurred in carrying on, or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession. Sec 34 (A) (1) (a)

CIR V.

CTA & SMITH KLINE & FRENCH OVERSEAS (1984)

It is manifest that where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. The overhead expenses incurred by the parent company in connection with finance, administration, and research and

development, all of which direct benefit its branches all over the world, including the Philippines, fall under a different category however. These are items which cannot be definitely allocated or Identified with the operations of the Philippine branch. Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. The matter of allocated expenses which are deductible under the law cannot be the subject of an agreement between private parties nor can the Commissioner acquiesce in such an agreement. Smith Kline had to amend its return because it is of common knowledge that audited financial statements are generally completed three or four months after the close of the accounting period. There being no financial statements yet when the certification of January 11, 1972 was made the treasurer could not have correctly computed Smith Kline's share in the home office overhead expenses in accordance with the gross income formula prescribed in section 160 of the Revenue Regulations. What the treasurer certified was a mere estimate.

GUITIERREZ V. CIR 14 SCRA 33 To be deductible, an expense must be: a. Ordinary and necessary b. Paid or incurred within the taxable year c. Paid or incurred in carrying on a trade or business. General Rule — In computing net income no deduction shall in any case be allowed in respect of — (1) Personal, living, or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the Page | 60

TAXATION I REVIEWER ATTY. C. VILLENA taxpayer is directly or indirectly a beneficiary under such policy

4. IT MUST BE SUPPORTED BY ADEQUATE INVOICES OR RECEIPTS. Sec. 34 (A) (1) (b) No deduction from gross income shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.

payments of royalty are not deductible as legitimate business expenses.

6. THE TAX REQUIRED TO BE WITHHELD ON THE EXPENSE PAID OR PAYABLE WAS REMITTED TO THE BIR. Sec. 34 (K) Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR.

II.

TYPES OF DEDUCTIONS 1. 2. 3.

Itemized Deductions. Sec. 34 (A) – (J) Optional Standard Deduction (OSD) Sec. 34 (L) Special Deductions under the NIRC and special laws. Sec. 34 and 38

GANCAYCO V. COLLECTOR (1961) Gancayco's claim for representation expenses was disallowed. Such disallowance is justified by the record, for, apart from the absence of receipts, invoices or vouchers of the expenditures in question, petitioner could not specify the items constituting the same, or when or on whom or on what they were incurred. 5.

It is not contrary to law, public policy or morals.

Sec. 34 (A) (1) (c) No deduction from gross income shall be allowed for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a GOCC, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback.

3M PHILIPPINES, INC V. CIR (1988) Although the Tax Code allows payments of royalty to be deducted from gross income as business expenses, it is CB Circular No. 393 that defines what royalty payments are proper. Hence, improper

Itemized Deductions (BELT-DID-CRP) Sec. 34 (A) – (J) 1. 2.

Bad debts Expenses (Ordinary and Necessary Trade, Business or Professional) 3. Losses 4. Taxes 5. Depreciation 6. Interest 7. Depletion 8. Charitable & other contributions 9. Research & development 10. Contribution to Pension Trust

III. ITEMIZED DEDUCTIONS 1. INTEREST

REQUISITES FOR DEDUCTIBILITY Sec. 34 (B) (1) a. There must be an indebtedness b. There should be an interest expense paid or incurred upon such indebtedness Page | 61

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong c. d. e. f. g. h. i. j.

Indebtedness must be that of the taxpayer Indebtedness must be connected with the taxpayer’s trade, business or exercise of profession Interest expense must have been paid or incurred during the taxable year Interest must have been stipulated in writing Interest must be legally due Interest payment arrangement must not be between related taxpayers Interest must not be incurred to finance petroleum operations In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure.

1.

If within the taxable year, an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise.  Allowed as deduction n the Such interest shall be allowed as a deduction in the year the indebtedness is paid.  If the indebtedness is payable in periodic amortization, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year.

2.

If both the taxpayer and the person to whom the payment has been made or is to be made are “related” persons specified under Sec. 36 (B) of NIRC, viz: a. Between members of the family (include only brothers and sisters, spouse, ancestors, and lineal descendants) b. Between an individual and a corporation more than 50% in value of the outstanding stock is owned by such individual; or c. Between 2 corporations more than 50% in value of the outstanding stock of each of which is owned by same individual d. Between grantor and fiduciary of any trust; or e. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or f. Between a fiduciary or a trust and a beneficiary of such trust. g. Interest on preferred stock which in reality is dividend h. Interest on unpaid salaries and bonuses i. Interest calculated for cost keeping on account of capital or surplus invested in business which does not represent charges arising under interestbearing obligation j. Interest paid when there is no stipulation for the payment thereof. If the indebtedness on which the interest expense is paid is incurred to finance petroleum exploration in the

NOTE: GENERAL RULE ON DEDUCTION The amount of interest expense or incurred within a taxable year on indebtedness in connection with the taxpayer’s trade, business of exercise of profession shall be allowed as a deduction from the taxpayer’s gross income. LIMITATION ON DEDUCTION: Interest expense shall be reduced by 42% of the interest income subjected to final tax. Effective jan. 1, 2009, the percentage shall be 33% Example: Interest expense: Interest Income subject to final tax: Deductible interest expense: [P2,000 – (P1,500 x 33% )]

Year 2012 P2,000 P1,500 P1,505

Disallowed interest on tax arbitrage. Sec. 34 (B) (2) TAX ARBITRAGE – is a method of borrowing without entering into a debtor/creditor relationship, often to resolve financing and exchange control problems. In tax cases, back-to-back loan is used to take advantage of the lower rate of tax on interest income and a higher rate of tax on interest expense deduction. Non-deductible Interest expense (from gross income)

3.

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TAXATION I REVIEWER ATTY. C. VILLENA Philippines. (The non-deductible interest expense herein referred to pertains to interest or other consideration paid or incurred by a service contractor engaged in the discovery and production of indigenous petroleum in the Philippines in respect of the financing of its petroleum operations).

OPTIONAL TREATMENT OF INTEREST Expense Sec 34 (B) (3) At the option of taxpayer, the interest incurred to acquire property used in trade, business, exercise of a profession may be allowed as:  As expense (outright deduction)  As capital expenditure (subject to depreciation)

PALANCA VS. CIR (1966) Interests on taxes should be considered as interests on indebtedness. Interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income

PAPER INDUSTRIES CORP. VS. CA (1995) The 35% transaction tax is imposed on interest income from commercial papers issued in the primary money market. Being a tax on interest, it is a tax on income. The Tax Code does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment. Neither does it compel the capitalization of interest payments on such a loan. The Tax Code is simply silent on a taxpayer's right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied.

