150469451 2012 ateneo lawtaxation law summer reviewer libre

TAXATION LAW

BAR REVIEWER

FACULTY ADVISERS ATTY. MICHAEL DANA MONTERO

ATTY. FRANCISCO GONZALES

ACADEMICS HEAD PIERRE MARTIN REYES

SUBJECT HEADS SHERYL CHRISTINE LAGROSAS

ELLIE CHRIS NAVARRA

ATENEO CENTRAL BAR OPERATIONS 2012

ACADEMICS COMMITTEE

Academics Head: Pierre Martin Reyes;

Understudy: Clariesse Jami Mari Chan

REVIEW COMMITTEE

Head: Yla Gloria Marie Paras;

Understudy: Ken Koga;

Members: Catherine Dela Rosa, Eric Lavadia, Le Iris Lucido,

Pearl Charisse Baustista; Mina Reyes

TAXATION LAW COMMITTEE

Heads: Sheryl Christine Lagrosas; Ellie Chris Navarra

Understudies: Abigail Bernandino; Philip Marion Ortal; Hailin Quintos

TAXATION LAW REVIEWER Page 3 of 165

TAXATION LAW

Table of Contents

I. GENERAL PRINCIPLES OF TAXATION ......................... 5

A. Definition and concept of Taxation ...................5

B. Nature and Characteristics of Taxation ..............5

D. Purpose of Taxation ...........................................6

E. Principles of Sound Tax System (FAT) ................6

F. Theory and Basis of Taxation (JBL) .....................7

G. Doctrines in Taxation .........................................7

1. Prospectivity of tax laws ................................. 7

2. Imprescriptibility ............................................ 7

3. Double Taxation (DT) ...................................... 7

4. Escape from Taxation ..................................... 8

5. Exemption from taxation ............................... 8

6. Compensation and Set-off.............................. 9

7. Compromise ................................................... 9

8. Tax Amnesty ................................................... 9

9. Construction and Interpretation of: ............. 10

H. Scope and Limitation of Taxation ....................11

1. Inherent Limitations ..................................... 11

2. Constitutional Limitations ............................. 12

I. Stages of Taxation (LAPR) .................................14

K. Requisites of a valid tax ....................................14

a. Must be for a public purpose ........................14

b. It should be uniform and equitable ..............14

c. That either the person or property taxed is

within the jurisdiction of the taxing authority ...14

d. That it complies with the requirements of due

process ...............................................................14

e. That it does not infringe any constitutional

limitations ..........................................................14

L. Tax as distinguished from other forms of

exactions ...............................................................14

M. Kinds of Taxes .................................................15

II. NATIONAL INTERNAL REVENUE CODE ................... 17

A. Income Taxation ...............................................17

1. Income Tax Systems .................................... 17

2. Features of the Philippine Income Tax Law .. 17

3. Criteria in Imposing Philippine Tax Law .........18

4. Types of Philippine Income Tax .................... 18

5. Taxable Period ............................................. 18

6. Kinds of Taxpayers ........................................ 18

7. Income Taxation .......................................... 21

8. Income .......................................................... 21

9. Gross Income ................................................. 23

10. Taxation of Resident Citizens, Non-resident

Citizens and Resident Aliens ...............................51

11. Taxation of Non-resident Aliens Engaged in

Trade or Business ...............................................54

12. Exclude Non-resident Aliens Not Engaged in

Trade or Business ...............................................54

13. Individual Taxpayers Exempt from Income Tax54

14. Taxation of Domestic Corporations .............54

15. Taxation of Resident Foreign Corporations57

16. Taxation of Non-resident Foreign

Corporations .......................................................59

17. Improperly Accumulated Earnings Tax ....60

18. Exemption from Tax on Corporations ......61

19. Taxation of Partnerships ..........................61

20. Taxation of General Professional

Partnership (GPP) ...............................................61

21. Taxation of Estates and Trusts.................62

22. Withholding Tax ......................................63

B. Estate Tax..........................................................68

C. Doos Ta .......................................................74 D. Value-Added Tax ..............................................78

1. NATURE AND CHARACTERISTIC ..................... 78

2. IMPACT OF TAX ............................................. 78

3. INCIDENCE OF TAX ........................................ 78

4. DESTINATION PRINCIPLE ............................... 78

5. PERSONS LIABLE (Sec. 105) ........................... 79

6. VAT ON SALE OF GOOD OR PROPERTIES (Sec.

106) ................................................................... 79

7. ZERO-RATED SALES OF GOODS OR

PROPERTIES, AND EFFECTIVELY ZERO RATED

SALES OF GOODS OR PROPERTIES ..................... 80

8. TRANSACTIONS DEEMED SALE (IN EFFECT

SUBJECT TO 12% VAT) ....................................... 81

9. CHANGES IN OR CESSATION OF STATUS OF A

VAT .................................................................... 82

10. VAT ON IMPORTATION OF GOODS (Sec. 107)

........................................................................... 82

11. VAT ON SALE OF SERVICES AND USE OR LEASE

OF PROPERTIES .................................................. 83

12. ZERO-RATED SALES OF SERVICE .................. 83

13. VAT EXEMPT TRANSACTIONS (Sec. 109) ..... 84

14. INPUT VAT AND OUTPUT VAT DEFINED ...... 87

15. SOURCES OF INPUT TAX .............................. 87

16. PERSONS WHO CAN AVAIL OF THE INPUT TAX

........................................................................... 87

17. DETERMINATION OF THE INPUT/OUTPUT

TAX; VAT ............................................................ 88

Credits for Input Tax .......................................... 88

18. SUBSTANTIATION REQUIREMENTS OF INPUT

TAX CREDITS ...................................................... 89


19. CLAIMS FOR REFUND/TAX CREDIT

CERTIFICATE OF INPUT TAX ............................... 90

20. INVOICING REQUIREMENTS ........................ 90

21. FILING OF RETURN AND PAYMENT ............. 91

22. WITHHOLDING OF VAT ................................ 91

E. Percentage Tax ..................................................95

F. Compliance Requirements ................................98

G. Tax remedies under the NIRC .........................108

III. LOCAL GOVERNMENT CODE OF 1991, as amended

............................................................................... 121

1. Fundamental Principles ............................... 121

2. Nature and Source of Taxing Power (CITE LAW)

121

3. Local Taxing Authority ................................. 122

4. Residual Taxing Powers of the LGU (Sec. 186

LGC) ................................................................. 122

5. Specific Taxing Power of Local Government

Unit (LGU) ........................................................ 123

6. Common Limitations on the Taxing Powers of

LGUs and common revenue ............................ 128

7. Collection of Business Taxes ........................ 128

. Tapaes eedies ................................... 129 a) Periods of assessment and collection of

local taxes, fees or charges ........................ 129

b) Protest of assessment (Sec. 195, LGC) ... 129

c) Claim for refund of tax credit for

erroneously or illegally collected tax, free or

charge ......................................................... 129

9. Civil Remedies by the LGU for the Collection of

Revenues ......................................................... 129

1. Fundamental Principles in Assessment of

Real Property Taxes (Sec. 198) [CUANE] .... 131

2. Nature of Real Property Tax ................... 131

3. Imposition of Real Property Tax ............. 132

4. Appraisal and Assessment of Real Property

Tax ...............................................................133

Actual Use of Property as Basis for

Assessment (LGC Sec. 217) .................... 133

Types of Real Property Tax .................... 133

5. Collection of Real Property Tax ...............133

Steps in the Assessment and Collection of RPT

.................................................................... 133

Remedies of LGUs for the Collection of Real

Property Tax ............................................... 134

6. Claim for Tax Refund or Credit (LGC Sec

253) .............................................................135

. Tapaes eedies ...............................135 IV. TARIFF AND CUSTOMS CODE OF 1978, as amended

............................................................................... 137

A. Definitions ......................................................137

B. General Rule ...................................................137

C. Purpose for Imposition ...................................137

LIABILITY FOR CUSTOMS DUTIES ........................137

D. Flexible Tariff ..................................................138

E. Requirements for Importation ........................138

F. Importation in Violation of TCC.......................139

G. Goods Conditionally-free from Tariff and

Customs Duties ...................................................139

H. Classification of Duties ...................................143

1. Ordinary/ Regular Duties ............................. 143

2. Special Duties .............................................. 144

I. Drawback .........................................................145

J. Tax Remedies under the TCC ...........................145

1. Government ................................................ 145

2. Taxpayer ...................................................... 145

V. Judicial Remedies; Republic Act 1125 The Act that

Created the Court of Tax Appeals (CTA), as amended,

and the Revised Rules of the Court of Tax Appeals .. 150

A. Jurisdiction of the Court of Tax Appeals .........150

B. Judicial Procedures .........................................150

1. Judicial action for collection of taxes .........150

C. Tapaes uit Ipugig the Validit of Ta Measures ............................................................152

. TAX PAYE UIT ................................... 152 . DITINGUIHED FOM CITI)EN UIT ... 153

..........................................................................................


