Notes in Taxation I.doc(1)

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 Notes In Taxation Taxation I By: Atty. Khaliquzzaman M. Macabato, CPA Professor, MSU-College of Law

I. Concept, Underlying U nderlying Basis and Purpose of Taxation Taxation

Taxation is a mode of raising revenue for public purpose. th ( Judge  Judge Cooley, Cooley, Taxation, Taxation, 4  Ed. P.72). P.72). It is a mode by which government make exactions for revenue in order to support their existence and carry out their legitimate objectives. The term taxation refers to either or both i. the i. the power to tax or ii. ii. the act or process by which the taxing power is exercised. On the other hand, Professor Cooley define taxes as enforced  proportional contributions from persons and property, property, levied by the State by virtue of its sovereignty for the support of the government and for all its public needs.( 1 Cooley 62) 62) Theory or underlying basis of taxation:

- Taxation proceeds from the theory that without money, the government cannot pay its expenses and it cannot, therefore, exist. That the existence existence of the Government Government is a necessity is the theory that underlies the power of taxation. The government has to call upon its citizen and residents to assume monetary burdens and pay taxes so that it can  perform its functions, meet its widely expanding services and carry on its legal as well as constitutional functions. Thus, in one case decided by the U. S Supreme Court ( Nicol  ( Nicol  vs. Ames), Ames), it was held that taxation involves not only the  power to destroy but also the power to keep alive. Taxes as Lifeblood of the nation-

-

Taxes are the lifeblood of the nation. Their primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. ( NPC  NPC vs.

 Province  Province of Albay) - Without taxation, government can neither exist nor last. - “Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need”(Comm. need”(Comm. Vs. Vs.  Pineda).  Pineda). Upon Taxation depends the Government’s Governmen t’s ability abilit y to serve the people for whose benefit taxes are collected (Vera vs. Fernandez ). ). - Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the state effects its functions for the welfare of its constituents. (CIR vs. CTA, G.R. 1066611 1066611,, July 21, 1994; 234 SCRA 348.) Symbiotic Relation of the State and its inhabitants, basis of  taxation.

- It is settled, settled, according to Professor Cooley, Cooley, that taxation is  based on the reciprocal duties of protection and support  between the State and its citizens as well as residents, and on the sovereign power as well as jurisdiction by State over its  people and property. property. The taxpayer is presumed to have received benefits and protection to life, liberty, and property from the Government for which they have to reciprocate by  paying taxes to support the existence existence of the Government. While it is true that not all taxpayers receive benefits from the Government, the theory is that they are presumed to have received such benefits even in an unequal proportions for  uniformity in this respect is impossible of attainment.  Nowadays, it is hardly believable to conclude that there are taxpayers who receive no benefits at all from Governmentsponsored projects, all of which improvements are used, directly or indirectly by all people or inhabitants. In Gomez  vs. Palomar   (L-23645, Oct. 29, 1968). it was held that as long as the tax is for public purpose, it matters not whether a  particular taxpayer stands to be benefited by the tax imposed. - Taxation is the indispensable and inevitable  price for  civilized society; without taxes, the government would be  paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender   part of one’s one’s hard-earned income to the taxing authorities, every person who is able must contribute his share in running of the government, for its part, it is expected to respond in the form of tangible or intangible benefits intended to improve the lives of the people and enhance

 Province  Province of Albay) - Without taxation, government can neither exist nor last. - “Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need”(Comm. need”(Comm. Vs. Vs.  Pineda).  Pineda). Upon Taxation depends the Government’s Governmen t’s ability abilit y to serve the people for whose benefit taxes are collected (Vera vs. Fernandez ). ). - Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the state effects its functions for the welfare of its constituents. (CIR vs. CTA, G.R. 1066611 1066611,, July 21, 1994; 234 SCRA 348.) Symbiotic Relation of the State and its inhabitants, basis of  taxation.

- It is settled, settled, according to Professor Cooley, Cooley, that taxation is  based on the reciprocal duties of protection and support  between the State and its citizens as well as residents, and on the sovereign power as well as jurisdiction by State over its  people and property. property. The taxpayer is presumed to have received benefits and protection to life, liberty, and property from the Government for which they have to reciprocate by  paying taxes to support the existence existence of the Government. While it is true that not all taxpayers receive benefits from the Government, the theory is that they are presumed to have received such benefits even in an unequal proportions for  uniformity in this respect is impossible of attainment.  Nowadays, it is hardly believable to conclude that there are taxpayers who receive no benefits at all from Governmentsponsored projects, all of which improvements are used, directly or indirectly by all people or inhabitants. In Gomez  vs. Palomar   (L-23645, Oct. 29, 1968). it was held that as long as the tax is for public purpose, it matters not whether a  particular taxpayer stands to be benefited by the tax imposed. - Taxation is the indispensable and inevitable  price for  civilized society; without taxes, the government would be  paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender   part of one’s one’s hard-earned income to the taxing authorities, every person who is able must contribute his share in running of the government, for its part, it is expected to respond in the form of tangible or intangible benefits intended to improve the lives of the people and enhance

their relation their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the notion that it is an arbitrary method of exaction by those in the seat of power.. (Comm. Vs. Algue, Inc.)

Taxation is an inherent prerogative of the taxing authority.

- In Antero In  Antero vs. Ruben Ancheta, the SC declared that the power  to tax, an inherent prerogative, has to be availed of to assure the performance performance of vital state functions. It is the source source of  the bulk of public funds. To paraphrase a recent decision, taxes, being the lifeblood of the government, their prompt and certain availability is of the essence, - Revenues, therefore, derived from taxes are intended primarily  to finance the government and its activities and are exempt from execution ( Mun. ( Mun. of Makati vs. CA). CA). The dynamism of government, as well as the expanding aims, correspondingly added new dimensions to the concept concept of taxation.   Gone were the days where one can seriously question the use of  taxation to attain what, traditionally, police power measures only could cover, such as social justice and the equitable distribution of  wealth, economic progress and and the protection protection of local industries as well as public welfare and similar objectives. Thus, in one case ( Republic (  Republic vs. Bacolod-Murcia Bacolod-Murcia Milling Co., et  al .) .) the defendants refused to pay the balance of the taxes due under  R. A. No. 632 ( a law levying tax on sugar production to support the Philippine Sugar Institute) on the ground that considering tha the Institute had acquired and operated a sugar refinery at a tremendous loss, the funds created by the tax under R. A. 632 were no longer for  the defendants’ defendants’ benefit and interest. The Supreme Supreme Court rejected defendants’ claim and held that R. A. 632 was not so much an exercise of the power of taxation nor the imposition of a special assessment,  but the exercise of the police power for general welfare of the entire country. Thus, it is clear that taxpayer need not derive direct benefit from the tax, the paramount consideration being the welfare of the nation or the greater portion of its population. Another example of the exercise of taxation, in conjunction with police power, power, is the imposition of of anti-dumping duties imposed on imported product to protect our local products and industry. Taxes effectively imposed and collected may be utilized to finance project ( like housing projects for the homeless) designed to

uplift the condition of the common  justice program of the government. II.

tao and

thus implement the social

Principles of a Sound Tax System; Canons of Taxation

The tax Commission of the Philippines, in its 1938 reports, characterize a sound tax system as follows: 1. Fiscal Adequacy- which means that sources of revenues must  be adequate to meet Government expenditures and their  variations; 2. Theoretical Justice- Which means that the taxes must be  based on ability to pay; and 3. Administrative Feasibility- which means thata) The tax law must be clear and concise;  b) It is capable of proper enforcement; c) It is not burdensome; and d) It is convenient as to time and manner of payment. The cannons of taxation of Adam Smith can be summarized as follows: 1) Ability to pay; 2) Certainty and simplicity; 3) Convenience as to time and manner of payment; 4) Economical to administer; and 5) Adequate to meet the fiscal requirement of government. The non-observance of these cannons, which are merely intended to make the tax system sound, will not render the tax impositions by the taxing authority invalid, except to the extent that specific constitutional or statutory limitations are impaired.   Accordingly, an exaction in kind or in services, instead of money, although perhaps violative of administrative feasibility, may not outright be legally objectionable (  see 51 Am. Jur. 40) since no specific constitutional or statutory limitations against it exist. An inequitable tax measure, however, may be declared void because of  the constitutional provision requiring taxation to be “equitable”. ( Art. VI, Sec. 28, Phil. Constitution)

III.

Scope and limitation of Taxation

Professor Cooley has described the wide spectrum of the power  to tax as one that “reaches to every trade or occupation, to every object of industry, use or enjoyment, to every species of possession; and it imposes a burden which, in case of failure to discharge, may be

followed by seizure or confiscation of property. No attribute of  sovereignty is more pervading and at no point does the power of  government affect more constantly and intimately all the relations of  life than through exactions made under it”. Others would simply refer  to the power of taxation as being “ unlimited, plenary, comprehensive and supreme.” The power to tax is an attribute of sovereignty. In fact, it is the strongest of all the power of government. But for all its plenitude, the  power to tax is not unconfined as there are restrictions. Adversely affecting as it does property rights, both the due process and equal  protection clauses of the Constitution may properly invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there will be truth to a 1903 dictum of Chief Justice Marshall that “the power to tax involves the power to destroy.” The web of unreality spin from the Marshall’s famous dictum was brushed away by one stroke of Mr. Justice Holmes’ pen, thus: “ The Power to tax is not the power to destroy while this court sits.” So it is in the Philippines. ( Reyes vs. Almanzor , G.R. No. L-49839, April 26,1991). In the same vein, the due process clause may be invoked where the taxing statute is so arbitrary that it finds no support from the constitution. And obvious example is where it can be shown to amount to confiscation of property. That would be a clear abuse of   power. It then become the duty of the Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. (ibid).

Limitations of Taxation

Taxation is subject to established limitations, such as those that are inherent in the power itself or mandated by the constitutional  precept. I. Inherent limitations on the power of taxation 1. Taxation is for Public purpose 2. Legislative in character  3. Territorial in nature 4. Subject to international comity 5. Exemption of government entities must be respected. A violation of these inherent limitations can amount to the taking of property without due process of law. ( Pepsi-Cola vs.  Municipality of Tanauan,  69 SCRA 460); hence, it can be said that any tax law contravening any limitation of taxation, in effect, will

likewise be validly struck down as unconstitutional. Nature of Taxation

Different authorities on the subject of taxation, sometimes, referred to the nature of taxation as the attributes, tenets, principles, due process, basic characteristics, elements, requisites, or inherent  limitations of taxation. 1. Taxation is for a public purpose.  - The proceeds of the tax must  be used (a) for support of the State or (b) for some recognized objects of government or directly to promote the welfare of the community. The tax is for public purpose if it is designed to support the services of Government and the recognized public needs.   The tax must affect the area as a community rather than as individuals. ( Lowell vs. City of Boston, 111 Mass. 454.) It was held that in order that a tax be for public purpose, the proceeds thereof must be used for the support of the Government, for some of the recognized objects of the country. In  Pascual vs. Sec. of Public Works ( 110 Phil 331), the Supreme Court ruled that the legislature is without the power to appropriate public revenues for anything but public purpose. x x x Said the SC, incidental advantage to the public or the State, which results from the promotion of private enterprises or   business, does not justify their aid by the use of public money. Thus, where, for instance, the land on which projected feeder  roads are to be constructed belong to private persons, an appropriation made by Congress for that purpose is null and void, and a donation to the government, made over five (5) months after the approval and effectivity of the Act for the  purpose of giving a "semblance of legality” to the appropriation, does not cure the basic defect. Hence, it can be said “that whether or not a public purpose exist is determined at the time of the enactment of the law and not at the time of its implementation. If taxes were spend for private ends, then it would be robbery. Thus, Justice Miller in Loan Association Vs. Topeka (30 Wall 655) said: “To lay with one hand the power of  government on the property of the citizen, and with the other   bestow it upon favored individuals to aid private enterprises and  build up private fortunes, is nonetheless a robbery because it is

done under a form of law and is called taxation. This is not legislation. It is a decree under legislative form.” On the other hand, the use of tax proceeds for putting up experimental facilities to increase sugar production and benefit that Industry ( Lutz vs. Araneta, 98 Phil. 148); for granting assistance to the BSP and GSP (City of Baguio vs. De la Rosa, 97 Phil, 994); for the support of public educational system (see Gomez vs. Palomar , 25 SCRA 827); and other special public  purposes, without any part of such money being channeled directly to private interest, cannot seriously be assailed. Additionally, the Supreme Court ruled in  Lutz vs.  Araneta, that taxation may be used to implement an object of   police power, being a legitimate aim of Government. In Commissioner vs. Algue, Inc  (158 SCRA 9), it was held that “the mere fact that a particular taxpayer received no special or  immediate benefit is of moment for it is the general good that matters in taxation. The symbiotic relation between the taxing authority and the subject is enough to justify the imposition. In Valentin Tio vs.Videogram Regulatory Board, et. al.   (151 SCRA 208) the SC declare, “that it is beyond serious question that tax does not cease to be valid merely because it regulates, discourage or even definitely deters the activity taxed. The  power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercise it. In another case, it was held that the Anti-TB Stamp Law is an exercise of the power to tax and it is an excise tax levied upon the privilege of using the mails. It was also held that the eradication of the dreaded disease like tuberculosis is a public  purpose. 2. Taxation is inherently legislative. – Even in the absence of any constitutional provision, the power falls to the legislature as  part of the more general power of law-making Like police  power (for public good or welfare) and eminent domain (for   public purpose), taxation is a inherent power of sovereignty ( Luzon Stevedoring Co. vs. CA, 163 SCRA 647). It follows that it is also legislative in character and a legislative prerogative.  But, these powers are not inherent in, but merely delegated by constitutional mandate or by law to, local governments. i) The power can also be exercised by Local government units (as a delegated power), independently of legislation, but

“subject to such limitations and guidelines” as may be  provided by law. ( see Constitution, Art. X, Sec 5); ii) By virtue of amendment No. 6 to the 1973 Constitution, the President was given concurrent legislative authority independent of the defunct Batasang Pambansa, which he exercised through the issuance of Presidential decrees and executive orders even after the lifting of Martial Law; and iii) Under the Transitory Provisions of the 1987 Constitution, The incumbent President shall continue to exercise legislative powers until the first Congress elected under  the New Constitution is convened.” (Art. XVIII, Sec. 6 Constitution). This power was exercised through the issuance of executive orders; and iiii) Pres. Corazon C. Aquino, under the Freedom Constitution, immediately after the EDSA Revolution in 1986, exercised legislative power until the ratification of the  1987 Constitution. Extent of the authority of the legislative taxing power.