2. TAXES Deductible taxes All taxes, national, or local, paid or incurred during the taxable year in connection with the taxpayer’s profession, trade or business, are deductible from gross income.

Requisites for deductibility. SEC 34 (C) (1) 1. It must be paid or incurred within the taxable year 2. It must be paid or incurred in connection with the taxpayer’s trade, profession or business 3. It must be imposed directly on the taxpayer 4. It must not be specifically excluded by law from being deducted from the taxpayer’s gross income Non-deductible taxes SEC 34 (C) (1) 1. Philippine income tax 2. Income tax imposed by authority of any foreign country (except when the taxpayer signifies his desire to avail of the tax credit for taxes of foreign country) 3. Estate and donor’s taxes; and 4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Taxes, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. Limitations on deductions in case of NRAETB. SEC 34 (C) (2) Taxes to be allowed only if and to the extent that they are connected with income from sources within the Philippines

CIR VS. LEDNICKY (1964) The right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an ALTERNATIVE to his right to claim a tax credit for such foreign income taxes so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. The law provides that the deduction shall be allowed if the taxpayer in his return does not signify his desire to have the benefits of tax credits for taxes paid to foreign countries. Thus, the statutes assumes that the taxpayer in question may also signify his desire to claim a tax credit and waive the deduction.

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong c. Foreign Tax Credit TAX CREDIT – a right of an income taxpayer to deduct from income tax payable the foreign income tax he has paid to his foreign country subject to limitation Persons Allowed. SEC 34 (C) (3) 1. Citizen and Domestic Corporations The tax imposed shall be credited with the amount of income taxes paid or incurred during the taxable year to any foreign country 2. Member of General Professional Partnership and/or Beneficiary of an Estate or Trust The tax imposed shall be credited with his proportionate share of such taxes of the GPP or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation. Limitations on Credit. SEC. 34 (C) (4) 1. Per Country Limitation – amount of credit to tax paid/incurred to any country shall not exceed same proportion of the tax against which such credit is taken 2.

Global Limitation – total amount of credit shall not exceed same proportion of tax which such credit is taken

Tax Credit vs. Tax Deduction  Tax Deduction: included in the gross income but later deducted.  Tax Credit : paid beforehand and is deducted from the tax liability of the taxpayer. 3.

LOSSES

Requisites for deductibility Sec. 34 (D) (1) a. Losses must be of the taxpayer b. Actually sustained during the taxable year

d.

e. f. g.

Not compensated for by insurance or other forms of indemnity Incurred in trade, business or profession OR property connected with trade, business or profession lost through fires, storm, shipwreck, or other casualties or from robbery, theft or embezzlement Evidenced by a completed transaction Not claimed as a deduction for estate tax purposes Notice of loss must be filed with the BIR within 30 days but not more than 90 days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.

MARCELO STEEL CORP. VS. COLLECTOR (1960) Petitioner cannot deduct from the profits realized from its taxable industries, the losses sustained by its tax exempt business activities. The law intended to treat taxable or non-exempt industry as separate and distinct from new and necessary industry, which is tax exempt, and did not mean to grant an entrepreneur, engaged at the same time in a taxable or non-exempt industry and a new and necessary industry, the benefit or privilege of deducting his gains or profit derived from the operation of the first from the losses incurred in the operation of the second. Moreover, aside from its exemption from the payment of income tax on its profits derived from the operation of new and necessary industries, the petitioner is exempt from the payment of other internal revenue taxes directly payable by it, such as the fixed and privilege tax on the sales of manufacture products, in respect to which exemption is granted, the compensating tax on the articles, goods or material exclusively used in the new and necessary industry, and the documentary stamp tax.

PLARIDEL SURETY & INS VS. CIR (1967) Loss is deductible only in the taxable year in which it actually happens or is sustained. However, if it is compensable by insurance or otherwise, deduction for the loss suffered is postponed to the subsequent year, which, to be precise, is that year in which it appears that no compensation at all can be had, or that there is a remaining net loss, i.e. no full compensation. So where there is

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TAXATION I REVIEWER ATTY. C. VILLENA reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery can be had. In other words, the taxpayer must exhaust all remedies first to recover or to reduce his loss.

CIR VS. PRISCILLA ESTATE (1964) Since the demolished building was not compensated for by insurance or otherwise, its loss should be charged off as deduction from gross income. Ordinary Loss vs. Capital Loss Ordinary Loss – Incurred in trade, business or profession OR property connected with trade, business or profession lost through fires, storm, shipwreck, or other casualties or from robbery, theft or embezzlement Limitations on Capital Losses Sec. 34 (D) (4) (a) Losses from sales or exchanges of capital assets shall be allowed only to the extent that it does not include: 1. Stock or trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year. 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business 3. Property used in the trade or business, of a character which is subject to the allowance for depreciation 4. Real property used in trade or business of the taxpayer Securities Becoming Worthless Sec 34 (D) (4) (b) If Bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation become worthless during the taxable year and are capital assets, the loss resulting therefrom shall be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets

If the shares of stock are held by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets, and thus not deductible from gross income.

Wash Sales Sec. 34 (D) (5) and 38  30 days before and after the date of the sale, the taxpayer has acquired or has entered into a contract or option so as to acquire, substantially identical stock/securities  GENERAL RULE: NOT deductible unless claim is made by a dealer in stock/securities and made in ordinary course of business of such dealer. Wagering Losses Sec. 34 (D) (6) Deductible only to the extent of gains from such transactions. Example, if winnings amounted to 10,000 and the losses amounted to 6,000, only 4,000 of the net winnings is taxable. However, if the winnings are 5,000 and losses are 6,000, the 1,000 net losses cannot be claimed as a deduction from gross income. Abandonment Losses Sec. 34 (D) (7)  In case of abandoned petroleum operations (wholly or partially), accumulated expenditures incurred prior to Jan. 1, 1979 allowed as deduction only from income derived from the same contract area, notice of abandonment shall be filed with Commissioner  In case of abandoned producing well, the unamortized cost and undepreciated costs of equipment directly used, allowed as deduction in the year of abandonment by the contractor. However, if such equipment is restored into service, said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated.

CHINA BANK CORP VS. CA (2000)

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong Net Operating Loss Carry Over (NOLCO) Sec. 34 (D) (3), RR 142001 

NOLCO refers to the excess of allowable deductions over gross income of the business for any taxable year, which has not been previously offset as deduction from gross income.



The net operating loss of a business shall be carried over as deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss.



The 3 year period shall continue to run notwithstanding that the corporation paid its taxes under MCIT, or that the individual availed of the OSD.