TAXATION LAW

I. GENERAL PRINCIPLES OF TAXATION ======================================

TOPICS UNDER THE SYLLABUS:

I. GENERAL PRINCIPLES

A. Definition and concept of Taxation

B. Nature and Characteristics of Taxation

C. Power of Taxation Compared with Other Powers

D. Purpose of Taxation

E. Principles of Sound Tax System (FAT)

F. Theory and Basis of Taxation (JBL)

G. Doctrines in Taxation

H. Scope and Limitation of Taxation

I. Stages of Taxation (LAPR)

J. Definition, Nature, and Characteristics of Taxes

K. Requisites of a valid tax


exactions

M. Kinds of Taxes

======================================

======================================

TOPIC UNDER THE SYLLABUS:


A. Definition and concept of Taxation

======================================

Power inherent in every sovereign State to impose a charge or burden upon persons, properties, or rights to

raise revenues for the use and support of the

government to enable it to discharge its appropriate

functions. Power by which an Independent State, through its lawmaking body, raises and accumulates revenue from

its inhabitants to pay the necessary expenses of the

government. [51 AM JUR 341] Process or act of imposing a charge by governmental authority on property, individuals or transactions to

raise money for public purposes. Blaks La Dictionary] Taxation is merely a way of apportioning the cost of government among those who in some measure are

privileged to enjoy its benefits and must bear its

burdens. [71 AM JUR 2ND

342] Taxation is described as a destructive power which interferes with the personal and property rights of the

people and takes from them a portion of their property

for the support of the government. Paseo Realty &

Development Corporation v.CA, [2004]

======================================



B. Nature and Characteristics of Taxation

======================================

The power of taxation is inherent in sovereignty as an incident or attribute thereof, being essential to the

existence of independent government. The right to tax exists apart from Constitutions and without being expressly conferred by the people. It is legislative in character. It is generally not delegated to executive or judicial department. Exceptions:

i. To LGUs in respect to matters of local concern to

be exercised by the LG bodies thereof [Sec. 5, Art.

X, 1987 Constitution];

ii. When allowed by the Constitution [Sec. 28[2], Art.

VI, 1987 Constitution];

iii. When the delegation relates merely to admin

implementation that may call for some degree of

discretionary powers under a set of sufficient

standards expressed by law Cervantes v. Auditor

General, [91 Phil. 359], or implied from the policy

and purpose of the Act Maceda v. Macaraig, [197

SCRA 771]. It is subject to constitutional and inherent limitations. It must be used for public purposes It has been held that tax has been utilized for public purpose if the

welfare of the nation or the greater portion of its

population has benefited for use Gomez v. Palomar,

[25 SCRA 827]; Phil Guaranty Co., Inc. v.

Commissioner, [13 SCRA 775]. It is the strongest of all the inherent powers of the government Sison v. Ancheta, [130 SCRA 654]. It is territorial in operation The power to tax can only be exercised within the territorial jurisdiction of a

taxing authority [51 Am Jur 88], except when there

exists privity of relationship between the taxing State

and the object of tax. It is an enforced charge and contribution. Generally pecuniary in nature (payable in money).


======================================



C. Power of Taxation Compared with Other Powers

======================================

TAX

POLICE POWER

(in the form of a

FEE)

EMINENT

DOMAIN

Concept

Power to enforce

contribution to

raise government

funds

Power to make

and implement

laws for the

general welfare

Power to take

private property

for public use

with just

compensation

Scope

Plenary,

comprehensive

and supreme

Broader in

application

General power to

make and

implement laws

Merely a power

to take private

property for

public use

Exercising Authority

Government or

political

subdivisions

Government or

political

subdivisions

Maybe granted to

public service

companies or

public utilities

Purpose

Raise revenue Exercise to

promote public

welfare through

regulation

The taking of

property for

public use

Amount of Imposition

No limit Limited to the

cost of

regulation,

issuance of

license, or

surveillance

No limit imposed,

but the amount

should be based

on the market

value of the

property

Effect

Becomes part of

public funds

Restraint on the

injurious use of

property

Transfer of right

to the property

Persons Affected

Applies to all

persons, property

and excises that

may be subject

thereto

Applies to all

persons, property

and excises that

may be subject

thereto

Only particular

property is

comprehended

Superiority of Contracts

Contracts may be

impaired unless (a)

government is

party to contract

Contracts may be

impaired

TAX

POLICE POWER

(in the form of a

FEE)

EMINENT

DOMAIN

granting

exemption; or (b)

involves franchise

Benefits Received

Protection and

general benefits

from the

government

No direct or

immediate

benefit but only

such as may arise

from the

maintenance of a

healthy economic

standard of

society

Market Value of

the property

Relationship to Constitution

Subject to certain

constitutional

limitations

Relatively free

from

constitutional

limitations

Subject to certain

constitutional

limitations

======================================



D. Purpose of Taxation

========================================

1. Revenue-raising Taxation is the power by which the sovereign raises revenue to defray the necessary expenses of

government. It is to provide funds or property with which to promote the general welfare and protection of the

whole citizenry. It is raised to serve as a means to provide public improvements designed for the enjoyment of the

itize ithi the tates teito.

2. Non-revenue/special or regulatory Taxation is also used for regulatory purposes; it is used to attain non-revenue objectives and pursue policy

decisions.

======================================



E. Principles of Sound Tax System (FAT)

======================================

1. Fiscal Adequacy - the sources of tax revenue should

coincide with and approximate the needs of the

government expenditures


2. Administrative Feasibility - the tax system should be

capable of being properly and efficiently administered

by the government and enforced with the least

inconvenience to the taxpayer

3. Theoretical Justice - the tax system should be fair to

the average taxpayer and based upon the ability to pay

======================================



F. Theory and Basis of Taxation (JBL)

======================================

1. Jurisdiction over subject & objects

2. Benefits-Protection Theory (Symbiotic relationship) The basis of taxation is found in the reciprocal duties of

protection and support between the state and its

inhabitants. In return for this contribution, the taxpayer

receives the general advantages and protection which

the government affords the taxpayer and his property.

3. Lifeblood/Necessity Theory - The power of taxation

proceeds upon the theory that the existence of

government is a necessity; that it cannot continue

without means to pay its expenses; and that for those

means it has the right to compel all citizens and

property within its limits to contribute.

======================================



G. Doctrines in Taxation

======================================

1. Prospectivity of tax laws

This principle provides that a tax bill must only be applicable and operative after becoming a law. As a general rule, taxing authorities must be applied prospectively, except by express provision of the law. Ex post facto is not applicable for tax purposes. However when it comes to civil penalties like fines and

forfeiture (except interest), tax laws may be applied

retroactively unless it produces harsh and oppressive

oseuees / iolate the tapaes ostitutional rights regarding equity and due process Fernandez v.

Fernandez, [99 Phil. 934]; Commissioner v. Filipinas

Cia de Seguros, [107 Phil. 1055].

2. Imprescriptibility

Unless otherwise provided by the tax law itself, taxes in general are not cancelable Commissioner v. Ayala

Securities Corporation, [101 SCRA 231].