(a) To determine the nature (kind ), object ( purpose) extent (amount or rate), coverage ( subjects and objects) and situs ( place) of the tax imposition; (b) To grant tax exemptions or condonations ( see  Petro vs.  Pililla, 198 SCRA); and (c) To specify or provide for administrative, as well as judicial, remedies that either the government or the taxpayers may avail themselves of in the proper implementation of tax measure. Being legislative in nature, the power to tax may not be delegated, except –  a) To local; governments (to be exercised by the local legislative bodies thereof) or political subdivisions ( see Unjieng vs. Pastones, 42, Phil. 818);  b) When allowed by the Constitution; e.g. Executive power to fix tariff rates, etc. - The Congress may, by law authorize the President subject to such limitations and restrictions as it may impose, to fix, within specified limits, tariff rates, import or export quota and tonnage and wharfage dues, and other duties or imposts within the framework of national development program of  the Government. (See Sec. 28(1), Art. VI, Id.)

c) When the delegation relates merely to administrative implementation that may call for some degree of  discretionary powers under a set of sufficient standard express by law ( see Cervantes vs. Auditor General, 197 SCRA 771). Stated otherwise, authorities on taxation state that the  power to tax may exceptionally be delegated, subject to such well-settled limitations asa) The delegation shall not contravene any constitutional  provision or the inherent limitations of taxation  b) The delegation is authorized either by the constitution or  a validly enacted legislative measures or statute; and c) The delegated power to tax, except when expressly authorized by the Constitution, should only be exercised  by local legislative body of local or municipal government concerned. It has been said that the power of taxation may be delegated to local governments in respect of matters of local concern. By inevitable inference, the legislative power to create political corporations for purposes of self government carries with it the power to confer on such local government agencies the power to tax. And, the plenary nature of the taxing power thus delegated would not suffice to invalidate the said law as confiscatory and oppressive. In delegating authority, the State is not limited to exact measure of the  power which is exercised by itself. X X X Thus, municipalities may be permitted to tax subjects, which for  reasons of public policy the State has not deemed wise to tax for general purposes ( Pepsi-Cola Bottling Co. of the  Phil. vs. Mun. of Tanauan, 69 SCRA 460). The assessment and collection of taxes duly levied are executive or administrative function, and these aspect of  taxation are not covered by the non-delegation rule (see infra). 3.

Taxation is territorial -

The general rule is that the taxing power  cannot go beyond the territorial limit of the taxing authority.

Thus, the situs or of taxation is important. Situs of  taxation is the State or country which has jurisdiction to tax the  person, property, activity or interest. In short, situs of taxation

is the place of taxation. The following are the places (situs) of taxation of various taxes1) Property tax a) In case of real property, it is the place where it is located regardless of domicile or citizenship of the owner. Mortgages over real property are likewise, taxed in the place where such property is situated.  b) If the personal property is intangible like credits,  bonds and bank deposits, the general rule is that it is taxable in the domicile of the owner under the maxim mobilia sequuntur personam. This rule  proceeds from the theory that intangibles do not admit of an actual location and may easily be transferred from one place to another so that the  possibility of escaping taxes is great, thus needing a fixed situs  for taxation. (Wells Fargo vs. Collector, 40 O.G. 159). This rule of mobilia sequuntur personam  is not absolute because it must yield to actual presence of and control over  the property. Thus, it was held that shares of stock  can be taxed at the domicile of the shareholder and also at the principal place of business (domicile) of the corporation. ( Ibid .) The rule was set forth that the maxim of mobilia sequuntur personam has been decided as 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 or legal ownership, actual presence and control elsewhere and cannot be applied if to do so would result in inescapable and patent injustice. ( Ibid.) c) In the case of Shell Co. of the Philippines vs. Mun. of Sipocot , L-12680, March, 1959, the Municipality of Sipocot, Camarines Sur, levied by ordinance, pursuant to R.A. 1435, additional tax on oil sold or distributed within the limits of the municipality’s territory. Does the ordinance subject to tax oil sold by the Shell Co. of the Philippines stored in Sipocot deposit and delivered outside Sipocot to the Shell customer? It was held

that “sold” means consummated sale and the latter  is consummated upon delivery of the oil. Delivery  being made outside Sipocot, the sale of the oil is not subject to the ordinance. It was likewise held that the word “distributed” had the same meaning as “sold”. d) Thus, the real property tax under the Real Property Tax Code cannot be imposed on real property located abroad, although owned by Filipino citizens (see Am. Jur. 458). Reason: the property do not have situs in the Philippines. 2. Income tax- Residence and/or citizenship of the taxpayer, as well as sources of income. 3. Poll or residence tax – Residence or domicile of the persons taxed  Note: It would be violative of the rule on territoriality for  the Philippine poll tax to be imposed even on its nonresident citizens (see Am Jur. 88) 4. Transfer taxes – The tax situs is the residence or citizenship or location of the property. The reason is that the activity or   privilege to transfer property is exercised in the Philippines.

5. Business and occupation taxes – Place where the act is done or occupation is pursued regardless of the domicile of the owner or proprietor and regardless of the location of the  property used for the business. Thus, In the case of  Allied Thread Co., Inc. vs. City  Mayor of Manila  (133 SCRA, 343), The Supreme Court ruled that “x x x The power to levy an excise (tax) upon the  performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the excise tax not upon the physical location of the property and in connection with the act or occupation taxed, but depends upon the place in which the act is performed or occupation engaged in.” 6. Excise taxes – The tax situs can be the place -

a) Where the privilege is exercised;  b) Where the taxpayer is a national of; or  c) Where the taxpayer has residence. The taxing authority is given wide latitude in the selection of the appropriate criteria; among the circumstances often considered are –  i. The nature of the tax, the extent of the benefit that may  be derived by the taxpayer (see Wells Fargo Bank  & Union Trust Co. vs. Coll ., 70 Phil 325;  Meralco vs. Yatco, 69 Phil 69); and ii. Equity Principles (see Art. VI, Sec. 28, Constitution) But, unless otherwise stated, the tax situs is deemed to be the place where the privilege is exercised. However, under  the provisions of the National Internal Revenue Code all three criteria (nationality, residence, and place where the  privilege is exercised) are used in the levy of income tax, as well as estate and gift taxes, but not of business taxes ( see  Business taxes provisions of the NIRC  ). Factors considered in determining Situs of Taxation-

1. Kinds of taxes; 2. Nature of the Property 3. Jurisdiction by the taxing power and State control over  the property taxed; 4. Protection and benefits, actual or presumed; and 5. Residence or domicile of the taxpayer. Cases on Situs of Taxation: Where incidents are attended to in the Philippines-

It was held that where the insured resides in the Philippines, the risk insured against being in the Philippines and other incidents of the contract were to be attended in the Philippines, the tax shall be imposed upon the insured regardless of whether the insurance contract is executed in a foreign country and withj a foreign corporation. ( Manila Electric Co. vs. Yatco, 69 Phil., 89 ) Where broker is subject to tax for sale abroad-

In the case of  A. Soriano Y Cia vs. Collector,  (54 O.G. 1938), it was held that where a broker received commissions for negotiating and consummating sales in Japan for   produced from mining properties in the Philippines, such  broker shall be subject to payment of broker’s tax, his  privilege to act as broker being recognized by Philippine Laws. NOTE: Brokers are now subject to VAT 7. Taxation is subject to International Comity- The Philippine Constitution, under the so-called incorporation clause, has expressly adopted the generally accepted  principles of international law as part of the law of the land ( Art. II, Sec. 2, 1987 Contitution). Under international comity, a State must recognize the generally accepted tenets of international law, among which is the sovereign equality of all states and their freedom from suit without their  consent. Even where one state enters with another’s territory, there is an implied understanding that the former does not subject itself to the authority and jurisdiction of the latter. Hence, the principle of international comity limit the authority of a government to effectively impose taxes on sovereign state and its instrumentalities, as well as on its  property held, and activities undertaken, in that capacity Although the this principle of international comity is not  covered directly or expressly by a constitutional provisions or  limitations, the Supreme Court had the opportunity to rule in  Pepsi-Cola vs. Mun. of Tanauan (69 SCRA 460), x x x that a violation thereof would contravene the general clause on due  process (Art. III, Sec. 1, 1987 Constitution), and any tax thereby levied shall amount to taking of property without due  process of law. The Court, further, held that the constitutional injunction against deprivation of property without due process of law may not be passed over under the guise of the taxing  powers, except when the taking of the property is in the lawful exercise of the taxing power, as when: (1) the tax is for a public  purpose; (2) the rule on uniformity of taxation is observed; (3)  either the person or property taxed is within the jurisdiction of  the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes, a notice and opportunity for  hearing are provided. In a way, therefore, the due process clause can be said to be the constitutional basis for these inherent limitations. So, in observance of international comity, property of  foreign sovereign cannot be a subject of Philippine taxation.

  Likewise, persons and properties exempt under International Law like salaries of ambassadors and residences of Foreign State are exempt under our domestic law in obedience to international comity.

8.

Exemption

of

Government

entities

must

be

respected.

Government agencies performing governmental function are exempt from taxation. But, there is no law prohibiting the government from taxing it self. Thus, certain taxes are imposed on the government, such as the Value-Added Tax (VAT). Being an excise tax, the producer or the seller of goods or services may shift the burden to the succeeding buyer or until it reaches the ultimate users. Thus, in this sense, the producer or the seller  may shift the burden to the government agencies if they happened to be the buyer of goods or services. May the Government tax itself?

IN  Standard Oil Co.. vs. Posadas,( 55 Phil. 715), It was held that tax statutes of the State are not construed to include its own property or that of its municipal corporation as subject to taxes although the terms of the statutes do not exempt them from taxation. The sovereign may not ordinarily tax itself or its subdivisions unless it appears from the tax statutes themselves that it subjects itself or any subdivision or instrumentality thereof to such statutes. Under present practice, the State, in the exercise of  sovereignty does not tax itself or any of its political subdivisions but the State may tax itself or any of its government owned or controlled corporations exercising  proprietary functions. Hence, the GSIS and DBP are subject to income taxes. II.

Constitutional Limitations on the power to tax.

Taxation, being an inherent power of the State, need not  be cloth with any constitutional authority for it to be exercised  by the sovereign state. Instead, constitutional provisions are meant and intended more to regulate and define, rather than to

grant, the power emanating therefrom. The constitution provides for limitations upon the power  to tax. These are – 1) Observance of the due process and equal protection  clauses in the constitution. a) Thus, the Constitution provides that- “ No person shall be deprived of life liberty or property without due process of  law, nor shall any person be denied the equal protection of laws. (Sec. 1, Art. III, 1987 Constitution) Due process clause-

Due process in taxation may involve previous notice and hearing. It may also refer to exercise of taxation within the territorial jurisdiction of the taxing authority. If a tax is levied for private purpose, the taxpayer is deprived of his property without due process of law. (22 J. Nolledo, Bar Reviewer in th Taxation, 1998, 13  Edition). In the following instances, due process is said to be denied in the exercise of taxation.

1. If by giving the tax law retroactive effect, there would be harshness or oppressiveness; 2. If the taxpayer is denied the right to question an assessment; 3. If a tax is levied for private purpose; and 4. If the taxing authority is exercised beyond its territorial limits. In one case (  Pepsi-Cola Bottling Co. of the Philippines,  Inc. vs. Mun. of Tanauan  L-31156, Feb. 27, 1976), The SC observed:  ,

“Due process is usually violated where the tax imposed is for a private as distinguished from public  purpose; a tax imposed on property outside the state, i.e., extra territorial taxation, and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does

not violate the due process clause, as applied to particular  taxpayer, although the purpose of the tax will result in injury rather than benefit to such taxpayer. Due process does not require that the property subject to the tax or the amount of  tax to be raised should be determined by judicial injury, and notice and hearing as to amount of tax and the manner in which it shall be apportioned are generally not necessary to due process of law.” Denial of the equal protection clause-

There is denial of equal protection of law if there is discrimination that finds no support in reason. It suffices that (there is equal protection) the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in privileges conferred and the liabilities imposed. Favoritism and undue  preference cannot be allowed. For the principle is that equal protection and security shall be given to every person under circumstances, which if not identical, are analogous.  If law be looked upon in terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast on some of the group equally  binding on the rest. (Sison vs. Ancheta, G. R. No. 59431, July 25, 1984) The equal protection clause is, of course, inspired by the noble concept of approximating the ideal of  the law’s benefit being available to all and the affairs of men  being governed by the serene and impartial uniformity, which is of the very essence of idea of law. The equality is not a disembodied equality. The Constitution does not require things which are different in fact or opinion to be treated in law as though they were the same. Hence, the constant reiteration of the view that classification if rational in character is allowable. (Ibid) The State is free to select the subject of taxation, and it has been repeatedly held that “inequalities which result from a singling out of one  particular class for taxation, or exemption infringe no constitutional limitation.” ( Ibid) A kindred principle is uniformity and equality of taxation. The rule of uniformity does not call for perfect uniformity or perfect equality  because this hardly attainable. 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. Where the differentiation complained of conforms to the practical

dictates of justice and equity, it is not discriminatory within the meaning of the constitutional clause and therefore uniform. (Ibid). Taxpayers may be classified into different categories.-

It is enough that the classification must rest upon substantial distinctions that make real differences. In the case of gross income taxation embodied BP 135, the discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them.   Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of   professionals in the practice of their calling and businesses, there is no uniformity in the costs or expenses necessary to  produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rate in the  basis of gross income. This an ample then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regard professional and business income. (Sison vs. Anceta, supra). 2) Non-impairment of the obligations of contracts. - No law impairing the obligations of contracts shall be passed. (Sec. 10, Id.) 3) Non imprisonment for non-payment of poll tax. - No person shall be imprisoned for debt or non-payment of a  poll tax. (Sec. 20, Id.) 4) Non-infringement of religious freedom. a. No law shall be made respecting an establishment of  religion, or prohibiting the free exercise thereof, and the exercise and enjoyment of religious profession and worship without discrimination or preference, shall be

allowed x x x (Sec. 5, Id.)  b. It has been held that it is unconstitutional to impose license fee upon the distribution and sale of bibles and other religious literature by a religious and non-profit organization. To rule otherwise would be to impair the free exercise and enjoyment of religious profession and worship as well as the right of dissemination of religious  beliefs. (See American Bible Society vs. City of Manila,  L-9637, April 30, 1957.)

