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I. General Principles
A.
Definition and Concept of Taxation
As a process, it is a means by which the sovereign, through its law-making body,
raises revenue to defray the necessary expenses of the government. It is merely a wayof apportioning the costs of government among those who in some measures are
privileged to enjoy its benefits and must bear its burdens.
As a power, taxation refers to the inherent power of the state to demand
enforced contributions for public purpose or purposes.
Taxation is a symbiotic relationship, whereby in exchange for the protection that
the citizens get from the government, taxes are paid.1
B.
Nature of Taxation
1. It is an inherent attribute of sovereignty
2. It is legislative in character
C. Characteristics of Taxation
1. The power of taxation is an incident of sovereignty as it is inherent in the
State, belonging as a matter of right to every independent government. It does need
constitutional conferment. Constitutional provisions do not give rise to the power to tax
but merely impose limitations on what would otherwise be an invincible power. 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
the exactions made under it.2
2. The power to tax is inherent in the State, and the State is free to select the
object of taxation, such power being exclusively vested in the legislature, except where
the Constitution provides otherwise.3
The Congress may by law authorize the President to fix within specified limits,
and subject to such limitations and restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within theframework of the national development program of the Government.
1Commissioner of Internal Revenue vs. Allegre, Inc., et al., L-28896, Feb. 17, 19882Churchill and Tait v. Concepcion, 34 Phil 9693Art. VI, Sec, 28 (2); Art. X, Sec. 5; Art. VI, Sec. 28. par. 2.
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Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines and limitations
as the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local governments.4
3. It is subject to Constitutional and inherent limitations; hence, it is not an
absolute power that can be exercised by the legislature anyway it pleases.
D. Power of Taxation Compared With Other Powers
1. Police Power
2. Power of Eminent Domain
Taxation Police Power Eminent Domain
Purpose
Raising revenue Promote public welfarethru regulations Taking of property forpublic use
Amount of exaction
No limit Limited to the cost of
regulations, issuance of
the license or
surveillance
No exaction,
compensation paid by
the government
Benefits received
No special or direct benefits
received but the enjoyment of
the privileges of living in an
organized society
No direct benefits but a
healthy economic
standard of society or
damnum absque
injuria is attained
Direct benefit results in
the form of just
compensation
Non-impairment of contracts
The impairment rule subsist Contracts may be
impaired
Contracts may be
impaired
Transfer of property rights
4Art. X, Sec. 5
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Taxes paid become part of public
funds
No transfer but only
restraint on the exercise
of property right exists
Property is taken by the
govt upon payment of
just compensation
Scope
Affects all persons, property and
excise
Affects all persons,
property, privileges, and
even rights
Affects only the
particular property
comprehended
Basis
Public necessity Public necessity and theright of the state and the
public to self-protection
and self-preservation
Public necessity, privateproperty is taken for
public use
Authority which exercises the power
Only by the government or
its political subdivisions
Only by the government or
its political subdivisions
May be granted to public
service, companies, or
public utilities
E.
Purpose of Taxation
1. Revenue-raising
To provide funds or property with which the State promotes the general welfare
and protection of its citizens.
2.Non-revenue/special or regulatory
Promotion of General
Welfare
Taxation may be used as an implement of police power
in order to promote the general welfare of the people.5
5see Lutz vs. Araneta, 98 Phil 148 and Osmea vs. Orbos, G.R. No. 99886, Mar. 31, 1993
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Regulation As in the case of taxes levied on excises and privileges
like those imposed in tobacco or alcoholic products or
amusement places like night clubs, cabarets, cockpits,
etc.6
Reduction of Social Inequality This is made possible through the progressive system of
taxation where the objective is to prevent the under-
concentration of wealth in the hands of few individuals.
Encourage Economic Growth In the realm of tax exemptions and tax reliefs, for
instance, the purpose is to grant incentives or
exemptions in order to encourage investments and
thereby promote the countrys economic growth.
e. Protectionism In some important sectors of the economy, as in the
case of foreign importations, taxes sometimes provide
protection to local industries like protective tariffs and
customs
F.
Principles of Sound Tax System
1.
Fiscal Adequacy
The sources of tax revenue should coincide with, and approximate the needs of
government expenditure. Neither an excess nor a deficiency of revenue vis--vis the
needs of government would be in keeping with the principle.
2. Administrative Feasibility
Tax laws should be capable of convenient, just and effective administration
3.
Theoretical Justice
6In the case of Caltex Phils. Inc. vs. COA(G.R. No. 92585, May 8, 1992), it was held that taxes may also be
imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened
industry which is affected with public industry like the oil industry.
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The tax burden should be in proportion to the taxpayers ability to pay7. The
1987 Constitution requires taxation to be equitable and uniform.
G. Theory and Basis of Taxation
1.
Lifeblood Theory
Taxes are the lifeblood of the government, being such, their prompt and certain
availability is an imperious need.8Without taxes, the government would be paralyzed
for lack of motive power to activate and operate it.
2. Necessity Theory
Taxes proceed upon the theory that the existence of the government is a
necessity; that it cannot continue without the means to pay its expenses; and that for
those means, it has the right to compel all citizens and properties within its limits to
contribute.9
3. Benefits-Protection Theory10
The basis of taxation is the reciprocal duty of protection between the state and
its inhabitants. In return for the contributions, the taxpayer receives the general
advantages and protection which the government affords the taxpayer and his property.
4. Jurisdiction over subject and objects
Rules:
a) Tax laws cannot operate beyond a States territorial limits.
b) The government cannot tax a particular object of taxation which is not within
its territorial jurisdiction.
c) Property outside ones jurisdiction does not receive any protection of the
State.
7ability-to-pay principle8Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 19659In a case, the Supreme Court held that:
Taxation is a power emanating from necessity. It is a necessary burden to preserve the States
sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the
citizenry and those which come with the States territory and facilities, and protection which a
government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA
775)10Symbiotic Relationship
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d) If a law is passed by Congress, it must always see to it that the object or
subject of taxation is within the territorial jurisdiction of the taxing authority.
H. Doctrines in Taxation
1.
Prospectivity of tax laws
General Rule Exception
Taxes must only be imposed prospectively. The language of the statute clearly
demands or express that it shall have a
retroactive effect.
2. Imprescriptibility
General Rule Exception
Taxes are imprescriptible. When provided otherwise by the tax law
itself.11
3. Double taxation
a. Strict sense
Referred to as direct duplicate taxation, it means:
1. Taxing twice;
2. by the same taxing authority;
3. within the same jurisdiction or taxing district;
4. for the same purpose;
5. in the same year or taxing period;
6. some of the property in the territory
11 Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein
imposed.
The law on prescription, being a remedial measure, should be liberally construed to afford protection as
a corollary, the exceptions to the law on prescription be strictly construed. ( CIR vs CA. G.R. No. 104171,
Feb. 24, 1999)
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b.