Although the NIRC provides for the limitation in the assessment and collection of taxes imposed, such

prescriptive period will only be applicable to those

taxes that were returnable. The prescriptive period

shall start from the time the taxpayer files the tax

return and declares his liability Collector v. Bisaya Land

Transportation Co., [1958] As to IAET, the court held that there is no time limit on the right of the BIR Commissioner to assess this type of

tax [Sec. 25, NIRC]. The law on prescription being a remedial measure should be interpreted liberally in order to protect the

taxpayer. Republic vs. Ablaza, [108 Phil 1105]

3. Double Taxation (DT)

a. Direct Duplicate Taxation (Strict sense) To constitute double taxation in the objectionable or prohibited

sense:

The same property must be taxed twice when it should be taxed once; Both taxes must be imposed:

i. On the same property or subject matter;

ii. For the same purpose;

iii. By the same State Government or taxing authority;

iv. Within the same jurisdiction or taxing district;

v. during the same period; and

vi. they must be the same kind or character of tax

Villanueva v. City of Iloilo, [26 SCRA 578]

b. Indirect Duplicate Taxation (Broad sense) It means indirect duplicate taxation. It extends to all cases in w/c

there are two or more pecuniary impositions. The

Constitution does not prohibit the imposition of double

taxation in the broad sense

c. Constitutionality of DT The SC held that there is no constitutional prohibition against double taxation in the

Phils. Villanueva v. City of Iloilo, [26 SCRA 578],

therefore it is not a valid defense against the validity of

a tax measure Pepsi Cola v. Tanauan, [69 SCRA 460].

i. There is no double taxation in the following cases:

i. B taig opoate ioe ad stokholdes dividends from the same corporation

ii. Tax imposed by the State and the local

government upon the same occupation, calling or

activity

iii. Real estate tax and income tax collected on the

same real estate property leased for earning

purposes. Villanueva vs. City of Iloilo, [26 SCRA

578]

iv. Taes ae iposed o tapaes fial podut ad the storage of raw materials used in the


production of the final product. Procter and

Gamble Philippines vs. Municipality of Jana, [94

SCRA 894]

d. Modes of eliminating DT

(1) Provide for exemptions or allowance of deduction

or tax credit for foreign taxes

(2) Enter into treaties with other states [like the

former Phil-Am Military Bases Agreements as to

income tax]

(3) Application of the Principle of Reciprocity

4. Escape from Taxation

a. Shifting of tax burden The imposition of tax is transferred from the statutory taxpayer to another

without violating the law.

(1) Ways of shifting the tax burden (FBO)

i. Forward shifting the transfer of burden from the producer to distributor until it finally reaches the

ultimate purchasers or consumers

ii. Backward shifting the reverse of forward shifting, e.g. the manufacturer has agreed to buy the

supplies podut ol if the pie is edued the amount of tax.

iii. Onward shifting the tax burden is shifted twice or more either forward or backward

(2) Taxes that can be shifted

i. VAT

ii. Percentage tax

iii. Excise tax on excisable articles

iv. Ad valorem taxes that oil companies pay to BIR

upon removal of petroleum products from its

refinery

(3) Meaning of impact and incidence of taxation

i. Impact of Taxation point on which the tax is originally imposed or the one on whom the tax is

formally assessed.

ii. Incidence of Taxation point on which the tax burden finally rests or settles down.

Example: VAT is originally assessed against the

seller who is required to pay the said tax, but the

burden is actually shifted or passed on to the

buyer.

b. Tax avoidance also called Tax Minimization; tax saving device that is legally permissible

c. Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat

taxes; must be willful and intentional

It connotes the integration of three factors: End to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or

the non-payment of tax when it is shown that a tax

is due; Accompanying state of mind which is described as being "evil," in "bad faith," "willful," or "deliberate

and not accidental"; and Course of action or failure of action which is unlawful. Benigno vs. Toda, [G.R. Nos. 78583-4

March 26, 1990]

TAX EVASION TAX AVOIDANCE

Other

Name

Tax Dodging Tax Minimization

Means Use illegal means Use legal means

Penalty Punishable by law Not punishable by law

Object To entirely escape

payment of taxes

To merely minimize

payment of taxes

5. Exemption from taxation

a. Meaning The grant of immunity to particular persons or corporations or to persons or corporations of a

particular class from a tax which persons and

corporations generally within the same state or taxing

district are obliged to pay.

i. It is an immunity or privilege; it is freedom from a

financial charge or burden to which others are

subjected. Greenfield v. Meer, [77 Phil 394]

b. Nature Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is

directly liable. In any case, it cannot be transferred or

assigned by the person to whom it is given without

the consent of the State. Tax exemptions are strictly construed against the taxpayer because such provisions are highly

disfavored and may almost be said to be odious to

the law Manila Electric Company v. Vera, [67 SCRA

351]. Exemptions are not presumed, but when public property is involved, exemption is the rule, and

taxation, the exception. There can be no simultaneous exemptions under 2 laws, one partial and the other total.

c. Kinds (ICE)

(1) Express (or affirmative) when certain persons, property or transactions are, by express provision,

exempted from all or certain taxes, either entirely

or in part.


Examples of Statutory Tax Exemptions: i. Inter-corporate dividends by a domestic

corporation from another domestic

corporation [Sec. 27 D [4], NIRC]

ii. Section 105 of the Tariff and Customs Code

iii. Section 234 of the Local Government Code

iv. Other special laws such as Omnibus

Investment Code of 1987, Philippine Overseas

Shipping Act

(2) Implied (or by omission) when a tax is levied on certain classes of person, properties or

transactions without mentioning the other classes.

Every tax statute makes exemptions since all those

not mentioned are deemed exempted. The

omission may either be accidental or intentional.

(3) Contractual those lawfully entered into by the government in contracts under existing laws.

These exemptions must not be confused with the

tax exemptions granted under franchises, which

are not contracts within the context of non-

impairment clause of the Constitution. Cagayan

Electronic Co. v. Commissioner, [138 SCRA 629]

d. Rationale/grounds for exemption A presumption that the public interest will be subserved by the exemption allowed. Grant of

exemption rests upon that such will benefit the body

of the people and not upon any idea of lessening the

burden of the individual owners of property. Purpose is some public benefit or interest, which the law-making body considers sufficient to offset the

monetary loss entailed in the grant of exemptions. Created in a treaty on grounds of reciprocity or to lessen the rigors of the international double or

multiple taxation. Equity is not a ground for tax exemption

e. Revocation Tax exemption is generally revocable. The congressional power to grant an exemption necessarily carries with it the consequent power to

revoke the same. In order to be irrevocable, the tax exemption must be founded on a contract or granted by the

Constitution. Revocations are constitutional even though the corporate do not have to perform a reciprocal duty

for them to avail of tax exemptions.

6. Compensation and Set-off

This doctrine states that taxes are not subject to set-off or legal compensation because the government and

the taxpayer are not mutual creditor and debtor of

each other Republic v. Mambulao Lumber Co., [6 SCRA

622]; Caltex Phils. V. COA, [208 SCRA 726].

Not subject to set-off or compensation for the following reasons:

i. Taxes are of distinct kind, essence and nature, and

these impositions cannot be classed in merely the

same category as ordinary obligations;

ii. The applicable laws and principles governing each

are peculiar, not necessarily common, to each; and

iii. Public policy is better subserved if the integrity and

independence of taxes are maintained Republic v.

Mambulao Lumber Co., [6 SCRA 622]. A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater

than the tax being collected. The collection of a tax

cannot await the results of a lawsuit against the

government. Philex Mining Corp. v. Commissioner,

[1998]; Francia v. Intermediate Court, [162 SCRA 753] An exception to the rule is where both the claims of the government and the taxpayer against each other have

already become due, demandable and fully liquidated.