5) Executive power to veto any separate item or items in a revenue or tariff bill. - 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. (Sec. 27(2), Art. VI, 1987 Constitution.) 6) The rule of taxation shall be uniform and equitable. The congress shall evolve a progressive system of taxation. - How does the authority to classify taxpayer be exercised? The taxing power has the authority to make a reasonable and natural classification for purposes of taxation  but the government’s act must not be prompted by a spirit of  hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all  persons must be treated in the same manner, the conditions not  being different both in the privileges conferred and the liabilities imposed. ( Reyes vs. Almanzor, G.R. No. L-49839,  April 26, 1991). - Uniformity, definedUniformity is tat principle by which all taxable articles or kinds of property of the same class shall be taxed at the same rate. (Reyes vs. Almanzor, G.R. No. L-49839,  April 26, 1991.) - Equitable and progressive, meaning of-

Taxation is said to be equitable when the burden falls on those better able to pay. Taxation is progressive   when its rate goes up depending on the resources of the  person affected. (Reyes vs. Almanzor, G.R. No. L-49839, April 26, 1991) - Uniformity Rule Distinguished From Equality In TaxationUniformity of taxation means, as already indicated, that the properties or persons of the same class must be taxed at the same rate while equality in taxation means that the tax must  be imposed based on ability to pay or in proportion to the relative value of the taxable property. Courts, however, have interchangeably used the two terms. Instances where uniformity of taxation has been upheld: 1. A license tax was imposed on boarding stables for race horses. It was held that the imposition is valid although other boarding stables are not subject to license tax. ( Manila Race Horse Owners Association vs. De la  Fuente, 88 Phil. 60.) 2. Uniformity is attained if the rates of taxes imposed on fishing privileges are classified according to the kind of  fishing apparatus used by persons who apply for the  privilege. (U.S. vs. Sumulong, 30 Phil. 381; cited in Sinco, p. 578.) 3. Uniformity is likewise observed is a statute imposes a tax of two pesos a square meter or fraction thereof on every  billboard or sign anywhere in the country. (Churchill vs. Conception, 34 Phil. 969; Sinco, p. 578.) 4. There is no violation of the uniformity rule if sales tax is imposed on the sales of lumber on the basis of gross selling price while operators or proprietors of sawmills who buys logs to be sawn or cut into lumber are subject to tax on their sales based only on the 33 1/3% of this gross cost of logs purchased there being two classes of  taxpayers involved. ( Lion Tiong vs. Collector L-10964,  Feb. 27, 1959.) Note: Under RA 6110, computation of 

the sales tax above on 33 1/3% of the gross cost of logs was repealed. The VAT has superseded the sales tax. 5. Wholesale dealers in oil are not illegally discriminated against by an occupation tax which is not exacted of  wholesale dealers in such other articles or merchandise as sugar, bacon, coal, iron, and other things. (Sinco, p. 579 citing Southern Oil Co. vs, Texas, 217 U.S. 114) 6. Ordinances imposing fees at different rates within each class on foot peddlers and peddlers using carts or  wagons are valid. ( Kneeland vs. Pittsbur, 10 Cent, 421.) 7. Classification of cities according to population for   purposes of taxation is valid. (Sinco, p. 579.) So also, it was held that a law granting a certain city the power to tax certain businesses or occupations, withholding such  power from other cities does not violate the uniformity rule, it being the legislative domain to authorize any city what occupations to tax and withhold the same from other cities. ( Punzalan vs. Mun. Board of Manila, 50 O.G. 2485.) 8. An ordinance imposing a graduated license tax upon hotels depending on the number of rooms used for  accommodation of the public is valid. (St. Luis vs.  Briber, 7 Mo. Anno. 69.) 9. Condonation of taxes due and payable excluding therefrom taxes already collected does not violate the uniformity rule because the property of persons exempted constitute a class by themselves, determination of which is within the legislative domain. ( Juan Luna Subdivision, Inc. vs. Sarmiento, 91 Phil. 371.) 10. The Supreme Court held that there is no constitutional injunction against granting tax exemptions to particular   persons. What the fundamental law forbids, observed the Supreme Court, is the denial of equal protection, such as through unreasonable discrimination or  classification. (Comm. vs. Botelho Shipping Corp., et al.,  June 29, 1967.) 11. Imposing tax on the occupation of installation managers is not discriminatory even if it happens that there is only one installation manager in the municipality. (Shell Co.

vs. Mun. of Cordova, 50 O.G. 1046.) 12. In one case, the constitutionality of the Anti-TB Stamp Law was assailed as denying equal protection of the law. The trial court held the law invalid on the ground that it singles out tuberculosis to the exclusion of other diseases which, it is said, are equally a menace to public health.   The Supreme Court reversing the trial court and upholding the validity of the Anti-TB Stamp Law said that “it is never a requirement of equal protection that all evils of the same gems be eradicated or none at all.”   Observed the SC: “If the law presumably hits the evil where it is most felt, it is not to be overthrown because there are other instances to which it might have been applied.” (Gomez vs. Palomar, L-23645, October 29, 1968.) - Cases Where Uniformity Of Taxation Was Not Adhered To1. An ordinance of the city of Manila levying ad valorem tax on all motor vehicles registered within the City was held as violative of the uniformity rule because the ordinance applies only to those vehicles registered in Manila and not to those vehicles which come to Manila temporarily and therefore, these vehicles also contribute to the deterioration of the city streets. (Association of Customs  Brokers, Inc. vs. Municipality Board, L- 4376, 1953.) 2. A tax upon receipts of corporations operating taxicabs not levied upon individuals or partnerships engaged in similar business is invalid, the discrimination not being  justified by any difference in the source of receipts or in the situation or character of the property employed. (Quaker City Cab Co. vs. Pennsylvania, 277 U.S. 389.) 3. A City ordinance imposing P50.00 permit fee upon an alien seeking employment is invalid for being excessive (not a police measure but a revenue measure) because it failed to consider substantial differences among aliens required to pay it. The same amount of P50.00 is being exacted upon any employed alien, whether a casual or   permanent employee, or whether lowly or highly paid. (See Villegas vs. Hui Chienf Tsai, 86 SCRA 270.) 7) Executive power to fix tariff rates, etc. subject to

statutory limitations or restrictions.

- The Congress may, by law, authorize the President subject to such limitations and restrictions as it may impose, to fix, within specified limits, tariff rates, import or export quotas, and tonnage and wharfage dues, and other duties or impost within the framework of the national development program of the Government. (See Sec. 28(1), Art. VI, Id .) 8) Exemption from property tax  of non-profit cemeteries, charitable institutions, churches and parsonages or convents appurtenant thereto, mosque and all lands, buildings and improvements used exclusively, actually and directly for  religious, charitable or educational purposes. (See Sec. 28(3), Art. VIII, Id.) - Nature of exemption of property used for religious,  charitable, etc. purposesThe exemption of churches, non profit cemeteries, lands, buildings and improvements used exclusively for  charitable, religious or educational purposes refers only to exemption from property tax. Thus, if the church receives donation, donor’s (and donee’s) taxes must be duly paid  because these taxes are not property but excise taxes. (see  Fr. Casimiro Lladoc vs, Commissioner of Internal Revenue, L-19201, 16, June 1965.) Note: Pd No. 69 eliminated the donee’s tax. It was held that the residence of the Catholic Archbishop of Manila 80 to 100 meters away from the Cathedral Church was tax exempt. (Catholic Church vs. Hastings, 5 Phil. 701.) - The tax exemption covers  property taxes only; accordingly, a conveyance of such exempt property can be subject to transfer taxes. (see  Hodges vs. Municipal  Board of Iloilo City, 19 SCRA 28.) Special levies or assessments, not being taxes, are not covered by the exemption (see  Apostolic  Prefect vs. City Treasurer of Baguio, 71 Phil. 547.) But, the Local Government Code, extends the exemption to special assessments. - Exemption extends to facilities “incidental and reasonably necessary for” the accomplishment of said religious, etc. Purpose.

The exemption in favor of property used exclusively for charitable purposes is not limited to property actually “indispensable” therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are “incidental to and reasonably necessary for” the accomplishment of said  purpose, such as in the case of hospitals, “a school for  training nurses, a nurses’ home, property used to provide housing facilities for interns, residents doctors, superintendents, and other members of hospital staff and recreational facilities for students, nurses, interns, and residents” (84 C.J.S. 621), such as athletic “fields”, including “a farm used for the inmates of the institution” [Cooley on Taxation, Vol. 2, p.430]. (Herrera vs. Q.C. Board  of Assessment Appeals, 3 SCRA 186). An adjacent ground or vegetable garden destained to the incidental use of the parish priest in his ordinary life is tax exempt. Likewise, a lot formerly a cemetery used as lodging place for those who participate in religious ceremonies for the dead is exempt from tax, there being incidental use in religious functions. ( Bishop of Nueva Segovia vs. Provincial Board of Ilocos Norte, 51 Phil. 252.) - In the case of  Abra Valley College, Inc. vs. Aquino (G.R. No. 39086, June 15, 1988 {162 SCRA 106}, it was held that the  portion of the school building which was being used for the residence of the school director was exempted from the real  property tax, but another portion thereof which was being leased to a marketing firm for commercial purposes was subjected to tax. - The test of exemption is the “use” of the property. The 1987 Constitution specifically requires that the  property be “actually” and “directly” used for religious, educational or charitable purposes. It would thus appear that ‘idle” land of, or property let to others for unlike purposes although owned by, religious, educational and charitable institutions could be subject to real estate tax. The test, therefore, is use. ( Abra Valley College, Inc. vs. Aquino, 162 SCRA 106) The issue of title or ownership is not relevant;   accordingly, a piece of real property that is leased for a consideration by a religious entity, which is then used by the latter actually, directly and exclusively for religious, educational or charitable purposes would be exempt from

 property taxes. (see Roman Catholic Church vs. Hastings, 5  Phil. 701; Bishop of Nueva Segovia vs. Provincial Board, 51  Phil. 352, but, see Opinion of Secretary of Justice of 14 January 1941). 9) 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. (Sec. 4(3) Art. XIV, 1987  Constitution.) - The above provision covers exemption from tax of revenues and exemption from customs duties of importation. - Meaning of the term ‘exclusively”. The term “exclusively” means  primarily, not Solely ( Herrera vs. Board of Assessment Appeals, 3 SCRA 186). Thus, the admission of pay patients does not detract from the charitable character of a hospital, if all its funds are devoted exclusively to the maintenance of the institution as a “public charity” (84 C.J.S. 617 ); see also 51 Am. Jur. 607; Cooley on Taxation, Vol. 2, p.1562; 144 A.L.R. 1489-1492).   In other words, “where rendering charity is its primary object, and the funds derived from payments made by  patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprived the hospital of its benevolent character” ( Praire Du Chian Sanitarium Co. vs. City of Praire Du Chian, 242 Wis. 262, 7NW[2d] 832, 144 A.L.R. 1480). The fact, therefore, that a hospital, which is a charitable institution, admits paying patients does not bar it from claiming that it is devoted exclusively to benevolent  purposes, if the income derived from pay patients is devoted to improvement of charity wards which represents two-third (2/3) of the bed capacity of the hospital, aside from “outcharity patients” who come only for consultation. 10) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. (Sec. 4(4); Art. XIV, 1987 Constitution). 11)Tax money collected for special purpose must be applied only for that purpose.

-

All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such  purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the government. (Sec. 29 (3), Art. VI, Id.)

- The Supreme Court ruled in Gascon vs. Republic Planters  Bank  (158 SCRA 626) that the “stabilization fees” collected  by the State (PHILSUCOM) for the promotion of the sugar  industry were in the nature of taxes and no implied trust was created for the benefit of sugar producers. Thus, the revenue derived therefrom are to be treated as a special fund to be administered for the purpose intended. No part thereof may  be used for the exclusive benefit of any private person or  entity but for the benefit of the entire sugar industry. Once the purpose is achieved, the balance if any remaining, is to  be transferred to the general funds of the government. (See  Art. VI, Sec 29, par. 3, 1987 Constitution). 12) Prohibition against use of public funds for sectarian purposes.

- No public money or property shall be appropriated, applied,  paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or other religious teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or  government orphanage or leprosarium. (Sec 29 (2), Art VI, Id.) 13) No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress. (Sec. 28(4) Art VI, Id.)

- Note the use of the words “majority of all the members of the Congress”, not just majority of a quorum. A tax exemption  being an exception to an imperative power of taxation, it needs a bigger vote in the legislature.* •

Asked in the 1989 Bar Exam. The Question is: Does the Constitution provide for any limitation on the exercise of  the power of Congress to grant tax exemption? Explain.

14) No money shall be paid out of the treasury except in pursuance of an appropriation made by law . (Sec. 29(1),  Art VI, Id.)

15)All appropriation, revenue or tariff bills, bills authorizing increase of public debt x x x shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. (Sec. 24, Art. VI, Id.) 16)Non-impairment by Congress of the Supreme Court  jurisdiction to review, revise, reverse, modify or affirm on appeal or certiorari final judgements or decrees of  inferior courts in, among others, all cases involving the legality of any tax, impost, assessment or toll or any penalty imposed in relation thereof. (Sec. 2 and 5, Art. VIII, Id.) 17) Miscellaneous- The provisions on appropriation in sec. 25 of Art. VI of the `1987 Constitution can also be considered as constitutional limitation on the power to tax. Thus, among others, the Congress may not increase the appropriations recommended  by the President for the operation of the Government as specified in the budget; no provision or enactment shall embrace in the general appropriations bill unless it relates specifically to some particular appropriation therein; a special appropriations bill shall specify the purpose for  which it is intended and shall be supported by funds actually available as certified by the National Treasurer, or to be raised by a corresponding revenue proposal therein; in general, there should be no transfer of appropriations; discretionary funds appropriated for particular officials shall  be disbursed only for public purposes to be supported by appropriate vouchers and subject to such guidelines as may  be prescribed by law, etc. - Taxation is subject to and subordinated by constitutional provisions and precepts; hence such set of rules as those affecting  Due process (Pipsi-Cola Vs. Mun. of Tanauan, 69 SCRA 460), Separation of Church and the State (See Garces vs. Estenzo, L-53487, 25 May 1981 ), as well as the non-impairment clause (where the taxing authority binds itself in contracts), may also affect, although indirectly,

taxation. In this context, it has been said that taxation is the weakest of all the three sovereign powers of government as distinguished from the scope of area that taxation can cover  and reach over which matter it is concededly the strongest( See Sison vs. Ancheta, G.R.59431, 25 July 1984, 130 SCRA 654). - The Supreme Court in American bible Society Vs. City of  Manila held: “ The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraint of such right can only be justified, like other  restraint of freedom of expression, on the ground that there is a clear and present danger of any substantive evil which the State has the right to prevent. x x x. It is true, the price asked for the religious articles was in some instances a little  bit higher than the actual cost of the same, but this cannot mean that plaintiff was engaged in the business or  occupation of selling merchandise for profit. For this reason, the provision of City Ordinance No. 2529, as amended, which requires the payment of license fee for  conducting the business of general merchandise, cannot be applied to plaintiff society for, in doing so, it would impair  its free exercise and enjoyment of its religious profession and worship, as well as its right of dissemination of religious  beliefs. Upon the other hand, City Ordinance No 3000, as amended, which requires the obtention of the Mayor’s Permit before any person can engage in any business, trades, occupations enumerated therein, does not impose any charge upon enjoyment of a right granted by the Constitution, nor  tax the exercise of religious practices. Hence it cannot be considered unconstitutional, even if applied to plaintiff  society. But Ordinance No. 2529 is not applicable to  plaintiff and the City of Manila is powerless to license or tax the business of plaintiff society involved therein, for the reason above stated, Ordinance No. 3000 is also in applicable to said business, trade or occupation of the  plaintiff. “ x x x. “We do not mean to say that religious groups and the  press are free from all financial burdens of government ( See Grosjean vs. American Press Co., 297 U.S. 233, 250, 80 L. Ed. 660, 668, 56 S. Ct. 444). ‘We have here something quite different, for example, from a tax on the income of one who engages in religious activities or a tax on the property used

or employed in connection with these activities. It is one thing to impose a tax on the income or property of of a  preacher. It is quite another thing to exact a tax from him for the privilege of delivering sermon. The tax imposed by the City of Jeannette is a flat license tax, payment of which is conditioned of the exercise of these constitutional  privileges. The power to tax the exercise of a privilege is the power to control or suppress its enjoyment. Those who can tax the exercise of this religious practice can make its exercise so costly as to deprive it of the resources necessary for its maintenance. “It is contended, however, that the fact that the license tax can suppress or control the activity is unimportant if it does not do so. But that is to disregard th nature of this tax.  It is a license tax, a flat license tax imposed on the exercise of a right granted by the Bill of rights. The power to impose a license tax on the exercise of these freedom is indeed as  potent as the power of censorship which this Court has repeatedly struck down. It is not a nominal fee imposed as a regulatory measure to defray the expenses of policing the activities in question. It is in no way apportioned. It is a flat license tax levied and collected as condition to the pursuit of  activities whose enjoyment is guaranteed by the constitutional liberties of press and religion and inevitably tends to suppress their exercise. That is almost uniformly recognized as the intent vice and evil of this flat license tax.” The taxing power of the State must yield to the nonimpairment clause.-