Broad sense
Referred to as indirect double taxation, it is taxation other than direct duplicate
taxation. It extends to all cases in which there is a burden of two or more impositions.
c. Constitutionality of double taxation
Unlike in the United States Constitution, our Constitution does not prohibit
double taxation.
However, while it is not forbidden, it is something not favored. Such taxation
should, whenever possible, be avoided and prevented.
In addition, where there is direct double taxation, there may be a violation of the
constitutional precepts of equal protection and uniformity in taxation.12
d.
Modes of eliminating double taxation
Two (2) methods of relief:13
Exemption method The income or capital which is taxable at the state of
12The argument against double taxation may not be invoked where one tax is imposed by the State and
the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in
the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or
activity by both the State and a political subdivision thereof. And where the statute or ordinance in
question, there is no infringement of the rule on equality ( City of Baguio v. De Leon, 25 SCRA 938)13A tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with r ega rd to cer tai n cla sse s of inc om e or cap ita l. In
some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other
items of income or capital, both states are given the right to tax, although the amount of tax that may be
imposed by the state of source is limited. The second method for the elimination of double taxation
applies whenever the state of source is given a full or limited right to tax together with the
state of residence. In this case, the treaties make it incumbent upon the state of residence to allow
relief on order to avoid double taxation.
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source or situs is exempted at the state of residence,
although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayers
remaining income or capital
Credit method Although the income or capital which is taxed in the state
of source is still taxable in the state of residence, the tax
paid in the former is credited against the tax levied in the
latter. The basic difference between the two methods is
that in the exemption method, the focus is on the income
or capital, whereas the credit method focuses upon the tax.
4. Escape from taxation
a.
Shifting of tax burden14
1) Ways of shifting the tax burden
14The transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or
imposed to someone else.
Process by which such tax burden is transferred from statutory taxpayer to another without violating
the law.
What is transferred is not the payment of the tax, but the burden of the tax
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a. Forward shifting When the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally
settles on the ultimate purchaser or consumer.15
b. Backward shifting When the burden of the tax is transferred from the
consumer or purchaser through the factors of distribution
to the factors of production.16
c. Onward shifting When the tax is shifted two or more times either forward
or backward.17
2) Taxes that can be shifted
Only indirect taxes may be shifted;18direct taxes19cannot be shifted.
3) Meaning of impact and incidence of taxation
Impact of taxation Incidence of taxation
The point on which a tax is originally
imposed. In so far as the law is concerned,
The point on which the tax burden finally
rests or settle down. It takes place when
15Example:
Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who
also shifts it to the final purchaser or consumer16Example:
Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is
reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer17Example:
Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the
wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the
retailer, we have three shifts in all.18e.g. VAT19e.g. Income tax
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the taxpayer is the person who must pay
the tax to the government. He is also
termed as the statutory taxpayer-the one
on whom the tax is formally assessed. He
is the subject of the tax.
shifting has been effected from the
statutory taxpayer to another.
b. Tax avoidance20
The exploitation of the taxpayer of legally permissible alternative tax rates or
methods of assessing taxable property or income in order to avoid or reduce tax liabilit
c. Tax evasion21
The use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of tax.
5. Exemption from taxation
a. Meaning of exemption from taxation
20also known as tax minimization; it is not punished by law21also known as tax dodging; it is punishable by law
Elements of tax evasion:
1. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or
paying no tax when it is shown that tax is due
2. An accompanying state of mind which is described as being evil, in bad faith, willful, or
deliberate and not accidental
3. A course of action (or failure of action) which is unlawful
Indicia of fraud in tax evasion:
1. Failure to declare for taxation purposes true and actual income derived from business for two (2)
consecutive years; or
2. Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive years
coupled with unintentional overstatement of deductions
Evidence to prove tax evasion:
Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the
circumstances of the case.
Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his
business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government of
its due taxes. (Republic vs. Gonzales, 13 SCRA 638)
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Agreed to by the taxing authority in contracts lawfully entered into by them
under enabling laws.
d. Rationale/grounds for exemption
Rationale for granting tax exemptions Grounds for granting tax exemptions
Its avowed purpose is some public benefit or
interests which the lawmaking body
considers sufficient to offset the monetary
loss entailed in the grant of the exemption.
The theory behind the grant of tax
exemptions is that such act will benefit the
body of the people. It is not based on theidea of lessening the burden of the individual
owners of property.
1) May be based on contract.26
2) May be based on some ground of
public policy.27
3) May be based on grounds of
reciprocity or to lessen the rigors ofinternational double or multiple
taxation.28
e.
Revocation of tax exemption
It is an act of liberality which could be taken back by the government unless
there are restrictions. Since taxation is the rule and taxation therefrom is the exception,
the exemption may be withdrawn by the taxing authority.29
26 In such a case, the public, which is represented by the government is supposed to receive a full
equivalent therefor, i.e. charter of a corporation.27 i.e., to encourage new industries or to foster charitable institutions. Here, the government need not
receive any consideration in return for the tax exemption.28Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.29Mactan Cebu International Airport Authority vs., Marcos, 261 SCRA 667.
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6. Compensation and Set-off30
General Rule Exception
Taxes are not subject to set-off or legal
compensation. The government and the
taxpayer are not creditors and debtors or
each other. Obligations in the nature of
debts are due to the government in its
corporate capacity, while taxes are due to
the government in its sovereign capacity.31
Where both the claims of the government
and the taxpayer against each other have
already become due and demandable as
well as fully liquated.32
7. Compromise
A contract whereby the parties, by reciprocal concessions, avoid litigation or put
an end to one already commenced.33
8. Tax amnesty
a. Definition
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 to
collect what otherwise would be due it and, in this sense, prejudicial thereto.34
30Requisites of Compensation in taxation
1. The tax assessed and the claim against the government be fully liquidated.
2. The tax assessed and the claim against the government is due and demandable, and
3. The government had already appropriated funds for the payment of the claim ( Domingo v. Garlitos,
L-18904, June 29, 1963)31Philex Mining Corp. vs. CIR, 294 SCRA 687; Republic vs. Mambulao Lumber Co., 6 SCRA 62232see Domingo vs. Garlitos, supra33Art. 2028, New Civil Code
Requisites:
1. Taxpayer must have a tax liability.
2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer.
3. There must be acceptance of the offer in settlement of the original claim.
When taxes may be compromised:
1. A reasonable doubt as to the validity if the claim against the taxpayer exists;
2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
3. Criminal violations, except:
a. Those already filed in court
b. Those involving fraud.
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9. Construction and Interpretation of:
a. Tax laws
General Rule Exception
Tax laws are liberally interpreted in favor
of the taxpayer and strictly against the
government.