In this case, compensation takes place by operation of

law and both obligations are extinguished to their

concurrent amounts. Domingo v. Garlitos, [8 SCRA

443]

7. Compromise

Compromises are generally allowed and enforceable when the subject matter thereof is not prohibited from

being compromised and the person entering such

compromise is duly authorized to do so. The law allows the ff: persons to do compromise in behalf of the government:

i. BIR Commissioner as expressly authorized by the

NIRC subject to certain conditions [Sec. 204, NIRC];

ii. Collector of Customs with respect to customs duties

limited to cases where the legitimate authority is

specifically granted such as in the remission of

duties [Sec. 709, TCC]; and

iii. Customs Commissioner subject to the approval of

the Secretary of Finance, in cases involving the

imposition of fines, surcharges, and forfeitures [Sec.

2316, TCC].

8. Tax Amnesty

a. Meaning It is the general or intentional overlooking by the State of its authority to impose penalties on

persons otherwise guilty of evasion or violation of a

revenue or tax law. It partakes of an absolute forgiveness or waiver of the Government of its right to collect.


It is a way to give tax evaders, who wish to relent & are willing to reform a chance to do so.

b. Distinguished from tax exemption:

AMNESTY EXEMPTION

Scope of

immunity

Immunity from all

criminal, civil and

administrative

liabilities from non-

payment of taxes

Immunity from civil

liability only

To whom

granted

General pardon given

to all taxpayers

A freedom from a

charge or burden to

which others are

subjected

Application Applies only to past

tax periods hence

retroactive

application

Generally,

prospective in

application

Presence of

Actual

Revenue

Loss

Yes, there is revenue

loss since there was

actually taxes due but

collection was waived

by the government

None, because

there was no actual

taxes due as the

person or

transaction is

protected by tax

exemption

9. Construction and Interpretation of:

a. Tax Laws

(1) General rule: No person or property is subject to taxation unless within the terms or plain import of a taxing

statute. In case of doubt, tax statutes are construed strictly against the government and liberally in favor of the

taxpayer. Taxes being burdens, they are not to be presumed beyond what the statute expressly and clearly

declares. Tax statutes offering rewards are liberally construed in favor of informers.

(2) Exception: The rule of strict construction as against the government is not applicable where the language

of the tax statute is plain and there is no doubt as

to the legislative intent. In such case, the words

employed are to be given their ordinary meaning. Tax statutes are to receive a reasonable construction with a view to carrying out their

purpose and intent. They should not be construed

as to permit the taxpayer to easily evade the

payment of tax. Thus, good faith of the taxpayer is

not a sufficient justification for exemption from

the payment of surcharges imposed by the law for

failing to pay tax within the period required. A tax statute should be construed to avoid the possibilities of tax evasion.

b. Tax Exemption and Exclusion

(1) General rule: Exemptions are not favored and are construed strictissimi juris [by the most strict right or law]

against the taxpayer. An exemption from the common burden cannot be permitted to exist upon vague implication or

inference The fundamental theory is that all taxable property should bear its share of the cost and expense of

government. Applying the rule of strict construction to statutory provisions granting tax exemptions [or deductions]

would minimize differential treatment and foster

fairness and equality of treatment among

taxpayers. Taxation is the rule and exemption, the exception. Therefore, whoever claims exemption must be able to justify his claim or right thereto, by a grant

epessed i tes too plai to e istake ad too ategoial to e isitepeted. If not expressly mentioned by law, it must at least be within its purview by clear legislative intent. Claims for refund partake of the nature of tax exemptions and will not be allowed unless granted

in the most explicit and categorical language.

(2) Exception: When the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be

resolved in favor of exemption When the exemption is in favor of the government itself or its agencies because the gen. rule is that

they are exempt from tax. When the exemption refers to religious, charitable and educational institutions. If there is an express mention or if the taxpayer falls within the purview of the exemption by clear

legislative intent, the rule on strict construction

does not apply.

c. Tax Rules and Regulations

(1) General rule only The construction placed by the office charged with implementing and enforcing

the provisions of a Code should be given

controlling weight unless such interpretation is

clearly erroneous.


d. Penal provisions of tax laws Strict construction so as not to extend the plain terms thereof that might create offenses by mere

implication not so intended by the legislative body

RP v. Martin, [G.R. No. L-38019, May 16, 1980].

e. Non-retroactive application to taxpayers The (tax) law cannot be given retroactive effect. It is established that tax laws are prospective in

application, unless it is expressly provided to apply

retroactively. Carmelino F. Pansacola v. CIR, [G.R.

No. 159991, November 16, 2006] A tax law should not be given retroactive application when it would be harsh and

oppressive, for in such case, the constitutional

limitation of due process would be violated. Sec. 246 of the NIRC provides that any revocation, modification or reversal of any of the rules and

regulations promulgated in accordance with Secs.

244 and 255 or any of the rulings or circulars

promulgated by the Commissioner shall not be

given retroactive application if the revocation,

modification or reversal will be prejudicial to the

taxpayers.

(1) Exceptions: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly

declared or is clearly the legislative intent. For

instance: the universal practice of increasing taxes

on income already earned. The rules and regulations promulgated by the CIR shall be retroactive in the following cases:

i. Where the taxpayer deliberately misstates or

omits material facts from his return or any

document required of him by the Bureau of

Internal Revenue;

ii. Where the facts subsequently gathered by the

Bureau of Internal Revenue are materially

different from the facts on which the ruling is

based; or

iii. Where the taxpayer acted in bad faith.

======================================



H. Scope and Limitation of Taxation

======================================

1. Inherent Limitations

a. Public Purpose

Test: whether the proceeds will be used for something

which is the duty of the State to provide. The public purpose of the tax law must exist at the

time of its enactment. Pascual v. Secretary of

Public Works, [G.R. No. L-10405, December 29,

1960] Legislatue is ot euied to adopt a poli of all o oe fo the Cogess has the poe to selet the object of taxation. Lutz v. Araneta, [G.R. No. L-

7859, December 22, 1955] A special benefit to specific individual does not diminish the nature of tax being for public purpose

as long as it is incidental.

b. Inherently Legislative

(1) General rule power of taxation cannot be delegated. Contemplates the power to determine kind, object, extent, amount, coverage, and situs of tax; Distinguish from power to assess and collect

(2) Exceptions:

(a) Delegation to local governments It is in line with the principle that the power to create

municipal corporations for purposes of local self-

government carries with it the power to confer

the power to tax on such local governments.

(b) Delegation to the President Certain aspects of the taxing process that are not legislative in

character may be vested to him.

(c) Delegation to administrative agencies They are authorized to fix within specified limits, Tariff

rates, import or export quotas, tonnage and

wharfage dues and other duties or imposts.

c. Territorial

(1) Situs of Taxation

(a) Meaning place of taxation; power to tax is limited to the territorial jurisdiction of the taxing

state.

EXCEPT where privity of relationship exists, the

State can exercise its taxing powers over its

citizen outside its territory.

(b) Situs of Income Tax

(1) From sources within the Philippines Interests derived from sources within the Philippines Dividends from domestic and foreign corporations Compensation for services performed within the Philippines Rentals and royalties from properties located in the Philippines or any interest in such

property including rentals or royalties for the

use of or for the privilege of using within the

Philippines, patents, copyrights and other like


properties. Sale of Real property located in the Philippines Sale of Personal property Gains, profit, and income derived from the purchase within and

its sale without the Phil, or from the purchase

without and its sale within shall be treated as

derived entirely from sources within the

country in which the personal property is sold.

Except: the gain from the sale of shares of

stock in a domestic corporation shall be

treated as derived entirely from sources

within the Phils. regardless where the said

shares are sold.

(2) From sources without the Philippines Interest other than those derived from sources within the Philippines Dividends other than those derived from sources within the Philippines Compensation for services performed without the Philippines Rentals and royalties from property located without the Philippines or from any interest in

such property including rentals or royalties for

the use of or for the privilege of using without

the Philippines, patents, copyrights and other

like properties.