The tax exemption based on public policy can be revoked at anytime. If the tax exemption is based on contract, it cannot be revoked if the revocation would amount to an impairment of the obligations of contracts. As already noted with respect to limitations on the power to tax, the taxing power of the State must yield to the nonimpairment clause, A legislative franchise that grants a tax exemption in consideration of a payment of a certain  percentage of gross receipt or earning, is contact that may not be impaired but the franchise itself may be amended or  repealed by the Congress when the common good so requires. (see  Jose N.  Nolido, p.83,  Bar Reviewer in th Taxation, 1988 13  Revised Edition). IV. Aspect of Taxation

The aspects (also referred to as the phases, process, stages of   , or steps in, taxation) are the following: 1.  Levy  – Which is the act of imposition by the legislature such as by its enactment of the law. The Term is understood to include not only the mandate on when and how the tax is imposed but also, whenever it may  be appropriate, the grant of tax exemptions, tax amnesties or tax condonations. The latter (tax exemptions, etc.), like tax impositions are themselves subject to due observance of the limitations of taxation (see Commissioner vs. Botelbo Shipping Corporation, 20 SCRA 487; 51 Am. Jur. 509). 2.  Assessment and Collection - Which is the act of administration and implementation of the tax law by the executive through its administrative agencies. The term “ assessment” which means notice and demand   for payment of tax liability, should not be confused with “assessment” relative to real property taxation, which refers to the listing  and valuation of taxable real property. 3.  Payment –  Which means the act of compliance by the taxpayer, including such options, schemes, or remedies as may be legally open or available to him. V. Taxes may be classified as follows1. According to Subject Matter or Object: a. Personal, capitation or poll taxes- Taxes of fixed amount upon residents or persons of certain class without regard to their   property or business ( e.g. the basic community tax). b. Property taxes - Taxes assessed on the things or property of a certain class (e.g. real estate taxes). c. Excise or license taxes-  Taxes on the  privilege, occupation or  business  not falling within the classification of poll taxes or   property taxes ( e.g. “internal revenue taxes” or customs duties). 2. According to burden or incidencea. Direct taxes – Taxes which are demanded from persons who are  primarily burdened to pay them (e.g. income, estate, and donor’s taxes).

b. Indirect taxes - Taxes levied upon transactions or activities before the articles subject matter thereof reach the consumers to whom the  burden of the tax may ultimately be charged or shifted (e.g., VAT). “A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in.” Examples are customs duties and ad valorem taxes paid by the oil companies to the Bureau of Customs for their importation of crude oil, and specific and ad  valorem taxes they pay to the BIR upon converting   the crude oil into  petroleum products. On the other hand, “ indirect taxes are taxes  primarily paid by persons who can shift the burden upon someone else.” For example, the excise and ad valorem  taxes that oil companies pay the BIR upon removal of petroleum products from its refinery can be shifted to its buyer by adding said taxes to the cash cost and/or selling price. ( See Maceda vs. Macaraeg, Jr ., 223 SCRA 217). In Commissioner of Internal Revenue vs. Tour Specialists,  Inc.,  (G.R. 66416, March 21, 1990), the Supreme Court held that  “Direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them, while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else.” Indirect tax cannot be shifted to a tax exempt entity-

The Court further declared that “ The contractor’s tax is  payable by the contractor but in the last analysis it is the owner of the  building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation.   Thus, it is an indirect tax. And it an indirect tax on the WHO ( World Health Organization) because, although it is payable by the contractor, the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that “ this tax has no bearing upon the World Health Organization.”(see Commissioner of Internal   Revenue vs. Tour Specialists, Inc., (G. R. 66416, March 31, 1990). 3. According to Determination of Amount (Tax Rates)a. Specific taxes – Taxes imposed per head, unit or number, or by weight or volume and which require no assessment beyond a listing and classification of the subject or articles to be taxed (e.g.

certain excise tax under the NIRC; see Tan vs. Mun. of Pagbilao, 7 SCRA 887).  b. Ad valorem taxes – Taxes based upon the value of the article subject to tax ( e.g. certain taxes on mineral products under the NIRC). 4. According to purposea. General or Fiscal – Taxes imposed for general puposes of the government (e.g. Income taxes). b. Special, Regulatory or Sumptuary-  Taxes imposed for a particular  legitimate object of government (e.g. the education fund tax under  the Real Property Taxation of the Local Government Code). An imposition may partake the nature of both a revenue measure and a regulatory fee. In such a case, the real intendment and the primary and substantial purpose of the law must be inquired into from which it may be held to be one or the other  depending on the statute’s predominant objective (see Cooley on Taxation, 2 Ed. 592; see also Calalang vs. Lorenzo, 97 Phil. 212). In exempting the  Philippine Air Lines (which was by its Charter exempt from all taxes) from motor vehicle registration fees, the Court held that since the fees imposed are mainly used for revenue and only a fifth thereof is retained by the Land Transportation Commission for regulation, the same should be considered taxes rather than as license fees ( Philippine Air Lines vs. Romeo Edu, et. al.,  G.R. No. 41383, 15 August 1988, 164 SCRA 320). In an earlier case, only the portion of a permit fee in excess of the cost of regulation was held to be a tax (Villegas vs.  Hsiu, 86 SCRA 270). A margin levy on foreign exchange was held to be police  power measure to strengthen the country’s international reserve rather than a tax (Esso Standard Eastern, Inc. vs. Commissioner, G.R. Nos. 28508-09, 7 July 1989, 175 SCRA 149). An amount imposed by the Energy Regulatory board on petroleum products to augment the resources of the Oil Stabilization Fund under  Presidential Decree No. 1956 was not considered, with Mr. Justice Paras dissenting, as an act of taxation ( Lozano vs. Energy  Regulatory Board , G.R. Nos. 95119-21, 18 December 1990, SCRA 363). 5. According to Scope or Authority Imposing the Tax-

a. National- Taxes imposed by the national government (e.g. internal revenue taxes and customs duties). The real property tax under  the then Real Property Tax Code, the Supreme Court held in Meralco Securities vs. Central Board of Assessment Appeals (L46245, 31 May 1982, 114 SCRA 260), is a national tax since the tax has always been imposed by the national government and enforced by throughout the Philippines. b. Municipal or Local – Taxes imposed by local governments (e.g.  business taxes that may be imposed under the Local Government Code). 6. According to Graduation (Tax Base and Rate)a. Progressive- The tax rate increases as the tax base increases (e.g. Income tax). b. Regressive- The tax rate decreases as the tax base increases. c. Mixed- The tax rate are partly progressive and partly regressive. d. Proportionate- The tax rates are fixed (in amounts or in percentage) on a flat tax base. Taxes may also be classified according to purpose as a) fiscal or   b) regulatory; and according to scope as a) general or b) special.   While it may be true that certain impositions may partake of the nature of both taxes (for revenue) and fee (for regulation), so termed as “regulatory taxes,” it would be more appropriate to consider their  real essence. If the imposition is principally for regulation, then it must be considered a license fee; otherwise a tax. Tax distinguished from debt-

Tax 1. Based on law contracts.

Debt .

2. Covers imprisonment. imprisonment. 3. Not assignable. 4. Generally payable in money.

1.Based on 2.Involves no 3.Assignable. 4.May be paid in money

or in kind. 5.Not subject to compensation as a rule 5.Subject to compensation. 6. Does not draw interest unless delinquent. 6. Draws interest if stipulated or in case of delay. 7.With special prescriptive periods in the 7. Prescriptive periods are Tax Code. found in general laws like The Civil Code or Rules Of Court.

Can Internal revenue taxes be the subject of set-off or compensation?

 No, as a general rule. But if a taxpayer is entitled to refund which is covered by a specific appropriation provided for by law, compensation may take place.  May a tax be considered a debt.?

In the following cases, a tax is considered a debt: 1. A tax is a debt for purposes of remedies for its enforcement; 2. For purposes of allowing interest on delinquent tax as a deduction from gross income, a tax is an indebtedness; 3. If the payment of the tax is secured by a bond; 4. If the taxpayer is entitled to refund of tax paid and such refund is covered by an appropriation provided for by special law. (see doctrine of equitable recoupment). Tax distinguished from toll-

Tax 1. Demand of sovereignty.

Toll 1. Demand of Proprietorship.

2. Imposed only by the State. 2. Imposed by the government or a private person or entity.

Taxes Distinguished from special assessment-

Special Assessment 1. Levied on land.

Tax 1. Levied on land and other   properties, etc.

2. In some States, it cannot be made the personal liability

2. It is made the personal liability of the taxpayer.

of the taxpayer. 3. Based solely on benefits.

3. Not based solely on benefits.

4. Exceptional as to time and

4. Not exceptional as to time and

locality

locality.

Taxes distinguished from custom duties; from revenues-

Taxes are distinguished from customs duties in that customs duties are taxes but not all taxes are customs duties making “taxes”  broader in scope. In the case of  Nestle Philippines, Inc. vs. Court of   Appeals, (G.R. No. 134114, July 6, 2001),  it was held that Custom duties is the name given to taxes on importation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. Tax is distinguished from revenue in that revenues refer to all sums coming into the State treasury whether from taxes or other kinds of  impositions, charges, fees like license and permit fees and donations.  Revenue is also referred to as the fruit or effect of tax. License fee vs. tax-

License fee 1. Regulatory measure. 2. Imposed in the exercise of  of  the police power. 3. Non-payment as a rule renders the business illegal.

Tax 1. Revenue measure. 2. Imposed in the exercise Taxation. 3. Non-payment does not  Necessarily render the  business illegal.

4. Limited to cover only cost of 

4. Not so limited.

Regulation. There may be a tax that is both regulatory and revenue measure.   There may also be taxes imposed in the exercise of both the police  power and the power of taxation like taxes imposed by the Sugar  Adjustment Act. The term “tax” frequently applies to all exactions of monies which become public funds. It is loosely used to include levies for  revenue as well as levies for regulatory purposes such that license fees are frequently called taxes although license fee is a legal concept distinguishable from tax; the former is imposed in the exercise of police  power primarily for purposes of regulation, while the latter is imposed under the taxing power for purposes of raising revenues. Thus, if the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax but if the regulation is the primary  purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. VI. Interpretation and Construction of Tax Statues-

The established rule in statutory construction are equally applicable to tax statutes; after all, the primordial considerations is, every time, the legislative intent. But where doubts exist in determining that intent, the doubt must be resolved liberally in favor of the taxpayers and strictly against the taxing authority (Comm. Vs. Fireman’s Ins. Co., G.R. No.-L-30644, 09 March 1987, 148 SCRA 315). This rule,  however, does not extend to cases involving the issue of the validity of  the tax law itself which, in every case, presumed valid. The same may  be said of on the issue of tax power. Under Art. X, Sec. 5 of the Constitution, a broader delegation of tax powers has been conferred to local governments subject only to such limitations as the national legislature would provide. That the power exists is then the rule, the limitation of such power the exception, and so it must be that such spirit and intendment govern in the interpretation and construction of law. This  principle should all the more be true in national taxation where the  power to tax is not merely conferred but inherent in sovereignty.

Mandatory Character of Constitutional provision

In the case of  Marcelino vs. Cruz   , (121 SCRA 57) The

Supreme Court held that “the established rule is that constitutional  provisions are to be considered as mandatory unless by express  provision or by necessary implication, a different intention is manifest.” A directory provision, the Court explained, is generally intended merely for expediency or convenience such that to have it enforced strictly may cause more harm than by disregarding it. In the case of statutory enactments, those dealing on the aspects of levy and compliance are generally treated as mandatory and those that are intended merely for administrative feasibility as directory.

Construction of tax laws-

The following are the rules on the construction of tax laws: 1. Provisions intended for the security of the citizen or taxpayer or to insure equality or uniformity of taxation are mandatory. 2. Provisions that are designed to inform administrative officers on the tax matters are generally directory. 3. If the intent or meaning of the tax statute is not clear, or is doubtful as to whether a taxpayer is covered by the tax obligation, the law shall be construed against the Government because revenue laws impose special burdens. (see Marindoque Iron Mines Agents, Inc. vs. Hinabangan, Samar , L-18924, 30 June 1964;  Luzon Stevedoring vs. Trinidad , 43 Phil. 803). 4. Where the intent to tax is clear and the taxpayer claims that he is exempt from the tax obligation, the tax shall be construed against the taxpayer and in favor of the government because the power of  taxation is necessary to the existence of such government ( Jai-alai Corp. vs. Collector , 57 O.G. 2490, see also Commissioner vs.  Filipinas Cia de Seguros, L-14880, 29 April 1960.) 5. Rules on the interpretation of customs and tariff laws do not apply to trade agreements, the former rules being promulgated in the exercise of the power of taxation while trade agreements are entered into in the exercise of police power. (Comm. vs. Valencia, 54 O.G. 3505.) 6. If the tax law is repealed, taxes assessed before repeal of the law

may still be collected unless the repealing law is made retroactive. ( Jovito vs. Collector , L-9352, November 29, 1956.) This ruling was reiterated in subsequent cases. 7. Tax exemptions are strictly construed except in the following cases: a. If the law provides for liberal construction;  b. In the case of special laws applying to special cases; c. If the exemptions refer to public property; d. In case of exemptions granted to entities organized for  charitable, religious and educational purposes. 8. Tax laws are given retroactive effect if there is a clear legislative intent in that regard. (Lorenzo vs. Posadas, 64 Phil. 353.) It has  been held that tax laws shall have prospective effect only unless “there is a clear provision to the contrary.”( Maria Castro vs. Collector , L-12174, 28 December 1962). If the retroactive effect would be harsh or oppressive, the same transgress the constitutional limitation of due process. (Republic vs. Oasan Vda de Fernandez , L-9141, 25 September 1956.) Taxes, being a burden, cannot be presumed beyond what the applicable statute expressly and clearly declares.