Liberal interpretation does not apply to tax
exemptions which should be construed in
strictissimi jurisagainst the taxpayer.35
b. Tax exemption and exclusion
General Rule Exceptions
In the construction of tax statutes,
exemptions are not favored and are
construed strictissimi juris against the
taxpayer.36The fundamental theory is that
all taxable property should bear its share
in the cost and expense of the
government.
Taxation is the rule and exemption. He
who claims exemption must be able to
justify his claim or right thereto by a grantexpress in terms too plain to be mistaken
1. The law itself expressly provides for a
liberal construction thereof.
2. In cases of exemptions granted to
religious, charitable and educational
institutions or to the government or its
agencies or to public property because the
general rule is that they are exempted
from tax.
35Reason: Lifeblood doctrine36Strict interpretation does not apply to the government and its agencies
Petitioner cannot invoke the rule of strictissimi juris with respect to the interpretation of statutes
granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of
exemptions in favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]
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and too categorical to be
misinterpreted.If not expressly
mentioned in the law, it must be at least
within its purview by clear legislative
intent.
c. Tax rules and regulations
1) General rule only
They shall not be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers.37
d. Penal provisions of tax laws
Tax laws are civil and not penal in nature, although there are penalties provided
for their violation.
The purpose of tax laws in imposing penalties for delinquencies is to compel the
timely payment of taxes or to punish evasion or neglect of duty in respect thereof.
e. Non-retroactive application to taxpayers
1) Exceptions
A statute may operate retroactively provided it is expressly declared or is clearly
the legislative intent. But a tax law should not be given retroactive application when it
would be harsh and oppressive.
I. Scope and Limitation of Taxation
1. Inherent Limitations
37Sec. 246
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a. Public Purpose38
The tax must be used:
1) for the support of the state or
2) for some recognized objects of governments or
3) directly to promote the welfare of the community39
b. Inherently Legislative
1) General Rule
Taxation is purely legislative, Congress cannot delegate the power to others. This
limitation arises from the doctrine of separation of powers among the three branches of
government.
2) Exceptions
a) Delegation to local governments40
The power of local government units to impose taxes and fees is always subject
to the limitations which the Congress may provide, the former having no inherent
power to tax.41
The power to tax is primarily vested in the Congress, however, in our jurisdiction,
it may be exercised by local legislative bodies, no longer merely by virtue of a validdelegation but pursuant to direct authority conferred by Section 5,42 Article X of
38Test in determining Public Purposes in tax:
a. Duty Testwhether the thing to be threatened by the appropriation of public revenue is something
which is the duty of the State, as a government.
b. Promotion of General Welfare Test whether the law providing the tax directly promotes the
welfare of the community in equal measure.
The term public purpose is synonymous with governmental purpose; a purpose affecting the
inhabitants of the state or taxing district as a community and not merely as individuals.
A tax levied for a private purpose constitutes a taking of property without due process of law.
The purposes to be accomplished by taxation need not be exclusively public. Although private
individuals are directly benefited, the tax would still be valid provided such benefit is only incidental.
The test is not as to who receives the money, but the character of the purpose for which it is expended;
not the immediate result of the expenditure but rather the ultimate.
In the imposition of taxes, public purpose is presumed.39taxation as an implement of police power40Art. X. Sec. 541Basco v. PAGCOR42 Each local government unit shall have the power to create its own sources of revenues and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent
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the1987 Constitution, subject to guidelines and limitations which Congress may provide
which must be consistent with the basic policy of local autonomy.43
b) Delegation to the President44
The power granted to Congress under this constitutional provision to authorizethe President to fix within specified limits and subject to such limitations and
restrictions as it may impose, tariff rates and other duties and imposts include tariffs
rates even for revenue purposes only. Customs duties which are assessed at the
prescribed tariff rates are very much like taxes which are frequently imposed for both
revenue-raising and regulatory purposes.45
c) Delegation to administrative agencies
With respect to aspects of taxation not legislative in character.46
c. Territorial
1) Situs of Taxation47
a)
Meaning
Literally means the place of taxation.
The place or the authority that has the right to impose and collect taxes.48 It is
premised upon the symbiotic relation between the taxpayer and the State.
with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.43MCIAA v. Marcos, 261 SCRA 66744Art.VI, Sec. 28(2)45Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 199246Example: assessment and collection
Certain aspects of the taxing process that are not really legislative in nature are vested in
administrative agencies. In these cases, there really is no delegation, to wit:
a) power to value property
b) power to assess and collect taxes
c) power to perform details of computation, appraisement or adjustments.
For the delegation to be constitutionally valid, the law must be complete in itself and must set forth
sufficient standards.47 It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise
within the territory of the taxing power because:
1. Tax laws do not operate beyond a countrys territorial limit.
2. Property which is wholly and exclusively within the jurisdiction of another state receives none of
the protection for which a tax is supposed to be compensation.
However, the fundamental basis of the right to tax is the capacity of the government to provide
benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing
state, where there is between him and the taxing state, a privity of relationship justifying the levy.
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b) Situs of Income Tax
1) From sources within the
Philippines
2)
From sources without thePhilippines
Determined by the nationality, residence of the taxpayer and source of income.49
3) Income partly within and partly
without the Philippines
Allocated or apportioned to sources within or without the Philippines.50
c) Situs of Property Taxes
(1) Taxes on Real Property
The place where the property is located. The applicable concept is lex situs or lex
rei sitae.51
(2) Taxes on Personal Property
Tangible personal property Intangible personal property
Where the property is physically locatedalthough the owner resides in another
jurisdiction.52
The place where the owner is located. Theapplicable concept is mobilia sequuntur
personam.53
48Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 200149Sec. 42
Theories:
1. Domicillary theory - the location where the income earner resides is the situs of taxation
2. Nationality theory - the country where the income earner is a citizen is the situs of taxation
3. Source rule - the country which is the source of the income or where the activity that produced the
income took place is the situs of taxation.50 For the purpose of computing the taxable income therefrom, where items of gross income are
separately allocated to sources within the Philippines, there shall be deducted:
(a) the expenses, losses and other deductions properly apportioned or allocated thereto, and
(b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to
some items or classes of gross income. The remainder, if any, shall be included in full as taxable income
from sources within the Philippines.51We can only impose property tax on the properties of a person whose residence is in the Philippines.5251 Am Jur. 46753movables follow the owner or domicile of the owner
Exceptions:
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The place of sale.
(3) VAT
Where the goods, property or services are destined, used or consumed.
d. International Comity56
The property of a foreign state or government may not be taxed by another.57
f.
Exemption of Government Entities, Agencies, and
Instrumentalities
i. Agencies performing governmental functions - tax exempt58
ii. Agencies performing proprietary functions - subject to tax.