For mines other than oil and gas wells, if loss incurred in any of the 1st 10 years of operation may be carried over as a deduction from taxable income for the next 5 years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the 5 taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted from the taxable income of the next remaining 4 years.

NOLCO requirements 1. The taxpayer was not exempt from income tax in the year of such net operating loss; 2. The loss was incurred in a taxable year during which the taxpayer was exempt from income tax; and 3. There has been no substantial change in the ownership of the business or enterprise There is no substantial change in the ownership of the business when:  Not less than 75% in the nominal value of outstanding issued shares is held by same persons.  Not less than 75% of paid up capital of corporation is held by same persons.

NOTE: no actual change in ownership is involved in when: 1. In case the transfer involves change from direct ownership to indirect ownership 2. Merger of the subsidiary into the parent company Other types of Losses 1. Losses from illegal transactions – NOT deductible 2. Losses due to voluntary removal of building incident to renewal or replacements – deductible expense from gross income 3. Loss of useful value of capital assets due to charges in business conditions – deductible expense only to the extent of actual loss sustained

PICOP VS. CA The rule applicable in respect of corporations not registered with the BOARD OF INVESTMENT as a preferred pioneer enterprise — is that net operating losses cannot be carried over. Under our Tax Code, losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off. Where a net operating loss is sustained by a corporation prior to its merger with another corporation and the business of the loss corporation becomes a unit of the business conducted by the surviving corporation, such pre-merger losses may not be used to offset the income of other units of the surviving corporation which prior to the merger were operated by the other corporation because the income against which the offset is made was not produced by substantially the same business which incurred the losses. And such rule has been applied even though the corporation which sustained the losses is the corporation surviving the merger.

4.

a.

BAD DEBTS

Requisites for Deductibility Sec. 34 (E) (1) 1) Existing indebtedness due to the taxpayer which must be valid and legally demandable; 2) Connected with the taxpayer’s trade, business or practice of profession

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TAXATION I REVIEWER ATTY. C. VILLENA 3) Must not be sustained in a transaction entered into between related parties. 4) Actually ascertained to be worthless and uncollectible as of the end of the taxable year; and 5) Actually charged off in the books of accounts of the taxpayer as of the end of the taxable year. i)

Transactions between related parties 36 (B) in relation to 34 (E) (1) In computing net income, net deduction shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly: i. ii. iii. iv. v. vi.

ii)

Between members of the family (include only brothers and sisters, spouse, ancestors, and lineal descendants) Between an individual and a corporation more than 50% in value of the outstanding stock is owned by such individual; or Between 2 corporations more than 50% in value of the outstanding stock of each of which is owned by same individual Between grantor and fiduciary of any trust; or Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or Between a fiduciary or a trust and a beneficiary of such trust.

Recovery of bad debt previously written off

1. Tax Benefit Rule 34 (E) (1) Recovery of bad debts previously allowed as deduction in the preceding year shall be included as part of gross income in the year of recovery to the extent of the income tax benefit of such deduction.

Our statute permits the deduction of debts "actually ascertained to be worthless within the taxable year," to prevent arbitrary action by the taxpayer, to unduly avoid tax liability. The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthlessness, in the year for which the deduction is sought; and (2) that, in so doing, he acted in good faith.

PHIL REFINING COMPANY VS. CA (1996) Before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; (4) filing a collection case in court.

5. DEPRECIATION Depreciation is the gradual diminution in the useful (service) value of tangible property used in trade, profession or business resulting from exhaustion, wear and tear and obsolescence. As a deductible expense, it refers to the periodic allocation as an expense of the portion of the cost of a tangible, permanent asset. For taxation purposes, the term is afforded a wider application to include the amortization of the value of intangible assets. NON-DEPRECIABLE ASSETS: (a) Inventories or stock (b) Land (c) Bodies of minerals subject to depletion (d) Personal effects and clothing

COLLECTOR VS. GOODRICH (1967)

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong WHO IS ENTITLED TO CLAIM DEPRECIATION EXPENSE: The owner since he sustains an economic loss from the decrease in the value of the property due to depreciation. However, NRA and FCs are allowed to deduct only when the property is located in the Philippines

a. REQUISITES FOR DEDUCTIBILITY (Sec 34.F.1) (1) The allowance for depreciation must be REASONABLE (2) It must be for property USED in trade, business or operation (3) It must be CHARGED off during the taxable year (4) A statement of allowance should be ATTACHED to the return

b. METHODS OF DEPRECIATION (Sec 34.F.2)

(1) STRAIGHT LINE METHOD – equal depreciation per unit of time, regardless of use or production output of the property FORMULA: Depreciation Expense = (Cost –salvage value)/estimated life Example: Cost = 15,000; SV = 5,000; Est. life – 5 yrs (15,000 – 5,000)/5 yrs = 2,000 (2) DECLINING BALANCE METHOD – Amount of depreciation is subtracted annually from the cost of the property and the rate then only applied to the resulting balance FORMULA: Depreciation Expense = [(Cost – Accumulated depreciation)/estimated life] x rate Example: Cost = 15,000; SV = 5,000; Est. life = 5 yrs; Depreciation rate = 200%

Year 1: [(15,000 – 0)/5] x 200% = 6,000

Year 2: [(15,000-6,000)/5] x 200% = 3,600 (3) SUM OF YEARS DIGIT METHOD – Application of a changing fraction to the taxpayer’s cost basis for the property, reduced by the estimated residual salvage value FORMULA: Depreciation Expense = (nth period/sum of year) x (cost – SV) Example: Cost = 15,000; SV = 5,000; Est. life = 5 yrs Sum of years: 5+4+3+2+1 = 15 Year 1: (5/15) x (15,000 – 5,000) = 3,333.33 Year 2: (4/15) x (15,000 – 5,000) = 2,666.67 (4) Any other method which may be prescribed by the Secretary of Finance upon recommendation of CIR

c. SPECIAL RULES ON DEPRECIATION (1) PRIVATE EDUCATIONAL INSTITUTIONS (Sec 34.A.2) – At its option may: (a) Deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for expansion of school facilities; or (b) Deduct allowance for depreciation of under Sec 34.F (2) PETROLEUM OPERATIONS (Sec 34.F.5) –An allowance for depreciation shall be allowed under the straight line or declining-balance method at the option of the service contractor. If the service contractor initially elects the declining-balance method, it may at any time, shift to straight-line method

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TAXATION I REVIEWER ATTY. C. VILLENA (a) The useful life of properties used in production of petroleum shall be 10 yrs (b) Properties not used directly in production of petroleum shall be depreciated using straightline method on the basis of estimated useful life 5 yrs (3) MINING OPERATIONS (Sec 34.F.5) – Allowance for depreciation used in mining operations other than petroleum shall be computed as: (a) At the normal rate of depreciation if the expected life is 10 yrs or less; or (b) Depreciated over any number of years between 5 yrs and the expected life if the expected life is more than 10 yrs, and the depreciation thereon shall be allowed as deduction from taxable income; provided the contractor notifies CIAR at the beginning of the depreciation period which rate shall be used (4) NRA-ETB or RFC (Sec 34.F.6) – A reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business, trade or profession shall only be allowed for property located in the Philippines

BASILAN ESTATE INC V. COMMISSIONER, 21 SCRA 17 (1967) Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescence. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings, the value of the property invested is kept

unimpaired, so that at the end of any given term of years, the original investment remains as it was in the beginning. The law allows deduction from gross income for depreciation but limits the recovery only to the capital invested in the asset being depreciated. The Income Tax does not authorize the depreciation of an asset beyond its acquisition cost. Deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law. If allowed, depreciation based on re-appraisal, will allow the company not only to recover acquisition cost but also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind the depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation.