The rule is that in case of doubt, tax statutes are construed strictly against the Government and liberally in favor of the taxpayer  for taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares. (See  Republic vs.  IAC , G. R. No. 69344, 26 April 1991.) Tax exemptions are not favored in law-

Tax exemptions cannot be created by implication because exemption from taxation are highly disfavored in law and one who claims exemption from tax must be able to justify his claim by clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist on vogue implication. (Collector vs. Manila Jockey Club, Inc..,  L-875, March 23, 1956,  Petroleum Co. vs. Llanes, 49 Phil.466). Tax exemptions are never presumed.

Tax exemptions are construed strictly against the taxpayer and

in favor of the public because exemptions are never presumed. ( Esso  standard Eastern, Inc. vs. Commissioner , L-21841, 28 October  1966). As the power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any reduction or  diminution thereof with respect to its mode or its rate must be strictly construed, and the same must be coached in clear and unmistakable terms in order that it may be applied. ( Luzon Stevedoring Corp. vs. Court of Appeals, G. R. 30232, 29 July 1988). To illustrate: Under the Mutual Defense Agreement between the United States of America and the Republic of the Philippines, a  provision therein stated that no tax of any kind or description will be levied on any material, equipment or supplies which may be  purchased or otherwise acquired in connection with a construction  project, was held not to exempt the oil used by private contractors of  the project in the operation of their machines or other equipment in  pursuance of their contracts. Said the Supreme Court: “The exeption contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemption s and that he who would seek to be, thus, privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.” (Commissioner of Internal Revenue vs. P.J.  Kiener Company, ltd., 65 SCRA 143). Likewise, an exemption from taxes in the importation of  engines and spare parts to be used by passenger  or cargo vessels has  been held not to include taxes on the importation of engines and parts used by tugboats  which are neither passenger not cargo vessels. ( Luzon Stevedoring Company vs. Court of Tax Appeals, G.R. No. 30232, 29 July 1988, 163 SCRA 647).

Tax exemption cannot be established by mere implication but it must be clearly expressed; exemptions are highly disfavored in law.

A grant of tax exemption for manufacture and sale of certain type of machine does not include the manufacture and sale of articles  produce by said machine. 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. The exemption cannot be established by mere implication but it must be clearly expressed (Wonder Mechanical Engineering 

Corporation vs. Court of Tax Appeals, et. al., 64 SCRA 555). But the tax exemption of the World Health Organization from indirect and direct taxes was held to preclude the imposition of the contractor’s tax on the construction of its building by an independent contractor  since the burden of the tax, said the court, is invariably shifted to the owner (Commissioner of Internal Revenue vs. Gotamco & Sons, G.R.  No. 31092, 27 February 1987, 148 SCRA 36). Statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously; A taxing act are not to be extended by implication.

The better rule in interpreting tax laws has been reiterated in the case of Commissioner of Internal Revenue vs, Court of Tax  Appeals and Ateneo de Manila, G.R. No. 115349, 18April 1997, 82 SCAD 45, 271 SCRA 605, where the Supreme Court states: “ Petitioner Commissioner of Internal Revenue erred in applying the  principle of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid  provisions. The Commissioner should have determine first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the  populace, before asking Ateneo to prove its exemption therefor. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously. Taxes cannot be imposed without clear and express words for that purpose accordingly. The general rule requiring adherence to the letter in construing statutes applies with peculiar  strictness to laws and the provisions of taxing act are not to extended  by implication. Equity, basis for tax exemption.

Likewise, no exemption unless authorized by statute can be granted solely on the grounds of equity. But equity can be used as a  basis for statutory exemption; thus, at times the law authorizes the condonation of taxes on equitable considerations. ( see Sec. 276 and  277, Local Government Code). Claims for refund of customs duties take the nature of tax exemptions that must be construed strictissimi juris  against the claimants.

Custom duties is the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. Any claim for refund of customs duties, therefore, take the nature of tax exemptions that must be construed  strctissimi juris against the claimants and liberally in favor of the taxing authority. This power of  taxation being a high prerogative of sovereignty, its relinquishment is never presumed. Any reduction or diminution thereof with regard to its mode or its rate must be strictly construed, and the same must be couched in clear and unmistakable terms in order that it may be applied. ( Nestle Philippines, Inc. vs. C.A., G.R. No. 134114, 6 July 2001). Classification of Tax Exemptions-

Tax exemption may be classified into- a. Tax exemption by express  provisions in the constitution, statutes, treaties, franchise or  similar legislative acts; b. Tax exemption by implied or   by omission of tax laws and statues; and c. Contractual  tax exemption. Where a law levies a tax, so also must the tax exemption be explicit in the law.

There is no tax by silence but, where the law levies a tax, so also must the tax exemption be explicit in the law. While exemptions are not presumed, the government, however, unless otherwise expressed, is deemed not subject to law imposing taxes ( see SSS vs.  Bacolod City,  115 SCRA 412) but there is no prohibition against the government taxing itself. (see  Bisaya Land Transportation Co., Inc. vs. Collector of Internal Revenue, L-11812, 29 May 1959, 105 Phil. 1338). Contractual exemption distinguished from exemption granted under franchise.

Contractual exemptions are those agreed to by the taxing authority in contract lawfully entered into by them under enabling laws. These exemptions must not be confused with the tax exemptions granted under franchises which are not contracts within the purview of the non-impairment clause of the constitution (see Cagayan Electric Co. vs. Commissioner , G.R. No. L-601026, 25 Sept. 1985). In entering into a contract, the government sheds its cloak of authority and waives its governmental immunity; a franchise is a special privilege conferred by governmental authority, acting as such on an undertaking that is within the scope of governmental

functions. Contractual tax exemptions covering covering matters that are not essentially government in nature, such as those contained in government bonds or debentures, unlike in franchises, may not be revoked without impairing the obligations of contracts (see Casanovas vs. Hord , 8 Phil. 125). A legislative franchise partakes of the nature of a contract.

Incidentally, Incidentally, in the case of legislative franchise, the Supreme Court, had this to say: “ A legislative franchise partakes of the nature of a contact.” (Commissioner (Commissioner of Internal Revenue vs. Court of Tax  Appeals,   Appeals,  195 SCRA 445). In the case of the  Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc., Inc. , it was held: “So was the exemption upheld in favor of Carcar Electric and Ice Plant Company when it was required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as amended by R. A. 39 (Carcar (Carcar Electric and Ice Plant vs. Collector of   Internal Revenue, 53 Revenue, 53 O.G. [No. 4] 1068). 1068). Such exemption is part of  the inducement for the acceptance of the franchise and the rendition of public service service by the grantee. As a charter is in the nature nature of a  private contract, the imposition of another franchise tax on the corporation by the local authority would constitute an impairment of  the contract between the government and the Corporation.   Franchises spring from contracts between the sovereign power and  private citizens made upon valuable considerations, for purposes of  individual advantages as well as public public service. It is generally considered that the obligation resting upon the grantee to comply with the terms and conditions of the grant constitutes a sufficient sufficient consideration for the grant of franchise by the state. Such being the case, the franchise is the law between the parties and they are bound  by the terms thereof.” Instances where exemptions are liberally construed in favor of  the grantee:

1. When the law so provides for such liberal construction; 2. Exemptions from certain taxes granted under special circumstances to special classes of persons; 3. Exemptions in favor of the government, its political subdivisions or instrumentalities; and 4. Exemption to traditional exemptees, such as those in favor of  religious and charitable institutions, etc. (see Cooley on taxation, 1414).

Provisions Granting exemptions to government agencies may be construed liberally in favor of non-taxability of such agencies.

In a case where the Supreme Court uphold the exemption to the National Power Corporation, the Court said: “It is a recognized  principle that the rule on strict interpretation does not apply in case of  exemptions in favor of the government political subdivision or  instrumentality. instrumentality. The basis for applying applying the rule of strict construction construction to statutory provisions granting tax exemptions or deductions, even more obvious than with reference to the affirmative or levying  provisions of tax statutes, is to minimize differential treatment and foster impartiality, fairness and equity of treatment among taxpayers. The reason for the rule does not apply in the case of exemptions running to the benefit of government itself or its agencies. agencies. In such case, the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally in favor of nontaxability of such agencies”. ( Maceda  Maceda vs. Macaraig, 197 SCRA 771). Nature of partial of partial refund of specific tax.

Where the law authorizes a partial refund of tax, the same  partakes of the nature of a tax exemption and therefore, it cannot be allowed unless granted in a most explicit and categorical language.   Well-settled is the rule that exemption to be recognized, the grant must be clear and expressed; it cannot be made to rest on vague implications. ( Insular  Insular Lumber Co. vs. Court of Appeals, Appeals, L-31057, 29 May 1981). Nature and effect of tax condonation.

Condonation of tax liability is construed as equivalent to and is in the nature of tax exemption. exemption. Being so, it should be sustained only when expressed in explicit terms and it cannot be extended beyond the plain meaning of the terms. (Surigao Consolidated Mining Co. vs. Collector , L-14878, 26 December  1963). Tax Statute offering rewards are liberally construed in favor of awardees.

In Crispin Penid, et. al. Vs. Cesar Virata  (L-44204, 25 March 1983, 121 SCRA 1-6), the government was able assess and collect substantial amount on percentage carrier’s taxes from a number of shipping companies from the year 1957 to 1965 as a result of confidential information given to the BIR by petitioner Penid. In  paying the 25% informer’s reward under RA 2338, the Secretary of  Finance deducted therefrom the sum of P216,848.04 paid by one of  the firms, Pan Fil. Co., Inc., on the ground that this taxpayercompany had not been cited in the confidential information. Also excluded were collections for 1957-1959 and March 9, 1962 to 1965, since petitioner’s information covered only the period from 1960 to March 8, 1962. The Supreme Court held: “1. The exclusion of collections for taxes from Pan Fil. Co., Inc. is not correct under Sec. 1 of RA 2338 (as implemented by Sec. 4 of Finance Regulation No. No. 1), What is vital is that the information given had led to or had been instrumental in the discovery of the fraud upon or violation of any of the provisions of  the Internal Revenue or Tariff and Customs Law and that such discovery resulted in the recovery or collection of revenues, surcharges, and fees. The inclusion of of Pan Fil., Co., Inc. Inc. among the firms investigated was the direct, logical and necessary consequence of the information given by petitioner. To sustain otherwise is to derogate from the basic tenet that statutes offering offering rewards must be liberally construed in favor favor of  informers with mere technicality yielding to the substantive purpose of the law. “2. Petitioner’s reward should not, however, extend to taxes accruing after 1962 since the non-payment after that date up to 1965 was because of the protest filed by the shipping forms with the Tax Court in the Royal Inter-Ocean Lines case where their position was that the carrier’s percentage tax on foreign exchange receipts should be based on the parity conversion rate of $1.00 to P2.00 and not the free market rate.” Tax statutes offering amnesty are also liberally construed in favor of the taxpayer.

Tax statutes offering amnesty are also liberally construed in favor of the taxpayer. In the case of Commissioner of Internal   Revenue vs. The Hon. Court of Appeals, R.O.H. Auto Products  Philippines, Inc. and the  Hon. Court of Tax Appeals  (G.R. No. 108358; 20 January 1995, 58 SCAD 604, 240 SCRA 368), the

Supreme Court said: If, as the Commissioner argues, Executive Order   No. 41 had not been intended to include 1981-1985 tax liabilities already assessed (administratively prior to 22 August 1986), the law could have simply so provided in its exclusionary clauses. It did not.  The conclusion is unavoidable, and it is that the executive order has  been designed to be in the nature of general grant of tax amnesty subject only to the cases specifically excepted by it. It might not be amiss to recall that the taxable period covered by the amnesty include the years immediately preceding the 1986 revolution during which time there had been persistent calls, all too vivid to be easily forgotten, for civil disobedience, most  particularly in the payment of taxes, to the Martial Law regime. It should be understandable then that those who ultimately took over  the reigns of government following the successful revolution would  promptly provide for broad, and not a confined, tax amnesty. But, in an earlier case decided by Supreme Court, the court said: “ A tax amnesty, much like 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 tax authority. ( People vs. Castaneda, Jr., G.R. No. 46881, 15 September 1988). In order to enjoy the benefits of the tax amnesty statute, the taxpayers must show that they have individually complied with and come within the terms of that statute. (ibid) Tax amnesty is waiver by Government’s right to collect taxes.

A tax amnesty, being a general pardon or intentional overlooking by the State of its authority to impose penalties on  persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute forgiveness or waiver by the government of its right to collect what otherwise would be due it. (  Republic vs.  IAC , G. R. No. 69344, 26 April 1991). Basis of tax exemptions under a treaty:

Tax exemption under treaty may be based 1. On the principle of reciprocity; 2. On the Principle of comity; 3. On the desire to avoid the rigor of double taxation.

VII. Some Important Doctrines In Taxation 1. Prospective application of Tax Laws Taxes may be imposed retroactively by law  but unless so expressed by such law, these taxes must only be imposed prospectively ( Hydro resources vs. Court of Appeals, G.R. NO. 80276, 21 December 1990, 192 SCRA 604). The ex  post facto  rule proscribed by the constitution, except for the  penalty imposed (not interest), would be inapplicable in taxation. Said the Supreme Court in the case of Hidalgo vs. Collector   (100 Phil. 288): “Tax Laws are neither political nor penal in nature, and they are deemed laws of the occupied territory rather than of  the occupying enemy. A harsh retroactivity of the law, however, may make it inequitable and violative of the Constitution; likewise, due process is violated if the tax is oppressive.” In one case, the War Profits Tax Law (RA 55) was questioned as ex post facto  because of its retroactive effect. The Supreme Court said that the prohibition against ex  post facto laws applies only to criminal or penal law matters and not to laws which concern civil matters. Our tax laws are civil in nature. ( Fernandez vs. Oasan Vda de Fernandez , L-9141, 24 September 1956). It was, thus held that our tax laws are not  penal laws although there are penalties provided for their  violation. 2.

Taxes are Impriscriptible

Unless otherwise provided by the tax law itself, taxes are imprescriptible (Commissioner vs. Ayala Securities Corporation, L-29485, 21 November 1980). Certain provisions of the National Internal Revenue Code  provide for statutes of limitation (see Secs. 203 and 222) in the assessment and collection of taxes imposed therein. In Commissioner vs. Ayala Securities Corporation, (101 SCRA 231),  supra, however, the prescriptive periods therein contained were considered to be applicable only to those taxes that were thereunder required to be reported or returned by the taxpayer for  tax purposes. The Court thus held that the then 25% surtax imposed on unreasonably accumulated surplus profits of 

corporations (Sec. 25, NIRC) is imprescriptible and there is no time limit on the right of the Commissioner to assess the same.   Where, however, the taxpayer, although not required, files a return and declares his tax liability, then the prescriptive periods may become operative. (see Collector vs. Bisaya Land  Transportation Co., L-12100, 29 May 1958). Law on prescription being a remedial measure, should be liberally construed in order to afford protection to taxpayers against unreasonable examination, investigation and assessment..