(3) Income partly within and partly without the

Philippines Items other than those specified above in i. and ii. shall be allocated or apportioned to

sources within or without the Philippines

(c) Situs of Property Taxes

(1) Taxes on Real Property Location of the property

(2) Taxes on Personal Property

i. Tangible Location of the property ii. Intangible Domicile of the owner

(d) Situs of Excise Tax

(1) Estate Tax Domicile of the decedent at the time of his death

(2) Doos Ta Domicile of the donor at the time of the transfer

(e) Situs of Business Tax Place where the taxpayer is registered or required to register

(1) Sale of Real Property

(2) Sale of Personal Property

(3) VAT

SUMMARY:

OBJECT SITUS RULE

Person Residence,

Domicile,

Citizenship

Real Property Location of the property

Tangible

Personal

Property

Physical location although the owner

resides in another jurisdiction

Intangible

Personal

Property

Domicile of the owner (mobilia

sequntur personam)

Income Citizenship

Residence

Source of Income

Transfer of

property

Citizenship

Residence

Location of Property

Business or

Occupation

Where the act/business/occupation is

performed/exercised

d. International Comity Property of a foreign State of government may not be taxed by another.

e. Exemption of Government Entities, Agencies, and

Instrumentalities Taking money from one pocket to the other. Applies only to entities exercising sovereign functions (acta jure imperii). However, it can tax itself if there is a statutory authority to do so and no express provision against

such act.

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation

(1) Prohibition against imprisonment of non-payment

of poll tax [Sec. 20, Art. III] Can still be made to pay fines and penalties for non-payment. Taxpayer may be imprisoned for non-payment of other kinds of taxes where the law so expressly

provides.

(2) Uniformity and equality of taxation [Sec. 28 (1),

Art VI] Uniform: all articles or properties of the same class taxed at the same rate Equity: apportionment must be more or less just in the light of tapaes ailit to shoulde ta burden The equal protection clause refers more to like


treatment in like circumstances The uniformity and equity clause refers to the proper relative treatment for tax purposes of

persons in unlike circumstances

(3) Grant by Congress of authority to the President to

impose tariff rates/Flexible tariff clause [Sec. 28

(2), Art. VI] Includes import and export quotas, tonnage and wharfage dues aside from tariff rates Delegated by Congress Through a law; the Tariff and Customs Code has poided fo hat has ee teed as the fleile taiff lause authoizig the Pesidet to odif import duties [Sec. 401, TCC] Subject to Congressional limits and restrictions Within the framework of national development program

(4) Prohibition against taxation of religious, charitable

and educational entities/Exemption from real

property taxes [Sec. 28 (3), Art. VI of the

Constitution] Covers charitable institutions, churches, and parsonages or convents appurtenant thereto,

mosques and non-profit cemeteries and all lands,

buildings and improvements ACTUALLY, DIRECTLY

and EXCLUSIVELY USED for charitable, religious and

educational purposes Pertains only to real estate tax Test of exemption: actual use of the property, not ownership

(5) Prohibition against taxation of non-stock, non-

profit [educational] institutions [Sec. 4(3&4), Art.

XIV] Exempts from taxes all revenues and assets of non-stock, non-profit educational institutions used

ACTUALLY, DIRECTLY AND EXCLUSIVELY for

educational purposes Eeptio oes ioe, eal estate, doos ta, and customs duties (distinguish from the previous

which pertains only to real estate tax) Income exempt provided it is used for maintenance or improvement of institution

(indispensable or essential). The exemption is strictly personal. (non-transferable) Distinguish from tax treatment of i. Proprietary educational institutions

(Preferential Tax of 10%);

ii. Government educational institutions (exempt,

ex. UP)

(6) Majority vote of Congress for grant of tax

exemption [Sec. 28 (4), Art. VI] Includes amnesties, condonations and refunds Involves majority of all members voting separately Relative majority (majority of quorum) is sufficient to withdraw exemption.

(7) Prohibition on use of tax levied for special purpose

[Sec. 29 (3), Art. VI] Revenues derived for a special fund shall be administered for the purpose intended only. Once the purpose is achieved, the balance, if any, is to be transferred to the general funds of the

government.

(8) Pesidets eto poe o appopiatio, eeue, and tariff bills [Sec. 27 (2), Art. VI]

(9) Non impairment of jurisdiction of the SC [Sec.

5(2)(b), Art. VIII]

(10) Grant of power to the local government units to

create its own sources of revenue [Sec. 5, Art. X]

(11) No appropriation or use of public money for

religious purposes [Sec. 29 (2), Art. VI]

b. Provisions Indirectly Affecting Taxation

(1) Due process [Sec. 1, Art. III]

SUBSTANTIVE PROCEDURAL

Should not be harsh,

oppressive, or confiscatory

(reasonableness)

No arbitrariness in

assessment and collection

By authority of valid law Right to notice and hearing

Must be for a public purpose

Imposed within territorial

jurisdiction

It can also be invoked by the government. Province of Abra v. Hernando, [G.R. No. L-49336 August 31,

1981]

(2) Equal protection [Sec. 1, Art. III] All persons subject to legislation shall be treated alike, under like circumstances and conditions both

in privileges conferred and liabilities imposed.

Sison, Jr. v. Ancheta, [G.R. No. L-59431, 25 July

1984]


No violation of equal protection when there is proper classification made; classification to be

valid must:

i. Rest on substantial distinctions

ii. Be germane to the purpose of the law

iii. Not be limited to existing conditions only; and

iv. Apply equally to all members of the same class

(3) Religious freedom [Sec. 5, Art III] The constitutional guaranty of the free exercise and enjoyment of religious profession and worship

carries with it the right to disseminate religious

information. American Bible Society v. City of

Manila, [G.R. No. L-9637, April 30, 1957]. Activities simply and purely for propagation of faith are exempt. Tax is unconstitutional if it operates as a prior restraint on exercise of religion or favors a certain

religion (non-establishment of religion) Income of religious organizations from any activity conducted for profit or from any of their property,

real or personal, regardless of disposition of such

income, is taxable

(4) Non-impairment of obligations [Sec. 10, Art. III] Applies only when government is party to the contract granting exemption EXCEPT if Franchise tax-exemption The Constitution provides that franchise is subject to

amendment, alteration, or repeal by Congress.

======================================



I. Stages of Taxation (LAPR)

======================================

1. Levy Refers to the enactment of a law by Congress, imposing a tax.

2. Assessment The act of administration and implementation of the tax law by the executive

department through the administrative agencies

3. Payment Act of compliance by the taxpayer, including such options, schemes or remedies as may be legally

available to him.

4. Refund Recovery of any tax alleged to have been erroneously or illegally assessed or collected, or of any

penalty claimed to have been collected without

authority, or of any sum alleged to have been

excessively, or in any manner wrongfully, collected.

======================================



J. Definition, Nature, and Characteristics of Taxes

====================================== A burden, charge, exaction, imposition or contribution assessed in accordance with some reasonable rule of

apportionment by authority of the sovereign state

upon the persons or property within its jurisdiction, to

provide public revenue for the support of the

government, the administration of the law, or the

payment of public expenses. [71 AM JUR 2ND

343-346] Any payment exacted by the State or its municipal subdivisions as a contribution toward the cost of

maintaining governmental functions, where the special

benefits derived from the performance is merged in the

general benefit. Taxes operate in INVITUM and are in no way dependent upon the will or contractual assent, express or implied,

of the person taxed. (1) Enforced (2) proportional and (3) pecuniary contributions (4) from persons and property (5) levied

by law-making body of (6) the state having jurisdiction

over the subject of the burden (7) for the support of the

government and all public needs.