ZAMORA V. COLLECTOR, 8 SCRA 163 (1963) The CTA was approximately correct in holding that the rate of depreciation must be 2.5%. An average hotel building’s estimated useful life is 5 yrs, but inasmuch as it also depends on the use and location, change in population and others, it is allowed a depreciation rate of 2.5% which corresponds to a useful life of 40 years.

US V. LUDLEY, 247 US 295 (1927) The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used. The amount of the allowance for depreciation is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost. The theory underlying this allowance for depreciation is that, by using up the plant, a gradual sale is made of it. The depreciation charged is the measure of the cost of the part which has been sold. Page | 69

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

When the plant is disposed of after years of use, the thing then sold is not the whole thing originally acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties. Any other construction would permit a double deduction for the loss of the same capital assets. The amounts of depreciation and depletion to be deducted from cost to ascertain gain on a sale of oil properties are equal to the aggregates of depreciation and depletion which the taxpayer was entitled to deduct from gross income in his income tax returns for earlier years; but are not dependent on the amounts which he actually so claimed.

6. DEPLETION Depletion is the exhaustion of natural resources like mines, oil, and gas wells as a result of production or severance from such mines or wells As an allowable deduction, it refers to the periodic allocation of the cost of the wasting asset over the period of the natural resources are extracted or produced. Wasting assets refer to natural physical resources that are physically consumed and once consumed, are irreplaceable. Example: lands containing deposits of cola, oil, ore, gold, silver and timber. WHO CAN AVAIL OF DEPLETION: Annual depletion deductions are allowed only to MINING ENTITIES which own an economic interest in mining deposits (Sec 3, RR 5-76) THEORY AND PURPOSE OF DEPLETION ALLOWANCE: As the product of the mine is sold, a gradual sale is being made of the taxpayer’s capital interest in the property. The purpose, then, is to enable him to recover the capital interest free of income tax at its cost or on some other basis REQUISITES FOR DEDUCTIBILITY (1) Depletable asset – Natural resources, e.g. mines, gas and oil wells

(2) Charged off within the taxable year (3) Allowance for depletion is computed in accordance with costdepletion method DEDUCT EXPLORATION AND DEVELOPMENT EXPENDITURES: At taxpayer’s option, he may deduct exploration and development expenditures provided it shall not exceed 25% of the taxable income from mining operations computed without the benefit of any tax incentives under existing laws (Sec 34.G.2) DETERMINATION OF AMOUNT OF DEPLETION: (1) Basis for the cost of the property (2) Estimated recoverable units in the property; and (3) Number of units recovered during the taxable year in question

a. IN GENERAL (Sec 34.G.1) Reasonable allowance for depletion or amortization computed in accordance with cost-depletion method, provided that: (1) When the allowance for depletion shall equal the capital invested, no further allowance shall be granted (2) After production in commercial quantities has commenced, intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines; or (b) shall be deductible in full in the year pair or incurred (taxpayer’s option)

US V. LUDLEY, 247 US 295 (1927) The depletion charge permitted as a deduction from the gross income in determining the taxable income of mines for any year represents the reduction in the mineral contents of the reserves from which the product is taken. The reserves are recognized as wasting assets. The depletion effected by operation is likened to the using up Page | 70

TAXATION I REVIEWER ATTY. C. VILLENA of raw material in making the product of a manufacturing establishment. As the cost of the raw material must be deducted from the gross income before the net income can be determined, so the estimated cost of the part of the reserve used up is allowed. The fact that the reserve is hidden from sight presents difficulties in making an estimate of the amount of the deposits. The actual quantity can rarely be measured. It must be approximated. And because the quantity originally the reserve is not actually known, the percentage of the whole withdrawn in any year, and hence the appropriate depletion charge, is necessarily a rough estimate. But Congress concluded, in the light of experience, that it was better to act upon a rough estimate than to ignore the fact of depletion.

7. CHARITABLE & OTHER CONTRIBUTIONS a. REQUISITES FOR DEDUCTIBILITY (Sec 34.H.1) (1) (2) (3) (4)

The contribution or gift must be ACTUALLY paid It must be paid WITHIN the taxable year It is given to the organization SPECIFIED by law It must be EVIDENCED by adequate receipts or records (5) The net income of the institution must not INURE to the benefit of any private stockholder or individual. Amount shall not exceed: (a) For individuals – 10% of taxable income before contributions (b) For corporations – 5% of taxable income before contributions

b. LIMITED DEDUCTIBILITY (Sec 34.H.1)

(1) Contributions not in accordance with the priority plan (2) Donations whose conditions are not complied with (3) Donations to the Government or political subdivisions exclusive for public purposes (4) Donations to domestic corporations organized exclusively for: (a) Religious

(b) (c) (d) (e) (f) (g)

Charitable Scientific Cultural Education Rehabilitation of veteran Social welfare

c. DEDUCTIBLE IN FULL (Sec 34.H.2) (1) Donations to GOVERNMENT or political subdivisions including full-owned GOCCs to be used exclusively in undertaking priority activities in: (a) Culture (b) Health (c) Economic development (d) Education (e) Science (f) Human settlement (g) Youth and sports development (2) Donations to FOREIGN institutions and international organizations in compliance with treaties and agreements with the government (3) Donations to ACRREDITED NGOs (a) Exclusively for: Scientific, Research, Character building, Youth and sports development, health, social welfare, cultural charitable, any combination thereof (b) Utilized not later than the 15h day of the 3rd month following the close of its taxable year (c) Administrative expenses must not exceed 30% of total expenses (d) Upon dissolution, assets must be distributed to another non-profit domestic corporation or to the State

ROXAS V. CTA, 23 SCRA 276 (1968) The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their Page | 71

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

respective holdings in installment for a period of 10 years, it would nevertheless not make the vendor Roxas y Cia a real estate dealer during the 10-year amortization period. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only inconsonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude. In fine, Roxas y Cia cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.