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes.  Thus, the law on prescription, being a remedial measure, should  be liberally construed in order to afford such protection. A corollary, the exceptions to the law on prescription should  perforce be strictly construed. (Commissioner of Internal   Revenue vs. C.A., G. R. No. 104171, 24 February 1999). Tariff and Custom Code  does not express any general statute of limitation.

The Tariff and Customs Code  does not express any general statute of limitation; it provide, however, that “when articles have entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of  one year   from date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of the import entry was merely tentative” (Sec. 1603). Five (5) years prescriptive periods for both assessment and collection of taxes prescribed by the Local Government Code.

The Local Government Code prescribes prescriptive  periods of five (5) years for both assessment and collection of  taxes (see Secs. 194 and 270, LGC, infra) unlike that which obtained under the then Local tax Code and the Real Property Tax Code. 3.

Double Taxation.

Double taxation means taxing twice for the same year, a property or interest within the territory, when it should be taxed but once, for the same purpose and with the same kind or character of tax. A common example of double taxation is taxing corporate income and shareholder’s dividends from the same corporation. There is no constitutional prohibition against double taxation although double taxation, whenever and wherever possible must be avoided to prevent injustices as well as unfairness. ( De Villata vs. Stanley, 32 Phil. 541). It was held that rule against double taxation cannot be invoked where one tax is imposed by the state and the other by the city upon the same occupation, calling or activity, it being widely recognized that there is nothing inherently obnoxious in this exaction by both the state and a political Subdivision thereof. ( Punsalan vs. Mun.  Board of Manila, L-4817, 26 May 1954). There would be no double taxation where a lessor of property has to reckon with and pay a real state on the leased premises, a real estate dealer’s tax based on rental receipts, and an income tax on such rentals, these impositions being of  different character and purposes (see Villarama vs. City of Iloilo, 26 SCRA 578). There is also no double taxation when a tax is imposed on soap and other similar products of a taxpayer and another tax on the storage of copra, a raw material for the taxpayer’s product. (see  Procter & Gamble Philippines vs.  Municipality of Jagna, 94 SCRA 894). Double Taxation is one of Direct Duplicate Taxation.

Double taxation is on of direct duplicate taxation when the levies are made by the same taxing authority; otherwise, the case is merely one of indirect duplicate taxation (or not an “obnoxious double taxation”). (Commissioner vs.  Lednicky, 11 SCRA 603). Double Taxation is not a valid defense against the validity of a tax measure.

Standing alone and not forbidden by our fundamental law, double taxation is not a valid defense against the validity of  a tax measure ( Pepsi-Cola vs. Tanauan, 69 SCRA 460). But from it might emanate such defense against taxation as oppressiveness and inequality of the tax.

Some of the measures that are normally adopted by a sovereign taxing authority in order to avoid the resulting inequities of  double taxation; they include the following:

1) Treaty provisions against double taxation; 2) Reciprocity provisions, and 3) Tax Credit provisions. Tax credit or exemption to avoid double taxation-

In view of different places of taxation of property tax and income tax, an inequitable situation may exist where the taxpayer pays twice the same taxes to two different jurisdictions.  To avoid the harshness of this situation, recourse has been made to treaty stipulations for reciprocal exemption or tax credit. Our  Supreme Court held that a resident foreigner who derives solely his income from the Philippines is not entitled to tax credit and deduction of foreign income tax from his income. (Commissioner  vs. Lednicky, L-18169, 18286, and 21434, 31 July 1964). 4. Tax evasion and tax avoidance. Tax evasion and tax avoidance are two most common ways used by tax payers in escaping from taxation. Tax evasion refers to fraudulent or forbidden scheme or  devices designed to lessen or defeat taxes. It is criminally  punishable law. (Yutivo Sons Hardware Co. vs. CTA, L-13203, 28 January 1965). Examples of acts constituting tax evasion are intentionally decreasing the income and intentionally increasing, without basis, deductions from taxable income; (e.g. increasing, without basis, expenses, exemptions, etc.). Tax avoidance refers to the legal means to lessen or  altogether avoid taxes. It is not punished by law. Example of a tax avoidance is availing of all deductions allowed by law. If the taxpayer is in doubt of whether an item is deductible or not  because the law or regulation is silent on the point, then he must deduct the same and if it turns out that the item is not deductible, he is not guilty of tax evasion; rather, he practiced tax avoidance.   Tax provisions on trusts, capital gains and donor taxes provide

 bases for tax avoidance, (see infra. ). Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arm length. Tax evasion, upon the other hand, is  a scheme used outside of those lawful means and, when availed of, it usually subjects the taxpayer to further or additional civil or  criminal liabilities. “A tax evader breaks the law, a tax avoider sidesteps it.” (Schultz & Harris on American Public Finance). The organization of a corporation prompted more on the mitigation of  tax liabilities than for legitimate business purposes could, for  example, constitute one of tax evasion. (see Norton and Harrison & Co. vs. Comm.,  L-36772, 25 June 1984; see also Comm. vs.  Rufino, G.R. Nos. L-33665-68, 27 February 1987, 148 SCRA 42). In  Delpher Trades Corporation,  (157 SCRA 349), the Supreme Court ruled: An “estate Planning” (conveyance of   property to a family corporation for shares) within the means sanctioned by Sec. 35 (now Sec. 34) of the Tax Code has been held to be one of tax avoidance. 5.

Doctrine of Equitable Recoupment

Equitable recoupment is a common law doctrine to the effect that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities should be pertinent only to taxes arising from the same transaction on which an overpayment is made and underpayment is due. The doctrine finds no sound application to cases where the taxes involved are totally unrelated. Under this doctrine, the mandatory provision in the NIRC (see Sec. 229, NIRC ) requiring that a refund must be in writing and filed within two years from payment of taxes, cannot should not be a constraint against the application of the doctrine even where the period had already lapsed. In deed, the application of  this principle is based on equity rather than of law. But, in one case, the Supreme Court altogether rejected the doctrine. Said the Court: “ it was not convinced of the wisdom and propriety thereof, and that it may work to tempt

 both the collecting agency and the taxpayer to delay and neglect their respective pursuits of legal action within the period set by law”. (Collector vs. University of Santo Tomas, 104 Phil. 1062). 6.

Set-off of Taxes

- Taxes not generally subject to set-off – 

Well-settled is the general rule that, based on public  policy, no set-off or compensation is admissible against demands for taxes levied for general purposes or local government  purposes. But, this rule admits of exception. Consequently, where both the claims of government and the taxpayer against each other have already become due and demandable as well as fully liquidated, a set-off may be allowed. Thus, a taxpayer who has been assessed municipal taxes may assign in favor of the municipality a final judgement obtained by him against the said municipality to cover the assessment. (see Domingo vs. Garlitos, 8 SCRA 443, 29 June 1963, see Art. 1279, 1290, Civil Code). - Taxes are not generally subject general -

to set-off; Reasons for the

1. The reason on which the general rule is based is that, taxes are not in the nature of contracts between the parties but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the  personal consent of individual taxpayers in not required.   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 judgement as is allowed to be setoff. 2. Furthermore, if the taxpayer can properly refuse to pay tax when called upon by the Collector, because he has claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer’s claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile, the financial affairs of  government will be thrown in great confusion. ( Republic vs.  Mambulao Lumber Co.,  4 SCRA 622, 28 February 1962, citing 47 Am. Jur. 766-767; Francia vs. IAC , 162 SCRA 753 [1088]; Cordero vs. Gonda, 18 SCRA 331, 15 October  1966; Caltex Phil., Inc. vs. Commission on Audit , 208 SCRA 726 [1992].)

- Collection of taxes cannot await the results of a lawsuit against the government. In  Philex Mining Corporation, (G.R. No. 125704, 28 August 1998). the Court held: “ We have consistently ruled that 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 law suit against the government”. - Taxes due from taxpayers are considered paid through the delivery of negotiable certificate of indebtedness issued by the Philippine Government. But, in  Republic vs. Sampaguita Pictures, Inc. (G.R. No. 35238, 21 April 1989, 172 SCRA 623), the Supreme Court allowed taxes due from taxpayer to be considered paid through the delivery of negotiable certificate of indebtedness issued by the Philippine Government which had therefore already been presented and surrendered to the  National Treasurer. 7. Taxpayer Suit- Tax payer suit; when allowed. In the case of  Pascual vs. Sec. of Public Works, (110 Phil. 331, citing 11 Am. Jur. 761), Supreme Court ruled that it is only when an act complained of, which may include legislative enactment, directly involves the legal disbursement of public funds derived from taxation that “taxpayer suit” may be allowed. - Cases where “taxpayer’s suit” Supreme Court to be improper:

is considered by the

1. A suit questioning the inaction of the Commission on Elections to call special election. ( Lozada and Igot vs. Commission on Elections, (L-59068, 27 January 1983);or 

2. A suit to stop the Commission on Elections from holding an exercise of suffrage. ( Dumlao vs. Commission on  Elections, 95 SCRA 392); or  3. A suit where the disbursement does not involve funds raised from taxation. (Gonzalez vs. Marcos, 65 SCRA ) Part II  NATIONAL TAXATION Income Taxation Sources of National Revenue-

1. Taxes derived from or levied under the National Internal Revenue Code; and 2. Taxes derived from or levied under the Tariff and Customs Code. Internal Revenue Taxes imposed by the NIRC-

The following are taxes imposed under the NIRC: i. income tax, ii. transfer (estate and donor’s) taxes, iii. value-added tax, iv.  other percentage taxes, v. excise taxes, vi. documentary stamp taxes, and vii. such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue. (see Sec. 21, NIRC) The National Internal Revenue Code, brief history:

Before the enactment of Commonwealth Act 466, in 1939, the income tax laws that were operative in our jurisdiction were Revenue Act of 1913, a law approved by the Congress of the United States on October 3, 1913 but made effective as of March 1, 1913, and Act  No.2339 of 1916 of the same US Congress which was incorporated in Act 2711, the Administrative Code of 1916. In June 15, 1939 the  National Assembly approved Commonwealth Act No. 466, thereby codifying our internal revenue laws for the first time. This law, commonly known as the National Internal Revenue Code took effect on July 1, 1939, although the provisions that pertain to income tax were made retroactive to January 1, 1939. Later, the same Commonwealth Act No. 466, as amended by R.A. No. 6110 (The Omnibus Tax Law), signed into law by the President on August 4, 1969 and by P.D. No. 69, issued on

  November 24, 1972, and subsequently presidential decrees which introduced extensive changes thereto, underwent series of further  amendments culminating in the issuance on June 3, 1977 of P.D. No. 1158, otherwise known as “The National Internal Revenue Code of  1977”. P.D. 1158 consolidated and codified into a single tax code all the internal revenue laws embodied in Commonwealth Act No. 466 and various laws and presidential decrees. Furthermore, the National Internal Revenue Code 1977 underwent series of amendments effected by several presidential decrees, acts enacted by the defunct Batasang Pambansa and Executive Orders of then President Corazon C. Aquino under the Freedom Constitution, as well as enactments of Congress after the ratification of the 1987 Constitution. Finally, On December 11, 1997, a new Tax Code (R.A. No. 8424 otherwise known as the National Internal Revenue Code of 1997), was signed into law by then President Fidel V. Ramos to further  introduce some important tax reforms, particularly in the area of  income taxes and excise taxes. R.A. 8424 took effect on January 1, 1998. Meaning of the term Income-

There is no law, rules regulation or jurisprudence that provides for a comprehensive definition of the term “income”. But in its  broadest sense, the term income means “ALL WEALTH WHICH FLOW INTO THE TAXPAYER OTHER THAN AS A MERE RETURN OF CAPITAL” (see Sec. 36, Rev. Regs No.2). It is the “gain derived from capital, labor, or from both combined.” ( Eisner vs. vs. Macomber , 252 U.S. 189, 1920). It is “an amount of money (it may be in kind coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment. An income means cash received or its equivalent, it cannot cover unrealized increments in the value of property. It is distinct from capital”( Fisher vs. Trinidad , 43 Phil. 973). Accordingly, an amount received other than from employment of one’s labor or capital such as donation or inheritance is not included in the term income. Essential difference between capital and income-

The essential difference between capital and income is that “capital is fund; income is a flow. Capital is wealth, while income is

the service of wealth. The fact is that property is the tree, income is the fruit; labor is a tree, income the fruit. Capital is a tree, income the fruit.” (Vicente Madrigal, et. al. Vs. James Rafferty, 38 Phil. 414). Meaning of the term “ gross income”-

In general, the term “ gross income” means all income from what ever sources derived, including (but not limited to) compensation for services, including fees, commissions, and similar  items; gross income from trade or business; gains derived from dealing in property; interest; rents; royalties; dividends; annuities;  prizes and winnings; pensions; and partner’s distributive share of the gross income of general partnership. (see Sec. 32[A], NIRC of 1997). Section 32[A] adopted the global concept in defining “ gross income” by including compensation income. It enumerates the items falling under the term without excluding other items not mentioned  but which are considered in the determination of gross income. Thus, “gross income” consists of all the gains, profits, and income of a taxpayer during a taxable year of whatever kind and in what ever form derived from any source, whether legal or illegal, except items of gross income (passive income) subject to final income tax (e.g. Sec. 24[B,C,D].); and income exempt from taxation (exclusions) under the law. (see H.S De Leon, The National Internal  th  Revenue Code. Annotated, 7   Ed., p.203) What forms of income are covered by the phrase “income derived” from whatever source mentioned in Subsec. A, 1 Paragraph of Sec. 32?

st

The phrase “income derived” from whatever source in st Subsection A, 1   par. covers all other forms of income not falling under any of the items of income enumerated in Subsection B. It discloses a legislative policy to include all income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in  producing the gain. (Gutierrez vs. Coll., CTA Case No. 65, 31 August 1965). Accordingly, income derived from expropriation of one’s  property and from gambling is taxable. (ibid .). Items Excluded from Gross Income:

Following are items excluded from gross income and shall be exempt from taxation:

1. Life Insurance; 2. Amount received by insured as return of premium; 3. Gift, Bequest, and devises; 4. Compensation for injuries or sickness; 5. Income exempt under treaty; 6. Retirement benefits, Pension, Gratuities, etc.; and 7. Miscellaneous Income. Meaning of the term “taxable income”

This term means the pertinent items of gross income specified under the National Internal Revenue Code, as amended, less the deductions and/or personal exemption, if any authorized by law to be deducted from the gross income (Sec. 31, NIRC). In short, this term refers to the “tax base”. Classification of Taxable Income-

Taxable income may be classified into1. Passive income; -

They are subject to a separate and final tax at fixed rates with a maximum of 20% and a minimum of 5%, such as interest from bank deposits and yield or any other monetary  benefit from deposits substitute (Sec. 22[Y].) and from trust fund and similar arrangements, royalties, prizes and other  earnings, dividends received by an individual who is a citizen or resident alien from domestic corporation, etc. and the share of the distributable net income of an individual  partner in a business partnership or in the net income of an association, etc. which is treated as a corporation for tax  purposes, and capital gains from sales of shares of stock and from sales of real property classified as capital assets. (Sec. 24, Subsections B,C,D.)