======================================



K. Requisites of a valid tax

======================================

a. Must be for a public purpose

b. It should be uniform and equitable

c. That either the person or property taxed is within the

jurisdiction of the taxing authority

d. That it complies with the requirements of due process

e. That it does not infringe any constitutional limitations

======================================




exactions

======================================

1. Customs Duty/Tariff

TAX CUSTOMS DUTY

Coverage More comprehensive than

customs duty

Kind of tax

Object Persons, prop, etc Goods imported

or exported


2. Toll

TAX TOLL

Kind of

demand

Demand of

sovereignty

Demand of ownership

Purpose support of

government

Collection for the use

of property

Amount No limit depends on need of the

government

Fair return of the cost

of the property or

improvement

3. License Fee

TAX LICENSE FEE

Source Exercise of

Taxing power

Emanate from the police

power of the State

Purpose Raise revenue Regulation

Object Persons,

property and

privilege

Right to exercise a privilege

Amount no limit only necessary to carry out

regulation

Distinction lies in the primary purpose: License fee primary purpose is to regulate and the excess of the amount collected from the cost to carry

out the regulation is minimal and incidental. Tas pia pupose, o at least oe of the eal ad substantial purposes is to raise revenue. If amount is too high for regulation, it would be a tax; unless imposed on non-useful occupations or

businesses. Purpose of distinction: limitations and exemptions apply only to one and not to the other (ex. Exemption

from taxation does not include exemption from fee)

4. Special Assessment

TAX SPECIAL ASSESSMENT

Imposed

on

Persons, properties,

etc.

Only on land

Why

imposed

Regardless of public

improvement

Public improvement

that benefits the land

Purpose Support of

government

Contribution to cost of

public improvement

When

imposed

Regular exaction Exceptional as to time

and locality

Basis Necessity Benefits obtained

5. Debt

TAX DEBT

Source Law; legal obligation Based on contract

Nature Personal Assignable

Right to

set-off

Generally not subject

to compensation/ set-

May be the subject of

compensation/ set-off

off

Effect Imprisonment is

sanction for non-

payment

No imprisonment for

non-payment

======================================



M. Kinds of Taxes

======================================

1. As to subject matter or object

a. Personal, poll, capitation tax Fixed amount Individuals residing within specified territory Without regard to their property, occupation or business

Ex. Community Tax (Cedula)

b. Property tax Imposed on property, real or personal In proportion to its value or other reasonable method of apportionment

Ex. Real estate tax

c. Excise/Privilege tax - (different from the excise tax

of Title VI of the NIRC) Imposed upon performance of an act, the enjoyment of a privilege or the engaging in an

occupation, profession or business

E. Ioe ta, VAT, estate ta, doos ta

2. As to who bears the burden or incidence

a. Direct the tax is imposed on the person who also bears the burden thereof

Ex. Income tax, community tax, estate tax

b. Indirect imposed on the taxpayer who shifts the burden of the tax to another

Ex. VAT, specific tax, percentage tax, customs

duties

3. As to tax rates or determination of amount

a. Specific tax imposed and based on a physical unit of measurement, as by head, number, weight,

length or volume

Ex. Tax on distilled spirits, fermented liquors,

cigars

b. Ad Valorem - tax of a fixed proportion of the value

of property with respect to which the tax is

assessed; requires intervention of assessor.


Ex. Real estate tax, excise tax on cars, non-

essential goods

c. Mixed

4. As to purposes

a. General, fiscal or revenue - imposed for the

general purpose of supporting the government

Ex. Income tax, percentage tax

b. Special or regulatory - imposed for a special

purpose, to achieve some social or economic

objectives

Ex. Protective tariffs or customs duties

5. As to scope or authority to impose

a. National - imposed by the national government

Ex. National internal revenue taxes, custom duties

b. Municipal or local - imposed by the municipal

corporations or local governments

Ex. Real estate tax, occupation tax

6. As to graduation of rate (Three systems of taxation)

a. Proportionate - based on a fixed percentage of the

amount of the property, income or other basis to

be taxed

Ex. Real estate tax, VAT, percentage tax

b. Progressive or graduated - tax rate increases as

the tax base or bracket increases

Ex. Ioe ta, estate ta, doos ta

c. Regressive - tax rate decreases as the tax base

increases


II.NATIONAL INTERNAL REVENUE CODE ======================================

TOPICS UNDER THE SYLLABUS:

A. Income Taxation

B. Estate Tax

C. Doos Ta D. Value-Added Tax (VAT)

E. Compliance Requirements (Internal Revenue

Taxes)

F. Tax Remedies under the NIRC

G. Organization and Function of the Bureau of

Internal Revenue ========================================

======================================


A. Income Taxation ========================================

1. Income Tax Systems

a. Global (unitary) Tax System the total allowable deductions, as well as personal and additional

exemptions, in the case of qualified individuals, or the

total allowable deductions only, in the case of

corporations, are deducted from the gross income (i.e.

sum of all items of taxable income, profit and gain) to

arrive at the net taxable income subject to the

graduated income tax rates, in the case of individuals,

or to the corporate income tax rate, in the case of

corporations.

All items of gross income, deductions, personal and

additional exemptions are reported in one income tax

return and a single tax is imposed on all income

received or earned by a person irrespective of the

activities which produced the income (i.e.

compensation income, net income from business, trade

or profession).

b. Schedular Tax System different types of incomes are subjected to different sets of graduated or flat income

tax rates. The applicable tax rates will depend on the

classification of the taxable income and the basis could

be gross income or net income (i.e. capital gains tax)

c. Semi-Schedular or Semi-Global Tax System the compensation income, business or professional income,

capital gain and passive income not subject to final tax,

and other income are added together to arrive at the

gross income and after deducting the sum of allowable

deductions, the taxable income is subjected to one set

of graduated tax rates for an individual or normal

corporate income tax rate for corporations.

With respect to the income, the computation of income

is global while the scheduler tax system applied to the

capital gains and passive income subject to final tax at

preferential tax rates.

NOTE: Philippine income taxation is a combination of both

system but is more schedular for individual while more

global for corporation.

GLOBAL SYSTEM SCHEDULAR SYSTEM

A system which imposes a

personal tax upon the total

income of the taxpayer

A system which imposes

various types of tax on

income producing activities

Emphasizes the burden

allocation aspects

Emphasizes on revenue and

administrative aspects

Most equitable in

distributing tax burden, as

burden of an individual is

closely related to his

resources and his ability to

pay

Because of its multiple rates,

the tax burden of a person

does not respond to his

income but rather fall

fortuitously on the type of

his income

It serves as a means for

redistributing income and

wealth

This function is alien to

schedular system where in

times of plenty or in times of

need, people pay the same

fixed tax on their income

It serves as a supplementary

devise to accomplish non-

fiscal goals of the

government

Schedular system cannot

perform these functions

Administration is not quite

as easy as schedular

because one has to consider

all income from whatever

sources

Administration is simple

being confined to each

transaction or activity

2. Features of the Philippine Income Tax Law

a. Direct tax tax burden us borne by the income tax recipient upon whom the tax is imposed.

b. Progressive tax tax rate increases as the tax base increases; direct taxes are to be preferred and as much

as possible, indirect taxes should be minimized.

Tolentino v. Secretary of Finance, [G.R. No. 115455,

October 30, 1995]

c. Comprehensive system adopts the citizenship principle, residence principle and the source principle

d. Semi-schedular or semi-global tax system certain passive incomes and capital gains are subject to final

taxes at preferential rates while all other income are


added together to arrive at the gross income and after

deducting the sum of allowable deductions, the taxable

income is subjected to one set of graduated tax rates

for an individual or normal corporate income tax rate

for corporations.

3. Criteria in Imposing Philippine Tax Law

a. Citizenship principle a citizen taxpayer is subject to income tax: (a) on his worldwide income if he resides in

the Philippines; or (b) only on his income from sources

within the Philippines, if he qualifies as non-resident

citizen.

b. Residence principle a resident alien is liable to pay income tax on his income from sources within the

Philippines but exempt from tax on his income from

sources outside the Philippines.

c. Source principle a non-resident alien is subject to Philippine income tax because he derives income from

sources within the Philippines such as dividend,

interest, rent or royalty.