(2) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral including oil or gas

9. CONTRIBUTION TO PENSION TRUST – Applicable only to employer on account of its contribution to a private pension plan for the benefit of the employee. Purely business in character

a. REQUISITES FOR DEDUCTIBILITY (Sec 34.J)

(1) Employer must have established a pension or retirement plan for the payment of reasonable pension to its employees (2) Pension plan is reasonable and actuarially sound (Sec 118, RR 2-40) (3) Funded by the employer (employer contributes cash) (4) Amount contributed must no longer be subject to control of the employer (5) Payment has not been allowed as deduction (6) Apportioned in equal parts over a period of 10 consecutive yrs beginning with the year in which the payment or transfer was made TREATMENT OF INCOME FROM PENSION PLAN (1) Not taxable to employee (BIR Ruling, 20 November 1956) (2) In case any portion of the funds is reverted back to the employer, said funds form part of the income of the employer during the taxable year of reversion (BIR Ruling, 3 April 1959)

8. RESEARCH AND DEVELOPMENT (Sec 34.I) Taxpayer may treat R&D as: (1) Revenue expenditure – it will be wholly deducted as ordinary and necessary expenses in the year it was paid or incurred (2) Deferred expense – allowed as deduction ratably distributed over a period of at least 60 months starting from the month benefits are received from such expenditure LIMITATIONS ON DEDUCTION (Sec 34.H.3) The following are not deductible: (1) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation; and

IV.

OPTIONAL STANDARD DEDUCTION OR OSD (Sec 34.L, RR 16-08) OSD is a scheme whereby a taxpayer is given the option to deduct from his gross revenue or gross income a lump sum equivalent to a percentage of such gross revenue or gross income for purposes of computing the net income on which the income tax rate will be applied

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TAXATION I REVIEWER ATTY. C. VILLENA WHO ARE ENTITLED: RC, NRC, DC and RFC, Partnerships, Taxable estates and trusts

1. REQUISITES FOR OSD a. b. c. d. 2.

Optional Taxpayer must signify in his return to elect OSD otherwise Itemized deductions shall apply Once elected, it is irrevocable for the entire taxable year Need not be substantiated by receipts

OSD FOR INDIVIDUALS – OSD not exceeding 40% of gross sales or gross receipts

3. OSD FOR CORPORATIONS – OSD not exceeding 40% of gross income

4. OSD FOR GPP (Sec 6, RR 16-2008)—GPP may claim either itemized deductions or OSD allowed to corporation. Net income is the distributable net income from which the share of each partner is to be determined

V. PREMIUM PAYMENTS ON HEALTH/HOSPITALIZATION INSURANCE (Sec 34.M) Premium payments on health and/or hospitalization insurance made during the taxable year maybe deducted provided the following are met: a. Taxpayer is individual, regardless whether he is deriving gross income or gross compensation income b. Health and/or hospitalization insurance is taken by taxpayer for himself or for any member/s of his family c. Amount deducted shall not exceed P2,400 per family or P200 a month during the taxable year d. Gross income of taxpayer’s family does not exceed 250K for the taxable year e. In case taxpayer is married, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction

VI.

ALLOWANCE FOR PERSONAL & ADDITIONAL EXEMPTION or PAE (Sec 35) PAE are arbitrary amounts allowed as deductions from gross income of an individual representing personal, living and family expenses of the taxpayer WHO ARE ENTITLED: RC, NRC, RA 1. PERSONAL EXEMPTION – 50K for each individual taxpayer 2. ADDITIONAL EXEMPTIONS – 25K for each dependent not exceeding 4 3. DEFINITION OF DEPENDENT – “Dependent” means: a. Legitimate, illegitimate or legally adopted child b. Chiefly dependent upon and living with taxpayer c. If dependent is: Not more than 21, unmarried and not gainfully employed d. If dependent, regardless of age, is: incapable of selfsupport because of physical or mental defect 4. IN CASE OF MARRIED INDIVIDUALS – Additional exemptions may be claimed only by one of the spouses

5. IN CASE OF LEGALLY SEPARATED SPOUSES – 6.

Additional exemptions may be claimed only by the spouse who has custody of the child or children CHANGE OF STATUS – During the taxable year CHANGE OF STATUS Death of taxpayer Death of dependent Additional dependent Dependent become more than 21 Marriage of taxpayer Death of spouse

TREATMENT Estate may claim personal exemption of 50K Taxpayer still entitled to additional exemption Taxpayer still entitled to additional exemption Taxpayer can still claim him or year Taxpayer entitled to full exemption for the particular taxable year Surviving spouse may still claim full

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

Marriage of dependent Gainful employment of dependent

amount of 50K Taxpayer can still claim him/her as dependent for the particular taxable year Taxpayer can still claim him/her as dependent for the particular taxable year

VII. ITEMS NOT DEDUCTIBLE (Sec 36) 1. GENERAL RULE: The following are not deductible a. b.

c.

d.

Personal, living or family expenses Amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of the property or estate Amount expended in restoring property or in making good the exhaustion thereof for which an allowance has been made Premiums made on any life insurance policy covering the life of any officer or employee, or any person financially interested in any trade or business carried on by taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy

2. LOSSES FROM SALES OR EXCHANGES OF PROPERTY BETWEEN RELATED PARTIES – NO deduction shall be allowed in respect of losses from sales or exchanges of property directly or directly: a. Between members of a family b. Except in the case of distributions in liquidation between an individual and corporation more than 50% in value of the outstanding stock of which is owned by or for such individual c. Except in the case of distributions in liquidation, between 2 corporations more than 50% of which is owned by or for the same individual, if either one of such corporations was, with respect to the taxable year prior to the sale/exchange, a personal holding company d. Between grantor and fiduciary of any trust

e.

f.

Between fiduciary of a trust and the fiduciary of another trust if the same person is grantor with respect to each trust Between a fiduciary of a trust and a beneficiary of such trust

CHAPTER VI – PARTNERSHIP

I. TAXATION OF GENERAL PARTNERSHIP (Sec 22.B) Partnerships, other than GPP, whether registered or not. General partnerships are considered as corporations and therefore ARE TAXED AS CORPORATION INCLUDES: a. Partnerships, no matter how created or organized b. Joint-stock companies c. Joint accounts (cuentas en participacion) NOTE: Partners are considered as stockholders and profits distributed them are considered as dividends subject to final tax

II. TAXATION OF GENERAL PROFESSIONAL PARTNERSHIP or GPP (Sec 26)

GPP is a partnership formed by persons for the sole purpose of exercising their common profession (Sec 22.B) INCOME TAX: GPP Is not subject to income tax but the persons engaged as partners in a GPP shall be liable in for income tax only in their separate and individual capacities (Sec 26). However, GPP is required to file information returns for its income for the purpose of furnishing information as to the share in the net income of the partnership which each partner should include in his individual return. NET INCOME OF GPP: For purposes of computing the distributive share of each partner, the net income of the partnership shall be computed in the same manner as a corporation.