2. Constitutional Limitations
a. Provisions Directly Affecting Taxation
56Comity is the respect accorded to other sovereign nations.57The grounds for the above are:
1. sovereign equality among states
2. usage among states that when one enter into the territory of another, there is an implied
understanding that the power does not intend to degrade its dignity by placing itself under the
jurisdiction of the latter
3. foreign government may not be sued without its consent so that it is useless to assess the tax since it
cannot be collected
4. reciprocity among states58The exemption applies only to governmental entities through which the government immediately and
directly exercises its sovereign powers.
Tax exemption of property owned by the Republic of the Philippines refers to the property owned by
the government and its agencies which do not have separate and distinct personality (NDC vs. Cebu City)
Those created by special charter (incorporated agencies) are not covered by the exemption
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5) Prohibition against taxation of non-stock, non-profit
institutions
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.63
6) Majority vote of Congress for grant of tax exemption
No law granting any tax exemption shall be passed without the concurrence of a
majority of all the members of the Congress.64
7) Prohibition on use of tax levied for special purpose
All money collected or 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.65
62Sec. 4(4), Art. XIV.
The exemption granted to non-stock, non-profit educational institution covers income, property, and
donors taxes, and custom duties.
To be exempt from tax or duty, the revenue, assets, property or donation must be used actually,
directly and exclusively for educational purpose.
In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to
property tax.
The said constitutional provision granting tax exemption to non-stock, non-profit educational institution
is self-executing.Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative
implementation. Their tax exemption is not self-executing.
Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed
are exempt from property tax, whether the educational institution is proprietary or non-profit63Sec. 4 (3), Art. XIV
Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax because
the transaction was an isolated one (Manila Polo Club vs. CTA)
Income derived from the hospital pharmacy, dormitory and canteen was exempt from income tax
because the operation of those entities was merely incidental to the primary purpose of the exempt
corporation (St. Paul Hospital of Iloilo vs. CIR)
Where the educational institution is private and non-profit (but a stock corporation), it is subject to
income tax but at the preferential rate of ten percent (10%)64Sec. 28(4), Art. VI
The provision requires the concurrence of a majority, not of attendees constituting a quorum, but of all
members of the Congress.65Sec. 29(3), Art. VI
An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of
imported crude oil. In a decide case, it was held that where under an executive order of the President, this
special fund is transferred from the general fund to a trust liability account, the constitutional mandate
is not violated. The OPSF, according to the court, remains as a special fund subject to COA audit ( Osmea
vs Orbos, et al., G.R. No. 99886, Mar. 31, 1993)
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8) Presidents veto power on appropriation, revenue, tariff
bills
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.66
9) Non-impairment of jurisdiction of the Supreme Court
The Congress shall have the power to define, prescribe, and apportion the
jurisdiction of the various courts but may not deprive the Supreme Court of its
jurisdiction over cases enumerated in Sec. 567hereof.
10) Grant of power to the local government units to create
its own sources of revenue
Each local government unit has the power to create its own revenue and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide.68
66Sec. 27(2), Art. VI67The Supreme Court shall have the following powers:
1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls,
and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.
2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in:
a. All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in
question.b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in
relation thereto.
c. All cases in which the jurisdiction of any lower court is in issue.
d. All criminal cases in which the penalty imposed is reclusion perpetuaor higher.
e. All cases in which only an error or question of law is involved.
3. Assign temporarily judges of lower courts to other stations as public interest may require. Such
temporary assignment shall not exceed six months without the consent of the judge concerned.
4. Order a change of venue or place of trial to avoid a miscarriage of justice.
5. Promulgate rules concerning the protection and enforcement of constitutional rights, pleading,
practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and legal
assistance to the under-privileged. Such rules shall provide a simplified and inexpensive procedure for the
speedy disposition of cases, shall be uniform for all courts of the same grade, and shall not diminish,
increase, or modify substantive rights. Rules of procedure of special courts and quasi-judicial bodies shall
remain effective unless disapproved by the Supreme Court.
6. Appoint all officials and employees of the Judiciary in accordance with the Civil Service Law. (Art. VIII)68Sec 5, Art. X
Local government units have no power to further delegate said constitutional grant to raise revenue,
because what is delegated is not the enactment or the imposition of a tax, it is the administrative
implementation.
The power of local government units to impose taxes and fees is always subject to the limitations
which Congress may provide, the former having no inherent power to tax.
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11) Flexible tariff clause
This clause provides the authority given to the President to adjust tariff rates
under Section 40169of the Tariff and Customs Code.70
12) Exemption from real property taxes
Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, building, and improvements
actually, directly and exclusivelyused for religious, charitable or educational purposes
shall be exempt from taxation.71
13) No appropriation or use of public money for religious
purposes
No public money or property shall be appropriated, applied, paid or employed,
directly or indirectly for the use, benefit, 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.72
Municipal corporations are mere creatures of Congress which has the power to create and abolish
municipal corporations. Congress therefore has the power to control over local government units. If
Congress can grant to a municipal corporation the power to tax certain matters, it can also provide for
exemptions or even take back the power (Basco vs. PAGCOR)69In the interest of national economy, general welfare and/or national security, the President upon the
recommendation of the National Economic and Development Authority is empowered:1) To increase, reduce or remove existing protective rates of import duty, provided that the increase
should not be higher than 100% ad valorem
2) To establish import quota or to ban imports of any commodity
3) To impose additional duty on all imports not exceeding 10% ad valorem.70Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)71Sec. 28(3), Art. VI
Lest of the tax exemption: the use and not ownership of the property
To be tax-exempt, the property must be actually, directly and exclusively used for the purposes
mentioned.
The word exclusively means primarily.
The exemption is not limited to property actually indispensable but extends to facilities which are
incidental to and reasonably necessary for the accomplishment of said purposes.
The constitutional exemption applies only to property tax.
However, it would seem that under existing law, gifts made in favor or religious charitable and
educational organizations would nevertheless qualify for donors gift tax exemption. (Sec. 101(9)(3), NIRC)
The constitutional tax exemptions refer only to real property that are actually, directly and exclusively
used for religious, charitable or educational purposes, and that the only constitutionally recognized
exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions
which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal
Revenue v. Court of Appeals, et al., 298 SCRA 83)72Sec. 29(2), Art. VI
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b. Provisions Indirectly Affecting Taxation
1) Due process
No person shall be deprived of life, liberty or property without due process oflaw73x x x.
2)
Equal protection
xxx nor shall any person be denied the equal protection of the laws.74
3)
Religious freedom
No law shall be made respecting an establishment of religion or prohibiting the
free exercise thereof. The free exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall be forever allowed.75
4) Non-impairment of obligations of contracts
No law impairing the obligation of contract shall be passed.76
J. Stages of Taxation
1. Levy
Determination of the persons, property or excises to be taxed, the sum or sumsto be raised, the due date thereof and the time and manner of levying and collecting
taxes.