3. Compensation Income; Income derived as a result of employee-employer  relationship. This class of income is taxable at the rates  provided for in Sec 24 [A].

4. Non- compensation or business income.

- Income derived in the exercise of profession, callings, or  conduct of trade or business. How income tax is levied.

In general, income tax are levied and paid through a selfassessment or self-computed system otherwise known as the “pay-asyou-file” income tax procedure (Chapter IX, Title II, NIRC). Under  this procedure the taxpayer himself or his authorized representative computes and prepares his own income tax return, files the same with the BIR and pay the tax due thereunder at the time the return is filed.   Inasmuch as the rates of tax are fixed by law, the role of the tax official is purely to determine the accuracy of the taxpayer’s assessment of his tax liability. Additionally, income taxes on certain types of income are levied and collected through withholding at source. Basically, there are two types of withholding, they are the “creditable withholding   system” and the “ final withholding system”. 1. “Creditable withholding system”- under this system, the  payor withholds from the payee the corresponding amount of withholding tax, issue to the payee the corresponding tax statement showing the amount of income payment and the amount of tax withheld therefrom; the payee reports the income in his income tax return and credits the amount of  tax withheld from him in computing for the amount of  income tax still due from his total taxable income. 2. “Final withholding system” – under this system, the payor  also withholds from the payee the corresponding amount of  withholding tax, issues to the payee a withholding tax statement showing the amount of income payment and the amount of tax withheld therefrom, but with the feature of  finality of the tax payment because the payee is not anymore required to report the income in his income tax return as the tax withheld is considered by law as final  payment of his income tax due on the income (see  Chap.  IX, Title II and sec. 57(B) NIRC, for creditable withholding  tax system and Section 57(A) for final withholding system; also see Sec. 58, NIRC ). Income tax is also computed either on a “ global or   schedular” basis. Example of schedular income tax procedure is the

income on capital gains from sale or disposition of real property held as capital asset where the vendor-transferor is an individual (Sec. 24[D], NIRC ). Under this system the vendor-transferor files a capital gains tax return on a per transaction basis rather than on the basis of  taxable period. Otherwise, all income derived during a taxable period, except such income subject to final withholding tax, shall be reported  by the taxpayer in his income tax return for the corresponding taxable  period under a system known as the  global concept of income taxation. Finally, income tax is also levied, based on “taxable income”, i.e., on the tax base, using either a single tax rate or a unitary  progressive tax rates, depending on the type of taxable income. To illustrate, interest income from Philippine currency bank deposit is taxed at 20% based on the gross amount of the interest (Sec. 24[B]1,  NIRC). Whereas income derived from business, trade, practice of   profession or employment, etc., is taxed based on an amount, net of  allowable deductions, at a unitary progressive rates ranging from 5% to 32, effective January 1, 2000. The applicable rates differ  depending on the type of income and the tax classification of the taxpayer (see Sec. 24 to 28, NIRC).

Income Tax on IndividualsClasses of persons taxed as individuals:

a. Resident citizens

A resident citizen is subject to income tax on taxable income defined in Sec. 31, of the NIRC derived from all sources within and without the Philippines, other than income subject to tax under Subsections (B), (C), and (D) of this Section. [See Sec. 24 (A)(1)(a)]. Other than items of income subject to schedular income taxation or final withholding tax system, the income tax treatment of a resident citizen is based on taxable income, i.e. net of deductions. The taxable base is “adjusted gross income”, i.e., net of personal exemption and income tax paid, if any was paid,

to the national government of a foreign country where he derived the income during the same taxable year.

The income tax rate applicable on the taxable of resident citizen are the progressive rate ranging from 5% to 34%. [Sec. 24(A)]. On the other hand, certain taxable (passive) income of  resident citizen shall be subject to final tax ranging from 5% to 20%, depending on the type of income. [see Sec 24(B)(1) to (2)];  Capital gains from sale of shares of stock not traded in the stock  exchange are subject schedular rate of 5% for an amount not exceeding P100,000.00 and 10% for the excess thereof, based on the net capital gains realized. [see Sec. 24(C)]; And capital gains from sale of real property classified as capital asset, is taxed at 6% based on the gross selling price or the current fair market value (FMV), whichever is higher.  b. Non-resident citizensSec. 22[E], NIRC defines the term non-resident citizens as follows, it means:

1. A “non-resident citizen” means one who establishes to the satisfaction of the Commissioner the fact of his physical  presence abroad with a definite intention to reside therein. 2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. 5. The taxpayer shall submit proof to the commissioner to

show his intention of leaving the Philippines permanently abroad or to return to and reside in the Philippine, as the case maybe, for purposes of this Section. Accordingly, a Filipino citizen who leaves the Philippines during the taxable year to reside abroad permanently and a contract worker whose contract of employment is renewed from time to time within or during the taxable year under such circumstances as to require him to be physically present abroad most of the time during the taxable year, shall be considered a non resident citizen for such taxable year with respect to the income he derived from foreign sources from the date he actually departed from the Philippines. A contract worker whose contract worker whose contract of employment is renewed from time to time shall qualify as a nonresident citizen only if his Physical  presence abroad during the taxable year amount to one hundred eighty-three (183) days or more (Sec. 2(c), Rev. Regs. No. 1-79). Individual citizen of the Philippine who is residing outside the Philippines including overseas contract workers referred to in Subsection (C) of Section 23 hereof are subject to income tax on taxable income defined in Section 31 of the NIRC derived from all sources within the Philippines, except income subject to tax under Subsections (B), (C), and (D) of this Section. [see Sec. 24[(A)(1)(b), NIRC.] The income tax rate applicable on the taxable income of a non resident citizen is the same as those applicable to resident citizen. [see Sec. 24 (A)]. On the other hand, certain taxable (passive) income of nonresident citizen shall be subject to final tax ranging from 5% to 20%, depending on the type of income. [see Sec 24(B)(1) to (2)]; Capital gains from sale of shares of  stock not traded in the stock exchange are subject to the schedular rate of 5% for an amount not exceeding P100,000.00 and 10% for the excess thereof, based on the net capital gains realized. [see Sec. 24(C)]; And capital gains from sale of real  property classified as capital asset, is taxed at 6% based on the gross selling price or the current fair market value (FMV), whichever is higher. c. Resident Aliens A resident alien means an individual whose resident is within the Philippines and who is not a citizen thereof. (Sec. 22[F], NIRC.). The term resident is a technical in the sense

that the same is not based alone on physical presence in the Philippines but most importantly by his intention as to his  presence. A mere transient or sojourner is considered nonresident. An alien who comes to th Philippines and whose intention as to his stay is indefinite is considered resident. An alien whose stay in the Philippines is for a definite purpose which  by its nature may be promptly accomplished is considered nonresident (Sec. 5, Rev. Regs. No. 2). A resident alien individual is subject to income tax on his taxable income defined in Section 31, NIRC, other than income subject to tax under Subsection (b), (C), and (D) of this Section, derived for each taxable year from all sources within the Philippines, [Sec. 24(c)] d. Non-resident aliens A non-resident alien means an individual whose residence is not the Philippines and who is not a citizen thereof. (Sec. 22[G], NIRC.) Non-resident aliens may either be1. engaged in trade or business (the term denotes habituality or sustained activity) in the Philippines and he is deemed as so engaged if the aggregate stay in the Philippines exceeds 180 days for each calendar year; or  2. not engage in trade or business in the Philippines (Sec. 25, NIRC). Both are, however, subject to income tax with respect to only to income derived from all sources within the Philippines (Sec. 25, NIRC). Nonresident Alien Engaged in Trade or Business:

A nonresident alien engaged in trade or business in the Philippines shall be subject to an income tax in the same manner  as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a nonresident alien doing business in the Philippines, Section 22(G) of the NIRC. (see Sec. 25[A(1)], NIRC.).

 Nonresident alien engaged in trade or business or in the   exercise of profession in the Philippines shall be entitled to a  personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject or resident, to citizen of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizen or residents of the Philippines. [see Sec. 35(D)]. Except for the limitations on deductions provided in Subsection (C)(2) of Section 34 (i.e. an alien individual taxpayer  engaged in trade or business in the Philippine is allowed to deduct from his gross income the allowable deductions for taxes  provided in Paragraph (2) of Subsection (C) of Section 34 of the  NIRC only if and to the extent that they are connected with income derived from sources within the Philippines), a resident alien individual doing business in the Philippines, who do not earn his income solely from compensation income arising from  personal services rendered under an employee-employer  relationship, shall be allowed the deductions from his gross income the allowable deductions enumerated in Section 34 of the  NIRC. [See Sec. 34, Subsecs. (A toM) With regards to certain passive income, like those  provided in Sec 24, Subsecs. (B,) of the NIRC (except prizes amounting to Ten Thousand Pesos [P10,000.00] or less which shall be subject to tax under Subsection (A)(1) of Section 24); and other winnings (except PCSO and Lotto winnings), of a nonresident alien individual engaged in trade shall be taxed at 20% on the total amount thereof: Except the following income which shall be taxed with their corresponding rate of tax as  provided in Subsec. (A)(2) of Section 25 of the NIRC: 1. Royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%); 2. Cinematographic films and similar works shall be subject to the twenty five percent (25%) final tax  provide under Sec. 28 of the NIRC; 3. Interest income from long-term deposit or investment evidence by certificate in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this subsection. In case of 

 pre-termination, however, of the deposit before the th fifth (5 ) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of long term investment certificate based on the remaining amount there of as follows: Four (4) years to less than five (5) years – 5% Three years (3) years to less than four (4) years –  12%; and Less than three (3) years – 20%. (see subsection (A)(2), Sec. 25, NIRC.) Capital gains realized from sale, barter or exchange of  shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribe under Subsections (C) and (D) of section 24 as follows: 1. Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange:  Not over P100,000.00 . . . . . . . . . . . . . . . . 5% On any amount in excess of P100,000.00. . 10% (see Subsec. (C), Sec. 24, NIRC.) 2. Capital Gains from Sale of Real Property . . 6% based on the gross selling price or current fair market value (FMV) as determined by the Commissioner of the BIR (Sec. 6(E)), whichever is higher. (see Sec. 24(D),  NIRC.) Nonresident Alien Individual Not Engaged in Trade or Business.

Except for Capital gains realized by nonresident alien individual  not engaged in trade or business   in the Philippines from shares of stock in domestic corporation and real  property which are subject to income tax prescribed under  Subsections (C) and (D) of Section 24, (NIRC), all other taxable income of nonresident alien individual not engage in trade in the Philippines shall be levied, collected and paid for each taxable

year upon the entire income received from all sources within the Philippines at a tax equal to twenty five percent of such income.. [see Sec. 25(B), NIRC]. Moreover, a nonresident individual alien not engaged in trade in the Philippines is not entitled to claim for  the allowable deductions provided in Sections 34 and the  personal exemptions provided in Section 34 because the basis for  their tax is their entire gross income from all sources with in the Philippines On the other hand, capital gains realized by a nonresident alien individual not engaged in trade or business   in the Philippines from sale of shares of stock in any domestic corporation and real property shall be subject to the income tax  prescribed by Subsection (C) and (D) of Section 24. [see Sec25(B). (See  earlier discussion of this notes for tax base and  rate of taxes.) Alien Individual Employed by Regional of Area Headquarters and Regional Operating Headquarters of Multinational Companies-

This class of taxpayer is taxes at Fifteen (15%)  of their gross income derived from salaries, wages, annuities, compensation, and other emoluments, such as honoraria and allowances from such regional or area headquarters and regional operating headquarters.  Provided, however , That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed the by these multinational companies. The term “multinational company” means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. [see Section 25(D)]. Any income earned from all other sources within the Philippines by this class of individual alien employee shall be subject to the pertinent income tax, as the case may be, imposed nd under the NIRC. [see Section 25(E), 2 paragraph, NIRC.] Alien Individual Employed by Offshore Banking Units-

A tax equal to fifteen percent (15%) of gross

income is imposed on this class of individual taxpayer on their  income as salaries, wages, annuities, compensation, remuneration and emoluments, such as honoraria and allowances from such offshore banking units.  Provided, however , that such tax treatment shall apply to Filipinos employed and occupying the same position as those aliens employed by these offshore banking units. Any income earned from all other sources within the Philippines by this class of individual alien employee shall be subject to the pertinent income tax, as the case may be, imposed nd under the NIRC. [see Section 25(E), 2  Paragraph, NIRC.] Alien Individual Employed by Petroleum Service Contractors and subcontractor.

A tax of fifteen percent (15%) from income earned as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowance, received from such contractors or subcontractor by alien individual who is a permanent resident of a foreign country but employed and assigned in the Philippines by a foreign service contractor or by foreign subcontractor engaged in petroleum operations in the Philippines. Provided, however, that the same tax treatment shall apply to Filipino employed and occupying the same position as an alien employed by  petroleum service contractor and subcontractor. Any income earned from all other sources within the Philippines by this class of individual alien employee shall be subject to the pertinent income tax, as the case may be, imposed under the NIRC. [see Section 25(E)]. E. Estate This term refers to the assets and liabilities left by the deceased individual which shall pass to his heirs by way of  hereditary succession. Income of the estate is subject to income tax and the obligation to pay for the tax may either  rest upon the administrator of the estate or the beneficiaries of  the estate, depending on whether or not the estate settlement is subject to testamentary or intestate proceeding, i.e. there is a  judicial proceedings for the settlement of the estate. If there is a judicial proceeding for the settlement of the estate, the administrator thereof is required to file the income

tax return in the name of the estate and pay the tax on its income, if any is due. Hence for income tax purposes the estate acquires a distinct personality. However, if there is no  judicial proceeding for the settlement of the estate, no income tax return is required to be filed in the name of the estate but rather the income thereof shall be directly taxable to its  beneficiaries, i.e. the beneficiaries shall report their shares from the income of the estate in their respective income tax returns. Hence, in the latter situation, the estate does not acquire, for income tax purposes, a distinct legal personality. (Sec. 209-210, Rev. Regs. No. 2.) If the estate is settled judicially and, accordingly, is required to file an income tax return, the tax due shall be computed in the manner as an individuals (Sec. 61, NIRC), except in connection with personal exemption which shall be limited only to twenty thousand pesos (P20,000.00) (Sec. 62,  NIRC), and deduction from gross income where, in addition to allowable deductions under Section 34 of the NIRC, the estate is further allowed to deduct income to be distributed to its beneficiary but the amount so allowed as deduction shall  be included in computing the taxable income of the  beneficiaries, whether distributed or not to them. [Sec. 61(A)].