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TAXATION I REVIEWER ATTY. C. VILLENA Each partner shall report his distributive share in the net income of the partnership as gross income in his return whether actually or constructively received.

IRREVOCABLE TRUST – A kind of trust which cannot be altered without the consent of the beneficiary

TREATMENT OF LOSSES: In case of loss, it will be divided as agreed upon by the partners and shall be taken by the individual partners in their respective returns.

NOTE: The income of a revocable trust is included in computing the taxable income of the grantor without any of the deductions allowed for estates while the income of an irrevocable trust is a separate taxable entity subject to tax as income after deducting the allowable deductions

CHAPTER VII – ESTATES AND TRUSTS NOTE: Estates and trusts are treated as individual taxpayers

I. APPLICATION OF TAX (Sec 60.A) Applies to income of estates or of any kind of property held in trust (separate taxable entities), including: 1. Income accumulated in trust: a. For the benefit of unborn/unascertained person/s with contingent interests b. Held for future distribution under the terms of the will or trust

ESTATE – refers to the mass of properties left by a deceased person. SUBJECT TO INCOME TAX: 3. Income tax for individuals: From January to the time of Death (Sec 24 and 25) 4. Income tax of the estate: If the estate is under administration or judicial settlement (Sec 60)

2.

TRUST – Right to property, whether real or personal, held by one person for the benefit of another CLASSIFICATION OF TRUSTS FOR TAX PURPOSES: f. Taxable and Tax-exempt trusts g. Irrevocable and revocable trusts h. Trust administered in the Philippines and trust administered in a foreign country – Only trusts administered in the Philippines are subject to tax REVOCABLE TRUST – A kind of trust where the power to revert to grantor title to any part of the corpus (body) of the trust is vested: c. In the grantor, either alone or in conjunction with any person having substantial adverse interest in the disposition of the corpus or the income therefrom; or d. In any person not having a substantial adverse interest in the disposition of the corpus or the income therefrom

3.

4.

II.

Income: a. To be distributed currently by the fiduciary to the beneficiaries b. Collected by a guardian of an infant to be held or distributed as the court may direct Income received by the estates of deceased persons during the period of administration or settlement of ht estate Income which, at the discretion of the fiduciary, may be either distributed to beneficiaries or accumulated

Exception (Sec 60.B) Not applicable to employees’ trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of his employees if: (Tax-exempt) 1. Contributions are made to the trust by such employer, employees or both, for the purpose of distributing to Page | 75

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong employees the earnings and principal of the fund accumulated by the trust 2. Under the trust it is impossible, at any time prior the satisfaction of all liabilities with respect to employees under the trust, for part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of the employees Any amount distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distribute.

b.

3. COMPUTATION AND PAYMENT (Sec 60.C) 1. IN GENERAL (Sec 60.C.1) – Computed upon the taxable income and paid by the fiduciary, except under Sec 63 (revocable trusts) and Sec 64 (income for the benefit of the grantor)

2. CONSOLIDATION OF INCOME OF TWO OR MORE TRUSTS (Sec 60.C.2) REQUISITES: Two or more trusts where: a. The creator of each of the trust is the same person b. The beneficiary of each trust is the same person EFFECTS: a. Taxable income of all the trusts shall be consolidated b. The tax provided shall be computed on such consolidated income c. The proportion of said tax shall be assessed and collected from each trustee based on the taxable income of the trust administered by him

3. TAXABLE INCOME (Sec 61) – Computed in the same manner as an individual taxpayer EXCEPT: a. DEDUCTION ALLOWED (Sec 61.A): (1) Amount of income of the estate/trust for the taxable year which is to be distributed evenly by the fiduciary to the beneficiaries and the amount of

the income collected by a guardian of an infant which is to be held/distributed as the court may direct (2) Amount allowed as deduction is included in computing the taxable income of the beneficiaries, whether distributed or not (3) Amount allowed as deduction under Sec 61.B ADDITIONAL DEDUCTION (Sec 61.B): (1) Amount of the income of the estate/trust for its taxable year, property paid/credited during such year to any legatee, heir or beneficiary may be claimed as deduction. This applies in cases of: (a) Income received by estate of deceased person during the period of administration or settlement of the estate (b) Income which, in the discretion of the fiduciary, may either be distributed to the beneficiary or accumulated (2) Amount paid/credited will be included in the taxable income of the legatee, heir or beneficiary NOTE: For trust administered in foreign country, the deductions shall not be allowed provided that the amount of income included in the return of said trust shall not be included in computing the income of the beneficiaries

4. EXEMPTION ALLOWED TO ESTATES AND TRUSTS (Sec 62)—Allowed exemption of 20K from the income of the estate or trust 5.

REVOCABLE TRUSTS (Sec 63)—The power to re-vest in the grantor title to any part of the corpus of the trust is vested: a. In the grantor either alone or in conjunction with any person not having substantial adverse interest in the disposition of such part of the corpus/income b. In any person not having a substantial adverse interest in the disposition of such part of the corpus/income Page | 76

TAXATION I REVIEWER ATTY. C. VILLENA EFFECT: The income of such trust shall be included in computing the taxable income of the grantor. A revocable trust is not taxable as a separate entity because the income forms part of the income of the grantor

NOTE:  An estate is taxable as a separate entity when it is already subject to a judicial proceeding  A trust is taxable as a separate entity if the trust is irrevocable. This is because the grantor has absolutely given up the corpus and any incidents thereto. In this case, the grantor has no control over the corpus of the trust. The grantor has transferred the income earning property to a beneficiary. If there is a condition that provides that a portion shall be reserved for the grantor, this condition does not convert the irrevocable trust into a revocable trust, but such portion is part of the taxable income of the grantor  If the transfer is revocable, the entire income shall be taxable in the hands of the grantor

6. INCOME FOR BENEFIT OF GRANTOR (Sec 64.A) REQUISITES: Where any part of the income of a trust is, or in the discretion of the grantor or any person not having substantial adverse interest in the disposition of such part of the income: a. May be held or accumulated for future distribution to the grantor b. May be distributed to the grantor c. May be applied to the payment of premiums upon policies of insurance on the life of the grantor EFFECT: Such part of the income is included in computing the policies of insurance on the life of the grantor

7. MEANING OF “IN THE DISCRETION OF GRANTOR” (SEC 64.B) – In the discretion o f the

having substantial adverse interest in the dispositions of the part of the income in question.