Public property may be leased to a religious group provided that the lease will be totally under the
same conditions as that to private persons (amount of rent).
Congress is without power to appropriate funds for a private purpose.73Sec. 1, Art. III74Ibid.75Sec. 5 Art. III
License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the
nature of a condition or permit of the exercise of the right.
However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally
applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentino vs
Secretary of Finance, 235 SCRA 630)76Sec. 10, Art. III
A law which changes the terms of the contract by making new conditions, or changing those in the
contract, or dispenses with those expressed, impairs the obligation.
The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject
to amendment, alteration or repeal by the Congress when the public interest so requires.
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2. Assessment and Collection
The manner of enforcement of the obligation on the part of those who are
taxed.77
The two processes together constitute the taxation system.
3. Payment
The act of compliance by the taxpayer, including such options, schemes or
remedies as may be legally available.
4. Refund
The 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.
K. Definition, Nature, and Characteristics of Taxes
Definition Taxesare the enforced proportional contributions from
persons and property levied by the law-making body of
the State by virtue of its sovereignty for the support of
government and for public needs.
Nature They are not arbitrary exactions but contributions levied
by authority of law, and by some rule of proportion
which is intended to ensure uniformity of contribution
and a just apportionment of the burdens of government.
Characteristics 1. It is levied by the law-making body of the State.78
2. It is an enforced contribution.79
3. It is generally payable in money.80
77This includes payment by the taxpayer and is referred to as tax administration78The power to tax is a legislative power which under the Constitution only Congress can exercise through
the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.79A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent,
express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.
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4. It is proportionate in character.81
5. It is levied on persons or property.82
6. It is levied for public purpose or purposes.83
7. It is levied by the State which has jurisdiction over the
persons or property.84
L. Requisites of a valid tax
1) It should be for a public purpose
2)
The rule of taxation should be uniform
3) Either the person or property taxed be within the jurisdiction of the taxing
authority
4) The assessment and collection be in consonance with the due process clause
5)
The tax must not infringe on the inherent and constitutional limitations of
the power of taxation.85
M. Tax as distinguished from other forms of exactions
1. Tariff
May be used in three (3) senses:
a. A book of rates drawn usually in alphabetical order containing the names of
several kinds of merchandise with the corresponding duties to be paid for the same.
b. Duties payable on goods imported or exported.86
80Tax is a pecuniary burdenan exaction to be discharged alone in the form of money which must be in
legal tender, unless qualified by law, such as R.A. 304 which allows backpay certificates as payment of
taxes.81It is ordinarily based on the taxpayers ability to pay.82A tax may also be imposed on acts, transactions, rights or privileges.83Taxation involves, and a tax constitutes, a burden to provide income for public purposes.84The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.85Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But
their collection should not be tainted with arbitrariness86P.D. No. 230
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c. The system or principle of imposing duties on the importation/exportation of
goods.
2. Toll
Sum of money for the use of something, generally applied to the considerationwhich is paid for the use of a road, bridge of the like, of a public nature.
Tax Toll
Demand of sovereignty Demand of proprietorship
Paid for the support of the government Paid for the use of anothers property
Generally, no limit as to amount imposed Amount depends on the cost of
construction or maintenance of the public
improvement used
Imposed only by the government Imposed by the government or private
individuals or entities
3. License fee
A charge imposed under the police power for the purposes of regulation.87
Tax License/Permit Fee
87Three kinds of licenses are recognized in the law:
1. Licenses for the regulation of useful occupations.
2. Licenses for the regulation or restriction of non-useful occupations or enterprises
3. Licenses for revenue only
Importance of the distinctions between tax and license fee:
1. Some limitations apply only to one and not to the other, and that exemption from taxes may not
include exemption from license fees.
2. The power to regulate as an exercise of police power does not include the power to impose fees for
revenue purposes. (seeAmerican Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases)
3. An extraction, however, maybe considered both a tax and a license fee.
4. But a tax may have only a regulatory purpose.
5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and
regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue
is also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs Quezon
City, 172 SCRA 629)
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Enforced contribution assessed by
sovereign authority to defray public
expenses
Legal compensation or reward of an officer
for specific purposes
For revenue purposes For regulation purposes
An exercise of the taxing power An exercise of the police power
Generally no limit in the amount of tax to
be paid
Amount is limited to the necessary
expenses of inspection and regulation
Imposed also on persons and property Imposed on the right to exercise privilege
4. Special assessment
An enforced proportional contribution from owners of lands especially or
peculiarly benefited by public improvements.88
Tax Special Assessment
Imposed on persons, property and excise Levied only on land
Personal liability of the person assessed Not a personal liability of the person
assessed, i.e. his liability is limited only to
the land involved
Based on necessity as well as on benefits
received
Based wholly on benefits
88 Since special assessments are not taxes within the constitutional or statutory provisions on tax
exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply to
special assessments.
However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties which
are actually, directly and exclusively used for religious, charitable and educational purposes are not
exactly exempt from real property taxes but are exempt from the imposition of special assessments as
well. (see Aban)
The general rule is that an exemption from taxation does not include exemption from special
assessment.
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General application89 Exceptional both as time and place
5. Debt
Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delicts
between parties for their private interest or resulting from their own acts or omissions.
Tax Debt
Based on law Based on contracts, express or implied
Generally, cannot be assigned Assignable
Generally payable in money May be paid in kind
Generally not subject to set-off or
compensation
May be subject to set-off or compensation
Imprisonment is a sanction for non-
payment of tax except poll tax
No imprisonment for non-payment of debt
Governed by special prescriptive periods
provided for in the Tax Code
Governed by the ordinary periods of
prescriptions
Does not draw interest except only whendelinquent
Draws interest when so stipulated, or incase of default
89seeApostolic Prefect vs Treas. Of Baguio, 71 Phil 547
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N. Kinds of Taxes
1. As to object
Personal, capitation, or poll
tax
Property tax Privilege tax
Tax of a fixed amount
imposed on persons
residing within a specified
territory, whether citizens
or not, without regard to
their property or the
occupation or business inwhich they may be
engaged.90
Tax imposed on property,
real or personal, in
proportion to its value or in
accordance with some
other reasonable method
of apportionment.
A charge imposed upon the
performance of an act, the
enjoyment of privilege, or
the engaging in an
occupation.
2. As to burden or incidence
Direct Indirect
Demanded from the person who also
shoulders the burden of the tax. It is a tax
which the taxpayer is directly or primarilyliable and which he or she cannot shift to
another.
Demanded from a person in the
expectation and intention that he or she
shall indemnify himself or herself at theexpense of another, falling finally upon the
ultimate purchaser or consumer. A tax
which the taxpayer can shift to another.