4. Types of Philippine Income Tax

a. Net Income Tax/Taxable Income (GI Deductions Exemptions)

b. Gross Income Tax

c. Final Income Tax (On passive income and capital gains)

d. Fringe Benefits Tax (amount of benefits to Managerial

and Supervisory Employee paid by Employer; employee

is taxed but burden is on employer)

e. Capital Gains Tax (Real property and stocks not traded

in stock market)

f. Optional Corporate Income Tax

g. Minimum Corporate Income Tax (2% of gross income)

h. Improperly Accumulated Earnings Tax

i. Preferential Rates (for special corporations)

j. Branch Profit Remittance Tax

5. Taxable Period

GENERAL RULE: The accounting period of a taxpayer is a

period of twelve (12) months.

a. Calendar Year accounting period from January 1 to December 31 which is allowed if the: Taxpayer is an individual Taxpayer is a partnership Accounting period is other than a fiscal year Taxpayer has no accounting period Taxpayer does not keep books.

b. Fiscal Year accounting period of twelve (12) months ending on the last day of any month other than

December which is allowed ONLY to corporations.

c. Short Period a taxpayer may have a taxable period of less than twelve (12) months when: Taxpayer dies Corporation is newly organized Corporation changes its accounting period Corporation is dissolved.

6. Kinds of Taxpayers

TAXPAYER TAX BASE TAXABLE ON INCOME

Resident Citizen

Taxable

Income

Within and without the

Philippines

Nonresident

Citizen

Taxable

Income Within the Philippines

Resident Alien Taxable


Nonresident Alien

engaged in trade

or business (more

than 180 days)

Taxable


Nonresident Alien

not engaged in

trade or business

(180 days or less)

Gross


General

Professional

Partnership

Taxable

Income

GPP itself not taxable,

however, individual

partners will be taxed

depending on

classification

Estate and Trust Taxable

Income

Same basis as an

individual (depending

on classification of

decedent, if estate,

trustor, if trust)

Domestic

Corporation

Taxable

Income

Within and Without

the Philippines

Resident Foreign

Corporation

Taxable


Non-resident

Foreign

corporation

Gross


a. Individual Taxpayers

(1) Citizens

(a) Resident Citizen citizen of the Philippines residing therein is taxable on all income derived

from sources within and without the Philippines.

(b) Nonresident Citizen citizen of the Philippines who are taxable only on his income from sources

within the Philippines if he:

i. Establishes the fact of his physical presence

abroad with a definite intention to reside

therein.


ii. Leaves the Philippines during the taxable year

to reside abroad, as immigrant or for

employment on a permanent basis.

iii. Works & derives income from abroad &

whose employment requires him to be

physically present abroad most of the time

(i.e. not less than 183 days) during the taxable

year.

iv. Was previously considered as nonresident

citizen & arrives in the Philippines at any time

during the taxable year to reside permanently

in the Philippines.

v. Examples of non-resident citizens:

a. Immigrant one who leaves the Philippines to reside abroad as an

immigrant for which a foreign visa has

been secured

b. Permanent employee one who leaves the Philippines on a more or less

permanent basis

c. Contract Worker one who leaves the Philippines on account of a contract of

employment which is renewed from time

to time under such circumstance as to

require him to be physically present

abroad most of the time (not less than

183 days)

NOTE: The taxpayer shall submit proof to the CIR to

show his intention of leaving the Philippines to reside

permanently abroad or to return to and reside in the

Philippines as the case may be.

Non-resident citizens who are exempt from tax with

respect to income derived from sources outside the

Philippines shall no longer be required to file

information returns from sources outside the

Philippines beginning 2001 [RR No. 5-2001]

For Overseas Contract Worker, the time spent abroad is

not material for tax exemption purposes. All that is

euied is fo the okes eploet otat to pass through and be registered with the POEA [BIR

Ruling 33-2000]

(2) Aliens

(a) Resident Alien an individual whose residence is within the Philippines and who is not a citizen

thereof is taxable only on income derived from

sources within the Philippines. One who comes to the Philippines for a definite purposes which in its nature would

require an extended stay, and makes his home

temporarily in the country becomes a resident

alien

Length of stay is indicative of intention An alien actually present in the Philippines who is not a mere transient or sojourner is a

resident of the Philippines for purposes of the

income tax. Whether he is a transient or not is

determined by his intentions with regard to

the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient

to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a

resident. One who comes to the Philippines

for a definite purpose which in its nature may

be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its

accomplishment, and to that end the alien

makes his home temporarily in the

Philippines, he becomes a resident, though it

may be his intention at all times to return to

his domicile abroad when the purpose for

which he came has been consummated or

abandoned. [RR No. 2] Loss of Residence by alien An alien who has acquired residence in the

Philippines retains his status until he

abandons the same and actually departs from

the Philippines

A mere intention to change his residence does

not change hid status. An alien who has

acquired a residence is taxable as a resident

for the remainder of his stay in the

Philippines. [Sec. 6, RR. No. 2]

(b) Nonresident Alien an individual whose residence is not within the Philippines and who

is not a citizen thereof but dong business therein

is taxable only on income from sources within.

(1) Engaged in trade or business an alien who comes and stays in the Philippines for an

aggregate period of more than 180 days

during any calendar year.

(2) Not engaged in trade or business an alien whose stay in the Philippines is 180 days or

less.

(3) Special Class of Individual Employees

(a) Aliens employed by regional or area

headquarters and regional operating

headquarters of multinational companies in the

Philippines.

(b) Aliens employed by offshore banking units.

(c) Aliens employed by petroleum contractors and

subcontractors.


(d) Minimum Wage Earner A worker in the private sector paid the statutory minimum wage, or to an employee

in the public sector with compensation

income of not more than the statutory

minimum wage in the non-agricultural sector

where he/she is assigned; His earnings (i.e. SMW, holiday, overtime, night shift differential and hazard pay) are

exempt from income tax pursuant to the

provisions of this Code and other laws,

general or special.

b. Corporations A corporation shall include partnerships, no matter how created or organized. Joint stock companies,

joint accounts, associations, and insurance

companies

But does not include, for the purpose of imposing ordinary 30% (starting 2009; 35% 2006 - 2008)

corporate income tax:

i. General professional partnerships

ii. Joint venture or consortium formed for the

purpose of undertaking construction projects or

engaging in petroleum, coal, geothermal & other

energy operations pursuant to an operating or

consortium agreement under a service contract

with the government

(1) Domestic Corporation created or organized in the Philippines or under its laws and is liable for

income derived from sources within and without.

(2) Foreign Corporation organized and existing under the laws of a foreign country, which

includes:

(a) Resident foreign corporation foreign corporation engaged in trade or business within

the Philippines and is liable from sources within.

In the case of CIR v. British Overseas Airways

Corp, [G.R. No. L-65773-74, April 30, 1987], the

Court held that there is no specific criterion as to

what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be

judged in the light of its peculiar environmental

circumstances. The term implies a continuity of

commercial dealings and arrangements, and

contemplates, to that extent, the performance

of acts or works or the exercise of some of the

functions normally incident to, and in

progressive prosecution of commercial gain or

for the purpose and object of the business

organization. In order that a foreign corporation

may be regarded as doing business within a

State, there must be continuity of conduct and

intention to establish a continuous business,

such as the appointment of a local agent, and

not one of a temporary character.

(b) Nonresident foreign corporation foreign corporation not engaged in trade or business

within the Philippines

c. Partnerships. Taxed as a corporation.

d. General Professional Partnerships Established solely for purpose of exercising common profession and no part of income derived

from engaging in trade or business. As an entity, it is not subject to income tax. i. Partners are liable for income tax on their

distributive share (computed by dividing net

income of GPP).

ii. Each partner shall report his distributive share as

part of his gross income.

iii. Individual partners are subject to regular income

tax rate on their taxable income.

Taxable/Business/Ordinary/General Partnership i. All other partnerships no matter how created or

organized.

ii. Includes unregistered joint ventures and

business partnerships.

iii. Taxable as an entity ordinary corporate income tax.

iv. Joint ventures are not taxable as corporations

when its purpose is: a) undertaking construction

projects; b) engaged in petroleum, coal and

other energy operation under a service contract

with the government.

v. Partners are considered stockholders; therefore,

their distributive share is taxed as dividends,

thus subject to final income tax on their gross

distributive share.

e. Estate and Trusts Estate: property, rights and obligations of a person which are not extinguished by his death and those

that accrues thereto; taxed in the same way as an

individual provided it is irrevocable and earns

income; what is taxed is not the property that

constitutes the trust (this was already subject to

doos ta ut the ioe of suh popet. Trust: arrangement created by agreement under which title to property is passed to another for

conservation or investment with the income and

the corpus/principal distributed in accordance with

the directions of the creator; to be taxable as a


separate entity, grantor must have absolutely and

irrevocably given up control and benefit over the

trust.

f. Co-ownerships Exists whenever the ownership of an undivided thing or right belongs to different persons. For

income tax purposes, the individual co-owners are

liable for the taxes due on their respective shares

and the co-ownership itself is not considered as a

separate taxable entity.