CHAPTER VIII – ACCOUNTING PERIODS AND METHODS OF ACCOUNTING I. ACOUNTING PERIODS Taxable income of a taxpayer is figured on the basis of his annual accounting period. 1. TAXABLE YEAR (Sec 22.P)—Calendar year or fiscal year ending during such calendar year, upon the basis of which the net income is computed a. CALENDAR YEAR – accounting period from January 1 to December 31 b. FISCAL YEAR (Sec 22.Q)—accounting period of 12 months ending on the last day of any month other than December; allowed only to corporations c. SHORTER PERIOD – Taxpayer may have a taxable period of less than 12 months when: (1) Taxpayer dies (2) Corporation is newly organized (3) Corporation changes its accounting period (4) Corporation is dissolved

2. GENERAL RULE ON COMPUTATION OF TAXABLE INCOME (Sec 43)—Taxable income shall be computed on the basis of annual accounting period (calendar year or fiscal year) in accordance with method of accounting used CALENDAR YEAR – Used when: (1) Taxpayer is an individual (2) Taxpayer is a partnership (3) Accounting period is other than a fiscal year (4) Taxpayer has no accounting period (5) Taxpayer does not keep books

grantor, either alone or in conjunction with any person not Page | 77

BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong

3. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED (Sec 44)—All items of gross income shall be included in the gross income for the taxable year in which received by taxpayer unless under methods of accounting, any such amounts are to be properly accounted for as of a different period

4. PERIOD IN WHICH DEDUCTIONS AND CREDITS TAKEN (Sec 45)—Shall be taken for the taxable year in which “PAID OR ACCRUED” or “PAID OR INCURRED” dependent upon the accounting method

5. CHANGE OF ACCOUNTING PERIOD (Sec 46)—Shall be computed on the basis of new accounting period subject to provisions of Sec 47 NOTE: A separate adjustment or final return shall be made for the period not covered by the old accounting period and the new accounting period (Sec 47)

II.

ACCOUNTING METHODS Except where final taxes on certain transactions are imposed, the liability of taxpayers for income tax is determined on the basis of a fixed period consisting normally of a taxable year covering a 12-month period. A taxpayer may adopt any standard method as long as it can properly reflect his income and deductions and that it is used by him with consistency.

1. CASH RECEIPTS AND DISBURSEMENT METHOD – Method of accounting whereby all items of gross income received during the year shall be accounted for in such taxable year and that only expenses actually paid shall be claimed as deductions during the year. o Income is realized upon actual or constructive receipt of cash or its equivalent, and expenses are deductible only upon actual payment thereof, regardless of the taxable year when the service is performed or the expense is incurred

CIR V. ISABELA CULTURAL CORP, G.R. NO 172231 (2007) Under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The amount of liability does not have to be determined exactly; it must be determined with “reasonable accuracy.” Accordingly, the term “reasonable accuracy” implies something less than an exact or completely accurate amount. The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the law firm and SGV, especially so that it is using the accrual method of accounting. For another, it could have reasonably determined the amount of legal, retainer fees and auditing fees owing to its familiarity with the rates charged by their long time legal consultant.

2. ACCRUAL METHOD – Method of accounting for income in the period it is earned, regardless of whether it has been received or not. Expenses are accounted for in the period they are incurred and not in the period they are paid. o Net income is being measured by the excess of the income earned during the period over the expenses incurred during the same period. The income that has been earned and the expenses that have been incurred are to be reported during

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TAXATION I REVIEWER ATTY. C. VILLENA the year, although they have not been collected or paid.

entire work performed under the contract. There should be deducted from gross income all expenditures made during the taxable year on account of the contract, accounting being taken of the materials and supplies on hand at the beginning and end of the taxable year for use in connection with the work under the contract but not yet so applied.

FILIPINAS SYNTHETIC FIBER CORP V. CA, 316 SCRA 480 (1999) "Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income." REQUISITES OF ACCRUAL METHOD: (1) that the right to receive the amount must be valid, unconditional and enforceable, i.e., not contingent upon future time; (2) the amount must be reasonably susceptible of accurate estimate; and (3) there must be a reasonable expectation that the amount will be paid in due course." 3.

LONG TERM CONTRACTS (Sec 48)—Percentage of completion method is applicable in case of a building, installation, or construction contract cover a period in excess of 1 year, where by gross income derived from such contract may be reported upon the basis of percentage of completion. In determining the percentage of completion of a contract: a. The costs incurred under the contract as of the end of the tax year are compared with the estimated total to be performed; or b. The work performed on the contract as of the end of the tax year is compared with the estimated work to be performed In such a case, the return should be accompanied by a certificate of the architect or engineer showing the percentage of completion during the taxable year of the

4.

SEC 44, RR 2-40: LONG TERM CONTRACTS — Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term "long-term" contracts means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases: a. Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects, or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, CIR may permit or require an amended return. b. Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong charged to the work under the contract but remaining on hand at the time of the completion.

that year, assuming that the money or property would have been income in the earlier year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off.

Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return.

5. INSTALLMENT BASIS (Sec 49)—Installment basis of reporting income is allowed in the following cases: a. Sale by dealer of personal property on installments b. Casual sale of personal property on installments where the selling price exceeds 1K and the initial payments do not exceed 25% of the selling price c. Sale of realty where the initial payments do not exceed 25% of the selling price; or d. Sale by individuals of real property, considered as capital asset, if initial payments do not exceed 25% of the selling price In cases where the installment method is not permitted, the initial installments, under the cash method, are immediately allotted to the income portion; under the accrual method, the income is deemed earned when the sale is consummated. 6.

SEC 51, RR 2-40: WHEN INCOME IS TO BE REPORTED — Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefore in a later year, income is realized in

CHAPTER X – WITHHOLDING TAXES I.

CONCEPT OF WITHHOLDING TAX CIR VS. SOLIDBANK CORPORATION, G.R. NO. 148191 (2003)

In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The payor, a separate entity, acts as no more than an agent of the government for the collection of tax in order to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds constitutive of the tax base.

II.

Types of Withholding Tax 1. 2. 3. 4.

1. a.

Withholding Tax on Wages Withholding Tax at Source Withholding VAT Fringe Benefit Tax

Withholding on Wages Requirement for withholding. SEC 79 (A)  Every employer must withhold from compensation paid to its employees  No withholding of tax shall be required on payments to employees who are classified as Minimum Wage earner  An employee who receives additional compensation and benefits in excess of the allowable statutory Page | 80

TAXATION I REVIEWER ATTY. C. VILLENA amount of P30,000 other than the Statutory Minimum Wage the entire amount, including the Statutory Minimum Wage shall be subject to withholding tax. b.

c.

d.