90i.e. community tax.
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There are different tax rates There is a single tax rate
There are different categories of taxable
income
There is no need for classification as all
taxpayers are subjected to a single taxrate.
Usually used in the income taxation of
individuals
Usually applied to corporations.
c. Semi-schedular or semi-global tax system93
A system where the compensation, business or professional income, capital gainand 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 from
business or professional income, capital gain and passive income not subject to final tax,
and other income, in the case of corporations, as well as personal and additional
exemptions, in the case of individual taxpayers, the taxable income is subjected to one
set of graduated tax rates; method of taxation under the law.
2. Features of the Philippine Income Tax Law
Direct tax Progressive Comprehensive Semi-schedular or
semi-global tax
system94
One assessed upon
the property,
person, business
income, etc. of
those who pay
them.
The tax rates
increase as the tax
base increases. In
certain cases,
however, final taxes
are imposed onpassive income.95
The Philippine
Income tax law
adopted the so-
called
comprehensive tax
situs comprehensive in
the sense that it
practically applies
93approach used in the Philippines94supra95The individual income tax system, in the main, is progressive in nature
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all possible rules of
tax situs.
3. Criteria in Imposing Philippine Income Tax
Citizenship Principle Residence Principle Source Principle
A citizen of the Philippines
is subject to Philippine
income tax
(a) on his worldwide
income, if he resides in the
Philippines, or
(b) only on his income from
sources within the
Philippines, if he qualifies
as nonresident citizen.
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.
An alien is subject to
Philippine income tax
because he derives income
from sources within the
Philippines. Thus, a
nonresident alien is liable
to pay Philippine income
tax on his income fromsources within the
Philippines96 despite the
fact that he has not set foot
in the Philippines.
4. Types of Philippine Income Tax
Presumptive Income Tax Composite Tax Unitary Income Tax
A scale of income taxes is
imposed in relation to a
group of persons actualexpenditure and the
presumed income.
A tax consisting of a series
of separate quasi-personal
taxes, assessed on theparticular source of income
with a superimposed
personal tax on the income
as a whole.
Incomes are arranged
according to source. The
separate items are addedtogether and the rate
applied to the resulting
total income.
96such as dividend, interest, rent, or royalty
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5. Taxable Period
Calendar Period Fiscal Period Short Period
A period of twelve (12)months commencing from
January 1 and ending
December 31.
An accounting period of 12months ending on the last
day of any month other
than December.97
A period of less than twelve(12) months.
6. Kinds of Taxpayers
a. Individual Taxpayers
1) Citizens
a) Resident citizens98
97ex. Feb. 1 to Jan. 3198Taxable for income derived from all sources based on taxable (i.e., net) income
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Citizens of the Philippines who are residing therein.
b) Non-resident citizens99
1. A citizen of the Philippines who establishes to the satisfaction of the
Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with adefinite intention to reside therein.
2. A citizen of the Phils. who leaves the country during the taxable year to reside
abroad, either as immigrant or for employment or on permanent basis.
3. A citizen of the Phils. who works and derives 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 non-resident citizen and who
arrives in the Phils. at any time during the taxable year to reside permanently in the
country.100
5. A citizen who shall have stayed outside the Phils. for 183 days or more by the
end of the year.101
2) Aliens102
99Taxable for income derived within the Philippines based on taxable (i.e., net) income100He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his
income derived from sources abroad until the date of his arrival in the Phils.101Sec. 22 (E)
The continuity of residence abroad is not essential. If physical presence is established, such physical
presence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73,
November 26, 1973)
An overseas contract worker is taxable only on income from sources within the Philippines. (Sec.
23 (c).
A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as
member of the complement of a vessel engaged exclusively in international trade is treated as an
overseas contract worker.
Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outside
the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence
abroad, however, need not be continuous. [RR1-79]102What makes an alien a resident or non-resident alien is his intention with regard to the length and
nature of his stay. Thus:
a. One who comes to the Philippines for a definite purpose which in its very nature may
be promptly accomplished is not a resident citizen.
b. One who comes to the Philippines for a definite purpose which in its very nature would
require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a
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a) Resident aliens
Those whose residence are within the Philippines but who are not citizens
thereof.103
b) Non-resident alien104
Those not residing in the Phils. and who are not citizens thereof.105
(1) Engaged in trade or business
An alien who stays in the Philippines for more than 180 days.106
(2) Not engaged in trade or business
An alien who stays in the Philippines for 180 days or less.107
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. (Sec. 5, RR 2)
Length of stay is indicative of intention.
An alien who shall have stayed in the Philippines for more than one (1) year by the end of the
taxable year is a resident alien
An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred
eighty (180) days during a calendar year shall be considered a non-resident alien in business, or in the
practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180
days or less during the calendar year, he shall be deemed a non-resident alien not doing business in thePhilippines, regardless of whether he owns
1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an
inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work
in Process Inventory, Office Supplies Inventory)
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business (example: Merchandise Inventory)
3. Property used in the trade or business which is subject to the allowance for depreciation
(example: Office Equipment) actually engages in trade or business therein. (Mamalateo)103Sec. 22 [F], NIRC
A mere floating intention, indefinite as to time, to return to another country is not sufficient to
constitute him a transient.
For tax purposes, a resident alien is;
1. An alien who lives in the Phils. with no definite intention to stay as a resident.
2. One who comes in the Phils. for definite purposes which in its very nature would require an
extended stay and to that end, makes his home temporarily in the Phils.
3. An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils.104A non-resident alien individual who came to the Phils. and stayed therein for an aggregate period of
more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.105Sec. 22 (G), id.106Sec. 25 [A], NIRC107Sec. 25 [B], id.
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(3) Special Class of Individual Employees
a) Minimum wage earner
A worker in the private sector paid the statutory minimum wage, or to anemployee 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.108
By virtue of the passage of R.A. 9504, minimum wage earners are exempted
from the payment of the net income tax.109
b) Corporations110
1) Domestic corporations
Created or organized in the Phils. or under its laws.111
2) Foreign corporations
Created, organized or existing under any laws other than those of the Phils.
(1)Resident
Engaged in trade or business112within the Phils.