There is co-ownership in the following instances: i. Two or more heirs inherit an undivided property

from a decedent;

ii. A donor makes a gift of an undivided property in

favor of two or more donees.

It is not taxable when the activities are limited merely to preservation of the co-owned property

but the co-owners are liable for income tax in their

separate and individual capacities.

It is taxable when the income of the co-ownership is invested by the co-owners in business creating a

partnership.

7. Income Taxation

a. Definition A tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on a

pesos ioe, eoluets, pofits ad the life. Income tax is a direct tax

b. Nature (same as Features of Philippine Income Tax Law)

(1) Direct Tax tax burden us borne by the income tax recipient upon whom the tax is imposed.

(2) Progressive Tax tax rate increases as the tax base increases; direct taxes are to be preferred and as

much as possible, indirect taxes should be

minimized. Tolentino v. Secretary of Finance, [G.R.

No. 115455, October 30, 1995]

(3) Comprehensive System adopts the citizenship principle, residence principle and the source

principle

(4) Semi-Schedular or Semi-Global Tax System certain passive incomes and capital gains are

subject to final taxes at preferential rates while all

other income are added together to arrive at the

gross income and after deducting the sum of

allowable deductions, the taxable income is

subjected to one set of graduated tax rates for an

individual or normal corporate income tax rate for

corporations.

c. General Principles

TAXPAYER TAX BASE TAXABLE ON INCOME

Resident Citizen Taxable

Income

Within and without

the Philippines

Nonresident Citizen Taxable

Income

Within the Philippines

Resident Alien Taxable


Nonresident Alien

engaged in trade or

business (more than

180 days)

Taxable


Nonresident Alien

not engaged in trade

or business (180 days

or less)

Gross


General Professional

Partnership

Taxable

Income

GPP itself not taxable,

however, individual

partners will be taxed

depending on

classification

Estate and Trust Taxable

Income

Same basis as an

individual (depending

on classification of

decedent, if estate,

trustor, if trust)

Domestic

Corporation

Taxable

Income

Within and Without

the Philippines

Resident Foreign

Corporation

Taxable


Non-resident Foreign

corporation

Gross


8. Income

a. Definition and Nature Income, in the broad sense, means all wealth which flows into the taxpayer other than as a mere

return of capital. It includes the forms of income

specifically described as gains and profits, including

gains derived from the sale or other disposition of

capital assets. Income cannot be determined

merely by reckoning cash receipts, for the statute

recognizes as income determining factor other

items, among which are inventories, accounts

receivable, property exhaustion, and accounts

payable for expenses incurred. [Sec. 36, RR No. 02-

40 dated 10 February 1940]

b. When income is taxable

(1) Existence of income For a taxable income to exist, gain or profit is necessary where there is an exchange of value received in the form of cash or its

equivalent as a result of rendition of service or


earnings in excess of capital invested. BIR

Ruling [DA-(C-335) 815-09] dated December

22, 2009

(2) Realization of income

(a) Tests of Realization Under the REALIZATION PRINCIPLE, revenue is generally recognized when both of the

following conditions are met: The earning is complete or virtually complete; and An exchange has taken place.

This principle requires that revenues must be earned before they are received. Amounts

received in advance are not treated as

revenue of the period in which they are

received, but as revenue of the future period

or period or periods in which they are earned.

These amounts are carried as unearned

revenue, that is, liabilities to transfer goods or

render services in the future until the earning process is complete. Manila

Mandarin Hotels v. Commissioner, [CTA Case

No. 5046, March. 24, 1997]

(b) Actual v. Constructive Receipt ACTUAL RECEIPT occurs when there is a physical transfer of the money consideration

or its equivalent to a person.

CONSTRUCTIVE RECEIPT occurs when the money consideration or its equivalent is

placed at the control of the person who

rendered the service without restrictions by

the payor. For example:

i. Deposit in banks which are made available

to the seller of service without restrictions;

ii. Issuance by the debtor of a notice to offset

any debt or obligation and acceptance

thereof by the seller as payment for

services rendered; and

iii. Transfer of amounts retained by the payor

to the account of the contractor. [Section

4.108-411 of RR No. 16-2005]

(3) Recognition of income

(4) Methods of accounting

(a) Cash method v. Accrual method CASH METHOD recognition of income and expense dependent on inflow or outflow of

cash (meaning, you recognize the income

when you actually receive the cash payment

for the sale, and you recognize the expense

when you actually pay cash for the expense).

ACCRUAL METHOD method under which income, gains and profits are included in gross

income when earned whether received or not,

and expenses are allowed as deductions when

incurred, although not yet paid. It is the right

to receive and not the actual receipt that

determines the inclusion of the amount in

gross income.

(b) Installment payment v. Deferred payment v.

Percentage of completion INSTALLMENT METHOD the taxpayer may report income over the several taxable years

in which collections are made based on the

terms of payment.

Generally, the income derived on installment

sale is the proportion of installment collection

actually received during the year in relation to

the gross profit and contract price.

DEFERRED PAYMENT METHOD where the initial payments on installment sale exceed

25% of the selling price but they may only be

realized in the subsequent year, the taxpayer

is allowed to defer reporting income for

accounting purposes but such sale is to be

considered as the equivalent of "cash" which

will be considered as taxable in the month of

sale. [Sec. 177, RR No. 2 as cited in BIR Ruling

No. 263-92 dated September 16, 1992]

PERCENTAGE OF COMPLETION METHOD a method of recognizing the earnings derived

from long-term construction contracts. This

method requires recognition of income based

on the progress of work.

c. Tests in determining whether income is earned for tax

purposes

(1) Under the REALIZATION PRINCIPLE, revenue is

generally recognized when both of the following

conditions are met:

(a) the earning is complete or virtually complete;

and

(b) an exchange has taken place.

This principle requires that revenues must be

earned before they are received. Amounts

received in advance are not treated as revenue of

the period in which they are received, but as

revenue of the future period or period or periods


in which they are earned. These amounts are

carried as unearned revenue, that is, liabilities to

transfer goods or render services in the future until the earning process is complete. Manila

Mandarin Hotels v. Commissioner, [CTA Case No.

5046, March 24, 1997]

(2) The "CLAIM-OF-RIGHT" DOCTRINE provides that if a

taxpayer receives earnings under a claim of right and

without restriction as to its disposition, he has received

income even though one may claim he is not entitled to

the money. Should it later appear that the taxpayer was

not entitled to keep the money, the taxpayer would be

entitled to a deduction in the year of repayment. North

American Oil Consolidated v. Burnet as cited in [BIR

Ruling DA-(C-168) 519-08 dated December 12, 2008]

(3) The ECONOMIC BENEFIT THEORY provides that

anything which benefits a person materially or

economically in whatever way is taxable under the law.

[BIR Ruling No. 123-97 dated November 10, 1997]

General Rule: in this jurisdiction, mere increase in the

value of property without actual realization, either

through sale or other disposition, is not taxable, the

only exception being that even without sale or other

disposition, if by reason of appraisal, the cost basis of

property is increased and the resultant basis is used as

the new tax base for purposes of computing the

allowable depreciation expense, the net difference

between the original cost basis and new basis due to

appraisal is taxable under the economic-benefit

principle. [BIR Ruling No. 029-98]

(4) Under the SEVERANCE TEST THEORY, income is

recognized when there is a separation of something

which is of exchangeable value. Eisner v. Macomber,

[252 US 189]

150469451 2012 ateneo lawtaxation law summer reviewer libre

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