Tax paid by recipient Sec. 79 (B)  Every person who is required to withhold the tax from the compensation of an employee is liable for the payment of such tax to the BIR. Such liability stays even if the employee subsequently pays the tax.  The payment of the tax by the employee does not relieve the employer from the liability for penalties and/or additions to the tax for failure to deduct and withhold within the time prescribed by law or regulations.  The employer will not be relieved of his liability for payment of the tax required to be withheld unless he van show that the tax has been paid by the employee. Refunds or credits Sec. 79 (C)  When the total amount withheld exceeds the annual tax due for the employee, the excess shall be credited or refunded to the employee not later than Jan. 25 of the following year  In case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year.  The employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer is fully paid. Year-end adjustments Sec. 79 (H)  On or before the end of the calendar year, and prior to the payment of the compensation for the



e.

last payroll period, the employer shall determine the sum of the taxable regular and supplementary compensation paid to each employee for the entire year, including the last compensation to be paid and compute for the amount of income tax on the annualized gross compensation income. The difference between the tax due from the employee for the entire year and the sum of taxes withheld from Jan. – Nov. shall either be withheld from his salary in Dec. of the current calendar year or refunded to the employee not later than Jan. 25 of the succeeding year.

Liability for tax Sec. 80  Employer The employer shall be responsible for the withholding and remittance of the correct amount of tax required to be deducted and withheld from the compensation income of his employees. If the employer fails to withhold and remit the correct amount of tax, such tax shall be collected from the employer together plus penalties. Failure to refund excess withholding tax not later than Jan. 25 of the succeeding year, shall make the employer liable to a penalty equal to the total amount of refund which was not refunded to the employee plus penalties. 

Employee Where an employee fails or refuses to file the withholding exemption certificate or willfully supplies false or inaccurate information thereunder after due written notice by the employer, the tax otherwise required o be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment.

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong For failure or refusal to file the withholding exemption certificate or supplying false or inaccurate information, the excess taxes withheld by the employer, if any, shall not be refunded to the employee but shall be forfeited in favor of the government. 2. a.

NOTE: Deductions and/or personal exemptions are not allowed. b.

WITHHOLDING TAX AT SOURCE

Final Withholding Taxes Sec. 57 (A) (PASSIVE INCOME)  The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.  The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding the deficiency tax shall be collected from the payor/withholding agent.  The payee is not required to file an income tax return for the particular income nor is he liable for the payment of the tax.  The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income. It does not extend the payee’s other tax liability on said income, such as when the said income is further subject to a percentage tax.

RCBC VS. CIR The liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. FORMULA:

x

Gross Income Final Tax Rate Final Tax

Creditable Withholding Taxes on your ordinary income or Expanded Withholding Tax Sec. 57 (B) (ACTIVE INCOME)

CREBA VS. ROMULO G.R. NO. 160756 (2010) The Secretary may, upon the recommendation of the [CIR], require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. The following are creditable withholding taxes: 1. Expanded withholding tax (EWT) on certain income payments 2. Withholding Tax on Wages (WTW) 3. Withholding Tax on money payments to the Government

3.

WITHHOLDING VAT Sec. 114 (C)

(1) ON PAYMENTS TO NONRESIDENTS (Creditable Withholding VAT) Payments to non-resident, with respect to lease or use of property or property rights in the Philippines owned by such non-residents, are subject to withholding VAT. The VAT shall be based on the contract price. Other services rendered in the Philippines by non-resident. General guidelines for Creditable WVAT:  The party required to withhold is the payor, regardless of whether or not he is VAT-registered.  The VAT is passed on to the resident withholding agent.

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TAXATION I REVIEWER ATTY. C. VILLENA  

6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations 7. Expenses for foreign travel 8. Holiday and vacation expenses; 9. Educational assistance to the employee or his dependents 10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows

The payor shall claim this as input tax upon filing of his own VAT return, subject to the rule of allocation of input tax. The duly filed BIR Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld form is the proof or documentary substantiation for the claimed input tax.

(2) ON PAYMENTS BY GOVERNMENT (Final Withholding VAT) The government or any of its political subdivisions, instrumentalities or agencies, including GOCCs shall, before making payment on account of its purchase of goods or services subject to the VAT, deduct and withhold a final VAT equivalent to 5% of the gross payment thereof; provided, that the payment for lease or use of properties or property rights to nonresident owners shall be subject to 12% withholding tax at the time of payment. The payor or person in control of the payment shall be considered as the withholding agent who shall remit the tax withheld to the BIR within 10 days following tax at the time of payment.

4.

FRINGE BENEFIT TAX 

Kinds of fringe benefits that are not subject to the FBT: 1.

3.

Fringe benefit is any good, service or other benefit furnished or granted by an employer in cash or in kind in addition to basic salaries, to an individual employee, except a rank and file employee, such as but not limited to:

HEV-HIM-HEEL 1. Housing 2. Expense account 3. Vehicle of any kind 4. Household personnel such as maid, driver and others 5. Interest on loans at less than market rate to the extent of the difference between the market rate and the actual rate granted

Fringe benefits which are authorized and exempted from tax under special laws Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the CIR

2.

Fringe Benefits Tax (FBT) Sec. 33 

A Fringe Benefit Tax (FBT) is imposed on the grossed-up monetary value of the fringe benefit furnished, granted or paid by the employer to managerial and supervisory employees.

4.

III. 1.

Returns and Payments QUARTERLY RETURNS AND PAYMENTS OF TAX WITHHELD Sec. 58 (A) 

Filing and Payment Deadline:

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BY: J. Lumbres, C. Mejia and M. Mejia Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong 1. 2.

2.

The return for final withholding tax shall be filed and the payment made within 25 days from the close of each calendar quarter. The return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made.

3.

CERTIFICATE OF TAX WITHHELD Sec. 58 (B)  Every withholding agent required to deduct and withhold taxes under sec. 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not later than 20th day following close of the quarter in the case of corporate payee, or not later than March 1 following year in the case of individual payee for creditable withholding taxes. 

For final withholding taxes, the statement should be given to the payee on or before Jan. 31 of the succeeding year.

ANNUAL INFORMATION RETURN Sec. 58 (C) Every withholding agent required to deduct and withhold taxes under sec. 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted.

4.

INCOME OF RECIPIENT Sec. 58 (B) Sec. 58 (D) Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax withheld over the tax due on his return shall be refunded to him; if the income tax collected at source is less than the tax due on his return, the difference shall be paid. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent.

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