(2) Non-resident
It is the length of stay in the Philippines that determines whether or not he is engaged in trade or
business. The number of transaction he entered into is immaterial.108Sec. 22 (HH), id. as amended by R.A. 9504109They are not required to file an income tax return
Thus: xxx, That minimum wage earners shall be exempt from the payment of income tax on their
taxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay and
hazard pay received by such minimum wage earners shall likewise be exempt from income tax. 110The term shall include partnership, no matter how created or organized, joint stock companies, joint
accounts, or insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to operating or consortium
agreement under a service contract with the government. (Sec. 24(b), id)111liable for income from sources within and without the Philippines (Sec 22[C], id.)112 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 insistent to
and in the progressive prosecution of commercial gain or for the purpose and the object of the business
organization (Comm. vs. British Overseas Airways CorporationBOAC case 149 SCRA 395)
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Not engaged in trade or business within the Phils.
c. Partnerships113
Partnership is a contract whereby two or more persons bind themselves to
contribute money, property, or industry to a common fund with the intention of dividingthe profits among themselves.114
d. General Professional Partnerships
Formed by persons for the role purpose of exercising their common profession,
no part of the income of which is derived from engaging in any trade & business.115
e. Estates and Trusts
Estate Trust
The mass of property, rights and
obligations left behind by the decedent
upon his death.116
An arrangement created by will or co-
agreement under which title to property is
passed to another for conservation or
investment with the income therefrom and
ultimately the corpus117to be distributed in
accordance with the directions of the
113An ordinary business partnership is considered as a corporation and is thus subject to tax as such.Partners are considered stockholders and, therefore, profits distributed to them by the partnership are
considered as dividends.114Partnerships, no matter how created or organized, including joint ventures or consortiums, are taxable.
What are taxable unregistered partnerships?
The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even
associations or joint accounts which have no legal personalities apart from their individual members.
Accordingly, a pool of individual real property owners dealing in real estate business was considered a
corporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1]115Sec. 22 (b)
e. g. Law firm
General professional partnerships are not taxable but partners are taxed on their share of partnership
profits actually or constructively paid during the year.116 Estates may be classified as follows:
1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership.
- The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs
shall include in their respective returns their distributive shares of the net income of the estate.
2. Estates under judicial settlement - are subject to income tax in the same manner as individual.
- Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor,
trustee, and administrator).
- The return should be filed by executor or administrator of the trust.117principal
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creator as expressed in the governing
instrument.118
f. Co-ownerships119
It is created whenever the ownership of an undivided thing or right belongs to
different persons.
7. Income Taxation
a. Definition
A tax on all yearly profits arising from property, profession, trade or business, or
a tax on persons income, emoluments, profits and the like.120
b. Nature
It is generally regarded as an excise tax. It is not levied upon persons, property,
funds or profits but on the privilege of receiving said income or profit.
118Two (2) Kinds of Trust :
1. Irrevocable Trust - is considered as a separate taxpayer.
2. Revocable Trust - is one where at anytime the power to revest the title to any part of the corpusof
the trust is vested:
(a) in the grantor (creator of the trust) either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or
(b) in any person not having a substantial adverse interest in the disposition of such part of the
corpus or the income therefrom.
The tax shall be imposed on taxable income of the grantor.119 General rule: Co-ownership is exempt from income tax because the activities of the co-owners are
usually limited to the preservation of the properties owned in common and the collection of the income
therefrom.
Exceptions: (When co-ownership is subject to tax).
(1) When the income of the co-ownership is invested by the co-owners in other income-producing
properties or income-producing activities, and
(2) When there is no attempt to divide inherited property for more than ten (10) years and the said
property was not under any administration proceedings nor held in trust, an unregistered partnership is
deemed to exist.
Tax liability of co-owners:
The co-owners in exempt co-ownership shall be liable for income tax only in their separate and
individual capacity.
Filing of return:
The owners shall report and include in their respective personal income tax returns their shares of the
net income of the co-ownership.
Test to determine whether co-ownership is a taxable unregistered partnership:
Find out whether the heirs have made substantial improvements on the inherited property. If so, the
implication is that they will engage in business for profit (Evangelista Doctrine). If that happens, the co-
ownership will be taxed as an unregistered partnership.120Fisher v. Trinidad, GR L-19030, Oct. 20, 1922
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c. General principles
1. A citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines.
2. A non-resident citizen is taxable only on income derived from sources within
the Philippines.
3. An individual citizen of the Philippines, who is working and deriving income
from abroad as an overseas contract worker, is taxable only on income derived from
sources within the Philippines. Provided, that a seaman who is a citizen of the
Philippines and who receives compensation for services rendered abroad as a member
of the complement of a vessel engaged exclusively in international trade shall be treated
as an overseas contract worker.
4. An alien individual, whether or not a resident of the Philippines, is taxable only
on income derived from sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within
and without the Philippines.
6. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines.
8. Income
a. Definition
It means cash or its equivalent coming to a person within a specified period,
whether as payment for services, interest or profit from investment. It covers gain
derived from capital, from labor, or from both combined, including gain from sale or
conversion of capital assets.121
b. Nature
121 It denotes the amount of money or property received by a person or corporation within a specified
time, whether as payment for services, interests, or profits from investments ( Fisher vs. Trinidad, 43 Phil
973)
Income is not merely increase in value of property; but a gain, a profit in excess of capital as a result of
exchange transactions.
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receipt. equivalent is placed at the control of the
person who
rendered the service without restriction
by the payor.125
3) Recognition of income
a. There is income, gain or profit
b. The income, gain or profit is received or realized during the taxable year
c. The income gain or profit is not exempt from income tax
4) Methods of accounting
a) Cash method vis--vis Accrual method
Cash method Accrual method
Recognition of income and expense
dependent on inflow or outflow of cash.126
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 vis--vis Deferred
payment vis-vis Percentage
completion127
Installment payment Deferred payment Percentage completion
125Sec. 4.108-A, RR 16-2005
Examples of income constructively received:
a. Deposit in banks which are made available to the seller of services without restrictions
b. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the
seller as payment for services rendered
c. Transfer of the amounts retained by the payor to the account of the contractor
d. Interest coupons that have matured and are payable but have not been encashed
e. Undistributed share of a partner in the profits of a general partnership126meaning, 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 expense127in long term contracts
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Appropriate when
collections extend over
relatively long periods of
time and there is a strong
possibility that full
collection will not be made.
Initial payments exceed
25% of the gross selling
price and such transaction
shall be treated as cash sale
which makes the entire
selling pricetaxable in the month of
sale.
Persons whose gross
income is derived from
long-term contracts shall
report such income upon
the basis of percentage of
completion.
d. Tests in determining whether income is earned for tax
purposes
1) Realization test
No taxable income until there is a separation from capital of something of
exchangeable value, thereby supplying the realization or transmutation which would
result in the receipt of income.128
2) Claim of right doctrine or Doctrine of ownership,command, or control
A taxable gain is conditioned upon the presence of a claim of right to the alleged
gain and the absence of a definite unconditional obligation to return or repay.
The power to dispose of income is the equivalent of ownership of it. The exercise
of that power to procure the payment of income to another is the enjoyment and
hence, the realization of the income by him who exercises it. The dominant purpose of
the revenue laws is the taxation of income to those who earn or otherwise create the
right to receive it and enjoy the benefit of it when paid.