Furthermore, in case the income received by estates of  the deceased person during the period of administration or  settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed or  accumulated, an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly  paid or credited during such year to any legatee, heir or   beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heirs or beneficiary. [Sec. 61(B)]. E. Trust

A trust is a legal arrangement o contract whereby there is a trustor, a trustee and a beneficiary. The trustor entrusts property for the administration by the trustee and for the benefit of the designated beneficiary. For income tax purposes, the trusts treated as distinct taxable entities, are those created by will or by trust deeds where the transfer of   property to such trusts is irrevocable and the income of which

is to be accumulated for a designated beneficiaries other than the grantor   . Hence, a revocable trust or grantor’s trust is not treated as distinct taxable entity. The income from this kind of trust shall be directly taxable against the grantor. A taxable trust is treated in the same manner  and on the same basis as a taxable individual (see Sec. 61,  NIRC), except that only twenty thousand (P20,000.00) is allowed as exemption allowed to taxable trust and the deduction from gross income where, in addition to allowable deductions under Section 34 of the NIRC, the estate is further  allowed to deduct income to be distributed to its beneficiary  but the amount so allowed as deduction shall be included in computing the taxable income of the beneficiaries, whether  distributed or not to them. [Sec. 61(A)].

Furthermore, in case the income received by (estates) or trust of the deceased person during the period of  administration or settlement of the estate, and in the case of  income which, in the discretion of the fiduciary, may be either  distributed or accumulated, an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heirs or beneficiary. [Sec. 61(B)]. Income tax Return for Individuals What are the returns that Individual income taxpayers are required to file?

The following are required to file income tax return as individuals: 1. Individuals whose income are derived from Compensation income only. (BIR Form 1701A); 2. Individuals whose income are derived from the exercise of   profession and business or mixed income (both professional and business). (BIR Form 1701); and

3. Non-Nonresident Citizens. (BIR Form 1701C). Who are the individuals required to file an income tax Return?

The following individuals are required to file an income tax return: [ see Sec. 51(A)(1) & (4), NIRC.] a. Resident Filipino citizen, on his income derived from all sources within and without  the Philippines;  b. Nonresident Filipino citizen, on his income from all sources within the Philippines; c. Resident alien, on his income derived from sources within the Philippines; and d. Nonresident alien engaged in trade or business or in the exercise of profession in the Philippines, on his income derived from sources within the Philippines. Who are not required to file an income tax return?

The following individuals are not required to file an income tax return: [ see Sec. 51(A)(2), NIRC.] a. An individual whose gross income does not exceed his total  personal and additional exemption for dependents under  Sec. 24:  Provided , the Resident citizens and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return, regardless of the amount of gross income;  b. An individual with respect to pure compensation income, as define in Section 32(A)(1), derived from sources within the Philippines, the income on which has been correctly withheld under the provisions of Section 79, NIRC:  Provided : That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return;  Provided, further , That an individual income derived from sources within the Philippines exceeds Sixty thousand  pesos (P60,000.00) shall also file an income tax return;

c. An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of the  NIRC; d. Alien employees of regional or area headquarters of multinational corporation with respect to income referred to under Section 25(C) of the NIRC; e. Alien employed by offshore banking units with respect to income under Section 25(D), of the NIRC; f. Alien employees of service contractors and subcontractors engaged in petroleum exploration in the Philippines with respect to income referred to under Section 25(E) of the  NIRC; and g. An individual who is exempt from income tax pursuant to the provisions of the NIRC and other laws, general or  special. Example of this category is a non resident alien not engaged in trade, business or practice of profession in the Philippines whereby the tax (at the rate of 20%) based on gross amount thereof, is to be withheld at source as final tax. (see Section 25(B). Another example are individuals covered by international agreements whereby the Philippines is a signatory like the agreement under the United Nations, the Asian Development Bank, etc. What return shall an individual exempt to file income tax return under the provisions of Section 51(A)(2) may file?

Any individual not required to file an income tax return  pursuant to the provisions of Section 51(A)(2), may be required to file an information return pursuant to rules and regulations  prescribed by the Secretary of Finance, upon recommendation of  the Commissioner of BIR. [See Section 51(A)(3), NIRC ]. Filing of income tax return/payment of income tax.

The income tax due per return shall be paid at the same time the return is filed, under the system known as “pay-as-youfile”. The return shall be filed with an authorized bank, the Revenue District Office, Collection Agent, or duly authorized

Treasurer of the city or municipality in which such person has legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the office of the Commissioner. [ see Sec. 51(B)].  Filing and payment shall not be later than April 30 following the close of the previous calendar year. [ see Section 51(C)(1), NIRC ].

Consolidated Return for husband and wife.

Married individuals, whether citizens, resident or  nonresident aliens, who do not derive income purely from compensation, shall file a consolidated return for both spouses,  but if it is impracticable for the spouses to file a single return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the BIR for purposes of  verification for the taxable year. [see Sec. 51(D)]. Income of unmarried minor; when included in the return of the parent- [ see Sec. 51(E), NIRC ]

The income of unmarried minors derived from property received from a living parent shall be included in the return of the  parent, except : 1. When the donor’s tax has been paid on such property; or  2. When the transfer of such property is exempt from donor’s tax. Who will file for return of a taxpayer who is unable to file his return by reason of disability or otherwise?

If the taxpayer is unable to make his return, the return maybe made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring  penalties provided for erroneous, false or fraudulent returns. [see Sec. 51(F), NIRC ]. Effect when an individual’s signature is affixed to a return-

The fact that an individual’s signature is signed to a filed return shall  be a prima facie evidence for all purposes that the return was actually signed by him. [see Sec. 51(G),NIRC.].

INCOME TAX ON CORPORATIONS

Corporation.-

The term “corporation” for income tax purposes is  broader compared with its meaning under the Corporation Law.   For income tax purposes, the term corporation “includes  partnerships, no matter how created or organized, joint-stock  companies, joint accounts (cuentas en participacion), associations or insurance companies, but not include general  professional partnerships and joint venture or consortium formed for the purpose of undertaking construction project or engaged in  petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. General professional 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 trade or business.” [see Sec. 22(B), NIRC .]. Classes of Corporations-

1. Domestic Corporation.This refers to corporation created or organized in the Philippines under its laws. (see Sec. 22(C), NIRC.]. 2. Foreign Corporation.This refers to corporation created and organized under the law of a foreign country. [see Sec. 22(D),  NIRC .]. Foreign corporations are further classified into  resident and nonresident corporations. a. Resident foreign corporation.- A Foreign Corporation engaged in trade or business in the Philippines. [see Sec. 22(H), NIRC .].

 b.

Nonresident foreign corporation.A foreign corporation not engaged in trade or business within the Philippines. [see Sec. 22(I). NIRC .].

Taxable situs of income of a foreign corporation.-

A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from all sources within the Philippines. [see Sec. 23(F),  NIRC.]`

Income tax returns for corporations.-

Corporations are required to file interim quarterly income tax returns (BIR Form 1702Q) for the first three quarters of each taxable year and a final adjustment return (BIR Form 1702) for the entire taxable year. The Quarterly Return.The interim quarterly income tax return shall be filed within sixty (60) days following the close of each quarter.  Computation of quarterly gross income, deductions, and income taxes shall be on cumulative basis. [see Sec. 75, NIRC.] The tax due per return shall be paid at the same time the return is filed, following the “pay-as-you-file system”. (see Sec. 77, NIRC .). The Final Adjustment Return.-

It shall also file a final adjustment income tax return covering the result of operation for the entire taxable year. The quarterly income tax, computed on a cumulative basis, shall be credited against the income tax due per final adjustment return.   The balance of the tax due per final adjustment return, if any, shall be paid at the same time the return is filed (see Sec. 76,  NIRC .). The deadline for filing of the final adjustment income th tax return is on the fifteenth (15 ) day of April, or on or before th th the fifteenth (15 ) day the fourth (4 ) month following the close of the fiscal year, as the case may be. The cumulative computation of corporate income taxes; how it operates.-

Under this concept, the gross income, deductions and the income tax due per quarter shall be computed on a cumulative  basis. Thus, in computing for income tax due as of the second quarter, consolidate the gross income, deductions and net income for the first and second quarter. Compute the income tax due on the consolidated net income and credit against the consolidated tax due as of the second quarter the income tax paid as of the  preceding first quarter.

In the computation of income tax due per the final adjustment income tax return, compute the net income for the entire taxable year, compute the tax due therefrom, and credit the income taxes paid during the preceding quarters. The balance, if  any, shall then be paid at the same time the final adjustment return is filed. If credits for quarterly income taxes previously  paid exceeds the income tax due per the final adjustment return, the excess credit may be either refunded or credited outright, at the option of the corporation. Availment of the option, i.e., whether for outright credit or for cash refund of the excess credit must be shown in the final adjustment return by checking the appropriate box provided therefor. In the event that the corporation avails for outright credit of the excess payments per final adjustment return due to excess credit per quarterly income tax returns, the said excess credits may be applied against the income tax due for the following quarter(s) of the following year(s) until the same has  been fully credited. If the excess credit per final adjustment return shall be deducted from the income tax due for the first quarter of the following year, a copy of the said final adjustment return should be attached with the quarterly return for the first quarter of said following taxable year. It is not necessary for the Corporation to secure from the BIR a tax credit certificate for purposes of crediting excess credit. But the excess credits may be used only against the income taxes due from the corporation, i.e., It may not be applied in payment of other national internal revenue taxes. Should the Corporation wishes to use such excess credit for payment of its other national internal revenue taxes, it may request for the issuance of a Tax Credit Certificate instead of 

using the same outright credit against income tax liabilities for  subsequent quarter/year. Unless the said Tax Credit Certificate has been issued, such excess credits may not be used in payment of other taxes. Partnership.-

For income tax purposes, partnerships are classified into-

1. General Professional partnerships.This classification of partnership refers to general professional partnership formed by individuals for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in trade or   business. [see Sec. 22(B), NIRC.]. General professional  partnerships are not subject to tax as corporation. Rather, individual members thereof shall be liable for income tax only in their separate and individual capacities. Accordingly, each  partner shall report as gross income his distributive share, actually or constructively received, in the net income of the  st  rd   partnership. [see Sec. 26, 1  and 3  paragraphs, NIRC .] How does the distributive share of a partners computed?

The distributive share of the partners is determined after the net in come of the partnership has been determined, i.e. the net income of the partnership is computed nd  in the same manner as a corporation. (See Sec.26, 2  paragraph, NIRC.). 2. Other partnerships.These entities are subject to corporateincome taxation system previously discussed in this work. They are partnerships other than general professional  partnership defined in Section 22 (B) of the NIRC.

Corporation exempt from corporate income tax.-

The following corporations are exempt from corporate income tax (see Sec. 30, NIRC ): (A) Labor, agricultural or horticultural organization not organized  principally for profit; (B) Mutual savings bank not having a capital stock represented  by shares, and cooperative bank without capital stock  organized and operated for mutual purposes and without  profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as fraternal organization operating under the lodge system, or mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of  such society, order, or association, or non-stock  corporation or their dependents; (D) Cemetery company owned and operated exclusively for the  benefit of its members; (E) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or  cultural purposes, or for the rehabilitation of veterans, no  part of its net income or assets shall belong to or inure to the benefit of any member, organizer, officer or their  dependents; (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inure to the benefit of any private stockholder or  individual; (G) Civic league or organization not organized for profit but operated exclusively for promotion of social welfare; (H) A non-stock and non profit educational institution; (I) Government educational institution; (J) Farmer’s or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of purely local character, the income of which consists solely of  assessments, dues, and fees collected from members for  the sole purpose of meeting its expenses; and (K) Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the  product of its members and turning back to them the  proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them.

Exception to the income tax exemption enjoyed by these organizations.-

 Notwithstanding exemption from income tax of the foregoing organizations, however, income of whatever kind and character from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to income tax. (see Sec. 30, last paragraph, NIRC .) What are the requirements to establish income tax exemption?-

In order for an exempt organization could claim for  exemption said organization shall apply for such tax exemption with the Commissioner of Internal Revenue. Its application must be accompanied with the following documents: a. Copy of the charter or articles of Incorporation;  b. Copy of the by-laws; c. Latest financial statement of the organization; and d. Affidavit showing the character of the organization, th  purpose for which it was organized, its actual activities, sources of its income and its disposition, whether or not any of its income is credited to surplus or inures to or  may inure to the benefit of any private stockholder or  individual, and in general, all facts relating to its operations which affect its right to exemption. The application will be evaluated by the Bureau of  Internal Revenue. Accordingly, the applicant shall be notified in writing, whether or not it qualifies for exemption from income tax. In the event the applicant is found to be eligible for  exemption, a certificate of exemption from income tax shall be issued by the BIR to the applicant organization. Thereafter, the organization shall not anymore file corporate income tax return. What kind of return is required for an exempt corporation to file?  – 

Every corporation which has duly established its eligibility for exemption from income tax shall file an annual information return, in lieu of the quarterly and final adjustment

tax return required of taxable corporation, under a BIR form  prescribed thereof (BIR Form No. 17.02-A) on or before April 15 following the close of the previous year or on or before the th th fifteenth (15 ) day of the fourth (4 ) month following the close of the fiscal year, depending on the accounting period regularly employed in keeping its books of accounts (see Sec. 43, NIRC).  The information return shall state its gross income and expenses incurred during the preceding year. The information return shall  be accompanied with a certification showing that there has not  been any substantial change in its by-laws, articles of  incorporation, manner of operation and activities as well as sources and disposition of income. (see Sec. 24, Rev. Regs. No. 2, as amended by Re Regs. No. 7-64).

Revenue of exempt corporation/organization not embraced by their exemption; its tax treatment; how will it be reported?

An exempt corporation/organization shall also file separate corporate income tax returns and pay the corresponding income taxes for its revenues derived during any part of their  taxable year which are not embraced by the tax exemption (supra), i.e., like- i. Income from real or personal property or ii. from any activity conducted for profit. It shall file the regular  quarterly and final adjustment income tax returns discussed elsewhere in this work. In the computation of the taxable income derived from such taxable sources, if entitled to deductions for certain expenses, only that portion of expenses directly attributable to or  allocable to the said taxable revenues shall be deducted therefrom. [see Sec. 34, NIRC , for rules on deductibility of  certain expenses]. However, if the only taxable income derived during the taxable year pertains to items of income subject to final schedular  tax procedures, the normal quarterly and annual corporate income tax returns shall no longer be filed. Thus, If the income consists of interest income from Philippine currency bank deposits, deposit substitutes and similar arrangements, etc. which are subject to final withholding tax procedure (supra), there is no need to file the corporate income tax returns.

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