3) Economic benefit test, Doctrine of proprietary
interest
128There must be separation from capital of something of exchangeable value (e.g., sale of asset)
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Income realized is taxable only to the extent that the taxpayer is economically
benefited.
Any economic benefit to the employee that increases his net worth is taxable.
4) Severance test
There is no taxable income until there is a separation from capital of something
which is of exchangeable value129 thereby supplying the realization or transmutation
which would result in the receipt of income. Thus, income is not taxable unless
separated or severed from the capital or labor that bore it.
5) All events test
Requires that the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not
demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year.130
9. Gross Income
a. Definition
All income derived during a taxable year by a taxpayer from whatever source,whether legal or illegal,131including the following items:
1. Gross income derived from the conduct of trade or business or the exercise of
a profession.
2. Rents
129Eisner vs. Macomer, 252 US 189130CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007131As such, income includes the following, among others:
1. Treasure found;
2. Punitive damages representing profit lost;
3. Amount received by mistake;
4. Cancellation of the taxpayer indebtedness;
5. Receipt of usurious interest;
6. Illegal gains;
7. Taxes paid and claimed as deduction subsequently refunded;
8. Bad debt recovery.
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3. Interests
4. Prizes and winnings
5. Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items
6. Annuities
7. Royalties
8. Dividends
9. Gains derived from dealings in property
10. Pensions
11. Partner's distributive share from the net income of the general professional
partnership.132
b. Concept of income from whatever source derived
Implies the inclusion of all income under the law, irrespective of the voluntary or
involuntary action of the taxpayer in producing the gains.133
All income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the taxpayer in producing the
income.134
c. Gross Income vis--vis Net Income vis--vis TaxableIncome
Gross Income Net Income or Taxable Income
132The above enumeration can be simplified into five (5) categories:
1. Compensation Income - income derived from rendering of services under an employer-employee
relationship.
2. Professional Income - fees derived from engaging in an endeavor requiring special training as
professional as a means of livelihood, which includes, but not limited to, the fees of CPAs, lawyers,
engineers and the like.
3. Business Income - gains or profits derived from rendering services, selling merchandise,
manufacturing products, farming and long-term contracts.
4. Passive Income - income in which the taxpayer merely waits for the amount to come in, which
includes, but not limited to interest income, royalty income, dividend income, prizes and
winnings.
5. Gains from Dealings in Property It includes all income derived from the disposition of property
whether real, personal or mixed.133It includes illegal gains arising from gambling, betting, lotteries, extortion and fraud.134Gutierrez v. CIR, CTA case
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As to deductions
Allows no deductions Allows deductions
As to exemptions
Grants no exemptions Grants exemptions
As to tax base
Gross Income Net Income
Advantages/Disadvantages
Simplifies the income tax
system
Confusing and complex
process of filing income
tax return
Substantial reduction in corruption and tax
evasion as the exercise of discretion, to
allow or disallow deductions, is dispensed
with.
Vulnerable to corruption on account of
margin of discretion in the grant of
deductions
More administratively feasible Provides equitable releifs in the form of
deductions, exemptions and tax credit
Does away with wastage of manpower and
supplies
Tax audit minimizes fraud
d. Classification of Income as to Source
1) Gross income and taxable income from sources
within the Philippines
1)
Interests:
a) Interests derived from sources withinthe Phils.
b) Interests on bonds, notes or other interest-bearing obligations of
residents, corporate or otherwise.135
2)
Dividends:
135Sec. 42, (A)( 1)
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a) From a domestic corporation, and
b) From a foreign corporation 50% or more of the gross income of which
for the 3-year period ending with the close of the taxable year preceding the
declaration of such dividends, or for such part of such period as thecorporation within the Phils.136 has been in existence, was derived from
sources. It must be only in an amount which bears the same ratio to such
dividends as the gross income of the corporation for such period derived
from sources within the Philippines bears to its gross income from all
sources.
3) Compensation for labor or personal services performed in the Phils.137
4) Rentals and Royalties from property located in the Phils.or from any interest
in such property, including rentals or royalties for
a) The use of, or the right or privilege to use in the Phils. any copyright,
patent, design or model, plan, secret formula or process, goodwill, trademark,
trade brand or other like property or night;
b) The use of, or the right to use in the Phils.any industrial, commercial
or scientific equipment;
c) The supply of scientific, technical, industrial or commercial knowledge
or information;
d) The supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any such
property or right as is mentioned in paragraph (a), any such equipment as is
mentioned in paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
e) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the installation or
operation of any brand, machinery or other apparatus purchased from such
nonresident person;
f) Technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; and
g) The use of, or the right to use:
136 Id. (A)(2)137 Id. (A)(3)
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1. motion picture films;
2. films or video tapes for use in connection with television; and
3. tapes for use in connection with radio broadcasting
5) Gains, profits, and income from the sale of real property located in the Phils.
and
6) Gains, profits, and income from sale of personal property, treated as derived
entirely from the country where it is sold.138
2) Gross income and taxable income from sources
without the Philippines
1) Interest other than those derived from sources within the Phils.
2) Dividends other than those derived from sources within the Phils.
a.
Dividends from foreign corporations in general; and
b. Dividends derived from foreign corporations, 50% or more of the gross
income of which for the 3-year period preceding the declaration of
dividends.
3) Compensation for labor or personal services performed outside the Phils.
138Exception to the rule: gain from the sale of shares of stock in a domestic corporation which is treated
as derived entirely from sources within the Phils. regardless of where the shares are sold.
Passage of title test: it is the prevailing view that in ascertaining the place of sale, the determination of
where and when the title to the goods passes from the seller to the buyer is decisive.
Enumeration in Section 42 not all-inclusive.
In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149 SCRA 395], the
Supreme Court held:
xxx Section 37 (now Section 42) by its language, does not intend the enumeration to be exclusive. It
merely directs that the types of income listed therein be treated as income from sources within the Phils.
a cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and
that no other kind of income may be so considered xxx
The Supreme Court further held:
xxx The absence of flight operations to and from the Phils. is not determination of the source of
income on the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time
pertinent to this case. The test of taxability is the source, and the source of an income is that activity xxx
which produced the income. Unquestionably the passage documentations in these cases were sold in the
Phils. and the revenue therefrom was derived from a business activity regularly pursued within the Phils.
xxx
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1)
Compensation Income142
All remuneration for services performed by an employee for his employer,
including the cash value of all remuneration paid in any medium other than cash.143
It includes all remuneration for services rendered by an employee for hisemployer unless specifically excluded under the NIRC.144
2) Fringe Benefits145
a) Special treatment of fringe benefits
Applied to fringe benefits given or furnished to managerial or supervising
employees and not to the rank and file.146
b) Definition
Any good, service or other benefit furnished or granted in cash or in kind by an